<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
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OR
[__] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________________________ to ___________________
Commission file number 0-18365
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American Income Partners V-B Limited Partnership
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3061971
- ---------------------------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 N. Washington St., Fifth Floor, Boston, MA 02114
- ---------------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
-----------------------------
Securities registered pursuant to Section 12(b) of the Act NONE
---------------------
Title of each class Name of each exchange on which registered
- ---------------------------------- ------------------------------------------
- ---------------------------------- ------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
1,547,930 Units Representing Limited Partnership Interest
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(Title of class)
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes XX No
---- ----
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 1996 (Part I and II)
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for the Partnership's Securities and 6
Related Security Holder Matters
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 7
PART III
Item 10. Directors and Executive Officers of the Partnership 8
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and
Management 10
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 13-15
</TABLE>
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<PAGE>
PART I
Item 1. Business.
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(a) General Development of Business
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on September 29, 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 December 27, 1989, the
Partnership issued 1,547,930 units, representing assignments of limited
partnership interests (the "Units"), to 2,402 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 and an affiliate of Equis
Financial Group Limited Partnership (formerly American Finance Group), a
Massachusetts limited partnership ("EFG"). The common stock of the General
Partner is owned by AF/AIP Programs Limited Partnership, of which EFG and a
wholly-owned 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 noncancellable rents exceed the Purchase Price of the leased
equipment. Operating leases are those in which the aggregate noncancellable
rental payments are less than the Purchase Price of the leased equipment.)
Industry segment data is not applicable.
(c) Narrative Description of Business
The Partnership was organized to acquire a 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 are to acquire and lease
equipment which will:
1. Generate quarterly cash distributions;
2. Preserve and protect Partnership 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 December
27, 1989. The initial purchase of equipment and the associated lease commitments
occurred on December 28, 1989. The acquisition of the equipment and its
associated leases is described in detail in Note 3 to the financial statements
included in Item 14, herein. The Partnership will terminate no later than
December 31, 2000; however, the General Partner is evaluating winding-up the
Partnership's operations in 1997 or 1998.
The Partnership has no employees; however, it entered into a Management
Agreement with AF/AIP Programs Limited Partnership. At the same time, AF/AIP
Programs Limited Partnership entered into an identical Management Agreement with
EFG (the "Manager") (collectively, the "Management Agreement"). The Manager's
role, among other things, is to (i) evaluate, select, negotiate, and consummate
the acquisition of equipment, (ii) manage the leasing, re-leasing, financing,
and refinancing of equipment, and (iii) arrange the resale of equipment.
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<PAGE>
The Manager is compensated for such services as described in the Restated
Agreement, as amended, Item 13 herein, and in Note 4 to the financial
statements, included in Item 14, herein.
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.
Consequently, the success of the Partnership is largely dependent upon the
ability of the General Partner and its Affiliates to forecast technological
advances, the ability of the lessees to fulfill their lease obligations and the
quality and marketability of the equipment at the time of sale.
In addition, the leasing industry is very competitive. Although all funds
available for acquisitions have been invested in equipment, subject to
noncancellable lease agreements, the Partnership will encounter considerable
competition when equipment is re-leased or sold at the expiration of primary
lease terms. The Partnership will 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.
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 a material portion of anticipated revenues and significantly weaken the
Partnership's ability to repay related debt.
Generally, the Partnership is prohibited from reinvesting the proceeds
generated by refinancing or selling equipment. Accordingly, it is anticipated
that the Partnership will begin to liquidate its portfolio of equipment at the
expiration of the initial lease terms and to distribute the net liquidation
proceeds. As an alternative to sale, the Partnership may enter re-lease
agreements when considered advantageous by the General Partner and the Manager.
In accordance with the Partnership's stated investment objective and policies,
the General Partner is evaluating winding-up the Partnership's operations,
including the liquidation of its entire portfolio.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1996, 1995 and 1994 is
incorporated herein by reference to Note 2 to the financial statements in the
1996 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 Equipment Manager or Advisor to the Partnership and
several other Direct-Participation equipment leasing programs sponsored or co-
sponsored by EFG (the "Other Investment Programs"). The Company arranges to
broker or originate equipment leases, acts as remarketing agent and asset
manager, and provides leasing support services, such as billing, collecting, and
asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also
owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party (the "Buyer"). AFG changed its name
to Equis Financial Group Limited Partnership after the sale was concluded.
Pursuant to terms
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<PAGE>
of the sale agreements, EFG agreed not to compete with the Buyer's lease
origination business for a period of five years; however, EFG is permitted to
originate certain equipment leases, principally those involving non-investment
grade lessees and ocean-going vessels, which are not in competition with the
Buyer. In addition, the sale agreements specifically reserved to EFG 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, including
the right to satisfy all required equipment acquisitions utilizing either
brokers or the Buyer. Geoffrey A. MacDonald, Chairman of Equis Corporation and
Gary D. Engle agreed not to compete with the sold business on terms and
conditions similar to those for the Company.
(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 1996 Annual Report.
Item 3. Legal Proceedings.
- ---------------------------
Incorporated herein by reference to Note 7 to the financial statements in
the 1996 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
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None.
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<PAGE>
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, 1996, there were 2,214 recordholders of Units in the
Partnership.
(c) Dividend History and Restrictions
Pursuant to Article VI of the Restated Agreement, as amended, the
Partnership's Distributable Cash From Operations and Distributable Cash From
Sales or Refinancings are determined and distributed to the Partners quarterly.
Each quarter's distribution may vary in amount. Distributions may be made to
the General Partner prior to the end of the fiscal quarter; however, the amount
of such distributions reflect only amounts to which the General Partner is
entitled at the time such distributions are made. Currently, there are no
restrictions that materially limit the Partnership's ability to distribute
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings or that the Partnership believes are likely to materially limit the
future distribution of Distributable Cash From Operations and Distributable Cash
From Sales or Refinancings. The Partnership expects to continue to distribute
all Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings on a quarterly basis.
Distributions in 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
General Recognized
Total Partner Owners
----------- --------- -----------
<S> <C> <C> <C>
Total 1996 distributions $3,935,003 $196,750 $3,738,253
Total 1995 distributions 4,073,500 203,675 3,869,825
---------- -------- ----------
Total $8,008,503 $400,425 $7,608,078
========== ======== ==========
</TABLE>
Distributions payable at December 31, 1996 and 1995 were $285,145 and
$1,018,375, respectively.
"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
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<PAGE>
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.
Each distribution of Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings of the Partnership shall be made 95% to the
Recognized Owners and 5% to the General Partner.
"Payout" is defined as the first time when the aggregate amount of all
distributions to the Recognized Owners of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings equals the aggregate amount of the
Recognized Owners' original capital contributions plus a cumulative annual
return of 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.
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings ("Distributions") are distributed within 45 days after the
completion of each quarter, beginning with the first full fiscal quarter
following the Partnership's Closing Date. Each Distribution is described in a
statement sent to the Recognized Owners.
Item 6. Selected Financial Data.
- ---------------------------------
Incorporated herein by reference to the section entitled "Selected Financial
Data" in the 1996 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
1996 Annual Report.
Item 8. Financial Statements and Supplementary Data.
- -----------------------------------------------------
Incorporated herein by reference to the financial statements and
supplementary data included in the 1996 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure.
---------------------
None.
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<PAGE>
PART III
Item 10. Directors and Executive Officers of the Partnership.
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(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 and the
Recognized Owners have no right to participate in the control of such
operations. The names, titles and ages of the Directors and Executive Officers
of the General Partner as of March 15, 1997 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF
THE GENERAL PARTNER (See Item 13)
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<TABLE>
<CAPTION>
Name Title Age Term
- --------------------------- ------------------------------------ ------- --------
<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member of the Until a
Executive Committee of EFG successor
and President and a Director is duly
of the General Partner 48 elected
and
qualified
Gary D. Engle President and Chief Executive
Officer and member of the
Executive Committee of EFG and a
Director of the General Partner 48
Gary M. Romano Executive Vice President and Chief
Operating Officer of EFG and
Clerk of the General Partner 37
James A. Coyne Senior Vice President of EFG 36
Michael J. Butterfield Vice President, Finance and Treasurer
of EFG and Treasurer of the
General Partner 37
James F. Livesey Vice President, Aircraft and Vessels 47
of EFG
Sandra L. Simonsen Senior Vice President, Information 46
Systems of EFG
Gail D. Ofgant Vice President, Lease Operations of 31
EFG
</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.
(e) Business Experience
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<PAGE>
Mr. MacDonald, age 48, 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 Vice President of
American Finance Group Securities Corp. and a limited partner in Atlantic
Acquisition Limited Partnership ("AALP"). Prior to co-founding EFG's
predecessors, Mr. MacDonald held various executive and management positions in
the leasing and pharmaceutical industries. Mr. MacDonald holds an M.B.A. from
Boston College and a B.A. degree from the University of Massachusetts (Amherst).
Mr. Engle, age 48, is President and Chief Executive Officer, a member of the
Executive Committee of EFG, a Director of the General Partner, and President of
AFG Realty Corporation. Mr. Engle is Vice President and a Director of certain
of EFG's affiliates. On December 16, 1994, Mr. Engle acquired control of EFG,
the General Partner and each of EFG's subsidiaries. Mr. Engle controls the
general partner of AALP and is also a limited partner in AALP. From 1987 to
1990, Mr. Engle was a principal and co-founder of Cobb Partners Development,
Inc., a real estate and mortgage banking company. From 1980 to 1987, Mr. Engle
was Senior Vice President and Chief Financial Officer of Arvida Disney Company,
a large scale community development company owned by Walt Disney Company. Prior
to 1980, Mr. Engle served in various management consulting and institutional
brokerage capacities. Mr. Engle has an M.B.A. from Harvard University and a
B.S. degree from the University of Massachusetts (Amherst).
Mr. Romano, age 37, is Executive Vice President and Chief Operating Officer
of EFG and certain of its affiliates and Clerk of the General Partner. Mr.
Romano joined EFG in November 1989 and was appointed Executive Vice President
and Chief Operating Officer in April 1996. Prior to joining EFG, Mr. Romano was
Assistant Controller for a privately-held real estate company which he joined in
1987. Mr. Romano held audit staff and manager positions at Ernst & Whinney (now
Ernst & Young LLP) from 1982 to 1986. Mr. Romano is a C.P.A. and holds a B.S.
degree from Boston College.
Mr. Coyne, age 36, is Senior Vice President of EFG. Mr. Coyne joined EFG in
1989, remained until May 1993, and rejoined EFG in November 1994. From May 1993
through November 1994, he was with the Raymond Company, a private investment
firm, where he was responsible for financing corporate and real estate
acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real
estate investment company and an equipment leasing company. Prior to 1985 he
was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He has
a BS in Business Administration from John Carroll University, a Masters Degree
in Accounting from Case Western Reserve University and is a Certified Public
Accountant.
Mr. Butterfield, age 37, joined EFG in June 1992 and became Vice President,
Finance and Treasurer of EFG and certain of its affiliates in April 1996 and is
Treasurer of the General Partner. Prior to joining EFG, Mr. Butterfield was an
Audit Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield
was employed in public accounting and industry positions in New Zealand and
London (U.K.) prior to coming to the United States in 1987. Mr. Butterfield
attained his Associate Chartered Accountant (A.C.A.) professional qualification
in New Zealand and has completed his C.P.A. requirements in the United States.
He holds a Bachelor of Commerce degree from the University of Otago, Dunedin,
New Zealand.
Mr. Livesey, age 47, is Vice President, Aircraft and Vessels, of EFG. Mr.
Livesey joined EFG in October, 1989, and was promoted to Vice President in
January 1992. Prior to joining EFG, Mr. Livesey held sales and marketing
positions with two privately-held equipment leasing firms. Mr. Livesey holds an
M.B.A. from Boston College and B.A. degree from Stonehill College.
Ms. Simonsen, age 46, joined EFG in February 1990 and was promoted to Senior
Vice President, Information Systems of EFG in April 1996. Prior to joining EFG,
Ms. Simonsen was Vice President, Information Systems with Investors Mortgage
Insurance Company which she joined in 1973. Ms. Simonsen provided systems
consulting for a subsidiary of American International Group and authored a
software program published by IBM. Ms. Simonsen holds a B.A. degree from Wilson
College.
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<PAGE>
Ms. Ofgant, age 31, is Vice President, Lease Operations of EFG and certain
of its affiliates. Ms. Ofgant joined EFG in June 1989, and was promoted to
Manager, Lease Operations in April 1994. In April 1996, Ms. Ofgant was
appointed Vice President, Lease Operations. Prior to joining EFG, Ms. Ofgant
was employed by Security Pacific National Trust Company. Ms. Ofgant holds a
B.S. degree in Finance from Providence College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
See Item 10 (a-b) above.
Item 11. Executive Compensation.
- ---------------------------------
(a) Cash Compensation
Currently, the Partnership has no employees. However, under the terms of
the Restated Agreement, as amended, the Partnership is obligated to pay all
costs of personnel employed full or part-time by the Partnership, including
officers or employees of the General Partner or its Affiliates. There is no
plan at the present time to make any 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 4 to the financial statements included in
Item 14, herein.
(d) Compensation of Directors
None.
(e) Termination of Employment and Change of Control Arrangement
There exists no remuneration plan or arrangement with the General Partner or
its Affiliates which results or may result from their resignation, retirement or
any other termination.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- -------------------------------------------------------------------------
By virtue of its organization as a limited partnership, the Partnership has
no outstanding securities possessing traditional voting rights. However, as
provided in Section 11.2(a) of the Restated Agreement, as amended (subject to
Sections 11.2(b) and 11.3), a majority interest of the Recognized Owners have
voting rights with respect to:
1. Amendment of the Restated Agreement;
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<PAGE>
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, 1997, the following person or group owns beneficially more
than 5% of the Partnership's 1,547,930 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 Atlantic Acquisition Limited Partnership
Limited Partnership 98 North Washington Street 94,570 Units 6.11%
Interests Boston, MA 02114
</TABLE>
Messrs. Engle, MacDonald and Coyne have ownership interests in AALP. On
December 1, 1996, EFG purchased a Class D interest, representing a 49% economic
interest in AALP. See Items 10 and 13 of this report.
The ownership and organization of EFG is described in Item 1 of this report.
Item 13. Certain Relationships and Related Transactions.
- ---------------------------------------------------------
The General Partner of the Partnership is AFG 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,
1996, 1995 and 1994, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Equipment management fees $144,159 $177,760 $357,155
Administrative charges 37,037 21,000 12,000
Reimbursable operating expenses
due to third parties 916,221 355,605 123,302
---------- -------- --------
Total $1,097,417 $554,365 $492,457
========== ======== ========
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include all aspects of
acquisition, management and sale of equipment. For acquisition services, EFG 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
the lesser of (i) 5% of gross operating lease rental revenues and 2% of gross
full payout lease rental revenues received by the Partnership or (ii) fees which
the General Partner reasonably believes to be competitive for similar services
for similar equipment. Both of these fees are subject to certain limitations
defined in the Management Agreement. Compensation to EFG for services connected
to the sale of equipment is calculated as the lesser of (i) 3% of gross sale
proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under
arm's length circumstances. Payment of the remarketing fee is subordinated to
Payout and is subject to certain limitations defined in the Management
Agreement.
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<PAGE>
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.
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 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 a lender. EFG temporarily deposits collected funds in a separate
interest-bearing escrow account prior to remittance to the Partnership. At
December 31, 1996, the Partnership was owed $459,038 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
1997.
On August 18, 1995, Atlantic Acquisition Limited Partnership ("AALP"), a
newly formed Massachusetts limited partnership owned and controlled by certain
principals of EFG, commenced a voluntary cash Tender Offer (the "Offer") for up
to approximately 45% of the outstanding units of limited partner interest in
this Partnership and 20 affiliated partnerships sponsored and managed by EFG.
The Offer was subsequently amended and supplemented in order to provide
additional disclosure to unitholders; increase the offer price; reduce the
number of units sought to approximately 35% of the outstanding units; and extend
the expiration date of the Offer to October 20, 1995. Following commencement of
the Offer, certain legal actions were initiated by interested persons against
AALP, each of the general partners (4 in total) of the 21 affected programs, and
various other affiliates and related parties. One action, a class action brought
in the United States District Court for the District of Massachusetts (the
"Court") on behalf of the unitholders (Recognized Owners), sought to enjoin the
Offer and obtain unspecified monetary damages. A settlement of this litigation
was approved by the Court on November 15, 1995. The Plaintiffs filed an appeal
in this matter. On November 26, 1996, the United States Court of Appeals for the
First Circuit handed down a decision affirming the Court's approval of the
settlement. A second class action, brought in the Superior Court of the
Commonwealth of Massachusetts (the "Superior Court") seeking to enjoin the
Offer, obtain unspecified monetary damages, and intervene in the first class
action, was dismissed by the Superior Court. The Recognized Owners of the
Partnership tendered approximately 94,570 units or 6.11% of the total
outstanding units of the Partnership to AALP. The operations of the Partnership
were not adversely affected by these proceedings or settlements. On December 1,
1996, EFG purchased a Class D interest, representing a 49% economic interest in
AALP.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
See Item 13(a) above.
-12-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
- -------------------------------------------------------------------------
(a) Documents filed as part of this report:
(1) Financial Statements:
Report of Independent Auditors................................. *
Statement of Financial Position
at December 31, 1996 and 1995.................................. *
Statement of Operations
for the years ended December 31, 1996, 1995 and 1994........... *
Statement of Changes in Partners' Capital
for the years ended December 31, 1996, 1995 and 1994........... *
Statement of Cash Flows
for the years ended December 31, 1996, 1995 and 1994........... *
Notes to the Financial Statements.............................. *
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K, as set forth
in Item 601 of Regulation S-K, are not applicable.
Exhibit
Number
------
4 Amended and Restated Agreement and Certificate of Limited
Partnership included as Exhibit A to the Prospectus
which is included in Registration Statement on Form
S-1 (No. 33-27828).
13 The 1996 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.
* Incorporated herein by reference to the appropriate portion of the 1996 Annual
Report to security holders for the year ended December 31, 1996. (See Part II)
-13-
<PAGE>
Exhibit
Number
------
99 (b) Lease agreement with Fred Meyer, Inc. was filed in the
Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994 as Exhibit 29 (c) and is
incorporated herein by reference.
99 (c) Lease agreement with Gearbulk Shipowning Ltd. was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 as Exhibit 99 (c) and is incorporated herein by
reference.
99 (d) Lease agreement with Horizon Air Industries, Inc. is filed in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 and is included herein.
99 (e) Lease agreement with Sunworld International Airlines, Inc. is
filed in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1996 and is included herein.
(b) Reports on Form 8-K
None.
-14-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
By: AFG Leasing IV Incorporated,
a Massachusetts corporation and the
General Partner of the Registrant.
By: /s/ Geoffrey A. MacDonald By: /s/ Gary D. Engle
--------------------------- -----------------------------
Geoffrey A. MacDonald Gary D. Engle
Chairman and a member of the President and Chief Executive
Executive Committee of EFG and Officer and a member of the
President and a Director of the Executive Committee of EFG and a
General Partner Director of the General Partner
(Principal Executive Officer)
Date: March 31, 1997 Date: March 31, 1997
------------------- -------------------
By: /s/ Gary M. Romano By: /s/ Michael J. Butterfield
--------------------------- -----------------------------
Gary M. Romano Michael J. Butterfield
Executive Vice President and Chief Vice President, Finance and
Operating Officer of EFG and Clerk Treasurer of EFG and Treasurer
of the General Partner of the General Partner
(Principal Financial Officer) (Principal Accounting Officer)
Date: March 31, 1997 Date: March 31, 1997
------------------- ---------------------
-16-
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.
No annual report has been sent to the Recognized Owners. A Report will be
furnished to the Recognized Owners subsequent to the date hereof.
No proxy statement has been or will be sent to the Recognized Owners.
-17-
<PAGE>
AMERICAN INCOME PARTNERS V
American Income Partners V-B Limited Partnership
Annual Report to the Partners, December 31, 1996
<PAGE>
AMERICAN INCOME PARTNERS V-B 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 3-6
FINANCIAL STATEMENTS:
Report of Independent Auditors 7
Statement of Financial Position
at December 31, 1996 and 1995 8
Statement of Operations
for the years ended December 31, 1996, 1995 and 1994 9
Statement of Changes in Partners' Capital
for the years ended December 31, 1996, 1995 and 1994 10
Statement of Cash Flows
for the years ended December 31, 1996, 1995 and 1994 11
Notes to the Financial Statements 12-20
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 21
Statement of Cash and Distributable Cash
From Operations, Sales and Refinancings 22
Schedule of Costs Reimbursed to the
General Partner and its Affiliates as
Required by Section 10.4 of the Amended
and Restated Agreement and Certificate of
Limited Partnership 23
</TABLE>
-1-
<PAGE>
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For each of the five years in the period ended December 31, 1996:
<TABLE>
<CAPTION>
Summary of
Operations 1996 1995 1994 1993 1992
- ----------------------------- ----------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Lease revenue $2,823,191 $ 3,901,359 $ 9,280,336 $10,372,781 $11,469,894
Net income (loss) $ 710,319 $ 458,868 $ 2,878,380 $(5,751,224) $ 148,203
Per Unit:
Net income (loss) $ 0.44 $ 0.28 $ 1.77 $ (3.53) $ 0.09
Cash distributions $ 2.42 $ 2.50 $ 2.50 $ 1.56 $ 3.44
Financial Position
- -----------------------------
Total assets $7,289,920 $11,486,422 $15,848,219 $23,049,892 $38,159,442
Total long-term obligations $ 707,842 $ 1,157,906 $ 1,858,684 $ 7,667,527 $13,166,519
Partners' capital $5,953,024 $ 9,177,708 $12,792,340 $13,987,459 $22,284,619
</TABLE>
-2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1996 compared to the year
ended December 31, 1995 and the year ended December 31, 1995
compared to the year ended December 31, 1994
Overview
- --------
American Income Partners V-B Limited Partnership (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 Partnership's stated investment objectives and policies
contemplated that the Partnership would wind-up its operations within
approximately seven years of its inception. 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. As a result of the Partnership's age
and a declining equipment portfolio, the General Partner is evaluating a variety
of transactions that will reduce the Partnership's prospective costs to operate
as a publicly registered limited partnership and, therefore, enhance overall
cash distributions to the limited partners. Such a transaction might involve
the sale of the Partnership's remaining equipment or a transaction that would
allow for the consolidation of the Partnership's expenses with other similarly-
organized equipment leasing programs. In order to increase the marketability of
the Partnership's remaining equipment, the General Partner expects to use a
portion of the Partnership's available cash and future cash flow to retire
indebtedness. This may negatively effect short-term cash distributions.
Results of Operations
- ---------------------
For the year ended December 31, 1996, the Partnership recognized lease revenue
of $2,823,191 compared to $3,901,359 and $9,280,336 for the years ended 1995 and
1994, respectively. Lease revenue in 1996 includes the receipt of $265,796 of
lease termination rents received in connection with the sale of the
Partnership's interest in two Boeing 727-Advanced aircraft in July 1996 (see
below). The decrease in lease revenue from 1994 to 1996 was expected and
resulted principally from primary lease term expirations and the sale of
equipment. The Partnership also earns interest income from temporary
investments of rental receipts and equipment sales proceeds in short-term
instruments.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by an affiliated equipment leasing program
sponsored by Equis Financial Group Limited Partnership (formerly American
Finance Group), a Massachusetts limited partnership ("EFG"). Proportionate
equipment ownership enables the Partnership to further diversify its equipment
portfolio by participating in the ownership of selected assets, thereby reducing
the general levels of risk which could result from a concentration in any single
equipment type, industry or lessee. The Partnership and each affiliate
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues, and expenses
associated with the equipment.
In 1996, the Partnership sold equipment having a net book value of $664,268 to
existing lessees and third parties. These sales resulted in a net gain, for
financial statement purposes, of $875,782 compared to a net gain of $475,734 in
1995 on equipment having a net book value of $1,045,647 and a net gain of
$1,843,074 in 1994 on equipment having a net book value of $2,246,146. The 1996
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 $2,404,163
and $431,852, respectively, which the Partnership sold to the existing lessee in
July 1996. In connection with these sales, the Partnership realized sale
proceeds of $615,218, which resulted in a net gain, for financial statement
purposes, of $183,366. This equipment was sold prior to the expiration of the
related lease term. The Partnership also realized lease termination rents in
connection with the sale of its interests in these aircraft, as described above.
-3-
<PAGE>
During 1995, the Partnership transferred its ownership interest in certain
trailers previously leased to The Atchison Topeka and Santa Fe Railroad. The
Partnership intended to replace all of the trailers with comparable trailers and
structure the transaction as a like-kind exchange for income tax reporting
purposes. A portion of this transaction was completed in 1995. A gain of
$31,546, pertaining to the trailers which had not been exchanged in 1995, was
deferred in anticipation of completing the exchange in 1996. This amount was
reported as Other Liabilities on the Statement of Financial Position at December
31, 1995. During 1996, the Partnership elected not to replace the remaining
trailers and, accordingly, the remaining deferred gain of $31,546 was recognized
as Gain on Sale of Equipment on the Statement of Operations during 1996. See
Note 3 to the financial statements for additional discussion of this
transaction.
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 and amortization expense was $2,024,625, $3,461,042 and
$7,407,855 for the years ended December 31, 1996, 1995 and 1994, respectively.
For financial reporting purposes, to the extent that an asset is held on primary
lease term, the Partnership depreciates the difference between (i) the cost of
the asset and (ii) the estimated residual value of the asset on a straight-line
basis over such term. For purposes of this policy, estimated residual values
represent estimates of equipment values at the date of primary lease expiration.
To the extent that an asset is held beyond its primary lease term, the
Partnership continues to depreciate the remaining net book value of the asset on
a straight-line basis over the asset's remaining economic life. (See Note 2 to
the financial statements herein.)
Interest expense was $76,800 or 2.7% of lease revenue in 1996, $151,589 or
3.9% of lease revenue in 1995 and $460,632 or 5% of lease revenue in 1994.
Interest expense in future periods will continue to decline in amount and as a
percentage of lease revenue as the principal balance of notes payable is reduced
through the application of rent receipts to outstanding debt. In addition, the
General Partner expects to use a portion of the Partnership's available cash and
future cash flow to retire indebtedness (see Overview).
Management fees were approximately 5.1%, 4.6% and 3.8% of lease revenue during
the years ended December 31, 1996, 1995 and 1994, respectively. Management fees
for the year ended December 31, 1996 include $7,780, 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.
Operating expenses consist principally of administrative charges, professional
service costs, such as audit and legal fees, as well as printing, distribution
and remarketing expenses. In certain cases, equipment storage or repairs and
maintenance costs may be incurred in connection with equipment being remarketed.
The overall increase in operating expenses from 1994 to 1996 was due primarily
to heavy maintenance costs of approximately $729,000 incurred or accrued 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 $39,000 per month (see discussion below relating to the
second aircraft). The amount of future operating expenses cannot be
-4-
<PAGE>
predicted with certainty; however, such expenses are usually higher during the
acquisition and liquidation phases of a partnership. Other fluctuations
typically occur in relation to the volume and timing of remarketing activities.
Liquidity and Capital Resources and Discussion of Cash Flows
- ------------------------------------------------------------
The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Accordingly, the Partnership's principal source of
cash from operations is 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 $1,781,983, $5,231,054 and $7,238,345
in 1996, 1995 and 1994, respectively. 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.
Ultimately, the Partnership will dispose of all assets under lease. This will
occur principally through sale transactions whereby each asset will be sold to
the existing lessee or to a third party. Generally, this will occur upon
expiration of each asset's primary or renewal/re-lease term. In certain
instances, casualty or early termination events may result in the disposal of an
asset. Such circumstances are infrequent and usually result in the collection
of stipulated cash settlements pursuant to terms and conditions contained in the
underlying lease agreements.
Cash 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, 1996, the
Partnership expended $657,000 to replace certain aircraft engines to facilitate
the release of an aircraft, in which the Partnership has an ownership interest,
to Transmeridian Airlines (see discussion below). In 1994, the Partnership
capitalized $49,500 of refurbishment costs to upgrade certain equipment. There
were no equipment acquisitions during 1995. During the year ended December 31,
1996, the Partnership realized $1,602,589 in equipment sale proceeds compared to
$1,521,381 and $4,107,220 in 1995 and 1994, respectively. Future inflows of
cash from asset disposals will vary in timing and amount and will be influenced
by many factors including, but not limited to, the frequency and timing of lease
expirations, the type of equipment being sold, its condition and age, and future
market conditions.
On November 30, 1995, upon the expiration of its lease term, Northwest
Airlines, Inc. returned a Boeing 727-251 Advanced aircraft (the "Aircraft") in
which the Partnership has a 60% ownership interest. The aircraft had a cost and
net book value to the Partnership of approximately $6,484,000 and $903,000,
respectively, at December 31, 1996. The Aircraft is currently undergoing heavy
maintenance expected to cost the Partnership approximately $550,000, all of
which was incurred or accrued during the year ended December 31, 1996. The
Partnership had entered into a 28-month lease agreement with Transmeridian
Airlines effective upon completion of the heavy maintenance. However, as a
result of delays in completing the heavy maintenance, the Aircraft could not be
delivered to the lessee on the stipulated date, resulting in the cancellation of
the agreement. The General Partner is currently negotiating a new lease
agreement for the Aircraft.
During 1994, the Partnership capitalized $397,500 of refurbishment costs
incurred to upgrade a cargo vessel leased by Gearbulk Shipowning Ltd.
("Gearbulk"), formerly Kristian Gerhard Jebsen Skipsrederi A/S, pursuant to the
terms of an extended and renegotiated contract with Gearbulk. The refurbishment
costs were financed with a third-party lender and shared between the Partnership
and other affiliated partnerships in proportion to their respective ownership
interests in the vessel.
The Partnership obtained long-term financing in connection with certain
equipment leases. The origination of such indebtedness and the subsequent
repayments of principal are reported as components of financing activities.
Cash inflows of $789,005 in 1995 resulted from leveraging a portion of the
Partnership's equipment portfolio with third-party lenders. Each note payable
is recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period (which
period generally coincides with the lease rental term). As rental payments are
collected, a portion or all of the rental payment is used to repay the
associated indebtedness. In future years, the amount of cash used to repay debt
obligations is scheduled to decline as the principal balance of notes payable is
reduced through the collection and application of
-5-
<PAGE>
rents. However, the amount of cash used to repay debt obligations may fluctuate
due to the use of the Partnership's available cash and future cash flow to
retire indebtedness (see Overview).
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, 1996, the Partnership
declared total cash distributions of Distributable Cash From Operations and
Distributable Cash From Sales and Refinancings of $3,935,003. In accordance
with the Amended and Restated Agreement and Certificate of Limited Partnership,
the Recognized Owners were allocated 95% of these distributions, or $3,738,253,
and the General Partner was allocated 5%, or $196,750. The fourth quarter 1996
cash distribution was paid on January 13, 1997.
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 investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date. Future market conditions, technological changes, the ability
of EFG to manage and remarket the assets, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's equipment portfolio.
The future liquidity of the Partnership will be influenced by the foregoing
and will be greatly dependent upon the collection of contractual rents and the
outcome of residual activities. The General Partner anticipates that cash
proceeds resulting from these sources will satisfy the Partnership's future
expense obligations. However, the amount of cash available for distribution in
future periods will fluctuate. Equipment lease expirations and asset disposals
will cause the Partnership's net cash from operating activities to diminish over
time; and equipment sale proceeds will vary in amount and period of realization.
In addition, the Partnership may be required to incur asset refurbishment or
upgrade costs in connection with future remarketing activities. Accordingly,
fluctuations in the level of future quarterly cash distributions are
anticipated.
-6-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
To the Partners of American Income Partners V-B Limited Partnership:
We have audited the accompanying statements of financial position of
American Income Partners V-B Limited Partnership as of December 31, 1996 and
1995, 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,
1996. 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-B
Limited Partnership at December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Additional Financial Information
identified in the Index to Annual Report to the Partners is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 14, 1997
-7-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ -------------
ASSETS
- ------
<S> <C> <C>
Cash and cash equivalents $ 1,961,623 $ 4,352,348
Contractual right for equipment -- 62,539
Rents receivable, net of allowance for
doubtful accounts of $10,000 233,569 180,609
Accounts receivable - affiliate 459,038 223,343
Equipment at cost, net of accumulated
depreciation of $21,000,199 and
$29,880,329 at December 31, 1996 4,635,690 6,667,583
and 1995, respectively ----------- -----------
Total assets $ 7,289,920 $11,486,422
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
Notes payable $ 707,842 $ 1,157,906
Accrued interest 7,428 7,703
Accrued liabilities 64,750 20,000
Accrued liabilities - affiliate 226,297 29,887
Other liabilities -- 31,546
Deferred rental income 45,434 43,297
Cash distributions payable to partners 285,145 1,018,375
----------- -----------
Total liabilities 1,336,896 2,308,714
----------- -----------
Partners' capital (deficit):
General Partner (1,418,884) (1,257,650)
Limited Partnership Interests
(1,547,930 Units; initial purchase
price of $25 each) 7,371,908 10,435,358
----------- -----------
Total partners' capital 5,953,024 9,177,708
----------- -----------
Total liabilities and partners' $ 7,289,920 $11,486,422
capital =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-8-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
Income:
<S> <C> <C> <C>
Lease revenue $2,823,191 $3,901,359 $ 9,280,336
Interest income 178,642 248,771 115,914
Gain on sale of equipment 907,328 475,734 1,843,074
---------- ---------- -----------
Total income 3,909,161 4,625,864 11,239,324
---------- ---------- -----------
Expenses:
Depreciation and amortization 2,024,625 3,461,042 7,407,855
Interest expense 76,800 151,589 460,632
Equipment management fees - affiliate 144,159 177,760 357,155
Operating expenses - affiliate 953,258 376,605 135,302
---------- ---------- -----------
Total expenses 3,198,842 4,166,996 8,360,944
---------- ---------- -----------
Net income $ 710,319 $ 458,868 $ 2,878,380
========== ========== ===========
Net income
per limited partnership unit $ 0.44 $ 0.28 $ 1.77
========== ========== ===========
Cash distributions declared
per limited partnership unit $ 2.42 $ 2.50 $ 2.50
========== ========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-9-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
General Recognized Owners
Partner ------------------------
Amount Units Amount Total
------------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $(1,017,162) 1,547,930 $15,004,621 $13,987,459
Net income - 1994 143,919 -- 2,734,461 2,878,380
Cash distributions declared (203,675) -- (3,869,824) (4,073,499)
----------- --------- ----------- -----------
Balance at December 31, 1994 (1,076,918) 1,547,930 13,869,258 12,792,340
Net income - 1995 22,943 -- 435,925 458,868
Cash distributions declared (203,675) -- (3,869,825) (4,073,500)
----------- --------- ----------- -----------
Balance at December 31, 1995 (1,257,650) 1,547,930 10,435,358 9,177,708
Net income - 1996 35,516 -- 674,803 710,319
Cash distributions declared (196,750) -- (3,738,253) (3,935,003)
----------- --------- ----------- -----------
Balance at December 31, 1996 $(1,418,884) 1,547,930 $ 7,371,908 $ 5,953,024
=========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-10-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
Cash flows from (used in)
operating activities:
<S> <C> <C> <C>
Net income $ 710,319 $ 458,868 $ 2,878,380
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 2,024,625 3,461,042 7,407,855
Gain on sale of equipment (907,328) (475,734) (1,843,074)
Changes in assets and
liabilities:
Decrease (increase) in:
Rents receivable (52,960) 365,351 161,530
Accounts receivable - affiliate (235,695) 1,499,460 (659,447)
Increase (decrease) in:
Accrued interest (275) (18,471) (64,074)
Accrued liabilities 44,750 4,500 1,000
Accrued liabilities - affiliate 196,410 (45,964) 45,667
Deferred rental income 2,137 (17,998) (689,492)
----------- ----------- -----------
Net cash from operating activities 1,781,983 5,231,054 7,238,345
----------- ----------- -----------
Cash flows from (used in) investing activities:
Purchase of equipment (657,000) -- (49,500)
Proceeds from equipment sales 1,602,589 1,521,381 4,107,220
----------- ----------- -----------
Net cash from investing activities 945,589 1,521,381 4,057,720
----------- ----------- -----------
Cash flows from (used in) financing activities:
Proceeds from notes payable -- 789,005 --
Principal payments - notes payable (450,064) (1,750,205) (6,206,343)
Distributions paid (4,668,233) (4,073,500) (3,564,311)
----------- ----------- -----------
Net cash used in financing activities (5,118,297) (5,034,700) (9,770,654)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (2,390,725) 1,717,735 1,525,411
Cash and cash equivalents at beginning of year 4,352,348 2,634,613 1,109,202
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,961,623 $ 4,352,348 $ 2,634,613
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 77,075 $ 170,060 $ 524,706
=========== =========== ===========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
See Note 3 to the financial statements.
The accompanying notes are an integral part
of these financial statements.
-11-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
December 31, 1996
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
- ---------------------------------------------
The Partnership was organized as a limited partnership under the
Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on September
29, 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
December 27, 1989, the Partnership issued 1,547,930 units, representing
assignments of limited partnership interests (the "Units"), to 2,402 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 and an
affiliate of Equis Financial Group Limited Partnership (formerly American
Finance Group), a Massachusetts limited partnership ("EFG"). The common stock
of the General Partner is owned by AF/AIP Programs Limited Partnership, of which
EFG and a wholly-owned subsidiary are the 99% limited partners and AFG Programs,
Inc., which is wholly-owned by Geoffrey A. MacDonald, 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 December 28, 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. Payout will occur when the Recognized Owners have received
distributions equal to their original investment plus a cumulative annual return
of 11% (compounded quarterly) on undistributed invested capital.
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. (Also see Note 4.)
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 Equipment Manager or Advisor to the Partnership and
several other Direct-Participation equipment leasing programs sponsored or co-
sponsored by EFG (the "Other Investment Programs"). The Company arranges to
broker or originate equipment leases, acts as remarketing agent and asset
manager, and provides leasing support services, such as billing, collecting, and
asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also
owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party (the "Buyer"). AFG changed its name
to Equis Financial Group Limited Partnership after the sale was concluded.
Pursuant to terms of the sale agreements, EFG agreed not to compete with the
Buyer's lease origination business for a period of five years; however, EFG is
permitted to originate certain equipment leases, principally those involving
non-investment
-12-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
grade lessees and ocean-going vessels, which are not in competition with the
Buyer. In addition, the sale agreements specifically reserved to EFG 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, including
the right to satisfy all required equipment acquisitions utilizing either
brokers or the Buyer. Geoffrey A. MacDonald, Chairman of Equis Corporation and
Gary D. Engle agreed not to compete with the sold business on terms and
conditions similar to those for the Company.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Statement of Cash Flows
- -----------------------
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight 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,
1996, the Partnership had $1,680,000 invested in reverse repurchase agreements
secured by U.S. Treasury Bills or interests in U.S. Government securities.
Revenue Recognition
- -------------------
Rents are payable to the Partnership monthly, quarterly or semi-annually and
no significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$3,309,314 are due as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
For the year ending December 31, 1997 $ 1,684,096
1998 1,410,734
1999 73,271
2000 47,071
2001 47,071
Thereafter 47,071
-----------
Total $3,309,314
===========
</TABLE>
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Gearbulk Shipowning Ltd. $ 795,855 $ 735,875 --
Northwest Airlines, Inc. $ 481,941 $ 1,192,661 $ 2,166,721
Fred Meyer, Inc. -- -- $ 1,394,588
Horizon Air Industries, Inc. $ 297,792 -- --
Sunworld International Airlines, Inc. $ 443,300 -- --
</TABLE>
-13-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
Use of Estimates
- ----------------
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Equipment on Lease
- ------------------
All equipment was acquired from EFG, one of its affiliates, including other
equipment leasing programs sponsored by EFG, or from third-party sellers.
Equipment cost represents asset base price plus acquisition fees and was
determined in accordance with the Restated Agreement, as amended, and certain
regulatory guidelines. Asset base price is affected by the relationship of the
seller to the Partnership as summarized herein. Where the seller of the
equipment was EFG or an affiliate, asset base price was the lower of (i) the
actual price paid for the equipment by EFG or the affiliate plus all actual
costs accrued by EFG or the affiliate while carrying the equipment less the
amount of all rents earned by EFG or the affiliate prior to selling the
equipment or (ii) fair market value as determined by the General Partner in its
best judgment, including all liens and encumbrances on the equipment and other
actual expenses. Where the seller of the equipment was a third party who did
not manufacture the equipment, asset base price was the lower of (i) the price
invoiced by the third party or (ii) fair market value as determined by the
General Partner. Where the seller of the equipment was a third party who also
manufactured the equipment, asset base price was the manufacturer's invoice
price, which price was considered to be representative of fair market value.
Depreciation and Amortization
- -----------------------------
The Partnership's depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset is
held on primary lease term, the Partnership depreciates the difference between
(i) the cost of the asset and (ii) the estimated residual value of the asset on
a straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Partnership continues to depreciate the remaining net book value of
the asset on a straight-line basis over the asset's remaining economic life.
Periodically, the General Partner evaluates the net carrying value of equipment
to determine whether it exceeds estimated net realizable value. Adjustments to
reduce the net carrying value of equipment are recorded in those instances where
estimated net realizable value is considered to be less than net carrying value.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including 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.
Organization costs were amortized using the straight-line method over a
period of five years.
Accrued Liabilities - Affiliate
- -------------------------------
Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges are reported as Accrued Liabilities -
Affiliate. (See Note 4.) At December 31, 1996, Accrued Liabilities - Affiliate
includes $201,399, representing aircraft reserves funded by the lessee and used
to pay maintenance costs which were advanced by EFG (See Note 3).
-14-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
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 1,547,930 units
outstanding during the years ended December 31, 1996, 1995 and 1994 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.
Impact of Recently Issued Accounting Standards
- ----------------------------------------------
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Partnership adopted Statement 121 in the first quarter of 1996. The adoption of
Statement 121 did not have a material effect on the financial statements of the
Partnership.
-15-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
NOTE 3 - EQUIPMENT
- ------------------
The following is a summary of equipment owned by the Partnership at December
31, 1996. In the opinion of EFG, the acquisition cost of the equipment did not
exceed its fair market value.
<TABLE>
<CAPTION>
Lease Term Equipment
Equipment Type (Months) at Cost Location
- -------------------------------- ----------- ------------- -----------------------------
<S> <C> <C> <C>
Aircraft 1-38 16,192,484 KY/MN/NY/OR
Vessels 57 4,205,030 Foreign
Manufacturing 24 1,551,460 OH
Materials handling 4-60 1,381,054 CA/CT/DE/GA/IN/LA/MD/MI/MO/NC
OK/SC/TN/TX/UT/WI
Computers & peripherals 6-51 886,571 AL/CT/GA/KY/MS/NC/SC/TN/VA
Construction and mining 12-60 526,525 MI/OH
Communications 60 469,389 OH
Trailers/intermodal containers 84 341,134 IL/OK
Retail store fixtures 12-36 33,820 GA/NC/SC/VA
Energy Systems 9-60 29,996 IL
Tractors and heavy duty trucks 60-78 18,426 IN
------------
Total equipment cost 25,635,889
Accumulated depreciation (21,000,199)
------------
Equipment, net of accumulated depreciation $ 4,635,690
============
</TABLE>
During September and November of 1995, the Partnership transferred its
ownership interest in certain trailers, previously leased to The Atchison Topeka
and Santa Fe Railroad, to a third party for cash consideration of $143,500. The
trailers had a net book value of $70,221 at the time of the transfer, resulting
in a net gain for financial statement purposes, of $73,279. In December 1995,
the Partnership replaced a portion of the trailers with comparable trailers and
leased such trailers to a new lessee. The transaction was structured as a like-
kind exchange for income tax reporting purposes. The net carrying value of the
new trailers, $299,650, was net of $41,733, representing the amount of gain
deferred on the original trailers. The Partnership funded this transaction with
the $80,961 of the cash consideration and long-term financing of $260,422. The
remaining gain of $31,546 was deferred in anticipation of completing an
additional like-kind exchange in 1996 and was reported as Other Liabilities on
the Statement of Financial Position at December 31, 1995. During 1996, the
Partnership elected not to replace the remaining trailers and, accordingly, the
remaining deferred gain of $31,546 was recognized as Gain on Sale of Equipment
on the Statement of Operations during 1996. In addition, the remaining cash
consideration of $62,539 from the original transaction, which was reported as
Contractual Right for Equipment on the Statement of Financial Position at
December 31, 1995, was recognized as proceeds from equipment sales.
During 1994, the Partnership incurred and capitalized costs of $397,500 to
refurbish and improve a cargo vessel leased by Gearbulk Shipowning Ltd.
("Gearbulk"), formerly Kristian Gerhard Jebsen Skipsrederi A/S, pursuant to the
terms of an extended and renegotiated lease contract with Gearbulk.
Refurbishment costs were financed by a third-party lender and shared between the
Partnership and other affiliated partnerships in proportion to their respective
ownership interests in the vessel. The refurbishment costs will be depreciated
over 15 years.
-16-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
In certain cases, the cost of the Partnership's equipment represents a
proportionate ownership interest. The remaining interests are owned by 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
enables the Partnership to further diversify its equipment portfolio by
participating in the ownership of selected assets, thereby reducing the general
levels of risk which could result from a concentration in any single equipment
type, industry or lessee. At December 31, 1996, the Partnership's equipment
portfolio included equipment having a proportionate original cost of
$20,946,654, representing approximately 82% of total equipment cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $3,677,899
and a net book value of approximately $2,274,868 at December 31, 1996. (See
Note 5.)
Generally, the costs associated with maintaining, insuring and operating the
Partnership's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Partnership.
As equipment is sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the equipment at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the equipment is dependent upon, among other things, EFG's
ability to maximize proceeds from selling or re-leasing the equipment upon the
expiration of the primary lease terms. The summary above includes equipment
held for sale or release with an original cost and net book value of
approximately $7,499,000 and $909,000, respectively, at December 31, 1996. This
equipment includes the Partnership's proportionate interest in a Boeing 727-251
Advanced aircraft (the "Aircraft"), formerly leased to Northwest Airlines,
Inc.("Northwest"), having a cost and net book value of approximately $6,484,000
and $903,000, respectively, at December 31, 1996. This aircraft was returned
upon expiration of its lease term on November 30, 1995 and is currently
undergoing heavy maintenance expected to cost the Partnership approximately
$550,000, all of which was incurred or accrued during the year ended December
31, 1996. The Partnership had entered into a 28-month lease agreement with
Transmeridian Airlines effective upon completion of the heavy maintenance.
However, as a result of delays in completing the heavy maintenance, the Aircraft
could not be delivered to the lessee on the stipulated date resulting in the
cancellation of the agreement. The General Partner is currently negotiating a
new lease agreement for the Aircraft.
NOTE 4 - RELATED PARTY TRANSACTIONS
- -----------------------------------
All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
1996, 1995 and 1994, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Equipment management fees $ 144,159 $177,760 $357,155
Administrative charges 37,037 21,000 12,000
Reimbursable operating
expenses due to third parties 916,221 355,605 123,302
---------- -------- --------
Total $1,097,417 $554,365 $492,457
========== ======== ========
</TABLE>
-17-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include all aspects of
acquisition, management and sale of equipment. For acquisition services, EFG 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
the lesser of (i) 5% of gross operating lease rental revenues and 2% of gross
full payout lease rental revenues received by the Partnership or (ii) fees which
the General Partner reasonably believes to be competitive for similar services
for similar equipment. Both of these fees are subject to certain limitations
defined in the Management Agreement. Compensation to EFG for services connected
to the sale of equipment is calculated as the lesser of (i) 3% of gross sale
proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under
arm's length circumstances. Payment of the remarketing fee is subordinated to
Payout and is subject to certain limitations defined in the Management
Agreement.
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.
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, 1996, the Partnership was owed $459,038 by EFG for such funds
and the interest thereon. These funds were remitted to the Partnership in
January 1997.
On August 18, 1995, Atlantic Acquisition Limited Partnership ("AALP"), a
newly formed Massachusetts limited partnership owned and controlled by certain
principals of EFG, commenced a voluntary cash Tender Offer (the "Offer") for up
to approximately 45% of the outstanding units of limited partner interest in
this Partnership and 20 affiliated partnerships sponsored and managed by EFG.
The Offer was subsequently amended and supplemented in order to provide
additional disclosure to unitholders; increase the offer price; reduce the
number of units sought to approximately 35% of the outstanding units; and extend
the expiration date of the Offer to October 20, 1995. Following commencement of
the Offer, certain legal actions were initiated by interested persons against
AALP, each of the general partners (4 in total) of the 21 affected programs, and
various other affiliates and related parties. One action, a class action
brought in the United States District Court for the District of Massachusetts
(the "Court") on behalf of the unitholders (Recognized Owners), sought to enjoin
the Offer and obtain unspecified monetary damages. A settlement of this
litigation was approved by the Court on November 15, 1995. The Plaintiffs filed
an appeal in this matter. On November 26, 1996, the United States Court of
Appeals for the First Circuit handed down a decision affirming the Court's
approval of the settlement. A second class action, brought in the Superior
Court of the Commonwealth of Massachusetts (the "Superior Court") seeking to
enjoin the Offer, obtain unspecified monetary damages, and intervene in the
first class action, was dismissed by the Superior Court. The Recognized Owners
of the Partnership tendered approximately 94,570 units or 6.11% of the total
outstanding units of the Partnership to AALP. The operations of the Partnership
were not adversely affected by these proceedings or settlements. On December 1,
1996, EFG purchased a Class D interest, representing a 49% economic interest in
AALP.
-18-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
NOTE 5 - NOTES PAYABLE
- ----------------------
Notes payable at December 31, 1996 consisted of installment notes of
$707,842 payable to banks and institutional lenders. All of the installment
notes are non-recourse, with interest rates ranging between 7.04% and 10.12%,
except one note which bears a fluctuating interest rate based on the London
Inter-Bank Offered Rate ("LIBOR") plus 1.5%. At December 31, 1996, the
applicable LIBOR rate was approximately 5.5%. The installment notes are
collateralized by the equipment and assignment of the related lease payments and
will be fully amortized by noncancellable rents. The carrying value of notes
payable approximates fair value at December 31, 1996.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
For the year ending December 31, 1997 455,514
1998 88,649
1999 36,717
2000 39,387
2001 42,251
Thereafter 45,324
----------
Total $ 707,842
==========
</TABLE>
NOTE 6 - INCOME TAXES
- ---------------------
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). 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 balance. At December 31, 1996, the General Partner had a
positive tax capital balance.
The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------------ ------------
<S> <C> <C> <C>
Net income $ 710,319 $ 458,868 $2,878,380
Financial statement depreciation
in excess of (less than) tax (112,391) 712,875 2,718,979
depreciation
Prepaid rental income 2,137 (17,998) (689,492)
Other 260,417 363,424 905,524
--------- ---------- ----------
Net income for federal income tax
reporting purposes $ 860,482 $1,517,169 $5,813,391
========= ========== ==========
</TABLE>
-19-
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
Notes to the Financial Statements
(Continued)
The principal component of "Other" consists of the difference between
the tax gain on equipment disposals and the financial statement gain 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, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Partners' capital $ 5,953,024 $ 9,177,708
Add back selling commissions and organization
and offering costs 4,348,553 4,348,553
Financial statement distributions in excess of
tax distributions 14,257 50,919
Cumulative difference between federal income
tax and financial statement income(loss) 1,183,493 1,033,330
------------- -------------
Partners' capital for federal income tax
reporting purposes $ 11,499,327 $ 14,610,510
============= =============
</TABLE>
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 7 - LEGAL PROCEEDINGS
- --------------------------
On July 27, 1995, EFG, on behalf of the Partnership and other
EFG-sponsored investment programs, filed an action in the Commonwealth of
Massachusetts Superior Court Department of the Trial Court in and for the County
of Suffolk, for damages and declaratory relief against a lessee of the
Partnership, National Steel Corporation ("National Steel"), under a certain
Master Lease Agreement ("MLA") for the lease of certain equipment. EFG is
seeking the reimbursement by National Steel of certain sales and/or use taxes
paid to the State of Illinois and other remedies provided by the MLA. On August
30, 1995, National Steel filed a Notice of Removal which removed the case to the
United States District Court, District of Massachusetts. On September 7, 1995,
National Steel filed its Answer to EFG's Complaint along with Affirmative
Defenses and Counterclaims, seeking declaratory relief and alleging breach of
contract, implied covenant of good faith and fair dealing and specific
performance. EFG filed its Answer to these counterclaims on September 29, 1995.
Though the parties have been discussing settlement with respect to this matter
for some time, to date, the negotiations have been unsuccessful.
Notwithstanding these discussions, EFG recently filed and Amended and
Supplemental Complaint alleging further default under the MLA and the matter
remains pending before the Court. The Partnership has not experienced any
material losses as a result of this action.
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and various other affiliated investment
programs, filed an action in the United States District Court for the District
of Massachusetts against Northwest, a lessee of the Partnership. The trustees
are seeking damages from Northwest and a declaratory judgment concerning
Northwest's maintenance and return obligations for certain aircraft owned by the
Partnership. In addition to filing its Answer to the Plaintiffs' Complaint.
Northwest also filed a motion to transfer venue of this proceeding to Minnesota.
The Court denied such motion. The parties have completed the initial phase of
discovery, and motions for partial summary judgment are due on March 28, 1997.
At present, it is not possible to determine the ultimate outcome of this matter.
