<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 December31, 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
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Commission file number 0-19137
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AIRFUND II International Limited Partnership
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(Exact name of registrant as specified in its charter)
Massachusetts 04-3057290
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
98 N. Washington St., Fifth Floor, Boston, MA 02114
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
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Securities registered pursuant to Section 12(b) of the Act NONE
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Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:
2,714,647Units 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
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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>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 7
PART III
Item 10. Directors and Executive Officers of the Partnership 8
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 10
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 13-15
</TABLE>
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<PAGE>
PART I
ITEM 1. BUSINESS.
(a) General Development of Business
AIRFUND II International Limited Partnership (the "Partnership") was
organized as a limited partnership under the Massachusetts Uniform Limited
Partnership Act (the "Uniform Act") on July 20, 1989 for the purpose of
acquiring and leasing to third parties a specified portfolio of used
commercial aircraft. Partners' capital initially consisted of contributions
of $1,000 from the General Partner (AFG Aircraft Management Corporation, a
Massachusetts corporation) and $100 from the Initial Limited Partner (AFG
Assignor Corporation, a Massachusetts corporation). The Partnership issued
2,714,647 units, representing assignments of limited partnership interests
(the "Units"), to 4,192 investors. Unitholders and Limited Partners (other
than the Initial Limited Partner) are collectively referred to as Recognized
Owners. The General Partner is an affiliate of Equis Financial Group Limited
Partnership (formerly American Finance Group), a Massachusetts limited
partnership ("EFG"). The common stock of the General Partner is owned by
AF/AIP Programs Limited Partnership. EFG and a wholly-owned affiliate are the
99% limited partners and AFG Programs, Inc., a Massachusetts corporation
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 of Limited Partnership (the "Restated Agreement, as amended").
(b) Financial Information About Industry Segments
The Partnership is engaged in only one industry segment: the business of
acquiring used commercial aircraft and leasing the aircraft to creditworthy
lessees on a full-payout or operating lease basis. (Full-payout leases are those
in which aggregate noncancellable rents equal or exceed the Purchase Price of
the aircraft. Operating leases are those in which the aggregate noncancellable
rental payments are less than the Purchase Price of the aircraft). Industry
segment data is not applicable.
(c) Narrative Description of Business
The Partnership was organized to acquire a specified portfolio of used
commercial jet aircraft subject to various full-payout and operating leases and
to lease the aircraft to third parties as income-producing investments. More
specifically, the Partnership's primary investment objectives are to acquire and
lease aircraft which will:
1. Generate quarterly cash distributions;
2. Preserve and protect invested capital; and
3. Maintain substantial residual value for ultimate sale of the aircraft.
The Partnership has the additional objective of providing certain federal
income tax benefits.
The initial Interim Closing date of the Offering of Units of the Partnership
was May 17, 1990. The initial purchase of aircraft and the associated lease
commitments occurred on May 18, 1990. Additional purchases of aircraft (or
proportionate interests in aircraft) occurred at each of five subsequent Interim
Closings, the last of which occurred on June 28, 1991, the Final Closing. The
acquisitions of the Partnership's aircraft and the associated leases is
described in Note 3 to the financial statements included in Item 14, herein. The
Partnership will terminate no later than December 31, 2005.
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 aircraft, (ii) manage the leasing, re-leasing, financing, and
refinancing of aircraft, and (iii) arrange the resale of aircraft. The Manager
is compensated for such services as described in the Restated Agreement, as
amended, in Item 13, herein and Note 4 to the financial statements included in
Item 14, herein.
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The Partnership's investment in commercial aircraft is, and will continue to
be, subject to various risks, including physical deterioration, technological
obsolescence and defaults by lessees. A principal business risk of owning and
leasing aircraft is the possibility that aggregate lease revenues and aircraft
sale proceeds will be insufficient to provide an acceptable rate of return on
invested capital after payment of all operating expenses. Consequently, the
success of the Partnership is largely dependent upon the ability of the General
Partner and its Affiliates to forecast technological advances, the ability of
the lessees to fulfill their lease obligations and the quality and marketability
of the aircraft at the time of sale.
In addition, the leasing industry is very competitive. Although all funds
available for acquisitions have been invested in aircraft, subject to
noncancellable lease agreements, the Partnership will encounter considerable
competition when the aircraft are re-leased or sold at the expiration of current
lease terms. The Partnership will compete with lease programs offered directly
by manufacturers and other equipment leasing companies, including lease programs
organized and managed similarly to the Partnership, and including other
EFG-sponsored partnerships and trusts, which may seek to re-lease or sell
aircraft within their own portfolios to the same customers as the Partnership.
Many competitors have greater financial resources and more experience than the
Partnership, the General Partner and the Manager.
In recent years, market values for used commercial jet aircraft have
deteriorated. Consistent price competition and other pressures within the
airline industry have inhibited sustained profitability for many carriers. Most
major airlines have had to re-evaluate their aircraft fleets and operating
strategies. Such issues complicate the determination of net realizable value for
specific aircraft, and particularly used aircraft, because cost-benefit and
market considerations may differ significantly between the major airlines.
Aircraft condition, age passenger capacity, distance capability, fuel
efficiency, and other factors also influence market demand and market values for
passenger jet aircraft.
Notwithstanding the foregoing, the ultimate realization of residual value
for any aircraft is dependent upon many factors, including EFG's ability to sell
and re-lease the aircraft. Changes in market conditions, industry trends,
technological advances, and other events could converge to enhance or detract
from asset values at any given time. Accordingly, EFG will attempt to monitor
changes in the airline industry in order to identify opportunities which may be
advantageous to the Partnership and which will maximize total cash returns for
each aircraft.
The General Partner will determine when each aircraft should be sold and the
terms of such sale based upon numerous factors with a view toward achieving the
investment objectives of the Partnership. The General Partner is authorized to
sell the aircraft prior to the expiration of the initial lease terms and intends
to monitor and evaluate the market for resale of the aircraft to determine
whether an aircraft should remain in the Partnership's portfolio or be sold. As
an alternative to sale, the Partnership may enter re-lease agreements when
considered advantageous by the General Partner and the Manager.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 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.
Default by a lessee under a lease may cause aircraft to be returned to the
Partnership at a time when the General Partner or the Manager is unable to
arrange for the re-lease or sale of such aircraft. This could result in the loss
of a material portion of anticipated revenues and significantly weaken the
Partnership's ability to recover the cost of invested capital.
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.
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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 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.
None.
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PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER
MATTERS.
(a) Market Information
There is no public market for the resale of the Units and it is not
anticipated that a public market for resale of the Units will develop.
(b) Approximate Number of Security Holders
At December 31, 1996, there were 3,946 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 a fiscal quarter; however,
the amount of such distribution reflects only amounts to which the General
Partner is entitled at the time such Distribution is made. 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 available Distributable Cash From
Operations and Distributable Cash From Sales or Refinancings on a quarterly
basis.
Distributions declared in 1996 and 1995 were made as follows:
<TABLE>
<CAPTION>
GENERAL RECOGNIZED
TOTAL PARTNER OWNERS
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<S> <C> <C> <C>
Total 1996 distribution $ 6,384,542 $ 276,587 $ 6,107,955
Total 1995 distributions 5,000,665 250,033 4,750,632
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Total $ 11,385,207 $ 526,620 $ 10,858,587
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</TABLE>
Distributions payable at December 31, 1995 was $714,381.
"Distributable Cash From Operations" means the net cash provided by the
Partnership's normal operations after general expenses and current
liabilities of the Partnership are paid, reduced by any reserves for working
capital and contingent liabilities to be funded from such cash, to the extent
deemed reasonable by the General Partner, and increased by any portion of
such reserves deemed by the General Partner not to be required for
Partnership operations and reduced by all accrued and unpaid Equipment
Management Fees and, after Payout, further reduced by all accrued and unpaid
Subordinated Remarketing Fees. Distributable Cash From Operations does not
include any Distributable Cash From Sales or Refinancings.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings as reduced by (i) (a) for a period of two years from Final
Closing, Cash From Sales or Refinancings, which the General Partner at its
sole discretion reinvests in additional aircraft, provided, however, that
Cash From Sales or Refinancings will be reinvested in additional aircraft
only if Partnership revenues are sufficient to make distributions to the
Recognized Owners in the amount of the income tax, if any, due from a
Recognized Owner in the 33% combined federal and state income tax bracket as
a result of such sale or refinancing of aircraft, and (b) amounts realized
from any loss or destruction of any aircraft which the General Partner
reinvests in replacement aircraft to be leased under the original lease of
the lost or destroyed aircraft, and (ii) any accrued and unpaid Equipment
Management Fees and, after Payout, any accrued and unpaid Subordinated
Remarketing Fees.
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<PAGE>
"Cash From Sales or Refinancings" means cash received by the Partnership
from Sale or Refinancing transactions, as (i) reduced by (a) all debts and
liabilities of the Partnership required to be paid as a result of Sale or
Refinancing transactions, whether or not then due and payable (including any
liabilities on aircraft 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 required
to be paid) 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 aircraft sold, which are secured by liens on such
aircraft, the amount of such obligations shall not be included in Cash From
Sales or Refinancings until the obligations are fully satisfied.
Each distribution of Distributable Cash From Operations and Distributable
Cash From Sales or Refinancings of the Partnership shall be made as follows:
Prior to Payout, (i) Distributable Cash From Operations will be distributed
95% to the Recognized Owners and 5% to the General Partner and (ii)
Distributable Cash From Sales or Refinancings shall be distributed 99% to the
Recognized Owners and 1% to the General Partner. After Payout, (i) all
Distributions will be distributed 99% to the General Partner and 1% to the
Recognized Owners until the General Partner has received an amount equal to
5% of all Distributions made by the Partnership and (ii) thereafter, all
Distributions will be made 90% to the Recognized Owners and 10% to the
General Partner.
"Payout" is defined as the first time when the aggregate amount of all
distributions to the Recognized Owners of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings equals the aggregate amount of the
Recognized Owners' original capital contributions plus a cumulative annual
return of 10% (compounded quarterly and calculated beginning with the last day
of the month of the Partnership's Closing Date) on their aggregate unreturned
capital contributions. For purposes of this definition, capital contributions
shall be deemed to have been returned only to the extent that distributions of
cash to the Recognized Owners exceed the amount required to satisfy the
cumulative annual return of 10% (compounded quarterly) on the Recognized Owners'
aggregate unreturned capital contributions, such calculation to be based on the
aggregate unreturned capital contributions outstanding on the first day of each
fiscal quarter.
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings ("Distributions") are distributed within 30 days after the
completion of each quarter, beginning with the first full fiscal quarter
following the Partnership's Closing Date. Each Distribution is described in a
statement sent to the Recognized Owners.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated herein by reference to the section entitled "Selected Financial
Data" in the 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.
(a-b) Identification of Directors and Executive Officers
THE PARTNERSHIP HAS NO DIRECTORS OR OFFICERS. As indicated in Item 1 of
this report, AFG Aircraft Management Corporation is the sole General Partner
of the Partnership. Under the Restated Agreement, as amended, the General
Partner is solely responsible for the operation of the Partnership's
properties and the Recognized Owners have no right to participate in the
control of such operations. The names, titles and ages of the Directors and
Executive Officers of the General Partner as of March 15, 1997 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF
THE GENERAL PARTNER (See Item 13)
<TABLE>
<CAPTION>
NAME TITLE AGE TERM
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<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member of the Until a
Executive Committee of successor
EFG and President and a Director is duly
of the General Partner 48 elected
and
Gary D. Engle President and Chief Executive qualified
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
of EFG 47
Sandra L. Simonsen Senior Vice President, Information
Systems of EFG 46
Gail D. Ofgant Vice President, Lease Operations
of EFG 31
</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 and a member
of the Executive Committee of EFG and President of AFG Realty Corporation.
Mr. Engle is Vice President and a Director of certain of EFG's affiliates and
a Director of the General Partner. On December 16, 1994, Mr. Engle acquired
control of EFG, the General Partner and each of EFG's subsidiaries. Mr. Engle
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.
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.
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<PAGE>
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.
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(a) Cash Compensation
Currently, the Partnership has no employees. However, under the terms of the
Restated Agreement, as amended, the Partnership is obligated to pay all costs of
personnel employed full or part-time by the Partnership, including officers or
employees of the General Partner or its Affiliates. There is no plan at the
present time to make any partners or employees of the General Partner or its
Affiliates employees of the Partnership. The Partnership has not paid and does
not propose to pay any options, warrants or rights to the officers or employees
of the General Partner or its Affiliates.
(b) Compensation Pursuant to Plans
None.
(c) Other compensation
Although the Partnership has no employees, as discussed in Item 11(a),
pursuant to Section 10.4(c) of the Restated Agreement, as amended, the
Partnership incurs a monthly charge for personnel costs of the Manager for
persons engaged in providing administrative services to the Partnership. A
description of the remuneration paid by the Partnership to the Manager for such
services is included in Item 13, herein, and in Note 4 to the financial
statements included in Item 14, herein.
(d) Compensation of Directors
None.
(e) Termination of Employment and Change of Control Arrangement
There exists no remuneration plan or arrangement with the General Partner or
its Affiliates which results or may result from their resignation, retirement or
any other termination.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
By virtue of its organization as a limited partnership, the Partnership has
outstanding no securities possessing traditional voting rights. However, as
provided for in Section 11.2(a) of the Restated Agreement, as amended (subject
to Sections 11.2(b) and 11.3), a majority interest of the Recognized Owners have
voting rights with respect to:
1. Amendment of the Restated Agreement;
2. Termination of the Partnership;
3. Removal of the General Partner; and
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<PAGE>
4. Approval or disapproval of the sale of substantially all of the assets of
the Partnership (except in the orderly liquidation of the Partnership upon its
termination and dissolution).
No person or group is known by the General Partner to own beneficially more
than 5% of the Partnership's 2,714,647 outstanding Units as of March 1, 1997.