-20-
<PAGE>
ADDITIONAL FINANCIAL INFORMATION
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1996, 1995 and 1994
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, 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- --------------
<S> <C> <C> <C>
Rents earned prior to disposal of $10,677,177 $3,973,037 $10,310,026
equipment, net of interest charges
Sale proceeds realized upon disposition
of equipment 1,602,589 1,521,381 4,107,220
----------- ---------- -----------
Total cash generated from rents
and equipment sale proceeds 12,279,766 5,494,418 14,417,246
Original acquisition cost of equipment
disposed 11,569,023 4,386,814 13,167,383
----------- ---------- -----------
Excess of total cash generated to cost
of equipment disposed $ 710,743 $1,107,604 $ 1,249,863
=========== ========== ===========
-21-
</TABLE>
<PAGE>
AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1996
<TABLE>
<CAPTION>
Sales and
Operations Refinancings Total
-------------- ------------- -------------------
<S> <C> <C> <C>
Net income (loss) $ (197,009) $ 907,328 $ 710,319
Add:
Depreciation 2,024,625 -- 2,024,625
Management fees 144,159 -- 144,159
Book value of disposed equipment -- 695,261 695,261
Less:
Principal reduction of notes payable (450,064) -- (450,064)
----------- ----------- -----------
Cash from operations, sales and
refinancings 1,521,711 1,602,589 3,124,300
Less:
Management fees (144,159) -- (144,159)
----------- ----------- -----------
Distributable cash from operations,
sales and refinancings 1,377,552 1,602,589 2,980,141
Other sources and uses of cash:
Cash at beginning of year 4,352,348 -- 4,352,348
Purchase of equipment (657,000) -- (657,000)
Net change in receivables and
accruals (45,633) -- (45,633)
Less:
Cash distributions paid (3,065,644) (1,602,589) (4,668,233)
----------- ----------- -------------
Cash at end of year $ 1,961,623 -- $ 1,961,623
=========== =========== =============
</TABLE>
-22-
<PAGE>
AMERICAN INCOME PARTNERS V-B 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, 1996
For the year ended December 31, 1996, the Partnership reimbursed the General
Partner and its Affiliates for the following costs:
Operating expenses $769,442
-23-
<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-B Limited Partnership of our report dated March
14, 1997, included in the 1996 Annual Report to Partners of American Income
Partners V-B Limited Partnership.
ERNST & YOUNG LLP
Boston, Massachusetts
March 14, 1997
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,961,623
<SECURITIES> 0
<RECEIVABLES> 702,607
<ALLOWANCES> 10,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,654,230
<PP&E> 25,635,889
<DEPRECIATION> 21,000,199
<TOTAL-ASSETS> 7,289,920
<CURRENT-LIABILITIES> 629,054
<BONDS> 707,842
0
0
<COMMON> 0
<OTHER-SE> 5,953,024
<TOTAL-LIABILITY-AND-EQUITY> 7,289,920
<SALES> 2,823,191
<TOTAL-REVENUES> 3,909,161
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,122,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,800
<INCOME-PRETAX> 710,319
<INCOME-TAX> 0
<INCOME-CONTINUING> 710,319
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 710,319
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
================================================================================
AIRCRAFT LEASE AGREEMENT
between
FIRST SECURITY BANK OF UTAH, N.A.
as Owner Trustee,
Lessor
and
SUNWORLD INTERNATIONAL AIRLINES, INC.,
Lessee
Dated as of January 1, 1996
covering one Boeing model 727-251A Aircraft
equipped with Pratt & Whitney model JT8D-15A Engines
Serial No. 21161
================================================================================
<PAGE>
LEASE AGREEMENT
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
SECTION 1. Definitions............................................................................ 1
-----------
SECTION 2. Lease and Delivery of the Aircraft..................................................... 5
----------------------------------
2.1. Lease. Lessee's Obligations and Conditions Precedent................................. 5
----------------------------------------------------
2.1.1. Execution of Operative Documents............................................ 5
--------------------------------
2.1.2. Evidence of Legal Authority to Lease and Operate the Aircraft............... 6
-------------------------------------------------------------
2.1.3. Evidence of Corporate Authority............................................. 6
-------------------------------
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
--------
2.3. Lessor Authority: Ancillary Documents................................................ 8
-------------------------------------
SECTION 3. Term, Rent, and Purchase Option........................................................ 8
-------------------------------
3.1. Term: Option to Extend............................................................... 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............................................................................. 9
--------
3.7 Purchase Option...................................................................... 11
---------------
SECTION 4. Representations, Warranties and Miscellaneous Covenants................................ 11
-------------------------------------------------------
4.1. The Lessee's Representations and Warranties.......................................... 11
-------------------------------------------
4.1.1. Organization and Qualification.............................................. 11
------------------------------
4.1.2. Corporate Authorization..................................................... 11
-----------------------
4.1.3. Government Approval......................................................... 11
-------------------
4.1.4. Valid and Binding Agreements................................................ 12
----------------------------
4.1.5. Litigation.................................................................. 12
----------
4.1.6. Financial Condition......................................................... 12
-------------------
4.1.7. Accuracy and Disclosure of Information...................................... 12
--------------------------------------
4.2. Representations and Warranties of the Lessor......................................... 12
--------------------------------------------
4.2.1. Due Organization............................................................ 12
----------------
4.2.2. Due Authorization: Enforceability........................................... 12
---------------------------------
4.2.3. No Violation................................................................ 13
------------
4.2.4. Ownership of Aircraft....................................................... 13
---------------------
4.2.5. No Consents or Approvals.................................................... 13
------------------------
4.2.6. Citizenship................................................................. 13
-----------
4.2.7. Discharge of FSBU Liens..................................................... 13
-----------------------
4.2.8. Litigation.................................................................. 13
----------
4.2.9. FSBU Litigation............................................................. 13
----------------
4.3. Disclaimer and Acknowledgment of Disclaimer: Waiver of Consequential Damages......... 14
----------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
4.4. Lessees 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........................................ 15
-------------------------------------
4.4.4. Change of Locale............................................................. 15
-----------------
4.4.5. Financial Information and Reports............................................ 15
----------------------------------
4.5. Lessors Covenant of Quiet Enjoyment.................................................. 16
-----------------------------------
SECTION 5. Operation. Maintenance. Possession..................................................... 16
----------------------------------
5.1. Title................................................................................ 16
-----
5.2. Operation............................................................................ 16
---------
5.3. Maintenance in General............................................................... 16
----------------------
5.4. Parts................................................................................ 17
-----
5.5. Airworthiness Directives............................................................. 18
------------------------
5.6. Service Bulletins.................................................................... 18
---------------
5.7. Modifications........................................................................ 18
-------------
5.8. Reports.............................................................................. 19
-------
5.9. Right to Inspect..................................................................... 20
----------------
5.10. Damage and Repairs................................................................... 20
------------------
5.11. Aircraft Documents................................................................... 20
------------------
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. Insignia............................................................................. 23
--------
SECTION 6. Return of the Aircraft................................................................. 23
----------------------
6.1. Return............................................................................... 23
------
6.2. Lease Continues...................................................................... 23
---------------
6.3. Return of Engines.................................................................... 23
-----------------
6.4. Condition of Aircraft................................................................ 24
---------------------
6.4.1. Operating Condition......................................................... 24
-------------------
6.4.2. Cleanliness Standards....................................................... 24
---------------------
6.4.3. Certificate of Airworthiness................................................ 24
----------------------------
6.4.4. Compliance with Governmental Requirements................................... 24
-----------------------------------------
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..................................................................... 25
-------
6.5.3. Parts....................................................................... 25
-----
6.6. Condition of Landing Gear............................................................ 26
-------------------------
6.7. Condition of Auxiliary Power Unit ("APU")............................................ 26
----------------------------------------
6.8. Condition of Engines................................................................. 26
--------------------
6.9. Historical Records: Trend Monitoring Data............................................ 26
-----------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6.10. Inspections.......................................................................... 27
-----------
6.11. Acceptance........................................................................... 27
----------
6.12. Discrepancy Correction: Financial Settlement......................................... 27
--------------------------------------------
6.13. Aircraft Documents................................................................... 28
------------------
6.14. Service Bulletin Kits................................................................ 28
---------------------
6.15. Lessee's Special Exterior Markings................................................... 28
----------------------------------
6.16. Disputes............................................................................. 28
--------
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.............................................................................. 34
---------
10.1. Reports.............................................................................. 34
-------
10.2. Lessor Maintaining Insurances........................................................ 34
----------------------------
10.3. Insurance Proceeds................................................................... 34
------------------
10.4. Property Insurance................................................................... 35
------------------
10.5. Liability Insurance.................................................................. 35
-------------------
10.6. Provisions Relating To All Insurances................................................ 36
-------------------------------------
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.............................................................. 39
-----------------------
14.2. Sale, Use, Etc....................................................................... 39
---------------
14.3. Liquidated Damages: Fair Market Rental................................................ 39
--------------------------------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
14.4. Cancellation, Termination, and Rescission............................................. 39
-----------------------------------------
14.5. Other Remedies....................................................................... 40
--------------
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........................................................... 43
-----------------------------
SECTION 19. Governing Law.......................................................................... 44
-------------
19.1. Consent to Jurisdiction.............................................................. 44
-----------------------
19.2. Choice of Law........................................................................ 44
-------------
SECTION 20. Miscellaneous.......................................................................... 44
-------------
SECTION 21. Truth-In-Leasing....................................................................... 45
----------------
EXHIBIT A: FORM OF LEASE SUPPLEMENT AND RECEIPT.................................................... 47
- -----------------------------------------------
EXHIBIT B: FORM OF AIRCRAFT RETURN RECEIPT AND LEASE
- -----------------------------------------------------
TERMINATION.................................................................................. 53
-----------
EXHIBIT C: FORM OF GUARANTEE....................................................................... 56
- ----------------------------
</TABLE>
<PAGE>
AIRCRAFT LEASE AGREEMENT
This AIRCRAFT LEASE AGREEMENT dated as of January 1, 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 1989-4 dated as of
December 13, 1989, and amended as of March 1,1990, 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 SUNWORLD
INTERNATIONAL AIRLINES, INC., a Kentucky corporation with its principal place of
business at 207 Grandview Drive, Fort Mitchell, Kentucky 41017-2799 ("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 21161, registration mark N282US, 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 a maintenance program applicable to
-----------------------------
the Aircraft 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 the 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.
"Beneficiaries" means American Income Partners V-A Limited Partnership, a
--------------
Massachusetts limited partnership, American Income Partners V-B Limited
Partnership, a Massachusetts limited partnership, American Income Partners V-C
Limited Partnership, a Massachusetts limited partnership, and American Income
Fund I-A, a Massachusetts Limited Partnership, a Massachusetts limited
partnership, each 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 Fort Mitchell, Kentucky.
"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
planning documents, or equivalent. Such full block C Check shall include all
structural inspections, corrosion control and other work normally completed in
conjunction with each block C Check.
Page 2 of 56
<PAGE>
"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 (3) Pratt & Whitney model JT8D-1SA engines,
-------
serial numbers 696253, 696529 and 695260, 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 (1)but excluding requisition for use or
hire not involving requisition of tide, provided such requisition for use
or hire does not continue beyond the end of the Term, and excluding
confiscation by the United States of America).
"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.
"FSBU" means First Security Bank of Utah, N.A., in its individual capacity.
----
"Guarantor" means Columbia Sussex Corporation, a Kentucky corporation with
---------
its principal place of business at 207 Grandview Drive, Fort Mitchell, Kentucky
41017-2799.
"Guaranty" means the Guaranty made by the Guarantor in favor of the Lessor
--------
and in the form attached hereto as Exhibit C.
Page 3 of 56
<PAGE>
"Indemnitee" means (i) the Lessor; (U) the Beneficiaries; (iii) any Lender;
-----------
(iv) American Finance Group, a Massachusetts general partnership, and (iv) their
respective successors, assigns, 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, or any Lien for Taxes imposed on any Indemnitee for which
the Lessee is not required to indemnify hereunder.
"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, notables, and discard items.
"Maintenance Provider" means Triad International Maintenance Corp.,
--------------------
Greensboro, North Carolina, or other internationally 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, such approval not to be
unreasonably withheld.
"Operative Documents" means this Lease (including a Lease Supplement and
-------------------
Receipt), the Guaranty, and any ancillary documents executed in connection
therewith.
"Overdue Payment Rate" means 12% 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
Page 4 of 56
<PAGE>
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 do not involve any material 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 Delivery Date and 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.
"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) 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" has the meaning given to such word in Section 3.1 hereof.
----
"US$ and Dollars" means the lawful currency of the United States.
---------------
Page 5 of 56
<PAGE>
SECTION 2. Lease and Delivery of the Aircraft
----------------------------------
2.1. Lease. Lessees 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. The
Lessees 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"): (1)
registered in the United States in the name of the Lessor (Lessor shall provide
a copy of a certificate of registration to Lessee); (2) with a current and valid
certificate of airworthiness (Lessor shall provide a copy of such certificate to
Lessee); (3) in compliance with all Aviation Authority regulations, including
without limitation, with all Airworthiness Directives (including twenty-year
aging aircraft Airworthiness Directives) completed on a terminating action
basis, qualified under Aviation Authority Part 121 for commercial passenger
operations, and accompanied by all Aircraft Documents required by the Aviation
Authority (Aircraft Documents for life-limited parts shall be "back-to-birth");
(4) fully equipped to Lessee's satisfaction; (5) configured with a minimum of
166 economy-class seats; (6) with Engines having an average of 3,000
hours/cycles across the wing, but no less than 2,000 hours/cycles on any one
Engine before next scheduled removal; (7) with all life-limited parts and
Aircraft time-controlled components having at least 2,000 hours/cycles remaining
based on the Northwest Airlines maintenance program; (8) zero time since a full
C Check and that segment of a D check necessary to bridge the Aircraft to the
Approved Maintenance Program; (9) with windshear detector installed; (10) with
MTOW increased to 186,500 pounds; (11) stripped or painted white; (12) clean by
commercial airlines standards; and with the auxiliary power unit in serviceable
condition and functioning satisfactorily. 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. Furthermore, the Lessee's obligation to lease the
Aircraft shall be conditioned upon provision, on the Delivery Date, to Lessee of
written confirmation in a form provided by Lessee and reasonably satisfactory to
Lessor from each Lender and Beneficiary that such Lender and Beneficiary is
aware of the covenant contained in Section 4.5 hereof and agrees that, provided
no Event of Default has occurred and continuing, such Lender or Beneficiary will
not interfere with Lessee's rights hereunder or its peaceful and quiet use,
operation and possession of the Aircraft hereunder. The Lessor's obligation to
lease the Aircraft shall be conditioned upon the absence of any Default
hereunder, 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 the Guarantor shall have executed and delivered the Guaranty:
Page 6 of 56
<PAGE>
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 the Guarantor, duly authorizing the execution, delivery and
performance of this Lease, the other Operative Documents to which the
Lessee or the Guarantor is a party, and other satisfactory evidence as may
be requested by Lessor that the Lessee and the 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 iii 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, confirming (subject to standard exceptions) that
(i) Lessee is a corporation duly incorporated, validly existing, in good
standing, and is qualified to do business under the laws of the State of
Kentucky; (iii) the execution, delivery and performance by Lessee of this
Lease have been duly authorized by all necessary corporate action on the
part of the Lessee, are not inconsistent with its Certificate of
Incorporation or By-Laws, and do not violate any United States or Kentucky
law, regulation or order applicable to Lessee; (iii) this Lease is the
legal, valid, binding and enforceable agreement of Lessee; and (iv) no
consent or approval by any United States or Kentucky authority or agency is
required with respect to the execution, delivery and performance by Lessee
of this Lease other than licenses, permits and approvals required of the
Aviation Authority for the operation and maintenance of the Aircraft by
Lessee.
2.1.6. Payment of Basic Rent and Security Deposit. Lessor shall have
------------------------------------------
received payment of Basic Rent for the first month of the Term, and 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 SECTION 4.3 HEREOF. Lessee shall accept delivery
of the Aircraft at Smyrna Airport, Smyrna, Tennessee, or such other place as may
be mutually agreed upon in writing by the Lessor and Lessee (the "Delivery
Location") and on January 19, 1996, or such other date as may be mutually agreed
upon in writing by the Lessor and Lessee (the "Delivery Date", which date shall
be the date of the Lease Supplement and Receipt). 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, as between Lessor and Lessee, by the Lessee of the
Aircraft under,
Page 7 of 56
<PAGE>
and for all purposes of, this Lease and as being airworthy, 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.
2.3. Lessor Authority: Ancillary Documents. On the Delivery Date, the
-------------------------------------
Lessor shall furnish to the Lessee (i) satisfactory evidence that the Lessor has
taken all corporate action necessary to authorize this Lease and the
transactions contemplated hereby; (ii) an incumbency certificate as to the
person or persons authorized to execute and deliver the same, in each case in
form and substance satisfactory to the Lessee; (iii) an assignment of 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 exists in favor of the Lessor and is
capable of being assigned or otherwise made available; and (iv) a favorable
opinion addressed to Lessee from counsel to Lessor, dated the Delivery Date and
in form and substance reasonably satisfactory to the Lessee.
2.4. Failure of Condition Precedent to Lessee's Acceptance. In the event
-----------------------------------------------------
that the 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. Upon such termination, Lessee shall be
entitled to the immediate return of the Security Deposit, and thereafter neither
party shall have any further liability or obligation to the other. 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.
SECTION 3. Term. Rent. and Purchase Option.
--------------------------------
3.1. Term: Option to Extend. The term for which the Aircraft is leased
----------------------
hereunder (the "Term") shall be thirty-six (36) months, commencing on the
Delivery Date, unless Expire occurs sooner pursuant to the express provisions of
this Lease. Provided no Default has occurred and is continuing, the Lessee may
extend the Term on the same terms for one year by providing Lessor with written
notice of its irrevocable election to extend the Term no less than ninety days
prior to the expiration of the original thirty-six-month Term.
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 Sixty-Five Thousand United States Dollars (US
$65,000).
3.3. Method of Payment. All Rent hereunder shall be paid by the Lessee
-----------------
not later than 2:00 P.M., New York time, on the date due thereof in U.S. Dollars
and in immediately available funds to the Lessor by deposit to:
Page 8 of 56
<PAGE>
National Westminster Bank
80 Pine Street
New York, New York 10005
ABA#021-000-322
Acct.#2181-01-7585
Acct. Name: American Finance Group
Reference: AFG Sunworld
or to such other United States bank 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 in an amount equal to One Hundred Thirty
Thousand United States Dollars (US $130,000) 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 to cure such Default by
the Lessee. 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 within five Business Days after 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. Except
as otherwise expressly provided herein, the Security Deposit shall remain in
effect until the Aircraft is returned in the condition required by this Lease
and an Aircraft Return Receipt and Lease Termination in the form of Exhibit B is
executed. Lessee shall not be entitled to off-set any Rent against the Security
Deposit. At the return of the Aircraft in the condition required by this Lease,
Lessor shall return the Security Deposit, without interest, provided that Lessee
has otherwise fulfilled all its obligations hereunder. Lessor shall be under no
obligation to segregate the Security Deposit, and may mingle the Security
Deposit with other funds. Lessee hereby grants Lessor a security interest in the
Security Deposit, and Lessee shall deliver to Lessor any financing statement or
other documentation necessary or advisable to perfect Lessor's security interest
in the Security Deposit.
3.6. Reserves. D Checks (whether phased or block, as defined in the
--------
Approved Maintenance Manual), C Checks, Engine heavy maintenance requiring shop
repair, landing gear
Page 9 of 56
<PAGE>
overhauls, and auxiliary power unit overhauls are collectively and individually
referred to as "Reserve Tasks." In addition to monthly installments of Basic
Rent, Lessee shall pay to Lessor an hourly payment to be reserved for Reserve
Tasks as follows:
3.6.1. The Lessee shall, on or before the 10th day of each calendar
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 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 heavy maintenance (including overhaul, hot section inspection,
replacement of internal Life Limited Components that have reached their
applicable hour or cycle limits, disassembly, assembly and testing required
thereof) requiring shop repair 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 auxiliary power unit overhaul in
accordance with the Approved Maintenance Program, US $3. The foregoing
amounts shall be collectively or individually referred to as "Reserves."
3.6.2. Upon submission by Lessee to Lessor of invoices or receipts
evidencing the performance of a Reserve Task in accordance with the
provisions hereof, Lessor shall, provided that an Event of Default shall
not have occurred and be continuing, reimburse Lessee from Reserves
corresponding to the Reserve Task, but not in an amount to exceed the
actual 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 3.6.5, 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. [INTENTIONALLY OMITTED]
3.6.4. Reserves shall be and remain the property of the Lessor until
disbursed. Except as expressly set forth in Section 3.7 below, all
undisbursed Reserves, upon Expire, 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.
3.6.5. Lessor Contribution for Reserve Tasks. Only for the first
-------------------------------------
scheduled overhaul for each Engine during the Term provided the build
standard for such Engine overhaul does not exceed 6,000 hours/cycles), for
the first auxiliary power unit overhaul
Page 10 of 56
<PAGE>
during the Term, and for the first landing gear overhaul during the Term,
the Lessor shall reimburse Lessee for a fraction of the cost to Lessee for
each such Reserve Task, the numerator of which fraction shall be the time
since such overhaul on the Delivery Date and the denominator of which
fraction shall be the time since overhaul when such Reserve Task is
occasioned.
3.7 Purchase Option. Provided no Default has occurred and is continuing,
---------------
the Lessee may purchase (i) the Aircraft, together with (ii) any undisbursed
Reserves less any Lessor contribution for Reserve Tasks pursuant to Section
3.6.5 above (the "Sold Reserves") on the following terms and conditions. The
Lessee may purchase the Aircraft together with the Sold Reserves at the end of
the twenty-fourth month of the Term for a purchase price of US$2,750,000, or at
the end of the thirty-sixth month of the Term for a purchase price of
US$2,450,000. To purchase the Aircraft together with the Sold Reserves at either
time, the Lessee must first provide the Lessor with written notice of its
irrevocable election to purchase no less than ninety days prior to the purchase
date. Any sale shall be "AS-IS," and Lessee shall be responsible for and
indemnify Lessor from any sales or use taxes. Upon such sale, the Lease shall
terminate, and Lessor shall return to Lessee the Security Deposit.
SECTION 4. Representations, Warranties and Miscellaneous Covenants.
--------------------------------------------------------
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 Kentucky,
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) [INTENTIONALLY OMITTED], (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, (E) 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
Page 11 of 56
<PAGE>
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 (1))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.
4.1.4. Valid and Binding Agreements. This Lease constitutes the
----------------------------
legal, valid and binding obligations of the Lessee enforceable against the
Lessee.
4.1.5. Litigation. There are no unsatisfied judgments 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 if adversely determined
would 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. [INTENTIONALLY OMITTED]
-------------------
4.1.7. Accuracy and Disclosure of Information. [INTENTIONALLY OMITTED]
--------------------------------------
4.2. Representations and Warranties of the Lessor and FSBU. The Lessor and,
-----------------------------------------------------
with respect to Sections 4.2.5, 4.2.6, 4.2.7, and 4.2.9., FSBU, make the
following representations and warranties:
4.2.1. Due Organization. The Lessor is a national banking association
----------------
duly organized and validly existing if 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;
Page 12 of 56
<PAGE>
4.2.2. Due Authorization: Enforceability. This Lease has been, and
---------------------------------
the Lease Supplement and Receipt, and each other document delivered by
Lessor in connection herewith 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 Supplement and Receipt will
be, legal, valid and binding obligations of the Lessor, enforceable against
Lessor.
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 and each other document to with Lessor is a party
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 16 hereof.
4.2.5 No Consents or Approvals. Neither the execution and delivery by
------------------------
Lessor of this Agreement or any other document delivered by it in
connection herewith nor the consummation of any of the transactions
contemplated thereby requires the consent or approval of, the giving of
notice to, or the registration with, any Utah state governmental authority
or agency or any United States federal governmental authority or agency
governing the banking or trust powers of FSBU.
4.2.6 Citizenship. FSBU is a "citizen of the United States" as
-----------
defined in Aviation Law, and Lessor hereby agrees, promptly upon an officer
in its Corporate Trust Department obtaining actual knowledge of its failure
to maintain its status as a citizen of the United States, to give notice to
the Lessee and to resign as owner trustee promptly upon its ceasing to be a
citizen of the United States.
4.2.7. Discharge of FSBU Liens. There are no Liens on the Aircraft
-----------------------
attributable to FSBU and FSBU agrees that it will, in its individual
capacity and at its own cost and expense, promptly take such action as may
be necessary to duly discharge and satisfy in full any such Liens.
4.2.8. Litigation. There are no unsatisfied judgements against Lessor,
----------
and there is no pending or, to the best of the Lessor's knowledge,
threatened action or proceeding affecting the Lessor before any court,
tribunal, governmental agency or arbitrator which
Page 13 of 56
<PAGE>
if adversely determined would materially adversely affect the financial
condition or operations of the Lessor or the ability of the Lessor to
perform its obligations under the Lease.
4.2.9. FSBU Litigation. There are no pending or, to the actual
---------------
knowledge of an official in FSBU's Corporate Trust Department, threatened
actions or proceedings before any court or administrative agency to which
FSBU is a party, or any other actions or proceedings before any court or
administrative agency which relate to FSBU's banking or trust powers which,
if determined adversely to FSBU, would materially and adversely affect its
right, power, and authority to perform its obligations under this Agreement
or any document delivered by it in accordance herewith.
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.
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
Page 14 0f 56
<PAGE>
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 3.6.5 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
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, all or
substantially all of its assets. Lessee shall not (A) voluntarily suspend
its operations; or (B) voluntarily or involuntarily permit to be revoked,
canceled or otherwise terminated all or substantially all of the
franchises, concessions, or permits 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 the occurrence of or the existence of a
Default forthwith upon becoming aware of such Default.
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 of Lessee 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 promptly advise Lessor of any
----------------
change in 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 and in any event within 120 days after
the end of each fiscal year
Page 15 of 56
<PAGE>
of each of the Lessee and the Guarantor, the Lessee's and the Guarantor's
respective audited annual financial statements in a form consistent with
generally accepted accounting principles certified as to their correctness
by independent public auditors, and (ii) within 45 days after the end
thereof their respective quarterly financial statements certified as to
their correctness by their respective duly authorized chief financial
officer, together with a certificate signed by the Lessee's duly authorized
chief executive officer to the effect that, based upon due inquiry and
investigation, during such financial quarter no Event of Default occurred.
The Lessee's fiscal year ends December 31. The Guarantor's fiscal year ends
December 31.
4.4.6. Evidence of Legal Authority to Lease and Operate the Aircraft.
--------------------------------------------------------------
No later than January 31, 1996, 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, any Lender, the Beneficiaries, nor anyone validly claiming through or
under any of them will take (or fail to take) any action, the taking (or failure
to take) of which causes interference with the Lessee's rights hereunder or its
peaceful and quiet use, operation and possession of the Aircraft under this
Lease. Should such interference occur, Lessor shall promptly eliminate the cause
thereof, upon written notice from Lessee.
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 operate
the Aircraft except in a passenger configuration, in commercial or other
operations for which Lessee is duly authorized by the Aviation Authority. 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, provided that Lessee will not
knowingly allow passengers or cargo customers to transport illegal drugs on the
Aircraft. 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. The
obligations of Lessee under this provision shall survive the end of the Term.
Page 16 0f 56
<PAGE>
5.3. Maintenance in General. Lessee, at its own cost and expense (except
----------------------
as expressly otherwise provided in Sections 3.6.5 and 5.5), 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 Boeing
727-200 aircraft in its fleet, including Airworthiness Directive compliance and
level of incorporation, repairs, cleanliness, and correction of items of a
cosmetic nature (such as hail damage), except where the terms of this Lease
dictate other standards (provided, however, that lessee shall not be required to
hushkit the Aircraft); 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. The "build standard" applicable to all Engine shop
visits shall be 6,000 hours with regard to both exhaust gas temperature and Life
Limited Components. Excepting only "AOG" situations, selection of a Maintenance
Provider shall be subject to Lessor's prior written approval, such approval not
to be unreasonably withheld. All maintenance (other than routine flight line
maintenance) shall be performed by the manufacturer or the Maintenance Provider
(excepting "AOG" situations) in accordance with the Approved Maintenance
Program. If any significant changes (including without limitation, time limit
changes) shall be made to such Approved Maintenance Program, a copy of such
proposed changes shall be delivered to Lessor for its prior written approval,
such approval not to be unreasonably withheld, before such change is submitted
to the Aviation Authority for approval.
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 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.
Page 17 of 56
<PAGE>
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 specific instructions. Lessee shall comply with all
Airworthiness Directives at its sole cost and expense up to US$25,000 per any
one Airworthiness Directive. In the event that the cost of incorporating any
terminating Airworthiness Directive (including parts, labor, and materials, but
excluding any profit to Lessee) exceeds US$25,000 per any one Airworthiness
Directive, the amount of the excess to be borne by the Lessor shall be
calculated in accordance with the following formula:
1 - (N-M) x (C-25,000)
-----
T
where "N" equals the total duration of the Term in months; "M" represents the
month of the Term in which the modification is completed; "C" represents the
total actual cost of labor, parts, and materials for the modification; and "T"
equals the actual useful life of the modification in months, not to extend
beyond December 31, 1999. If the Lessee's cost of complying with any one
Airworthiness Directive that must be accomplished during the Term exceeds One
Hundred Thousand Dollars (US$100,000) in any individual case, 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 US$100,000, 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 (i) the Excepted AD, and (ii) the C Check
required by Section 6.5.1.
Page 18 of 56
<PAGE>
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 adopts and
incorporates during the Term on the rest of the B727-200 aircraft in its fleet.
The Aircraft, with respect to the rest of the B727-200 aircraft in Lessee's
fleet, shall not be discriminated against in service bulletin compliance or
other maintenance matters.
5.7. Modifications.
-------------
5.7.1. Lessee, at its own expense, shall make such alterations and
modifications in and additions to the Airframe or any Engine or Appliance
as may be required to be made from time to time by Aviation Law during the
Term regardless upon whom such requirements are, by their terms, nominally
imposed, including, without limitation, any modifications required to
enable the Aircraft to comply with environmental, noise, air pollution, and
other standards ("Required Modifications"); provided, however, that Lessee
shall not be required to hushkit the Aircraft.
5.7.2. 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, (ii) changes which could
adversely affect spare parts, interchangeability or replaceability, and
shall exclude Required Modifications.
5.7.3. 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.
5.7.4. All Optional Modifications, except as otherwise provided
herein, 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. Lessor hereby consents to the following Optional Modifications,
and agrees that such Optional Modifications may be
Page 19 0f 56
<PAGE>
removed from the Aircraft on the Return Date: (1) a global positioning
system, provided that wiring therefor shall become an accession to the
Aircraft owned by Lessor; (2) overwater emergency equipment supplied by
Lessee; (3) an HF radio system supplied by Lessee; and (4) ACARS supplied
by Lessee.
5.8. Reports. Lessee shall furnish to Lessor the following reports on a
-------
monthly basis: (i) the hours and cycles operated by the Airframe; and (ii) the
hours and cycles operated by each of the Engines (noting their location). Lessee
shall furnish to Lessor the following reports on a quarterly basis: (iii)
scheduled and unscheduled Engine and Appliance changes; (iv) damage reports; (v)
a list of those service bulletins, Airworthiness Directives and engineering
modifications issued during such quarter and applicable to the Aircraft, whether
or not incorporated on the Aircraft; (vi) copies of any written communications
with manufacturers with respect to defects or malfunctions of the Aircraft or
such other matters; and (vii) 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. No such inspection shall
interfere with Lessee's business or operations. The cost of the inspection or
survey shall be paid by Lessee if the Aircraft, or any part thereof, is not in
the condition required by this Lease, but shall otherwise be paid by the Lessor.
All repairs which shall be shown by the inspection or survey to be required
shall be made at Lessee's expense in accordance with the 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. 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. Such repairs shall be permanent.
Repairs to the skin of the Aircraft shall be flush and not merely patched,
unless otherwise permitted or provided in the Airframe manufacturer structural
repair manual; provided that any such permitted patch shall be permanent and not
temporary. 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; 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
Page 20 of 56
<PAGE>
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.
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 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.
Page 21 of 56
<PAGE>
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 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;
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; and
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) no Default or Event of
Default shall have occurred and be continuing; (iii) the term of any such
sublease shall not exceed the Term of this Lease; (iv) the
Page 22 of 56
<PAGE>
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 (in the name of the Lessor
or otherwise) exercise all rights and powers, and have all benefits, of the
sublessor under any such sublease, including, without limitation, the right
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. Insignia. [INTENTIONALLY OMITTED]
--------
SECTION 6. Return of the Aircraft.
----------------------
6.1. Return. Subject to the provisions of Sections 3.7 and 5.5 above,
------
Section 9 below, and 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 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 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; provided, however that if on the Return Date the
Aircraft is not in Lessee's possession as a result of a breach by Lessor of the
covenant set forth in Section 4.5 hereof, the aircraft shall be deemed
redelivered to Lessor wherever then located and any taxes or other costs and
expenses associated with delivery at such location shall be for the account of
Lessor. At the time of acceptance of return of the Aircraft to Lessor,
Page 23 of 56
<PAGE>
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 day of the Term or earlier Expiry in
the condition required hereunder, then all of the obligations of Lessee under
this Lease shall continue and such continued use shall not be considered a
renewal of the Term of this Lease or a waiver of any right of 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 within five (5)
Business Days after presentation of Lessor's invoice and any failure to pay
shall constitute an Event of Default of Lessee.
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 by bill of
sale 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
m accordance with their intended use irrespective of deviations or
variations authorized by the minimum equipment list or configuration
deviation list.
Page 24 of 56
<PAGE>
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.
6.4.3. Certificate of Airworthiness. The Aircraft shall have; and
----------------------------
be in compliance with (except to the extent that the provisions of Section
5.5 above pertain) 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; provided, however, the
Lessee shall not be required to hushkit the Aircraft.
6.4.4. Compliance with Governmental Requirements. Subject only to
-----------------------------------------
the provisions of Section 5.5 above, 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 and parts permitted to be removed pursuant to Section 5.7.4.
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.
Page 25 of 56
<PAGE>
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 zero (0) hours out of a C
-------
Check immediately prior to its flight to the Return Location which C Check
shall include 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.
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 paint shall be touched up. 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
Aviation Authority 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 Aviation Authority
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.
Page 26 of 56
<PAGE>
6.6. Condition of Landing Gear. Each main and nose landing gear component
-------------------------
and each associated actuator and Part 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 serviceable 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. Each Engine shall meet both the Engine
--------------------
manufacturer specifications and the Approved Maintenance Program parameters for
acceptable exhaust gas temperature margin, engine pressure ratio, and fuel flow
at maximum certificated rated thrust.
6.9. Historical Records: Trend Monitoring Data. If the Engine historical
-----------------------------------------
and maintenance records and/or trend monitoring data indicate a rate of
acceleration in performance deterioration of any installed Engine which is
higher than normal based on Lessee's maintenance experience in operating such
Engines, or if an Engine is "on watch," Lessee shall, prior to the Aircraft's
return, correct or cause to be corrected such conditions which are determined to
exceed the Engine manufacturer's maintenance manual tolerances or otherwise be
causing such performance deteriorations or "on watch" condition.
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 the 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.
Page 27 of 56
<PAGE>
6.10.4. The Aircraft shall be test flown by Lessee at Lessee's
expense for not less 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 certificated performance without
limitation.
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 after presentation 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 greater 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 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. 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.
Page 28 of 56
<PAGE>
6.15. Lessee's Special Exterior Markings. At the time of the return of the
----------------------------------
Aircraft, Lessee shall 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 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 after presentation of Lessor's invoice therefor. Any late payments
shall be subject to interest at the Overdue Payment Rate.
6.16. 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. Anything to
the contrary provided in this Section 6, (i) in the event that at the Return
Date Lessee shall not be in possession by reason of a breach by Lessor of the
covenant set forth in Section 4.5 herein, Lessee shall be deemed to be in full
compliance with the conditions set forth in this Section 6, assuming such
Aircraft was in the condition then required at the time of its removal from
Lessee's possession as a result of such breach; and (ii) 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;
Page 29 of 56
<PAGE>
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;
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
8.1.12. 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
Page 30 of 56
<PAGE>
Indemnitee), save where such sale, assignment, transfer or other
disposition is caused by or results from an Event of Default.
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 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 Lease.
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
Page 31 of 56
<PAGE>
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 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, except only if arising during any period when
the Aircraft shall not be in Lessee's possession as a result of a breach by
Lessor of the covenant set forth in Section 4.5 hereof, during the period
commencing when the Lease Supplement and Receipt is executed and delivered by
Lessee
Page 32 of 56
<PAGE>
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 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, this Lease shall terminate and
the Lessor will transfer to Lessee or its insurers, as appropriate, 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, as soon as reasonably practicable 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 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, the Lessor will (A) transfer to
Lessee or its insurers title to 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. Lessee shall be entitled to retain or to be reimbursed by
Lessor the amount of insurance or condemnation proceeds, if any, received by
Lessor with respect to such replaced Engine.
Page 33 of 56
<PAGE>
9.4. Requisition. In the event of the requisition for use by the
-----------
Government of the United States of the Airframe or any Engine during the Term,
Lessee shall promptly notify Lessor of such requisition and all Lessee's
obligations under this Lease with respect to the Airframe or such Engine shall
continue to the same extent as if such requisition had not occurred. If the
Airframe or such Engine shall not be returned by the Government of United States
prior to the end of the Term, Lessee obligations under this Lease shall continue
until the end of such requisition, including without limitation the obligations
to pay Rent and to return the Airframe or such Engine to Lessor in accordance
with the provisions of Section 6 promptly upon its return by the Government of
the United States. Provided no Event of Default has occurred and is continuing,
all payments received by Lessor or Lessee from the Government of the United
States for the use of the Airframe or such Engine during such requisition shall
be paid over to, or retained by, Lessee.
SECTION 10. Insurance. Throughout the Term 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.
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 of the types
and in the amounts herein provided 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
Page 34 of 56
<PAGE>
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 insurers are 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 insurers have 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:
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 Five Hundred Thousand Dollars (US$3,500,000) (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 or a state thereof; 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.
Page 35 of 56
<PAGE>
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 (US$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
Two Hundred Fifty Million Dollars (US$250,000,000) 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:
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, provided that full war risks and related insurance must be in
effect at all times for all areas into or over which the Aircraft may
operate);
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;
Page 36 of 56
<PAGE>
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. 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 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 Lessor and Lessee will each
------------------
promptly and duly execute and deliver such documents and assurances and take
such action as may be necessary or desirable, or as either party 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.
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 days after receipt of notice
from Lessor that such payment was not received when due; or
Page 37 of 56
<PAGE>
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 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 in this Lease or in any other Operative Document or
in any document or certificate furnished by the Lessee 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 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, unbonded or unstayed for a period of
60 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 thirty (30) calendar 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. Lessee shall fail to pay any indebtedness or
-----------------
other obligation of Lessee due and payable in excess of the value of US$100,000,
or there shall occur a declaration of default, an acceleration or any exercise
of remedies with respect to any
Page 38 of 56
<PAGE>
obligation or liability of Lessee in or relating to an amount in excess of the
value of US$100,000; or
13.9. Guarantor Default. An "Event of Default," as defined therein, shall
-----------------
have occurred under the 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 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
Page 39 of 56
<PAGE>
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 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:
Page 40 of 56
<PAGE>
15.1.1.1. This Lease, any misrepresentation made by the Lessee under
this Lease, or the breach of any representation, warranty, or covenant made
by the Lessee under this Lease;
15.1.1.2. The manufacture, lease, delivery, nondelivery, acceptance,
rejection, ownership (to the extent attributable to Lessee's acts or
omissions), 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.
15.1.1.5. The foregoing indemnity shall not apply to (i) any Claim
that constitutes a Permitted Lien, (ii) Claims for Taxes, it being agreed
that Section 8 hereof represents Lessee's entire obligation with respect to
Taxes, (iii) Claims attributable to the wilful misconduct of an
Indemnitee; (iv) Claims attributable to any misrepresentation made by the
Lessor under this Lease, or the breach of any representation, warranty, or
covenant made by the Lessor under this Lease; or (v) Claims arising prior
to the Delivery Date or subsequent to the Return Date; provided, however,
that this Subsection 15.1.1.5 shall be construed only as a limitation on
the indemnity set forth in this Section 15, and shall not be deemed a
waiver by Lessor of any Claims available to Lessor at law or in equity.
15.1.2. The Lessee waives and releases each Indemnitee from any Claims in
any way connected with injury to or death of the Lessee's personnel, loss or
damage of the Lessee's property, which may:
15.1.2.1. Result from or arise during the Term in any manner out of
the leasing, condition, use or operation of the Aircraft; or
15.1.2.2. Be caused during the Term 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, except
to the extent that such Claim arises out of the breach by any Indemnitee of
its obligations hereunder. The foregoing waiver and release shall not apply
to any Claim arising out of the wilful misconduct of any Indemnitee.
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.
Page 41 0f 56
<PAGE>
15.2. Legal Fees and Expenses. The Lessee agrees to pay the reasonable
-----------------------
legal fees and expenses of Lessor's counsel in connection with the enforcement
against Lessee 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. 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 in any manner adversely
affect Lessee's rights or increase the aggregate financial exposure under the
indemnity obligations of Lessee under this Lease or unreasonably increase any
other obligation, liability, cost, or expense, as compared to what such
indemnity obligations, or any other obligation, liability, cost or expense would
have been had such assignment, sale or encumbrance not occurred; provided,
however, that as a minimum level cooperation Lessee at its expense shall, if
requested by Lessor, (i) execute documents naming any Lender as an Indemnitee
hereunder; (ii) cause the Insurances to designate any Lender as a loss payee and
additional insured; (iv) provide notices to any Lender pursuant to Section 17
hereof; and (v) execute a reasonable consent to an assignment of this Lease to
such Lender. In the event any interest of the Lessor in the Aircraft or this
Lease and/or the proceeds therefrom is assigned, sold or encumbered by Lessor,
any assignee, transferee, mortgagee, or other secured party shall agree as a
condition precedent thereto, and shall furnish written evidence of such
agreement to Lessee, not to disturb or otherwise interfere with the rights of
Lessee under this Lease or the quiet enjoyment of Lessee of the Aircraft so long
as no Event or Default shall have occurred and be continuing; and provided,
further, that no such assignment, sale or encumbrance shall be to other than an
entity which shall be a United States citizen in accordance with Aviation Law.
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:
Sunworld International Airlines, Inc.
207 Grandview Drive
Fort Mitchell, Kentucky 41017-2799
Attention: Treasurer
Page 42 of 56
<PAGE>
Telecopier: (606) 331 6383
with copies to:
Winthrop, Stimson, Putnam & Roberts
1 Battery Park Plaza
New York, New York 10004
Attention: Ruth J. Weinstein
Telecopier: (212) 858-1500
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 Like City, Utah 84111
Attention: Corporate Trust Department
Telecopier: (801) 246-5053
with copy to:
American Finance Group
98 North Washington Street
Boston, Massachusetts 02114
Attention: Manager
Telecopier: (617) 523-1410
and:
American Finance Group, Inc.
One Market Plaza, Steuart Street Tower, Suite 900
San Francisco, CA 94105 U.S.A.
Attention: General Counsel
Telecopier: (415) 905-7256
or to such other address as the Lessor shall from time to time designate in
writing to Lessee.
Page 43 of 56
<PAGE>
SECTION 18. No Set-Off, Counterclaim, Etc. Subject only to the
-----------------------------
Lessor's compliance with its obligations under Sections 3.6.5, 4.5, and 5.5, 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 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. If for any reason whatsoever this Lease
shall be terminated in whole or in part by operation of Applicable Law the
Lessee nonetheless agrees to pay to the Lessor an amount equal to each Basic
Rent payment for the Aircraft at the time such payment would have become due and
payable in accordance with the terms hereof had this Lease not been so
terminated in whole or in part. 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
Page 44 of 56
<PAGE>
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 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.
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.
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 agents,
servants, and personal representatives 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. 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.
Page 45 of 56
<PAGE>
SECTION 21. Truth-In-Leasing. FOR PURPOSES OF 14 CRF SECTION 91.23
----------------
ONLY, LESSOR CERTIFIES THAT DURING THE TWELVE MONTHS PRECEDING THE EXECUTION OF
THIS LEASE THE AIRCRAFT WAS MAINTAINED AND INSPECTED UNDER PART 121 OF THE
FEDERAL AVIATION REGULATIONS.
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. 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 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, National Association,
not in its individual capacity but solely as owner
trustee under that certain Trust Agreement
"AFG/Northwest Airlines 1989-4 Trust" dated as of
December 13, 1989, and amended as of March 1, 1990,
the Lessor
/s/ Greg A. Hawley
By: Greg A. Hawley
Title: Assistant Vice President
SUNWORLD INTERNATIONAL AIRLINES, INC.
the Lessee
/s/ Terence O. Dennison
By: Terence O. Dennison
Title: Executive Vice President
Page 46 of 56
<PAGE>
EXHIBIT A: FORM OF LEASE SUPPLEMENT AND RECEIPT
-----------------------------------------------
LEASE SUPPLEMENT AND RECEIPT dated January 19 , 1996 between FIRST
--
SECURITY BANK OF UTAH, N.A., not in its individual capacity but solely as owner
trustee under that certain Trust Agreement 1989-4 dated as of December 13, 1989,
and amended as of March 1, 1990 (the "Lessor"), and Sunworld International
Airlines, Inc. (the "Lessee").
The Lessor and the Lessee have heretofore entered into that certain
Aircraft Lease Agreement. dated as of January 1, 1996 (herein called the "Lease"
and the defined terms therein being hereinafter used with the same meanings),
relating to one Boeing model 727-25lA aircraft, manufacturer serial number
21161. 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, binding, and enforceable agreements of
Lessee. 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 5 pages (including attachments) and
---
made a part hereof, and the Aircraft Documents described in Schedule 2 hereto,
consisting of 1 pages (including attachments) and made a part hereof, have been
---
delivered to the Lessee, inspected by the Lessee, 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 SECTION
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.
Page 47 of 56
<PAGE>
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.
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, National Association,
not in its individual capacity but solely
as Owner Trustee under that certain Trust Agreement
"AFG/Northwest Airlines 1989-4 Trust" dated as of
December 13, 1989, and amended as of March 1, 1990,
the Lessor
/s/ Greg A. Hawley
By: Greg A. Hawley
Title: Assistant Vice President
SUNWORLD INTERNATIONAL AIRLINES, INC.
the Lessee
/s/ Terence O. Dennison
By: Terence O. Dennison
Title: Executive Vice President
Page 48 of 56
<PAGE>
SCHEDULE 1 TO LEASE SUPPLEMENT AND RECEIPT: AIRCRAFT DESCRIPTION
- -------- - -- ----- ---------- --- ------- -------- -----------
Airframe: Boeing model 727-251A, serial number 21161, US
registration N282US
Total hours: 50598:33 Total cycles: 35609
Time since C check: 0 Time since D check: 0
Engine No.1: Pratt & Whitney model JT8D-15A engine,
manufacturer serial number 696253.
See. Attached disk sheet dated 9/15/95, 1995
- ---
Engine No. 2: Pratt & Whitney model JT8D-15-A engine,
manufacturer serial number 696520.
See. Attached disk sheet dated 10/10/95, 1995
- ---
Engine No. 3: Pratt & Whitney model JT8D-15-A engine,
manufacturer serial number 695260.
See. Attached disk sheet dated 10/10/95, 1995
Landing gear time since overhaul: L9309 hours, R6 hours, N17779 hours.
Auxiliary power unit: manufacturer Garrett serial number P36543.
Time since hot section inspection: 0
Avionics (specified by manufacturer): see attachment consisting of 3 pages. see
attachment A.
Interior configuration: 164 seats coach
Loose equipment: [SPECIFY GALLEY EQUIPMENT, EXTRA SEATS,
ETC.] see attachment B.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
*1 *2
----- -----
Operating weights: Maximum ramp weight: 177,500 187,500
Maximum gross take-off weight: 176,500 186,500
Maximum landing weight: 150,000 150,000
Zero fuel weight: 138,000 141,000
</TABLE>
*1 As delivered
*2 Weight per lease, awaiting FAA Engineering approval.
Page 49 of 56
<PAGE>
SCHEDULE 2 TO LEASE SUPPLEMENT AND RECEIPT: AIRCRAFT DOCUMENTS
- -------- - -- ----- ---------- --- ------- -------- ---------
AIRCRAFT DOCUMENTS CHECKLIST
1. Avionics Installation List
2. Original Manufacturers Inventory List
3. Current Component Inventory List (Northwest)
4. Service Bulletin (SB) Accomplishment List (Northwest)
5. Record of last Compass Swing
6. List of Oils and Fluids
7. FAA Approved Airplane Flight Manual (AFM)
8. Manufacturer's Flight Crew Operating Manual (FCOM) (Northwest)
9. Releasing Operator's Flight Crew Operating Manual (Northwest)
10. Weight and Balance Manual; last weighing
11. Minimum Equipment List (MEL) (Northwest)
12. MEL Procedures manual (Northwest)
13. Maintenance Manuals (Northwest)
14. Wiring Diagram Manual; Termination and Equipment Lists (Northwest)
15. Structural Repair Manual (SRM) (Northwest)
16. Illustrated Parts Catalog (IPC) (Northwest)
17. Aircraft/Cockpit Log Books (Northwest)
18. Engine Log Books (Northwest)
19. Auxiliary Power Unit (APU) Log Book (Northwest)
20. Current, or last, Airworthiness Certificate
21. Current, or last, Registration
22. Current, or last, Radio License
23. Supplemental Type Certificates (STC)
24. Certificate of Sanitary Construction, Galleys
25. Modification Records
26. Form 337, major Repair and Alteration
27. Major and Minor Repair Records
28. Airworthiness Directive (AD) Accomplishment List
29. Airworthiness Directive (AD) Records and Documentation
30. Time Controlled Component (TCC) List, history and status (Northwest)
31. Life Limited Part (LLP) List, history and status (Northwest)
32. Scheduled Maintenance Check Status
33. Total Time and Cycle Justification
34. Maintenance Records
35. Performance Manual (Northwest)
36. Quick Reference Manual (Northwest)
Page 50 of 56
<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 C
IN WITNESS WHEREOF, the Lessor and the Lessee have caused this
Schedule 3 to Lease Supplement and Receipt to be duly executed as of January
- ---, 1996.
FIRST SECURITY BANK OF UTAH, National Association,
not in its individual capacity but solely
as Owner Trustee under that certain Trust Agreement
"AFG/Northwest Airlines 1989-4 Trust" dated as of
December 13, 1989, and amended as of March 1, 1990,
the Lessor
/s/ Greg A. Hawley
By: Greg A. Hawley
Title: Assistant Vice President
SUNWORLD INTERNATIONAL AIRLINES, INC.
the Lessee
/s/ Terence O. Dennison
By: Terence O. Dennison
Title: Executive Vice President
Page 51 of 56
<PAGE>
SUNWORLD INTERNATIONAL AIRLINES
ATTACHMENT A
AVIONICS LISTING
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
NOMENCLATURE POS MANUFACTURER PART NUMBER SERIAL NUMBER
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Lower Yew Damper Computer Sperry 4030952-901 77090124
- --------------------------------------------------------------------------------------------------
Audio Accessory Unit Bac 65-5280438 R00032
- --------------------------------------------------------------------------------------------------
GPW Computer Bendix 2041033-8313 1043
- --------------------------------------------------------------------------------------------------
Passenger Address Collins 522-4538-002 6376
- --------------------------------------------------------------------------------------------------
ADF Receiver Bendix 2087786-7302 4214
- --------------------------------------------------------------------------------------------------
VHF Transceiver #1 Collins 618M-3 8416
- --------------------------------------------------------------------------------------------------
VHF Transceiver #2 Collins 618M-3 6921
- --------------------------------------------------------------------------------------------------
Radio Altimeter Bendix 2067631-5315 5431
- --------------------------------------------------------------------------------------------------
Autopilot Access. Bac 65-24917-72 R00010S
- --------------------------------------------------------------------------------------------------
Pitch Control Channel (SP-50) Sperry 2585804-4 0191616
- --------------------------------------------------------------------------------------------------
Static Inverter Bendix 39B168 B 1099
- --------------------------------------------------------------------------------------------------
Upper Yaw Damper Coupler Sperry 2588880-901 0190872
- --------------------------------------------------------------------------------------------------
ATC Transponder Mode C Collins 787-6211-003 2078
- --------------------------------------------------------------------------------------------------
Roll Control Channel (SP-150) Sperry 4030951-901 67C-859
- --------------------------------------------------------------------------------------------------
Anti-skid Control Unit Bac 10-61853-11 217C
- --------------------------------------------------------------------------------------------------
Air Data Computer Sperry HG180U255 A-892/70
- --------------------------------------------------------------------------------------------------
Vertical Gyro Aux. Sperry 2587335-12 9024865
- --------------------------------------------------------------------------------------------------
Transformer Rectifier APU Elden Dl0-60011-2 740
- --------------------------------------------------------------------------------------------------
General Protection Panel APU Westinghouse 904F242-5 UB7895M
- --------------------------------------------------------------------------------------------------
Voltage Regulator APU Westinghouse 939D150-2 XA5009
- --------------------------------------------------------------------------------------------------
Bus Protection Panel Westinghouse 902F283-2 ZW1108A
- --------------------------------------------------------------------------------------------------
Transformer Rectifier Ext Power Elden D10-600l1-2 7447530
- --------------------------------------------------------------------------------------------------
Frequency and Load Controller #2 G.E. 700662A 2709
- --------------------------------------------------------------------------------------------------
Frequency and Load Controller #3 G.E. 700662A 3380
- --------------------------------------------------------------------------------------------------
Directional Gyro #2 Sperry 2588302-2 78032190
- --------------------------------------------------------------------------------------------------
Vertical Gyro #2 Sperry 2587335-11 6088944
- --------------------------------------------------------------------------------------------------
Vertical Gyro #1 Sperry 2587335-11 7052215
- --------------------------------------------------------------------------------------------------
GPW Pressure Rate Sensor ColIins 66-3444-9-00l 01215
- --------------------------------------------------------------------------------------------------
Battery Charger Ledec 2-301-3 3736
- --------------------------------------------------------------------------------------------------
Autospeed Brake Controller Bac 65-8409-l M00019
- --------------------------------------------------------------------------------------------------
VHF Transceiver Aux Bendix 2070945-4301 1965
- --------------------------------------------------------------------------------------------------
Marker Receiver Bendix MKA-280 1679
- --------------------------------------------------------------------------------------------------
ILS Receiver #2 Collins 522-4280-102 4793
- --------------------------------------------------------------------------------------------------
ILS Receiver #1 Collins 522-4280-102 B1794
- --------------------------------------------------------------------------------------------------
DME #1 Collins 622-2920-001 6497
- --------------------------------------------------------------------------------------------------
DME #2 Collins 622-2920-001 6503
- --------------------------------------------------------------------------------------------------
Comparator Warning Monitor Collins 522-3948-002 322
- --------------------------------------------------------------------------------------------------
Flight Instrument Accessory Unit Bac 65-60214-36 R00149
- --------------------------------------------------------------------------------------------------
Steering Computer #1 Collins 562A-5F4 1104
- --------------------------------------------------------------------------------------------------
Steering Computer #2 Collins 562A-5F4 1403
- --------------------------------------------------------------------------------------------------
Instrument AMP #1 Collins 522-3120-005 2757
- --------------------------------------------------------------------------------------------------
Instrument AMP #2 Collins 522-3120-004 791
- --------------------------------------------------------------------------------------------------
Window Heat Control R1 Pacific 231-2 2678
- --------------------------------------------------------------------------------------------------
Window Heat Control R2 Pacific 65-52803-5 R02557
- --------------------------------------------------------------------------------------------------
</TABLE>
Page 52 of 56
<PAGE>
SUNWORLD INTERNATIONAL AIRLINES
ATTACHMENT A
AVIONICS LISTING
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
NOMENCLATURE POS MANUFACTURER PART NUMBER SERIAL NUMBER
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Window Heat Control L1 Pacific 231-2 3570
- --------------------------------------------------------------------------------------------------
Window Heat Control L2 Pacific 231-2 4412
- --------------------------------------------------------------------------------------------------
Landing Gear Accessory Unit Bac 65-60211-32 00095
- --------------------------------------------------------------------------------------------------
Compass System Rack #2 Sperry 614937-101 8057427A
- --------------------------------------------------------------------------------------------------
Compass System Rack #1 Sperry 614937-101 5040270A
- --------------------------------------------------------------------------------------------------
LILS Receiver Aux Collins 522-4280-105 B638
- --------------------------------------------------------------------------------------------------
Flight Director Indicator F/O Collins 522-3752-001 140
- --------------------------------------------------------------------------------------------------
Course Director Indicator F/O Collins 522-3342-001 27
- --------------------------------------------------------------------------------------------------
Servo Altimeter F/O Smith WL708AMFAZ AE151
- --------------------------------------------------------------------------------------------------
Radio Altimeter F/O Bendix INA-51A 7409
- --------------------------------------------------------------------------------------------------
VSI/TRA Indicator F/O Honeywell 4067241-860 42046
- --------------------------------------------------------------------------------------------------
VSI Pressure Transducer F/O Honeywell 4067487-901 91020508
- --------------------------------------------------------------------------------------------------
Pressure Ration Indicator #1 G.E. JG298A4 E-256
- --------------------------------------------------------------------------------------------------
Pressure Ration Indicator #2 G.E. JG298A4 D-351
- --------------------------------------------------------------------------------------------------
Pressure Ration Indicator #3 G.E. JG298A4 E-195
- --------------------------------------------------------------------------------------------------
N1 Indicator #1 G.E. 8DJ8I-WAG4 V0087
- --------------------------------------------------------------------------------------------------
N1 Indicator #2 G.E. 8DJ8I-WAG4 S0177
- --------------------------------------------------------------------------------------------------
N1 Indicator #3 G.E. 8DJ81-WAG4 S3930
- --------------------------------------------------------------------------------------------------
Exhaust Gas Temperature #1 Lewis 152BL801E 62
- --------------------------------------------------------------------------------------------------
Exhaust Gas Temperature #2 Lewis 152BL801E 624
- --------------------------------------------------------------------------------------------------
Exhaust Gas Temperature #3 Lewis 152BL801E 656
- --------------------------------------------------------------------------------------------------
N2 Indicator #1 G.E. 8DJ81-LXHU L3766
- --------------------------------------------------------------------------------------------------
N2 Indicator #2 G.E. 8DJ81-LYV4 R629l
- --------------------------------------------------------------------------------------------------
N2 Indicator #3 G.E. 8DJ81-LYV4 R5893
- --------------------------------------------------------------------------------------------------
Fuel Flow Indicator #1 G.E. 8DJ88-LWC B987
- --------------------------------------------------------------------------------------------------
Fuel Flow Indicator #2 G.E. 8DJ88-LWC 00265
- --------------------------------------------------------------------------------------------------
Fuel Flow Indicator #3 G.E. 8DJ88-LWC M0350
- --------------------------------------------------------------------------------------------------
Outboard Flap Position Indicator Memoor 18-1299-3 0574AN
- --------------------------------------------------------------------------------------------------
Inboard Flap Position Indicator Memoor 18-1299-2 16299
- --------------------------------------------------------------------------------------------------
Autopilot Capture Indicator F/O Bac 75-0149-77 2367
- --------------------------------------------------------------------------------------------------
Airspeed Indicator F/O Kollsman A3615910057 1392
- --------------------------------------------------------------------------------------------------
Clock Indicator F/O Wakemann 651-12-24-15 1222
- --------------------------------------------------------------------------------------------------
Machmeter F/O Bac 10-60713-1 NT989
- --------------------------------------------------------------------------------------------------
ADF/VOR Compass RMI F/O Sperry CI-800 3070877
- --------------------------------------------------------------------------------------------------
Pneumatic Brake Pressure Indicator US Gage SRL-07AM 5739
- --------------------------------------------------------------------------------------------------
Hydraulic Brake Pressure Indicator US Gage SRL-07CA 5830
- --------------------------------------------------------------------------------------------------
DME Indicator F/O ColIins 522-1859-033 4018
- --------------------------------------------------------------------------------------------------
Airspeed Indicator Capt Kollsman A3615910057 1360
- --------------------------------------------------------------------------------------------------
Compass ADF/VOR RMI Capt Sperry CI-600 24
- --------------------------------------------------------------------------------------------------
Clock Indicator Capt Wakemann 651-12-24-15 1219
- --------------------------------------------------------------------------------------------------
Machmeter Capt Bac 10-60713-1 NT1156
- --------------------------------------------------------------------------------------------------
DME Indicator Capt Collins 522-1859-033 C8002
- --------------------------------------------------------------------------------------------------
Flight Director Indicator Capt Collins 522-3752-001 135
- --------------------------------------------------------------------------------------------------
Course Director Indicator Capt Collins 522-3342-001 446
- --------------------------------------------------------------------------------------------------
Autopilot Capture Indicator Capt Bac 75-0149-77 2371
- --------------------------------------------------------------------------------------------------
Rad/Alt Indicator Capt Bendix INA-51A 01988
- --------------------------------------------------------------------------------------------------
</TABLE>
Revision:IR Setion: Avionics List
Revision Date 11/1/95 Page 2 of 3
Page 52a of 56
<PAGE>
SUNWORLD INTERNATIONAL AIRLINES
Attachment A
AVIONICS LISTING
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
NOMENCLATURE POS MANUFACTURER PART NUMBER SERIAL NUMBER
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Baro-Altimeter Capt Kollsman A3811910008 l752
- --------------------------------------------------------------------------------------------------
Total Air Indicator Capt Lewis 161BL501 B545
- --------------------------------------------------------------------------------------------------
Servo Altimeter Capt Smith WL1152AM8 AE968
- --------------------------------------------------------------------------------------------------
VSI/TRA Indicator Capt Honeywell 4057241-850 11532
- --------------------------------------------------------------------------------------------------
VSI Pressure Transducer Capt Honeywell 4067487-901 91010491
- --------------------------------------------------------------------------------------------------
Standby Horizon Indicator Stena 705-7V9 19728
- --------------------------------------------------------------------------------------------------
Altitude Alert Honeywell JG1052AAO3 U-12
- --------------------------------------------------------------------------------------------------
Elevator & Rudder Position Indicator Sperry 248541 00286
- --------------------------------------------------------------------------------------------------
Radar Indicator Bendix 66-3442-9-0002 03141
- --------------------------------------------------------------------------------------------------
VOR/DME Control Panel Capt Gables G-4578 138
- --------------------------------------------------------------------------------------------------
ADF Control Panel Capt Bendix 2087780-7308 3141
- --------------------------------------------------------------------------------------------------
Radar Control Panel Gables G-4104 96
- --------------------------------------------------------------------------------------------------
Flight Director Control Panel Capt Collins 777-1253-001 102
- --------------------------------------------------------------------------------------------------
Instrument Warning Capt Gables G-2662 27
- --------------------------------------------------------------------------------------------------
Transponder Control Panel F/O Gables G-6993-03 00214
- --------------------------------------------------------------------------------------------------
Lighted Flight Counter Dexter-Wilson 600 4275
- --------------------------------------------------------------------------------------------------
Flight Director Control Panel F/O Collins 777-1253-001 47
- --------------------------------------------------------------------------------------------------
VOR/DME Control Panel F/O Gables G-4578 86
- --------------------------------------------------------------------------------------------------
Frequency and Load Controller #1 G.E. 700662B 3798
- --------------------------------------------------------------------------------------------------
Voltage Regulator #1 Westinghouse 939D150-2 UW3601M
- --------------------------------------------------------------------------------------------------
Voltage Regulator #2 Westinghouse 939D150-2 SB5430
- --------------------------------------------------------------------------------------------------
Voltage Regulator #3 Westinghouse 939D150-2 PY3961M
- --------------------------------------------------------------------------------------------------
Transformer/Rectifier #1 Bac 10-3257-3 5474
- --------------------------------------------------------------------------------------------------
Transformer/Rectifier #2 Bac 10-3257-3 5205
- --------------------------------------------------------------------------------------------------
Transformer/ Rectifier #3 Bac 10-3257-3 5256
- --------------------------------------------------------------------------------------------------
General Protection Panel #3 Westinghouse 902F242-5 OB7667
- --------------------------------------------------------------------------------------------------
General Protection Panel #2 Westinghouse 902F242-5 UJ599M
- --------------------------------------------------------------------------------------------------
General Protection Panel #1 Westinghouse 902F242-5 RO3532
- --------------------------------------------------------------------------------------------------
TCAS Processor Honeywell 4066010-904 91020299
- --------------------------------------------------------------------------------------------------
Transponder Mode S Collins TPR-720 1741
- --------------------------------------------------------------------------------------------------
Radar Transceiver Bendix 66-3442-9-0004 02329
- --------------------------------------------------------------------------------------------------
Main Battery Sonotone CA-727-3 120406
- --------------------------------------------------------------------------------------------------
Flight Data Recorder Sundstrand 980-4100-GQUS 8378
- --------------------------------------------------------------------------------------------------
Accelerometer Sundstrand 3001-01-101-2 9510-2132
- --------------------------------------------------------------------------------------------------
Windshear Computer Honeywell 4061048-904 90040242
- --------------------------------------------------------------------------------------------------
Windshear Switching Unit ASM 103006-001-01 134
- --------------------------------------------------------------------------------------------------
Windshear Switching Unit ASM 103006-001-01 109
- --------------------------------------------------------------------------------------------------
Selcal Encoder Motorola NA135PH5O Unk
- --------------------------------------------------------------------------------------------------
Selcal Control Panel Gables G1402 85
- --------------------------------------------------------------------------------------------------
</TABLE>
Page 52b of 56
<PAGE>
ATTACHMENT B
------------
LOOSE EQUIPMENT:
- ---------------
l EACH RIGHT HAND COAT CLOSET
1 EACH LEFT HAND MOVABLE BULKHEAD
1 EACH LEFT HAND TRIPLE SEAT ASSY
6 EACH FIRST CLASS SEAT ASSYS
2 EACH GALLEY CARTS
9 EACH OVEN TRAY CARRIERS WITH 54 TRAYS
12 EACH LARGE CARRIERS
6 EACH SMALL CARRIERS
6 EACH COFFEE POTS
4 EACH TRASH CANS
Page 52c of 56
<PAGE>
ATTACHMENT C
---------- -
1. External doubler at Left cockpit sliding window
2. External doubler at Left windshield
3. External doubler at Right cockpit sliding window
4. Dent in fuselage above #3 Left cockpit window
5. Minor dents in fuselage AFT of Left main door
6. 7 each external doublers inside #2 engine S duct
7. External doubler station 440 lower Left side fuselage skin
8. Deep scratch station 650 lower Left Side fuselage skin
9. Latches for external air conditioning connection damaged
10. External repair #1 Left leading edge flap
11. Dent in #1 Left leading edge flap center
12. External repair #2 Left leading edge flap
13. External repair #3 Left leading edge flap
14. External repair inboard of Left wing fuel vent box on inspection plate
15. External repair outboard flap jack screw cover
16. Dent in left outboard trailing edge flap 18 inches from inboard bottom end
17. Left inboard flap has dent bottom side 12 inches from outboard end - Also
dents between flap fairings
18. External repair on fuselage at Left rear service door at station 1030
19. External repair at Left rear service door station 1070
20. #1 Engine Thrust Reverser does not have speed kit instal
-led
21. Right leading edge inboard flap has 3 external repairs
22. Right leading edge outboard flap has external repair
23. #7 leading edge slat Right wing has external repair
24. Right wing outboard flap has dent bottom of flap 18 inches from outboard
end. Also dent between flap fairings
25. External doubler on top Right wing middle ground spoiler
26. Several dents on inboard flap top trailing edge inboard end
27. External doubler Right side fuselage at 3rd window behind rear emergency
window
28. External doubler Right side fuselage at 5th window behind rear emergency
window
29. Several dents on inboard flap bottom side trailing edge inboard end and
between flap fairings
30. Two external repairs on bottom of AFT stair
31. Overhead panel row 8 center retension is broken out and covered with metal
peace
32. Seats 29F, 30D & E do not have tray tables
Page 52d of 56
<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 under that certain Trust Agreement 1989-4
dated as of December 13,1989, and amended as of March 1,1990 ("Lessor") has
inspected the following described Aircraft in conjunction with its return to the
Lessor under the Aircraft Lease Agreement dated as of January l, 1996 (the
"Lease") by and between Lessor and SUNWORLD INTERNATIONAL AIRLINES, INC.
("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 727-251A, serial number 21161, US registration N282U5
Total hours: _____ Total cycles: _____
Time since C check: _____ Time since D check: _____
Engine No. 1: Pratt & Whitney model JT8D-l5A engine, manufacturer serial number
696523.
SEE ATTACHED DISK SHEET DATED _______, 199_
- ---
Engine No. 2: Pratt & Whitney model JT8D-1SA engine, manufacturer serial number
696520.
SEE ATTACHED DISK SHEET DATED ________ 199_
- ---
Engine No. 3: Pratt & Whitney model JT8D-1SA engine, manufacturer serial number
695260.
SEE ATTACHED DISK SHEET DATED _______, 199_
- ---
Landing gear time remaining until next scheduled overhaul: L ___ hours, R ___
hours, N ___ hours
Auxiliary power unit: manufacturer ____ serial number ____
Time since hot section inspection: ____
Avionics (specified by manufacturer): see attachment consisting of _____ pages
Interior configuration:
Loose equipment: [SPECIFY GALLEY EQUIPMENT, EXTRA SEATS, ETC.)
Operating weights: Maximum ramp weight:
Maximum gross take-off weight:
Maximum landing weight:
Page 53 of 56
<PAGE>
Zero fuel weight
Discrepancies in components returned (see Schedule l 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):
Lessor and Lessee each agree with the other in respect to said Aircraft:
l. The parties shall execute and deliver an FAA Aircraft Registry Lease
Termination in the form attached hereto as Schedule l.
2. Without waiver or release of (i) the foregoing discrepancies, or (ii)
all 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 _____, 1998, at _______________.
FIRST SECURITY BANK OF UTAH, N.A.,
not in its individual capacity but solely
as owner trustee under that certain
Trust Agreement 1989-4 dated as of December 13, 1989,
and amended as of March 1, 1990,
the Lessor
By:
Title:
SUNWORLD INTERNATIONAL AIRLINES, INC.,
the Lessee
By:
Title:
Page 54 of 56
<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 1989-4
dated as of December 13, 1989, and amended as of March 1, 1990 ("Lessor") and
SUNWORLD INTERNATIONAL AIRLINES, INC. ("Lessee") are parties to that certain
Aircraft Lease Agreement dated as of January 1, 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 727-25lA airframe, serial number 21161, registration mark
N282US, equipped with three Pratt & Whitney model JT8D-15A engines, serial
numbers 696529, 696520 and 695260 (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 1989-4 dated as of December 13, 1989,
and amended as of March 1, 1990,
the Lessor
By:
Title:
SUNWORLD INTERNATIONAL AIRLINES, INC.
the Lessee
By:
Title:
Page 55 of 56
<PAGE>
EXHIBIT C: FORM OF GUARANTY
---------------------------
GUARANTY AGREEMENT
This Guaranty Agreement ("Guaranty") dated as of January 19, 1996, is made
by Columbia Sussex Corporation, a corporation organized under the laws of
Kentucky ("Guarantor").
WITNESSETH:
WHEREAS, FIRST SECURITY BANK OF UTAH, National Association, ("Lessor"), 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 "AFG/Northwest Airlines 1989-4 Trust" dated as of
December 13, 1989, and Amended as of March 1, 1990, has agreed to enter into
that certain Aircraft Lease Agreement dated as of January 19, 1996 (the "Lease")
pursuant to which it is to lease the Aircraft defined therein to SUNWORLD
INTERNATIONAL AIRLINES, INC., a Kentucky corporation ("Lessee"), and
WHEREAS, Lessor has agreed to enter into the Lease with Lessee but only if
Lessee's obligations under the Lease are guaranteed by Guarantor.
NOW, THEREFORE, in consideration of the premises and in order to induce
Lessor, as requested by Guarantor, to enter into the Lease, Guarantor does
hereby represent, covenant and agree with Lessor as follows:
I. GUARANTY OBLIGATIONS
1.1 Guarantor hereby absolutely and unconditionally guarantees to Lessor,
the punctual and faithful payment and performance of all of the Liabilities (as
hereinafter defined) of Lessee to Lessor under the Lease (whether such
Liabilities are now existing or arise hereafter); and the strict performance and
observance by Lessee of all of the terms, covenants and conditions contained in
the Lease. As used herein, the term "Liabilities" includes, without limitation,
any and all Basic Rent, Supplemental Rent and undertakings of Lessee to Lessor
of every kind and description under the Lease (including, also, without
limitation, reasonable costs and expenses incurred by the Lessor in attempting
to collect or enforce any of the foregoing including reasonable attorneys' fees)
including interest on any such amounts accrued in each case from the due date
thereof to the date payment is received by Lessor provided, however, interest
--------- -------
due Lessor hereunder as Supplemental Rent shall not also be payable to Lessor a
second time because of the provisions of this sentence.
-56-
<PAGE>
1.2 This Guaranty is an absolute, unconditional and continuing guaranty of
the full and punctual payment and performance by Lessee of the Liabilities and
not of their collectibility only The liabilities and obligations of Guarantor
hereunder may be enforced without any suit or action against Lessee or any other
guarantor of any of the Liabilities, without regard or resort to any security or
other means of obtaining payment of the Liabilities which Lessor may now or
hereafter have or hold, and without the performance or occurrence of any other
condition or contingency whatsoever; provided, however, that the exercise or
attempted exercise, at any time or times, of any or all of such rights and
remedies as Lessor may have against Lessee, or with respect to any security for
liabilities or under any other guaranty of Liabilities shall not affect, reduce,
modify or impair, in any manner whatsoever, the liabilities and obligations of
the Guarantor hereunder, except and to the extent Lessor has received payment or
performance of such Liabilities of Lessee. Guarantor hereby unconditionally
waives to the fullest extent permitted by law (except to the extent specifically
provided in this Guaranty) demand, or notice of any nature. Payments by
Guarantor hereunder shall be unlimited in amount with respect to its guaranty of
the Liabilities, as defined above.
1.3 Guarantor hereby waives any and all suretyship defenses and defenses
in the nature thereof; and agrees that enforcement of this Guaranty shall not be
affected, reduced, modified or impaired by any dealing by Lessor with Lessee or
anyone else who may now or hereafter become liable in any manner for any of the
Liabilities, in such manner as Lessor, in its sole discretion, may deem fit,
except to the extent that Lessor has waived or released in writing any
Liabilities and except and to the extent Lessor has received payment or
performance of such Liabilities by Lessee. If for any reason, Lessee has no
legal existence or is under no legal obligation to discharge any of the
Liabilities; or if, by operation of law or for any other reason, moneys included
in the Liabilities have become irrecoverable from Lessee, or if any security for
any of the Liabilities or if any other guaranty thereof is invalid, defective or
unenforceable, this Guaranty shall be binding upon Guarantor to the same extent
as if Guarantor were at all time primarily obligated on the Liabilities .
1.4 No setoff, counterclaim, reduction or diminution of any Liabilities,
or any defense of any kind or nature, which Guarantor has or may have against
Lessee, shall be available hereunder to Guarantor against Lessor.
1.5 This Guaranty shall remain in full force and effect regardless of any
payment hereunder or of any reduction in, or modification or alteration of the
Liabilities, until such time as
-57-
<PAGE>
all Liabilities not waived or released by Lessor in writing and all liabilities
and obligations of Guarantor hereunder have been paid and performed in full.
Guarantor's obligations under this Guaranty shall be immediately extinguished
upon the full, complete and faithful performance by Lessee of all of its
Liabilities. So long as this Guaranty remains in force, as aforesaid, Guarantor
will not, (x) by paying any sum recoverable hereunder (whether or not demanded
by the Lessor) or by any means or on any other ground, claim any set-off or
counterclaim against Lessee in respect of any liability of Guarantor to Lessee
or, (y) in bankruptcy or insolvency proceedings of any nature, prove in
competition with Lessor in respect of any payment hereunder or in any such
proceeding be entitled to have the benefit of any counterclaim or proof of claim
or dividend or payment by or on behalf of Lessee or the benefit of any other
security for any of the Liabilities which, now or hereafter, Lessor may hold or
in which it may have any share. All payments by Guarantor hereunder shall be
made in lawful money of the United States of America in immediately available
funds and, so long as the person or entity entitled thereto is a United States
person within the meaning of the Internal Revenue Code, without any deduction or
withholding of any kind.
1.6 Guarantor hereby confirms that this Guaranty shall remain in full
force and effect notwithstanding that:
(a) the obligations of the Lessee under the Lease are discharged,
extinguished, terminated, rescinded, avoided or suspended
(whether pursuant to any provision of the Lease or otherwise) by
virtue of any breach on the part of the Lessee, under the
doctrine of frustration, as a result of the liquidation of the
Lessee or any action taken in such liquidation (for example, a
disclaimer), except by payment or performance thereof; or
(b) subject to the provisions of the Lease, performance of the Lease
by the Lessee becomes impossible or illegal,
and, in particular, the Lessor shall be entitled to recover under this Guaranty
in respect of any payment or obligation (including any obligation of paying
interest) which the Lessor would have received under the Lease but for the
occurrence of any of the circumstances described in subsections (a) or (b)
above.
1.7 If the Lease is disclaimed in a liquidation of the Lessee:
(a) so long as any amounts or obligations then due from the Guarantor
under this Guaranty remain unpaid or unperformed, as the case may
be, the
-58-
<PAGE>
Guarantor shall not, in respect of any payment which it makes or
any liability which it has, under this Guaranty or the Lease,
claim any amount from the Lessee, make or enforce any security
against any asset of the Lessee, or claim any set off against any
sum from it to the Lessee; and
(b) the Guarantor shall not, in respect of such payment or liability,
prove in the liquidation of the Lessee, except that, if the
Guarantor shall have paid and/or performed all of its obligations
then due hereunder, it shall be subrogated to all rights of
Lessor against Lessee, and the Guarantor may, by exercise of that
statutory right, prove for any loss or damage suffered by the
Lessor, and otherwise as its interests may appear.
II. REPRESENTATIONS AND WARRANTIES
Guarantor hereby represents and warrants to Lessor as follows:
2.1 (a) Guarantor is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Kentucky, is duly qualified
to do business and in good standing in each jurisdiction where the character of
its business and the ownership of its property, as now conducted or owned or as
proposed to be conducted or owned, requires such qualification;
(b) The execution, delivery and performance by Guarantor of this
Guaranty have been duly authorized by all necessary corporate action on the part
of the Guarantor, are not inconsistent with its Certificate of Incorporation or
By-Laws, do not violate any law or governmental rule, regulation or order
applicable to Guarantor, do not and will not contravene any provision of, or
constitute a material default under, any indenture, mortgage, contract or other
instrument to which it is bound and, upon execution and delivery hereof, will
constitute a legal, valid and binding agreement of Guarantor, enforceable in
accordance with its terms;
(c) No consent or approval by governmental authority or agency is
required with respect to the execution, delivery and performance by Guarantor of
this Guaranty;
(d) There are no litigations or proceedings pending against it not
covered by insurance which, if adversely determined, would have a materially
adverse effect on Guarantor or would prevent or hinder the performance by it of
its obligations hereunder;
-59-
<PAGE>
2.2 Guarantor will provide an opinion of its counsel confirming (subject
to standard exceptions) that:
(a) Guarantor is a corporation duly incorporated, validly existing,
in good standing and is duly qualified to do business under the laws of the
Commonwealth of Kentucky,
(b) The execution, delivery and performance of Guarantor of this
Guaranty have been duly authorized by all necessary corporate action on the part
of Guarantor, are not inconsistent with its Certificate of Incorporation or By-
Laws, do not violate any law or governmental rule, regulation or order
applicable to Guarantor and this Guaranty is the legal, valid and binding
agreement of the Guarantor, enforceable in accordance with its terms;
(c) No consent or approval by any governmental authority or agency of
the United States or the Commonwealth of Kentucky is required with respect to
the execution, delivery and performance by Guarantor of this Guaranty.
III. DEFAULT
3.1 The following described events shall constitute "Events of Default"
hereunder:
3.1.1 An "Event of Default" as defined in Section 13.3 of the
Lease shall occur and remain unremedied.
3.1.2 An "Event of Default" as defined in Sections 13.1 and 13.2
of the Lease shall occur and remain unremedied for a period of three Business
Days after written notice thereof to Guarantor;
3.1.3 An "Event of Default" as defined in Section 13.4, 13.5,
13.6, 13.7 and 13.8 of the Lease shall occur and remain unremedied for 10 days
following notice thereof from Lessor to Guarantor or such longer period of time
as is reasonably required to cure such Event of Default provided the Guarantor
is diligently attempting such cure and such default does not result in a
material risk to the Aircraft or Lessor's title thereto.
3.1.4 The Guarantor shall:
(a) admit its inability to pay its debts generally as they become due
or otherwise acknowledging its insolvency;
-60-
<PAGE>
(b) file a petition in bankruptcy or for reorganization or for the
adoption of an arrangement under the Bankruptcy Code (or similar laws of the
United States of America, or any other jurisdiction which relates to the
liquidation or reorganization of companies or the modification or alteration of
the rights of creditors, each such law, as from time to time in effect, being
sometimes referred to as a "bankruptcy act", each as now or in the future
amended) or an answer or other pleading admitting or failing to deny the
material allegations of such a petition or seeking, consenting to or acquiescing
in the relief therein provided; or
(c) make an assignment, or so-called trust mortgage or the like, for
the benefit of its creditors or by its making a proposal to its creditors under
the bankruptcy act; or
(d) consent to the appointment of a receiver or trustee (or other
persons performing a similar function) for the Aircraft or for all or a
substantial part of its property; or
(e) be adjudicated a bankrupt; or
(f) suffer the entry of, or be the subject of, a court order for all
or a substantial part of its property which order shall not be vacated, set
aside, bonded, or stayed within 60 days from the date of entry; (i) appointing a
receiver or a trustee for all or a substantial part of its property, or (ii)
approving a petition filed or application made against it for, or effecting an
arrangement in bankruptcy or for a reorganization or other relief pursuant to
any bankruptcy act or for any other judicial modification or alteration of the
rights of creditors; or
(g) have all or a substantial part of its property taken into custody
or be sequestrated by a court of competent jurisdiction, which custody or
sequestration shall not be suspended or terminated within 60 days (or such
longer period as the Lessor may agree in writing) from it inception.
3.1.5 Any representation or warranty made in writing by the
Guarantor in this Guaranty, or in any certificate or written disclosure
delivered in connection with this Guaranty shall prove to have been false or
incorrect in any material respect on the date of such representation or
warranty.
3.1.6 Twenty-five percent (25%) (calculated excluding current
maturities of long-term debt) or more of Guarantor's current liabilities, less
any disputed amounts and other than current maturities of long-term debt, shall
remain unpaid for 45 days or more beyond the due date;
-61-
<PAGE>
3.1.7 Guarantor shall be in default in the observance or
performance of any other covenant, condition or agreement to be observed or
performed by Guarantor hereunder and such default shall continue for a period of
30 days after written notice from Lessor.
IV. MISCELLANEOUS
4.1 No provision of this Guaranty can be changed, waived, discharged or
terminated except by an instrument in writing by Lessor and Guarantor expressly
referring to the provision of this Guaranty to which such instrument is related,
and no such waiver shall extend to, affect or impair any right with respect to
any liability or obligation which is not expressly dealt with therein. No
course of dealing or delay or omission on the part of Lessor in exercising any
right or remedy hereunder, shall operate as a waiver thereof or otherwise be
prejudicial thereto. The rights and remedies of Lessor hereunder are cumulative
and not exclusive of any other rights and remedies under any other guaranty by
Guarantor or under applicable law, and all such rights and remedies may be
exercised singly or concurrently.
4.2 The Guarantor shall provide financial reports as required by Section
4.4.5 of the Lease.
4.3 This Guaranty shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts and shall be binding upon
Guarantor and its successors and assigns, and shall inure to the benefit of
Lessor and its successors and assigns.
4.4 This Guaranty can be assigned by Lessor if the Lease is assigned
pursuant to its terms and shall be fully enforceable to the same extent as if
made to Lessor's assignee. This Guaranty cannot be assigned by Guarantor without
the prior written consent of Lessor.
4.5 All capitalized terms not otherwise defined herein shall have the
meaning given to such terms in the Lease.
4.6 Guarantor agrees that the federal and state courts located in the
Commonwealth of Massachusetts shall have non-exclusive jurisdiction to settle
any disputes which may arise out of or in connection with this Guaranty.
4.6.1 Guarantor hereby waives any objection on the grounds of
inconvenient forum to any proceedings which relate to this Guaranty being
brought in the courts located in the Commonwealth of Massachusetts.
4.7 All demands, notices and other communications pursuant to or relating
to this Guaranty shall be in writing and shall be
-62-
<PAGE>
delivered in hand by courier or other means, or sent by registered air mail with
postage prepaid, or by telex or telefax with receipt confirmed by answerback or
other means, addressed as follows:
(a) If to Lessor:
First Security Bank of Utah, National Association
79 South Main Street
Salt Lake City, Utah 84111
Attention: Corporate Trust Department
Telecopier: (801) ( 246-5799
with copies to:
American Finance Group
98 North Washington Street
Boston, Massachusetts 02114
Attention: President
Telecopier: (617) 523-1410
(b) If to Guarantor:
Columbia Sussex Corporation
207 Grandview Drive
Fort Mitchell, Kentucky 41017
Attention: Joseph E. Marquet
Telecopier: (606) 331-6383
with copies to:
Winthrop, Stimson, Putnum & Roberts
1 Battery Park Plaza
New York, New York 10004
Attention: Ruth J. Weinstein
Telecopier: (212) 858-1500
or such other address as either party shall designate in a written notice to the
other party hereto. Any notice provided for herein shall be deemed to have been
effected when delivered in hand to an officer of the addressee, or if sent by
registered air mail or by courier or other similar means and if properly
addressed, either when received or on the seventh day following
-63-
<PAGE>
the day of dispatch, which shall occur earlier. Notices sent by telex or
telefax shall be deemed to have been received when receipt is confirmed.
IN WITNESS WHEREOF Guarantor has executed this Guaranty by its duly
authorized representative as of the date first above written.
GUARANTOR:
COLUMBIA SUSSEX CORPORATION
By: [SIGNATURE NOT LEGIBLE]
---------------------------
Title: Vice President Finance
-------------------------
ACKNOWLEDGED AND ACCEPTED BY:
FIRST SECURITY BANK OF UTAH,
NATIONAL ASSOCIATION, not in
its individual capacity but
solely as Trustee of the
AFG/Northwest Airlines 1989-4
Trust"
By: [SIGNATURE NOT LEGIBLE]
--------------------------
Title: Asst. Vice President
------------------------
-64-
<PAGE>
LEASE SUPPLEMENT AND RECEIPT dated January 19, 1996 between FIRST
SECURITY BANK OF UTAH, N A., not in its individual capacity but solely as owner
trustee under that certain Trust Agreement 1989-4 dated as of December 13, 1989,
and amended as of March 1, 1990 (the "Lessor"), and Sunworld International
Airlines, Inc. (the "Lessee").
The Lessor and the Lessee have heretofore entered into that certain
Aircraft Lease Agreement dated as of January 1, 1996 (herein called the "Lease"
and the defined terms therein being hereinafter used with the same meanings),
relating to one Boeing model 727-251A aircraft, manufacturer serial number
21161. 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, binding, and enforceable agreements of
Lessee. 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 5 pages (including attachments) and
made a part hereof, and the Aircraft Documents described in Schedule 2 hereto,
consisting of 1 pages (including attachments) and made a part hereof, have been
delivered to the Lessee, inspected by the Lessee, 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 WAS IS," "WHERE IS," AND SUBJECT TO
EACH AND EVERY DISCLAIMER OF WARRANTY AND REPRESENTATION AS SET FORTH IN SECTION
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.
<PAGE>
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.
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, National Association,
not in its individual capacity but solely
as Owner Trustee under that certain Trust Agreement
"AFG/Northwest Airlines 1989-4 Trust" dated as of
December 13, 1989, and amended as of March 1, 1990, the Lessor
/s/ Greg A. Hawley
By: Greg A. Hawley
Title: Assistant Vice President
SUNWORLD INTERNATIONAL AIRLINES, INC.
the Lessee
/s/ Terence O. Dennison
By: Terence O. Dennison
Title:Executive Vice President
Page 48 of 56
<PAGE>
SCHEDULE 1 TO LEASE SUPPLEMENT AND RECEIPT: AIRCRAFT DESCRIPTION
- ----------------------------------------------------------------
Airframe: Boeing model 727-25lA, serial number 21161, Us
registration N282US
Total hours: 50598:33 Total cycles: 35609
Time since C check: 0 Time since D check: 0
Engine No.1: Pratt & Whitney model JT8D-15A engine, manufacturer
serial number 696253.
See. Attached disk sheet dated 9/15/95, 1995
- ---
Engine No. 2: Pratt & Whitney model JT8D-15-A engine, manufacturer
serial number 696520.
See. Attached disk sheet dated 10/10/95, 1995
- ---
Engine No. 3: Pratt & Whitney model JT8D-15-A engine, manufacturer
serial number 695260.
See. Attached disk sheet dated 10/10/95, 1995
Landing gear time since overhaul: L9309 hours, R6 hours, N17779 hours.
Auxiliary power unit: manufacturer Garrett serial number P36543. Time since hot
section inspection: 0
Avionics (specified by manufacturer): see attachment consisting of 3 pages. See
attachment A.
Interior configuration: 164 seats coach
Loose equipment: [SPECIFY GALLEY EQUIPMENT, EXTRA SEATS, ETC.] see
attachment B.
<TABLE>
<CAPTION>
*1 *2
------- -------
<S> <C> <C> <C>
operating weights: Maximum ramp weight: 177,500 187,500
Maximum gross take-off weight: 176,500 186,500
Maximum landing weight: 150,000 150,000
Zero fuel weight: 138,000 141,000
</TABLE>
*1 As delivered
*2 Weight per lease, awaiting FAA Engineering approval.
<PAGE>
SCHEDULE 2 TO LEASE SUPPLEMENT AND RECEIPT: AIRCRAFT DOCUMENTS
- --------------------------------------------------------------
AIRCRAFT DOCUMENTS CHECKLIST
1. Avionics Installation List
2. Original Manufacturer's Inventory List
3. Current Component Inventory List (Northwest)
4. Service Bulletin (SB) Accomplishment List (Northwest)
5. Record of last Compass Swing
6. List of Oils and Fluids
7. FAA Approved Airplane Flight Manual (AFM)
8. Manufacturer's Flight Crew Operating Manual (FCOM) (Northwest)
9. Releasing Operator's Flight Crew Operating Manual (Northwest)
10. Weight and Balance Manual; last weighing
11. Minimum Equipment List (MEL) (Northwest)
12. MEL Procedures manual (Northwest)
13. Maintenance Manuals (Northwest)
14. Wiring Diagram Manual; Termination and Equipment Lists (Northwest)
15. Structural Repair Manual (SRM) (Northwest)
16. Illustrated Parts Catalog (IPC) (Northwest)
17. Aircraft/Cockpit Log Books (Northwest)
18. Engine Log Books (Northwest)
19. Auxiliary Power Unit (APU) Log Book (Northwest)
20. Current, or last, Airworthiness Certificate
21. Current, or last, Registration
22. Current, or last, Radio License
23. Supplemental Type Certificates (STC)
24. Certificate of Sanitary Construction, Galleys
25. Modification Records
26. Form 337, major Repair and Alteration
27. Major and Minor Repair Records
28. Airworthiness Directive (AD) Accomplishment List
29. Airworthiness Directive (AD) Records and Documentation
30. Time Controlled Component (TCC) List, history and status (Northwest)
31. Life Limited Part (LLP) List, history and status (Northwest)
32. Scheduled Maintenance Check Status
33. Total Time and Cycle Justification
34. Maintenance Records
35. Performance Manual (Northwest)
36. Quick Reference Manual (Northwest)
<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 qualification s to the return conditions set
forth in Section 6 of the Lease.
See Attachment C
IN WITNESS WHEREOF, the Lessor and the Lessee have caused this
Schedule 3 to Lease Supplement and Receipt to be duly executed as of January __,
1996.
FIRST SECURITY BANK OF UTAH, National Association,
not in its individual capacity but solely
as Owner Trustee under that certain Trust Agreement
"AFG/Northwest Airlines 1989-4 Trust" dated as of
December 13, 1989, and amended as of March 1, 1990, the Lessor
/s/ Greg A. Hawley
By: Greg A. Hawley
Title: Assistant Vice President
SUNWORLD INTERNATIONAL AIRLINES, INC.
the Lessee
/s/ Terence O. Dennison
By: Terence O. Dennison
Title: Executive Vice President
Page 51 of 56
<PAGE>
SUNWORLD INTERNATIONAL AIRLINES
Attachment A
AVIONICS LISTING
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
NOMENCLATURE POS MANUFACTURER PART NUMBER SERIAL NUMBER
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Lower Yew Damper Computer Sperry 4030952-901 77090124
- -------------------------------------------------------------------------------------------------------------
Audio Accessory Unit Bac 65-5280438 R00032
- -------------------------------------------------------------------------------------------------------------
GPW Computer Bendix 2041033-8313 1043
- -------------------------------------------------------------------------------------------------------------
Passenger Address Collins 522-4538-002 6376
- -------------------------------------------------------------------------------------------------------------
ADF Receiver Bendix 2087786-7302 4214
- -------------------------------------------------------------------------------------------------------------
VHF Transceiver #1 Collins 618M-3 8416
- -------------------------------------------------------------------------------------------------------------
VHF Transceiver #2 Collins 618M-3 6921
- -------------------------------------------------------------------------------------------------------------
Radio Altimeter Bendix 2067631-5315 5431
- -------------------------------------------------------------------------------------------------------------
Autopilot Access. Bac 65-24917-72 R00010S
- -------------------------------------------------------------------------------------------------------------
Pitch Control Channel (SP-50) Sperry 2585804-4 0191616
- -------------------------------------------------------------------------------------------------------------
Static Inverter Bendix 39B168 B 1099
- -------------------------------------------------------------------------------------------------------------
Upper Yaw Damper Coupler Sperry 2588880-901 0190872
- -------------------------------------------------------------------------------------------------------------
ATC Transponder Mode C Collins 787-6211-003 2078
- -------------------------------------------------------------------------------------------------------------
Roll Control Channel (SP-150) Sperry 4030951-901 80040705
- -------------------------------------------------------------------------------------------------------------
Fire & Overheat Detection Unit Bac 65-24920-3 R00601
- -------------------------------------------------------------------------------------------------------------
Temperature Controller Sundstrand 1548376-5 67C-859
- -------------------------------------------------------------------------------------------------------------
Anti-skid Control Unit Bac 10-61853-11 217C
- -------------------------------------------------------------------------------------------------------------
Air Data Computer Sperry HG180U255 A-892/70
- -------------------------------------------------------------------------------------------------------------
Vertical Gyro Aux. Sperry 2587335-12 9024865
- -------------------------------------------------------------------------------------------------------------
Transformer Rectifier APU Elden Dl0-60011-2 740
- -------------------------------------------------------------------------------------------------------------
General Protection Panel APU Westinghouse 904F242-5 UB7895M
- -------------------------------------------------------------------------------------------------------------
Voltage Regulator APU Westinghouse 939D150-2 XA5009
- -------------------------------------------------------------------------------------------------------------
Bus Protection Panel Westinghouse 902F283-2 ZW1108A
- -------------------------------------------------------------------------------------------------------------
Transformer Rectifier Ext Power Elden D10-600l1-2 7447530
- -------------------------------------------------------------------------------------------------------------
Frequency and Load Controller #2 G.E. 700662A 2709
- -------------------------------------------------------------------------------------------------------------
Frequency and Load Controller #3 G.E. 700662A 3380
- -------------------------------------------------------------------------------------------------------------
Directional Gyro #2 Sperry 2588302-2 78032190
- -------------------------------------------------------------------------------------------------------------
Vertical Gyro #2 Sperry 2587335-11 6088944
- -------------------------------------------------------------------------------------------------------------
Vertical Gyro #1 Sperry 2587335-11 7052215
- -------------------------------------------------------------------------------------------------------------
GPW Pressure Rate Sensor Collins 66-3444-9-00l 01215
- -------------------------------------------------------------------------------------------------------------
Battery Charger Ledec 2-301-3 3736
- -------------------------------------------------------------------------------------------------------------
Autospeed Brake Controller Bac 65-8409-1 M00019
- -------------------------------------------------------------------------------------------------------------
VHF Transceiver Aux Bendix 2070945-4301 1965
- -------------------------------------------------------------------------------------------------------------
Marker Receiver Bendix MKA-280 1679
- -------------------------------------------------------------------------------------------------------------
ILS Receiver #2 Collins 522-4280-102 4793
- -------------------------------------------------------------------------------------------------------------
ILS Receiver #1 Collins 522-4280-102 B1794
- -------------------------------------------------------------------------------------------------------------
DME #1 Collins 622-2920-001 6497
- -------------------------------------------------------------------------------------------------------------
DME #2 Collins 622-2920-001 6503
- -------------------------------------------------------------------------------------------------------------
Comparator Warning Monitor Collins 522-3948-002 322
- -------------------------------------------------------------------------------------------------------------
Flight Instrument Accessory Unit Bac 65-60214-36 R00149
- -------------------------------------------------------------------------------------------------------------
Steering Computer #1 Collins 562A-5F4 1104
- -------------------------------------------------------------------------------------------------------------
Steering Computer #2 Collins 562A-5F4 1403
- -------------------------------------------------------------------------------------------------------------
Instrument AMP #1 Collins 522-3120-005 2757
- -------------------------------------------------------------------------------------------------------------
Instrument AMP #2 Collins 522-3120-004 791
- -------------------------------------------------------------------------------------------------------------
Window Heat Control R1 Pacific 231-2 2678
- -------------------------------------------------------------------------------------------------------------
Window Heat Control R2 Pacific 65-52803-8 R02557
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Revision: IR Section: Avionics Listing
Revision Date: 11/1/95 Page 1 of 3
<PAGE>
SUNWORLD INTERNATIONAL AIRLINES
Attachment A
AVIONICS LISTING
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NOMENCLATURE POS MANUFACTURER PART NUMBER SERIAL NUMBER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Window Heat Control L1 Pacific 231-2 3670
- --------------------------------------------------------------------------------------------------------------
Window Heat Control L2 Pacific 231-2 4412
- --------------------------------------------------------------------------------------------------------------
Landing Gear Accessory Unit Bac 65-60211-32 00095
- --------------------------------------------------------------------------------------------------------------
Compass System Rack #2 Sperry 614937-1C1 8057427A
- --------------------------------------------------------------------------------------------------------------
Compass System Rack #1 Sperry 614937-1CI 5040270A
- --------------------------------------------------------------------------------------------------------------
LILS Receiver Aux Collins 522-4280-105 B638
- --------------------------------------------------------------------------------------------------------------
Flight Director Indicator F/O Collins 522-3752-001 140
- --------------------------------------------------------------------------------------------------------------
Course Director Indicator F/O Collins 522-3342-001 27
- --------------------------------------------------------------------------------------------------------------
Servo Altimeter F/O Smith WL708AMFAZ AE151
- --------------------------------------------------------------------------------------------------------------
Radio Altimeter F/O Bendix INA-51A 7409
- --------------------------------------------------------------------------------------------------------------
VSI/TRA Indicator F/O Honeywell 4067241-860 42046
- --------------------------------------------------------------------------------------------------------------
VSI Pressure Transducer F/O Honeywell 4067487-901 91020508
- --------------------------------------------------------------------------------------------------------------
Pressure Ration Indicator #1 G.E. JG298A4 E-256
- --------------------------------------------------------------------------------------------------------------
Pressure Ration Indicator #2 G.E. JG298A4 D-351
- --------------------------------------------------------------------------------------------------------------
Pressure Ration Indicator #3 G.E. JG298A4 E-195
- --------------------------------------------------------------------------------------------------------------
N1 Indicator #1 G.E. DJ8I-WAG4 V0087
- --------------------------------------------------------------------------------------------------------------
N1 Indicator #2 G.E. 8DJ8I-WAG4 S0177
- --------------------------------------------------------------------------------------------------------------
N1 Indicator #3 G.E. 8DJ81-WAG4 S3930
- --------------------------------------------------------------------------------------------------------------
Exhaust Gas Temperature #1 Lewis 152BL801E 62
- --------------------------------------------------------------------------------------------------------------
Exhaust Gas Temperature #2 Lewis 152BL801E 624
- --------------------------------------------------------------------------------------------------------------
Exhaust Gas Temperature #3 Lewis 152BL801E 656
- --------------------------------------------------------------------------------------------------------------
N2 Indicator #1 G.E. 8DJ81-LXHU L3766
- --------------------------------------------------------------------------------------------------------------
N2 Indicator #2 G.E. 8DJ81-LYV4 R629l
- --------------------------------------------------------------------------------------------------------------
N2 Indicator #3 G.E. 8DJ81-LYV4 R5893
- --------------------------------------------------------------------------------------------------------------
Fuel Flow Indicator #1 G.E. 8DJ88-LWC B987
- --------------------------------------------------------------------------------------------------------------
Fuel Flow Indicator #2 G.E. 8DJ88-LWC 00265
- --------------------------------------------------------------------------------------------------------------
Fuel Flow Indicator #3 G.E. 8DJ88-LWC M0350
- --------------------------------------------------------------------------------------------------------------
Outboard Flap Position Indicator Memoor 18-1299-3 0574AN
- --------------------------------------------------------------------------------------------------------------
Inboard Flap Position Indicator Memoor 18-1299-21 6299
- --------------------------------------------------------------------------------------------------------------
Autopilot Capture Indicator F/O Bac 75-0149-77 2367
- --------------------------------------------------------------------------------------------------------------
Airspeed Indicator F/O Kollsman A3615910057 1392
- --------------------------------------------------------------------------------------------------------------
Clock Indicator F/O Wakemann 651-12-24-15 1222
- --------------------------------------------------------------------------------------------------------------
Machmeter F/O Bac 10-60713-1 NT989
- --------------------------------------------------------------------------------------------------------------
ADF/VOR Compass RMI F/O Sperry CI-600 3070877
- --------------------------------------------------------------------------------------------------------------
Pneumatic Brake Pressure Indicator US Gage SRL-07AM 5739
- --------------------------------------------------------------------------------------------------------------
Hydraulic Brake Pressure Indicator US Gage SRL-07CA 5830
- --------------------------------------------------------------------------------------------------------------
DME Indicator F/O Collins 522-1859-033 4018
- --------------------------------------------------------------------------------------------------------------
Airspeed Indicator Capt Kollsman A3615910057 1360
- --------------------------------------------------------------------------------------------------------------
Compass ADF/VOR RMI Capt Sperry CI-600 24
- --------------------------------------------------------------------------------------------------------------
Clock Indicator Capt Wakerman 651-12-24-15 1219
- --------------------------------------------------------------------------------------------------------------
Machmeter Capt Bac 10-60713-1 NT1156
- --------------------------------------------------------------------------------------------------------------
DME Indicator Capt Collins 522-1559-033 C8002
- --------------------------------------------------------------------------------------------------------------
Flight Director Indicator Capt Collins 522-3752-001 135
- --------------------------------------------------------------------------------------------------------------
Course Director Indicator Capt Collins 522-3342-001 446
- --------------------------------------------------------------------------------------------------------------
Autopilot Capture Indicator Capt Bac 75-0149-77 2371
- --------------------------------------------------------------------------------------------------------------
Rad/Alt Indicator Capt Bendix INA-51A 01988
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Revision: IR Section: Avionics Listing
Revision Date: 11/1/95 Page 2 of 3
<PAGE>
SUNWORLD INTERNATIONAL AIRLINES
Attachment A
AVIONICS LISTING
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
NOMENCLATURE POS MANUFACTURER PART NUMBER SERIAL NUMBER
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Baro-Altimeter Capt Kollsman A3811910008 1752
- --------------------------------------------------------------------------------------------------------------
Total Air Indicator Capt Lewis 161BL501 B545
- --------------------------------------------------------------------------------------------------------------
Servo Altimeter Capt Smith WL1152AM8 AE968
- --------------------------------------------------------------------------------------------------------------
VSI/TRA Indicator Capt Honeywell 4067241-860 11532
- --------------------------------------------------------------------------------------------------------------
VSI Pressure Transducer Capt Honeywell 4067487-901 91010491
- --------------------------------------------------------------------------------------------------------------
Standby Horizon Indicator Stena 705-7V9 19728
- --------------------------------------------------------------------------------------------------------------
Altitude Alert Honeywell JG1052AAO3 U-12
- --------------------------------------------------------------------------------------------------------------
Elevator & Rudder Position Indicator Sperry 248541 00286
- --------------------------------------------------------------------------------------------------------------
Radar Indicator Bendix 66-3442-9-0002 03141
- --------------------------------------------------------------------------------------------------------------
VOR/DME Control Panel Capt Gables G-4578 138
- --------------------------------------------------------------------------------------------------------------
ADF Control Panel Capt Bendix 2087780-7308 3141
- --------------------------------------------------------------------------------------------------------------
Radar Control Panel Gables G-4104 96
- --------------------------------------------------------------------------------------------------------------
Flight Director Control Panel Capt Collins 777-1253-001 102
- --------------------------------------------------------------------------------------------------------------
Instrument Warning Capt Gables G-2662 27
- --------------------------------------------------------------------------------------------------------------
Transponder Control Panel F/O Gables G-6993-03 00214
- --------------------------------------------------------------------------------------------------------------
Lighted Flight Counter Dexter-Wilson 600 4275
- --------------------------------------------------------------------------------------------------------------
Flight Director Control Panel F/O Collins 777-1253-001 47
- --------------------------------------------------------------------------------------------------------------
VOR/DME Control Panel F/O Gables G-4578 86
- --------------------------------------------------------------------------------------------------------------
Frequency and Load Controller #1 G.E. 700662B 3798
- --------------------------------------------------------------------------------------------------------------
Voltage Regulator #1 Westinghouse 939D150-2 UW3601M
- --------------------------------------------------------------------------------------------------------------
Voltage Regulator #2 Westinghouse 939D150-2 SB5430
- --------------------------------------------------------------------------------------------------------------
Voltage Regulator #3 Westinghouse 939D150-2 PY3961M
- --------------------------------------------------------------------------------------------------------------
Transformer/Rectifier #1 Bac 10-3257-3 5474
- --------------------------------------------------------------------------------------------------------------
Transformer/Rectifier #2 Bac 10-3257-3 5205
- --------------------------------------------------------------------------------------------------------------
Transformer/ Rectifier #3 Bac 10-3257-3 5256
- --------------------------------------------------------------------------------------------------------------
General Protection Panel #3 Westinghouse 902F242-5 OB7667
- --------------------------------------------------------------------------------------------------------------
General Protection Panel #2 Westinghouse 902F242-5 UJ599M
- --------------------------------------------------------------------------------------------------------------
General Protection Panel #1 Westinghouse 902F242-5 RO3532
- --------------------------------------------------------------------------------------------------------------
TCAS Processor Honeywell 4066010-904 91020299
- --------------------------------------------------------------------------------------------------------------
Transponder Mode S Collins TPR-720 1741
- --------------------------------------------------------------------------------------------------------------
Radar Transceiver Bendix 66-3442-9-0004 02329
- --------------------------------------------------------------------------------------------------------------
Main Battery Sonotone CA-727-3 120406
- --------------------------------------------------------------------------------------------------------------
Flight Data Recorder Sundstrand 980-4100-GQUS 8378
- --------------------------------------------------------------------------------------------------------------
Accelerometer Sundstrand 3001-01-101-2 9510-2132
- --------------------------------------------------------------------------------------------------------------
Windshear Computer Honeywell 4061048-904 90040242
- --------------------------------------------------------------------------------------------------------------
Windshear Switching Unit ASM 103006-001-01 134
- --------------------------------------------------------------------------------------------------------------
Windshear Switching Unit ASM 103006-001-01 109
- --------------------------------------------------------------------------------------------------------------
Selcal Encoder Motorola NA135PH50 Unk
- --------------------------------------------------------------------------------------------------------------
Selcal Control Panel Gables G1402 85
- --------------------------------------------------------------------------------------------------------------
</TABLE>
Revision: IR Section: Avionics Listing
Revision Date: 11/1/95 Page 3 of 3
<PAGE>
ATTACHMENT B
------------
Loose Equipment:
- ---------------
1 each Right Hand Coat Closet
1 each Left Hand Movable Bulkhead
1 each Left Hand Triple Seat Assy
6 each First Class Seat Assys
2 each Galley Carts
9 each Oven Tray Carriers with 54 Trays
12 each Large Carriers
6 each Small Carriers
6 each Coffee Pots
4 each Trash Cans
<PAGE>
ATTACHMENT C
------------
1. External doubler at Left cockpit sliding window
2. External doubler at Left windshield
3. External doubler at Right cockpit sliding window
4. Dent in fuselage above #3 Left cockpit window
5. Minor dents in fuselage AFT of Left main door
6. 7 each external doublers inside #2 engine S duct
7. External doubler station 440 lower Left side fuselage skin
8. Deep scratch station 650 lower Left Side fuselage skin
9. Latches for external air conditioning connection damaged
10. External repair #1 Left leading edge flap
11. Dent in #1 Left leading edge flap center
12. External repair #2 Left leading edge flap
13. External repair #3 Left leading edge flap
14. External repair inboard of Left wing fuel vent box on inspection plate
15. External repair outboard flap jack screw cover
16. Dent in left outboard trailing edge flap 18 inches
from inboard bottom end
17. Left inboard flap has dent bottom side 12 inches from outboard end -
Also dents between flap fairings
18. External repair on fuselage at Left rear service door at station 1030
19. External repair at Left rear service door station 1070
20. #1 Engine Thrust Reverser does not have speed kit installed
21. Right leading edge inboard flap has 3 external repairs
22. Right leading edge outboard flap has external repair
23. #7 leading edge slat Right wing has external repair
24. Right wing outboard flap has dent bottom of flap 18 inches from outboard
end. Also dent between flap fairings
25. External doubler on top Right wing middle ground spoiler
26. Several dents on inboard flap top trailing edge inboard end
27. External doubler Right side fuselage at 3rd window behind rear emergency
window
28. External doubler Right side fuselage at 5th window behind rear emergency
window
29. Several dents on inboard flap bottom side trailing edge inboard end and
between flap fairings
30. Two external repairs on bottom of AFT stair
31. Overhead panel row 8 center retension is broken out
and covered with metal peace
32. Seats 29F, 30D & E do not have tray tables
<PAGE>
GUARANTY AGREEMENT
This Guaranty Agreement ("Guaranty) dated as of January 19, 1996, is made
--
by Columbia Sussex Corporation a corporation organized under the laws of
Kentucky ("Guarantor").