The ownership and organization of EFG is described in Item 1 of this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The General Partner of the Partnership is AFG Aircraft Management
Corporation, an affiliate of EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
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 $ 235,339 $ 329,292 $ 450,100
Administrative charges 28,694 21,000 12,000
Reimbursable operating expenses
due to third parties 2,071,725 136,035 116,701
------------ ---------- ----------
Total $ 2,335,758 $ 486,327 $ 578,801
------------ ---------- ----------
------------ ---------- ----------
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include all aspects of
acquisition, management and sale of equipment. For acquisition services, EFG was
compensated by an amount equal to 3.07% 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(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG.
All aircraft were purchased from EFG or one of its affiliates. The
Partnership's Purchase Price was determined by the method described in Note 2 to
the financial statements included in Item 14, herein.
All rents and proceeds from the sale of equipment are paid directly to EFG.
EFG temporarily deposits collected funds in a separate interest-bearing escrow
account prior to remittance to the Partnership. At December 31, 1996, the
Partnership was owed $146,567 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in January 1997.
In 1990, EFG assigned its equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG. AF/AIP
Programs Limited Partnership also entered into a nonexclusive confirmatory
agreement with
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EFG's former majority owned subsidiary, AIRFUND Corporation ("AFC"), for the
provision of aircraft remarketing services.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
See Item 13(a) above.
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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:
<TABLE>
<S> <C>
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........................................... *
</TABLE>
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K, as set forth in
Item 601 of Regulation S-K, are not applicable.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
--------
<S> <C>
4 Amended and Restated Agreement and Certificate of Limited Partnership included as
Exhibit A to the Prospectus which is included in Registration Statement on Form S-1
(No. 33-25334).
13 The 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 period May 17, 1990 (commencement of operations) to
December 31, 1990 as Exhibit 28 (a) and is incorporated herein by reference.
</TABLE>
* 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>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
--------
<S> <C>
99 (b) Lease agreement with Northwest Airlines, Inc. was filed in the Registrant's Annual
Report on Form 10-K for the period May 17, 1990 (commencement of operations) to
December 31, 1990 as Exhibit 28 (b) and is incorporated herein by reference.
99 (c) Lease agreement with Alaska Airlines, Inc. was filed in the Registrant's Annual
Report on Form 10-K for the period May 17, 1990 (commencement of operations) to
December 31, 1990 as Exhibit 28 (c) and is incorporated herein by reference.
99 (d) Lease agreement with Cathay Pacific Airways Limited was filed in the Registrant's
Annual Report on Form 10-K for the period May 17, 1990 (commencement of operations)
to December 31, 1990 as Exhibit 28 (d) and is incorporated herein by reference.
99 (e) Lease agreement with Cathay Pacific Airways Limited was filed in the Registrant's
Annual Report on Form 10-K for the period May 17, 1990 (commencement of operations)
to December 31, 1990 as Exhibit 28 (e) and is incorporated herein by reference.
99 (f) Lease agreement with American Trans Air, Inc. is filed in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996 and is included herein.
</TABLE>
(b) Reports on Form 8-K
None.
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<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of AIRFUND II International Limited Partnership of our report dated
March 14, 1997, included in the 1996 Annual Report to Partners of AIRFUND II
International Limited Partnership.
ERNST & YOUNG LLP
Boston, Massachusetts
March 14, 1997
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
By: AFG Aircraft Management Corporation,
a Massachusetts corporation and the
General Partner of the Registrant.
<TABLE>
<S> <C>
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 Treasure
of the General Partner of the General Partner
(Principal Financial Officer) (Principal Accounting Officer)
Date: March 31, 1997 Date: March 31, 1997
- -------------------------------------- -------------------------------
</TABLE>
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<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.
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<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
Annual Report to the Partners, December 31, 1996
<PAGE>
AIRFUND II INTERNATIONAL 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.......................................................................... 3-7
FINANCIAL STATEMENTS:
Report of Independent Auditors........................................................ 8
Statement of Financial Position at December 31, 1996 and 1995......................... 9
Statement of Operations for the years ended December 31, 1996, 1995 and 1994.......... 10
Statement of Changes in Partners' Capital for the years ended December 31, 1996, 1995
and 1994............................................................................ 11
Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994.......... 12
Notes to the Financial Statements..................................................... 13-22
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment
Disposed............................................................................ 23
Statement of Cash and Distributable Cash From Operations, Sales and Refinancings...... 24
Schedule of Costs Reimbursed to the General Partner and its Affiliates as Required
Section 10.4 of the Amended and Restated Agreement and Certificate of Limited
Partnership......................................................................... 25
</TABLE>
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<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 years in the five year period ended December 31, 1996:
<TABLE>
<CAPTION>
SUMMARY OF
OPERATIONS 1996 1995 1994 1993 1992
- -------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Lease revenue......................... $ 4,706,774 $ 6,585,836 $ 9,001,993 $ 7,976,109 $ 8,366,019
Net income (loss)..................... $ (3,649,940) $ (5,286,053) $ (1,474,819) $ (4,686,207) $ 2,184,789
Per Unit:
Net income (loss)................... $ (1.28) $ (1.85) $ (0.52) $ (1.64) $ 0.76
Cash distributions declared......... $ 2.25 $ 1.75 $ 2.50 $ 2.50 $ 2.56
FINANCIAL POSITION
- --------------------------------------
Total assets.......................... $ 13,163,812 $ 21,432,133 $ 31,553,833 $ 40,195,205 $ 51,782,365
Total long-term obligations........... $ 3,419,785 $ 1,432,396 -- -- --
Partners' capital..................... $ 8,602,879 $ 18,637,361 $ 28,924,079 $ 37,542,705 $ 49,372,719
</TABLE>
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<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
As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. During 1990 and 1991, the Partnership purchased
four commercial jet aircraft and a proportionate interest in two additional
aircraft which were leased by major carriers engaged in passenger
transportation. Initially, each aircraft generated rental revenue pursuant to
primary-term lease agreements. In 1995, the Partnership transferred its
proportionate ownership interest in one aircraft to the existing lessee, United
Airlines, Inc.("United"), in exchange for proportionate interests in three
aircraft leased to Southwest Airlines, Inc., pursuant to lease agreements which
expire in 1999. During the first quarter of 1996, the Partnership completed the
replacement of the United Aircraft with proportionate interests in two aircraft
leased to Finnair OY, pursuant to lease agreements which also expire in 1999.
One of the four commercial aircraft held in the Partnership's original portfolio
was returned to the Partnership in 1995, upon the expiration of its lease term
and in September 1996, upon completion of refurbishments, was re-leased to
Transmeridian Airlines (see below). The Partnership continues to own a
proportionate interest in an aircraft which was returned by the lessee on June
30, 1996 and is currently undergoing heavy maintenance. The Partnership entered
into a new 12-month lease agreement with Aer Lease Limited with respect to its
interest in this aircraft, effective upon completion of the heavy maintenance.
In 1996, the Partnership sold one of its original aircraft to the lessee,
Northwest Airlines, Inc.("Northwest"). At December 31, 1996, the Partnership
also owned a complete interest in two other aircraft, one of which is being
leased pursuant to a re-lease agreement which will expire in January 1997 (see
below), and the second which is currently undergoing heavy maintenance. The
second aircraft was returned by the lessee, upon completion of its renewal lease
term, in September 1996. The General Partner is actively seeking the re-lease of
this aircraft. Upon expiration of the current lease agreements, each aircraft
will be re-leased or sold depending on prevailing market conditions and the
assessment of such conditions by Equis Financial Group Limited Partnership
(formerly American Finance Group) a Massachusetts limited partnership ("EFG") to
obtain the most advantageous economic benefit. Ultimately, all aircraft will be
sold and the net proceeds will be distributed to the Partners, after all
liabilities and obligations of the Partnership have been satisfied.
RESULTS OF OPERATIONS
For the year ended December 31, 1996, the Partnership recognized lease
revenue of $4,706,774 compared to $6,585,836 and $9,001,993 for the same
periods in 1995 and 1994, respectively. The decrease in lease revenue from
1995 to 1996 was due primarily to lease term expirations related to the
Partnership's Lockheed L-1011-100 and its proportionate interest in a
Lockheed L-1011-50 and the sale of a 727-200 ADV aircraft (discussed below).
The decrease was partially offset by the effects of the Partnership's
aircraft exchange (discussed below) which was concluded late in the first
quarter of 1996. As a result of the exchange, the Partnership replaced its
ownership interest in a Boeing 747-SP aircraft, having aggregate quarterly
lease revenues of $149,640, with interests in five other aircraft (three
Boeing 737 aircraft leased by Southwest Airlines, Inc. and two McDonnell
Douglas MD-82 aircraft leased by Finnair OY) having aggregate quarterly lease
revenues of $254,373. The Finnair Aircraft were exchanged into the
Partnership on March 25, 1996. Accordingly, revenue for year ended December
31, 1996 did not fully reflect the annual rents ultimately anticipated from
the like-kind exchange. The decrease in lease revenue from 1994 to 1995 was
due primarily to the receipt in 1994, of lease termination rents of
$1,966,511 (see below).
The Partnership's Boeing 727-251 ADV aircraft, formerly on a renewal rental
agreement with Northwest was returned upon expiration of its lease term on
November 30, 1995. This aircraft has undergone heavy maintenance, approximately
$984,000 of which was incurred or accrued during the year ended
-3-
<PAGE>
December 31, 1996. During 1996, the Partnership received $468,133 from the
former lessee of this aircraft, representing a reimbursement of additional
heavy maintenance costs. In September 1996, the Partnership entered into a
new 28-month lease agreement with Transmeridian Airlines, to re-lease this
aircraft for aggregate rents over the lease term of approximately $1,941,000.
The Partnership owns a whole and a partial interest in two Lockheed L-1011
aircraft formerly leased to Cathay Pacific Airways Limited ("Cathay"). The
Partnership's original lease agreements with Cathay provided for semi-annual
rent adjustments based on the six month London Inter-Bank Offered Rate
("LIBOR"). Accordingly, rents generated from these leases fluctuated in relation
to the prevailing LIBOR rate on a semi-annual basis. The Partnership's renewal
lease agreements with Cathay (having adjusted semi-annual rents aggregating
$1,353,599) expired on February 14, 1996 and were extended until April 11, 1996.
Subsequent to this extension, Cathay again extended the lease on one of the
aircraft until June 30, 1996 and on the other until September 30, 1996, both at
fixed rates. The Partnership recognized aggregate revenue from the extensions of
both of these aircraft of $576,814 in 1996. Cathay subsequently returned both
aircraft to the Partnership upon the expiration of the extensions and both
aircraft are currently undergoing heavy maintenance. The heavy maintenance on
the Lockheed L-1011-50 is expected to cost the Partnership approximately
$362,000, all of which was accrued or incurred during the year ended December
31, 1996. The Partnership entered into a new 12-month lease agreement with Aer
Lease Limited, with respect to its interest in the L-1011-50 aircraft, at a base
rent to the Partnership of $39,550 per month, effective upon completion of the
heavy maintenance. The heavy maintenance on the Lockheed L-1011-100 is expected
to cost the Partnership approximately $400,000 all of which was accrued or
incurred during the year ended December 31, 1996. The General Partner is
actively seeking the re-lease of this aircraft. Currently, the demand for L-1011
aircraft is weak, limited principally to air cargo carriers and operators of
passenger charters. Several major airlines have reduced their commitment to the
L-1011. Such circumstances have inhibited the remarketing of the Partnership's
L-1011 aircraft and have required the Partnership to incur costs to meet the
needs of Aer Lease Limited and other potential successor lessees. Accordingly,
until the Partnership's L-1011 aircraft are sold, the General Partner will
continue to reserve a portion of the Partnership's cash for such purposes.
The Partnership's portfolio includes an aircraft currently leased to
American Trans Air, Inc. ("ATA") pursuant to a re-lease agreement which was
originally scheduled to expire on January 31, 1997. ATA has renewed this lease
for an additional twenty-four months through January 31, 1999, at the existing
rent of $63,500 per month. In 1994, the Partnership received $1,966,511 from the
former lessee of this aircraft as part of an agreement to terminate its lease.
The Partnership holds a proportionate ownership interest in the Cathay,
Southwest and Finnair Aircraft discussed above. The remaining interests are
owned by other affiliated partnerships sponsored by EFG. All partnerships
individually report, in proportion to their respective ownership interests,
their respective shares of assets, liabilities, revenues and expenses
associated with the aircraft. (See Notes 2 and 3 to the financial statements.)
Interest income for the year ended December 31, 1996 was $265,820 compared
to $172,530 and $140,762 for the years ended December 31, 1995 and 1994,
respectively. Generally, interest income is generated from temporary investments
of rental receipts and equipment sale proceeds in short-term instruments. The
increase in interest income in 1996 compared to 1995 and 1994 is a result of
interest of $39,346 earned on cash held in a special-purpose escrow account in
connection with the like-kind exchange transactions discussed below and interest
earned on sale proceeds associated with the Boeing 727-200 ADV aircraft prior to
the time such proceeds were distributed to the Recognized Owners.
During July 1996, the Partnership sold a Boeing 727-200 ADV jet aircraft
with an original cost and net book value of $11,164,679 and $3,074,680,
respectively, to the existing lessee. In connection with this sale, the
Partnership realized sale proceeds of $3,535,649, which resulted in a net gain,
for financial statement purposes, of $460,969. The Partnership also realized
lease termination rents of $429,351 in connection with this sale as the aircraft
was sold prior to the expiration of the related lease term.