WITNESSETH :
WHEREAS, FIRST SECURITY BANK OF UTAH, National Association, ("Lessor"), 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 "AFG/Northwest Airlines 1989-4 Trust" dated as of
December 13, 1989, and Amended as of March 1, 1990, has agreed to enter into
that certain Aircraft Lease Agreement dated as of January 19, 1996 (the "Lease")
--
pursuant to which it is to lease the Aircraft defined therein to SUNWORLD
INTERNATIONAL AIRLINES, INC., a Kentucky corporation ("Lessee"), and
WHEREAS, Lessor has agreed to enter into the Lease with Lessee but only if
Lessee's obligations under the Lease are guaranteed by Guarantor.
NOW, THEREFORE, in consideration of the premises and in order to induce
Lessor, as requested by Guarantor, to enter into the Lease, Guarantor does
hereby represent, covenant and agree with Lessor as follows:
I. GUARANTY OBLIGATIONS
1.1 Guarantor hereby absolutely and unconditionally guarantees to Lessor,
the punctual and faithful payment and performance of all of the Liabilities (as
hereinafter defined) of Lessee to Lessor under the Lease (whether such
Liabilities are now existing or arise hereafter); and the strict performance and
observance by Lessee of all of the terms, covenants and conditions contained in
the Lease. As used herein, the term "Liabilities" includes, without limitation,
any and all Basic Rent, Supplemental Rent and undertakings of Lessee to Lessor
of every kind and description under the Lease (including, also, without
limitation, reasonable costs and expenses incurred by the Lessor in attempting
to collect or enforce any of the foregoing including reasonable attorneys' fees)
including interest on any such amounts accrued in each case from the due date
thereof to the date payment is received by Lessor provided, however, interest
--------- -------
due Lessor hereunder as Supplemental Rent shall not also be payable to Lessor a
second time because of the provisions of this sentence.
<PAGE>
1.2 This Guaranty is an absolute, unconditional and continuing guaranty of
the full and punctual payment and performance by Lessee of the Liabilities and
not of their collectibility only. The liabilities and obligations of Guarantor
hereunder may be enforced without any suit or action against Lessee or any other
guarantor of any of the Liabilities, without regard or resort to any security or
other means of obtaining payment of the Liabilities which Lessor may now or
hereafter have or hold, and without the performance or occurrence of any other
condition or contingency whatsoever; provided, however, that the exercise or
attempted exercise, at any time or times, of any or all of such rights and
remedies as Lessor may have against Lessee, or with respect to any security for
liabilities or under any other guaranty of Liabilities shall not affect, reduce,
modify or impair, in any manner whatsoever, the liabilities and obligations of
the Guarantor hereunder, except and to the extent Lessor has received payment or
performance of such Liabilities of Lessee. Guarantor hereby unconditionally
waives to the fullest extent permitted by law (except to the extent specifically
provided in this Guaranty) demand, or notice of any nature. Payments by
Guarantor hereunder shall be unlimited in amount with respect to its guaranty of
the Liabilities, as defined above.
1.3 Guarantor hereby waives any and all suretyship defenses and defenses
in the nature thereof; and agrees that enforcement of this Guaranty shall not be
affected, reduced, modified or impaired by any dealing by Lessor with Lessee or
anyone else who may now or hereafter become liable in any manner for any of the
Liabilities, in such manner as Lessor, in its sole discretion, may deem fit,
except to the extent that Lessor has waived or released in writing any
Liabilities and except and to the extent Lessor has received payment or
performance of such Liabilities by Lessee. If for any reason, Lessee has no
legal existence or is under no legal obligation to discharge any of the
Liabilities; or if, by operation of law or for any other reason, moneys included
in the Liabilities have become irrecoverable from Lessee, or if any security for
any of the Liabilities or if any other guaranty thereof is invalid, defective or
unenforceable, this Guaranty shall be binding upon Guarantor to the same extent
as if Guarantor were at all time primarily obligated on the Liabilities.
1.4 No setoff, counterclaim, reduction or diminution of any Liabilities,
or any defense of any kind or nature, which Guarantor has or may have against
Lessee, shall be available hereunder to Guarantor against Lessor.
1.5 This Guaranty shall remain in full force and effect regardless of any
payment hereunder or of any reduction in, or modification or alteration of the
Liabilities, until such time as
-2-
<PAGE>
all Liabilities not waived or released by Lessor in writing and all liabilities
and obligations of Guarantor hereunder have been paid and performed in full.
Guarantor's obligations under this Guaranty shall be immediately extinguished
upon the full, complete and faithful performance by Lessee of all of its
Liabilities. So long as this Guaranty remains in force, as aforesaid, Guarantor
will not, (x) by paying any sum recoverable hereunder (whether or not demanded
by the Lessor) or by any means or on any other ground, claim any set-off or
counterclaim against Lessee in respect of any liability of Guarantor to Lessee
or, (y) in bankruptcy or insolvency proceedings of any nature, prove in
competition with Lessor in respect of any payment hereunder or in any such
proceeding be entitled to have the benefit of any counterclaim or proof of claim
or dividend or payment by or on behalf of Lessee or the benefit of any other
security for any of the Liabilities which, now or hereafter, Lessor may hold or
in which it may have any share. All payments by Guarantor hereunder shall be
made in lawful money of the United States of America in immediately available
funds and, so long as the person or entity entitled thereto is a United States
person within the meaning of the Internal Revenue Code, without any deduction or
withholding of any kind.
1.6 Guarantor hereby confirms that this Guaranty shall remain in full
force and effect notwithstanding that:
(a) the obligations of the Lessee under the Lease are discharged,
extinguished, terminated, rescinded, avoided or suspended
(whether pursuant to any provision of the Lease or otherwise) by
virtue of any breach on the part of the Lessee, under the
doctrine of frustration, as a result of the liquidation of the
Lessee or any action taken in such liquidation (for example, a
disclaimer), except by payment or performance thereof; or
(b) subject to the provisions of the Lease, performance of the Lease
by the Lessee becomes impossible or illegal;
and, in particular, the Lessor shall be entitled to recover under this Guaranty
in respect of any payment or obligation (including any obligation of paying
interest) which the Lessor would have received under the Lease but for the
occurrence of any of the circumstances described in subsections (a) or (b)
above.
1.7 If the Lease is disclaimed in a liquidation of the
Lessee :
(a) so long as any amounts or obligations then due from the Guarantor
under this Guaranty remain unpaid or unperformed, as the case may
be, the
-3-
<PAGE>
Guarantor shall not, in respect of any payment which it makes or
any liability which it has, under this Guaranty or the Lease,
claim any amount from the Lessee, make or enforce any security
against any asset of the Lessee, or claim any set off against any
sum from it to the Lessee; and
(b) the Guarantor shall not, in respect of such payment or liability,
prove in the liquidation of the Lessee, except that, if the
Guarantor shall have paid and/or performed all of its obligations
then due hereunder, it shall be subrogated to all rights of
Lessor against Lessee, and the Guarantor may, by exercise of that
statutory right, prove for any loss or damage suffered by the
Lessor, and otherwise as its interests may appear.
II. REPRESENTATIONS AND WARRANTIES
Guarantor hereby represents and warrants to Lessor as follows :
2.1 (a) Guarantor is a corporation duly incorporated, validly existing
and in good standing under the laws of the State of Kentucky, is duly qualified
to do business and in good standing in each jurisdiction where the character of
its business and the ownership of its property, as now conducted or owned or as
proposed to be conducted or owned, requires such qualification;
(b) The execution, delivery and performance by Guarantor of this
Guaranty have been duly authorized by all necessary corporate action on the part
of the Guarantor, are not inconsistent with its Certificate of Incorporation or
By-Laws, do not violate any law or governmental rule, regulation or order
applicable to Guarantor, do not and will not contravene any provision of, or
constitute a material default under, any indenture, mortgage, contract or other
instrument to which it is bound and, upon execution and delivery hereof, will
constitute a legal, valid and binding agreement of Guarantor, enforceable in
accordance with its terms;
(c) No consent or approval by governmental authority or agency is
required with respect to the execution, delivery and performance by Guarantor of
this Guaranty;
(d) There are no litigations or proceedings pending against it not
covered by insurance which, if adversely determined, would have a materially
adverse effect on Guarantor or would prevent or hinder the performance by it of
its obligations hereunder;
-4-
<PAGE>
2.2 Guarantor will provide an opinion of its counsel confirming (subject
to standard exceptions) that:
(a) Guarantor is a corporation duly incorporated, validly existing,
in good standing and is duly qualified to do business under the laws of the
Commonwealth of Kentucky,
(b) The execution, delivery and performance of Guarantor of this
Guaranty have been duly authorized by all necessary corporate action on the part
of Guarantor, are not inconsistent with its Certificate of Incorporation or By-
Laws, do not violate any law or governmental rule, regulation or order
applicable to Guarantor and this Guaranty is the legal, valid and binding
agreement of the Guarantor, enforceable in accordance with its terms;
(c) No consent or approval by any governmental authority or agency of
the United States or the Commonwealth of Kentucky is required with respect to
the execution, delivery and performance by Guarantor of this Guaranty.
III. DEFAULT
3.1 The following described events shall constitute "Events of Default"
hereunder:
3.1.1 An "Event of Default" as defined in Section 13.3 of the
Lease shall occur and remain unremedied.
3.1.2 An "Event of Default" as defined in Sections 13.1 and 13.2
of the Lease shall occur and remain unremedied for a period of three Business
Days after written notice thereof to Guarantor;
3.1.3 An "Event of Default" as defined in Section 13.4, 13.5,
13.6, 13.7 and 13.8 of the Lease shall occur and remain unremedied for 10 days
following notice thereof from Lessor to Guarantor or such longer period of time
as is reasonably required to cure such Event of Default provided the Guarantor
is diligently attempting such cure and such default does not result in a
material risk to the Aircraft or Lessor's title thereto.
3.1.4 The Guarantor shall:
(a) admit its inability to pay its debts generally as they become due
or otherwise acknowledging its insolvency;
-5-
<PAGE>
(b) file a petition in bankruptcy or for reorganization or for the
adoption of an arrangement under the Bankruptcy Code (or similar laws of the
United States of America, or any other jurisdiction which relates to the
liquidation or reorganization of companies or the modification or alteration of
the rights of creditors, each such law, as from time to time in effect, being
sometimes referred to as a "bankruptcy act", each as now or in the future
amended) or an answer or other pleading admitting or failing to deny the
material allegations of such a petition or seeking, consenting to or acquiescing
in the relief therein provided; or
(c) make an assignment, or so-called trust mortgage or the like, for
the benefit of its creditors or by its making a proposal to its creditors under
the bankruptcy act; or
(d) consent to the appointment of a receiver or trustee (or other
persons performing a similar function) for the Aircraft or for all or a
substantial part of its property; or
(e) be adjudicated a bankrupt; or
(f) suffer the entry of, or be the subject of, a court order for all
or a substantial part of its property which order shall not be vacated, set
aside, bonded, or stayed within 60 days from the date of entry; (i) appointing a
receiver or a trustee for all or a substantial part of its property, or (ii)
approving a petition filed or application made against it for, or effecting an
arrangement in bankruptcy or for a reorganization or other relief pursuant to
any bankruptcy act or for any other judicial modification or alteration of the
rights of creditors; or
(g) have all or a substantial part of its property taken into custody
or be sequestrated by a court of competent jurisdiction, which custody or
sequestration shall not be suspended or terminated within 60 days (or such
longer period as the Lessor may agree in writing) from it inception.
3.1.5 Any representation or warranty made in writing by the
Guarantor in this Guaranty, or in any certificate or written disclosure
delivered in connection with this Guaranty shall prove to have been false or
incorrect in any material respect on the date of such representation or
warranty.
3.1.6 Twenty-five percent (25%) (calculated excluding current
maturities of long-term debt) or more of Guarantor's current liabilities, less
any disputed amounts and other than current maturities of long-term debt, shall
remain unpaid for 45 days or more beyond the due date;
-6-
<PAGE>
3.1.7 Guarantor shall be in default in the observance or
performance of any other covenant, condition or agreement to be observed or
performed by Guarantor hereunder and such default shall continue for a period of
30 days after written notice from Lessor.
IV. MISCELLANEOUS
4.1 No provision of this Guaranty can be changed, waived, discharged or
terminated except by an instrument in writing by Lessor and Guarantor expressly
referring to the provision of this Guaranty to which such instrument is related,
and no such waiver shall extend to, affect or impair any right with respect to
any liability or obligation which is not expressly dealt with therein. No
course of dealing or delay or omission on the part of Lessor in exercising any
right or remedy hereunder, shall operate as a waiver thereof or otherwise be
prejudicial thereto. The rights and remedies of Lessor hereunder are cumulative
and not exclusive of any other rights and remedies under any other guaranty by
Guarantor or under applicable law, and all such rights and remedies may be
exercised singly or concurrently.
4.2 The Guarantor shall provide financial reports as required by Section
4.4.5 of the Lease.
4.3 This Guaranty shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts and shall be binding upon
Guarantor and its successors and assigns, and shall inure to the benefit of
Lessor and its successors and assigns.
4.4 This Guaranty can be assigned by Lessor if the Lease is assigned
pursuant to its terms and shall be fully enforceable to the same extent as if
made to Lessor's assignee. This Guaranty cannot be assigned by Guarantor without
the prior written consent of Lessor.
4.5 All capitalized terms not otherwise defined herein shall have the
meaning given to such terms in the Lease.
4.6 Guarantor agrees that the federal and state courts located in the
Commonwealth of Massachusetts shall have non-exclusive jurisdiction to settle
any disputes which may arise out of or in connection with this Guaranty.
4.6.1 Guarantor hereby waives any objection on the grounds of
inconvenient forum to any proceedings which relate to this Guaranty being
brought in the courts located in the Commonwealth of Massachusetts.
4.7 All demands, notices and other communications pursuant to or relating
to this Guaranty shall be in writing and shall be
-7-
<PAGE>
delivered in hand by courier or other means, or sent by registered air mail with
postage prepaid, or by telex or telefax with receipt confirmed by answerback or
other means, addressed as follows:
(a) If to Lessor:
First Security Bank of Utah, National Association
79 South Main Street
Salt Lake City, Utah 84111
Attention: Corporate Trust Department
Telecopier: (801) ( 246-5799
with copies to:
American Finance Group
98 North Washington Street
Boston, Massachusetts 02114
Attention: President
Telecopier: (617) 523-1410
(b) If to Guarantor:
Columbia Sussex Corporation
207 Grandview Drive
Fort Mitchell, Kentucky 41017
Attention: Joseph E. Marquet
Telecopier: (606) 331-6383
with copies to:
Winthrop, Stimson, Putnum & Roberts
1 Battery Park Plaza
New York, New York 10004
Attention: Ruth J. Weinstein
Telecopier: (212) 858-1500
or such other address as either party shall designate in a written notice to the
other party hereto. Any notice provided for herein shall be deemed to have been
effected when delivered in hand to an officer of the addressee, or if sent by
registered air mail or by courier or other similar means and if properly
addressed, either when received or on the seventh day following
-8-
<PAGE>
the day of dispatch, which shall occur earlier. Notices sent by telex or telefax
shall be deemed to have been received when receipt is confirmed.
IN WITNESS WHEREOF Guarantor has executed this Guaranty by its duly
authorized representative as of the date first above written.
GUARANTOR :
COLUMBIA SUSSEX CORPORATION
By: /s/ Joseph E, Marquet
-------------------------------
Title: Vice President-Finance
----------------------------
ACKNOWLEDGED AND ACCEPTED BY:
FIRST SECURITY BANK OF UTAH,
NATIONAL ASSOCIATION, not in
its individual capacity but
solely as Trustee of the "AFG/Northwest
Airlines 1989-4 Trust"
By: /s/[SIGNATURE ILLEGABLE]
-------------------------------------
Title: Asst. Vice President
----------------------------------
-9-
<PAGE>
AIRCRAFT LEASE
DATED AS OF DECEMBER 20, 1989
between
INVESTORS ASSET HOLDING CORP.,
Trustee of AFG/Horizon-II Trust,
as Lessor,
and
HORIZON AIR INDUSTRIES, INC.
as Lessee,
Covering one Fairchild Metro III
Aircraft Model 5A227-AC
U.S. Registration Number N27442
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
1. Acceptance and Lease of Aircraft 1
2. Conditions Precedent; Closing Covenants 1
3. Term and Rent 2
4. Limited Appointment of Agent 3
5. Warranty of Lessor 4
6. Representations, Warranties and
Agreements of Lessee 5
7. Net Lease 6
8. Return of Aircraft 7
9. Liens 9
10. Taxes 9
11. Registration, Maintenance and Operations;
Compliance and Use; Replacement Parts;
Additions; Aircraft Marking 10
12. Inspection 13
13. Loss or Destruction; Requisition of Use 13
14. Insurance 15
15. Indemnification 17
16. Sublease; Possession 18
17. Tax Treatment; Tax Indemnification 20
18. Events of Default 24
19. Remedies 26
20. Notices 29
21. Assignment and Subletting 29
22. Miscellaneous 30
23. Performance of Obligations of Lessee
by Lessor 31
24. Additional Covenants of Lessee 31
25. Counterparts 33
</TABLE>
Exhibits
- --------
A Definitions
B Financial Terms
C Casualty Value Schedule
D Opinion of Lessee's Counsel
E Opinion of Guarantor's Counsel
F Guaranty of Alaska Air Group, Inc.
G Permitted Sublessees
<PAGE>
AIRCRAFT LEASE
--------------
This AIRCRAFT LEASE dated as of December 20, 1989 ("Lease") is between
INVESTORS ASSET HOLDING CORP., a Massachusetts corporation (the "Trustee"), not
in its individual capacity but solely as trustee of AFG/Horizon-II Trust
("Lessor"), and HORIZON AIR INDUSTRIES, INC., a Washington corporation
("Lessee"). Certain capitalized terms as used in this Lease are defined in
Exhibit A hereto, and such definitions are hereby incorporated herein and made a
part hereof as though set forth herein in full.
1. ACCEPTANCE AND LEASE OF AIRCRAFT
--------------------------------
Subject to the satisfaction of each condition set forth in Sections 2(a)
and (b), Lessor hereby agrees to lease to Lessee, and Lessee hereby agrees to
lease from Lessor, the Aircraft pursuant to the terms and conditions of this
Lease including all Lease Supplements and Exhibits added hereto. Lessee
acknowledges that it has accepted the Aircraft as of the Delivery Date.
2. Conditions Precedent; Closing Covenants
---------------------------------------
(a) Lessor's obligation to be bound by the terms of this Lease are
conditioned upon the receipt by Lessor of the following documents in a form
satisfactory to it:
(i) the original of this Lease duly executed by Lessee;
(ii) copies of resolutions of Lessee's board of directors or
officers authorizing Lessee to enter into and perform this Lease and
the transaction contemplated thereby, certified to be true and up to
date by a duly authorized officer of Lessee;
(iii) a certificate of a duly authorized officer of Lessee setting
out the names and signatures of the persons authorized to sign this
Lease and any document to be delivered by Lessee pursuant hereto;
(iv) certificates of insurance evidencing coverage for Lessor's
interest, all as required hereunder;
(v) evidence that FAA counsel has received in escrow an executed
duplicate of this Lease, in proper form for filing with the FAA, and
pursuant to instructions from Lessor and Lessee has filed such
document with the Federal Aviation Registry in accordance with Title
14, Part 49 of the Code of Federal Regulations;
(vi) a favorable opinion of FAA counsel to Lessor;
<PAGE>
-2-
(vii) an opinion of counsel of Lessee substantially in the form of
Exhibit D and an opinion of counsel to Guarantor substantially in the
form of Exhibit E;
(viii) the Guaranty of Guarantor substantially in the form of Exhibit
F; and
(ix) such other documents, certificates and opinions as Lessor may
reasonably require.
(b) Lessee covenants that, upon purchase of the Aircraft by Lessor,
Lessee shall release from escrow the documents held therein by FAA counsel
on behalf of Lessee. Lessee further represents and warrants that on such
release date no legal or practical impediment will exist which would
prevent FAA counsel from filing the Lease and that each of the foregoing
shall have been duly executed and in a form appropriate for filing so that
the same may then be duly filed and accepted for filing by the Federal
Aviation Administration.
(c) Filing of the Lease for recordation with the FAA shall constitute
Lessor's and Lessee 5 acknowledgment that they are bound by the terms of
this Lease, notwithstanding anything to the contrary in this Lease.
3. Term and Rent
-------------
(a) This Lease shall commence on the Delivery Date and shall end on
the Expiration Date unless this Lease shall have been terminated in
accordance with the terms hereof.
(b) Lessee shall pay to Lessor, as basic rent (herein referred to as
"Basic Rent"), in advance, on the Delivery Date, and on each Basic Rent
Date thereafter, an amount equal to the monthly Basic Rent specified in
Exhibit B.
(c) In addition, Lessee shall pay to Lessor the following amounts
(herein referred to as "Supplemental Rent" and, together with all Basic
Rent, as "Rent"):
(i) on demand, any amount payable hereunder (other than Basic Rent
or Casualty value) which Lessee assumed the obligation to pay, or
agrees to pay, under this Lease;
(ii) on the date provided herein, any amount payable hereunder as
Casualty Value; and
(iii) on demand, to the extent permitted by applicable law, interest
(computed on the basis of a 365/366-day year for actual days elapsed)
at the Late Payment Rate on any payment of Rent which is overdue.
<PAGE>
-3-
The expiration or other termination of Lessee's obligation to pay
Basic Rent hereunder shall not limit or modify the obligations of Lessee
with respect to Supplemental Rent.
(d) All payments of Rent hereunder shall be made to Lessor in
immediately available funds on the date payable hereunder or if such day is
not a Business Day, on the first Business Day thereafter, at its address
set forth in Exhibit B or at such other address or to such other Person as
Lessor may direct by notice in writing to Lessee.
4. Limited Appointment of Agent
----------------------------
(a) Enforcement of Warranties; Claims. Lessor hereby appoints and
---------------------------------
constitutes Lessee its agent and attorney-in-fact during the term of this
Lease, so long as no Event of Default has occurred and is continuing, to
assert from time to time, in the name of Lessor, but for the benefit of
Lessee and at Lessee's expense, whatever claims and rights (including
warranties pertaining to the Aircraft) which Lessor may have against any
manufacturer or vendor of the Airframe, Engines, or other components or
Parts of the Aircraft or Engines. In the event Lessee is not able to
enforce in the name of Lessor any such performance by legal proceedings,
Lessor shall participate with Lessee and provide the assistance requested
by Lessee, at Lessee's expense, in asserting claims and rights as specified
in this Section 4(a).
(b) Acceptance of Aircraft. Solely for purposes of accepting delivery
----------------------
of the Aircraft from the Manufacturer, Lessor hereby appoints Lessee as
authorized representative of Lessor. Until such authority shall have been
terminated pursuant to paragraph (c) of this Section, such authorized
representative shall be authorized to take possession of the Aircraft upon
the delivery thereof to Lessee by the Manufacturer, to accept on behalf of
Lessor all Purchase Documents, if any, delivered at such time with respect
to the Aircraft, either to accept delivery of the Aircraft on behalf of
Lessor if it is found to be in good order or to refuse delivery of the
Aircraft if it is found not to be in good order, and to take such other
action on behalf of Lessor, including execution of a delivery receipt and
such other documents as shall be required to accept delivery of the
Aircraft.
(c) Termination of Appointment of Authorized Agent. The authority of
----------------------------------------------
the authorized representative granted pursuant to paragraph (b) of this
Section shall terminate upon the earlier of (i) acceptance of the Aircraft
by Lessee on its own behalf and on behalf of Lessor or (ii) notice to
Lessee by Lessor revoking the same. If requested by the Manufacturer,
Lessor will provide to the Manufacturer at the delivery, written assurances
that such authority has not been revoked.
(d) Purchase from Lessee. Paragraphs (b) and (c) of this Section
--------------------
shall not apply in the event that the Lessor acquires the Aircraft directly
from the Lessee.
<PAGE>
-4-
5. Warranty of Lessor
------------------
(a) Lessor represents and warrants (which representations and
warranties shall survive the execution and performance hereof);
(i) that this Lease has been duly executed and delivered by Lessor
and constitutes a legal, valid and binding obligation of Lessor
enforceable against Lessor in accordance with its terms;
(ii) that the party executing this Lease on behalf of the Lessor has
the authority to execute same and bind Lessor;
(iii) that this Lease has been duly authorized by all necessary
action;
(iv) that Trustee is a corporation, and the Lessor is a nominee
trust, each duly organized and validly existing under the laws of the
Commonwealth of Massachusetts, and Lessor has the requisite power and
authority to enter into and perform its obligations under this Lease;
and
(v) that the execution and delivery by Lessor of this Lease, and
the performance by the Lessor of its obligations under the Lease, 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 it is a party or by which it is
bound.
(b) Lessor warrants and agrees (i) that during the Term of this
Lease it qualifies and will continue to qualify, and will cause the Trustee
and any Transferee to qualify, as a "Citizen of the United States" as
defined in Section 101(16) of the Federal Aviation Act and that it shall
take, or cause to be taken, all necessary action on its part (except any
such actions as are required to be taken solely by Lessee hereunder) to
maintain the United States registration of the Aircraft in accordance with
the Federal Aviation Act, and (ii) that during the Term of this Lease as
long as no Event of Default has occurred and is continuing, Lessee's use of
the Aircraft shall not be interrupted or impaired by Lessor or anyone
claiming through or under Lessor.
(c) The warranties set forth hereinabove are exclusive and in lieu of
all other warranties of Lessor, whether written, oral or implied with
respect to this Lease or the Aircraft, and Lessor shall not be deemed to
have modified in any respect the obligations of Lessee under any of the
Operative Agreements, which obligations are absolute and unconditional,
come "hell or high water" except in the case of a breach of Section 5(b).
LESSEE EXPRESSLY AGREES TO LEASE THE AIRCRAFT "AS IS". LESSOR SHALL NOT BE
DEEMED TO HAVE MADE, AND LESSOR HEREBY DISCLAIMS ANY OTHER REPRESENTATION
OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER,
INCLUDING WITHOUT LIMITATION, LESSOR'S TITLE TO THE AIRCRAFT,
<PAGE>
-5-
THE DESIGN OR CONDITION OF THE AIRCRAFT, ITS MERCHANTABILITY OR ITS FITNESS
FOR ANY PARTICULAR PURPOSE, THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF
THE AIRCRAFT, ITS VALUE OR AIRWORTHINESS OR CONFORMITY OF THE AIRCRAFT TO
THE PROVISIONS AND SPECIFICATION OF ANY PURCHASE AGREEMENT OR AGREEMENTS
RELATING THERETO, NOR SHALL LESSOR BE LIABLE, REGARDLESS OF ANY ACTUAL OR
ALLEGED NEGLIGENCE OF LESSOR FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OR FOR
STRICT OR ABSOLUTE LIABILITY IN TORT.
6. Representations, Warranties and Agreements of the Lessee
--------------------------------------------------------
(a) Due Organization. Lessee is a corporation duly organized and
----------------
validly existing in good standing under the laws of the State of
Washington, is and/or will be duly qualified to do business as a foreign
corporation and in good standing in each other jurisdiction where the
conduct of its business requires it to be so qualified, and has the
corporate power and authority to carry on its business as presently
conducted, to hold property under lease and to enter into and perform its
obligations under this Lease and all other Operative Agreements to which
Lessee is a party.
(b) Due Authorization; Enforceability; No Violation. This Lease and
----------------- -------------- ------------
all other Operative Agreements to which Lessee is a party have been duly
authorized by all necessary corporate action on the part of Lessee and do
not require any approval of the stockholders of Lessee which has not been
obtained, and have been or will be duly executed and delivered by Lessee
and, assuming due authorization, execution and delivery by the other party
thereto, are or will be legal, valid and binding obligations of Lessee
enforceable in accordance with their terms. The execution and delivery by
Lessee of the foregoing documents are not, and the performance by it of its
obligations under each will not be, inconsistent with its charter or by-
laws, do not and will not contravene any law, governmental rule or
regulation, judgment or order applicable to or binding on Lessee, do not
and will not contravene any provisions of, or constitute a default or
result in the creation of any Lien (other than as permitted by Section 9
hereof) under any indenture, mortgage, contract or other instrument to
which Lessee is a party or by which it is bound, and do not and will not
require any approval or consent of any trustee or holders of indebtedness
or obligations of Lessee, except such as have been duly obtained.
(c) Government Approvals. No consent or approval of, giving of notice
--------------------
to, registration with, or taking of any other action in respect of or by,
any Federal, state or local governmental authority or agency (including,
without limitation, the FAA) or other person is required with respect to
the execution, delivery and performance by Lessee of this Lease or the
other Operative Agreements or the consummation of any of the transactions
by Lessee contemplated hereby or thereby, or if any such approval, notice,
registration or action is required, it has been, or will be, duly given or
obtained prior to closing.
<PAGE>
-6-
(d) Location of Chief Executive Office. The chief executive office or
----------------------------------
principal place of business (as either of such terms is used in Article 9
of the Uniform Commercial Code) of Lessee is located at the address set
forth in Exhibit B to the Lease, and Lessee agrees to give Lessor prior
written notice of any relocation of the chief executive office or principal
place of business.
(e) Lessee's Selection. Lessee has selected the Aircraft and
------------------
manufacturer thereof and all maintenance facilities required thereby or
hereby.
(f) Litigation. There are no suits or legal proceedings (including
----------
any administrative proceeding) pending or, to Lessee's knowledge,
threatened before any court or administrative agency against Lessee which,
if adversely determined, would have a material adverse effect upon its
financial condition or business or its ability to perform its obligations
hereunder, except as disclosed on an exhibit to the opinion of Lessee's
counsel required pursuant hereto.
(g) Financial Statements, Financial Conditions, Disclosures. The
--------- ---------- --------- ---------- -----------
unaudited financial statements of Lessee in respect of the three month
period ended on June 30, 1989, as delivered to Lessor have been prepared in
accordance with generally accepted accounting principles and present fairly
the financial position of Lessee as of such date, and as of such date
Lessee had no significant liabilities (contingent or otherwise) which are
not disclosed by, or reserved against in, such financial statements. There
has been no material adverse change in the financial position of Lessee
from that set forth in the financial statements referred to in this Section
6(g). The financial statements referred to in this Section 6(g) together
with all other documents furnished by or on behalf of Lessee to Lessor in
connection with the transactions contemplated hereby do not contain any
untrue statement of a material fact or omit a material fact necessary to
make the statements contained therein not misleading.
7. Net Lease; Lessor's Default; Limitation or Lessee's Remedies.
-------------------------------------------------------------
This Lease is a net lease, and Lessee acknowledges and agrees that Lessee's
obligation to pay all Rent hereunder, and the rights of Lessor in and to such
Rent, shall be absolute and unconditional and shall not be subject to any
abatement, reduction, set-off, defense, counterclaim or recoupment for any
reason whatsoever, other than for a breach of Section 5(b). Except as otherwise
expressly provided herein and except with respect to a breach by Lessor of
Section 5(b), this Lease shall not terminate, nor shall the obligations of
Lessee be affected, by reason of any defect in or damage to, or any loss or
destruction of, the Aircraft or any part thereof from whatsoever cause, or the
interference with the use thereof by Lessor or any Person, or the invalidity or
unenforceability or lack of due authorization of this Lease or lack of right,
power or authority of Lessor to enter into this Lease, or for any other cause,
whether similar or dissimilar to the foregoing, any
<PAGE>
-7-
present or future law or regulation to the contrary notwithstanding, it being
the express intention of Lessor and Lessee that all Rent payable by Lessee
hereunder shall be, and continue to be, payable in all events unless the
obligation to pay the same shall be terminated pursuant to the express
provisions of this Lease. If Lessor shall breach any representation, warranty or
covenant contained herein, Lessee shall have no remedy against Lessor on account
thereof unless Lessee has given Lessor notice thereof and such breach has not
been cured within thirty (30) days thereafter. Section
8. Return of Aircraft
------------------
(a) Condition Upon Return. Upon the expiration or termination of this
---------------------
Lease, the Lessee, at its own expense, will return the Aircraft to the
Lessor at any reasonable location chosen by the Lessor in the continental
United States, which is within 1,500 miles of Portland, OR, and in the
condition in which the Aircraft is required to be maintained pursuant to
Section 11 hereof, but with all logos or other identifying marks of the
Lessee removed in a workmanlike manner. If the Lessee desires to obtain for
its own use the U.S. "N" registration number that is on the Airframe, prior
to return, the Lessee, at its expense, shall make application to the FAA
for a new "N" number designated by Lessor, and shall have such new number
painted on the aircraft in such a location and to such specifications as
the Lessor shall direct. The Aircraft, upon redelivery pursuant hereto, (i)
shall be duly certified by the FAA as an airworthy aircraft, (ii) shall be
free and clear of all Liens, other than Lessor's Liens, and (iii) all
Engines shall have on average (i.e., the total number of hours divided by
the total number of engines) available operating hours until (y) the next
scheduled "hot section" inspection, and (z) next scheduled CAMP Inspection,
both of not less than 50% of the total operating hours respectively
available between such hot section inspection or CAMP Inspection.
(b) Lessee shall have the right to return to Lessor engines or parts
thereof different from the Engines leased to Lessee hereunder subject to
the following conditions. Any substituted engine or part thereof shall be
of the same manufacture and the same or improved utility, performance and
efficiency, shall be suitable for use on the Airframe and shall have a
value and utility at least equal to the Engine or part thereof leased
hereunder and shall otherwise comply with the return conditions set forth
in (a) above. Upon return Lessee shall transfer good and marketable title
to such substitute engine or part thereof, free and clear of all
encumbrances, evidenced by a warranty bill of sale and supported by an
opinion of counsel as to the absence of recorded liens in form and
substance satisfactory to Lessor. Upon receipt of such bill of sale and
opinion of counsel, and compliance with all other conditions set forth
herein, Lessor shall transfer to Lessee title to the Engine or part thereof
for which substitution is being made as is, where is and with all faults,
without warranty and without recourse as to condition, but shall provide
Lessee with a bill of sale which provides a warranty of ownership and
freedom from Lessor's Liens.
<PAGE>
-8-
(c) In the event that such Engines do not meet the conditions set
forth in paragraph (a) (iii) hereinabove, Lessee shall pay Lessor an amount
equal to the sum of (i) the product of: the current estimated cost of the
next scheduled hot section inspection (including in such estimated cost,
all required replacement of life limited parts) multiplied by the fraction
wherein the numerator shall be the remainder (0 if negative) of (x) the
actual number of hours of operations since the previous hot section
inspection for both Engines, added together, minus (y) the total operating
hours allowable between hot section inspections, and the denominator shall
be the total operating hours allowable between hot section inspections,
plus (ii) the product of: the current estimated cost of the next scheduled
CAMP inspection (including in such estimated cost, all required replacement
of life limited parts) multiplied by the fraction wherein the numerator
shall be the remainder (0 if negative) of (x) the actual number of hours of
operations since the previous CAMP inspection for both Engines, added
together minus (y) the total operating hours allowable between CAMP
inspections, and the denominator shall be the total operating hours
allowable between CAMP inspections. All prorated inspection charges, if
any, shall be payable as Supplemental Rent and shall be due upon
presentation to Lessee of an invoice setting forth in reasonable detail,
the calculation of such amounts due including the names of all sources used
for the required cost estimates. Unless both Lessor and Lessee agree to
alternative source(s), the manufacturer of the Engines shall be used as the
source for all cost estimates.
(d) Fuel, Manuals. Upon the return of the Airframe in accordance with
---- -------
this Section 8(d), (i) Lessee shall cause each fuel tank to contain the
same quantity of fuel as was contained in such tanks when such Airframe was
delivered to Lessee on the Delivery Date (which shall be presumed to be 50
percent (50%) of full capacity unless otherwise specified on the Delivery
Date) or, in the case of differences in such quantity, an appropriate
adjustment will be made by payment, at the then current market price of
fuel by Lessee to Lessor, or Lessor to Lessee, as appropriate, and (ii)
Lessee shall deliver to Lessor all logs, manuals and data and inspection,
modification and overhaul records required to be maintained with respect
thereto under applicable rules and regulations of the FAA.
(e) Propellers. The provisions of paragraphs (a)(iii) (but with
----------
respect to scheduled overhauls rather than hot-section or CAMP
inspections), (b) and (c) of this Section 8 shall be deemed to apply to the
Propellers with similar effect as provided therein to Engines.
(f) Delivery Receipt. Upon the return of the Aircraft to Lessor in
----------------
accordance with the provisions of this Lease, the parties shall execute a
delivery receipt whereby Lessor acknowledges its acceptance of the Aircraft
and that the aircraft meets the conditions specified in the Lease for
return. Following such redelivery, Lessee shall have no further obligation
to Lessor in respect of the condition of the Aircraft.
<PAGE>
-9-
9. Liens
-----
Lessee will not directly or indirectly create, incur, assume or suffer to
exist any mortgage, pledge, lien, charge, encumbrance, lease, security interest
or claim ("Lien" or "Liens") on or with respect to the Airframe, the Engines or
any Part thereof, Lessor's title thereto or any interest of Lessor therein (and
Lessee will promptly, at its own expense, take such action as may be necessary
duly to discharge any such Lien), except (a) the respective rights of Lessor and
Lessee as herein provided, (b) the rights of others under agreements or
arrangements to the extent expressly provided by the terms of Sections 11 and 16
hereof, (c) Lessor's Liens, (d) Liens for taxes either not yet due or being
contested by Lessee (or any Permitted Sublessee) in good faith (and for the
payment of which adequate reserves in accordance with generally accepted
accounting principles have been provided), with due diligence and by appropriate
proceedings so long as such proceedings do not involve any danger of sale,
forfeiture or loss of the Airframe or any Engine or interest therein, (e)
material supplier's mechanic's, worker's, repairer's, employee's or other like
Liens arising in the ordinary course of business for amounts and payment of
which is either not yet delinquent or is being contested in good faith (and for,
the payment of which adequate reserves in accordance with generally accepted
accounting principles have been provided) so long as such proceedings do not
involve any danger of the sale, forfeiture or loss of the Airframe or any Engine
or interest therein, and (f) Liens arising out of judgments or awards against
Lessee with respect to which at the time an appeal or proceeding for review
shall be progressing and there shall have been secured a stay of execution
pending such appeal or proceeding for review.
10. Taxes
-----
Lessee agrees to pay and to indemnify Lessor for, and hold Lessor harmless
from and against, all license and registration fees, income franchise, receipts,
sales, use, excise, personal property, ad valorem, value added, leasing, leasing
use, stamp, landing, airport use or other taxes, levies, imports, duties,
charges, or withholdings of any nature, together with any penalties, fines or
interest thereon ("Impositions"), arising out of the transactions contemplated
by this Lease and imposed against Lessor, Lessee or the Aircraft, the Airframe,
the Engines or any Part thereof by any Federal, state, local or foreign
government or other taxing authority upon or with respect to the Aircraft, the
Airframe, the Engines, or any Part thereof or upon the sale, purchase,
ownership, delivery, leasing, possession, use, operation, return, transfer or
other disposition thereof or upon or with respect to this Lease, unless, and
only to the extent that, Lessee shall have given to Lessor written notice of any
such Imposition, which notice shall state that such Imposition is being
contested by Lessee in good faith with due diligence and by appropriate
proceedings and independent counsel selected by Lessee and reasonably acceptable
to Lessor shall not have determined in his opinion that the nonpayment of any
such tax or the contest of any such payment in such proceedings involves a
danger of sale, forfeiture or loss of the Airframe or any Engine or interest
therein. If a claim is made against Lessee or Lessor for any imposition, the
party receiving notice of such claim shall promptly notify the other, but the
failure of either party to so notify the other shall not relieve Lessee of its
obligation under this Section to
<PAGE>
-10-
indemnify Lessor, unless such failure prevents or impairs contest of such claim.
Notwithstanding anything to the contrary contained herein, Lessee shall have no
liability for (i) Impositions on, based on, or measured by or with respect to
net income or receipts, gross income, capital, net worth, franchise, or conduct
of business of Lessor (other than any taxes in the nature of sales, use, value
added, or similar taxes), (ii) Impositions imposed in connection with any
voluntary or involuntary sale, assignment, transfer or other disposition by
Lessor except to the extent such transfer is taken in connection with or by
reason of any Event of Default that has occurred and is continuing or any
exercise of the remedies as provided under Section 19 of this Lease, (iii)
Impositions to the extent incurred or imposed in respect of any period after (A)
the expiration or earlier termination of this Lease with respect to the Aircraft
and (B) delivery of possession of the Aircraft to Lessor pursuant to the terms
of the Lease upon such expiration or termination or upon commencement of Lessor
requested work pursuant to Section 8(e) of this Lease following expiration or
termination, (iv) Impositions which result from Lessor's engaging in
transactions other than those permitted or contemplated by this Lease, (v)
Impositions which have been included in Cost or Capitalized Cost, and (vi)
Impositions dealt with in Section 17 hereof.
11. Registration, Maintenance and Operation; Compliance and Use; Replacement
------------------------------------------------------------------------
Parts; Additions; Aircraft Marking
----------------------------------
(a) Registration, Maintenance and Operation. Lessee, directly or through
----------------------------------------
any Permitted Sublessee, at its own cost and expense, shall (i) cause the
Aircraft to be duly registered under the Federal Aviation Act at all times
from and after the Delivery Date in the name of Lessor except as otherwise
required by the FAA, (ii) maintain, inspect, service, repair, overhaul and
test the Airframe and each Engine in the same manner and with the same care
used by Lessee (or Permitted Sublessee if applicable) with respect to
similar aircraft and engines owned by Lessee (or Permitted Sublessee if
applicable) and utilized in similar circumstances, and in accordance with
(w) all maintenance manuals initially furnished with the Aircraft,
including any subsequent amendments or supplements to such manuals issued
by the manufacturer from time to time, (x) Lessee's (or any Permitted
Sublessee's) FAA approved maintenance program, (y) all "airworthiness
alerts" and Airworthiness Directives issued by the FAA or similar
regulatory agency having jurisdictional authority, and (z) incorporate all
"mandatory" or "alert service" bulletins published by the Airframe or
Engine or component manufacturer; (iii) maintain all records, logs and
other materials required by the FAA to be maintained in respect of the
avionics, Airframe and each Engine or by the manufacturer thereof for
enforcement of any warranties; (iv) promptly furnish to Lessor such
information as may be required to enable Lessor to file any reports
required by any governmental authority as a result of Lessor's ownership of
the Aircraft; and (v) operate the Aircraft exclusively within the United
States of America and Canada. All maintenance procedures required by this
Section 11(a) shall be undertaken and completed only by properly trained,
licensed, and certified maintenance sources and maintenance personnel, so
as to keep the Airframe and each Engine in as good operating condition as
when delivered to Lessee hereunder, ordinary wear and tear excepted, and
<PAGE>
-11-
so as to keep the Aircraft in such operating condition as may be necessary
to enable the airworthiness certification of such Aircraft to be maintained
in good standing at all times under the Federal Aviation Act.
(b) Compliance and Use. Lessee agrees that the Aircraft will be
-------------------
maintained, used and operated in compliance with any and all statutes,
laws, ordinances, regulations and mandatory standards or directives issued
by any governmental agency applicable to the maintenance, use or operation
thereof, in compliance with any airworthiness certificate, license or
registration relating to the Aircraft issued by any agency and in a manner
that does not modify or impair any existing warranties on the Aircraft or
any part thereof. Lessee will, and will cause any Permitted Sublessee to,
operate the Aircraft solely in the conduct of its business and not operate
or permit the Aircraft to be operated (i) at any time or In any geographic
area when insurance required by the provision of Section 14 hereof shall
not be in effect, or (ii) in a manner wherein the predominance of use
during any consecutive twelve month period would be for purposes other than
transportation for Lessee, or any Permitted Sublessee, or in a manner, for
any time period, such that Lessor (or a third party not permitted by the
terms of this Lease) shall be deemed to have "operational control" of the
Aircraft. Throughout the Term of this Lease, the possession, use and
maintenance of the Aircraft shall be at the sole risk and expense of Lessee
and the Aircraft shall be based at the Principal Location set forth in
Exhibit B. In no event will the Aircraft be principally based outside the
United States. At all times the Aircraft will be operated only by duly-
qualified, currently-certified pilots or pilots possessing the minimum
total pilot hours required for certification by the FAA and shall not be
used for the transport of contraband.
(c) Replacement Parts. Lessee, directly or through any Permitted
------------------
Sublessee, at no cost or expense to Lessor, will promptly replace all parts
which may from time to time become worn out, lost, stolen, destroyed,
seized, confiscated, damaged beyond repair or permanently rendered or
declared unfit for use for any reason whatsoever (such substituted Parts,
when intended to be permanent replacement Parts are hereinafter called
"Replacement Parts"). In addition, in the ordinary course of maintenance,
service, repair, overhaul or testing, Lessee may, directly, or through any
Permitted Sublessee, at no cost and expense to Lessor, remove serviceable
Parts, provided that such serviceable Parts shall be replaced as promptly
as practicable. All Replacement Parts shall be free and clear of all 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. All Parts at any time removed from the Airframe or any Engine shall
remain the property of the Lessor, no matter where located, until such time
as such Parts shall be replaced by Parts which have been incorporated or
installed in or attached to the Airframe or such Engine and which meet the
requirements for Replacement Parts specified above. Immediately upon any
Replacement Part becoming incorporated or installed in or attached to the
Airframe or any Engine as above provided, without further act, (i) title to
the removed Part shall thereupon vest in Lessee, free and clear of all
rights
<PAGE>
-12-
of Lessor and shall no longer be deemed a Part hereunder, (ii) title to
such Replacement Part shall thereupon vest in Lessor, and (iii) such
Replacement Part shall become subject to this Lease and be deemed part of
the Airframe or Engine, as the case may be, for all purposes hereof to the
same extent as the Parts originally incorporated or installed in or
attached to the Airframe or such Engine. Lessee or Permitted Sublessee may
use temporary replacement parts provided that such parts are replaced with,
or become, Replacement Parts, as soon as practicable.
(d) Additions, Discretionary Modification. Lessee (or any Permitted
--------------------------------------
Sublessee), at is own expense, may from time to time make such alterations
and modification in and additions (any part so added is herein referred to
as an "Addition") to the Airframe, or any Engine as Lessee (or any
Permitted Sublessee) may deem desirable in the proper conduct of its
business, including removal of Parts which Lessee (or any Sublessee) deems
to be obsolete or no longer suitable or appropriate for use on the
Airframe, or such Engine; provided that no such alteration, modification,
removal or addition impairs the condition or airworthiness of the Airframe
or such Engine or diminishes the value or utility of the Airframe or such
Engine below the value or utility thereof immediately prior to such
alteration, modification, or addition assuming the Airframe or such Engine
was then in the condition required to be maintained by the terms of this
Lease. Lessee agrees to notify Lessor in writing thirty (30) days prior to
making any change in the configuration (other than changes in configuration
mandated by the FAA) of the Aircraft from that in effect at the time the
Aircraft is accepted by Lessee hereunder, and in the event of such change
or modification of configuration, upon the request of Lessor to restore the
Aircraft to the configuration in effect on the Delivery Date, or at
Lessor's option to pay Lessor an amount equal to the reasonable cost of
such restoration. All Additions incorporated or installed in or attached or
added to the Airframe or an Engine as the result of such alteration,
modification or addition (except those Parts which Lessee has leased from
others and which may be removed by Lessee pursuant to the next sentence)
shall, without further act, become the property of, and title thereto shall
vest in, Lessor. Notwithstanding the foregoing sentence, Lessee (or any
Permitted Sublessee) may, at any time during the Term, so long as no
Default or Event of Default shall have occurred and be continuing, remove
or suffer to be removed any Addition provided that such Addition (i) is in
addition to, and not in replacement of or substitution for, any Part
originally incorporated or installed in or attached to such Airframe or any
Engine at the time of delivery thereof hereunder or any Part in replacement
of or substitution for any such Part, (ii) is not required to be
incorporated or installed in or attached or added to the Airframe or any
Engine pursuant to the terms of this Section 11 and (iii) can be removed
from the Airframe or such Engine without impairing the airworthiness or
diminishing the value and utility of the Airframe or such Engine which the
Airframe or such Engine would have had at such time had such alteration,
modification or addition not occurred. Upon the removal thereof as provided
above, such Addition shall no longer be deemed the property of Lessor or
part of the Airframe or Engine from which it was removed and shall become
the property of Lessee (or, if applicable, any Permitted Sublessee). Any
<PAGE>
-13-
addition not so removed prior to return of the Aircraft shall remain the
property of Lessor.
(e) Aircraft Marking. Lessee agrees, at its own cost and expense, to
-----------------
(i) cause the Airframe and the Engines to be kept numbered with the
identification or serial numbers specified in Schedule 1 to this Lease;
(ii) prominently display on the Aircraft that N number, and only that N
number, specified in Schedule 1; and (iii) at Lessor's request, affix and
maintain in the Airframe adjacent to the airworthiness certificate and on
each Engine a name plate naming Lessor as owner and identifying the rights
under this Lease of Lessor. Lessee will replace promptly any such name
plate which may be removed, defaced or destroyed. Lessee may cause the
Aircraft to be painted in the livery and with the logo of the Lessee. The
reference to Lessee in this paragraph shall also refer to any Permitted
Sublessee.
12. Inspection
----------
Lessor shall have the right, but not the duty, to inspect the Aircraft at
any reasonable time wherever located. In the event Lessor desires to inspect the
Aircraft, Lessee shall make the Aircraft and Lessee's records pertaining the
Aircraft available to Lessor for inspection, at a time which does not interfere
with the operation of the Aircraft by Lessee (or Permitted Sublessee) and is
acceptable to all parties.
13. Loss or Destruction; Requisition of Use
---------------------------------------
(a) Event of Loss with Respect to the Aircraft. Upon the occurrence
-------------------------------------------
of an Event or Loss with respect to the Airframe, or any Engine (whether or
not then installed on such Airframe), Lessee shall notify Lessor thereof
within fifteen (15) days of the date thereof. On the Basic Rent Date next
following the date of an Event of Loss with respect to the Airframe or the
Airframe and any Engines (or, if such Event of Loss occurs less than thirty
(30) days prior to the next Basic Rent Date within thirty (30) days after
such Event of Loss), Lessee shall pay to Lessor an amount ("Event of Loss
Payment") equal to the Casualty Value of the Aircraft determined as of the
date set forth in the Casualty Value schedule which is the date, or which
immediately precedes the date, as the case may be, of the Event of Loss,
together with any Rent then due, prorated to the date of payment, plus
interest, if any, on such sum as provided in Section 3(c)(iii) from the
date due to the date of payment. Upon making such Casualty Value payment in
respect thereto and paying all Rent due and owing with respect thereto,
Lessee's obligation to pay further Basic Rent for the Aircraft for the
period commencing subsequent to such Event of Loss shall cease, but
Lessee's obligation to pay Supplemental Rent, if any, for the Aircraft
shall remain unchanged. Following Payment of the Event of Loss payment in
accordance with the provisions of this Section 13(a), Lessor shall transfer
title to the Airframe and the Engines (whether or not then installed on the
Airframe) to Lessee unless title thereto is required to be conveyed to an
insurance carrier in order to settle an insurance claim relating to the
Event of Loss giving rise to such payment. Such transfer shall furthermore
be made in accordance with the provisions of Section 22(h). Following such
transfer, Lessee shall have the right to receive any and all amounts
<PAGE>
-14-
payable by all Persons in respect of the Aircraft and the Engines and shall
be entitled to recover possession of the Aircraft unless possession thereof
is required to be delivered to an insurance carrier in order to settle an
insurance claim relating to the Event of Loss. Lessor shall also return to
Lessee unearned Basic Rent (that portion of Basic Rent paid by Lessee for
the period following the date the Casualty Value is received by Lessor to
the next Basic Rent Date, if any).
With respect to a Requisition of Use of the Airframe or the Airframe and
the Engines then installed thereon, Lessor agrees that after Lessor has
received the Event of Loss Payment, Lessee shall receive and retain all
amounts paid by any governmental authority up to the Event of Loss Payment
paid by Lessee to Lessor hereunder, and any excess shall be paid over and
retained by Lessor; and Lessor shall transfer title to any Engine not
installed on the Airframe to Lessee Immediately upon receipt of the Event
of Loss Payment. Such transfer shall furthermore be made in accordance with
the provisions of Section 22(h). Lessor shall be under no duty to Lessee to
pursue any claim against any governmental authority, but Lessee may at is
own cost and expense pursue the same.
(b) Event of Loss with Respect to an Engine. Notwithstanding
----------------------------------------
anything in (a) above to the contrary, upon the occurrence of an Event of
Loss with respect to an Engine whether or not said Engine is then installed
on the Airframe under circumstances in which there has not occurred an
Event of Loss with respect to the Airframe, Lessee directly, or by any
Permitted Sublessee, shall give Lessor and Lender, if any, prompt written
notice thereof and shall, within thirty (30) days after the occurrence of
such Event of Loss, duly convey to Lessor, as replacement for the Engine
with respect to which such Event of Loss occurred, title to a similar
engine of the same make and model number as that suffering the Event of
Loss, free and clear of all Liens and having a value and utility at least
equal to, and being in as good operating condition as, the Engine with
respect to which such Event of Loss occurred, assuming such Engine was of
the value and utility and in the condition and repair required by the terms
hereof immediately prior to the occurrence of such Event of Loss. Prior to
or at the time of any such conveyance, Lessee, at its own expense, will
furnish Lessor with such documents to evidence such conveyance as Lessor
shall reasonably request, including, without limitation, a bill of sale and
opinion of counsel. Upon full compliance by Lessee with the terms of this
Section 13(b), Lessor will transfer to Lessee title to the Engine with
respect to which such Event of Loss occurred. such transfer shall
furthermore be made in accordance with the provisions of Section 22(h). For
all purposes hereof, each such replacement Engine shall, after such
conveyance, be deemed part of the property leased hereunder, shall be
deemed an "Engine" as defined herein and shall be deemed part of the
Aircraft. No Event of Loss with respect to an Engine under the
circumstances contemplated by the terms of this Section 13(b) shall result
in any reduction in or delay in payment of Basic Rent.
<PAGE>
-15-
(c) Risk of Loss; No Release of Obligations. Lessee shall bear the
----------------------------------------
risk of loss and shall not be released from its obligations hereunder in
the event of any damage to the Airframe, the Engines or any Part thereof or
any Event of Loss relating thereto.
(d) Application of Proceeds in an Event of Loss. Provided no Event
--------------------------------------------
of Default shall exist, it is agreed that all insurance payments received
at the result of the occurrence of an Event of Loss with respect to the
Airframe and any installed Engine will be applied in reduction of the
Lessee 5 obligation to pay the Event of Loss Payment, if not already paid
by the Lessee and the balance, if any, of such payment remaining thereafter
will be paid over to, or retained by, Lessee; and any amount payable to
Lessee shall not be paid to Lessee if at the time of such payment an Event
of Default shall have occurred and be continuing, but shall be held by the
Lessor as security for the obligations of Lessee under this Lease and such
amount shall be paid to Lessee at such time as there no longer exists any
Event of Default.
14. Insurance
---------
(a) Required Insurance. Lessee will at all times keep the Aircraft
-------------------
fully insured against such perils and risks as are customarily insured
against by owners or operators of similar equipment engaged in the same or
similar business, similarly situated with Lessee (or if applicable,
Permitted Sublessee). Without limiting the generality of the foregoing,
Lessee agrees at its own expense to effect the following insurance
throughout the term hereof:
(i) "All Risk" Aviation Hull insurance including comprehensive ground
and flight coverage, which shall be at least equal to the Casualty
Value of the Aircraft;
(ii) Aviation Allied Perils insurance covering hull and public
liability and insuring against strikes, riots, civil commotions or
labor disturbances, any malicious act or act of sabotage, hi-jacking
or any unlawful seizure or wrongful exercise of control of the
Aircraft or crew in flight (including any attempt at such seizure or
control) made by any person or persons on board the Aircraft acting
without the consent of the Lessor or Lessee when the Aircraft is
operated in the United States or Canada. In the event the Aircraft is
operated at any time for any reason outside of the United States or
Canada, Lessee shall provide and maintain full Aviation War and Allied
Perils insurance covering hull and public liability insuring against
the following perils: 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, strikes, riots, civil commotions or
labor disturbances, 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, any malicious act or act of sabotage, confiscation,
nationalization, seizure, restraint,
<PAGE>
-16-
detention, appropriation, requisition for title or use by or under the
order of any government (whether civil military or de facto), other
than the United States of America, or public or local authority, hi-
jacking or any unlawful seizure or wrongful exercise of control of the
Aircraft or crew in flight (including any attempt at such seizure or
control) made by any person or persons on board the Aircraft acting
without the consent of the Lessor or Lessee;
(iii) "All Risk" insurance with respect to any Engine(s) and/or Parts
furnished hereunder or in relation to the Aircraft, while such items
are removed from the Aircraft; and
(iv) Aircraft Liability insurance including bodily injury, property
damage, passenger liability and contractual liability insurance (but
excluding manufacturer's products and completed operations exposures),
which shall protect and indemnify Lessee against any claims arising in
connection with any loss, damage or injury arising out of any
occurrence, cause or operations anywhere in the world and/or
operations incidental thereto in the amount of at least $100,000,000
combined single limit per occurrence.
(b) Special Requirements as to Insurers, Form and Content. All such
------------------------------------------------------
insurance taken out of or effected pursuant to the provisions hereof shall
be subject to the following:
(i) Lessee will place all insurance with insurers or aviation
underwriting groups which are substantially similar in reputation and
financial responsibility and condition to insurers or aviation
underwriting groups used by a majority of United States Group II and
III Airlines as defined by the Department of Transportation in 14 CFR
241 or other insurers or aviation underwriting groups reasonably
satisfactory to Lessor; and all insurance policies shall provide that
they are payable in U.S. dollars and shall provide for a deductible
amount not in excess of $200,000;
(ii) each policy shall provide that it will not lapse (other than by
expiration of the policy), terminate, be cancelled or materially
modified without thirty (30) days prior written notice to Lessor
(except in the case of Allied Perils or War Risk coverage the period
shall be 7 days or such shorter period from the date of notice as is
customary in the aviation insurance market), and that there shall be
no recourse against Lessor for payment of premiums, commissions or
other consents;
(iii) all insurance shall insure the interests of Lessor regardless
of any breach or violation by any party or entity (other than Lessor)
of any warranties, declarations or conditions contained in such
policies;
(iv) all insurance shall provide that all provisions, except the
limit of liability, shall operate as if there were a separate policy
covering each insured;
<PAGE>
-17-
(v) all insurance shall name Lessee and Lessor as additional insureds
and loss payees as their respective interests may appear;
(vi) all insurance shall be primary and without the right of
contribution of other insurance which may be available to or by
Lessor;
(vii) all insurance shall contain a waiver of subrogation in favor of
Lessor providing that insurers will not seek to recover claim payment
from Lessor via subrogation;
(viii) insurers shall waive any right to set off, recoup,
counterclaim, or otherwise deduct whether by attachment or otherwise,
any payment due or to become due on any required insurance; and
(ix) each policy shall be endorsed with a U.S.A. "Service of Suit"
clause if insurance is placed with insurers domiciled outside of the
United States.
(c) Evidence of Insurance. Lessee shall deliver to Lessor, through
----------------------
an insurer authorized representative, prior to the commencement of this
Lease, and prior to any policy expiration date, written evidence of such
insurance satisfactory to Lessor.
(d) Prosecution of Claims. If an Event of Default exists or if the
----------------------
Event of Loss Payment Was not been made when due, Lessor is hereby
authorized, but not required in its own name and/or Lessee's name to
demand, collect, receipt for, and prosecute all necessary actions in the
courts to recover any and all insurance moneys which may become due and
payable under any insurance. An insured claim payment not exceeding
$200,000 shall be payable to Lessee for the repair, salvage or other
charges involved in such claim provided, however, that if there exists an
Event of Default any insured claim payment shall be payable to Lessor. Any
insured claim payment exceeding $200,000 whether or not an Event of Default
may exist shall be payable to Lessor.
15. Indemnification
---------------
Lessee assumes liability for and hereby agrees to indemnify, protect, save
and keep harmless Lessor from and against any and all liabilities, obligations,
losses, damages, penalties, claims (including, without limitation, claims
involving or alleging Lessor's negligence and claims involving strict or
absolute liability in tort), actions, suits, costs, expenses and disbursements
(including, without limitation, legal fees and expenses) of any kind and nature
whatsoever excluding, however, impositions and claims involving taxes under
Sections 10 and 17 ("Claim(s)") which may be imposed on, incurred by or asserted
against Lessor, whether or not Lessor shall also be indemnified as to any such
Claim by any other Person, in any way relating to or arising out of this Lease
or any documents contemplated hereby, or the performance or enforcement of any
of the terms hereof or thereof, or in
<PAGE>
-18-
any way relating to or arising out of the manufacture, purchase, acceptance,
rejection, ownership, delivery, lease, sublease, possession, use, operation,
maintenance, condition, registration, sale, return, storage or other disposition
of the Aircraft or any part thereof or any accident in connection therewith
(including, without limitation, latent and other defects, whether or not
discoverable and any claim for patent, trademark or copyright infringement);
provided, however, that Lessee shall not be required to indemnify Lessor for (a)
any Claim in respect of the Aircraft arising after possession of the Aircraft
has been re-delivered to Lessor in accordance with Section 8 hereof, or (b) any
Claim resulting from acts which would constitute the willful misconduct or
active negligence of Lessor or (c) any Claim by Lessee against Lessor for breach
of this Lease. If any Claim is made against Lessee or Lessor, the party
receiving notice of such Claim shall promptly notify the other, but the failure
of the party receiving notice to so notify the other shall not relieve Lessee of
any obligation hereunder, unless such failure detrimentally affects Lessee's
ability to defend such claim. LESSEE AGREES THAT LESSOR SHALL NOT BE LIABLE TO
LESSEE FOR ANY CLAIM CAUSED DIRECTLY OR INDIRECTLY BY THE INADEQUACY OF THE
AIRCRAFT OR ANY PART THEREOF FOR ANY PURPOSE OR ANY DEFICIENCY OR DEFECT
THEREIN, THE USE, MAINTENANCE OR ANY SERVICING OR ADJUSTMENTS THERETO, OR ANY
DELAY IN PROVIDING OR FAILURE TO PROVIDE ANY OF THE FOREGOING, OR ANY
INTERRUPTION OR LOSS OF SERVICE OR USE THEREOF, OR ANY LOSS OF BUSINESS, ALL OF
WHICH SHALL BE THE RISK AND RESPONSIBILITY OF LESSEE.
The liability of Lessee to make indemnification payments pursuant to the
Section 15 shall, notwithstanding any expiration or termination of this Lease,
continue to exist until such indemnity payments are made by Lessee in full.
16. Sublease; Possession
--------------------
Lessee shall not sublease, or otherwise in any manner deliver, relinquish
or transfer possession of the Airframe or any Engine leased hereunder to any
Person without Lessor's prior written consent (which consent shall not be
unreasonably withheld or delayed), provided, however, so long as Lessee shall
comply or cause the compliance with the provisions of Section 14 hereof, Lessee
or any Permitted Sublessee may, without the prior written consent of Lessor
unless otherwise specifically provided;
(a) (i) subject the Airframe or any Engine to the United States Civil
Reserve Air Fleet Program or contracts with the United States Government,
or (ii) enter into a wet lease under which Lessee or a Permitted Sublessee
has effective control of the Aircraft in the ordinary course of Lessee's or
such Permitted Sublessee's business which shall not be considered a
transfer of possession hereunder;
(b) deliver possession of the Aircraft, the Airframe, any Engine or
any Part thereof to the manufacturer thereof for testing or other similar
purposes or to any organization for services, repair, maintenance or
overhaul work on the Aircraft, the Airframe or such Engine or any Part
thereof or for alterations or modifications in or additions to the
Aircraft, the Airframe or such Engine, to the extent required or permitted
by the terms of this Lease;
<PAGE>
-19-
(c) install an Engine on an Airframe owned by or leased to Lessee or
a Permitted Sublessee or purchased by Lessee or such Permitted Sublessee
subject to a lease, conditional sale or other security agreement, provided
--------
that such Airframe is free and clear of all Liens except the rights of the
parties to the lease or conditional sale or other security agreement
covering such Airframe and such Liens as are permitted by Section 9 and
within a reasonable time after a request by Lessor, Lessee will notify the
requesting entity of the location of the Engine;
(d) transfer possession of the Airframe and/or any Engine or Engines
to the United States of America or any instrumentality or agency thereof in
accordance with applicable laws, rules, regulations or orders, provided
that such transfer of possession does not continue beyond the Expiration
Date;
(e) so long as no Default or Event of Default shall have occurred and
be continuing, sublease the Airframe and/or any Engine or Engines to any
Permitted Sublessee listed on Exhibit G hereto;
provided that (i) the rights of any transferee who received possession by reason
- --------
of a transfer permitted by this Section (other than the transfer of an Engine
which is deemed an Event of Loss), and any sublease permitted by this Section
16, shall be subject and subordinate to all the terms of this Lease, and Lessee
shall remain primarily liable hereunder for the performance of all of the terms
of this Lease to the same extent as if such sublease or transfer had not
occurred, (ii) any such sublease shall include provisions for the use,
maintenance and insurance of the Aircraft at least as favorable to the sublessor
as those contained in this Lease benefiting Lessor, and (iii) any such
instrument of transfer or sublease shall contain provisions pursuant to which
the Airframe or an Engine shall not be operated, used or located, or suffered to
be operated, used or located (x) outside the United States or Canada or
principally located outside the United States unless such Airframe or Engine is
operated or used by the government of the United States and such government
assumes liability for any damages, loss, destruction or failure to return
possession of such Airframe or Engine at the end of the term of such contract or
for injury to persons or damage to property of others arising out of such use,
(y) at any time in any country with which the United States Government does not
maintain at such time diplomatic relations or (z) at any time in any area
excluded from coverage by any insurance required by the terms of Section 14
hereof.
In the event Lessor shall have received from the lessor or secured party of
any Airframe leased to the Lessee or a Permitted Sublessee or purchased by the
Lessee or a Permitted Sublessee subject to a conditional sale or other security
agreement, a written agreement which provides that the lessor or secured party
under such agreement shall not acquire or claim any right, title or interest in
any Engine, and the lease or conditional sale or other security agreement
covering such Airframe also covers an engine or engines owned by the lessor
under such lease or subject to a security interest in favor of such secured
party under such conditional sale or other security agreement, Lessor
<PAGE>
-20-
hereby agrees for the benefit of such lessor or secured party that Lessor will
not acquire or claim, as the result of such engine being installed on the
Airframe at any time while such engine is owned by such lessor or is subject to
such conditional sale or other security agreement or security interest in favor
of such secured party, any right, title, or interest in such engine. The
existence of a clause substantially similar to this clause in such lease,
conditional sale or other security agreement whereby the Lessor or secured
party, as the case may be, is substituted for Lessor shall suffice as the
required written agreement.
17. Tax Treatment; Special Tax Indemnification
------------------------------------------
(a) This Lease has been entered into on the assumption that the
Lessor will have the following tax consequences (herein referred to as
"Assumed Tax Consequences"):
(i) for tax purposes, the transaction contemplated by this Lease will
be treated as a true lease, the Lessor will be treated as the owner
and lessor of the Aircraft, and Lessee will be treated as lessee of
the Aircraft;
(ii) in the hands of Lessor, the Aircraft will constitute "recovery
property" which is "7-year property" within the meaning of Section 168
of the Code;
(iii) Lessor will be entitled to depreciation deductions under
Section 168 of the Code, with respect to at least 100% of Equipment
Cost, salvage value will be zero for such purposes, the full amount of
such depreciation deductions ("Depreciation Deductions") will be
allowed to Lessor beginning in the year placed in service by Lessor,
and there will be no recapture of such Depreciation Deductions by
Lessor;
(iv) the amounts of interest payable on any financing relating to the
Aircraft ("Interest Deductions") shall be deductible under Section 163
of the Code on an accrual basis;
(v) maintenance of the Aircraft, equipment changes and replacement of
Parts in the Aircraft by Lessee will not result in any tax
consequences to Lessor;
(vi) Lessor's combined Federal, state and local tax rate for items of
ordinary income is 34%;
(vii) Lessee's payments of Rent with respect to the Aircraft will
constitute rental income to Lessor, for tax purposes, in the amounts
and for the respective periods determined on the assumption that such
amounts will be includable in Lessor's income, for tax purposes, as
they accrue under the Lease and that such amounts will be the only
income to be realized by the Lessor for tax purposes, from or with
respect to the Aircraft under this Lease, except for Supplemental Rent
and indemnity payments made to Lessor pursuant to
<PAGE>
-21-
this Section, all of which shall be includable in Lessor's income for
tax purposes only if and when they are actually paid to Lessor; and
(viii) Lessor may amortize ratably the transaction expenses which it
incurs in connection with entering into this Lease ("Amortization
Deductions") over a period not longer than the Term.
(b) If by reason of Lessee's acts or omissions Lessor shall not be
entitled to claim or shall lose all or any portion of Depreciation
Deductions, Amortization Deductions or Interest Deductions, as set forth in
the Assumed Tax Consequences, or (i) any Depreciation Deductions are
recaptured pursuant to Section 1245 of the Code or any similar provision,
or (ii) the Internal Revenue Service, any state taxing authority or any
court shall conclude that the tax consequences of this Lease differ in any
respect from the Assumed Tax Consequences (each of the foregoing events
being referred to hereinafter as a "Loss"), then, unless excused by the
----
provisions of Section 17(c) hereof, Lessee will pay to Lessor, on an After
Tax Basis, an amount sufficient to maintain the Lessor's Net Economic
Return, after taking into account additions to tax payable by Lessor with
respect to such Loss, and any tax liabilities Incurred by Lessor in respect
of the receipt of such amount, plus, on an After-Tax Basis, any interest
and penalties payable to the Internal Revenue Service and state taxing
authorities with regard to such Loss. Except as otherwise provided in
Section 17(e), all amounts payable to Lessor hereunder shall be paid
promptly and in any event within 30 days after receipt by Lessee of a
written demand therefore, accompanied by a written statement describing in
reasonable detail the Loss in question at the computation of the amount so
payable.
(c) Notwithstanding anything to the contrary set forth in this
Section 17, any Loss which would otherwise be indemnified by Lessee under
such Section 17 shall not be subject to indemnification to the extent that
such Loss is a direct result of the occurrence of any of the following
events:
(i) a voluntary or involuntary transfer or other disposition by
Lessor of the Aircraft, other than any such transfer following an
Event of Default;
(ii) failure of Lessor to claim all or any portion of the
Depreciation Deductions, the Amortization Deductions, the Interest
Deductions, or any other Federal income tax benefits described in the
Assumed Tax Consequences unless (a) the claim of any such benefit
would be inconsistent with any prior audit adjustment by the Internal
Revenue service pursuant to the context provisions of this Section 17;
(b) Lessor shall have furnished Lessee, at Lessee's sole cost and
expense, with an opinion of Lessor's tax counsel to the effect that a
basis, as set forth in ABA Formal Opinion 85-352, does not exist for
such claim or (c) such failure to claim is caused by a failure of
Lessee to take action or provide information to Lessor required or
permitted hereunder;
<PAGE>
-22-
(iii) failure of Lessor to have sufficient gross income to benefit to
the fullest extent from the Depreciation Deductions or the Interest
Deductions;
(iv) breach of any of Lessor 5 representations, warranties or
covenants contained in this Lease, or willful misconduct or gross
negligence of Lessor;
(v) an event which causes Lessee or its insurer to pay the Casualty
Value if such Casualty Value is paid in full;
(vi) the failure of Lessor to take timely action in contesting a
claim made by any taxing authority with respect to the disallowance of
any Tax benefits in such failure shall preclude the right of Lessor to
contest such claim and if such failure was not caused by Lessee's
failure to request action by Lessor after timely receipt of notice
from Lessor or to otherwise comply with the obligations under the
contest provisions of this Section;
(vii) the failure of the Lease to constitute a "true lease" for
Federal income tax purposes other than by reason of any act of
commission or omission, any misrepresentations, breach of any
agreement, covenant or warranty by Lessee contained herein or in any
related document, any modification, improvement, alteration, repair,
maintenance or addition of or to the Aircraft or any part thereof, or
any disposition of the Aircraft or any part thereof, or any damage to,
destruction of, theft, requisition or taking of the Aircraft or any
part thereof;
(viii) any change, amendment, modification, addition or deletion in,
to, or from the Code, any administrative regulation or ruling
pertaining thereto, or any judicial or administrative interpretation
of any of the foregoing that is enacted or promulgated after the date
of Delivery other than: (y) any change in the Code enacted prior to
the Delivery Date; or (z) any Treasury Regulation published as a
temporary or final regulation prior to the Delivery Date;
(ix) the application of Section 467 of the Code, unless solely by
virtue of a payment by Lessee of an amount of Rent due under the Lease
before the due date thereof;
(x) the status for Federal Income Tax purposes of Lessor;
(xi) the application of any minimum tax or alternative minimum tax;
or
(xii) the application of the "mid-quarter convention" within the
meaning of Section 168(d)(4)(C).
(d) If a claim shall be made at any time by the Internal Revenue
Service or state taxing authority which, if successful, would require
Lessee to make an indemnity payment to Lessor under Section 17(b) above,
<PAGE>
-23-
Lessor hereby agrees to take such action in connection with contesting such
claim, including any appeal to review any adverse determination by a court
(other than an appeal to the United States Supreme Court), as Lessee shall
reasonably request in writing from time to time; provided, however, that:
-------- -------
(i) within 30 days after notice by Lessor to Lessee of such claim,
Lessee shall request that such claim be contested;
(ii) Lessor, at is sole option, may forego any and all administrative
appeals, proceedings, hearings and conferences with the Internal
Revenue Service or state taxing authority with respect to such claim
and either pay the tax claimed and or contest such claim in the forum
selected by Lessor (in the manner provided in Section 17(f));
(iii) prior to the Lessor taking any such action in contesting such
claim, Lessee shall have furnished to Lessor, at Lessee's expense, an
opinion of independent tax counsel satisfactory to Lessor to the
effect that Lessor is more likely than not to prevail in contesting
such claim;
(iv) Lessee shall have indemnified Lessor in a manner satisfactory to
Lessor for any liability or loss which Lessor may incur as a result of
contesting such claim and shall have agreed to pay to Lessor within 30
days after written demand from time to time an amount which, on an
After-Tax Basis, shall be equal to all costs and expenses which Lessor
may incur from time to time in connection with contesting such claim,
including, without limitation, reasonable attorneys' and accountants'
fees and disbursements, and the amount of any interest or penalty
which may ultimately be payable as a result of contesting such claims;
(v) Lessor shall be obligated to contest a claim beyond the level of
administrative proceedings only if the amount of the indemnity arising
from such claim should exceed $25,000 Dollars; and
(vi) if Lessor is to pay the tax claimed and then seek a refund,
Lessee will provide Lessor with sufficient funds, interest free and on
an After-Tax Basis, to pay the tax, penalties interest and additions
to tax.
(e) If any such claim referred to in Section 17(d) shall be made by
the Internal Revenue Service, and Lessee shall have reasonably requested
Lessor to contest such claim as provided in Section 17(d) and shall have
duly complied with all of the terms of this Section 17, Lessee's liability
for indemnification under this Section 17 shall be deferred until a
"determination" of such liability, as defined in Section 1313(a) of the
Code. At such time Lessee shall become obligated for the payment of any
indemnification hereunder resulting from the outcome of such contest, and
Lessor shall become obligated to refund to Lessee any amount received as a
refund by Lessor fairly attributable to advances by Lessee
<PAGE>
-24-
hereunder, together with any interest received by Lessor on such refund
fairly attributable to such advances. Such obligation of Lessor and Lessee
will first be set off against each other and any difference owing by either
party shall be paid within 30 days after such final determination.
(f) Lessor agrees promptly to notify Lessee in writing of any claim by
the Internal Revenue Service referred to in Section 17(d) and agrees not to
make payment of the tax claimed or to consent to the assessment of any
deficiency relating to such claim for at least 30 days after the giving of
such notice and agrees to give to Lessee any relevant information relating
to such claim which may be peculiarly within the knowledge of Lessor and
otherwise to cooperate with Lessee in good faith in order to contest any
such claim, provided, that Lessor in its sole discretion after good faith
--------
consultation with Lessee may determine the forum of the contest and whether
to pay the tax claimed and seek a refund thereof or not to pay the tax.
(g) Lessee represents, warrants and covenants that neither it nor any
Person controlled by it, in control of it, or under common control with it,
directly or indirectly, nor any Permitted Sublessee will at anytime take
any action or file any return or other document inconsistent with the
Assumed Tax Consequences and that each of such Persons will file such
returns, take such actions and execute such documents as may be reasonable
and necessary to facilitate accomplishment of the intent hereof.
Lessee's obligations under this Section shall continue in full force and effect,
notwithstanding the expiration or earlier termination of the Term of this Lease.
18. Events of Default
-----------------
The term Event of Default, wherever used herein, shall mean any of the
following events under this Lease (whatever the reason for such Event of Default
and whether it shall be voluntary or involuntary, or come about or be effected
by operation of law, or be pursuant to or in compliance with any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body), and each such event of Default shall be
deemed to exist and continue so long as, but only so long as, it shall not have
been remedied.
(a) Lessee shall fail to make any payment of Rent (other than
Supplemental Rent consisting solely of indemnity payments under Section 17
thereof) within five (5) business days after notice from Lessor to Lessee
the same shall be due; or
(b) Lessee shall fail to make any payment of Supplemental Rent
consisting solely of indemnity payments under Section 17 hereof within the
later of (i) the 15th day after such payment of Supplemental Rent shall
have become due and (ii) the fifth day after giving of notice by Lessor to
Lessee that such nonpayment of Supplemental Rent constitutes an Event of
Default; or
<PAGE>
-25-
(c) Lessee shall fail to carry and maintain insurance on or with
respect to the Aircraft in accordance with the provisions of Section 14,
provided that in the case of insurance with respect to which cancellation,
change or lapse for nonpayment of premium shall not be effective as to
Lessor for 30 days (seven days, or such shorter period as may from time to
time be customarily obtainable in the industry, in the case of war risk and
allied perils coverage) after receipt of notice by Lessor of such
cancellation, change or lapse, no such failure to carry and maintain
insurance shall constitute an Event of Default hereunder until the earlier
of (i) the date such failure shall have continued unremedied for a period
of 20 days (five days in the case of required war risk and allied perils
coverage) after receipt by Lessor of the notice of cancellation, change or
(ii) such insurance not being in effect as to the Lessor or Lessee; or
(d) Lessee shall fail to perform or observe any covenant, condition or
agreement (other than that referred to in (a) or (b) above or breach of any
covenant, condition or agreement contained in Section 17 hereof) required
to be performed or observed by it under this Lease or any Operative
Agreement, document or certificate delivered by Lessee in connection
herewith, and such failure shall continue for thirty (30) days after
written notice thereof from the Lessor to Lessee, provided, however, that
if Lessee shall have undertaken to cure any such failure and,
notwithstanding the reasonable diligence of Lessee in attempting to cure
such failure, such failure is not cured within said 30 day period, there
shall exist no event of Default for such future time as may reasonably be
required to effect such cure, so long as Lessee is proceeding with due
diligence to cure such failure; or
(e) Any representation or warranty made by Lessee in this Lease or any
Operative Agreement, document or certificate delivered by Lessee in
connection herewith or pursuant hereto (other than those made in Section
17) shall prove to have been incorrect in any material respect when any
such representation or warranty was made or given (or, if a continuing
representation or warranty, at any material time) and shall remain
material; or
(f) Lessee shall cease to be an "air carrier" within the meaning of
the Federal Aviation Act; or
(g) Lessee shall or shall attempt to (except as expressly permitted by
the provisions of this Lease) remove, sell, transfer, encumber, part with
possession of, assign or sublet the Airframe, the Engines or any part
thereof, use the Aircraft for an illegal purpose, or knowingly permit the
same to occur; or
(h) Lessee shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself under
any bankruptcy, insolvency or other similar law now or hereafter in effect
or seeking the appointment of a trustee, receiver, liquidator, custodian or
other similar official of it, the Aircraft or a
<PAGE>
-26-
substantial portion of its property, or shall consent to any such relief or
to the appointment of or taking possession of the Aircraft by any such
official or agency in an involuntary case or other proceeding commenced
against it, or shall make a general assignment for the benefit of
creditors, or shall take any corporate action to authorize any of the
foregoing; or an involuntary case or other proceeding shall be commenced
against Lessee seeking liquidation, reorganization or other relief with
respect to it under any bankruptcy, insolvency or other similar law now or
hereafter in effect, or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official or agency of Lessee the
Aircraft or a substantial portion of its property and such involuntary case
or other proceeding shall remain undismissed and unstayed for a period of
90 days; or
(i) Lessee shall fail to make any payment when due of any indebtedness
for borrowed money or basic rent under any lease of aircraft, provided that
the obligation in respect of which such failure to pay has occurred (when
aggregated with other obligations having a payment default) shall be in an
outstanding amount in excess of $20,000,000 (or in the case of a lease, the
present value of the outstanding basic rent payments thereunder, when
aggregated with other obligations having a payment default, shall exceed
$20,000,000) and such failure to pay shall have resulted in the
acceleration of such outstanding amount.
19. Remedies
--------
(a) Upon the occurrence of any Event of Default and so long as the
Event of Default shall be continuing, Lessor may, at its option, declare
this Lease to be in default by written notice to such effect given to
Lessee, and at any time thereafter, Lessor may exercise one or more of the
following remedies, as Lessor in its sole discretion shall lawfully elect:
(i) proceed by appropriate court action, either at law or in equity,
to enforce performance by Lessee of the applicable covenants of this
Lease or to recover damages for the breach thereof;
(ii) by notice in writing terminate this Lease, whereupon all rights
of Lessee to the use of the Aircraft or any part thereof shall
absolutely cease and terminate but Lessee shall remain liable as
hereinafter provided; and whether or not this Lease is terminated, if
so requested by Lessor, Lessee shall at its expense promptly return
the Aircraft to the possession of Lessor at such place as Lessor shall
designate and in the condition required as if the Aircraft were being
returned at the expiration of the Term pursuant to and in accordance
with the terms hereof, or Lessor, at its option, may enter upon the
premises where the Aircraft is located and take immediate possession
of and remove the same together with any Engines and Parts by summary
proceeding or otherwise. If upon Lessees return or Lessor's
repossession of the Aircraft it is not in the condition required if it
were being
<PAGE>
-27-
returned at the expiration of the Term, Lessor may perform all
maintenance, repair, overhead and other work to accomplish the same
and shall be entitled upon demand to reimbursement from Lessee, for
all expenses incurred in so doing, together with interest thereon at
the Late Payment Rate from the date of incurrence until paid.
Notwithstanding anything herein to the contrary, but subject to
reimbursement as provided below, Lessee shall, without further demand,
forthwith pay to Lessor an amount equal to any unpaid Rent due and
payable for all periods up to and including the Basic Rent Date
following the date on which Lessor has declared this Lease to be in
default, plus, as liquidated damages for loss of a bargain and not as
a penalty, an amount equal to the Casualty Value of the Aircraft,
computed as of the Basic Rent Date immediately preceding the date on
which Lessor has declared this Lease to be in default, together with
interest on such amounts at the Late Payment Rate from the date of
demand until paid. Following the return of the Aircraft to Lessor
pursuant to this subparagraph, Lessor shall proceed to sell the
Aircraft by public or private sale in such commercially reasonable
manner as it shall deem appropriate; provided that Lessor, if it so
elects, may purchase the Aircraft at such sale for a price not less
than the highest bona fide bid given by a person unrelated to the
Lessee or Lessor. The Proceeds of such sale other than a sale to
Lessor as provided above shall be applied by Lessor (x) first, to pay
all costs, charges and expenses, including Liens, other than Lessor's
Liens, governmental fines and assessments prior in right to that of
Lessor in the Aircraft and all reasonable legal fees and other
disbursements incurred by Lessor as a result of the Event of Default
and the exercise of its remedies with respect thereto, including,
without limitation, costs of putting the Aircraft in return condition
and costs of sale, together with interest on all such amounts at the
Late payment Rate from the date expended by Lessor until paid, (y)
second, to pay Lessor the unpaid Rent due and payable as provided
above and the Casualty Value amount payable as liquidated damages, to
the extent not previously paid, together with interest as provided
above, and (z) third, to reimburse Lessee for the Casualty Value to
the extent previously paid by Lessee as liquidated damages. Any
surplus remaining thereafter shall be retained by Lessor. To the
extent that all Rent then due and payable as provided above with
respect to the Aircraft and the Casualty Value amount payable as
liquidated damages in respect of the Aircraft have not been previously
paid, Lessee shall forthwith pay to Lessor the amount by which (1) the
sum of (aa) all Rent then due and payable as provided above with
respect to the Aircraft, (bb) the Casualty Value amount payable as
liquidated damages or portion thereof not theretofore paid, (cc) the
amount payable under clause (x) of the preceding sentence, and (dd)
interest at the Late Payment Rate on the items described in (aa), (bb)
and (cc) as provided above, computed as provided above exceeds (2) the
sale price of the Aircraft. Instead of selling the Aircraft, Lessor
may lease the Aircraft to another user pursuant to an arm s-length
transaction and in such case, in lieu of paying Lessor the Casualty
Value, Lessee shall reimburse Lessor for (i) the
<PAGE>
-28-
Rent lost during such time as Lessor was actively trying to lease the
Aircraft or otherwise proceeding in a commercially reasonable manner
in the exercise of its remedies hereunder, together with interest
thereon at the Late Payment Rate from the date the Rent was due until
paid, (ii) such reasonable legal fees and other disbursements incurred
by Lessor as a result of the Event of Default and the exercise of its
remedies with respect thereto and all costs and expenses of Lessor
related to putting the Aircraft in the condition required for return
hereunder and the costs, including legal fees, associated with finding
a Lessee and negotiating a new lease, together with interest thereon
at the Late Payment Rate from the date of expenditure until paid, and
(iii) provided that the rental rate contained in the new lease is a
Fair Rental Rate and is less than the Rent specified in this Lease,
the difference between the Rent and the rent under the new lease. Such
rental shortfall shall be payable on the Basic Rent payment dates
remaining during the Term, or in a lump sum reduced to present value
at a discount rate of 11% per annum, at Lessor's election.
Notwithstanding anything herein to the contrary, Lessor shall not be
required to sell or lease the Aircraft if, in its reasonable judgment,
doing so would not be commercially reasonable.
(b) Lessee shall be liable for all costs, charges and expenses,
including reasonable legal fees and disbursements, incurred by Lessor by
reason for the occurrence of any Event of Default or the exercise of
Lessor's remedies with respect thereto.
(c) Lessee hereby waives, to the extent now or hereafter permitted by
applicable law, for itself and for its successors and assigns, any and all
rights Lessee or Lessees successors or assigns may have under any
bankruptcy, insolvency or similar laws, rules or regulations with respect
to the continued possession or use of the Aircraft, or payment of Rent
therefor, or with respect to this Lease. Rejection of this Lease by any
bankruptcy trustee or debtor-in-possession shall entitle Lessor to the
immediate return of the Aircraft.
In addition to the foregoing, Lessee hereby unconditionally waives its
rights to retain the Aircraft after the filing of a petition under Chapter
7 or of the U.S. Federal Bankruptcy Law.
(d) No remedy referred to herein is intended to be exclusive, but each
shall be cumulated and in addition to any other remedy referred to above or
otherwise available to Lessor at law or in equity. No express or implied
waiver by Lessor of any Default or Event of Default hereunder shall in any
way be, or be construed to be, a waiver of any future or subsequent Default
or Event of Default. The failure or delay of Lessor in exercising any
rights granted it hereunder upon any occurrence of any of the contingencies
set forth herein shall not constitute a waiver of any such right upon the
continuation or recurrence of any such contingencies or similar
contingencies and any single or partial exercise of any particular right by
Lessor shall not exhaust the same or constitute a waiver of any other right
provided herein.
<PAGE>
-29-
20. Notices
-------
All communications and notices provided for herein shall be in writing and
shall become effective when received, if deposited in the United States mail,
with proper postage for certified mail, return receipt requested, prepaid, or if
sent by receipted courier service, telex or facsimile machine addressed to
Lessor or Lessee, at their respective addresses set forth in Exhibit B hereof or
such other addresses as either party may hereafter designate by written notice
to the other.
21. Assignment
----------
(a) This Lease, the Aircraft and Lessor's interest in each thereof is
freely assignable and alienable by Lessor, provided the provisions of this
Section are met. The agreements, covenants, obligations and liabilities
contained herein, including but not limited to all obligations to pay Rent,
Supplemental Rent and other amounts payable hereunder and indemnify Lessor,
are made for the benefit of Lessor, any assignee, and their respective
successors and assigns, and all rights and remedies hereunder including,
without limitation, for enforcement or to grant waivers, consents and
approvals, or take other action, shall be exercisable by them,
notwithstanding the possibility that any such person was not originally a
party to this Lease or may, at the time such enforcement is sought, no
longer be a party to this Lease. Lessee shall comply with all reasonable
requests of Lessor, its successors and assigns respecting the assignment
and Lessee's acknowledgement of the assignee as Lessor; provided, however,
-------- -------
that no assignment of Lessors interest in this Lease or the Aircraft shall
alter the terms of this Lease in so far as the benefits to Lessee hereunder
are concerned. Upon any such assignment, and subject to the first sentence
of this Section 21(a), Lessee agrees to look solely to the assignee with
respect to all matters in connection with this Agreement and Lessor shall
be released from any further obligations hereunder.
(b) With respect to any assignment by Lessor,
(i) any expenses Lessee shall reasonably incur to carry out an
assignment or transfer by Lessor hereunder shall be paid by Lessor;
(ii) the Transferee shall have the requisite power and authority to
enter into and carry out the transactions contemplated hereby and
shall be, and shall have furnished reasonable evidence to the effect
that it is, a citizen of the United States within the meaning of
Section 101(16) of the Federal Aviation Act of 1958, as amended, or
any successor provision;
(iii) the Transferee shall enter into an agreement or agreements
whereby the Transferee confirms that it shall be deemed a party to
this Lease and agrees to be bound by all of the terms of, and to
undertake all of the obligations of, the Lessor contained in this
Lease;
<PAGE>
-30-
(iv) such transfer shall not violate any provision of the Securities
Act of 1933 or the Federal Aviation Act as amended, or any other
applicable law, as amended, or create relationship which would be in
violation thereof; and
(v) the Transferee shall be a single entity.
In any case, Lessor shall continue to be liable for all obligations hereunder
accruing prior to such transfer notwithstanding such transfer and that any
Transferee of such obligations shall have the required power and authority to
enter into and carry out the transaction contemplated hereby. Upon any transfer
permitted by this paragraph, the Transferee shall be deemed "Lessor" for all
purposes hereof, and each reference herein to the Lessor shall thereafter be
deemed to be a reference to the Transferee for all purposes, provided, however,
-------- -------
that no Transferee shall be liable for the obligation of Lessor unless expressly
assured in writing.
If the Lessor proposes to transfer its interest under the Lease, it shall give
written notice to the Lessee specifying the name and address of the proposed
transferee and certifying that such transfer and transferee comply with the
requirements of this Section. Provided that Lessee obtains a covenant of quiet
enjoyment from Lessor or any lender, notwithstanding anything to the contrary
herein contained, this paragraph (i) shall not be deemed to preclude Lessor from
encumbering its interest in the Aircraft to secure loans advanced to the Lessor;
and (ii) shall be of no force or effect in connection with any transfer of the
Aircraft upon exercise of any remedy by Lessor pursuant to Section 19 hereof
following an Event of Default.
22. Miscellaneous
-------------
(a) The terms of this Lease shall not be waived, altered, modified,
amended, supplied or terminated in any manner whatsoever except by written
instrument signed by Lessor and Lessee.
(b) All agreements, indemnities, representations and warranties
contained in this Lease or any agreement, document or certificate delivered
pursuant hereto or thereto or in connection herewith or therewith shall
survive the execution and delivery of this Lease and the expiration or
other termination of this Lease.
(c) Any provision of this Lease which may be determined by competent
authority to be prohibited or unenforceable in any jurisdiction shall, as
to such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction.
<PAGE>
-31-
(d) This Lease and the Operative Agreements represent the entire
agreement of the parties hereto with respect to the subject matter hereof
and supersede any and all other understandings. This Lease shall constitute
an agreement of lease and nothing herein shall be construed as conveying to
Lessee any right, title or interest in or to the Aircraft, except as Lessee
only.
(e) This Lease shall be governed by, and construed in accordance with,
the laws of the Commonwealth of Massachusetts.
(f) The division of this Lease into sections, the provisions of a
table of contents and the insertion of headings are for the convenience of
reference only and shall not affect the construction or interpretation of
this Lease.
(g) Time is of the essence in the performance of the terms and
conditions of this Lease.
(h) Except as otherwise expressly provided herein, if Lessor is
required to transfer title to the Aircraft, the Airframe, the Engine, or
any Part thereof to Lessee, then such transfer shall be made "as is," where
is," and without representation or warranty of any kind express or implied,
except a warranty of title; provided that Lessor or any one claiming
through Lessor who succeeds to Lessor's interest in this Lease shall
warrant, only that the property transferred is free of Lessors Liens and
assign to Lessee all warranties of title received by Lessor. The transferor
shall to the extent customary execute a bill of sale with such warranty.
(i) If legal or other proceeding is instituted with respect to any of
the Operative Agreements, the party prevailing in such proceeding shall be
paid all of its costs, expenses and fees by the other party, and if any
judgment is secured, all such costs, expenses and fees shall be included in
any such judgment, attorneys fees to be set by the court and not by the
jury.
23. Performance of Obligations of Lessee by Lessor
----------------------------------------------
If an Event of Default should occur hereunder, Lessor may thereafter make
the payment or perform or comply with the agreement, the nonpayment,
nonperformance or noncompliance with which caused such Event of Default, and the
amount of such payment and the amount of reasonable expenses of Lessor incurred
in connection with such payment or the performance of or compliance with such
agreement, as the case may be, together with interest at the Late Payment Rate,
shall be payable by Lessee upon demand by Lessor, and such action by Lessor
shall not be deemed a cure or waiver of any Default or event of Default
hereunder.
24. Additional Covenants of Lessee
------------------------------
(a) Maintenance of Status. Lessee agrees to remain during the Term a
---------------------
Certificated Air Carrier. To the extent provided thereby (or to the
<PAGE>
-32-
fullest extent it may lawfully so agree, whether or not provided thereby),
Lessee hereby agrees that any right of Lessor to take possession of such
Aircraft or Engines in compliance with the provisions of this Lease and in
accordance with Section 1110 of Title 11 of the United States Code or any
similar provision of any superseding statute, as amended from time to time,
shall not be affected by the provisions of Sections 362 and 363 of said
Title, or other analogous part of any superseding statute, as amended from
time to time, and accordingly, it is the intention of the parties hereto
that this Lease be afforded the benefits of said Section 1110.
(b) Financial Information. Lessee agrees to furnish to Lessor during
---------------------
the Term:
(i) within 60 days after the end of each of the first three fiscal
quarters in each fiscal year of Lessee and Guarantor, consolidated
balance sheets of Guarantor as of the end of such quarter and related
statements of income, shareholders' equity and changes in financial
condition of Guarantor for the period commencing at the end of the
previous fiscal year and ending with the end of such quarter, together
with the unaudited statements of Lessee, setting forth in each case in
comparative form the corresponding figures for the corresponding
period in such other preceding fiscal year, prepared in accordance
with generally accepted accounting principles and practices, provided
--------
that so long as such Person is subject to the reporting provisions of
the Securities Exchange Act of 1934 a copy of Lessees or Guarantor's
Form 10-Q will satisfy this requirement as to such entity;
(ii) within 120 days after the end of each fiscal year of Lessee and
Guarantor, a copy of the annual report for such year for Guarantor,
consolidated balance sheets of Guarantor as of the end of such fiscal
year and related statements of income, shareholders' equity and
changes in financial condition of Guarantor for such fiscal year,
together with the unaudited statements of Lessee, in comparative form
with the preceding fiscal year, and in the case of Guarantor's
consolidated statements, certified by independent certified public
accountants as having been prepared in accordance with generally
accepted accounting principles and practices consistently applied
(except as noted therein), provided that so long as such Person is
--------
subject to the report provisions of the Securities Exchange Act of
1934 a copy of Lessee's or Guarantor's annual report on Form 10-K will
satisfy this requirement as to such entity;
(iii) accompanying the annual financial statements described in
Section 24(b), an Officers' Certificate of Lessee to the effect that
the signer is familiar with or has reviewed the relevant terms of this
Lease and has made, or caused to be made under his supervision, a
review of the transactions and conditions of Lessee during the
preceding fiscal year, and that such review has not disclosed the
existence during such fiscal year, nor does the signer have
<PAGE>
-33-
knowledge of the existence as at the date of such certificate, of any
condition or event which constituted or constitutes an Event of
Default, or, if any such condition or event existed or exists,
specifying the nature and period of existence thereof and what action
Lessee has taken or is taking or proposes to take with respect
thereto; and
(iv) from time to time, such other information relating to its
financial, operational or business affairs or conditions as Lessor may
reasonably request.
25. Counterparts
------------
This Lease may be executed in any number of counterparts and by the
different parties hereto on separate counterparts. The counterparts shall be
numbered consecutively. To the extent that this Lease constitutes chattel paper,
as such term is defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction, no security interest in this Lease may be created
through the transfer or possession of any counterpart other than "Original
No. 1".
IN WITNESS WHEREOF, the parties hereto have each caused this Lease to be
duly executed by the respective officers thereunto duly authorized.
INVESTORS ASSET HOLDING CORP., HORIZON AIR INDUSTRIES, INC.
as Trustee of AFG/Horizon-II as Lessee
Trust, as Lessor
By: [SIGNATURE NOT LEGIBLE] By: [SIGNATURE NOT LEGIBLE]
---------------------------- --------------------------
Title: Vice President Title: Vice President
------------------------- -----------------------
Date: 12/21/89 Date: 12/21/89
-------------------------- ------------------------
<PAGE>
-34-
SCHEDULE NO. 1
TO THE LEASE
IDENTIFICATION OF AIRCRAFT
--------------------------
<TABLE>
<CAPTION>
U.S. FAA AIRCRAFT ENGINE PROPELLERS
AIRCRAFT MODEL AND MODEL AND MODEL AND
REGISTRATION MANUFACTURER'S SERIAL SERIAL
NUMBER SERIAL NUMBER NUMBER NUMBER
- -------------- ------------------- ------------------ -----------------
<S> <C> <C> <C>
N27442 Fairchild Metro III Garrett AiResearch Dowty Rotol
Model SA227-AC TPE-331-11U-611G (C) R321/4-82-F/8
AC-750 P44673C (left) DAC/DRG/2300/89
P44675C (right) DAC/DRG/2301/89
</TABLE>
The Aircraft includes standard accessories and optional equipment and such
other items fitted or installed on the aircraft and set forth in Schedule A,
attached hereto and by this reference made a part hereof.
<PAGE>
SCHEDULE A
TO
SCHEDULE NO. 1
--------------
OPTIONS
- -------
Two each UPS type cargo nets
Aft Passenger Seat Relocated and Installed in lieu of Wardrobe
Recessed Bulkhead, Exchange
Wardrobe as loose equipment
Outboard Armrests
Center cockpit windshield defogger
Additional cabin speakers
Remote cabin temperature sensor and indicator
Magnasticks
Chine note tires
Small clip approachplate holder
GPU plug in right wing root
Clear radar nose cap
Wraparound sunvisor bracket
Tel-tail lights (upper only)
115 Cu. Ft. Capacity oxygen bottle
Passenger seat back covers (19)
Dowty Rotol Propellers, including service Bulletin Kit. No. 227-30-004A
Engine Soft Line Conversion
<PAGE>
COLLINS PRO-LINE II AVIONICS PACKAGE
------------------------------------
Collins VHF-21A main transceiver with single Gables control
Collins VHF-21A standby transceiver with dual Gables control
Collins VIR-32AGM automatic Omni #1 with 331A-3G indicator and Gables control
Collins VIR-32AGM automatic Omni #2 with IND-31C indicator and Gables control
Dual Baker M-1035 Audio/ISO amplifier system with push botton controls,
automatic audio leveling. (Includes Cabin P.A. and crew I/C)
Collins ADF-60A with 614L-11 control head
Collins Marker Beacon (included in VIR-30 #1) with dual marker lights
Dual Collins glideslope (included in VIR-30 #1 & #2) RDS-81
Bendix RDR-160 digital radar/monochromatic indicator
Collins PN-101 slaved gyro-compass (pilot) with free slave switch
Collins RMI-30 new Nav 1/ADF Selectable on single bar needle,
NAV 2/ADF selectable or double bar needle
Collins TDR-90 transponder with Gables control
Collins DME-42 252 channel 250 NM digital display, Nav 1/Nav 2 switching and
hold
AIM 510 ECFL Electric Gyro Horizon (pilot and co-pilot)
Dual lightweight boom mike headsets with push button switches on wheels
Dual hand microphones
Dual cockpit speakers
Downed aircraft locater beacon
Dual cockpit speakers
Downed aircraft locater beacon
IDC 28702-502 encoding altimeter
IDC 22722-004 Altitude alerter
Second Collins PN-1O1 (co-pilot) slaved gyro
Second Collins TDR-90
Second Collins RMI-30
Datcon 873 hour meter
Vacuum standby gyro (pilot)
Second Gables control head (co-pilot)
Independent P.A. system
Second clock (co-pilot)
Cabin pressurization controller moved to co-pilot's side
<PAGE>
EXHIBIT A
DEFINITIONS
-----------
(a) All references in the Lease to designated Sections and other subdivisions
are to designated Sections and other subdivisions of the Lease, and the words
"herein", "hereof" and "hereunder" and other words of similar import refer to
the Lease as a whole and not to any particular Section or other subdivision.
(b) Except as otherwise indicated, all the agreements or instruments defined
herein or in the Lease shall mean such agreements or instruments as the same may
from time to time be supplemented or amended or the terms thereof waived or
modified to the extent permitted by, and in accordance with, the terms thereof.
(c) The terms defined herein and in the Lease shall, for purposes of the Lease
and all Exhibits thereto, have the meanings assigned to them and shall include
the plural as well as the singular.
(d) The following terms shall have the following meanings for all purposes of
the Lease:
Basic Rent Dates, Cost, Late Payment Rate, Term and Principal Location shall
- ---------------- ---- ----------------- ---- ------------------
have the meanings set forth on Exhibit B to the Lease.
Additions shall have the meaning set forth in Section 11 (d) of the Lease.
- ---------
After-Tax Basis shall mean that the amount to be paid pursuant to any provision
- ---------------
of this Lease is to be increased by the amount of all Taxes payable by reason of
the receipt of such payment (assuming that such Taxes all are paid at the
highest marginal rates and taking into account all tax savings realized by the
recipient with respect to such payment), with the result that the net amount
after payment of such Taxes and taking into account such savings is equal to the
amount that is due pursuant to such provision.
Aircraft shall mean the Airframe with the Engines described in Schedule No. 1 to
- --------
the Lease and any and all Parts so long as the same shall be incorporated or
installed in or attached to such Aircraft and all Parts removed from the
Aircraft so long as title thereto shall remain vested in Lessor in accordance
with Section 11 of the Lease after removal from such Aircraft.
Airframe shall mean (i) the Aircraft described in Schedule No. 1 to the Lease
- --------
and, unless the context requires otherwise, shall not include engines or Engines
from time to time installed thereon and (ii) any and all Parts, including any
replacement airframe or Part thereof, so long as the same shall be incorporated
or installed in or attached to such Airframe and all parts removed from the
Airframe so long as title thereto shall remain vested in Lessor in accordance
with the terms of Section 11 of the Lease after removal from such Airframe.