-4-
<PAGE>
In September 1995, the Partnership transferred its entire ownership interest
(23.19%) in a Boeing 747-SP aircraft (the "United Aircraft") to its lessee,
United. The transaction was structured as a like-kind exchange for income tax
reporting purposes. The Partnership received aggregate cash consideration of
$1,910,907, including $106,411 for rent accrued through the transfer date. The
net cash consideration of $1,804,496 was deposited into a special-purpose escrow
account through a third-party exchange agent pending the completion of the
aircraft exchange. The Partnership's interest in the United Aircraft had a net
book value of $2,301,510 at the date of transfer and resulted in a net loss for
financial reporting purposes of $497,014.
In November 1995, the Partnership partially replaced the United Aircraft
with a 13.11% ownership interest in the Southwest Aircraft, at an aggregate cost
of $1,919,500. To acquire the interest in the Southwest Aircraft, the
Partnership obtained financing of $1,432,396 from a third-party lender and
utilized $487,104 of the cash consideration received from the transfer of the
United Aircraft. The remaining ownership interest of 86.89% in the Southwest
Aircraft is held by affiliated equipment leasing programs sponsored by EFG.
Additionally, in March 1996, the Partnership completed the replacement of
the United Aircraft with a 14.85% ownership interest in two Finnair Aircraft
at a total cost to the Partnership of $4,157,280. To acquire the ownership
interest in the Finnair Aircraft, the Partnership paid $1,389,942, including
the remaining balance of the United cash consideration, and obtained
financing of $2,767,338 from a third-party lender. The remaining ownership
interest of 85.15% of the Finnair Aircraft is held by affiliated equipment
leasing programs sponsored by EFG. The like-kind exchange, involving the
United, Southwest and Finnair Aircraft, was undertaken, in part, to mitigate
the Partnership's economic risk resulting from the United Aircraft being
returned to the Partnership upon its lease expiration in April 1996 and
remaining off-lease for an extended period. The exchange enabled the
Partnership to replace a specialized aircraft with other aircraft which are
used more widely in the industry and also to significantly extend its rental
stream with two creditworthy lessees.
The Partnership recorded a write-down of aircraft carrying values,
representing impairments, during each of the years ended December 31, 1996, 1995
and 1994. The resulting charges, $2,832,800 ($0.99 per limited partnership unit)
in 1996, $6,139,040 ($2.15 per limited partnership) in 1995 and $3,721,000
($1.30 per limited partnership unit) in 1994 were based on a comparison of
estimated net realizable values and corresponding carrying values for each of
the Partnership's aircraft.
Net realizable values were estimated based on (i) third-party appraisals
of the Partnership's aircraft and (ii) EFG's assessment of prevailing market
conditions for similar aircraft. Market values for the Partnership's used
commercial jet aircraft have continued to deteriorate. Consistent price
competition and other pressures within the airline industry have inhibited
sustained profitability for many carriers. Most major airlines have had to
re-evaluate their aircraft fleets and operating strategies. Such issues
complicate the determination of net realizable value for specific aircraft,
and particularly used aircraft, because cost-benefit and market
considerations may differ significantly between the major airlines. Aircraft
condition, age, passenger capacity, distance capability, fuel efficiency, and
other factors also influence market demand and market values for passenger
jet aircraft.
A significant consideration in evaluating used commercial aircraft is
compliance with The Airport Capacity Act of 1990 (the "Airport Act"), which
prohibits the operation of Stage 2 commercial jet aircraft to or from U.S.
airports after December 31, 1999. Stage designations range from Stage 1 to Stage
3 and are indicative of an aircraft's compliance with noise level regulations
promulgated by the Federal Aviation Administration. Stage 3 designates the
highest level of compliance. The Partnership's two Boeing 727 aircraft leased to
Transmeridian and ATA are Stage 2 aircraft. Various hush kit and re-engineering
programs are available to retrofit Stage 2 aircraft to comply with the Airport
Act; however, the cost to effect such improvements is estimated to range from $2
million to $3 million per aircraft. Accordingly, this factor is a major
consideration in assessing estimated net realizable value for used aircraft and
is the principal reason for the write-down which the Partnership recognized in
1994. The write-downs in 1996 and 1995 resulted from the deterioration in the
market value of the Partnership's interest in the L-1011 aircraft (see
discussion above).
Notwithstanding the foregoing, the ultimate realization of residual value
for any aircraft will be dependent upon many factors, including EFG's ability to
sell and re-lease the aircraft. Changes in market conditions, industry trends,
technological advances, and other events could converge to enhance or detract
from asset values at any
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<PAGE>
given time. Accordingly, EFG will attempt to monitor changes in the airline
industry in order to identify opportunities which may be advantageous to the
Partnership and which will maximize total cash returns for each aircraft.
The total economic value realized upon final disposition of each aircraft
will be comprised of all primary lease term revenue generated from that
aircraft, together with its residual value. The latter consists of cash proceeds
realized upon the aircraft's sale in addition to all other cash receipts
obtained from renting the aircraft on a re-lease, renewal or month-to-month
basis. Consequently, the amount of any future gain or loss reported in the
financial statements may not necessarily be indicative of the total residual
value the Partnership achieved from leasing the aircraft
Interest expense was $264,200 or 5.6% of lease revenue in 1996 and $19,198
or less than 1% of lease revenue in 1995. Interest expense resulted from
financing obtained from third-party lenders in connection with the Southwest
Aircraft and the Finnair Aircraft, described above. Interest expense in future
periods will decline as the principal balance of notes payable is reduced
through the application of rent receipts to outstanding debt.
Management fees were 5% of lease revenue during 1996, 1995 and 1994 and will
not change as a percentage of lease revenue in future periods.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as
insurance, printing, distribution and remarketing expenses The increase in
operating expenses during 1996 compared to 1995 and 1994 is due primarily to
heavy maintenance costs incurred in connection with the Boeing 727-251 ADV
aircraft and the two Lockheed L-1011 aircraft, discussed above. In addition,
in 1996 the Partnership incurred legal costs associated with Transmeridian
Airlines legal proceedings (see Note 7 to the financial statements, herein)
Operating expenses increased in 1995 compared to 1994 due to an increase in
professional service costs. The amount of future operating expenses cannot be
predicted with certainty; however, such expenses are usually higher during
the acquisition and liquidation phases of a partnership. Other fluctuations
will occur in relation to the volume and timing of aircraft remarketing
activities. Depreciation and amortization expense was $3,650,745, $4,902,840
and $6,317,773 for the years ended December 31, 1996, 1995 and 1994,
respectively.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity which was established
for specific purposes described in the preceding "Overview". As an equipment
leasing program, the Partnership's principal operating activities derive from
aircraft rental transactions. Accordingly, the Partnership's principal source of
cash from operations is 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 $3,205,567, $6,010,056 and $8,649,676
in 1996, 1995 and 1994, respectively. The expiration of the Partnership's lease
agreements related to its Lockheed L-1011-100 and its proportionate interest in
the Lockheed L-1011-50 and the sale of a Boeing 727-200 Advanced aircraft will
cause a decline in the Partnership's future lease revenue and corresponding
sources of operating cash. This will be partially offset by rents generated in
connection with the Southwest Aircraft, the Finnair Aircraft and the aircraft on
lease to Transmeridian Airlines. Overall, expenses associated with rental
activities, such as management fees, and net cash flow from operating activities
will decline as the Partnership remarkets its aircraft. Ultimately, the
Partnership will dispose of all aircraft under lease. This will occur
principally through sale transactions whereby each aircraft will be sold to the
existing lessee or to a third party. Generally, this will occur upon expiration
of each aircraft's primary or renewal/re-lease term.
Cash expended for equipment acquisitions and cash realized form asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. For the year ended December 31, 1996, the
Partnership expended $72,550 in cash in connection with the like-kind exchange
transactions referred to above. During year ended December 31, 1996, the
Partnership realized $3,535,649 in proceeds from the sale of a Boeing 727-200
ADV aircraft. Future inflows of cash from asset disposals will vary in
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<PAGE>
timing and amount and will be influenced by many factors including, but not
limited to, the frequency and timing of lease expirations, the equipment's
condition and age, and future market conditions.
As described in Results of Operations, the Partnership obtained long-term
financing in connection with the like-kind exchange transactions involving the
Southwest Aircraft and the Finnair Aircraft. The corresponding note agreements
are recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period. As
rental payments are collected, a portion or all of the rental payment will be
used to repay principal and interest. The Partnership has a balloon payment
obligation at the expiration of the primary lease term related to the Finnair
Aircraft of $1,411,035 (see Note 5 to the financial statements, included
herein).
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 $6,384,542. Of the total
distributions, $6,107,955 was allocated to the Recognized Owners and $276,587
was allocated to the General Partner. The was no fourth quarter 1996 cash
distribution.
Cash distributions paid to the Recognized Owners consist of both a return of
and a return on capital. To the extent that cash distributions consist of Cash
From Sales or Refinancings, substantially all of such cash distributions should
be viewed as a return of capital. Cash distributions do not represent and are
not indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each aircraft
at its disposal date. Future market conditions, technological changes, the
ability of EFG to manage and remarket the aircraft, and many other events and
circumstances, could enhance or detract from individual asset yields and the
collective performance of the Partnership's aircraft portfolio.
Overall, the future liquidity of the Partnership will be greatly dependent
upon the collection of contractual rents and the outcome of residual activities.
The General Partner anticipates that cash proceeds resulting from these sources
will satisfy the Partnership's future expense obligations. However, the amount
of cash available for distribution in future periods is expected to fluctuate
widely as the General Partner attempts to remarket the Partnership's aircraft
and possibly upgrade certain aircraft to meet the standards of potential
successor lessees.
The Partnership has incurred and accrued significant heavy maintenance
costs in connection with its remarketing efforts related to the two Cathay
aircraft and the Transmeridian aircraft. The Partnership also expects to
incur additional costs in future years as the Partnership's remaining
aircraft are remarketed. The amount of such costs will depend upon the extent
of upgrades or refurbishments necessary to prepare these aircraft for sale or
re-lease. These costs have presented, and will continue to present, demands
on the Partnership's cash position. Accordingly, the General Partner will
continue to reserve a significant portion of the Partnership's cash for such
purposes. The General Partner anticipates that future cash distributions will
be contingent primarily upon the realization of sale proceeds generated from
remarketing the Partnership's remaining aircraft and the extent of the
Partnership's cash reserve requirements. Accordingly, the General Partner
expects to continue to suspend the declaration of quarterly cash
distributions between the periods corresponding to major remarketing events.
-7-
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of AIRFUND II International Limited Partnership:
We have audited the accompanying statements of financial position of AIRFUND
II International 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 AIRFUND II International
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
-8-
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents...................................... $ 2,347,762 $ 3,557,968
Contractual right for equipment................................ -- 1,317,392
Rents receivable............................................... -- 169,906
Accounts receivable--affiliate................................. 146,567 316,439
Equipment at cost, net of accumulated depreciation of
$39,961,731 and $41,568,185 at December 31, 1996 and 1995,
respectively................................................. 10,669,483 16,070,428
----------- -----------
Total assets................................................. $13,163,812 $21,432,133
----------- -----------
----------- -----------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable.................................................. $ 3,419,785 $ 1,432,396
Accrued interest............................................... 35,929 19,197
Accrued liabilities............................................ 541,534 93,140
Accrued liabilities--affiliate................................. 489,018 58,152
Deferred rental income......................................... 74,667 477,506
Cash distributions payable to partners......................... -- 714,381
----------- -----------
Total liabilities............................................ 4,560,933 2,794,772
----------- -----------
Partners' capital (deficit):
General Partner................................................ (2,565,312) (2,106,228)
Limited Partnership Interests (2,714,647 Units; initial
purchase price of $25 each).................................. 11,168,191 20,743,589
----------- -----------
Total partners' capital...................................... 8,602,879 18,637,361
----------- -----------
Total liabilities and partners' capital...................... $13,163,812 $21,432,133
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
9
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Income:
Lease revenue................................................... $ 4,706,774 $ 6,585,836 $ 9,001,993
Interest income................................................. 265,820 172,530 140,762
Gain on sale of equipment....................................... 460,969 -- --
Loss on exchange of equipment................................... -- (497,014) --
----------- ----------- -----------
Total income.................................................. 5,433,563 6,261,352 9,142,755
----------- ----------- -----------
Expenses:
Depreciation and amortization................................... 3,650,745 4,902,840 6,317,773
Write-down of equipment......................................... 2,832,800 6,139,040 3,721,000
Interest expense................................................ 264,200 19,198 --
Equipment management fees--affiliate............................ 235,339 329,292 450,100
Operating expenses--affiliate................................... 2,100,419 157,035 128,701
----------- ----------- -----------
Total expenses................................................ 9,083,503 11,547,405 10,617,574
----------- ----------- -----------
Net loss.......................................................... $(3,649,940) $(5,286,053) $(1,474,819)
----------- ----------- -----------
----------- ----------- -----------
Net loss per limited partnership unit............................. $ (1.28) $ (1.85) $ (0.52)
----------- ----------- -----------
----------- ----------- -----------
Cash distributions declared per limited partnership unit.......... $ 2.25 $ 1.75 $ 2.50
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
-10-
<PAGE>
AIRFUND II INTERNATIONAL 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........................... $(1,160,961) 2,714,647 $38,703,666 $37,542,705
Net loss--1994......................................... (73,741) -- (1,401,078) (1,474,819)
Cash distributions declared............................ (357,190) -- (6,786,617) (7,143,807)
----------- ---------- ----------- -----------
Balance at December 31, 1994........................... (1,591,892) 2,714,647 30,515,971 28,924,079
Net loss--1995......................................... (264,303) -- (5,021,750) (5,286,053)
Cash distributions declared............................ (250,033) -- (4,750,632) (5,000,665)
----------- ---------- ----------- -----------
Balance at December 31, 1995........................... (2,106,228) 2,714,647 20,743,589 18,637,361
Net loss--1996......................................... (182,497) -- (3,467,443) (3,649,940)
Cash distributions declared............................ (276,587) -- (6,107,955) (6,384,542)
----------- ---------- ----------- -----------
Balance at December 31, 1996........................... $(2,565,312) 2,714,647 $11,168,191 $ 8,602,879
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
11
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ---------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net loss............................................................. $(3,649,940) $(5,286,053) $(1,474,819)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation and amortization....................................... 3,650,745 4,902,840 6,317,773
Write-down of equipment............................................. 2,832,800 6,139,040 3,721,000
Gain on sale of equipment........................................... (460,969) -- --
Loss on exchange of equipment...................................... -- 497,014 --
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable................................................... 169,906 (65,982) --
Accounts receivable--affiliate..................................... 169,872 19,004 108,468
Increase (decrease) in:
Accrued interest................................................... 16,732 19,197 --
Accrued liabilities................................................ 448,394 (178,101) (38,881)
Accrued liabilities--affiliate..................................... 430,866 33,241 16,843
Deferred rental income............................................. (402,839) (70,144) (708)
----------- ----------- -------------
Net cash from operating activities................................ 3,205,567 6,010,056 8,649,676
----------- ----------- -------------
Cash flow from (used in) investing activities:
Purchase of equipment............................................... (72,550) -- --
Proceeds from equipment sales....................................... 3,535,649 -- --
----------- ----------- -------------
Net cash from investing activities................................ 3,463,099 -- --
----------- ----------- -------------
----------- ----------- -------------
Cash flow used in financing activities:
Principal payments--notes payable................................... (779,949) -- --
Distributions paid.................................................. (7,098,923) (6,072,236) (7,143,807)
----------- ----------- -------------
Net cash used in financing activities................................ (7,878,872) (6,072,236) (7,143,807)
----------- ----------- -------------
Net increase (decrease) in cash and cash equivalents................. (1,210,206) (62,180) 1,505,869
Cash and cash equivalents at beginning of year....................... 3,557,968 3,620,148 2,114,279
----------- ----------- -------------
Cash and cash equivalents at end of year............................. $ 2,347,762 $ 3,557,968 $ 3,620,148
----------- ----------- -------------
----------- ----------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............................... $ 247,468 -- --
----------- ----------- -------------
----------- ----------- -------------
</TABLE>
Supplemental disclosure 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.
-12-
<PAGE>
AIRFUND II INTERNATIONAL 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 July 20,
1989 for the purpose of acquiring and leasing to third parties a specified
portfolio of used commercial aircraft. Partners' capital initially consisted
of contributions of $1,000 from the General Partner (AFG Aircraft Management
Corporation, a Massachusetts corporation) and $100 from the Initial Limited
Partner (AFG Assignor Corporation, a Massachusetts corporation). The
Partnership issued 2,714,647 units, representing assignments of limited
partnership interests (the "Units"), to 4,192 investors. Unitholders and
Limited Partners (other than the Initial Limited Partner) are collectively
referred to as Recognized Owners. The General Partner is an affiliate of
Equis Financial Group Limited Partnership (formerly American Finance Group),
a Massachusetts limited partnership ("EFG"). The common stock of the General
Partner is owned by AF/AIP Programs Limited Partnership. EFG and a
wholly-owned affiliate are the 99% limited partners and AFG Programs, Inc., a
Massachusetts corporation which is wholly-owned by Geoffrey A. MacDonald, is
the 1% general partner. The General Partner is not required to make any other
capital contributions to the Partnership except as may be required under the
Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and
Certificate of Limited Partnership (the "Restated Agreement, as amended").
EFG is a Massachusetts partnership formerly known as American Finance Group
("AFG"). AFG was established in 1988 as a Massachusetts general partnership and
succeeded American Finance Group, Inc., a Massachusetts corporation organized in
1980. EFG and its subsidiaries (collectively, the "Company") are engaged in
various aspects of the equipment leasing business, including EFG's role as
Equipment Manager or Advisor to the Partnership and several other
Direct-Participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also owns
a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party (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 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.
In 1990, EFG assigned its Equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG. AF/AIP
Programs Limited Partnership also entered into a nonexclusive confirmatory
agreement with EFG's former majority owned subsidiary, AIRFUND Corporation, for
the provision of aircraft remarketing services.
-13-
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1--ORGANIZATION AND PARTNERSHIP MATTERS (CONTINUED)
On June 28, 1991, the Offering of Units of the Partnership was concluded.
The Partnership issued an aggregate of 2,714,647 Units in six Interim Closings
during the period May 17, 1990 through June 28, 1991. The initial purchase of
the aircraft and the associated lease commitments occurred on May 18, 1990.
Additional purchases of aircraft (or proportionate interests in aircraft)
occurred subsequent to each Closing. The six Interim Closings which occurred in
1990 and 1991 and the associated Units issued, purchase price and number of
investors who became Recognized Owners of the Partnership are summarized below.
RECOGNIZED
CLOSING DATE UNITS ISSUED PURCHASE PRICE OWNERS
- -------------------------------- ------------ -------------- ---------
May 17, 1990.................... 1,725,100 $43,127,500 2,600
August 2, 1990.................. 317,986 7,949,650 494
October 1, 1990................. 159,510 3,987,750 251
December 27, 1990............... 246,845 6,171,125 398
February 15, 1991............... 112,796 2,819,900 173
June 28, 1991................... 152,410 3,810,250 276
----------- ------------- -----
Totals.......................... 2,714,647 $67,866,175 4,192
----------- ------------- -----
----------- ------------- -----
Pursuant to the Restated Agreement, as amended, distributions of
Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings of the Partnership shall be made as follows: Prior to Payout, (i)
Distributable Cash From Operations will be distributed 95% to the Recognized
Owners and 5% to the General Partner and (ii) Distributable Cash From Sales or
Refinancings shall be distributed 99% to the Recognized Owners and 1% to the
General Partner. After Payout, (i) all Distributions will be distributed 99% to
the General Partner and 1% to the Recognized Owners until the General Partner
has received an amount equal to 5% of all Distributions made by the Partnership
and (ii) thereafter, all Distributions will be made 90% to the Recognized Owners
and 10% 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 10% (compounded quarterly) on undistributed invested capital.
Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services. (Also see Note
4.)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STATEMENT OF CASH FLOWS
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in reverse
repurchase agreements with overnight maturities. Under the terms of the
agreements, title to the underlying securities passes to the Partnership. The
securities underlying the agreements are book entry securities. At December 31,
1996 the Partnership had $2,245,000 invested in reverse repurchase agreements
secured by U.S. Treasury Bills or interests in U.S. Government securities.
-14-
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
STATEMENT OF CASH FLOWS (CONTINUED)
REVENUE RECOGNITION
Rents are payable to the Partnership monthly or quarterly and no significant
amounts are calculated on factors other than the passage of time. The leases are
accounted for as operating leases and are noncancellable. Rents received prior
to their due dates are deferred. Future minimum rents are $5,838,915 are due as
follow:
For the year ending December 31, 1997................. $2,739,492
1998................. 2,466,911
1999................. 601,048
2000................. 31,464
---------
Total................ $5,838,915
----------
----------
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 as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Northwest Airlines, Inc. (One Boeing 727-251 ADV and one Boeing 727-200
ADV) $1,421,629 $2,493,823 $3,223,153
Alaska Airlines, Inc./American Trans Air, Inc. (One Boeing 727-208 ADV) $ 762,000 $ 762,000 $2,126,511
Cathay Pacific Airways Limited (Two Lockheed L-1011) $1,419,024 $2,775,726 $2,373,018
</TABLE>
In September 1995, the Partnership transferred its ownership interest in a
Boeing 747-SP-21 commercial jet aircraft (the "United Aircraft") to the existing
lessee, United Air Lines, Inc., pursuant to the rules for a like-kind exchange
transaction for income tax reporting purposes. In November 1995, the Partnership
partially replaced the United Aircraft with a 13.11% interest in three Boeing
737-2H4 aircraft leased to Southwest Airlines, Inc. (the "Southwest Aircraft").
The Partnership will receive approximately $378,000 of rental revenue in each of
the years in the period ending December 31, 1999, and approximately $31,000 in
the year ending December 31, 2000, pursuant to the Southwest Aircraft lease
agreement.
Additionally, in March 1996, the Partnership completed the replacement of
the United Aircraft with a 14.85% interest in two McDonnell-Douglas MD-82
Aircraft leased by Finnair OY (the "Finnair Aircraft"). The Partnership will
receive approximately $640,000 of rental revenue in each of the years in the
period ending December 31, 1998, and approximately $160,000 in the year ending
December 31, 1999, pursuant to the Finnair Aircraft lease agreement.
Effective September 1996, the Partnership re-leased a Boeing 727-251 ADV
aircraft, formerly on a renewal rental agreement with Northwest Airlines,
Inc.("Northwest"), to Transmeridian Airlines. The Partnership will receive
approximately $960,000 of rental revenue in the year ended December 31, 1997 and
$687,000 in the year ended December 31, 1998.
Effective January 1997, the Partnership renewed its lease agreement with
American Trans Air, Inc. for an additional twenty-four months. The Partnership
will receive approximately $698,500 of rental revenue in the year
-15-
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
STATEMENT OF CASH FLOWS (CONTINUED)
ending December 31, 1997, $762,000 in the year ending December 31, 1998 and
$63,500 in the year ending December 31, 1999.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
EQUIPMENT ON LEASE
All aircraft were acquired from EFG or one of its Affiliates. Equipment cost
represents asset base price plus acquisition fees and was determined in
accordance with the Restated Agreement, as amended, and certain regulatory
guidelines. Asset base price was the lower of (i) the actual price paid for the
aircraft by EFG or the Affiliate plus all actual costs accrued by EFG or the
Affiliate while carrying the aircraft less, (a) for all aircraft other than the
Alaska Aircraft, the amount of all rents received by EFG or the Affiliate prior
to selling the aircraft or, (b) with respect to the Alaska Aircraft, rents
received from the date of the commencement of the lease of the aircraft until
the date of the sale to the Partnership or ii) fair market value as determined
by the General Partner in its best judgment, including all liens and
encumbrances on the aircraft, carrying costs and acquisition costs.
DEPRECIATION AND AMORTIZATION
The Partnership's depreciation policy is intended to allocate the cost of
aircraft over the period during which they produce economic benefit. The
principal period of economic benefit is considered to correspond to each
aircraft's primary lease term, which term generally represents the period of
greatest revenue potential for each aircraft. Accordingly, to the extent that an
aircraft is held on primary lease term, the Partnership depreciates the
difference between (i) the cost of the aircraft and (ii) the estimated residual
value of the aircraft on a straight-line basis over such term. For purposes of
this policy, estimated residual values represent estimates of aircraft values at
the date of primary lease expiration. To the extent that an aircraft is held
beyond its primary lease term, the Partnership continues to depreciate the
remaining net book value of the aircraft on a straight-line basis over the
aircraft's remaining economic life. Periodically, the General Partner evaluates
the net carrying value of 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. Such adjustments are reflected
separately on the accompanying Statement of Operations as Write-Down of
Equipment.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. 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 $468,133, representing aircraft reserves
funded by the lessee and used to pay maintenance costs which were advanced by
EFG (see Note 3).
-16-
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
STATEMENT OF CASH FLOWS (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 LOSS AND CASH DISTRIBUTIONS PER UNIT
Net loss and cash distributions per Unit are based on 2,714,647 Units
outstanding during each of the three years in the period ended December 31, 1996
and computed after allocation of the General Partner's 5% share of net loss and
share of cash distributions (see Note 1).
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.
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>
One Lockheed L-1011-100.................................................. -- $15,879,518 Foreign
One Boeing 727-208 ADV (ATA)............................................. 36 12,928,710 IN
One Boeing 727-251 ADV (Transmeridian)................................... 28 9,732,714 MN
One Lockheed L-1011-50................................................... -- 6,013,492 Foreign
Two McDonnell-Douglas MD-82 (Finnair).................................... 36 4,157,280 Foreign
Three Boeing 737-2H4 (Southwest)......................................... 49 1,919,500 TX
-----------
Total equipment cost................................................ 50,631,214
Accumulated depreciation............................................ (39,961,731)
-----------
Equipment, net of accumulated depreciation.......................... $ 10,669,483
-----------
-----------
</TABLE>
-17-
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3--EQUIPMENT (CONTINUED)
The costs of the Lockheed L-1011-50 aircraft, the two McDonnell-Douglas
MD-82 aircraft, and the three Boeing 737-2H4 aircraft represent proportionate
ownership interests. The remaining interests are owned by other affiliated
partnerships sponsored by EFG. All partnerships individually report, in
proportion to their respective ownership interests, their respective shares of
assets, liabilities, revenues, and expenses associated with the aircraft.
The Partnership's portfolio includes a Boeing 727-251 ADV aircraft formerly
on a renewal rental agreement with Northwest. This aircraft was returned upon
expiration of its lease term on November 30, 1995 and has undergone heavy
maintenance, approximately $984,000 of which was incurred or accrued during the
year ended December 31, 1996. During the quarter ended September 30, 1996, the
Partnership received $468,133 from the former lessee of this aircraft,
representing a reimbursement of additional maintenance costs. The Partnership
entered into a new 28-month lease agreement with Transmeridian Airlines, to
re-lease the aircraft effective September 1996.
In September 1995, the Partnership transferred its 23.19% ownership interest
in the United Aircraft, pursuant to the rules for a like-kind exchange for
income tax reporting purposes. In November 1995, the Partnership partially
replaced the United Aircraft with a 13.11% ownership interest in the Southwest
Aircraft, at an aggregate cost to the Partnership of $1,919,500. To acquire the
interest in the Southwest Aircraft, the Partnership obtained financing of
$1,432,396 from a third-party lender and utilized $487,104 of the cash
consideration received from the transfer of the United Aircraft. The remaining
ownership interest of 86.89% in the Southwest Aircraft is held by affiliated
equipment leasing programs sponsored by EFG.