<PAGE>
Amortization Deductions shall have the meaning set forth in Section 17 of the
- ------------------------
Lease.
Assumed Tax Consequences shall have the meaning set forth in Section 17 of the
- ------------------------
Lease.
Approved Maintenance Program shall mean the maintenance program of Lessee or a
- ----------------------------
Permitted Sublessee (if applicable) for the maintenance of Metro III aircraft
which has the approval of the FAA.
Basic Rent shall have the meaning set forth in Section 3 of the Lease.
- ----------
Business Day shall mean any day other than a Saturday, Sunday, or other day on
- ------------
which banks in Seattle, Washington or Boston, Massachusetts are authorized to
close.
Capitalized Cost shall mean Cost plus, if and to the extent permitted for tax
- ----------------
purposes under Section 168 of the Code, printing expenses, fees of counsel, and
certain other fees and expenses associated with the transaction and capitalized
by Lessor.
Casualty Value shall have the meaning set forth in Exhibit C to the Lease.
- --------------
Certificated Air Carrier shall mean any air carrier operating under a
- ------------------------
Certificate of Public Convenience and Necessity issued by the Department of
Transportation, or pursuant to an exemption under Part 298 of the U.S.
Department of Transportation's economic regulations or any similar authority.
Claims shall have the meaning set forth in Section 15 of the Lease.
- ------
Code shall have the meaning set forth in Section 17 of the Lease.
- ----
Default shall mean an event which, after the giving of notice or lapse of time
- -------
or both, would mature into an Event of Default.
Delivery Date shall mean the date the Aircraft was delivered to, and accepted
- -------------
by, Lessee from Lessor.
Depreciation Deductions shall have the meanings set forth in Section 17 of the
- -----------------------
Lease.
Engine shall mean (i) each of the engines described and listed by manufacturer's
- ------
serial numbers in Schedule No. 1 to the Lease whether or not from time to time
thereafter no longer installed on such Airframe, and (ii) any engine which may
from time to time be substituted, pursuant to Section 13(b) of the Lease, for an
Engine leased thereunder; together in each case with any and all Parts
incorporated or installed in or attached thereto (excluding Propellers) and any
and all parts removed therefrom so long as title thereto shall remain vested in
Lessor in accordance with the terms of Section 11 of the Lease after removal
from such Engine; and Engines shall mean, as a date of determination, all
-------
Engines then leased under the Lease.
Event of Default shall have the meaning set forth in Section 18 of the Lease.
- ----------------
-2-
<PAGE>
Event of Loss with respect to the Aircraft, the Airframe or any Engine shall
- -------------
mean any of the following events with respect to such property; (i) loss of such
property or the use thereof due to theft (when the property is not recovered in
60 days), disappearance (for a period in excess of 30 days), destruction, damage
beyond repair or rendition of such property permanently unfit for normal use for
any reason whatsoever; (ii) any damage of such property which results in an
insurance settlement with respect to such property on the basis of a total loss;
(iii) any Requisition of Use; or (iv) as a result of any rule, regulation, order
or other action by any government (foreign or domestic) or governmental body
(including, without limitation, the FAA or any foreign governmental body having
jurisdiction), the use of such property shall have been prohibited, or such
property shall have been declared unfit for use, for a period of six consecutive
months, unless Lessee, prior to the expiration of such six-month period, shall
have undertaken and shall be diligently carrying forward all steps which are
necessary or desirable to permit the normal use of such property by Lessee or,
in any event, if use shall have been prohibited, or such property shall have
been declared unfit for use, for a period of twelve consecutive months. The
date of such Event of Loss shall be the date of such theft, disappearance,
destruction, damage, Requisition of Use, or unfitness for use for the stated
period. An Event of Loss with respect to the Aircraft shall be deemed to have
occurred if an Event of Loss occurs with respect to the Airframe which is part
of such Aircraft. An Event of Loss with respect to any Engine shall not, without
loss of the Airframe, be deemed an Event of Loss with respect to the Aircraft.
Event of Loss Payment shall have the meaning set forth in Section 13 of the
- ---------------------
Lease.
Expiration Date shall mean the last day of the Term.
- ---------------
FAA Counsel shall mean the firm of Crowe & Dunlevy in Oklahoma City, Oklahoma.
- -----------
FAA shall mean the Federal Aviation Administration or any successor thereto.
- ---
Fair Market Value ("FMV") shall mean with respect to any property, the value of
- -------------------------
the property as determined on the basis of, and shall be equal in amount to, the
value which one would obtain in an arms-length transaction between an informed
and willing buyer-user (other than a lessee currently in possession and a used
equipment dealer) and an informed and willing seller under no compulsion to sell
and, in such determination, costs of removal of property from its location or
current use shall not be a deduction from such value. In the event the FMV is
not agreed upon by Lessee and Lessor, it shall be determined by the average of
three (3) independent appraisals by parties which shall include two parties
individually, one selected by Lessee and one selected by Lessor and a third
mutually selected by Lessee and Lessor. The expense of any such appraisal shall
be shared equally by Lessor and Lessee.
Fair Rental Rate shall mean with respect to any property, the rental rate of the
- ----------------
property as determined on the basis of, and shall be in an amount equal to, the
rental rate which one would obtain in an arms length transaction between an
informed and willing lessor (under no compulsion to lease) and lessee for a
lease term not to exceed five (5) years. If not agreed upon by Lessor and
Lessee, it shall be determined by appraisal in the manner in which FMV is
determined when not so agreed upon.
-3-
<PAGE>
Federal Aviation Act shall mean the Federal Aviation Act of 1958, as amended.
- --------------------
Guarantor shall mean Alaska Air Group, Inc. a Delaware corporation, its
- ---------
successors and assigns.
Impositions shall have the meaning set forth in Section 10 of the Lease.
- -----------
Index shall mean the rate of interest publicly announced, from time to time, by
- -----
Citibank, N.A., New York, New York, as the base rate of interest charged by such
bank to its most creditworthy commercial borrowers, notwithstanding the fact
that some borrowers of Citibank may borrow from Citibank at rates of interest
less than the announced base rate.
Interest Deductions shall have the meaning set forth in Section 17 of the Lease.
- -------------------
Lease Supplement shall mean a supplement to the Lease entered into by Lessor and
- ----------------
Lessee with respect to this Lease.
Lessor's Liens shall mean Liens created or granted by Lessor or resulting from
- --------------
(w) claims against or affecting Lessor, (x) acts of Lessor not related to the
transactions contemplated by the Lease or not permitted under the Lease, (y)
taxes imposed against Lessor which are not indemnified against by Lessee under
the Lease, or (z) claims against Lessor arising out of the voluntary transfer by
Lessor of its interest in the Aircraft or the Lease, other than a transfer
pursuant to Section 19 of the Lease.
Lessor Payment Amount shall have the meaning set forth in Section 17 of the
- ---------------------
Lease.
Liens shall have the meaning set forth in Section 9 of the Lease.
- -----
Loss shall have the meaning set forth respectively in Section 17 of the Lease.
- ----
Maintenance Manual shall mean the manual issued by the manufacturer for the
- ------------------
maintenance of the Aircraft, as updated from time to time.
Manufacturer shall mean the Fairchild Aircraft Corporation.
- ------------
Net Economic Return shall mean the after-tax economic yields and after-tax
- -------------------
annual aggregate cash flows expected by Lessor with respect to its lease of the
Aircraft under this Lease, utilizing the same assumptions and methods of
calculation which Lessor used in evaluating the transactions contemplated by
this Lease.
Operative Agreements shall mean the Lease, the Aircraft Purchase Agreement or
- --------------------
Purchase Agreement Assignment, as appropriate, the guaranty executed by
Guarantor and all other agreements or instruments now or hereafter executed by
Lessee or Guarantor in connection with the Lease.
-4-
<PAGE>
Parts shall mean all appliances, parts, instruments, appurtenances accessories,
- -----
furnishings and other equipment of whatever nature (other than complete Engines
or engines and other than temporary replacement parts), which may from time to
time be incorporated or installed in or attached to the Airframe or any Engine
or so long as title thereto shall remain vested in Lessor in accordance with the
terms of Section 11 of the Lease after removal from such Airframe or Engine.
Permitted Sublessee shall mean any Person to whom the Aircraft has been
- -------------------
subleased in accordance with the provisions of Section 16 of the Lease.
Person shall mean any individual, partnership, corporation, trust,
- ------
unincorporated association or joint venture, a government or any department or
agency thereof, or any other entity.
Propeller shall mean (i) each of the propellers described and listed by
- ---------
manufacturer's serial numbers in Schedule No. 1 to the Lease whether or not from
time to time thereafter no longer installed on an Engine, but (once removed)
only so long as title remains vested in Lessor in accordance with the terms of
the Lease and (ii) any propeller which may be from time to time substituted by
following the procedure provided for substitution of engines in Section 13(b) of
the Lease for a Propeller leased thereunder.
Rent shall have the meaning set forth in Section 3 of the Lease.
- ----
Replacement Parts shall have the meaning set forth in Section 11 of the Lease.
- -----------------
Requisition of Use shall mean the condemnation, confiscation or seizure of, or
- ------------------
requisition of title to such property by the act of any government (foreign or
domestic) or of any state or local authority or any instrumentality or agency of
the foregoing or the requisition of use of such property which use extends
beyond the Expiration Date.
Supplemental Rent shall have the meaning set forth in Section 3(c) of the Lease.
- -----------------
Tax Benefits shall mean the Depreciation Deductions, the Interest Deductions and
- ------------
the Amortization Deductions.
Transferee shall mean any Person to whom Lessor has transferred its interest in
- ----------
the Aircraft and/or this Lease in accordance with the provisions of Section 21.
-5-
<PAGE>
EXHIBIT B
FINANCIAL TERMS
Delivery Date: December 28, 1989
Cost: $2,767,500
Basic Rent: $2,061,000, payable $34,350 on the Delivery Date and
$34,350/month on each Basic Rent Date thereafter
Term: The period commencing on the Delivery Date and ending
on December 27, 1994.
Basic Rent Dates: The Delivery Date and the same date of each month
thereafter until the end of the Term
First Basic Rent Date: Delivery Date
Late Payment Rate: The Index plus 2% floating, but in no event at a
rate greater than that permitted by applicable law.
Principal Location: Portland International Airport Portland, Oregon
Lessor's Address: c/o American Finance Group
Exchange Place
Boston, MA 02109
Fax No. (617) 523-1410
Lessee's Address: 19521 Pacific Highway South
Seattle, Washington 98188
Attn: Chief Operations Officer
Fax No. (206)241-6757
Guarantor's Address: 19300 Pacific Highway South
Seattle, Washington 98188
Attn: Chief Financial Officer
Fax No. (206)433-3379
Lessee's Chief Executive 19521 Pacific Highway South
Office or Place of Seattle, Washington 98188
Business (Section 6(e)
of the Lease):
INVESTORS ASSET HOLDING CORP., HORIZON AIR INDUSTRIES, INC.
as Trustee, as Lessor as Lessee
By: [SIGNATURE NOT LEGIBLE] By: [SIGNATURE NOT LEGIBLE]
------------------------ -----------------------
Title: Vice President Title: Vice President
---------------------- ---------------------
<PAGE>
HORIZON AIR INDUSTRIES, INC.
EXHIBIT C
CASUALTY TABLES
(Stated as Percentage of Equipment Cost)
<TABLE>
<CAPTION>
AFTER CASUALTY AFTER CASUALTY
PAYMENT NO. VALUE PAYMENT NO. VALUE
- ----------- -------- ----------- --------
<S> <C> <C> <C>
1 111.86 31 105.78
2 111.72 32 105.50
3 111.57 33 105.22
4 111.42 34 104.93
5 111.27 35 104.63
6 111.12 36 104.33
7 110.95 37 104.02
8 110.79 38 103.71
9 110.62 39 103.38
10 110.45 40 103.06
11 110.27 41 102.72
12 110.09 42 102.38
13 109.91 43 102.03
14 109.72 44 101.68
15 109.53 45 101.32
16 109.33 46 100.95
17 109.13 47 100.57
18 108.92 48 100.19
19 108.71 49 99.79
20 108.49 50 99.40
21 108.27 51 98.99
22 108.05 52 98.57
23 107.82 53 98.15
24 107.58 54 97.72
25 107.34 55 97.28
26 107.09 56 96.84
27 106.84 57 96.38
28 106.59 58 95.92
29 106.32 59 95.45
30 106.06 60 95.00
</TABLE>
<PAGE>
EXHIBIT D
[DATE]
Dear Sirs:
I am General Counsel of HORIZON AIR INDUSTRIES, INC., a Washington
corporation (the "Lessee"), and as such I am delivering this opinion in
connection with the transactions contemplated by the Aircraft Lease dated
December 20, 1989 (the "Lease"). Capitalized terms used herein without
definition are used as defined in the Lease.
In so acting, I have examined the Lease and the Operative Agreements and
have examined and relied upon the representations and warranties as to factual
matters contained therein and upon the originals, or copies certified or
otherwise identified to my satisfaction, of such corporate records, documents
and other instruments as in my judgment are necessary or appropriate to enable
me to render the opinions expressed below. I am of the following opinion.
1. Lessee is a corporation duly organized and validly existing in good
standing pursuant to the laws of the State of Washington; is duly licensed or
qualified and is in good standing as a foreign corporation wherever necessary to
carry on its present business and operations and to own or lease its Properties
and to enter into and perform its obligations under the Lease and the Operative
Agreements to which it is a party (collectively the "Lessee's Documents"); is an
"air carrier" and a citizen of the United States within the meaning of the
Federal Aviation Act, certificated under Section 401 of the Federal Aviation
Act; has its chief executive office (as such term is defined in Article 9 of the
Uniform Commercial Code) in King County, Washington; holds all licenses,
certificates, permits and franchises from the appropriate agencies of the United
States of America and/or all other governmental authorities having jurisdiction
necessary to authorized Lessee to engage in air transport and to carry on
scheduled passenger service as presently conducted; and has the corporate power
and authority to conduct its business as it is presently being conducted, to
hold under lease the Aircraft and to enter into and perform its obligations
under the Lessee's Documents.
2. The execution, delivery and performance by Lessee of the Lessee 5
Documents have been duly authorized by all necessary corporate action on the
part of Lessee, do not require any stockholder approval which has not been
obtained, or the approval or consent of any trustee or holders of any
indebtedness or obligations of Lessee except such as have been duly obtained,
and will not contravene any law, judgment, government rule, regulation or order
binding on Lessee or the Articles of Incorporation or Bylaws of Lessee or, to
the best of my knowledge, after due inquiry, contravene the provisions of, or
constitute a default under, or result in the creation of any Lien (other than as
permitted in the Lease), upon the property of Lessee under, any material
indenture, mortgage, contract or other agreement to which Lessee is a party or
by which it or its properties may be bound or affected.
<PAGE>
Page two
December ___, 1989
3. Neither the execution and delivery by Lessee of the Lessee's Documents
nor the performance by Lessee of its obligations thereunder require the consent
or approval of, the giving of notice to, the registration with, or the taking of
any other action in respect of, any federal, state or foreign government
authority or agency, except for (A) the orders, permits, waivers, exemptions,
authorizations and approvals of the regulatory authorities having jurisdiction
over the operation of the Aircraft by Lessee, which orders, permits, waivers,
exemptions, authorizations and approvals have been duly obtained and are in full
force and effect, (B) the registration of the Aircraft with the FAA and the
filings referred to in Section 2 of the Lease, and (C) any normal periodic and
other reporting requirements under the applicable rules and regulations of the
FAA to the extent required to be given or obtained only after the Delivery Date.
4. The Lessee's Documents are duly authorized, executed by persons
authorized by all necessary corporate action, and delivered; and, assuming due
execution and delivery by the other parties thereto, each constitutes legal,
valid and binding obligations of Lessee enforceable against Lessee in accordance
with the terms thereof.
5. No filing of recording or any document (including any financing
statement), other than those which have been made, is necessary to establish and
perfect Lessors interest in the Aircraft against Lessee and any third parties in
any applicable jurisdiction in the United States (assuming that at the time of
any such filing pursuant to the Act or other unrecorded documents relating to
the Aircraft have been filed but have not been shown on indices of filed but
unrecorded documents made available to special FCC counsel).
The opinion set forth in Paragraph 4 is limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally, and by general equitable principles, and in the case of the
Lease, is limited by applicable laws affecting the remedies provided therein,
which laws, however, do not in my opinion make the remedies provided in the
Lease inadequate for the practical realization of the rights and benefits
intended to be provided.
I am admitted to practice law in the State of Washington and in rendering
the foregoing opinions have not passed upon, or purported to pass upon, the laws
of any jurisdiction other than the State of Washington and the federal laws of
the United States.
Very truly yours,
________________________________
<PAGE>
EXHIBIT E
[DATE]
Dear Sirs:
I am ____________ (of) (to) Alaska Air Group, Inc., a Delaware corporation
(the "Guarantor"), and as such I am delivering this opinion in connection with
the transactions contemplated by the Guaranty dated December 20, 1989 (the
"Guaranty"). Capitalized terms used herein without definition are used as
defined in the Guaranty.
In so acting, I have examined the Guaranty and the Lease which is the
subject of the Guaranty and have examined and relied upon the representations
and warranties as to factual matters contained therein and upon the originals,
or copies certified or otherwise identified to my satisfaction, of such
corporate records, documents and other instruments as in my judgment are
necessary or appropriate to enable me to render the opinions expressed below. I
am of the following opinion.
1. Guarantor is a corporation duly organized and validly existing in good
standing pursuant to the laws of the State of Delaware; is duly licensed or
qualified and is in good standing as a foreign corporation wherever necessary to
carry on its present business and operations and to own or lease its properties
and to enter into and perform its obligations under the Guaranty and has the
corporate power and authority to conduct its business as it is presently being
conducted and to enter into and perform its obligations under Guaranty.
2. The execution, delivery and performance by Guarantor of the Guaranty
have been duly authorized by all necessary corporate action on the part of
Guarantor, do not require any stockholder approval which has not been obtained,
or the approval or consent of any trustee or holders of any indebtedness or
obligations of Guarantor except such as have been duly obtained, and will not
contravene any law, judgment, government rule, regulation or order binding on
Guarantor or the Articles of Incorporation or Bylaws of Guarantor or, to the
best of my knowledge, after due inquiry, contravene the provisions of, or
constitute a default under, or result in the creation of any lien upon the
property of Guarantor under, any material indenture, mortgage, contract or other
agreement to which Guarantor is a party or by which it or its properties may be
bound or affected.
3. Neither the execution and delivery by Guarantor of the Guaranty nor the
performance by Guarantor of its obligations thereunder require the consent or
approval of, the giving of notice to, the registration with, or the taking of
any other action in respect of, any federal, state or foreign government
authority or agency.
<PAGE>
Page two
December ___ , 1989
4. The Guaranty has been duly authorized, executed by person(s) authorized
by all necessary corporate action, and delivered; and, assuming due execution
and delivery by the other parties thereto, constitutes legal, valid and binding
obligations of Guarantor enforceable against Guarantor in accordance with the
terms thereof.
The opinion set forth in Paragraph 4 is limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally, general equitable principles and applicable laws affecting
the remedies provided therein, which laws, however, do not in my opinion make
the remedies provided in the guaranty inadequate for the practical realization
of the rights and benefits intended to be provided.
I am admitted to practice law in the State of Washington and in rendering
the foregoing opinions have not passed upon, or purported to pass upon, the laws
of any jurisdiction other than the State of Washington and the federal laws of
the United States.
Very truly yours,
______________________________
<PAGE>
EXHIBIT F
GUARANTY
<PAGE>
GUARANTY
To induce INVESTORS ASSET HOLDING CORP., as Trustee of AFG/Horizon-II Trust
("Lessor") to enter into an Aircraft Lease with Horizon Air Industries, Inc.
("Lessee"), dated as of December 20, 1989 (the "Lease"), Alaska Air Group, Inc.
("Guarantor"), for good and valuable consideration, does hereby guarantee to
Lessor the due, regular and punctual payment of the total rental as provided in
the Lease, whether it represents an original balance, a balance reduced by part
payment, or a deficiency after sale of equipment or otherwise, and does hereby
further guarantee that the Lessee will faithfully perform and fulfill all
agreements and obligations provided in the Lease at the time and in the manner
therein provided. Guarantor does hereby further guarantee to pay on demand all
losses, costs, attorney's fees or expenses which may be suffered by Lessor by
reason of Lessee's default under the Lease or default of Guarantor under this
Guaranty. Guarantor agrees that nothing herein shall be deemed to render this
Guaranty in any was conditional, and it is agreed that Lessor may, upon default
of Lessee, or at any time thereafter, make demand upon and receive payment of
any sum or performance or any covenant or agreement hereunder guaranteed by
Guarantor, with or without notice or demand for payment or performance by
Lessee, its successors or assigns, or any other person or entity. All
aforementioned indebtedness and obligations of Guarantor are hereinafter
collectively referred to as the "Indebtedness".
Guarantor hereby waives: (a) notice of acceptance of this Guaranty and any
default by the Lessee or any other person; (b) presentment, protest and demand,
and notice of protest, demand and dishonor of the Lease, and the exercise of
possessory, collection or other remedies under the Lease; (c) any defense based
upon any legal disability of the Lessee or any discharge or limitation of the
liability of the Lessee to the lessor, whether consensual or arising by
operation of law or any bankruptcy, insolvency or debtor-relief proceeding, or
from any other cause; and (d) all rights of subrogation, all rights to enforce
any remedy that the Lessor may have against the Lessee, and all rights to
participate in any security held by the Lessor for the Indebtedness, until such
Indebtedness has been paid and performed in full.
This Guaranty shall continue to be effective, or be reinstated, as the case
may be, if at any time payment, or any part thereof, of any amount paid under
the Lease is rescinded or must otherwise be restored or returned by the
recipient thereof upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of the Lessee, or upon or as a result of the appointment of a
custodian, receiver, intervenor or conservator of, or trustee or similar officer
for, the Lessee or any substantial part of the property of the Lessee, or
otherwise, all as though such payments had not been made. If an event
permitting the exercise of remedies under the Lease shall at such time be
prevented by reason of the pendency against the Lessee of a case or proceeding
under a bankruptcy or insolvency law, the Guarantor agrees that, for purposes of
this Guaranty and its obligations hereunder, the Lease shall be deemed to have
been declared in default with all attendant consequences as provided in the
Lease as if such declaration of default and acceleration and the consequences
thereof had been accomplished in accordance with the terms of the Lease, and the
Guarantor shall forthwith pay any amounts guaranteed hereunder upon such
declaration of default and acceleration and consequences, without further notice
or demand. No failure by Lessor to exercise its rights hereunder shall give
rise to any estoppel against Lessor, or excuse Guarantor
<PAGE>
-2-
from performing hereunder. As used in this Guaranty, the word "person" shall
include any individual corporation or partnership, and refers to Guarantor and
to anyone absolutely, contingently, partly, or wholly liable for payment and/or
performance of the Lessee 5 obligations being guaranteed hereunder.
Except as expressly provided herein, Guarantor hereby agrees that its
obligations hereunder shall be unconditional, irrespective of (a) the validity,
regularity or enforceability of the Indebtedness, (b) the absence of any attempt
to collect from the Lessee or any other Guarantor, (c) the waiver of consent by
the Lessor with respect to any provisions of the Lease, (d) the validity or
enforceability of this Guaranty against one or more of any other guarantors, or
(e) any other circumstance which might otherwise constitute a legal or equitable
discharge or defense of Guarantor other than a breach of Section 5(b) of the
Lease.
Guarantor hereby waives any and all legal requirements that Lessor, its
successors or assigns, shall institute any action or proceeding at law or in
equity against Lessee, its successors or assigns, or anyone else, with respect
to the Lease or with respect to any other security held by Lessor, as a
condition precedent to bringing an action against the Guarantor upon this
Guaranty. All remedies afforded to Lessor, its successors or assigns, by reason
of this Guaranty are separate and cumulative remedies and no one of such
remedies, whether exercised by Lessor, or its successors or assigns, or not,
shall be deemed to be an exclusion of any one of the other remedies available to
Lessor, its successors or assigns, and shall in no way limit or prejudice any
other legal or equitable remedies which Lessor, its successors or assigns, may
have in the aircraft which is the subject of the Lease (the "Aircraft").
Guarantor authorizes the Lessor, without notice or demand and without
affecting the liability of the Guarantor hereunder, from time to time to (a)
renew, extend, accelerate or otherwise change the time for payment of
Indebtedness; (b) accept partial payments on the Indebtedness; (c) take and hold
security for the payment of this Guaranty or the Indebtedness and exchange,
enforce, waive and release any such security; (d) apply such security and direct
the order or manner of sale thereof as the Lessor in its discretion may
determine; (e) exercise any of its remedies under the Lease; and (f) settle,
release, compromise, collect or otherwise liquidate any Indebtedness and any
security therefor in any manner, without affecting or impairing the obligations
of Guarantor hereunder.
Until the Indebtedness is paid in full and until each and all of the terms,
covenants, and conditions of the Lease and this Guaranty are performed fully,
the Guarantor shall not be released by any act or thing with might, but for this
provision of this Guaranty, be deemed a legal or equitable discharge of a
surety, or by reason of any waiver, extension, modification, forebearance or
delay of Lessor, its successors or assigns, or its or their failure to proceed
promptly or otherwise, and the Guarantor hereby expressly waives and surrenders
any defense to its liability hereunder based upon any of the foregoing acts,
things, agreements or waivers or any of them.
<PAGE>
-3-
No failure or delay by Lessor, its successors or assigns, in exercising any
right, power or privilege hereunder or under the Lease shall operate as a waiver
thereof; nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any right, power or privilege.
Any notice, demand or request by Lessor, its successors or assigns, to the
Guarantor shall be in writing and shall be deemed to have duly been given or
made if either delivered personally to the Guarantor or if mailed by certified
mail postage prepaid by Lessor to the Guarantor at its address set forth below
its signature at the end of this Guaranty.
This Guaranty shall be governed by and construed in accordance with the laws
of the Commonwealth of Massachusetts and shall be binding on the parties hereto
and their respective permitted successors and assigns and shall inure to the
benefit of the successors and assigns of the Lessor.
Lessor and Guarantor agree that Guarantor shall pay to the Lessor the
out-of-pocket costs and expenses reasonably incurred by Lessor, its successors
and assigns, including but not limited to costs and attorneys fees reasonably
incurred in any effort to enforce this Guaranty on account of a breach by
Guarantor, whether or not any lawsuit is filed. Furthermore, if legal or other
proceeding is instituted, the party prevailing in such proceeding shall be
entitled to recover court costs and related fees from the losing party.
This Guaranty and all guarantees, covenants and agreements of the Guarantor
contained herein shall continue in full force and effect and shall not be
discharged until such time as all of the agreements of the Lessee under the
Lease and the Guarantor hereunder, shall be duly performed. This Guaranty shall
bind Guarantor's successors and assigns and the benefits thereof shall extend to
and include Lessors successors and assigns. In the event of default hereunder
Lessor may, at any time, inspect Guarantor's records or, at Lessor's option,
Guarantor shall furnish a current independent audit report.
Any provision of this Guaranty which may be determined by competent
authority to be prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
This Guaranty and each of its provisions may only be waived, modified,
varied, released, terminated or surrendered, in whole or in part, by a duly
authorized written instrument signed by Lessor (or its successors or assigns).
This Guaranty embodies the entire agreement and understanding between the
Guarantor and Lessor (or its successors or assigns), and supersedes all prior
agreements and understandings relating to the subject matter hereof.
Each signatory hereof warrants that he/she currently has authority to sign
on behalf of the entity for which the signatory is signing in his/her
representative capacity and by so signing, to bind such entity hereunder.
<PAGE>
-4-
Notwithstanding anything herein to the contrary, Guarantor shall have as
defenses under this Guaranty to the performance of any of Lessee's obligations
under the Lease all of the defenses which Lessee has under the Lease to the
performance of such obligations. Guarantor acknowledges that to its knowledge,
as of the date hereof, Lessee has no defense to the performance of its
obligations under the Lease and it has no defenses to its obligations under this
Guaranty.
IN WITNESS WHEREOF, this Guaranty is executed the day and year above
written.
GUARANTOR:
----------
ALASKA AIR GROUP, INC.
By______________________________
J. Ray Vingo
Vice President, Finance &
Chief Financial Officer
Address:
19300 Pacific Highway South
Seattle Washington 98188
Attn: Chief Financial Officer
Fax No. (206) 433-3379
<PAGE>
EXHIBIT G
PERMITTED SUBLESSEES
--------------------
Any U.S. Certificated Air Carrier which is an affiliate of the Guarantor or is
rated investment grade or better by either Moody's Investors Services or
Standard and Poors.
<PAGE>
AIRCRAFT LEASE EXTENSION AGREEMENT (N27442)
This Aircraft Lease Extension Agreement (N27442) dated as of December 28,
1994 (the "Extension Agreement") is by and between Investors Asset Holding Corp,
not individually but solely as Trustee of AFG/Horizon-II Trust, as Lessor, and
Horizon Air Industries, Inc. as Lessee.
WHEREAS, Lessor and Lessee have entered into that certain Aircraft Lease
dated as of December 20, 1989 (the "Lease"), recorded by the FAA on January 16,
1990, as Conveyance No. E06617, amended by the Amendment to Lease dated as of
October 30, 1990, recorded December 18, 1990, as Conveyance No. W13151.
Capitalized terms not otherwise defined herein shall have the meaning given to
such terms in the Lease. In the event of a conflict between the terms of the
Lease and the terms of this Agreement, the terms of this Agreement shall govern;
and
WHEREAS, the Lease shall expire by its terms on December 27, 1994; and
WHEREAS, Lessee and Lessor wish to extend the Term of the Lease and amend
certain other provisions of the Lease, including amount of Basic Rent payable
during the extension of the Term;
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements set forth herein and other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Lessor and Lessee agree as follows:
1. Amendments to Lease. The provisions of Exhibit B of the Lease are
-------------------
hereby amended as follows:
A. The language opposite "Basic Rent" is hereby amended in its entirety to
read as follows: "$2,957,712.00, payable in the amount of $34,350 on the
Delivery Date and $34,350 per month on each Basic Rent Date thereafter through
and including the Basic Rent Date occurring on October 28, 1990, and Basic Rent
of $34,038.00 per month on each Basic Rent Date commencing with the Basic Rent
Date occurring on November 28, 1990 through and including the Basic Rent Date
occurring on November 28, 1994, and Basic Rent of $24,000.00 per month on each
Basic Rent Date commencing with the Basic Rent Date occurring on December 28,
1994 through and including the Basic Rent Date occurring on January 28, 1998".
B. The language opposite "Term" is hereby amended in its entirety to read
as follows: The period commencing on the Delivery Date and ending at 12:00 PM
on February 27, 1998".
2. Representations, Warranties and Agreements of the Lessee. Lessee
--------------------------------------------------------
hereby represents to Lessor that, as of the date hereof:
(a) The representations and warranties contained in Sections 6(a-f) of the
Lease, as amended by this Extension Agreement, are true and correct as of the
date hereof.
Page 1
<PAGE>
(b) The representations contained in Section 6(g) of the Lease are true and
correct with respect to the financial statements of Lessee dated September 30,
1994.
(c) No Event of Default, or event which, with the passage of time or giving
of notice, or both, would constitute an Event of Default, has occurred and
remains unremedied under the Lease.
(d) No Event of Loss has occurred under the Lease.
3. Warranty of Lessor. Lessor hereby represents to Lessee that, as of the
------------------
date hereof, the representations and warranties contained in Sections 5(a-c) of
the Lease, as amended by this Extension Agreement, are true and correct as of
the date hereof.
4. Loss or Destruction; Requisition of Use
---------------------------------------
The Casualty Value schedule attached hereto as Schedule C hereby supplements
the Casualty Tables attached to the Lease as Exhibit C and shall relate to any
Event of Loss occurring during the Extension Term.
5. Events of Default
-----------------
The following shall be added as Section 18(j) of the Lease: "Alaska Air
Group, Inc. shall be in default of any of its obligations under that certain
Guaranty dated as of December 20, 1989".
6. Counterpart Execution
---------------------
This Agreement may be executed in separate counterparts, which together shall
form one and the same instrument.
(The rest of this page is intentionally left blank.)
---------------------------------------------------
Page 2
<PAGE>
7. Full Force and Effect
---------------------
Except as expressly amended by this Extension Agreement, the Lease remains in
full force and effect.
IN WITNESS WHEREOF Lessor and Lessee have executed this Extension Agreement as
of the date first written above.
LESSEE LESSOR
HORIZON AIR INDUSTRIES, INC. INVESTORS ASSET HOLDING CORP.,
not individually, but solely as
Trustee of Horizon/AFG-II Trust
By: /s/ Glenn S. Johnson By: /s/ Eileen Water
------------------------------ ------------------------------
Name: GLENN S. JOHNSON Name: Eileen Water
---------------------------- ----------------------------
Title: VICE PRESIDENT/CONTROLLER & TREASURER Title: Manager
-------------------------------------- ---------------------------
COUNTERPART NO. 2 OF THREE SERIALLY NUMBERED MANUALLY EXECUTED
COUNTERPARTS. TO THE EXTEND, IF ANY, THAT THIS DOCUMENT CONSTITUTES CHATTEL
PAPER UNDER THE UNIFORM COMMERCIAL CODE, NO SECURITY INTEREST MAY BE CREATED
THROUGH THE TRANSFER AND POSSESSION OF ANY COUNTERPART OTHER THAN COUNTERPART
NO. 1.
Page 3
<PAGE>
LLR40D-10 AMERICAN FINANCE GROUP 5/23/94 16:11:45 PAGE 1
Schedule A - Rental Schedule Economics
LESSEE: HORIZON AIR INDUSTRIES, INC.
LESSOR: AMERICAN FINANCE GROUP
RENTAL SCHEDULE: N27442RN1
LEASE TERM (MONTHS): 38
PRIMARY START DATE: 12/28/1994
LEASE EXPIRATION DATE: 2/27/1998
PAYMENT FREQUENCY: MONTHLY
ADVANCE/ARREARS: ADVANCE
LEASE RATE: .008672087
PER DIEM LEASE RATE: .000289070
PERIODIC RENT: $24,000.00
NUMBER OF PAYMENTS: 38
TOTAL INTERIM RENT: $.00
PAYMENT COMMENCEMENT DATE: 12/28/1994
TOTAL EQUIPMENT COST: $2,767,500.00
DOCUMENTATION FEE: -0-
----------------
________________________ LESSEE INITIALS
________________________ LESSOR INITIALS
<PAGE>
LLR41D-10 AMERICAN FINANCE GROUP 5/23/94 16:11:46 PAGE 1
Schedule B Equipment Description
LESSEE: HORIZON AIR INDUSTRIES, INC. RENTAL SCHEDULE AND ACCEPTANCE
CERTIFICATE NUMBER: N27442RN1
LESSOR: AMERICAN FINANCE GROUP
<TABLE>
<CAPTION>
Acceptance
Equipment Cost Serial Number Year Manufacturer Model Type Date
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2,767,500.00 AC-750 FAIRCHILD METRO III SA227-AC AIRCRAFT 12/28/1994
- ---------------
2,767,500.00 Total for Location PORTLAND INTERNATIONAL AIRPORT PORTLAND OR 97200
- ---------------
- ---------------
2,767,500.00 Total Equipment Cost
</TABLE>
<PAGE>
AMERICAN FINANCE GROUP
HORIZON AIR INDUSTRIES, INC.
Schedule C - Casualty Value Table for Rental Schedule N27442RN1
(Stated as a Percentage of Equipment Cost)
AFTER
PRIMARY
TERM CASUALTY
PAYMENT NO. VALUE
- ----------- --------
Prior to 1 95.00
1 94.83
2 94.67
3 94.50
4 94.33
5 94.15
6 93.96
7 93.77
8 93.58
9 93.38
10 93.18
11 92.97
12 92.76
13 92.54
14 92.31
15 92.08
16 91.85
17 91.61
18 91.36
19 91.10
20 90.85
21 90.58
22 90.31
23 90.03
24 89.75
25 89.46
26 89.16
27 88.86
28 88.55
29 88.24
30 87.91
31 87.58
32 87.25
33 86.90
34 86.55
35 86.19
36 85.83
37 85.45
38 85.00
<PAGE>
AIRCRAFT LEASE
DATED AS OF DECEMBER 20, 1989
between
INVESTORS ASSET HOLDING CORP.,
Trustee of AFG/Horizon-I Trust,
as Lessor,
and
HORIZON AIR INDUSTRIES, INC.
as Lessee,
Covering one Fairchild Metro III
Aircraft Model SA227-AC
U.S. Registration Number N27444
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Section Page
- ------- ----
<S> <C>
1. Acceptance and Lease of Aircraft 1
2. Conditions Precedent; Closing Covenants 1
3. Term and Rent 2
4. Limited Appointment of Agent 3
5. Warranty of Lessor 4
6. Representations, Warranties and
Agreements of Lessee 5
7. Net Lease 6
8. Return of Aircraft 7
9. Liens 9
10. Taxes 9
11. Registration, Maintenance and Operations;
Compliance and Use; Replacement Parts;
Additions; Aircraft Marking 10
12. Inspection 13
13. Loss or Destruction; Requisition of Use 13
14. Insurance 15
15. Indemnification 17
16. Sublease; Possession 18
17. Tax Treatment; Tax Indemnification 20
18. Events of Default 24
19. Remedies 26
20. Notices 29
21. Assignment and Subletting 29
22. Miscellaneous 30
23. Performance of Obligations of Lessee by Lessor 31
24. Additional Covenants of Lessee 31
25. Counterparts 33
</TABLE>
Exhibits
- --------
A Definitions
B Financial Terms
C Casualty Value Schedule
D Opinion of Lessee's Counsel
E Opinion of Guarantor's Counsel
F Guaranty of Alaska Air Group, Inc.
G Permitted Sublessees
<PAGE>
AIRCRAFT LEASE
--------------
This AIRCRAFT LEASE dated as of December 20, 1989 ("Lease") is between
INVESTORS ASSET HOLDING CORP., a Massachusetts corporation (the "Trustee"), not
in its individual capacity but solely as trustee of AFG/Horizon-I Trust
("Lessor"), and HORIZON AIR INDUSTRIES, INC., a Washington corporation
("Lessee"). Certain capitalized terms as used in this Lease are defined in
Exhibit A hereto, and such definitions are hereby incorporated herein and made a
part hereof as though set forth herein in full.
1. ACCEPTANCE AND LEASE OF AIRCRAFT
--------------------------------
Subject to the satisfaction of each condition set forth in Sections 2(a)
and (b), Lessor hereby agrees to lease to Lessee, and Lessee hereby agrees to
lease from Lessor, the Aircraft pursuant to the terms and conditions of this
Lease including all Lease Supplements and Exhibits added hereto. Lessee
acknowledges that it has accepted the Aircraft as of the Delivery Date.
2. Conditions Precedent; Closing Covenants
---------------------------------------
(a) Lessor's obligation to be bound by the terms of this Lease are
conditioned upon the receipt by Lessor of the following documents in a form
satisfactory to it:
(i) the original of this Lease duly executed by Lessee;
(ii) copies of resolutions of Lessee's board of directors or officers
authorizing Lessee to enter into and perform this Lease and the
transaction contemplated thereby, certified to be true and up to date
by a duly authorized officer of Lessee;
(iii) a certificate of a duly authorized officer of Lessee setting
out the names and signatures of the persons authorized to sign this
Lease and any document to be delivered by Lessee pursuant hereto;
(iv) certificates of insurance evidencing coverage for Lessor's
interest, all as required hereunder;
(v) evidence that FAA counsel has received in escrow an executed
duplicate of this Lease, in proper form for filing with the FAA, and
pursuant to instructions from Lessor and Lessee has filed such
document with the Federal Aviation Registry in accordance with Title
14, Part 49 of the Code of Federal Regulations;
(vi) a favorable opinion of FAA counsel to Lessor;
<PAGE>
-2-
(vii) an opinion of counsel of Lessee substantially in the form of
Exhibit D and an opinion of counsel to Guarantor substantially in the
form of Exhibit E;
(viii) the Guaranty of Guarantor substantially in the form of Exhibit
F; and
(ix) such other, documents certificates and opinions as Lessor may
reasonably require.
(b) Lessee covenants that, upon purchase of the Aircraft by Lessor,
Lessee shall release from escrow the documents held therein by FAA counsel
on behalf of Lessee. Lessee further represents and warrants that on such
release date no legal or practical impediment will exist which would
prevent FAA counsel from filing the Lease and that each of the foregoing
shall have been duly executed and in a form appropriate for filing so that
the same may then be duly filed and accepted for filing by the Federal
Aviation Administration.
(c) Filing of the Lease for recordation with the FAA shall constitute
Lessor's and Lessee's acknowledgment that they are bound by the terms of
this Lease, notwithstanding anything to the contrary in this Lease.
3. Term and Rent
-------------
(a) This Lease shall commence on the Delivery Date and shall end on
the Expiration Date unless this Lease shall have been terminated in
accordance with the terms hereof.
(b) Lessee shall pay to Lessor, as basic rent (herein referred to as
"Basic Rent"), in advance, on the Delivery Date, and on each Basic Rent
Date thereafter, an amount equal to the monthly Basic Rent specified in
Exhibit B.
(c) In addition, Lessee shall pay to Lessor the following amounts
(herein referred to as "Supplemental Rent" and, together with all Basic
Rent, as "Rent"):
(i) on demand, any amount payable hereunder (other than Basic Rent or
Casualty value) which Lessee assumed the obligation to pay, or agrees
to pay, under this Lease;
(ii) on the date provided herein, any amount payable hereunder as
Casualty Value; and
(iii) on demand, to the extent permitted by applicable law, interest
(computed on the basis of a 365/366-day year for actual days elapsed)
at the Late Payment Rate on any payment of Rent which is overdue.
<PAGE>
-3-
The expiration or other termination of Lessee's obligation to pay
Basic Rent hereunder shall not limit or modify the obligations of Lessee
with respect to Supplemental Rent.
(d) All payments of Rent hereunder shall be made to Lessor in
immediately available funds on the date payable hereunder or if such day is
not a Business Day, on the first Business Day thereafter, at its address
set forth in Exhibit B or at such other address or to such other Person as
Lessor may direct by notice in writing to Lessee.
4. Limited Appointment of Agent
----------------------------
(a) Enforcement of Warranties; Claims. Lessor hereby appoints and
----------- -- ---------- ------
constitutes Lessee its agent and attorney-in-fact during the term of this
Lease, so long as no Event of Default has occurred and is continuing, to
assert from time to time, in the name of Lessor, but for the benefit of
Lessee and at Lessee's expense, whatever claims and rights (including
warranties pertaining to the Aircraft) which Lessor may have against any
manufacturer or vendor of the Airframe, Engines, or other components or
Parts of the Aircraft or Engines. In the event Lessee is not able to
enforce in the name of Lessor any such performance by legal proceedings,
Lessor shall participate with Lessee and provide the assistance requested
by Lessee, at Lessee's expense, in asserting claims and rights as specified
in this Section 4(a).
(b) Acceptance of Aircraft. Solely for purposes of accepting
----------------------
delivery of the Aircraft from the Manufacturer, Lessor hereby appoints
Lessee as authorized representative of Lessor. Until such authority shall
have been terminated pursuant to paragraph (c) of this Section, such
authorized representative shall be authorized to take possession of the
Aircraft upon the delivery thereof to Lessee by the Manufacturer, to accept
on behalf of Lessor all Purchase Documents, if any, delivered at such time
with respect to the Aircraft, either to accept delivery of the Aircraft on
behalf of Lessor if it is found to be in good order or to refuse delivery
of the Aircraft if it is found not to be in good order, and to take such
other action on behalf of Lessor, including execution of a delivery receipt
and such other documents as shall be required to accept delivery of the
Aircraft.
(c) Termination of Appointment of Authorized Agent. The authority of
----------------------------------------------
the authorized representative granted pursuant to paragraph (b) of this
Section shall terminate upon the earlier of (i) acceptance of the Aircraft
by Lessee on its own behalf and on behalf of Lessor or (ii) notice to
Lessee by Lessor revoking the same. If requested by the Manufacturer,
Lessor will provide to the Manufacturer at the delivery, written assurances
that such authority has not been revoked.
(d) Purchase from Lessee. Paragraphs (b) and (c) of this Section
--------------------
shall not apply in the event that the Lessor acquires the Aircraft directly
from the Lessee.
<PAGE>
-4-
5. Warranty of Lessor
------------------
(a) Lessor represents and warrants (which representations and
warranties shall survive the execution and performance hereof);
(i) that this Lease has been duly executed and delivered by Lessor
and constitutes a legal, valid and binding obligation of Lessor
enforceable against Lessor in accordance with its terms;
(ii) that the party executing this Lease on behalf of the Lessor has
the authority to execute same and bind Lessor;
(iii) that this Lease has been duly authorized by all necessary
action;
(iv) that Trustee is a corporation, and the Lessor is a nominee
trust, each duly organized and validly existing under the laws of the
Commonwealth of Massachusetts, and Lessor has the requisite power and
authority to enter into and perform its obligations under this Lease;
and
(v) that the execution and delivery by Lessor of this Lease, and the
performance by the Lessor of its obligations under the Lease, 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 it is a party or by which it is bound.
(b) Lessor warrants and agrees (i) that during the Term of this Lease
it qualifies and will continue to qualify, and will cause the Trustee and
any Transferee to qualify, as a "Citizen of the United States" as defined
in Section 101(16) of the Federal Aviation Act and that it shall take, or
cause to be taken, all necessary action on its part (except any such
actions as are required to be taken solely by Lessee hereunder) to maintain
the United States registration of the Aircraft in accordance with the
Federal Aviation Act, and (ii) that during the Term of this Lease as long
as no Event of Default has occurred and is continuing, Lessee's use of the
Aircraft shall not be interrupted or impaired by Lessor or anyone claiming
through or under Lessor.
(c) The warranties set forth hereinabove are exclusive and in lieu of
all other warranties of Lessor, whether written, oral or implied with
respect to this Lease or the Aircraft, and Lessor shall not be deemed to
have modified in any respect the obligations of Lessee under any of the
Operative Agreements, which obligations are absolute and unconditional,
come "hell or high water" except in the case of a breach of Section 5(b).
LESSEE EXPRESSLY AGREES TO LEASE THE AIRCRAFT "AS IS". LESSOR SHALL NOT BE
DEEMED TO HAVE MADE, AND LESSOR HEREBY DISCLAIMS ANY OTHER REPRESENTATION
OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER,
INCLUDING WITHOUT LIMITATION, LESSOR'S TITLE TO THE AIRCRAFT,
<PAGE>
-5-
THE DESIGN OR CONDITION OF THE AIRCRAFT, ITS MERCHANTABILITY OR ITS FITNESS
FOR ANY PARTICULAR PURPOSE, THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF
THE AIRCRAFT, ITS VALUE OR AIRWORTHINESS OR CONFORMITY OF THE AIRCRAFT TO
THE PROVISIONS AND SPECIFICATION OF ANY PURCHASE AGREEMENT OR AGREEMENTS
RELATING THERETO, NOR SHALL LESSOR BE LIABLE, REGARDLESS OF ANY ACTUAL OR
ALLEGED NEGLIGENCE OF LESSOR FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES OR FOR
STRICT OR ABSOLUTE LIABILITY IN TORT.
6. Representations, Warranties and Agreements of the Lessee
--------------------------------------------------------
(a) Due Organization. Lessee is a corporation duly organized and
--- ------------
validly existing in good standing under the laws of the State of
Washington, is and/or will be duly qualified to do business as a foreign
corporation and in good standing in each other jurisdiction where the
conduct of its business requires it to be so qualified, and has the
corporate power and authority to carry on its business as presently
conducted, to hold property under lease and to enter into and perform its
obligations under this Lease and all other Operative Agreements to which
Lessee is a party.
(b) Due Authorization; Enforceability; No Violation. This Lease and
--- ------------- -------------- ------------
all other Operative Agreements to which Lessee is a party have been duly
authorized by all necessary corporate action on the part of Lessee and do
not require any approval of the stockholders of Lessee which has not been
obtained, and have been or will be duly executed and delivered by Lessee
and, assuming due authorization, execution and delivery by the other party
thereto, are or will be legal, valid and binding obligations of Lessee
enforceable in accordance with their terms. The execution and delivery by
Lessee of the foregoing documents are not, and the performance by it of its
obligations under each will not be, inconsistent with its charter or by-
laws, do not and will not contravene any law, governmental rule or
regulation, judgment or order applicable to or binding on Lessee, do not
and will not contravene any provisions of, or constitute a default or
result in the creation of any Lien (other than as permitted by Section 9
hereof) under any indenture, mortgage, contract or other instrument to
which Lessee is a party or by which it is bound, and do not and will not
require any approval or consent of any trustee or holders of indebtedness
or obligations of Lessee, except such as have been duly obtained.
(c) Government Approvals. No consent or approval of, giving of
---------- ---------
notice to, registration with, or taking of any other action in respect of
or by, any Federal, state or local governmental authority or agency
(including, without limitation, the FAA) or other person is required with
respect to the execution, delivery and performance by Lessee of this Lease
or the other Operative Agreements or the consummation of any of the
transactions by Lessee contemplated hereby or thereby, or if any such
approval, notice, registration or action is required, it has been, or will
be, duly given or obtained prior to closing.
<PAGE>
-6-
(d) Location of Chief Executive Office. The chief executive office
-------- -- ----- --------- ------
or principal place of business (as either of such terms is used in Article
9 of the Uniform Commercial Code) of Lessee is located at the address set
forth in Exhibit B to the Lease, and Lessee agrees to give Lessor prior
written notice of any relocation of the chief executive office or principal
place of business.
(e) Lessee's Selection. Lessee has selected the Aircraft and
-------- ---------
manufacturer thereof and all maintenance facilities required thereby or
hereby.
(f) Litigation. There are no suits or legal proceedings (including
----------
any administrative proceeding) pending or, to Lessee's knowledge,
threatened before any court or administrative agency against Lessee which,
if adversely determined, would have a material adverse effect upon its
financial condition or business or its ability to perform its obligations
hereunder, except as disclosed on an exhibit to the opinion of Lessee's
counsel required pursuant hereto.
(g) Financial Statements, Financial Conditions, Disclosures. The
--------- ---------- --------- ---------- -----------
unaudited financial statements of Lessee in respect of the three month
period ended on June 30, 1989, as delivered to Lessor have been prepared in
accordance with generally accepted accounting principles and present fairly
the financial position of Lessee as of such date, and as of such date
Lessee had no significant liabilities (contingent or otherwise) which are
not disclosed by, or reserved against in, such financial statements. There
has been no material adverse change in the financial position of Lessee
from that set forth in the financial statements referred to in this Section
6(g). The financial statements referred to in this Section 6(g) together
with all other documents furnished by or on behalf of Lessee to Lessor in
connection with the transactions contemplated hereby do not contain any
untrue statement of a material fact or omit a material fact necessary to
make the statements contained therein not misleading.
7. Net Lease; Lessor's Default; Limitation or Lessee's Remedies.
-------------------------------------------------------------
This Lease is a net lease, and Lessee acknowledges and agrees that Lessee's
obligation to pay all Rent hereunder, and the rights of Lessor in and to such
Rent, shall be absolute and unconditional and shall not be subject to any
abatement, reduction, set-off, defense, counterclaim or recoupment for any
reason whatsoever, other than for a breach of Section 5(b). Except as otherwise
expressly provided herein and except with respect to a breach by Lessor of
Section 5(b), this Lease shall not terminate, nor shall the obligations of
Lessee be affected, by reason of any defect in or damage to, or any loss or
destruction of, the Aircraft or any part thereof from whatsoever cause, or the
interference with the use thereof by Lessor or any Person, or the invalidity or
unenforceability or lack of due authorization of this Lease or lack of right,
power or authority of Lessor to enter into this Lease, or for any other cause,
whether similar or dissimilar to the foregoing, any
<PAGE>
-7-
present or future law or regulation to the contrary notwithstanding, it being
the express intention of Lessor and Lessee that all Rent payable by Lessee
hereunder shall be, and continue to be, payable in all events unless the
obligation to pay the same shall be terminated pursuant to the express
provisions of this Lease. If Lessor shall breach any representation, warranty or
covenant contained herein, Lessee shall have no remedy against Lessor on account
thereof unless Lessee has given Lessor notice thereof and such breach has not
been cured within thirty (30) days thereafter.
8. Return of Aircraft
------------------
(a) Condition Upon Return. Upon the expiration or termination of
---------------------
this Lease, the Lessee, at its own expense, will return the Aircraft to the
Lessor at any reasonable location chosen by the Lessor in the continental
United States, which is within 1,500 miles of Portland, OR, and in the
condition in which the Aircraft is required to be maintained pursuant to
Section 11 hereof, but with all logos or other identifying marks of the
Lessee removed in a workmanlike manner. If the Lessee desires to obtain for
its own use the U.S. "N" registration number that is on the Airframe, prior
to return, the Lessee, at its expense, shall make application to the FAA
for a new "N" number designated by Lessor, and shall have such new number
painted on the aircraft in such a location and to such specifications as
the Lessor shall direct. The Aircraft, upon redelivery pursuant hereto, (i)
shall be duly certified by the FAA as an airworthy aircraft, (ii) shall be
free and clear of all Liens, other than Lessor's Liens, and (iii) all
Engines shall have on average (i.e., the total number of hours divided by
the total number of engines) available operating hours until (y) the next
scheduled "hot section" inspection, and (z) next scheduled CAMP Inspection,
both of not less than 50% of the total operating hours respectively
available between such hot section inspection or CAMP Inspection.
(b) Lessee shall have the right to return to Lessor engines or parts
thereof different from the Engines leased to Lessee hereunder subject to
the following conditions. Any substituted engine or part thereof shall be
of the same manufacture and the same or improved utility, performance and
efficiency, shall be suitable for use on the Airframe and shall have a
value and utility at least equal to the Engine or part thereof leased
hereunder and shall otherwise comply with the return conditions set forth
in (a) above. Upon return Lessee shall transfer good and marketable title
to such substitute engine or part thereof, free and clear of all
encumbrances, evidenced by a warranty bill of sale and supported by an
opinion of counsel as to the absence of recorded liens in form and
substance satisfactory to Lessor. Upon receipt of such bill of sale and
opinion of counsel, and compliance with all other conditions set forth
herein, Lessor shall transfer to Lessee title to the Engine or part thereof
for which substitution is being made as is, where is and with all faults,
without warranty and without recourse as to condition, but shall provide
Lessee with a bill of sale which provides a warranty of ownership and
freedom from Lessor's Liens.
<PAGE>
-8-
(c) In the event that such Engines do not meet the conditions set
forth in paragraph (a) (iii) hereinabove, Lessee shall pay Lessor an amount
equal to the sum of (i) the product of: the current estimated cost of the
next scheduled hot section inspection (including in such estimated cost,
all required replacement of life limited parts) multiplied by the fraction
wherein the numerator shall be the remainder (0 if negative) of (x) the
actual number of hours of operations since the previous hot section
inspection for both Engines, added together, minus (y) the total operating
hours allowable between hot section inspections, and the denominator shall
be the total operating hours allowable between hot section inspections,
plus (ii) the product of: the current estimated cost of the next scheduled
CAMP inspection (including in such estimated cost, all required replacement
of life limited parts) multiplied by the fraction wherein the numerator
shall be the remainder (0 if negative) of (x) the actual number of hours of
operations since the previous CAMP inspection for both Engines, added
together minus (y) the total operating hours allowable between CAMP
inspections, and the denominator shall be the total operating hours
allowable between CAMP inspections. All prorated inspection charges, if
any, shall be payable as Supplemental Rent and shall be due upon
presentation to Lessee of an invoice setting forth in reasonable detail,
the calculation of such amounts due including the names of all sources used
for the required cost estimates. Unless both Lessor and Lessee agree to
alternative source(s), the manufacturer of the Engines shall be used as the
source for all cost estimates.
(d) Fuel, Manuals. Upon the return of the Airframe in accordance
---- -------
with this Section 8(d), (i) Lessee shall cause each fuel tank to contain
the same quantity of fuel as was contained in such tanks when such Airframe
was delivered to Lessee on the Delivery Date (which shall be presumed to be
50 percent (50%) of full capacity unless otherwise specified on the
Delivery Date) or, in the case of differences in such quantity, an
appropriate adjustment will be made by payment, at the then current market
price of fuel by Lessee to Lessor, or Lessor to Lessee, as appropriate, and
(ii) Lessee shall deliver to Lessor all logs, manuals and data and
inspection, modification and overhaul records required to be maintained
with respect thereto under applicable rules and regulations of the FAA.
(e) Propellers. The provisions of paragraphs (a)(iii) (but with
----------
respect to scheduled overhauls rather than hot-section or CAMP
inspections), (b) and (c) of this Section 8 shall be deemed to apply to the
Propellers with similar effect as provided therein to Engines.
(f) Delivery Receipt. Upon the return of the Aircraft to Lessor in
-------- -------
accordance with the provisions of this Lease, the parties shall execute a
delivery receipt whereby Lessor acknowledges its acceptance of the Aircraft
and that the aircraft meets the conditions specified in the Lease for
return. Following such redelivery, Lessee shall have no further obligation
to Lessor in respect of the condition of the Aircraft.
<PAGE>
-9-
9. Liens
-----
Lessee will not directly or indirectly create, incur, assume or suffer to
exist any mortgage, pledge, lien, charge, encumbrance, lease, security interest
or claim ("Lien" or "Liens") on or with respect to the Airframe, the Engines or
any Part thereof, Lessor's title thereto or any interest of Lessor therein (and
Lessee will promptly, at its own expense, take such action as may be necessary
duly to discharge any such Lien), except (a) the respective rights of Lessor and
Lessee as herein provided, (b) the rights of others under agreements or
arrangements to the extent expressly provided by the terms of Sections 11 and 16
hereof, (c) Lessor's Liens, (d) Liens for taxes either not yet due or being
contested by Lessee (or any Permitted Sublessee) in good faith (and for the
payment of which adequate reserves in accordance with generally accepted
accounting principles have been provided), with due diligence and by appropriate
proceedings so long as such proceedings do not involve any danger of sale,
forfeiture or loss of the Airframe or any Engine or interest therein, (e)
material supplier's mechanic's, worker's, repairer's, employee's or other like
Liens arising in the ordinary course of business for amounts and payment of
which is either not yet delinquent or is being contested in good faith (and for,
the payment of which adequate reserves in accordance with generally accepted
accounting principles have been provided) so long as such proceedings do not
involve any danger of the sale, forfeiture or loss of the Airframe or any Engine
or interest therein, and (f) Liens arising out of judgments or awards against
Lessee with respect to which at the time an appeal or proceeding for review
shall be progressing and there shall have been secured a stay of execution
pending such appeal or proceeding for review.
10. Taxes
-----
Lessee agrees to pay and to indemnify Lessor for, and hold Lessor harmless
from and against, all license and registration fees, income franchise, receipts,
sales, use, excise, personal property, ad valorem, value added, leasing, leasing
use, stamp, landing, airport use or other taxes, levies, imports, duties,
charges, or withholdings of any nature, together with any penalties, fines or
interest thereon ("Impositions"), arising out of the transactions contemplated
by this Lease and imposed against Lessor, Lessee or the Aircraft, the Airframe,
the Engines or any Part thereof by any Federal, state, local or foreign
government or other taxing authority upon or with respect to the Aircraft, the
Airframe, the Engines, or any Part thereof or upon the sale, purchase,
ownership, delivery, leasing, possession, use, operation, return, transfer or
other disposition thereof or upon or with respect to this Lease, unless, and
only to the extent that, Lessee shall have given to Lessor written notice of any
such Imposition, which notice shall state that such Imposition is being
contested by Lessee in good faith with due diligence and by appropriate
proceedings and independent counsel selected by Lessee and reasonably acceptable
to Lessor shall not have determined in his opinion that the nonpayment of any
such tax or the contest of any such payment in such proceedings involves a
danger of sale, forfeiture or loss of the Airframe or any Engine or interest
therein. If a claim is made against Lessee or Lessor for any imposition, the
party receiving notice of such claim shall promptly notify the other, but the
failure of either party to so notify the other shall not relieve Lessee of its
obligation under this Section to
<PAGE>
-10-
indemnify Lessor, unless such failure prevents or impairs contest of such claim.
Notwithstanding anything to the contrary contained herein, Lessee shall have no
liability for (i) Impositions on, based on, or measured by or with respect to
net income or receipts, gross income, capital, net worth, franchise, or conduct
of business of Lessor (other than any taxes in the nature of sales, use, value
added, or similar taxes), (ii) Impositions imposed in connection with any
voluntary or involuntary sale, assignment, transfer or other disposition by
Lessor except to the extent such transfer is taken in connection with or by
reason of any Event of Default that has occurred and is continuing or any
exercise of the remedies as provided under Section 19 of this Lease, (iii)
Impositions to the extent incurred or imposed in respect of any period after (A)
the expiration or earlier termination of this Lease with respect to the Aircraft
and (B) delivery of possession of the Aircraft to Lessor pursuant to the terms
of the Lease upon such expiration or termination or upon commencement of Lessor
requested work pursuant to Section 8(e) of this Lease following expiration or
termination, (iv) Impositions which result from Lessor's engaging in
transactions other than those permitted or contemplated by this Lease, (v)
Impositions which have been included in Cost or Capitalized Cost, and (vi)
Impositions dealt with in Section 17 hereof.
11. Registration, Maintenance and Operation; Compliance and Use; Replacement
------------------------------------------------------------------------
Parts; Additions; Aircraft Marking
----------------------------------
(a) Registration, Maintenance and Operation. Lessee, directly or through
---------------------------------------
any Permitted Sublessee, at its own cost and expense, shall (i) cause the
Aircraft to be duly registered under the Federal Aviation Act at all times
from and after the Delivery Date in the name of Lessor except as otherwise
required by the FAA, (ii) maintain, inspect, service, repair, overhaul and
test the Airframe and each Engine in the same manner and with the same care
used by Lessee (or Permitted Sublessee if applicable) with respect to
similar aircraft and engines owned by Lessee (or Permitted Sublessee if
applicable) and utilized in similar circumstances, and in accordance with
(w) all maintenance manuals initially furnished with the Aircraft,
including any subsequent amendments or supplements to such manuals issued
by the manufacturer from time to time, (x) Lessee's (or any Permitted
Sublessee's) FAA approved maintenance program, (y) all "airworthiness
alerts" and Airworthiness Directives issued by the FAA or similar
regulatory agency having jurisdictional authority, and (z) incorporate all
"mandatory" or "alert service" bulletins published by the Airframe or
Engine or component manufacturer; (iii) maintain all records, logs and
other materials required by the FAA to be maintained in respect of the
avionics, Airframe and each Engine or by the manufacturer thereof for
enforcement of any warranties; (iv) promptly furnish to Lessor such
information as may be required to enable Lessor to file any reports
required by any governmental authority as a result of Lessor's ownership of
the Aircraft; and (v) operate the Aircraft exclusively within the United
States of America and Canada. All maintenance procedures required by this
Section 11(a) shall be undertaken and completed only by properly trained,
licensed, and certified maintenance sources and maintenance personnel, so
as to keep the Airframe and each Engine in as good operating condition as
when delivered to Lessee hereunder, ordinary wear and tear excepted, and
<PAGE>
-11-
so as to keep the Aircraft in such operating condition as may be necessary
to enable the airworthiness certification of such Aircraft to be maintained
in good standing at all times under the Federal Aviation Act.
(b) Compliance and Use. Lessee agrees that the Aircraft will be
---------- --- ---
maintained, used and operated in compliance with any and all statutes,
laws, ordinances, regulations and mandatory standards or directives issued
by any governmental agency applicable to the maintenance, use or operation
thereof, in compliance with any airworthiness certificate, license or
registration relating to the Aircraft issued by any agency and in a manner
that does not modify or impair any existing warranties on the Aircraft or
any part thereof. Lessee will, and will cause any Permitted Sublessee to,
operate the Aircraft solely in the conduct of its business and not operate
or permit the Aircraft to be operated (i) at any time or in any geographic
area when insurance required by the provision of Section 14 hereof shall
not be in effect, or (ii) in a manner wherein the predominance of use
during any consecutive twelve month period would be for purposes other than
transportation for Lessee, or any Permitted Sublessee, or in a manner, for
any time period, such that Lessor (or a third party not permitted by the
terms of this Lease) shall be deemed to have "operational control" of the
Aircraft. Throughout the Term of this Lease, the possession, use and
maintenance of the Aircraft shall be at the sole risk and expense of Lessee
and the Aircraft shall be based at the Principal Location set forth in
Exhibit B. In no event will the Aircraft be principally based outside the
United States. At all times the Aircraft will be operated only by duly-
qualified, currently-certified pilots or pilots possessing the minimum
total pilot hours required for certification by the FAA and shall not be
used for the transport of contraband.
(c) Replacement Parts. Lessee, directly or through any Permitted
----------- -----
Sublessee, at no cost or expense to Lessor, will promptly replace all parts
which may from time to time become worn out, lost, stolen, destroyed,
seized, confiscated, damaged beyond repair or permanently rendered or
declared unfit for use for any reason whatsoever (such substituted Parts,
when intended to be permanent replacement Parts are hereinafter called
"Replacement Parts"). In addition, in the ordinary course of maintenance,
service, repair, overhaul or testing, Lessee may, directly, or through any
Permitted Sublessee, at no cost and expense to Lessor, remove serviceable
Parts, provided that such serviceable Parts shall be replaced as promptly
as practicable. All Replacement Parts shall be free and clear of all 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. All Parts at any time removed from the Airframe or any Engine shall
remain the property of the Lessor, no matter where located, until such time
as such Parts shall be replaced by Parts which have been incorporated or
installed in or attached to the Airframe or such Engine and which meet the
requirements for Replacement Parts specified above. Immediately upon any
Replacement Part becoming incorporated or installed in or attached to the
Airframe or any Engine as above provided, without further act, (i) title to
the removed Part shall thereupon vest in Lessee, free and clear of all
rights
<PAGE>
-12-
of Lessor and shall no longer be deemed a Part hereunder, (ii) title to
such Replacement Part shall thereupon vest in Lessor, and (iii) such
Replacement Part shall become subject to this Lease and be deemed part of
the Airframe or Engine, as the case may be, for all purposes hereof to the
same extent as the Parts originally incorporated or installed in or
attached to the Airframe or such Engine. Lessee or Permitted Sublessee may
use temporary replacement parts provided that such parts are replaced with,
or become, Replacement Parts, as soon as practicable.
(d) Additions, Discretionary Modification. Lessee (or any Permitted
--------- ------------- ------------
Sublessee), at is own expense, may from time to time make such alterations
and modification in and additions (any part so added is herein referred to
as an "Addition") to the Airframe, or any Engine as Lessee (or any
Permitted Sublessee) may deem desirable in the proper conduct of its
business, including removal of Parts which Lessee (or any Sublessee) deems
to be obsolete or no longer suitable or appropriate for use on the
Airframe, or such Engine; provided that no such alteration, modification,
removal or addition impairs the condition or airworthiness of the Airframe
or such Engine or diminishes the value or utility of the Airframe or such
Engine below the value or utility thereof immediately prior to such
alteration, modification, or addition assuming the Airframe or such Engine
was then in the condition required to be maintained by the terms of this
Lease. Lessee agrees to notify Lessor in writing thirty (30) days prior to
making any change in the configuration (other than changes in configuration
mandated by the FAA) of the Aircraft from that in effect at the time the
Aircraft is accepted by Lessee hereunder, and in the event of such change
or modification of configuration, upon the request of Lessor to restore the
Aircraft to the configuration in effect on the Delivery Date, or at
Lessor's option to pay Lessor an amount equal to the reasonable cost of
such restoration. All Additions incorporated or installed in or attached or
added to the Airframe or an Engine as the result of such alteration,
modification or addition (except those Parts which Lessee has leased from
others and which may be removed by Lessee pursuant to the next sentence)
shall, without further act, become the property of, and title thereto shall
vest in, Lessor. Notwithstanding the foregoing sentence, Lessee (or any
Permitted Sublessee) may, at any time during the Term, so long as no
Default or Event of Default shall have occurred and be continuing, remove
or suffer to be removed any Addition provided that such Addition (i) is in
addition to, and not in replacement of or substitution for, any Part
originally incorporated or installed in or attached to such Airframe or any
Engine at the time of delivery thereof hereunder or any Part in replacement
of or substitution for any such Part, (ii) is not required to be
incorporated or installed in or attached or added to the Airframe or any
Engine pursuant to the terms of this Section 11 and (iii) can be removed
from the Airframe or such Engine without impairing the airworthiness or
diminishing the value and utility of the Airframe or such Engine which the
Airframe or such Engine would have had at such time had such alteration,
modification or addition not occurred. Upon the removal thereof as provided
above, such Addition shall no longer be deemed the property of Lessor or
part of the Airframe or Engine from which it was removed and shall become
the property of Lessee (or, if applicable, any Permitted Sublessee). Any
<PAGE>
-13-
addition not so removed prior to return of the Aircraft shall remain the
property of Lessor.
(e) Aircraft Marking. Lessee agrees, at its own cost and expense, to
-------- -------
(i) cause the Airframe and the Engines to be kept numbered with the
identification or serial numbers specified in Schedule 1 to this Lease;
(ii) prominently display on the Aircraft that N number, and only that N
number, specified in Schedule 1; and (iii) at Lessor's request, affix and
maintain in the Airframe adjacent to the airworthiness certificate and on
each Engine a name plate naming Lessor as owner and identifying the rights
under this Lease of Lessor. Lessee will replace promptly any such name
plate which may be removed, defaced or destroyed. Lessee may cause the
Aircraft to be painted in the livery and with the logo of the Lessee. The
reference to Lessee in this paragraph shall also refer to any Permitted
Sublessee.
12. Inspection
----------
Lessor shall have the right, but not the duty, to inspect the Aircraft at
any reasonable time wherever located. In the event Lessor desires to inspect the
Aircraft, Lessee shall make the Aircraft and Lessee's records pertaining the
Aircraft available to Lessor for inspection, at a time which does not interfere
with the operation of the Aircraft by Lessee (or Permitted Sublessee) and is
acceptable to all parties.
13. Loss or Destruction; Requisition of Use
---------------------------------------
(a) Event of Loss with Respect to the Aircraft. Upon the occurrence
----- -- ---- ---- ------- -- --- --------
of an Event or Loss with respect to the Airframe, or any Engine (whether or
not then installed on such Airframe), Lessee shall notify Lessor thereof
within fifteen (15) days of the date thereof. On the Basic Rent Date next
following the date of an Event of Loss with respect to the Airframe or the
Airframe and any Engines (or, if such Event of Loss occurs less than thirty
(30) days prior to the next Basic Rent Date within thirty (30) days after
such Event of Loss), Lessee shall pay to Lessor an amount ("Event of Loss
Payment") equal to the Casualty Value of the Aircraft determined as of the
date set forth in the Casualty Value schedule which is the date, or which
immediately precedes the date, as the case may be, of the Event of Loss,
together with any Rent then due, prorated to the date of payment, plus
interest, if any, on such sum as provided in Section 3(c)(iii) from the
date due to the date of payment. Upon making such Casualty Value payment in
respect thereto and paying all Rent due and owing with respect thereto,
Lessee's obligation to pay further Basic Rent for the Aircraft for the
period commencing subsequent to such Event of Loss shall cease, but
Lessee's obligation to pay Supplemental Rent, if any, for the Aircraft
shall remain unchanged. Following Payment of the Event of Loss payment in
accordance with the provisions of this Section 13(a), Lessor shall transfer
title to the Airframe and the Engines (whether or not then installed on the
Airframe) to Lessee unless title thereto is required to be conveyed to an
insurance carrier in order to settle an insurance claim relating to the
Event of Loss giving rise to such payment. Such transfer shall furthermore
be made in accordance with the provisions of Section 22(h). Following such
transfer, Lessee shall have the right to receive any and all amounts
<PAGE>
-14-
payable by all Persons in respect of the Aircraft and the Engines and shall
be entitled to recover possession of the Aircraft unless possession thereof
is required to be delivered to an insurance carrier in order to settle an
insurance claim relating to the Event of Loss. Lessor shall also return to
Lessee unearned Basic Rent (that portion of Basic Rent paid by Lessee for
the period following the date the Casualty Value is received by Lessor to
the next Basic Rent Date, if any).
With respect to a Requisition of Use of the Airframe or the Airframe
and the Engines then installed thereon, Lessor agrees that after Lessor has
received the Event of Loss Payment, Lessee shall receive and retain all
amounts paid by any governmental authority up to the Event of Loss Payment
paid by Lessee to Lessor hereunder, and any excess shall be paid over and
retained by Lessor; and Lessor shall transfer title to any Engine not
installed on the Airframe to Lessee immediately upon receipt of the Event
of Loss Payment. Such transfer shall furthermore be made in accordance with
the provisions of Section 22(h). Lessor shall be under no duty to Lessee to
pursue any claim against any governmental authority, but Lessee may at is
own cost and expense pursue the same.
(b) Event of Loss with Respect to an Engine. Notwithstanding anything
----- -- ---- ---- ------- -- -- ------
in (a) above to the contrary, upon the occurrence of an Event of Loss with
respect to an Engine whether or not said Engine is then installed on the
Airframe under circumstances in which there has not occurred an Event of
Loss with respect to the Airframe, Lessee directly, or by any Permitted
Sublessee, shall give Lessor and Lender, if any, prompt written notice
thereof and shall, within thirty (30) days after the occurrence of such
Event of Loss, duly convey to Lessor, as replacement for the Engine with
respect to which such Event of Loss occurred, title to a similar engine of
the same make and model number as that suffering the Event of Loss, free
and clear of all Liens and having a value and utility at least equal to,
and being in as good operating condition as, the Engine with respect to
which such Event of Loss occurred, assuming such Engine was of the value
and utility and in the condition and repair required by the terms hereof
immediately prior to the occurrence of such Event of Loss. Prior to or at
the time of any such conveyance, Lessee, at its own expense, will furnish
Lessor with such documents to evidence such conveyance as Lessor shall
reasonably request, including, without limitation, a bill of sale and
opinion of counsel. Upon full compliance by Lessee with the terms of this
Section 13(b), Lessor will transfer to Lessee title to the Engine with
respect to which such Event of Loss occurred. such transfer shall
furthermore be made in accordance with the provisions of Section 22(h). For
all purposes hereof, each such replacement Engine shall, after such
conveyance, be deemed part of the property leased hereunder, shall be
deemed an "Engine" as defined herein and shall be deemed part of the
Aircraft. No Event of Loss with respect to an Engine under the
circumstances contemplated by the terms of this Section 13(b) shall result
in any reduction in or delay in payment of Basic Rent.
<PAGE>
-15-
(c) Risk of Loss; No Release of Obligations. Lessee shall bear the
---- -- ---- -- ------- -- -----------
risk of loss and shall not be released from its obligations hereunder in
the event of any damage to the Airframe, the Engines or any Part thereof or
any Event of Loss relating thereto.
(d) Application of Proceeds in an Event of Loss. Provided no Event of
----------- -- -------- -- -- ----- -- ----
Default shall exist, it is agreed that all insurance payments received at
the result of the occurrence of an Event of Loss with respect to the
Airframe and any installed Engine will be applied in reduction of the
Lessee's obligation to pay the Event of Loss Payment, if not already paid
by the Lessee and the balance, if any, of such payment remaining thereafter
will be paid over to, or retained by, Lessee; and any amount payable to
Lessee shall not be paid to Lessee if at the time of such payment an Event
of Default shall have occured and be continuing, but shall be held by the
Lessor as security for the obligations of Lessee under this Lease and such
amount shall be paid to Lessee at such time as there no longer exists any
Event of Default.
14. Insurance
---------
(a) Required Insurance. Lessee will at all times keep the Aircraft
-------- ---------
fully insured against such perils and risks as are customarily insured
against by owners or operators of similar equipment engaged in the same or
similar business, similarly situated with Lessee (or if applicable,
Permitted Sublessee). Without limiting the generality of the foregoing,
Lessee agrees at its own expense to effect the following insurance
throughout the term hereof:
(i) "All Risk" Aviation Hull insurance including comprehensive
ground and flight coverage, which shall be at least equal to the
Casualty Value of the Aircraft;
(ii) Aviation Allied Perils insurance covering hull and public
liability and insuring against strikes, riots, civil commotions or
labor disturbances, any malicious act or act of sabotage, hi-jacking
or any unlawful seizure or wrongful exercise of control of the
Aircraft or crew in flight (including any attempt at such seizure or
control) made by any person or persons on board the Aircraft acting
without the consent of the Lessor or Lessee when the Aircraft is
operated in the United States or Canada. In the event the Aircraft is
operated at any time for any reason outside of the United States or
Canada, Lessee shall provide and maintain full Aviation War and Allied
Perils insurance covering hull and public liability insuring against
the following perils: 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, strikes, riots, civil commotions or
labor disturbances, 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, any malicious act or act of sabotage, confiscation,
nationalization, seizure, restraint,
<PAGE>
-16-
detention, appropriation, requisition for title or use by or under the
order of any government (whether civil military or de facto), other
than the United States of America, or public or local authority,
hi-jacking or any unlawful seizure or wrongful exercise of control of
the Aircraft or crew in flight (including any attempt at such seizure
or control) made by any person or persons on board the Aircraft acting
without the consent of the Lessor or Lessee;
(iii) "All Risk" insurance with respect to any Engine(s) and/or Parts
furnished hereunder or in relation to the Aircraft, while such items
are removed from the Aircraft; and
(iv) Aircraft Liability insurance including bodily injury, property
damage, passenger liability and contractual liability insurance (but
excluding manufacturer's products and completed operations exposures),
which shall protect and indemnify Lessee against any claims arising in
connection with any loss, damage or injury arising out of any
occurrence, cause or operations anywhere in the world and/or
operations incidental thereto in the amount of at least $100,000,000
combined single limit per occurrence.
(b) Special Requirements as to Insurers, Form and Content. All such
------- ------------ -- -- -------- ---- --- -------
insurance taken out of or effected pursuant to the provisions hereof shall
be subject to the following:
(i) Lessee will place all insurance with insurers or aviation
underwriting groups which are substantially similar in reputation and
financial responsibility and condition to insurers or aviation
underwriting groups used by a majority of United States Group II and
III Airlines as defined by the Department of Transportation in 14 CFR
241 or other insurers or aviation underwriting groups reasonably
satisfactory to Lessor; and all insurance policies shall provide that
they are payable in U.S. dollars and shall provide for a deductible
amount not in excess of $200,000;
(ii) each policy shall provide that it will not lapse (other than by
expiration of the policy), terminate, be cancelled or materially
modified without thirty (30) days prior written notice to Lessor
(except in the case of Allied Perils or War Risk coverage the period
shall be 7 days or such shorter period from the date of notice as is
customary in the aviation insurance market), and that there shall be
no recourse against Lessor for payment of premiums, commissions or
other consents;
(iii) all insurance shall insure the interests of Lessor regardless
of any breach or violation by any party or entity (other than Lessor)
of any warranties, declarations or conditions contained in such
policies;
(iv) all insurance shall provide that all provisions, except the
limit of liability, shall operate as if there were a separate policy
covering each insured;
<PAGE>
-17-
(v) all insurance shall name Lessee and Lessor as additional insureds
and loss payees as their respective interests may appear;
(vi) all insurance shall be primary and without the right of
contribution of other insurance which may be available to or by
Lessor;
(vii) all insurance shall contain a waiver of subrogation in favor of
Lessor providing that insurers will not seek to recover claim payment
from Lessor via subrogation;
(viii) insurers shall waive any right to set off, recoup,
counterclaim, or otherwise deduct whether by attachment or otherwise,
any payment due or to become due on any required insurance; and
(ix) each policy shall be endorsed with a U.S.A. "Service of Suit"
clause if insurance is placed with insurers domiciled outside of the
United States.
(c) Evidence of Insurance. Lessee shall deliver to Lessor, through an
-------- -- ---------
insurer authorized representative, prior to the commencement of this Lease,
and prior to any policy expiration date, written evidence of such insurance
satisfactory to Lessor.
(d) Prosecution of Claims. If an Event of Default exists or if the
----------- -- ------
Event of Loss Payment has not been made when due, Lessor is hereby
authorized, but not required in its own name and/or Lessee's name to
demand, collect, receipt for, and prosecute all necessary actions in the
courts to recover any and all insurance moneys which may become due and
payable under any insurance. An insured claim payment not exceeding
$200,000 shall be payable to Lessee for the repair, salvage or other
charges involved in such claim provided, however, that if there exists an
Event of Default any insured claim payment shall be payable to Lessor. Any
insured claim payment exceeding $200,000 whether or not an Event of Default
may exist shall be payable to Lessor.
15. Indemnification
---------------
Lessee assumes liability for and hereby agrees to indemnify, protect, save
and keep harmless Lessor from and against any and all liabilities, obligations,
losses, damages, penalties, claims (including, without limitation, claims
involving or alleging Lessor's negligence and claims involving strict or
absolute liability in tort), actions, suits, costs, expenses and disbursements
(including, without limitation, legal fees and expenses) of any kind and nature
whatsoever excluding, however, impositions and claims involving taxes under
Sections 10 and 17 ("Claim(s)") which may be imposed on, incurred by or asserted
against Lessor, whether or not Lessor shall also be indemnified as to any such
Claim by any other Person, in any way relating to or arising out of this Lease
or any documents contemplated hereby, or the performance or enforcement of any
of the terms hereof or thereof, or in
<PAGE>
-18-
any way relating to or arising out of the manufacture, purchase, acceptance,
rejection, ownership, delivery, lease, sublease, possession, use, operation,
maintenance, condition, registration, sale, return, storage or other disposition
of the Aircraft or any part thereof or any accident in connection therewith
(including, without limitation, latent and other defects, whether or not
discoverable and any claim for patent, trademark or copyright infringement);
provided, however, that Lessee shall not be required to indemnify Lessor for (a)
any Claim in respect of the Aircraft arising after possession of the Aircraft
has been re-delivered to Lessor in accordance with Section 8 hereof, or (b) any
Claim resulting from acts which would constitute the willful misconduct or
active negligence of Lessor or (c) any Claim by Lessee against Lessor for breach
of this Lease. If any Claim is made against Lessee or Lessor, the party
receiving notice of such Claim shall promptly notify the other, but the failure
of the party receiving notice to so notify the other shall not relieve Lessee of
any obligation hereunder, unless such failure detrimentally affects Lessee's
ability to defend such claim. LESSEE AGREES THAT LESSOR SHALL NOT BE LIABLE TO
LESSEE FOR ANY CLAIM CAUSED DIRECTLY OR INDIRECTLY BY THE INADEQUACY OF THE
AIRCRAFT OR ANY PART THEREOF FOR ANY PURPOSE OR ANY DEFICIENCY OR DEFECT
THEREIN, THE USE, MAINTENANCE OR ANY SERVICING OR ADJUSTMENTS THERETO, OR ANY
DELAY IN PROVIDING OR FAILURE TO PROVIDE ANY OF THE FOREGOING, OR ANY
INTERRUPTION OR LOSS OF SERVICE OR USE THEREOF, OR ANY LOSS OF BUSINESS, ALL OF
WHICH SHALL BE THE RISK AND RESPONSIBILITY OF LESSEE.
The liability of Lessee to make indemnification payments pursuant to the
Section 15 shall, notwithstanding any expiration or termination of this Lease,
continue to exist until such indemnity payments are made by Lessee in full.
16. Sublease; Possession
--------------------
Lessee shall not sublease, or otherwise in any manner deliver, relinquish
or transfer possession of the Airframe or any Engine leased hereunder to any
Person without Lessor's prior written consent (which consent shall not be
unreasonably withheld or delayed), provided, however, so long as Lessee shall
comply or cause the compliance with the provisions of section 14 hereof, Lessee
or any Permitted Sublessee may, without the prior written consent of Lessor
unless otherwise specifically provided;
(a) (i) subject the Airframe or any Engine to the United States Civil
Reserve Air Fleet Program or contracts with the United States Government,
or (ii) enter into a wet lease under which Lessee or a Permitted Sublessee
has effective control of the Aircraft in the ordinary course of Lessee's or
such Permitted Sublessee's business which shall not be considered a
transfer of possession hereunder;
(b) deliver possession of the Aircraft, the Airframe, any Engine or
any Part thereof to the manufacturer thereof for testing or other similar
purposes or to any organization for services, repair, maintenance or
overhaul work on the Aircraft, the Airframe or such Engine or any Part
thereof or for alterations or modifications in or additions to the
Aircraft, the Airframe or such Engine, to the extent required or permitted
by the terms of this Lease;
<PAGE>
-19-
(c) install an Engine on an Airframe owned by or leased to Lessee or a
Permitted Sublessee or purchased by Lessee or such Permitted Sublessee
subject to a lease, conditional sale or other security agreement, provided
--------
that such Airframe is free and clear of all Liens except the rights of the
parties to the lease or conditional sale or other security agreement
covering such Airframe and such Liens as are permitted by Section 9 and
within a reasonable time after a request by Lessor, Lessee will notify the
requesting entity of the location of the Engine;
(d) transfer possession of the Airframe and/or any Engine or Engines
to the United States of America or any instrumentality or agency thereof in
accordance with applicable laws, rules, regulations or orders, provided
that such transfer of possession does not continue beyond the Expiration
Date;
(e) so long as no Default or Event of Default shall have occurred and
be continuing, sublease the Airframe and/or any Engine or Engines to any
Permitted Sublessee listed on Exhibit G hereto;
provided that (i) the rights of any transferee who received possession by reason
- --------
of a transfer permitted by this Section (other than the transfer of an Engine
which is deemed an Event of Loss), and any sublease permitted by this Section
16, shall be subject and subordinate to all the terms of this Lease, and Lessee
shall remain primarily liable hereunder for the performance of all of the terms
of this Lease to the same extent as if such sublease or transfer had not
occurred, (ii) any such sublease shall include provisions for the use,
maintenance and insurance of the Aircraft at least as favorable to the sublessor
as those contained in this Lease benefiting Lessor, and (iii) any such
instrument of transfer or sublease shall contain provisions pursuant to which
the Airframe or an Engine shall not be operated, used or located, or suffered to
be operated, used or located (x) outside the United States or Canada or
principally located outside the United States unless such Airframe or Engine is
operated or used by the government of the United States and such government
assumes liability for any damages, loss, destruction or failure to return
possession of such Airframe or Engine at the end of the term of such contract or
for injury to persons or damage to property of others arising out of such use,
(y) at any time in any country with which the United States Government does not
maintain at such time diplomatic relations or (z) at any time in any area
excluded from coverage by any insurance required by the terms of Section 14
hereof.
In the event Lessor shall have received from the lessor or secured party of
any Airframe leased to the Lessee or a Permitted Sublessee or purchased by the
Lessee or a Permitted Sublessee subject to a conditional sale or other security
agreement, a written agreement which provides that the lessor or secured party
under such agreement shall not acquire or claim any right, title or interest in
any Engine, and the lease or conditional sale or other security agreement
covering such Airframe also covers an engine or engines owned by the lessor
under such lease or subject to a security interest in favor of such secured
party under such conditional sale or other security agreement, Lessor
<PAGE>
-20-
hereby agrees for the benefit of such lessor or secured party that Lessor will
not acquire or claim, as the result of such engine being installed on the
Airframe at any time while such engine is owned by such lessor or is subject to
such conditional sale or other security agreement or security interest in favor
of such secured party, any right, title, or interest in such engine. The
existence of a clause substantially similar to this clause in such lease,
conditional sale or other security agreement whereby the Lessor or secured
party, as the case may be, is substituted for Lessor shall suffice as the
required written agreement.
17. Tax Treatment; Special Tax Indemnification
------------------------------------------
(a) This Lease has been entered into on the assumption that the Lessor
will have the following tax consequences (herein referred to as "Assumed
Tax Consequences"):
(i) for tax purposes, the transaction contemplated by this Lease will
be treated as a true lease, the Lessor will be treated as the owner
and lessor of the Aircraft, and Lessee will be treated as lessee of
the Aircraft;
(ii) in the hands of Lessor, the Aircraft will constitute "recovery
property" which is "7-year property" within the meaning of Section 168
of the Code;
(iii) Lessor will be entitled to depreciation deductions under
Section 168 of the Code, with respect to at least 100% of Equipment
Cost, salvage value will be zero for such purposes, the full amount of
such depreciation deductions ("Depreciation Deductions") will be
allowed to Lessor beginning in the year placed in service by Lessor,
and there will be no recapture of such Depreciation Deductions by
Lessor;
(iv) the amounts of interest payable on any financing relating to the
Aircraft ("Interest Deductions") shall be deductible under Section 163
of the Code on an accrual basis;
(v) maintenance of the Aircraft, equipment changes and replacement of
Parts in the Aircraft by Lessee will not result in any tax
consequences to Lessor;
(vi) Lessor's combined Federal, state and local tax rate for items of
ordinary income is 34%;
(vii) Lessee's payments of Rent with respect to the Aircraft will
constitute rental income to Lessor, for tax purposes, in the amounts
and for the respective periods determined on the assumption that such
amounts will be includable in Lessor's income, for tax purposes, as
they accrue under the Lease and that such amounts will be the only
income to be realized by the Lessor for tax purposes, from or with
respect to the Aircraft under this Lease, except for Supplemental Rent
and indemnity payments made to Lessor pursuant to
<PAGE>
-21-
this Section, all of which shall be includable in Lessor's income for
tax purposes only if and when they are actually paid to Lessor; and
(viii) Lessor may amortize ratably the transaction expenses which it
incurs in connection with entering into this Lease ("Amortization
Deductions") over a period not longer than the Term.
(b) If by reason of Lessee's acts or omissions Lessor shall not be
entitled to claim or shall lose all or any portion of Depreciation Deductions,
Amortization Deductions or Interest Deductions, as set forth in the Assumed Tax
Consequences, or (i) any Depreciation Deductions are recaptured pursuant to
Section 1245 of the Code or any similar provision, or (ii) the Internal Revenue
Service, any state taxing authority or any court shall conclude that the tax
consequences of this Lease differ in any respect from the Assumed Tax
Consequences (each of the foregoing events being referred to hereinafter as a
"Loss"), then, unless excused by the provisions of Section 17(c) hereof, Lessee
will pay to Lessor, on an After Tax Basis, an amount sufficient to maintain the
Lessor's Net Economic Return, after taking into account additions to tax payable
by Lessor with respect to such Loss, and any tax liabilities incurred by Lessor
in respect of the receipt of such amount, plus, on an After-Tax Basis, any
interest and penalties payable to the Internal Revenue Service and state taxing
authorities with regard to such Loss. Except as otherwise provided in Section
17(e), all amounts payable to Lessor hereunder shall be paid promptly and in any
event within 30 days after receipt by Lessee of a written demand therefore,
accompanied by a written statement describing in reasonable detail the Loss in
question at the computation of the amount so payable.
(c) Notwithstanding anything to the contrary set forth in this Section 17,
any Loss which would otherwise be indemnified by Lessee under such Section 17
shall not be subject to indemnification to the extent that such Loss is a direct
result of the occurrence of any of the following events:
(i) a voluntary or involuntary transfer or other disposition by Lessor of
the Aircraft, other than any such transfer following an Event of Default;
(ii) failure of Lessor to claim all or any portion of the Depreciation
Deductions, the Amortization Deductions, the Interest Deductions, or any
other Federal income tax benefits described in the Assumed Tax Consequences
unless (a) the claim of any such benefit would be inconsistent with any
prior audit adjustment by the Internal Revenue service pursuant to the
context provisions of this Section 17; (b) Lessor shall have furnished
Lessee, at Lessee's sole cost and expense, with an opinion of Lessor's tax
counsel to the effect that a basis, as set forth in ABA Formal Opinion 85-
352, does not exist for such claim or (c) such failure to claim is caused
by a failure of Lessee to take action or provide information to Lessor
required or permitted hereunder;
<PAGE>
-22-
(iii) failure of Lessor to have sufficient gross income to benefit to the
fullest extent from the Depreciation Deductions or the Interest Deductions;
(iv) breach of any of Lessor's representations, warranties or covenants
contained in this Lease, or willful misconduct or gross negligence of
Lessor;
(v) an event which causes Lessee or its insurer to pay the Casualty Value
if such Casualty Value is paid in full;
(vi) the failure of Lessor to take timely action in contesting a claim
made by any taxing authority with respect to the disallowance of any Tax
benefits in such failure shall preclude the right of Lessor to contest such
claim and if such failure was not caused by Lessee's failure to request
action by Lessor after timely receipt of notice from Lessor or to otherwise
comply with the obligations under the contest provisions of this Section;
(vii) the failure of the Lease to constitute a "true lease" for Federal
income tax purposes other than by reason of any act of commission or
omission, any misrepresentations, breach of any agreement, covenant or
warranty by Lessee contained herein or in any related document, any
modification, improvement, alteration, repair, maintenance or addition of
or to the Aircraft or any part thereof, or any disposition of the Aircraft
or any part thereof, or any damage to, destruction of, theft, requisition
or taking of the Aircraft or any part thereof;
(viii) any change, amendment, modification, addition or deletion in, to,
or from the Code, any administrative regulation or ruling pertaining
thereto, or any judicial or administrative interpretation of any of the
foregoing that is enacted or promulgated after the date of Delivery other
than: (y) any change in the Code enacted prior to the Delivery Date; or (z)
any Treasury Regulation published as a temporary or final regulation prior
to the Delivery Date;
(ix) the application of Section 467 of the Code, unless solely by virtue
of a payment by Lessee of an amount of Rent due under the Lease before the
due date thereof;
(x) the status for Federal Income Tax purposes of Lessor;
(xi) the application of any minimum tax or alternative minimum tax; or
(xii) the application of the "mid-quarter convention" within the meaning
of Section 168(d)(4)(C).
(d) If a claim shall be made at any time by the Internal Revenue Service
or state taxing authority which, if successful, would require Lessee to make an
indemnity payment to Lessor under Section 17(b) above,
<PAGE>
-23-
Lessor hereby agrees to take such action in connection with contesting such
claim, including any appeal to review any adverse determination by a court
(other than an appeal to the United States Supreme Court), as Lessee shall
reasonably request in writing from time to time; provided, however, that:
-------- -------
(i) within 30 days after notice by Lessor to Lessee of such claim, Lessee
shall request that such claim be contested;
(ii) Lessor, at is sole option, may forego any and all administrative
appeals, proceedings, hearings and conferences with the Internal Revenue
Service or state taxing authority with respect to such claim and either pay
the tax claimed and or contest such claim in the forum selected by Lessor
(in the manner provided in Section 17(f));
(iii) prior to the Lessor taking any such action in contesting such claim,
Lessee shall have furnished to Lessor, at Lessee's expense, an opinion of
independent tax counsel satisfactory to Lessor to the effect that Lessor is
more likely than not to prevail in contesting such claim;
(iv) Lessee shall have indemnified Lessor in a manner satisfactory to
Lessor for any liability or loss which Lessor may incur as a result of
contesting such claim and shall have agreed to pay to Lessor within 30 days
after written demand from time to time an amount which, on an After-Tax
Basis, shall be equal to all costs and expenses which Lessor may incur from
time to time in connection with contesting such claim, including, without
limitation, reasonable attorneys' and accountants' fees and disbursements,
and the amount of any interest or penalty which may ultimately be payable
as a result of contesting such claims;
(v) Lessor shall be obligated to contest a claim beyond the level of
administrative proceedings only if the amount of the indemnity arising from
such claim should exceed $25,000 Dollars; and
(vi) if Lessor is to pay the tax claimed and then seek a refund, Lessee
will provide Lessor with sufficient funds, interest free and on an After-
Tax Basis, to pay the tax, penalties interest and additions to tax.
(e) If any such claim referred to in Section 17(d) shall be made by the
Internal Revenue Service, and Lessee shall have reasonably requested Lessor to
contest such claim as provided in Section 17(d) and shall have duly complied
with all of the terms of this Section 17, Lessee's liability for indemnification
under this Section 17 shall be deferred until a "determination" of such
liability, as defined in Section 1313(a) of the Code. At such time Lessee shall
become obligated for the payment of any indemnification hereunder resulting from
the outcome of such contest, and Lessor shall become obligated to refund to
Lessee any amount received as a refund by Lessor fairly attributable to advances
by Lessee
<PAGE>
-24-
hereunder, together with any interest received by Lessor on such refund
fairly attributable to such advances. Such obligation of Lessor and Lessee
will first be set off against each other and any difference owing by either
party shall be paid within 30 days after such final determination.
(f) Lessor agrees promptly to notify Lessee in writing of any claim
by the Internal Revenue Service referred to in Section 17(d) and agrees not
to make payment of the tax claimed or to consent to the assessment of any
deficiency relating to such claim for at least 30 days after the giving of
such notice and agrees to give to Lessee any relevant information relating
to such claim which may be peculiarly within the knowledge of Lessor and
otherwise to cooperate with Lessee in good faith in order to contest any
such claim, provided, that Lessor in its sole discretion after good faith
--------
consultation with Lessee may determine the forum of the contest and whether
to pay the tax claimed and seek a refund thereof or not to pay the tax.
(g) Lessee represents, warrants and covenants that neither it nor any
Person controlled by it, in control of it, or under common control with it,
directly or indirectly, nor any Permitted Sublessee will at anytime take
any action or file any return or other document inconsistent with the
Assumed Tax Consequences and that each of such Persons will file such
returns, take such actions and execute such documents as may be reasonable
and necessary to facilitate accomplishment of the intent hereof.
Lessee's obligations under this Section shall continue in full force and effect,
notwithstanding the expiration or earlier termination of the Term of this Lease.
18. Events of Default
-----------------
The term Event of Default, wherever used herein, shall mean any of the
following events under this Lease (whatever the reason for such Event of Default
and whether it shall be voluntary or involuntary, or come about or be effected
by operation of law, or be pursuant to or in compliance with any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body), and each such event of Default shall be
deemed to exist and continue so long as, but only so long as, it shall not have
been remedied.
(a) Lessee shall fail to make any payment of Rent (other than
Supplemental Rent consisting solely of indemnity payments under Section 17
thereof) within five (5) business days after notice from Lessor to Lessee
the same shall be due; or
(b) Lessee shall fail to make any payment of Supplemental Rent
consisting solely of indemnity payments under Section 17 hereof within the
later of (i) the 15th day after such payment of Supplemental Rent shall
have become due and (ii) the fifth day after giving of notice by Lessor to
Lessee that such nonpayment of Supplemental Rent constitutes an Event of
Default; or
<PAGE>
-25-
(c) Lessee shall fail to carry and maintain insurance on or with respect
to the Aircraft in accordance with the provisions of Section 14, provided that
in the case of insurance with respect to which cancellation, change or lapse for
nonpayment of premium shall not be effective as to Lessor for 30 days (seven
days, or such shorter period as may from time to time be customarily obtainable
in the industry, in the case of war risk and allied perils coverage) after
receipt of notice by Lessor of such cancellation, change or lapse, no such
failure to carry and maintain insurance shall constitute an Event of Default
hereunder until the earlier of (i) the date such failure shall have continued
unremedied for a period of 20 days (five days in the case of required war risk
and allied perils coverage) after receipt by Lessor of the notice of
cancellation, change or (ii) such insurance not being in effect as to the Lessor
or Lessee; or
(d) Lessee shall fail to perform or observe any covenant, condition or
agreement (other than that referred to in (a) or (b) above or breach of any
covenant, condition or agreement contained in Section 17 hereof) required to be
performed or observed by it under this Lease or any Operative Agreement,
document or certificate delivered by Lessee in connection herewith, and such
failure shall continue for thirty (30) days after written notice thereof from
the Lessor to Lessee, provided, however, that if Lessee shall have undertaken to
cure any such failure and, notwithstanding the reasonable diligence of Lessee in
attempting to cure such failure, such failure is not cured within said 30 day
period, there shall exist no event of Default for such future time as may
reasonably be required to effect such cure, so long as Lessee is proceeding with
due diligence to cure such failure; or
(e) Any representation or warranty made by Lessee in this Lease or any
Operative Agreement, document or certificate delivered by Lessee in connection
herewith or pursuant hereto (other than those made in Section 17) shall prove to
have been incorrect in any material respect when any such representation or
warranty was made or given (or, if a continuing representation or warranty, at
any material time) and shall remain material; or
(f) Lessee shall cease to be an "air carrier" within the meaning of the
Federal Aviation Act; or
(g) Lessee shall or shall attempt to (except as expressly permitted by the
provisions of this Lease) remove, sell, transfer, encumber, part with possession
of, assign or sublet the Airframe, the Engines or any part thereof, use the
Aircraft for an illegal purpose, or knowingly permit the same to occur; or
(h) Lessee shall commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself under any
bankruptcy, insolvency or other similar law now or hereafter in effect or
seeking the appointment of a trustee, receiver, liquidator, custodian or other
similar official of it, the Aircraft or a
<PAGE>
-26
substantial portion of its property, or shall consent to any such relief or to
the appointment of or taking possession of the Aircraft by any such official or
agency in an involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall take any
corporate action to authorize any of the foregoing; or an involuntary case or
other proceeding shall be commenced against Lessee seeking liquidation,
reorganization or other relief with respect to it under any bankruptcy,
insolvency or other similar law now or hereafter in effect, or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official or agency of Lessee the Aircraft or a substantial portion of its
property and such involuntary case or other proceeding shall remain undismissed
and unstayed for a period of 90 days; or
(i) Lessee shall fail to make any payment when due of any
indebtedness for borrowed money or basic rent under any lease of aircraft,
provided that the obligation in respect of which such failure to pay has
occurred (when aggregated with other obligations having a payment default)
shall be in an outstanding amount in excess of $20,000,000 (or in the case
of a lease, the present value of the outstanding basic rent payments
thereunder, when aggregated with other obligations having a payment
default, shall exceed $20,000,000) and such failure to pay shall have
resulted in the acceleration of such outstanding amount.
19. Remedies
--------
(a) Upon the occurrence of any Event of Default and so long as the
Event of Default shall be continuing, Lessor may, at its option, declare
this Lease to be in default by written notice to such effect given to
Lessee, and at any time thereafter, Lessor may exercise one or more of the
following remedies, as Lessor in its sole discretion shall lawfully elect:
(i) proceed by appropriate court action, either at law or in equity,
to enforce performance by Lessee of the applicable covenants of this
Lease or to recover damages for the breach thereof;
(ii) by notice in writing terminate this Lease, whereupon all rights
of Lessee to the use of the Aircraft or any part thereof shall
absolutely cease and terminate but Lessee shall remain liable as
hereinafter provided; and whether or not this Lease is terminated, if
so requested by Lessor, Lessee shall at its expense promptly return
the Aircraft to the possession of Lessor at such place as Lessor shall
designate and in the condition required as if the Aircraft were being
returned at the expiration of the Term pursuant to and in accordance
with the terms hereof, or Lessor, at its option, may enter upon the
premises where the Aircraft is located and take immediate possession
of and remove the same together with any Engines and Parts by summary
proceeding or otherwise. If upon Lessee's return or Lessor's
repossession of the Aircraft it is not in the condition required if it
were being
<PAGE>
-27-
returned at the expiration of the Term, Lessor may perform
all maintenance, repair, overhead and other work to accomplish the
same and shall be entitled upon demand to reimbursement from Lessee,
for all expenses incurred in so doing, together with interest thereon
at the Late Payment Rate from the date of incurrence until paid.
Notwithstanding anything herein to the contrary, but subject to
reimbursement as provided below, Lessee shall, without further demand,
forthwith pay to Lessor an amount equal to any unpaid Rent due and
payable for all periods up to and including the Basic Rent Date
following the date on which Lessor has declared this Lease to be in
default, plus, as liquidated damages for loss of a bargain and not as
a penalty, an amount equal to the Casualty Value of the Aircraft,
computed as of the Basic Rent Date immediately preceding the date on
which Lessor has declared this Lease to be in default, together with
interest on such amounts at the Late Payment Rate from the date of
demand until paid. Following the return of the Aircraft to Lessor
pursuant to this subparagraph, Lessor shall proceed to sell the
Aircraft by public or private sale in such commercially reasonable
manner as it shall deem appropriate; provided that Lessor, if it so
elects, may purchase the Aircraft at such sale for a price not less
than the highest bona fide bid given by a person unrelated to the
Lessee or Lessor. The Proceeds of such sale other than a sale to
Lessor as provided above shall be applied by Lessor (x) first, to pay
all costs, charges and expenses, including Liens, other than Lessor's
Liens, governmental fines and assessments prior in right to that of
Lessor in the Aircraft and all reasonable legal fees and other
disbursements incurred by Lessor as a result of the Event of Default
and the exercise of its remedies with respect thereto, including,
without limitation, costs of putting the Aircraft in return condition
and costs of sale, together with interest on all such amounts at the
Late payment Rate from the date expended by Lessor until paid, (y)
second, to pay Lessor the unpaid Rent due and payable as provided
above and the Casualty Value amount payable as liquidated damages, to
the extent not previously paid, together with interest as provided
above, and (z) third, to reimburse Lessee for the Casualty Value to
the extent previously paid by Lessee as liquidated damages. Any
surplus remaining thereafter shall be retained by Lessor. To the
extent that all Rent then due and payable as provided above with
respect to the Aircraft and the Casualty Value amount payable as
liquidated damages in respect of the Aircraft have not been previously
paid, Lessee shall forthwith pay to Lessor the amount by which (1) the
sum of (aa) all Rent then due and payable as provided above with
respect to the Aircraft, (bb) the Casualty Value amount payable as
liquidated damages or portion thereof not theretofore paid, (cc) the
amount payable under clause (x) of the preceding sentence, and (dd)
interest at the Late Payment Rate on the items described in (aa), (bb)
and (cc) as provided above, computed as provided above exceeds (2) the
sale price of the Aircraft. Instead of selling the Aircraft, Lessor
may lease the Aircraft to another user pursuant to an arm's-length
transaction and in such case, in lieu of paying Lessor the Casualty
Value, Lessee shall reimburse Lessor for (i) the
<PAGE>
-28-
Rent lost during such time as Lessor was actively trying to lease the
Aircraft or otherwise proceeding in a commercially reasonable manner
in the exercise of its remedies hereunder, together with interest
thereon at the Late Payment Rate from the date the Rent was due until
paid, (ii) such reasonable legal fees and other disbursements incurred
by Lessor as a result of the Event of Default and the exercise of its
remedies with respect thereto and all costs and expenses of Lessor
related to putting the Aircraft in the condition required for return
hereunder and the costs, including legal fees, associated with finding
a Lessee and negotiating a new lease, together with interest thereon
at the Late Payment Rate from the date of expenditure until paid, and
(iii) provided that the rental rate contained in the new lease is a
Fair Rental Rate and is less than the Rent specified in this Lease,
the difference between the Rent and the rent under the new lease. Such
rental shortfall shall be payable on the Basic Rent payment dates
remaining during the Term, or in a lump sum reduced to present value
at a discount rate of 11% per annum, at Lessor's election.
Notwithstanding anything herein to the contrary, Lessor shall not be
required to sell or lease the Aircraft if, in its reasonable judgment,
doing so would not be commercially reasonable.