Additionally, in March 1996, the Partnership completed the replacement of
the United Aircraft with a 14.85% ownership interest in the Finnair Aircraft at
a total cost to the Partnership of $4,157,280. To acquire the ownership interest
in the Finnair Aircraft, the Partnership paid $1,389,942, including the balance
of the cash consideration, and obtained financing of $2,767,338 from a
third-party lender. The remaining ownership interest of 85.15% in the Finnair
Aircraft is held by affiliated equipment leasing programs sponsored by EFG.
On June 30 and September 30, 1996, the Lockheed L-1011-50 and L-1011-100
aircraft were returned by the lessee. Currently, both aircraft are undergoing
heavy maintenance. The heavy maintenance on the Lockheed L-1011-50 is expected
to cost the Partnership approximately $362,000, all of which was accrued or
incurred during the year ended December 31, 1996. The Partnership entered into a
new 12-month lease agreement with Aer Lease Limited at a base rent to the
Partnership of $39,550 per month, effective upon completion of the heavy
maintenance. The heavy maintenance on the Lockheed L-1011-100 is expected to
cost the Partnership approximately $400,000 all of which was accrued or incurred
during the year ended December 31, 1996. The General Partner is actively seeking
the re-lease of this aircraft.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $6,077,000
and a net book value of approximately $5,543,000 at December 31, 1996. (See Note
5.)
Generally, the costs associated with maintaining, insuring and operating
the Partnership's aircraft are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
However, the Partnership has purchased supplemental insurance coverage to
reduce the economic risk arising from certain losses. Specifically, the
Partnership is insured under supplemental policies for "Aircraft Hull Total
Loss Only" and "Aircraft Hull Total Loss Only War and Other Perils."
As aircraft are sold to third parties, or otherwise disposed of, the
Partnership will recognize a gain or loss equal to the difference between the
net book value of the aircraft at the time of sale or disposition and the
-18-
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3--EQUIPMENT (CONTINUED)
proceeds realized upon sale or disposition. The ultimate realization of
estimated residual value in the aircraft is dependent upon, among other
things, EFG's ability to maximize proceeds from selling or re-leasing the
aircraft upon the expiration of the primary lease terms.
The Partnership recorded a write-down of aircraft carrying values,
representing impairments, during each of the years ended December 31, 1996, 1995
and 1994. The resulting charges, $2,832,800 ($0.99 per limited partnership unit)
in 1996, $6,139,040 ($2.15 per limited partnership unit) in 1995 and $3,721,000
($1.30 per limited partnership unit) in 1994 were based on a comparison of
estimated net realizable values and corresponding carrying values for each of
the Partnership's aircraft.
NOTE 4--RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three years in
the period ended December 31, 1996, 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.................................................. $ 235,339 $329,292 $450,100
Administrative charges..................................................... 28,694 21,000 12,000
Reimbursable operating expenses due to third parties....................... 2,071,725 136,035 116,701
---------- -------- --------
Total...................................................................... $2,335,758 $486,327 $578,801
---------- -------- --------
---------- -------- --------
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include all aspects of
acquisition, management and sale of equipment. For acquisition services, EFG was
compensated by an amount equal to 3.07% 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 revenue and 2% of gross
full payout lease rental revenue 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(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG.
All equipment was purchased from EFG or one of its Affiliates. The
Partnership's Purchase Price was determined by the method described in Note 2.
All rents and proceeds from the sale of equipment are paid directly to EFG.
EFG temporarily deposits collected funds in a separate interest-bearing escrow
account prior to remittance to the Partnership. At
-19-
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4--RELATED PARTY TRANSACTIONS (CONTINUED)
December 31, 1996, the Partnership was owed $146,567 by EFG for such funds
and the interest thereon. These funds were remitted to the Partnership in
January 1997.
NOTE 5--NOTES PAYABLE
Notes payable at December 31, 1996 consisted of installment notes payable to
banks of $3,419,785. The installment notes are non-recourse, with interest rates
ranging between 8.65% and 8.76% and are collateralized by the equipment and
assignment of the related lease payments. All of the notes were originated in
connection with the Southwest Aircraft and the Finnair Aircraft. The installment
notes related to the Southwest Aircraft will be fully amortized by
noncancellable rents. The Partnership has a balloon payment obligation at the
expiration of the primary lease term related to the Finnair Aircraft of
$1,411,035. The carrying amount of notes payable approximates fair value at
December 31, 1996.
THE ANNUAL MATURITIES OF THE INSTALLMENT NOTES PAYABLE ARE AS FOLLOWS:
For the year ending December 31, 1997................. $ 715,783
1998................. 807,335
1999................. 1,865,428
2000................. 31,239
----------
Total................ $3,419,785
----------
----------
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 reporting purposes, the Partnership allocates net income
or loss in accordance with such agreement. The Restated Agreement, as amended,
requires that upon dissolution of the Partnership, the General Partner will be
required to contribute to the Partnership an amount equal to any negative
balance which may exist in the General Partner's tax capital account. At
December 31, 1996, the General Partner had a negative tax capital account
balance of approximately $763,000.
-20-
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6--INCOME TAXES (CONTINUED)
The following is a reconciliation between net loss reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net loss............................................................. $(3,649,940) $(5,286,053) $(1,474,819)
Tax depreciation in excess of financial statement depreciation..... (3,015,164) (1,959,389) (704,217)
Write-down of equipment............................................ 2,832,800 6,139,040 3,721,000
Prepaid rental income.............................................. (402,839) (70,144) (708)
Other.............................................................. 1,501,218 521,195 (73,144)
----------- ------------ -----------
Net income (loss) for federal income tax reporting purposes.......... $(2,733,925) $ (655,351) $1,468,112
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The principal component of "Other" consists of the difference between the
tax gain on equipment disposals and the financial statement gain on equipment
disposals. It also includes reversal of the maintenance reserves.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Partners' capital.............................................. $ 8,602,879 $18,637,361
Add back selling commissions and organization and offering
costs........................................................ 7,085,240 7,085,240
Financial statement distributions in excess of tax
distributions................................................ -- 35,719
Cumulative difference between federal income tax and financial
statement income (loss)...................................... 1,833,651 917,636
----------- -----------
Partners' capital for federal income tax reporting purposes.... $17,521,770 $26,675,956
----------- -----------
----------- -----------
</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 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 former 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
-21-
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7--LEGAL PROCEEDINGS (CONTINUED)
also filed a motion to transfer the 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.
On October 11, 1996, Prime Air Inc. d/b/a Transmeridian Airlines
("Transmeridian") filed an action in the 61st Judicial District Court of Harris
County, Texas entitled Prime Air, Inc. d/b/a Transmeridian Airlines v. Investors
Asset Holding Corp., as Trustee for Airfund II International Limited
Partnership, PLM International, and NavCom Aviation, Inc. In that action,
Transmeridian claims damages of more that $3,000,000 for alleged breach of
contract, fraud, civil conspiracy, tortious interference of business relations,
negligent misrepresentation, negligence and gross negligence, and punitive
damages against Investors Asset Holding Corp., as Trustee for Airfund II
International Limited Partnership ("Investors Asset") and its co-defendants. On
November 7, 1996, PLM removed the action to the United Sates District Court for
the Southern District of Texas; Investors Asset intends to seek a transfer of
venue to United States District Court for the District of Massachusetts. On
February 14, 1997, Investors Asset answered the Complaint generally denying the
allegations made therein and asserting various defenses. At a March 21, 1997
Scheduling Conference, the Court established a discovery deadline of December 1,
1997 and placed this action on the trial calendar for March/April 1998. At
present, it is not possible to determine the ultimate outcome of this matter.
-22-
<PAGE>
ADDITIONAL FINANCIAL INFORMATION
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the year ended December 31, 1996
The Partnership classifies all rents from leasing aircraft as lease revenue.
Upon expiration of the primary lease terms, aircraft may be sold, rented on a
month-to-month basis or re-leased for a defined period under a new or extended
lease agreement. The proceeds generated from selling or re-leasing the aircraft,
in addition to any month-to-month revenue, represent the total residual value
realized for each aircraft. Therefore, the financial statement gain or loss,
which reflects the difference between the net book value of the aircraft at the
time of sale or disposition and the proceeds realized upon sale or disposition
may not reflect the aggregate residual proceeds realized by the Partnership for
such aircraft.
The following is a summary of cash excess associated with the aircraft
disposition which occurred in the year ended December 31, 1996. No aircraft were
disposed of during the years ended December 31, 1995 or 1994.
1996
-----------
Rents earned prior to disposal of
aircraft, net of interest charges........ $11,072,532
Sale proceeds realized upon disposition
of aircraft.............................. 3,535,649
-----------
Total cash generated from rents
and aircraft sale proceeds............... 14,608,181
Original acquisition cost of aircraft
disposed................................. 11,164,679
-----------
Excess of total cash generated to cost
of aircraft disposed..................... $ 3,443,502
-----------
-----------
23
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS
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)..................................................... $(4,110,909) $ 460,969 $(3,649,940)
Add:
Depreciation........................................................ 3,650,745 -- 3,650,745
Write-down of equipment............................................. 2,832,800 -- 2,832,800
Management fees..................................................... 235,339 -- 235,339
Book value of disposed equipment.................................... -- 3,074,680 3,074,680
Less:
Principal repayment of notes payable................................ (779,949) -- (779,949)
----------- ---------- -----------
Cash from operations, sales and refinancings........................ 1,828,026 3,535,649 5,363,675
Less:
Management fees..................................................... (235,339) -- (235,339)
----------- ---------- -----------
Distributable cash from operations, sales and refinancings.......... 1,592,687 3,535,649 5,128,336
Other sources and uses of cash:
Cash at beginning of year........................................... 3,557,968 -- 3,557,968
Purchase of equipment............................................... (72,550) -- (72,550)
Net change in receivables and accruals.............................. 832,931 -- 832,931
Less:
Cash distributions paid............................................. (5,911,036) (1,187,887) (7,098,923)
----------- ---------- -----------
Cash at end of year................................................... -- $2,347,762 $ 2,347,762
----------- ---------- -----------
----------- ---------- -----------
</TABLE>
-24-
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
SCHEDULE OF COSTS REIMBURSED TO THE
GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 10.4 OF THE AMENDED AND RESTATED
AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP
December 31, 1996
For the year ended December 31, 1996, the Partnership reimbursed the General
Partner and its Affiliates for the following costs:
Operating expenses.............................................. $1,126,982
-25-
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of AIRFUND II International Limited Partnership of our report dated March
14, 1997, included in the 1996 Annual Report to Partners of AIRFUND II
International 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> 2,347,762
<SECURITIES> 0
<RECEIVABLES> 146,567
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,494,329
<PP&E> 50,631,214
<DEPRECIATION> 39,961,731
<TOTAL-ASSETS> 13,163,812
<CURRENT-LIABILITIES> 1,141,148
<BONDS> 3,419,785
0
0
<COMMON> 0
<OTHER-SE> 8,602,879
<TOTAL-LIABILITY-AND-EQUITY> 13,163,812
<SALES> 4,706,774
<TOTAL-REVENUES> 5,433,563
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,819,303
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 264,200
<INCOME-PRETAX> (3,649,940)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,649,940)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,649,940)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
-----------------------------------------------------
-----------------------------------------------------
LEASE AGREEMENT
dated as of January 27, 1994
between
INVESTORS ASSET HOLDING CORP.,
not in its individual capacity
but solely as trustee of the Alaska/AFG 1989-1 TRUST,
Lessor
and
AMERICAN TRANS AIR, INC.,
Lessee
--------------------
Covering One (1)
Boeing 727-208 ADV
Aircraft
Manufacturers Serial No. 22295
U.S. Registration Mark N329AS
and
Three (3) Pratt & Whitney
JT8D-17 Engines
and Related Parts and Records
<PAGE>
TABLE OF CONTENTS
-----------------
Heading Page
------- ----
SECTION 1. DEFINITIONS 1-1
SECTION 2. AGREEMENT TO LEASE; TERM. 2-1
2.1 Leasing of Aircraft 2-1
2.2 Acceptance 2-1
2.3 Delivery of Aircraft 2-1
2.4 Term 2-1
2.5 Guaranty 2-2
SECTION 3. LESSEE'S REPRESENTATIONS, WARRANTIES AND
COVENANTS 3-1
3.1 Organization; Good Standing; Certification 3-1
3.2 Authority; Consent 3-1
3.3 Legal, Valid and Binding 3-1
3.4 Compliance with Other Instruments 3-1
3.5 Governmental Consents 3-1
3.6 No Adverse Agreements 3-1
3.7 No Defaults or Violations 3-2
3.8 Litigation 3-2
3.9 Tax Returns 3-2
3.10 Filing or Recordation 3-2
3.11 No Event of Default 3-2
3.12 Principal Place of Business 3-3
3.13 Citizenship 3-3
3.14 Financial Statements 3-3
3.15 Financial and Other Information to be Supplied 3-3
SECTION 4. LESSOR'S REPRESENTATIONS, WARRANTIES AND
AGREEMENTS 4-1
4.1 Citizenship 4-1
4.2 Quiet Enjoyment 4-1
SECTION 5. CONDITIONS PRECEDENT 5-1
5.1 Conditions Precedent to Obligation of Lessor to
Lease Aircraft 5-1
i
<PAGE>
TABLE OF CONTENTS
-----------------
Heading Page
------- ----
5.2 Conditions Precedent to Obligations of Lessee to
Lease Aircraft 5-2
SECTION 6. PAYMENTS 6-1
6.1 Basic Rent 6-1
6.2 Net Lease; No Set-off or Deductions 6-1
6.3 Immediately Available Funds 6-2
6.4 Supplemental Rent 6-2
SECTION 7. DISCLAIMER OF WARRANTIES AND MANUFACTURERS'
WARRANTIES 7-1
7.1 Disclaimer 7-1
7.2 Other Warranties 7-2
SECTION 8. USE, OPERATION AND MAINTENANCE 8-1
8.1 General 8-1
8.2 Operation and Use 8-1
8.3 Maintenance in General 8-2
8.4 Specific Items of Maintenance 8-2
8.5 Parts 8-3
8.6 Airworthiness Directives 8-4
8.7 Maintenance Agencies 8-5
8.8 Corrosion Control 8-5
8.9 Modifications 8-5
8.10 Possession 8-6
8.11 Reports 8-8
8.12 Right to Inspect 8-9
8.13 Repairs 8-9
8.14 Aircraft Records 8-10
8.15 Lessor's Disclaimer 8-10
SECTION 9. RETURN OF AIRCRAFT 9-1
9.1 Return Location 9-1
9.2 Return of Other Engines 9-1
9.3 Condition of Aircraft 9-1
9.4 Specific Items 9-3
9.5 Condition of Airframe 9-3
ii
<PAGE>
TABLE OF CONTENTS
-----------------
Heading Page
------- ----
9.6 APU and Engines 9-4
9.7 Maintenance Program Conversion 9-5
9.8 Return Condition Adjustment 9-6
9.9 Engine Inspections 9-7
9.10 Inspection 9-7
9.11 Operational Ground Check 9-7
9.12 Operational Check Flight 9-7
9.13 Acceptance 9-8
9.14 Deferred Return Condition Discrepancy Correction 9-8
9.15 Flight Cost 9-8
9.16 Manuals and Technical Records 9-9
9.17 [Intentionally Left Blank] 9-9
9.18 Lessee's Special Exterior Markings 9-9
9.19 Ownership 9-9
9.20 Parking of Aircraft Upon Return 9-9
SECTION 10. TITLE; REGISTRATION; LIENS 10-1
10.1 Tide 10-1
10.2 Registration 10-1
10.3 Liens 10-1
10.4 Notice of Ownership 10-1
SECTION 11. INSURANCE 11-1
11.1 All-Risk Insurance 11-1
11.2 War Risk Insurance 11-1
11.3 Deductibles 11-2
11.4 Liability Insurance 11-2
11.5 Additional Requirements; Loss Payment 11-2
11.6 No Set-off 11-3
11.7 Notice of Material Alteration or Cancellation 11-3
11.8 Application of Hull Insurance Proceeds 11-4
11.9 Insurance for Own Account 11-4
11.10 Reports 11-4
11.11 Changes in Industry Practice 11-5
11.12 Continuing Insurance 11-5
iii
<PAGE>
TABLE OF CONTENTS
-----------------
Heading Page
------- ----
SECTION 12. LOSS, DAMAGE OR REQUISITION 12-1
12.1 Total Loss of Airframe 12-1
12.2 Engine Loss 12-1
12.3 Repairable Damage; Use of Insurance Proceeds 12-2
12.4 Payment from Governmental Authorities for
Requisition of Title or Use 12-2
12.5 Application of Payments During Existence of
Event of Default 12-3
12.6 Prohibition of Use by the Government 12-3
SECTION 13. EVENT OF DEFAULT 13-1
13.1 Failure to Make Payments 13-1
13.2 Failure to Obtain or Maintain Insurance 13-1
13.3 Failure to Perform Other Obligations 13-1
13.4 Representations and Warranties Untrue 13-1
13.5 Insolvency or Bankruptcy 13-1
13.6 Loss of License 13-2
SECTION 14. REMEDIES 14-1
SECTION 15. GENERAL INDEMNITIES 15-1
15.1 General Indemnification and Waiver of Certain Claims 15-1
15.2 Continuing Indemnification 15-3
SECTION 16. TAX INDEMNITY 16-1
16.1 Taxes and Other Charges 16-1
16.2 Certain Covenants 16-3
16.3 Tax Savings 16-3
16.4 Payments 16-4
16.5 Contests 16-5
16.6 Continuing Indemnification 16-7
SECTION 17. [Intentionally Left Blank] 17-1
SECTION 18. TRANSFER, ASSIGNMENT AND SUBLEASE 18-1
18.1 Assignment or Encumbrance by Lessor 18-1
18.2 Sublease of Aircraft or Assignment by Lessee 18-1
iv
<PAGE>
TABLE OF CONTENTS
-----------------
Heading Page
------- ----
18.3 Consolidation, Merger or Transfer by Lessee 18-1
18.4 Limited Liability of Lessor 18-1
SECTION 19. APPRAISALS 19-1
SECTION 20. NOTICES 20-1
SECTION 21. LESSOR'S RIGHT TO PERFORM FOR LESSEE 21-1
SECTION 22. [Intentionally Left Blank] 22-1
SECTION 23. MISCELLANEOUS 23-1
23.1 Federal Bankruptcy Code 23-1
23.2 Waivers, Headings 23-1
23.3 Counterparts 23-1
23.4 Agreement to Lease 23-1
23.5 Governing Law 23-1
23.6 Benefit and Binding Effect 23-1
23.7 Further Assurances 23-1
v
<PAGE>
TABLE OF CONTENTS
-----------------
EXHIBITS
- --------
A Schedule and Description of Aircraft
B Lease Supplement
C Aircraft Documents
D Technical Acceptance Certificate (Delivery)
E Technical Acceptance Certificate (Return)
F Acceptance Flight Report
G Stipulated Loss Value Table
vi
<PAGE>
LEASE AGREEMENT
---------------
This LEASE AGREEMENT, dated as of January 27, 1994 ("Lease"), is by and
between Investors Asset Holding Corp., a Massachusetts corporation, having its
principal place of business at c/o American Finance Group, Exchange Place, 14th
Floor, Boston, Massachusetts 02109, not in its individual capacity but solely as
trustee of the Alaska/AFG 1989-1 TRUST ("Lessor") and American Trans Air, Inc.,
an Indiana corporation, having its principal place of business at Indianapolis
International Airport, 7337 West Washington Street, Indianapolis, Indiana 46231
("Lessee");
WITNESSETH
WHEREAS, Lessor desires to lease the Aircraft to Lessee and Lessee desires
to lease the Aircraft from Lessor pursuant to the terms and conditions of this
Lease;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows.
SECTION 1. DEFINITIONS.
------------
The following terms shall have the following respective meanings for all
purposes of this Lease:
1.1 "Aircraft" means (A) the Airframe identified and described in
Exhibit A hereto together with the three Engines delivered in connection
therewith as identified and described in Exhibit A hereto (or any engine
substituted for any of said Engines pursuant to Section 8.10, Section 9.2 or
Section 12.2 of this Lease), whether or not any of such initial Engines or
substitute engines may from time to time be installed on such Airframe or may be
installed on any other airframe or on any other aircraft; and (B) where the
context permits, the Manuals and Technical Records.
1.2 "Airframe" means the Boeing 727-208 ADV aircraft (except the
Engines or engines from time to time installed thereon) identified and described
in Exhibit A hereto, and any Parts incorporated or installed in or attached to
the Airframe, or so long as title thereto shall remain vested in Lessor in
accordance with the terms of 8.5 of this Lease, after removal from the Airframe.
1.3 "Airworthiness Directive(s)" has the meaning given the Section 8.6
hereof.
1-1
<PAGE>
1.4 "Alaska" means Alaska Airlines, Inc., a corporation organized and
existing under the laws of the State of Alaska.
1.5 "Amtran" means Amtran, Inc., a corporation organized and existing
under the laws of the State of Indiana and the owner of 100% of the capital
stock of Lessee.
1.6 "Applicable Law" means all applicable laws and treaties of any
government and applicable, legally adopted rules, regulations and orders of any
governmental body, instrumentality, agency or authority.
1.7 "Basic Rent" means the rent payable on Rent Payment Dates
throughout the Basic Term for the Aircraft pursuant to Section 6.1 of the Lease.
1.8 "Basic Term" means the period during which Lessee shall lease the
Aircraft in accordance with this Lease, which shall be a period commencing on
the Delivery Date and continuing for 36 calendar months following the Delivery
Date and any extension thereof pursuant to the terms of clause (iv)(B) of
Section 1.63 hereof (the definition of Total Loss).
1.9 "Beneficiary" means AIRFUND International II Limited Partnership,
a Massachusetts limited partnership, the owner of 100% of the beneficial
interests under that certain trust agreement "Alaska/AFG 1989-I Trust," dated as
of May 30, 1989, as amended and restated on October 5, 1989.
1.10 "Business Day(s)" means any day other than a Saturday, a Sunday
or a day on which commercial banking institutions are authorized by law to be
closed in Boston, Massachusetts, Indianapolis, Indiana and/or New York. New
York.
1.11 "Certificated Air Carrier" means a United States "air carrier"
within the meaning of the Federal Aviation Act, operating pursuant to a
certificate of convenience and necessity issued under Section 401 of the Federal
Aviation Act, or a carrier of comparable status under any successor law or
provision.
1.12 "Cycle" means one take-off and landing of the Aircraft.
1.13 "Default" means an event or condition which, with the lapse of
time or the giving of notice or both, would constitute an Event of Default.
1-2
<PAGE>
1.14 "Delivery Date" means the date on which Lessee signs and delivers
to Lessor the Lease Supplement in accordance with Section 2.2. The approximate
Delivery Date is January 24, 1994.
1.15 "Department of Transportation" means the United States Department
of Transportation and any agency or instrumentality of the United States
government succeeding to its functions.
1.16 "Direct Labor Rate" means Lessee's cost, inclusive of overhead
charges per hour of productive labor, but exclusive of profit.
1.17 [Intentionally Left Blank]
1.18 "Engine" means: (A) any or all of the three Pratt & Whitney
JT8D-17 engines identified and described in Exhibit A and accepted by Lessee on
the Delivery Date, whether or not from time to time installed on such Airframe
or installed on any other airframe; (B) any engine that may from time to time be
substituted, pursuant to Section 8.10, Section 8.2 or Section 12.2 of this
Lease, for such Engine; (C) any and all Parts incorporated or installed in or
attached thereto or any and all Parts removed therefrom so long as title thereto
shall remain vested in Lessor in accordance with the terms of Section 8.5 of
this Lease after removal from such Engine; and (D) any "Replacement Engine."
1.19 "Event of Default" has the meaning given in Section 13 hereof.
1.20 [Intentionally Left Blank]
1.21 "FAA" means the United States Federal Aviation Administration of
the United States Department of Transportation, and any agency or
instrumentality of the United States government succeeding to its functions.
1.22 "FAA Repair Station" means an airframe, engine or avionics repair
facility holding a valid and current license issued by the FAA authorizing the
specific work to be accomplished by Lessee under this Lease.
1.23 "Fair Market Rental Value" of the Airframe or any Engine shall
mean the rent which would be obtained in an arms' length transaction between an
informed and willing lessee (other than a Lessee currently in possession or a
used equipment dealer) under no compulsion to lease, and an informed and willing
lessor under no compulsion to lease, as the same shall he specified by agreement
between Lessor and Lessee or, if not agreed to by Lessor and Lessee within a
period of
1-3
<PAGE>
15 days after either party requests a determination, then as specified
by appraisal in accordance with the provisions of Section 19 hereof. In making
any appraisal, it will be assumed the credit standing of the lessee in question
shall be the same as the then credit standing of Lessee. It will, further, be
assumed that the period with respect to which such rental shall be paid shall
equal the Term, and it will be assumed that the Aircraft is in the condition and
overhaul status in which it is required to be returned to Lessor pursuant to
Section 9 of this Lease. Except as otherwise expressly provided in this Lease,
the appraisal costs shall be paid for by Lessee.
1.24 "Fair Market Sales Value" of the Airframe or any Engine shall mean
the value which would be obtained in an arms' length transaction between an
informed and willing buyer-user (other than a Lessee currently in possession or
a used equipment dealer) under no compulsion to buy, and an informed and willing
seller under no compulsion to sell, as the case may be, as the same shall be
specified by agreement between Lessor and Lessee or, if not agreed to by Lessor
and Lessee within a period of 15 days after either party requests a
determination, then as specified by appraisal in accordance with the provisions
of Section 19 hereof. In making the appraisal, it will be assumed that the
Aircraft is in the condition and overhaul status in which it is required to be
returned to Lessor pursuant to Section 9 of this Lease; provided, however, that
an appraisal for purposes of Section 14 of this Lease will be on an "as-is,
where-is" basis. Except as otherwise expressly provided in this Lease, the
appraisal costs shall be paid for by Lessee.
1.25 "Federal Aviation Act" means the Federal Aviation Act of 1958, as
amended. or any subsequent legislation that amends, supplements or supersedes
the Federal Aviation Act.
1.26 "Guarantor" means Amtran.
1.27 "Guaranty" means the Guaranty of the Obligations of American Trans
Air, Inc. dated as of the date hereof, between Lessor and Guarantor.
1.28 "Hour(s)" means Aircraft flight time between take-off and landing.
1.29 "Lease" means this Lease Agreement and the Exhibits hereto as the
same may be modified, amended or supplemented from time to time pursuant to the
terms hereof.
1.30 "Lease Documents' means the Lease with the Exhibits attached
hereto and the Lease Supplement.
1-4
<PAGE>
1.31 "Lease Commencement Date" means the date designated for the
commencement of the Lease as set forth on the Lease Supplement.
1.32 "Lease Supplement" means the lease supplement in substantially the
form of Exhibit B hereto.
1.33 "Lessee" means American Trans Air, Inc., a corporation organized
and existing under the laws of the State of Indiana.
1.34 "Lessor" means Investors Asset Holding Corp., a Massachusetts
corporation, not in its individual capacity, but solely as trustee of the
"Alaska/AFG 1989-1 Trust" and its successors and assigns.
1.35 "Lessor's Lien" means any Lien arising as a result of (i) claims
against Lessor not related to the transactions contemplated by this Lease, (ii)
any act or omission of Lessor which is not related to the transactions
contemplated by this Lease or is in violation of any of the terms of this Lease,
or (iii) claims against Lessor with respect to Taxes against which Lessee is not
required to indemnify Lessor.