(b) Lessee shall be liable for all costs, charges and expenses, including
reasonable legal fees and disbursements, incurred by Lessor by reason for the
occurrence of any Event of Default or the exercise of Lessor's remedies with
respect thereto.
(c) Lessee hereby waives, to the extent now or hereafter permitted by
applicable law, for itself and for its successors and assigns, any and all
rights Lessee or Lessee's successors or assigns may have under any bankruptcy,
insolvency or similar laws, rules or regulations with respect to the continued
possession or use of the Aircraft, or payment of Rent therefor, or with respect
to this Lease. Rejection of this Lease by any bankruptcy trustee or
debtor-in-possession shall entitle Lessor to the immediate return of the
Aircraft.
In addition to the foregoing, Lessee hereby unconditionally waives its rights to
retain the Aircraft after the filing of a petition under chapter 7 or of the
U.S. Federal Bankruptcy Law.
(d) No remedy referred to herein is intended to be exclusive, but each
shall be cumulated and in addition to any other remedy referred to above or
otherwise available to Lessor at law or in equity. No express or implied waiver
by Lessor of any Default or Event of Default hereunder shall in any way be, or
be construed to be, a waiver of any future or subsequent Default or Event of
Default. The failure or delay of Lessor in exercising any rights granted it
hereunder upon any occurrence of any of the contingencies set forth herein shall
not constitute a waiver of any such right upon the continuation or recurrence of
any such contingencies or similar contingencies and any single or partial
exercise of any particular right by Lessor shall not exhaust the same or
constitute a waiver of any other right provided herein.
<PAGE>
-29-
20. Notices
-------
All communications and notices provided for herein shall be in writing and
shall become effective when received, if deposited in the United States mail,
with proper postage for certified mail, return receipt requested, prepaid, or if
sent by receipted courier service, telex or facsimile machine addressed to
Lessor or Lessee, at their respective addresses set forth in Exhibit B hereof or
such other addresses as either party may hereafter designate by written notice
to the other.
21. Assignment
----------
(a) This Lease, the Aircraft and Lessor's interest in each thereof is
freely assignable and alienable by Lessor, provided the provisions of this
Section are met. The agreements, covenants, obligations and liabilities
contained herein, including but not limited to all obligations to pay Rent,
Supplemental Rent and other amounts payable hereunder and indemnify Lessor,
are made for the benefit of Lessor, any assignee, and their respective
successors and assigns, and all rights and remedies hereunder including,
without limitation, for enforcement or to grant waivers, consents and
approvals, or take other action, shall be exercisable by them,
notwithstanding the possibility that any such person was not originally a
party to this Lease or may, at the time such enforcement is sought, no
longer be a party to this Lease. Lessee shall comply with all reasonable
requests of Lessor, its successors and assigns respecting the assignment and
Lessee's acknowledgement of the assignee as Lessor; provided, however, that
-------- -------
no assignment of Lessor's interest in this Lease or the Aircraft shall alter
the terms of this Lease in so far as the benefits to Lessee hereunder are
concerned. Upon any such assignment, and subject to the first sentence of
this Section 21(a), Lessee agrees to look solely to the assignee with
respect to all matters in connection with this Agreement and Lessor shall be
released from any further obligations hereunder.
(b) With respect to any assignment by Lessor,
(i) any expenses Lessee shall reasonably incur to carry out an
assignment or transfer by Lessor hereunder shall be paid by Lessor;
(ii) the Transferee shall have the requisite power and authority to
enter into and carry out the transactions contemplated hereby and
shall be, and shall have furnished reasonable evidence to the effect
that it is, a citizen of the United States within the meaning of
Section 101(16) of the Federal Aviation Act of 1958, as amended, or
any successor provision;
(iii) the Transferee shall enter into an agreement or agreements
whereby the Transferee confirms that it shall be deemed a party to
this Lease and agrees to be bound by all of the terms of, and to
undertake all of the obligations of, the Lessor contained in this
Lease;
<PAGE>
-30-
(iv) such transfer shall not violate any provision of the Securities
Act of 1933 or the Federal Aviation Act as amended, or any other
applicable law, as amended, or create relationship which would be in
violation thereof; and
(v) the Transferee shall be a single entity.
In any case, Lessor shall continue to be liable for all obligations hereunder
accruing prior to such transfer notwithstanding such transfer and that any
Transferee of such obligations shall have the required power and authority to
enter into and carry out the transaction contemplated hereby. Upon any transfer
permitted by this paragraph, the Transferee shall be deemed "Lessor" for all
purposes hereof, and each reference herein to the Lessor shall thereafter be
deemed to be a reference to the Transferee for all purposes, provided, however,
--------
that no Transferee shall be liable for the obligation of Lessor unless expressly
assured in writing.
If the Lessor proposes to transfer its interest under the Lease, it shall give
written notice to the Lessee specifying the name and address of the proposed
transferee and certifying that such transfer and transferee comply with the
requirements of this Section. Provided that Lessee obtains a covenant of quiet
enjoyment from Lessor or any lender, notwithstanding anything to the contrary
herein contained, this paragraph (i) shall not be deemed to preclude Lessor from
encumbering its interest in the Aircraft to secure loans advanced to the Lessor;
and (ii) shall be of no force or effect in connection with any transfer of the
Aircraft upon exercise of any remedy by Lessor pursuant to Section 19 hereof
following an Event of Default.
22. Miscellaneous
-------------
(a) The terms of this Lease shall not be waived, altered, modified,
amended, supplied or terminated in any manner whatsoever except by written
instrument signed by Lessor and Lessee.
(b) All agreements, indemnities, representations and warranties
contained in this Lease or any agreement, document or certificate delivered
pursuant hereto or thereto or in connection herewith or therewith shall
survive the execution and delivery of this Lease and the expiration or
other termination of this Lease.
(c) Any provision of this Lease which may be determined by competent
authority to be prohibited or unenforceable in any jurisdiction shall, as
to such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and
any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction.
<PAGE>
-31-
(d) This Lease and the Operative Agreements represent the entire
agreement of the parties hereto with respect to the subject matter hereof
and supersede any and all other understandings. This Lease shall constitute
an agreement of lease and nothing herein shall be construed as conveying to
Lessee any right, title or interest in or to the Aircraft, except as Lessee
only.
(e) This Lease shall be governed by, and construed in accordance
with, the laws of the Commonwealth of Massachusetts.
(f) The division of this Lease into sections, the provisions of a
table of contents and the insertion of headings are for the convenience of
reference only and shall not affect the construction or interpretation of
this Lease.
(g) Time is of the essence in the performance of the terms and
conditions of this Lease.
(h) Except as otherwise expressly provided herein, if Lessor is
required to transfer title to the Aircraft, the Airframe, the Engine, or
any Part thereof to Lessee, then such transfer shall be made "as is,"
where is," and without representation or warranty of any kind express or
implied, except a warranty of title; provided that Lessor or any one
--------
claiming through Lessor who succeeds to Lessor's interest in this Lease
shall warrant, only that the property transferred is free of Lessor's Liens
and assign to Lessee all warranties of title received by Lessor. The
transferor shall to the extent customary execute a bill of sale with such
warranty.
(i) If legal or other proceeding is instituted with respect to any of
the Operative Agreements, the party prevailing in such proceeding shall be
paid all of its costs, expenses and fees by the other party, and if any
judgment is secured, all such costs, expenses and fees shall be included in
any such judgment, attorneys' fees to be set by the court and not by the
jury.
23. Performance of Obligations of Lessee by Lessor
----------------------------------------------
If an Event of Default should occur hereunder, Lessor may thereafter make
the payment or perform or comply with the agreement, the nonpayment,
nonperformance or noncompliance with which caused such Event of Default, and the
amount of such payment and the amount of reasonable expenses of Lessor incurred
in connection with such payment or the performance of or compliance with such
agreement, as the case may be, together with interest at the Late Payment Rate,
shall be payable by Lessee upon demand by Lessor, and such action by Lessor
shall not be deemed a cure or waiver of any Default or event of Default
hereunder.
24. Additional Covenants of Lessee
------------------------------
(a) Maintenance of Status. Lessee agrees to remain during the Term a
----------- -- ------
Certificated Air Carrier. To the extent provided thereby (or to the
<PAGE>
-32-
fullest extent it may lawfully so agree, whether or not provided thereby),
Lessee hereby agrees that any right of Lessor to take possession of such
Aircraft or Engines in compliance with the provisions of this Lease and in
accordance with Section 1110 of Title 11 of the United States Code or any
similar provision of any superseding statute, as amended from time to time,
shall not be affected by the provisions of Sections 362 and 363 of said
Title, or other analogous part of any superseding statute, as amended from
time to time, and accordingly, it is the intention of the parties hereto
that this Lease be afforded the benefits of said Section 1110.
(b) Financial Information. Lessee agrees to furnish to Lessor during
--------- -----------
the Term:
(i) within 60 days after the end of each of the first three fiscal
quarters in each fiscal year of Lessee and Guarantor, consolidated
balance sheets of Guarantor as of the end of such quarter and related
statements of income, shareholders' equity and changes in financial
condition of Guarantor for the period commencing at the end of the
previous fiscal year and ending with the end of such quarter, together
with the unaudited statements of Lessee, setting forth in each case in
comparative form the corresponding figures for the corresponding
period in such other preceding fiscal year, prepared in accordance
with generally accepted accounting principles and practices, provided
--------
that so long as such Person is subject to the reporting provisions of
the Securities Exchange Act of 1934 a copy of Lessee's or Guarantor's
Form 10-Q will satisfy this requirement as to such entity;
(ii) within 120 days after the end of each fiscal year of Lessee and
Guarantor, a copy of the annual report for such year for Guarantor,
consolidated balance sheets of Guarantor as of the end of such fiscal
year and related statements of income, shareholders' equity and
changes in financial condition of Guarantor for such fiscal year,
together with the unaudited statements of Lessee, in comparative form
with the preceding fiscal year, and in the case of Guarantor's
consolidated statements, certified by independent certified public
accountants as having been prepared in accordance with generally
accepted accounting principles and practices consistently applied
(except as noted therein), provided that so long as such Person is
--------
subject to the report provisions of the Securities Exchange Act of
1934 a copy of Lessee's or Guarantor's annual report on Form 10-K will
satisfy this requirement as to such entity;
(iii) accompanying the annual financial statements described in
Section 24(b), an Officers' Certificate of Lessee to the effect that
the signer is familiar with or has reviewed the relevant terms of this
Lease and has made, or caused to be made under his supervision, a
review of the transactions and conditions of Lessee during the
preceding fiscal year, and that such review has not disclosed the
existence during such fiscal year, nor does the signer have
<PAGE>
-33-
knowledge of the existence as at the date of such certificate, of any
condition or event which constituted or constitutes an Event of
Default, or, if any such condition or event existed or exists,
specifying the nature and period of existence thereof and what action
Lessee has taken or is taking or proposes to take with respect
thereto; and
(iv) from time to time, such other information relating to its
financial, operational or business affairs or conditions as Lessor may
reasonably request.
25. Counterparts
------------
This Lease may be executed in any number of counterparts and by the
different parties hereto on separate counterparts. The counterparts shall be
numbered consecutively. To the extent that this Lease constitutes chattel paper,
as such term is defined in the Uniform Commercial Code as in effect in any
applicable jurisdiction, no security interest in this Lease may be created
through the transfer or possession of any counterpart other than "Original No.
1".
IN WITNESS WHEREOF, the parties hereto have each caused this Lease to be
duly executed by the respective officers thereunto duly authorized.
INVESTORS ASSET HOLDING CORP., HORIZON AIR INDUSTRIES, INC.
as Trustee of AFG/Horizon-I as Lessee
Trust, as Lessor
By: [SIGNATURE NOT LEGIBLE] By: [SIGNATURE NOT LEGIBLE]
------------------------- -------------------------
Title: Vice President Title: Vice President
---------------------- ------------------------
Date: 12/21/89 Date: 12/26/89
---------------------- ------------------------
<PAGE>
SCHEDULE NO. l
TO THE LEASE
IDENTIFICATION OF AIRCRAFT
--------------------------
U.S. FAA AIRCRAFT ENGINE PROPELLERS
AIRCRAFT MODEL AND MODEL AND MODEL AND
REGISTRATION MANUFACTURER'S SERIAL SERIAL
NUMBER SERIAL NUMBER NUMBER NUMBER
- ------------ -------------- --------- ----------
N27444 Fairchild Metro III Garrett AiReserach Dowty Rotol
Model SA227-AC TPE-331-11U-611G (C) R321/4-82-F/8
AC-752 P44682C (left) DAC/DRG/4779/89 (left)
P44688C (right) DAC/DRG/2304/89 (right)
The Aircraft includes standard accessories and optional equipment and such
other items fitted or installed on the aircraft and set forth in Schedule A,
attached hereto and by this reference made a part hereof.
<PAGE>
SCHEDULE A
TO
SCHEDULE NO. l
--------------
OPTIONS
- -------
Two each UPS type cargo nets
Aft Passenger Seat Relocated and Installed in lieu of Wardrobe
Recessed Bulkhead, Exchange
Wardrobe as loose equipment
Outboard Armrests
Center cockpit windshield defogger
Additional cabin speakers
Remote cabin temperature sensor and indicator
Magnasticks
Chine note tires
Small clip approachplate holder
GPU plug in right wing root
Clear radar nose cap
Wraparound sunvisor bracket
Tel-tail lights (upper only)
115 Cu. Ft. Capacity oxygen bottle
Passenger seat back covers (19)
Dowty Rotol Propellers, including service Bulletin Kit. No. 227-30-004A
Engine Soft Line Conversion
<PAGE>
COLLINS PRO-LINE II AVIONICS PACKAGE
- ------------------------------------
Collins VHF-21A main transceiver with single Gables control
Collins VHF-21A standby transceiver with dual Gables control
Collins VIR-32AGM automatic Omni #1 with 331A-3G indicator and Gables control
Collins VIR-32AGM automatic Omni #2 with IND-31C indicator and Gables control
Dual Baker M-1035 Audio/ISO amplifier system with push button controls,
automatic audio leveling. (Includes Cabin P.A. and crew I/C)
Collins ADF-60A with 614L-11 control head
Collins Marker Beacon (included in VIR-30 #1) with dual marker lights
Dual Collins glideslope (included in VIR-30 #1 & #2) RDS-81
Bendix RDR-160 digital radar/monochromatic indicator
Collins PN-1O1 slaved gyro-compass (pilot) with free slave switch
Collins RMI-30 new Nav 1/ADF Selectable on single bar needle,
NAV 2/ADF selectable or double bar needle
Collins TDR-90 transponder with Gables control
Collins DME-42 252 channel 250 NM digital display, Nav 1/Nav 2 switching and
hold
AIM 510 ECFL Electric Gyro Horizon (pilot and co-pilot)
Dual lightweight boom mike headsets with push button switches on wheels
Dual hand microphones
Dual cockpit speakers
Downed aircraft locater beacon
Dual cockpit speakers
Downed aircraft locater beacon
IDC 28702-502 encoding altimeter
IDC 22722-004 Altitude alerter
Second Collins PN-1O1 (co-pilot) slaved gyro
Second Collins TDR-90
Second Collins RMI-30
Datcon 873 hour meter
Vacuum standby gyro (pilot)
Second Gables control head (co-pilot)
Independent P.A. system
Second clock (co-pilot)
Cabin pressurization controller moved to co-pilot's side
<PAGE>
EXHIBIT A
DEFINITIONS
-----------
(a) All references in the Lease to designated Sections and other subdivisions
are to designated Sections and other subdivisions of the Lease, and the words
"herein", "hereof" and "hereunder" and other words of similar import refer to
the Lease as a whole and not to any particular Section or other subdivision.
(b) Except as otherwise indicated, all the agreements or instruments defined
herein or in the Lease shall mean such agreements or instruments as the same may
from time to time be supplemented or amended or the terms thereof waived or
modified to the extent permitted by, and in accordance with, the terms thereof.
(c) The terms defined herein and in the Lease shall, for purposes of the Lease
and all Exhibits thereto, have the meanings assigned to them and shall include
the plural as well as the singular.
(d) The following terms shall have the following meanings for all purposes of
the Lease:
Basic Rent Dates, Cost, Late Payment Rate, Term and Principal Location shall
- ---------------- ---- ----------------- ---- ------------------
have the meanings set forth on Exhibit B to the Lease.
Additions shall have the meaning set forth in Section 11 (d) of the Lease.
- ---------
After-Tax Basis shall mean that the amount to be paid pursuant to any provision
- ---------------
of this Lease is to be increased by the amount of all Taxes payable by reason of
the receipt of such payment (assuming that such Taxes all are paid at the
highest marginal rates and taking into account all tax savings realized by the
recipient with respect to such payment), with the result that the net amount
after payment of such Taxes and taking into account such savings is equal to the
amount that is due pursuant to such provision.
Aircraft shall mean the Airframe with the Engines described in Schedule No. l to
- --------
the Lease and any and all Parts so long as the same shall be incorporated or
installed in or attached to such Aircraft and all Parts removed from the
Aircraft so long as title thereto shall remain vested in Lessor in accordance
with Section 11 of the Lease after removal from such Aircraft.
Airframe shall mean (i) the Aircraft described in Schedule No. l to the Lease
- --------
and, unless the context requires otherwise, shall not include engines or Engines
from time to time installed thereon and (ii) any and all Parts, including any
replacement airframe or Part thereof, so long as the same shall be incorporated
or installed in or attached to such Airframe and all parts removed from the
Airframe so long as title thereto shall remain vested in Lessor in accordance
with the terms of Section 11 of the Lease after removal from such Airframe.
<PAGE>
Amortization Deductions shall have the meaning set forth in Section 17 of the
- ------------ ----------
Lease.
Assumed Tax Consequences shall have the meaning set forth in Section 17 of the
- ------------------------
Lease.
Approved Maintenance Program shall mean the maintenance program of Lessee or a
- ----------------------------
Permitted Sublessee (if applicable) for the maintenance of Metro III aircraft
which has the approval of the FAA.
Basic Rent shall have the meaning set forth in Section 3 of the Lease.
- ----------
Business Day shall mean any day other than a Saturday, Sunday, or other day on
- ------------
which banks in Seattle, Washington or Boston, Massachusetts are authorized to
close.
Capitalized Cost shall mean Cost plus, if and to the extent permitted for tax
- ----------------
purposes under Section 168 of the Code, printing expenses, fees of counsel, and
certain other fees and expenses associated with the transaction and capitalized
by Lessor.
Casualty Value shall have the meaning set forth in Exhibit C to the Lease.
- --------------
Certificated Air Carrier shall mean any air carrier operating under a
- ------------------------
Certificate of Public Convenience and Necessity issued by the Department of
Transportation, or pursuant to an exemption under Part 298 of the U.S.
Department of Transportation's economic regulations or any similar authority.
Claims shall have the meaning set forth in Section 15 of the Lease.
- ------
Code shall have the meaning set forth in Section 17 of the Lease.
- ----
Default shall mean an event which, after the giving of notice or lapse of time
- -------
or both, would mature into an Event of Default.
Delivery Date shall mean the date the Aircraft was delivered to, and accepted
- -------------
by, Lessee from Lessor.
Depreciation Deductions shall have the meanings set forth in Section 17 of the
- -----------------------
Lease.
Engine shall mean (i) each of the engines described and listed by manufacturer's
- ------
serial numbers in Schedule No. l to the Lease whether or not from time to time
thereafter no longer installed on such Airframe, and (ii) any engine which may
from time to time be substituted, pursuant to Section 13(b) of the Lease, for an
Engine leased thereunder; together in each case with any and all Parts
incorporated or installed in or attached thereto (excluding Propellers) and any
and all parts removed therefrom so long as title thereto shall remain vested in
Lessor in accordance with the terms of Section 11 of the Lease after removal
from such Engine; and Engines shall mean, as a date of determination, all
-------
Engines then leased under the Lease.
Event of Default shall have the meaning set forth in Section 18 of the Lease.
- ----------------
-2-
<PAGE>
Event of Loss with respect to the Aircraft, the Airframe or any engine shall
- -------------
mean any of the following events with respect to such property; (i) loss of such
property or the use thereof due to theft (when the property is not recovered in
60 days), disappearance (for a period in excess of 30 days), destruction, damage
beyond repair or rendition of such property permanently unfit for normal use for
any reason whatsoever; (ii) any damage of such property which results in an
insurance settlement with respect to such property on the basis of a total loss;
(iii) any Requisition of Use; or (iv) as a result of any rule, regulation, order
or other action by any government (foreign or domestic) or governmental body
(including, without limitation, the FAA or any foreign governmental body having
jurisdiction), the use of such property shall have been prohibited, or such
property shall have been declared unfit for use, for a period of six consecutive
months, unless Lessee, prior to the expiration of such six-month period, shall
have undertaken and shall be diligently carrying forward all steps which are
necessary or desirable to permit the normal use of such property by Lessee or,
in any event, if use shall have been prohibited, or such property shall have
been declared unfit for use, for a period of twelve consecutive months. The date
of such Event of Loss shall be the date of such theft, disappearance,
destruction, damage, Requisition of Use, or unfitness for use for the stated
period. An Event of Loss with respect to the Aircraft shall be deemed to have
occurred if an Event of Loss occurs with respect to the Airframe which is part
of such Aircraft. An Event of Loss with respect to any Engine shall not, without
loss of the Airframe, be deemed an Event of Loss with respect to the Aircraft.
Event of Loss Payment shall have the meaning set forth in Section 13 of the
- ---------------------
Lease.
Expiration Date shall mean the last day of the Term.
- ---------------
FAA Counsel shall mean the firm of Crowe & Dunlevy in Oklahoma City, Oklahoma.
- -----------
FAA shall mean the Federal Aviation Administration or any successor thereto.
- ---
Fair Market Value ("FMV") shall mean with respect to any property, the value of
- -------------------------
the property as determined on the basis of, and shall be equal in amount to, the
value which one would obtain in an arm's-length transaction between an informed
and willing buyer-user (other than a lessee currently in possession and a used
equipment dealer) and an informed and willing seller under no compulsion to sell
and, in such determination, costs of removal of property from its location or
current use shall not be a deduction from such value. In the event the FMV is
not agreed upon by Lessee and Lessor, it shall be determined by the average of
three (3) independent appraisals by parties which shall include two parties
individually, one selected by Lessee and one selected by Lessor and a third
mutually selected by Lessee and Lessor. The expense of any such appraisal shall
be shared equally by Lessor and Lessee.
Fair Rental Rate shall mean with respect to any property, the rental rate of the
- ----------------
property as determined on the basis of, and shall be in an amount equal to, the
rental rate which one would obtain in an arms length transaction between an
informed and willing lessor (under no compulsion to lease) and lessee for a
lease term not to exceed five (5) years. If not agreed upon by Lessor and
Lessee, it shall be determined by appraisal in the manner in which FMV is
determined when not so agreed upon.
-3-
<PAGE>
Federal Aviation Act shall mean the Federal Aviation Act of 1958, as amended.
- --------------------
Guarantor shall mean Alaska Air Group, Inc. a Delaware corporation, its
- ---------
successors and assigns.
Impositions shall have the meaning set forth in Section 10 of the Lease.
- -----------
Index shall mean the rate of interest publicly announced, from time to time, by
- -----
Citibank, N.A., New York, New York, as the base rate of interest charged by such
bank to its most creditworthy commercial borrowers, notwithstanding the fact
that some borrowers of Citibank may borrow from Citibank at rates of interest
less than the announced base rate.
Interest Deductions shall have the meaning set forth in Section 17 of the Lease.
- -------------------
Lease Supplement shall mean a supplement to the Lease entered into by Lessor and
- ----------------
Lessee with respect to this Lease.
Lessor's Liens shall mean Liens created or granted by Lessor or resulting from
- --------------
(w) claims against or affecting Lessor, (x) acts of Lessor not related to the
transactions contemplated by the Lease or not permitted under the Lease, (y)
taxes imposed against Lessor which are not indemnified against by Lessee under
the Lease, or (z) claims against Lessor arising out of the voluntary transfer by
Lessor of its interest in the Aircraft or the Lease, other than a transfer
pursuant to Section 19 of the Lease.
Lessor Payment Amount shall have the meaning set forth in Section 17 of the
- ---------------------
Lease.
Liens shall have the meaning set forth in Section 9 of the Lease.
- -----
Loss shall have the meaning set forth respectively in Section 17 of the Lease.
- ----
Maintenance Manual shall mean the manual issued by the manufacturer for the
- ------------------
maintenance of the Aircraft, as updated from time to time.
Manufacturer shall mean the Fairchild Aircraft Corporation.
- ------------
Net Economic Return shall mean the after-tax economic yields and after-tax
- -------------------
annual aggregate cash flows expected by Lessor with respect to its lease of the
Aircraft under this Lease, utilizing the same assumptions and methods of
calculation which Lessor used in evaluating the transactions contemplated by
this Lease.
Operative Agreements shall mean the Lease, the Aircraft Purchase Agreement or
- --------------------
Purchase Agreement Assignment, as appropriate, the guaranty executed by
Guarantor and all other agreements or instruments now or hereafter executed by
Lessee or Guarantor in connection with the Lease.
-4-
<PAGE>
Parts shall mean all appliances, parts, instruments, appurtances, accessories,
- -----
furnishings and other equipment of whatever nature (other than complete Engines
or engines and other than temporary replacement parts), which may from time to
time be incorporated or installed in or attached to the Airframe or any Engine
or so long as title thereto shall remain vested in Lessor in accordance with the
terms of Section 11 of the Lease after removal from such Airframe or Engine.
Permitted Sublessee shall mean any Person to whom the Aircraft has been
- -------------------
subleased in accordance with the provisions of Section 16 of the Lease.
Person shall mean any individual, partnership, corporation, trust,
- ------
unincorporated association or joint venture, a government or any department or
agency thereof, or any other entity.
Propeller shall mean (i) each of the propellers described and listed by
- ---------
manufacturer's serial numbers in Schedule No. 1 to the Lease whether or not from
time to time thereafter no longer installed on an Engine, but (once removed)
only so long as title remains vested in Lessor in accordance with the terms of
the Lease and (ii) any propeller which may be from time to time substituted by
following the procedure provided for substitution of engines in Section 13(b) of
the Lease for a Propeller leased thereunder.
Rent shall have the meaning set forth in Section 3 of the Lease.
- ----
Replacement Parts shall have the meaning set forth in Section 11 of the Lease.
- -----------------
Requisition of Use shall mean the condemnation, confiscation or seizure of, or
- ------------------------
requisition of title to such property by the act of any government (foreign or
domestic) or of any state or local authority or any instrumentality or agency of
the foregoing or the requisition of use of such property which use extends
beyond the Expiration Date.
Supplemental Rent shall have the meaning set forth in Section 3(c) of the Lease.
- -----------------
Tax Benefits shall mean the Depreciation Deductions, the Interest Deductions and
- ------------
the Amortization Deductions.
Transferee shall mean any Person to whom Lessor has transferred its interest in
- ----------
the Aircraft and/or this Lease in accordance with the provisions of Section 21.
-5-
<PAGE>
EXHIBIT B
FINANCIAL TERMS
Delivery Date: December 28, 1989
Cost: $2,767,500
Basic Rent: $2,061,000, payable $34,350 on the Delivery Date
and $34,350/month on each Basic Rent Date
thereafter
Term: The period commencing on the Delivery Date and
ending on December 27, 1994.
Basic Rent Dates: The Delivery Date and the same date of each month
thereafter until the end of the Term
First Basic Rent Date: Delivery Date
Late Payment Rate: The Index plus 2% floating, but in no event at a
rate greater than that permitted by applicable
law.
Principal Location: Portland International Airport
Portland, Oregon
Lessor's Address: c/o American Finance Group
Exchange Place
Boston, MA 02109
Fax No. (617) 523-1410
Lessee's Address: 19521 Pacific Highway South
Seattle, Washington 98188
Attn: Chief Operations Officer
Fax No. (206)241-6757
Guarantor's Address: 19300 Pacific Highway South
Seattle, Washington 98188
Attn: Chief Financial Officer
Fax No. (206)433-3379
Lessee's Chief Executive 19521 Pacific Highway South
Office or Place of Seattle, Washington 98188
Business (Section 6(e)
of the Lease):
INVESTORS ASSET HOLDING CORP., HORIZON AIR INDUSTRIES, INC.
as Trustee, as Lessor as Lessee
By:[SIGNATURE NOT LEGIBLE] By: [SIGNATURE NOT LEGIBLE]
--------------------------- ---------------------------
Title: Vice President Title: Vice President
------------------------ ---------------------------
<PAGE>
HORIZON AIR INDUSTRIES, INC.
EXHIBIT C
CASUALTY TABLES
(Stated as Percentage of Equipment Cost)
AFTER CASUALTY AFTER CASUALTY
PAYMENT NO. VALUE PAYMENT NO. VALUE
- ----------- ---------- ------------- ----------
1 111.86 31 105.78
2 111.72 32 105.50
3 111.57 33 105.22
4 111.42 34 104.93
5 111.27 35 104.63
6 111.12 36 104.33
7 110.95 37 104.02
8 110.79 38 103.71
9 110.62 39 103.38
10 110.45 40 103.06
11 110.27 41 102.72
12 110.09 42 102.38
13 109.91 43 102.03
14 109.72 44 101.68
15 109.53 45 101.32
16 109.33 46 100.95
17 109.13 47 100.57
18 108.92 48 100.19
19 108.71 49 99.79
20 108.49 50 99.40
21 108.27 51 98.99
22 108.05 52 98.57
23 107.82 53 98.15
24 107.58 54 97.72
25 107.34 55 97.28
26 107.09 56 96.84
27 106.84 57 96.38
28 106.59 58 95.92
29 106.32 59 95.45
30 106.06 60 95.00
<PAGE>
EXHIBIT D
[DATE]
Dear Sirs:
I am General Counsel of HORIZON AIR INDUSTRIES, INC., a Washington
corporation (the "Lessee"), and as such I am delivering this opinion in
connection with the transactions contemplated by the Aircraft Lease dated
December 20, 1989 (the "Lease"). Capitalized terms used herein without
definition are used as defined in the Lease.
In so acting, I have examined the Lease and the Operative Agreements and
have examined and relied upon the representations and warranties as to factual
matters contained therein and upon the originals, or copies certified or
otherwise identified to my satisfaction, of such corporate records, documents
and other instruments as in my judgment are necessary or appropriate to enable
me to render the opinions expressed below. I am of the following opinion.
1. Lessee is a corporation duly organized and validly existing in good
standing pursuant to the laws of the State of Washington; is duly licensed or
qualified and is in good standing as a foreign corporation wherever necessary to
carry on its present business and operations and to own or lease its Properties
and to enter into and perform its obligations under the Lease and the Operative
Agreements to which it is a party (collectively the "Lessee's Documents"); is an
"air carrier" and a citizen of the United States within the meaning of the
Federal Aviation Act, certificated under Section 401 of the Federal Aviation
Act; has its chief executive office (as such term is defined in Article 9 of the
Uniform Commercial Code) in King County, Washington; holds all licenses,
certificates, permits and franchises from the appropriate agencies of the United
States of America and/or all other governmental authorities having jurisdiction
necessary to authorized Lessee to engage in air transport and to carry on
scheduled passenger service as presently conducted; and has the corporate power
and authority to conduct its business as it is presently being conducted, to
hold under lease the Aircraft and to enter into and perform its obligations
under the Lessee's Documents.
2. The execution, delivery and performance by Lessee of the Lessee's
Documents have been duly authorized by all necessary corporate action on the
part of Lessee, do not require any stockholder approval which has not been
obtained, or the approval or consent of any trustee or holders of any
indebtedness or obligations of Lessee except such as have been duly obtained,
and will not contravene any law, judgment, government rule, regulation or order
binding on Lessee or the Articles of Incorporation or Bylaws of Lessee or, to
the best of my knowledge, after due inquiry, contravene the provisions of, or
constitute a default under, or result in the creation of any Lien (other than as
permitted in the Lease), upon the property of Lessee under, any material
indenture, mortgage, contract or other agreement to which Lessee is a party or
by which it or its properties may be bound or affected.
<PAGE>
Page two
December ___, 1989
3. Neither the execution and delivery by Lessee of the Lessee's Documents
nor the performance by Lessee of its obligations thereunder require the consent
or approval of, the giving of notice to, the registration with, or the taking of
any other action in respect of, any federal, state or foreign government
authority or agency, except for (A) the orders, permits, waivers, exemptions,
authorizations and approvals of the regulatory authorities having jurisdiction
over the operation of the Aircraft by Lessee, which orders, permits, waivers,
exemptions, authorizations and approvals have been duly obtained and are in full
force and effect, (B) the registration of the Aircraft with the FAA and the
filings referred to in section 2 of the Lease, and (C) any normal periodic and
other reporting requirements under the applicable rules and regulations of the
FAA to the extent required to be given or obtained only after the Delivery Date.
4. The Lessee's Documents are duly authorized, executed by persons
authorized by all necessary corporate action, and delivered; and, assuming due
execution and delivery by the other parties thereto, each constitutes legal,
valid and binding obligations of Lessee enforceable against Lessee in accordance
with the terms thereof.
5. No filing of recording or any document (including any financing
statement), other than those which have been made, is necessary to establish and
perfect Lessor's interest in the Aircraft against Lessee and any third parties
in any applicable jurisdiction in the United States (assuming that at the time
of any such filing pursuant to the Act or other unrecorded documents relating to
the Aircraft have been filed but have not been shown on indices of filed but
unrecorded documents made available to special FCC counsel).
The opinion set forth in Paragraph 4 is limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally, and by general equitable principles, and in the case of the
Lease, is limited by applicable laws affecting the remedies provided therein,
which laws, however, do not in my opinion make the remedies provided in the
Lease inadequate for the practical realization of the rights and benefits
intended to be provided.
I am admitted to practice law in the State of Washington and in rendering
the foregoing opinions have not passed upon, or purported to pass upon, the laws
of any jurisdiction other than the State of Washington and the federal laws of
the United States.
Very truly yours,
______________________________
<PAGE>
EXHIBIT E
[DATE]
Dear Sirs:
I am _______________________ (of) (to) Alaska Air Group, Inc., a Delaware
corporation (the "Guarantor"), and as such I am delivering this opinion in
connection with the transactions contemplated by the Guaranty dated December 20,
1989 (the "Guaranty"). Capitalized terms used herein without definition are
used as defined in the Guaranty.
In so acting, I have examined the Guaranty and the Lease which is the
subject of the Guaranty and have examined and relied upon the representations
and warranties as to factual matters contained therein and upon the originals,
or copies certified or otherwise identified to my satisfaction, of such
corporate records, documents and other instruments as in my judgment are
necessary or appropriate to enable me to render the opinions expressed below. I
am of the following opinion.
l. Guarantor is a corporation duly organized and validly existing in good
standing pursuant to the laws of the State of Delaware; is duly licensed or
qualified and is in good standing as a foreign corporation wherever necessary to
carry on its present business and operations and to own or lease its properties
and to enter into and perform its obligations under the Guaranty and has the
corporate power and authority to conduct its business as it is presently being
conducted and to enter into and perform its obligations under Guaranty.
2. The execution, delivery and performance by Guarantor of the Guaranty
have been duly authorized by all necessary corporate action on the part of
Guarantor, do not require any stockholder approval which has not been obtained,
or the approval or consent of any trustee or holders of any indebtedness or
obligations of Guarantor except such as have been duly obtained, and will not
contravene any law, judgment, government rule, regulation or order binding on
Guarantor or the Articles of Incorporation or Bylaws of Guarantor or, to the
best of my knowledge, after due inquiry, contravene the provisions of, or
constitute a default under, or result in the creation of any lien upon the
property of Guarantor under, any material indenture, mortgage, contract or other
agreement to which Guarantor is a party or by which it or its properties may be
bound or affected.
3. Neither the execution and delivery by Guarantor of the Guaranty nor
the performance by Guarantor of its obligations thereunder require the consent
or approval of, the giving of notice to, the registration with, or the taking of
any other action in respect of, any federal, state or foreign government
authority or agency.
<PAGE>
Page two
December ___ , 1989
4. The Guaranty has been duly authorized, executed by person(s) authorized
by all necessary corporate action, and delivered; and, assuming due execution
and delivery by the other parties thereto, constitutes legal, valid and binding
obligations of Guarantor enforceable against Guarantor in accordance with the
terms thereof.
The opinion set forth in Paragraph 4 is limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the rights of
creditors generally, general equitable principles and applicable laws affecting
the remedies provided therein, which laws, however, do not in my opinion make
the remedies provided in the guaranty inadequate for the practical realization
of the rights and benefits intended to be provided.
I am admitted to practice law in the State of Washington and in rendering
the foregoing opinions have not passed upon, or purported to pass upon, the laws
of any jurisdiction other than the State of Washington and the federal laws of
the United States.
Very truly yours,
_____________________________
<PAGE>
EXHIBIT F
GUARANTY
<PAGE>
GUARANTY
To induce INVESTORS ASSET HOLDING CORP., as Trustee of AFG/Horizon-I Trust
("Lessor") to enter into an Aircraft Lease with Horizon Air Industries, Inc.
("Lessee"), dated as of December 20, 1989 (the "Lease"), Alaska Air Group, Inc.
("Guarantor"), for good and valuable consideration, does hereby guarantee to
Lessor the due, regular and punctual payment of the total rental as provided in
the Lease, whether it represents an original balance, a balance reduced by part
payment, or a deficiency after sale of equipment or otherwise, and does hereby
further guarantee that the Lessee will faithfully perform and fulfill all
agreements and obligations provided in the Lease at the time and in the manner
therein provided. Guarantor does hereby further guarantee to pay on demand all
losses, costs, attorney's fees or expenses which may be suffered by Lessor by
reason of Lessee's default under the Lease or default of Guarantor under this
Guaranty. Guarantor agrees that nothing herein shall be deemed to render this
Guaranty in any was conditional, and it is agreed that Lessor may, upon default
of Lessee, or at any time thereafter, make demand upon and receive payment of
any sum or performance or any covenant or agreement hereunder guaranteed by
Guarantor, with or without notice or demand for payment or performance by
Lessee, its successors or assigns, or any other person or entity. All
aforementioned Indebtedness and obligations of Guarantor are hereinafter
collectively referred to as the "Indebtedness".
Guarantor hereby waives: (a) notice of acceptance of this Guaranty and any
default by the Lessee or any other person; (b) presentment, protest and demand,
and notice of protest, demand and dishonor of the Lease, and the exercise of
possessory, collection or other remedies under the Lease; (c) any defense based
upon any legal disability of the Lessee or any discharge or limitation of the
liability of the Lessee to the lessor, whether consensual or arising by
operation of law or any bankruptcy, insolvency or debtor-relief proceeding, or
from any other cause; and (d) all rights of subrogation, all rights to enforce
any remedy that the Lessor may have against the Lessee, and all rights to
participate in any security held by the Lessor for the Indebtedness, until such
Indebtedness has been paid and performed in full.
This Guaranty shall continue to be effective, or be reinstated, as the case
may be, if at any time payment, or any part thereof, of any amount paid under
the Lease is rescinded or must otherwise be restored or returned by the
recipient thereof upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of the Lessee, or upon or as a result of the appointment of a
custodian, receiver, intervenor or conservator of, or trustee or similar officer
for, the Lessee or any substantial part of the property of the Lessee, or
otherwise, all as though such payments had not been made. If an event permitting
the exercise of remedies under the Lease shall at such time be prevented by
reason of the pendency against the Lessee of a case or proceeding under a
bankruptcy or insolvency law, the Guarantor agrees that, for purposes of this
Guaranty and its obligations hereunder, the Lease shall be deemed to have been
declared in default with all attendant consequences as provided in the Lease as
if such declaration of default and acceleration and the consequences thereof had
been accomplished in accordance with the terms of the Lease, and the Guarantor
shall forthwith pay any amounts guaranteed hereunder upon such declaration of
default and acceleration and consequences, without further notice or demand. No
failure by Lessor to exercise its rights hereunder shall give rise to any
estoppel against Lessor, or excuse Guarantor
<PAGE>
-2-
from performing hereunder. As used in this Guaranty, the word "person" shall
include any individual corporation or partnership, and refers to Guarantor and
to anyone absolutely, contingently, partly, or wholly liable for payment and/or
performance of the Lessee's obligations being guaranteed hereunder.
Except as expressly provided herein, Guarantor hereby agrees that its
obligations hereunder shall be unconditional, irrespective of (a) the validity,
regularity or enforceability of the Indebtedness, (b) the absence of any attempt
to collect from the Lessee or any other Guarantor, (c) the waiver of consent by
the Lessor with respect to any provisions of the Lease, (d) the validity or
enforceability of this Guaranty against one or more of any other guarantors, or
(e) any other circumstance which might otherwise constitute a legal or equitable
discharge or defense of Guarantor other than a breach of Section 5(b) of the
Lease.
Guarantor hereby waives any and all legal requirements that Lessor, its
successors or assigns, shall institute any action or proceeding at law or in
equity against Lessee, its successors or assigns, or anyone else, with respect
to the Lease or with respect to any other security held by Lessor, as a
condition precedent to bringing an action against the Guarantor upon this
Guaranty. All remedies afforded to Lessor, its successors or assigns, by reason
of this Guaranty are separate and cumulative remedies and no one of such
remedies, whether exercised by Lessor, or its successors or assigns, or not,
shall be deemed to be an exclusion of any one of the other remedies available to
Lessor, its successors or assigns, and shall in no way limit or prejudice any
other legal or equitable remedies which Lessor, its successors or assigns, may
have in the aircraft which is the subject of the Lease (the "Aircraft").
Guarantor authorizes the Lessor, without notice or demand and without
affecting the liability of the Guarantor hereunder, from time to time to (a)
renew, extend, accelerate or otherwise change the time for payment of
Indebtedness; (b) accept partial payments on the Indebtedness; (c) take and hold
security for the payment of this Guaranty or the Indebtedness and exchange,
enforce, waive and release any such security; (d) apply such security and direct
the order or manner of sale thereof as the Lessor in its discretion may
determine; (e) exercise any of its remedies under the Lease; and (f) settle,
release, compromise, collect or otherwise liquidate any Indebtedness and any
security therefor in any manner, without affecting or impairing the obligations
of Guarantor hereunder.
Until the Indebtedness is paid in full and until each and all of the terms,
covenants, and conditions of the Lease and this Guaranty are performed fully,
the Guarantor shall not be released by any act or thing with might, but for this
provision of this Guaranty, be deemed a legal or equitable discharge of a
surety, or by reason of any waiver, extension, modification, forebearance or
delay of Lessor, its successors or assigns, or its or their failure to proceed
promptly or otherwise, and the Guarantor hereby expressly waives and surrenders
any defense to its liability hereunder based upon any of the foregoing acts,
things, agreements or waivers or any of them.
<PAGE>
-3-
No failure or delay by Lessor, its successors or assigns, in exercising any
right, power or privilege hereunder or under the Lease shall operate as a waiver
thereof; nor shall any single or partial exercise thereof preclude any other or
further exercise thereof or the exercise of any right, power or privilege.
Any notice, demand or request by Lessor, its successors or assigns, to the
Guarantor shall be in writing and shall be deemed to have duly been given or
made if either delivered personally to the Guarantor or if mailed by certified
mail postage prepaid by Lessor to the Guarantor at its address set forth below
its signature at the end of this Guaranty.
This Guaranty shall be governed by and construed in accordance with the
laws of the Commonwealth of Massachusetts and shall be binding on the parties
hereto and their respective permitted successors and assigns and shall inure to
the benefit of the successors and assigns of the Lessor.
Lessor and Guarantor agree that Guarantor shall pay to the Lessor the out-
of-pocket costs and expenses reasonably incurred by Lessor, its successors and
assigns, including but not limited to costs and attorneys' fees reasonably
incurred in any effort to enforce this Guaranty on account of a breach by
Guarantor, whether or not any lawsuit is filed. Furthermore, if legal or other
proceeding is instituted, the party prevailing in such proceeding shall be
entitled to recover court costs and related fees from the losing party.
This Guaranty and all guarantees, covenants and agreements of the Guarantor
contained herein shall continue in full force and effect and shall not be
discharged until such time as all of the agreements of the Lessee under the
Lease and the Guarantor hereunder, shall be duly performed. This Guaranty shall
bind Guarantor's successors and assigns and the benefits thereof shall extend to
and include Lessor's successors and assigns. In the event of default hereunder
Lessor may, at any time, inspect Guarantor's records or, at Lessor's option,
Guarantor shall furnish a current independent audit report.
Any provision of this Guaranty which may be determined by competent
authority to be prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
This Guaranty and each of its provisions may only be waived, modified,
varied, released, terminated or surrendered, in whole or in part, by a duly
authorized written instrument signed by Lessor (or its successors or assigns).
This Guaranty embodies the entire agreement and understanding between the
Guarantor and Lessor (or its successors or assigns), and supersedes all prior
agreements and understandings relating to the subject matter hereof.
Each signatory hereof warrants that he/she currently has authority to sign
on behalf of the entity for which the signatory is signing in his/her
representative capacity and by so signing, to bind such entity hereunder.
<PAGE>
-4-
Notwithstanding anything herein to the contrary, Guarantor shall have as
defenses under this Guaranty to the performance of any of Lessee's obligations
under the Lease all of the defenses which Lessee has under the Lease to the
performance of such obligations. Guarantor acknowledges that to its knowledge,
as of the date hereof, Lessee has no defense to the performance of its
obligations under the Lease and it has no defenses to its obligations under this
Guaranty.
IN WITNESS WHEREOF, this Guaranty is executed the day and year above
written.
GUARANTOR:
----------
ALASKA AIR GROUP, INC.
By ____________________________
J. RAY VINGO
Vice President, Finance &
Chief Financial Officer
Address:
19300 Pacific Highway South
Seattle Washington 98188
Attn: Chief Financial Officer
Fax No. (206) 433-3379
<PAGE>
EXHIBIT G
PERMITTED SUBLESSEES
--------------------
Any U.S. Certificated Air Carrier which is an affiliate of the Guarantor or is
rated investment grade or better by either Moody's Investors Services or
Standard and Poors.
<PAGE>
AIRCRAFT LEASE EXTENSION AGREEMENT (N27444)
This Aircraft Lease Extension Agreement (N27444) dated as of December 28,
1994 (the "Extension Agreement") is by and between Investors Asset Holding Corp,
not individually but solely as Trustee of AFG/Horizon-I Trust, as Lessor, and
Horizon Air Industries, Inc. as Lessee.
WHEREAS, Lessor and Lessee have entered into that certain Aircraft Lease
dated as of December 20, 1989 (the "Lease") , recorded by the FAA on December
29, 1989, as Conveyance No. W08375, amended by the Amendment to Lease dated as
of October 30, 1990, recorded December 22, 1990, as Conveyance No. H73915.
Capitalized terms not otherwise defined herein shall have the meaning given to
such terms in the Lease. In the event of a conflict between the terms of the
Lease and the terms of this Agreement, the terms of this Agreement shall govern;
and
WHEREAS, the Lease shall expire by its terms on December 27, 1994; and
WHEREAS, Lessee and Lessor wish to extend the Term of the Lease and amend
certain other provisions of the Lease, including amount of Basic Rent payable
during the extension of the Term;
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements set forth herein and other valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Lessor and Lessee agree as follows:
1. Amendments to Lease. The provisions of Exhibit B of the Lease are
-------------------
hereby amended as follows:
A. The language opposite "Basic Rent" is hereby amended in its entirety
to read as follows: "$2,957,712.00, payable in the amount of $34,350 on the
Delivery Date and $34,350 per month on each Basic Rent Date thereafter through
and including the Basic Rent Date occurring on October 28, 1990, and Basic Rent
of $34,038.00 per month on each Basic Rent Date commencing with the Basic Rent
Date occurring on November 28, 1990 through and including the Basic Rent Date
occurring on November 28, 1994, and Basic Rent of $24,000.00 per month on each
Basic Rent Date commencing with the Basic Rent Date occuring on December 28,
1994 through and including the Basic Rent Date occurring on January 28, 1998".
B. The language opposite "Term" is hereby amended in its entirety to read
as follows: "The period commencing on the Delivery Date and ending at 12:00 PM
on February 27, 1998".
2. Representations, Warranties and Agreements of the Lessee. Lessee
---------------------------------------------------------
hereby represents to Lessor that, as of the date hereof.
(a) The representations and warranties contained in Sections 6 (a-f) of
the Lease, as amended by this Extension Agreement, are true and correct as of
the date hereof.
(b) The representations contained in Section 6(g) of the Lease are true
and correct with respect to the financial statements of Lessee dated September
30, 1994.
Page 1
<PAGE>
(c) No Event of Default, or event which, with the passage of time or
giving of notice, or both, would constitute an Event of Default, has occurred
and remains unremedied under the Lease.
(d) No Event of Loss has occurred under the Lease.
3. Warranty of Lessor. Lessor hereby represents to Lessee that, as of
------------------
the date hereof, the representations and warranties contained in Sections 5(a-c)
of the lease, as amended by this Agreement, are true and correct as of the date
hereof
4. Loss or Destruction; Requisition of Use
---------------------------------------
The Casualty Value schedule attached hereto as Schedule C hereby
supplements the Casualty Tables attached to the Lease as Exhibit C and shall
relate to any Event of Loss occurring during the Extension Term.
5. Events of Default
-----------------
The following shall be added as Section 18(j) of the Lease: "Alaska Air
Group, Inc. shall be in default of any of its obligations under that certain
Guaranty dated as of December 20, 1989".
6. Counterpart Execution
---------------------
This Agreement may be executed in separate counterparts, which together shall
form one and the same instrument.
(The rest of this page intentionally left blank.)
-----------------------------------------------
Page 2
<PAGE>
7. Full Force and Effect
---------------------
Except as expressly amended by this Extension Agreement, the Lease remains in
full force and effect.
IN WITNESS WHEREOF Lessor and Lessee have executed this Agreement as of the date
first written above.
LESSEE LESSOR
HORIZON AIR INDUSTRIES, INC. INVESTORS ASSET HOLDING CORP.,
not individually, but solely
as Trustee of Horizon/AFG-I Trust
By: /s/Glenn S. Johnson By: /s/ Eileen Waters
-------------------------------- -----------------------------
Name: Glenn S JOHNSON Name: Eileen Waters
------------------------------- ----------------------------
Title: VICE PRESIDENT/CONTROLLER & TREASURER Title: Manager
-------------------------------------- ---------------------------
COUNTERPART NO. 2 OF THREE SERIALLY NUMBERED MANUALLY EXECUTED
-
COUNTERPARTS. TO THE EXTEND, IF ANY, THAT THIS DOCUMENT CONSTITUTES CHATTEL
PAPER UNDER THE UNIFORM COMMERCIAL CODE, NO SECURITY INTEREST MAY BE CREATED
THROUGH THE TRANSFER AND POSSESSION OF ANY COUNTERPART OTHER THAN COUNTERPART
NO. 1.
Page 3
<PAGE>
LLR4OD-0l AMERICAN FINANCE GROUP 5/23/94 16:11:51 PAGE 1
Schedule A - Rental Schedule Economics
<TABLE>
<CAPTION>
LESSEE: HORIZON AIR INDUSTRIES, INC.
LESSOR: AMERICAN FINANCE GROUP
<S> <C>
RENTAL SCHEDULE: N27444RN1
LEASE TERM (months): 38
PRIMARY START DATE: 12/28/1994
LEASE EXPIRATION DATE: 2/27/1998
PAYMENT FREQUENCY: MONTHLY
ADVANCE/ARREARS: ADVANCE
LEASE RATE: .008672087
PER DIEM LEASE RATE: .000289070
PERIODIC RENT: $ 24,000.00
NUMBER OF PAYMENTS: 38
TOTAL INTERIM RENT: $ .00
PAYMENT COMMENCEMENT DATE: 12/28/1994
TOTAL EQUIPMENT COST: $2,767,500.00
DOCUMENTATION FEE: -0-
-------------
</TABLE>
/s/ GJ LESSEE INITIALS LESSOR INITIALS
- ----------------------
/s/ EW LESSOR INITIALS
- ----------------------
<PAGE>
LLR41D-0l AMERICAN FINANCE GROUP 5/23/94 16:11:52 PAGE 1
Schedule B Equipment Description
<TABLE>
<CAPTION>
<S>
LESSEE: HORIZON AIR INDUSTRIES, INC. RENTAL SCHEDULE AND ACCEPTANCE CERTIFICATE NUMBER: N27444RN1
LESSOR: AMERICAN FINANCE GROUP
Acceptance
Equipment Cost Serial Number Year Manufacturer Model Type Date
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2,767,500.00 AC-752 FAIRCHILD METRO III SA227-AC AIRCRAFT 12/28/1994
- -------------------
2,767,500.00 Total for Location PORTLAND INTERNATIONAL AIRPORT PORTLAND OR 97200
- -------------------
- -------------------
2,767,500.00 Total Equipment Cost
</TABLE>
<PAGE>
AMERICAN FINANCE GROUP
HORIZON AIR INDUSTRIES, INC.
Schedule C - Casualty Value Table for Rental Schedule N27444RN1
(Stated as a Percentage of Equipment Cost)
<TABLE>
<CAPTION>
AFTER
PRIMARY
TERM CASUALTY
PAYMENT NO. VALUE
- ---------- --------
<S> <C>
Prior to l 95.00
l 94.83
2 94.67
3 94.50
4 94.33
5 94.15
6 93.96
7 93.77
8 93.58
9 93.38
10 93.18
11 92.97
12 92.76
13 92.54
14 92.31
15 92.08
16 91.85
17 91.61
18 91.36
19 91.10
20 90.85
21 90.58
22 90.31
23 90.03
24 89.75
25 89.46
26 89.16
27 88.86
28 88.55
29 88.24
30 87.91
31 87.58
32 87.25
33 86.90
34 86.55
35 86.19
36 85.83
37 85.45
38 85.00
</TABLE>