1.36 "Lien" means any mortgage, pledge, lien, charge or encumbrance,
lease or security interest.
1.37 "Maintenance Program" has the meaning given in Section 8.3 hereof.
1.38 "Manuals," "Technical Records" and "Manuals and Technical Records"
means all such manuals, technical data, log books and other records pertaining
to the Aircraft (including, without limitation, the technical manuals and
aircraft records listed in Exhibit C hereto) to be maintained by Lessee as shall
be required to comply with the requirements of the FAA from time to time in
force.
1.39 [Intentionally Left Blank]
1.40 "Officer's Certificate" means as to any company a certificate
signed by the Chairman, the Vice Chairman, the President, any Vice President,
any Assistant Vice President, the Treasurer, the Secretary or Clerk, or by any
Assistant Treasurer duly authorized to execute such certificate.
1.41 "Operative Documents" means the Lease Documents and each document
provided by or entered into by Lessee, Lessor and/or Guarantor in conjunction
with this Lease, including the Redelivery and Acceptance Agreement, the Pooling
1-5
<PAGE>
Agreement, the Guaranty and any other document or agreement delivered or entered
into in connection with the foregoing, and any and all amendment, revisions,
supplements and modifications thereto.
1.42 [Intentionally Left Blank]
1.43 "Overdue Rate" means interest at an annual rate equal to the Prime
Rate plus 3.0 percentage points.
1.44 "Parts" means all appliances, parts, instruments, appurtenances
accessories, furnishings and other equipment of whatever nature (other than (a)
Engines or engines, (b) any items leased to or furnished to Lessee from a third
party (other than Lessor) unless such items are required to be incorporated or
installed in or attached to the Airframe or any Engine pursuant to the terms of
Sections 8 or 9 hereof and (c) 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 tide hereto shall remain vested in Lessor in accordance
with Section 8.5 hereof after removal therefrom.
1.45 "Permitted Liens" means (a) the respective rights of Lessor and
Lessee as provided herein, including, without limitation, any encumbrance which
Lessor has caused to be placed on the Aircraft as set forth in Section 18.1
hereof; (b) the rights of others under agreements or arrangements to the extent
expressly permitted in Section 8.11 hereof; (c) Liens for Taxes either not yet
due or being contested in good faith (and for the payments of which adequate
reserves have been provided) by appropriate proceedings so long as such
proceedings do not involve any material danger of the sale, forfeiture or loss
of the Airframe or any Engine; (d) material suppliers', mechanics , workers',
repairers', employees' or other like liens arising in the ordinary course of
business and for amounts the payment of which is either not yet delinquent and
so long as such proceedings do not involve a material danger of the sale,
forfeiture or loss of the Airframe or any Engine; and (e) Lessor's Liens.
1.46 "Permitted Sublease" means a sublease meeting the requirements of
Section 18.2 hereof.
1.47 "Permitted Sublessee" means any sublessee pursuant to a Permitted
Sublease.
1.48 "Person" means an individual. partnership corporation, business
trust, joint venture, governmental authority or other entity of whatever nature.
1-6
<PAGE>
1.49 "Pooling Agreement" means the Aircraft Engine Pooling Agreement.
dated as of November 8, 1993, by and between Lessee and Alaska, as such
agreement may be amended from time to time.
1.50 "Prime Rate" means the corporate base interest rate announced from
time to time by Citibank, N.A.
1.51 "Prohibited Use" has the meaning given in clause (vi) of Section
1.63.
1.52 [Intentionally Left Blank]
1.53 "Rent" means Basic Rent and Supplemental Rent.
1.54 "Rent Payment Date" has the meaning given in Section 6.1 hereof.
1.55 "Replacement Engine" means an engine of the same or an improved
model as an Engine being replaced pursuant to Sections 8.10, 9.2, or 12.2
hereof, which is suitable for installation and use on the Airframe without
materially impairing the value or utility of the Airframe and having a
modification status, and condition and utility substantially equal to the Engine
it is replacing (assuming such Engine was in the modification status, condition,
and repair required by the terms hereof immediately prior to being replaced).
Any such Replacement Engine shall be an Engine hereunder.
1.56 "Redelivery and Acceptance Agreement" means the Redelivery and
Acceptance Agreement, dated as of the date hereof, among Lessor, Lessee and
Alaska.
1.57 "Stipulated Loss Value" for the Aircraft means, the amounts set
forth on Exhibit G.
1.58 "Supplemental Rent" means all monetary amounts, liabilities and
obligations (other than Basic Rent) that Lessee assumes or agrees to pay to
Lessor under any Operative Document to which Lessee is a party, including,
without limitation, Stipulated Loss Value.
1.59 "Tax" means all license and registration fees and all taxes
(including but not limited to sales and use taxes), levies, imposts duties,
charges, assessments or withholdings of any nature whatsoever together with any
penalties, additions to tax, fines or interest thereon.
1-7
<PAGE>
1.60 "Technical Acceptance Certificate (Delivery)" means a certificate
in substantially the form of Exhibit D hereto, completed and signed on the
Delivery Date as required by under Section 2.2.
1.61 "Technical Acceptance Certificate (Return)" means a certificate in
substantially the form of Exhibit E hereto, completed and signed on the return
of the Aircraft as required by Section 9.1.
1.62 "Term" means the Basic Term pursuant to Sections 2.4 and any
extension thereof pursuant to the terms hereof or otherwise as Lessor and Lessee
may hereinafter agree.
1.63 "Total Loss" with respect to the Aircraft, Airframe or any Engine
means any of the following events with respect to such property: (i) loss of
such property or the use thereof due to theft or disappearance for more than 60
days; (ii) loss of such property or the use thereof due to destruction, damage
beyond repair or rendition of such property permanently unfit for normal use;
(iii) any event which should or does result in the receipt of insurance proceeds
with respect to such property on the basis of a total loss, arranged total loss
or constructive total loss; (iv) (A) the confiscation or seizure of title to the
Aircraft or Airframe or (B) the condemnation, taking, confiscation or seizure of
the use of the Aircraft or Airframe for a period in excess of 90 days (or 180
days, provided that Lessee has provided insurance, reasonably satisfactory to
Lessor in an amount not less than the Stipulated Loss Value, naming Lessor as
additional insured and loss payee and protecting Lessor against confiscation or
seizure) by any government or agency or instrumentality thereof other than a
requisition for use by the United States government which does not continue more
than 30 days beyond the end of the Basic Term, provided, however, that to the
extent a requisition by the United States government continues for a period of
not more than 30 days beyond the end of the Basic Term the Basic Term hereof
shall be extended for such period; provided, further, that Lessee's obligations
hereunder shall continue during such period to the extent provided in Section
12.4 hereof and Lessee shall owe an additional payment of Basic Rent, prorated
to the extent appropriate, if the Aircraft is returned pursuant to Section 9
hereof prior to the next Rent Payment Date; (v) with respect to any Engine, the
taking of title or requisition for use by any government and any divestiture of
title deemed a Total Loss pursuant to Section 12.2 of this Lease; or (vi) as a
result of any rule regulation, order or other action (generally applicable to
aircraft of the same type as the Aircraft) by the FAA the Department of
Transportation or other governmental body (including any court) having
jurisdiction, the use of the Aircraft for the commercial transportation of
persons is prohibited for a period of six (6) consecutive months, unless the
condition causing the prohibition shall be curable and Lessee, prior to the
expiration of such six-month period undertakes and is diligently taking all
steps necessary or desirable to restore use of the
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<PAGE>
Aircraft or, in any event, if such use is prohibited for a period of 12 months
(hereinafter a "Prohibited Use"). A Total Loss with respect to the Aircraft
shall be deemed to occur if a Total Loss occurs with respect to the Airframe.
1-9
<PAGE>
SECTION 2. AGREEMENT TO LEASE; TERM.
-------------------------
2.1 Leasing of Aircraft. Subject to the terms and conditions of the
-------------------
Lease Documents, and in reliance upon the agreements, representations and
warranties therein contained and made pursuant hereto, Lessor agrees to lease
the Aircraft to Lessee hereunder on the Delivery Date, such leasing to be
evidenced by Lessor executing and delivering the Lease Supplement hereunder, and
(to the extent that it has not already done so) to take the following actions:
(a) execute and deliver the Technical Acceptance Certificate
(Delivery); and
(b) execute and deliver all other Operative Documents or
certificates and take such other actions as are required to be executed and
delivered or taken by Lessor on or before the Delivery Date pursuant to the
terms of any of the Operative Documents.
2.2 Acceptance. Subject to the terms and conditions of the Lease
----------
Documents, and in reliance upon the agreements, representations and warranties
therein contained and made pursuant hereto, Lessee hereby agrees to lease the
Aircraft from Lessor hereunder on the Delivery Date, such leasing to be
evidenced by Lessee executing and delivering the Lease Supplement, and (to the
extent that it has not already done so) to take the following actions:
(a) execute and deliver the Technical Acceptance Certificate
(Delivery);
(b) execute and deliver all other Operative Documents and
certificates and take all other actions as are required to be executed and
delivered or taken by Lessee on or before the Delivery Date pursuant to the
terms of any of the Operative Documents.
2.3 Delivery of Aircraft. The Aircraft shall be delivered for purposes
--------------------
of this Lease at Alaska's operations/maintenance facilities at Seattle-Tacoma
International Airport Seattle, Washington.
2.4 Term. The Aircraft shall be leased for a term that comprises the
----
Basic Term, except that the Term shall end upon any earlier termination of this
Lease in accordance with its terms.
2-1
<PAGE>
2.5 Guaranty. Simultaneously with the execution and delivery of the
--------
Lease Supplement by Lessee and Lessor hereunder, Guarantor shall execute and
deliver the Guaranty to Lessor.
2-2
<PAGE>
SECTION 3. LESSEE'S REPRESENTATIONS. WARRANTIES AND COVENANTS.
--------------------------------------------------
Lessee represents, warrants and agrees as follows:
3.1 Organization: Good Standing; Certification. Lessee is a
------------------------------------------
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Indiana and has the corporate power and authority to own or
hold under lease its properties and to enter into and perform its obligations
hereunder. Lessee is duly qualified and authorized to do business wherever the
nature of its activities or properties requires such authorization. Lessee is a
Certificated Air Carrier.
3.2 Authority: Consent. Lessee has the full power, authority and
------------------
legal right to execute, deliver and perform the terms of each of the Operative
Documents to which it is a party. The execution, delivery and performance of
each of the Lease Documents to which it is a party have been duly authorized by
all necessary corporate action of Lessee and do not require any stockholder
approval or approval or consent of, or notice to, any trustee or holders of any
indebtedness or obligations of Lessee.
3.3 Legal. Valid and Binding. Each of the Operative Documents to which
------------------------
Lessee is a party has been duly executed and delivered by Lessee and constitutes
the legal, valid and binding obligations of Lessee, enforceable in accordance
with their terms.
3.4 Compliance with Other Instruments. Neither the execution, delivery
---------------------------------
or performance by Lessee of the Operative Documents to which it is a party nor
the consummation or performance by Lessee of the transactions contemplated
therein will conflict with or result in any violation of, or constitute a
default under, the certificate of incorporation or by-laws of Lessee or any
agreement, mortgage, indenture, lease or other instrument or any Applicable Law
by which Lessee or its properties or assets are bound.
3.5 Governmental Consents. Neither the execution and delivery of any
---------------------
of the Operative Documents nor the performance of any of the transactions
contemplated thereby by Lessee requires the consent or approval of, the giving
of notice to, the registration with, or the taking of any other action in
respect to the FAA, the Department of Transportation or any other Federal, state
or foreign governmental authority or agency, including any judicial body, except
for the filings for recording, registration and termination of existing
interests with the FAA referred to in Section 5.1(b) hereof.
3.6 No Adverse Agreements. Lessee is not a party to any agreement or
---------------------
instrument or subject to any charter or any corporate restriction, which if
performed in
3-1
<PAGE>
accordance with its terms, would materially and adversely affect Lessee's
financial condition, business or operations or the ability of Lessee to perform
its obligations under any of the Operative Documents to which it is a party.
3.7 No Defaults or Violations. Lessee is not and during the Term will
-------------------------
not be in default under any mortgage, deed of trust, indenture or other
instrument or agreement to which Lessee is a party or by which it or any of its
properties or assets may be bound or be in violation of any Applicable Law,
which default or violation would have a material adverse effect on the financial
condition, business or operations of Lessee or its ability to perform any of its
obligations under any of the Lease Documents to which it is a party.
3.8 Litigation. There are no pending or, to the best of Lessee's
----------
knowledge after due inquiry, threatened actions or proceedings by or before any
court, administrative agency, regulatory authority or arbitrator that would
either individually or in the aggregate materially and adversely affect the
financial condition, business or operations of Lessee or the ability of Lessee
to perform its obligations under any of the Operative Documents to which it is a
party, except as may be disclosed in a letter from Lessee to Lessor dated as of
the Delivery Date.
3.9 Tax Returns. Lessee has filed or caused to be filed all material
-----------
tax returns which are required to be filed by it, and has paid or caused to be
paid all taxes shown to be due or payable on said returns or on any assessment
received by Lessee, except as may be contested in good faith by appropriate
proceedings.
3.10 Filing or Recordation. Except for the filing for recordation of
---------------------
this Lease with the FAA, and the filing of any Uniform Commercial Code financing
statements required (and continuation statements at periodic intervals), no
further filing or recording of this Lease or of any other document (including
any financing statement under Article 9 of the Uniform Commercial Code) and no
further action, are necessary or desirable under the laws of the United States
of America in order to (A) fully protect and establish Lessor's title to, and
interest in, and property rights with respect to the Aircraft as against Lessee
or any third party claiming through Lessee and to ensure that the property
rights of Lessor therein will have priority in all respects over the claims of
all creditors of Lessee, or (B) ensure the validity, effectiveness and
enforceability of this Lease and the other Operative Documents.
3.11 No Event of Default. No event exists which, upon delivery and
-------------------
leasing of the Aircraft hereunder, would be an Event of Default hereunder.
3-2
<PAGE>
3.12 Principal Place of Business. Unless Lessee gives the notice
---------------------------
provided for in this Section 3.12, Lessee shall maintain its principal place of
business and chief executive office and the office where it keeps its business
and financial records and files concerning the Operative Documents at the
location specified in Section 20 hereof. Lessee shall hold and preserve such
records and files concerning the Operative Documents as are required hereunder
and shall permit representatives of Lessor at any time during normal business
hours (but after reasonable notice) to inspect and make abstracts from such
records and files. Lessee shall give Lessor at least 30 days' prior written
notice of any change in Lessee's principal place of business and chief executive
office, and shall cooperate with Lessor in executing and delivering all such
documents as Lessor may reasonably request which are required or desirable as a
result of such change of principal place of business of Lessee. Notwithstanding
any of the foregoing provisions of this Section 3.12 to the contrary, Lessee
shall not maintain its principal place of business in any location which would
cause Lessee not to be a Certificated Air Carrier.
3.13 Citizenship. Lessee represents that as of the date hereof it is,
-----------
and covenants and agrees that at all time during the Term it shall remain, a
"citizen of the United States" as such term is defined in Section 101(16) of the
Federal Aviation Act.
3.14 Financial Statements. The audited consolidated balance sheet of
--------------------
Amtran and its subsidiaries (including Lessee), as of the fiscal year ended
December 31, 1992, and the related audited consolidated statements of income and
changes in financial position for the years then ended and the unaudited
consolidated balance sheet of Amtran as of September 30, 1993 and the related
statements of income and changes in financial position for the nine months then
ended (copies of each of which have been furnished to Lessor), each prepared ill
accordance with generally accepted accounting principles and practices, fairly
and accurately present the financial position of Lessee and its affiliates, as
of the dates thereof and for the periods covered thereby. Since September 30,
1993, there has been no material adverse change in the financial condition,
business, operations or prospects of Amtran or Lessee.
3.15 Financial and Other Information to be Supplied. Lessee agrees to
----------------------------------------------
furnish to Lessor during the Term:
(a) as soon as possible and in any event within five (5)
days after the occurrence of an Event of Default which is continuing, an
Officer's Certificate setting forth in detail the nature of such Event of
Default and the action which Lessee proposes to take with respect thereto;
(b) as soon as available, and in any event within 60 days
after the end of each of the first three fiscal quarters in each fiscal year of
the Lessee, consolidated
3-3
<PAGE>
balance sheets of Lessee (or Amtran) as of the end of such quarter and related
statements of income, shareholders' equity and changes in financial condition of
Lessee (or Amtran) for the period commencing at the end of the previous fiscal
year and ending with the end of such quarter, setting forth in each case in
comparative form the corresponding figures for the corresponding period in such
other preceding fiscal year, all in reasonable detail and duly certified
(subject to year-end audit adjustments) by a financial officer of Lessee (or
Aintran) as having been prepared in accordance with generally accepted
accounting principles and practices;
(c) as soon as available, and in any event within 120 days
after the end of each fiscal year of Lessee, a copy of the annual report for
such year for Lessee (or Amtran) and its subsidiaries on a consolidated basis,
including therein consolidated balance sheets of Lessee (or Amtran) as of the
end of such fiscal year and related statements of income, shareholders' equity
and changes in financial condition of Lessee (or Amtran) for such fiscal year,
in comparative form with the preceding fiscal year, in each case certified by
independent certified public accountants of national standing as having been
prepared in accordance with generally accepted accounting principles and
practices consistently applied (except as noted therein); provided that any
changes in accounting principles or practices must be approved by such
accountants, provided that, so long as Amtran is subject to the reporting
provisions of the Securities Exchange Act of 1934, a copy of Amtran's annual
report on Form 10-K will satisfy this requirement;
(d) promptly upon the sending or filing thereof, copies of
all such proxy statements, financial statements and reports which Lessee or the
affiliated group of which Lessee is a member sends to its stockholders
generally, and copies of all regular periodic and special reports and all
registration statements under the Securities Act of 1933, as amended, which
Lessee or the affiliate group of which Lessee is a member files with the
Securities and Exchange Commission or any governmental authority which may be
substituted therefor, or with any national securities exchange;
(e) as soon as available, and in any event within 45 days
after the end of each fiscal year of Lessee, a report listing each of the
domestic U.S. and foreign jurisdictions into which the Aircraft was operated
during such fiscal year.
(f) from time to time, such other information relating to
Lessee s (or Amtran's) financial, operational or business affairs or conditions
as Lessor may reasonably request.
3-4
<PAGE>
SECTION 4. LESSOR'S REPRESENTATIONS. WARRANTIES AND AGREEMENTS.
---------------------------------------------------
Subject to certain disclaimers set forth in Section 7 hereof, Lessor
represents, warrants and agrees as follows:
4.1 Citizenship. Lessor represents and warrants that it is a citizen
-----------
of the United States as defined in Section 101(16) of the Federal Aviation Act
and agrees that if at anytime it shall cease to be a "citizen of the United
States" within the meaning of Section 101(16) of the Federal Aviation Act, it
will promptly resign as owner trustee effective upon appointment of successor
owner trustees (if and so long as such citizenship is necessary under the
Federal Aviation Act in effect at such time to permit the unrestricted use of
the Aircraft) and arrange for the appointment of a successor owner trustee which
meets the requirements of Section 101(16).
4.2 Quiet Enjoyment. Lessor covenants that provided no Event of
---------------
Default has occurred and remains unremedied, neither it nor anyone claiming
exclusively by, through or under Lessor will interfere with Lessee's quiet use
and enjoyment of the Aircraft during the Term.
4.1
<PAGE>
SECTION 5. CONDITIONS PRECEDENT.
---------------------
5.1 Conditions Precedent to Obligation of Lessor to Lease
-----------------------------------------------------
Aircraft. In addition to the provisions of Section 2.1 hereof, the obligation of
- --------
Lessor to lease the Aircraft to Lessee under this Lease is subject to the
fulfillment to the satisfaction of Lessor, on or before the Delivery Date, of
the following conditions precedent:
(a) Each of the Operative Documents, and such other
documents as have been reasonably requested by Lessor, shall have been duly
authorized, executed and delivered by the respective party or parties thereto
and shall be satisfactory in form and substance to Lessor, and an executed
original or conformed copy, as appropriate, of the Lease Documents and such
other documents shall have been delivered to Lessor.
(b) On the Delivery Date, the following statements
shall be true and Lessor shall have received evidence in form and substance
satisfactory to it that:
(i) The Aircraft is duly registered with and
certified by the FAA as to type and airworthiness in accordance with the terms
of this Lease;
(ii) The Lease and the Lease Supplement shall
be in due form for recording and shall be duly filed for recordation with the
FAA pursuant to the Federal Aviation Act.
(c) On the Delivery Date for the Aircraft (i) the
representations and warranties of Lessee contained in the Lease Documents shall
be true and accurate; (ii) nothing shall have occurred which materially and
adversely has affected or will affect the ability of Lessee to carry on its
business and to perform its obligations under the Operative Documents to which
it is a party; and (iii) no event shall have occurred and be continuing, or
would result from the lease of the Aircraft, which constitutes a Default or an
Event of Default.
(d) Lessee shall have delivered an Officer's
Certificate to Lessor certifying as to the matters set forth with respect to
Lessee in Section 3 hereof.
(e) Lessor shall have received the following, in
each case in form and substance satisfactory to it:
(i) an incumbency certificate of Lessee
regarding the officers of Lessee authorized to execute and deliver the Operative
Documents to which it is a party and other documents and agreements delivered in
connection therewith;
5-1
<PAGE>
(ii) an insurance report of an independent insurance
broker and certificates of insurance, as to Lessee's due compliance with the
terms of Section II of this Lease;
(iii) certified copies of all documents evidencing the
corporate actions of Lessee, the Board of Directors or the executive committee
of such Board of Directors of Lessee, duly authorizing the lease by Lessee of
the Aircraft hereunder and the execution, delivery and performance by Lessee of
each of the Operative Documents to which it is a party;
(iv) such other documents and evidence with respect
to Lessee as Lessor may reasonably request in order to establish consummation of
the transactions contemplated by the Operative Documents, the taking of all
corporate proceedings in connection therewith and compliance with the conditions
herein set forth.
(f) UCC Financing Statements with respect to the Operative
Documents shall have been duly executed, delivered and filed with the Secretary
of State of the State of Indiana.
(g) Lessor shall have received favorable opinion from
General Counsel of Lessee, covering such other matters incident to the
transactions hereto as Lessor may reasonably request.
(h) Lessor shall have received a favorable opinion from
Messrs. Daugherty, Fowler & Peregrin, special FAA counsel, covering such matters
incident to the transactions hereto as Lessor may reasonably request.
Promptly upon the recordation with the FAA of the documents filed with
respect to the Aircraft referred to in Section 5.1 hereof, Lessee will cause
such special FAA counsel to deliver to Lessor and Lender an opinion addressed to
each as to the due recordation of the Lease Documents filed with respect to the
Aircraft.
5.2 Conditions Precedent to Obligations of Lessee to Lease Aircraft.
----------------------------------------------------------------
In addition to the provisions of Section 2.2 hereof, Lessee's obligation to
lease the Aircraft from Lessor is subject to the fulfillment to the satisfaction
of Lessee on or before the Delivery Date, of the following conditions precedent:
(a) The events described in Section 5.1 shall have occurred.
(b) On the Delivery Date (i) the representations and
warranties of Lessor contained in the Lease Documents shall he true and accurate
and (ii) nothing shall
5-2
<PAGE>
have occurred which materially and adversely has affected or will affect the
ability of Lessor to carry on its business and to perform its obligations under
the Lease Documents.
(c) Lessee shall have received such other documents and
evidence with respect to Lessor as Lessee may reasonably request.
5-3
<PAGE>
SECTION 6. PAYMENTS.
---------
6.1 Basic Rent. During the Basic Term, Lessee shall pay Lessor (in
----------
accordance with Section 6.3 hereof) Basic Rent in the amount of $63,500 per
month. Basic Rent shall commence on the Lease Commencement Date (prorated to
reflect the remaining portion of such month in which this Lease commences) and
continue thereafter on a monthly basis with Basic Rent payable on the first day
of each month during the Basic Term ("Rent Payment Date"); provided, however,
that if the last month of the Basic Term shall not be a full month, the last
payment of Basic Rent shall be prorated to reflect that portion of such month
included in the Basic Term.
6.2 Net Lease: No Set-off or Deductions. This Lease is a net lease.
-----------------------------------
Lessee acknowledges and agrees that its obligations to pay all Rent due and
owing under the terms hereof shall be absolute and unconditional and shall not
be affected by any circumstance whatsoever, including, without limitation (a)
any set-off, counterclaim, recoupment, defense or other right which Lessee may
have against Lessor or anyone else for any reason whatsoever, (b) any defect in
the title, airworthiness, eligibility for registration under the Federal
Aviation Act, or any damage to or loss or destruction of, the Aircraft, or any
interference, interruption or cessation in or prohibition of the use or
possession thereof by Lessee for any reason whatsoever, including, without
limitation, any such interference, interruption, cessation or prohibition
resulting from the act of any governmental authority or any violation by Lessor
of Section 18 hereof, (c) any liens, encumbrances or rights of others with
respect to the Aircraft, (d) the invalidity or unenforceability or lack of due
authorization or other infirmity of this Lease or any lack of right, power or
authority of Lessor or Lessee to enter into this Lease, (e) any insolvency,
bankruptcy, reorganization or similar proceedings by or against Lessee, Lessor,
or any other person, or (f) any other cause whether similar or dissimilar to the
foregoing, any present or future law notwithstanding, it being the intention of
the parties hereto that all Rent payable by Lessee hereunder shall continue to
be payable in all events in the manner and at the times provided herein. Such
Rent shall not be subject to any abatement and the payments hereof shall not be
subject to any set-off or reduction for any reason whatsoever, including any
present or future claims of Lessee against Lessor under this Lease or otherwise.
Each Rent payment made pursuant to this Lease by Lessee shall be final and
Lessee will not seek to recover all or any part of such payment from Lessor or
for any reason whatsoever.
If for any reason whatsoever this Lease shall be terminated in whole or
in part by operation of law or otherwise, except as specifically provided herein
or as otherwise agreed, Lessee nonetheless agrees to pay to Lessor an amount
equal to each payment of Basic Rent and Supplemental Rent due hereunder at the
time such payment would have become due and payable in accordance with the terms
hereof had this Lease not been
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terminated in whole or in part. The obligation of Lessee in this Section 6.2
shall survive the expiration or the termination of this Lease other than in
accordance with its terms. To the extent permitted by Applicable Law. Lessee
hereby waives any rights which it may now have or which may be conferred upon
it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease
except in accordance with the terms hereof.
6.3 Immediately Available Funds. All Rent shall be paid in
---------------------------
United States Dollars by wire transfer in immediately available funds by 4:00
p.m. EST or EDT, as the case may be, on the day in question to Lessor at
National Westminster Bank, USA. 80 Pine Street, New York, New York, ABA No.021
000 322, Account No.218-01-7572, AFG Rent Escrow Ref. ATA Lease Supplement No.
1, with sufficient information to identify the source and application of such
funds. If any Rent is due on a day which is not a Business Day, it shall be due
on the next succeeding Business Day.
6.4 Supplemental Rent. Lessee also agrees to pay to Lessor,
-----------------
subject to Section 6.3 hereof, any and all Supplemental Rent when the same shall
become due and owing, and in the event of any failure on the part of Lessee to
pay any Supplemental Rent, Lessor shall have all rights, powers and remedies
provided for herein or by law or equity in the case of nonpayment of Basic Rent.
Lessee will also pay, on demand, as Supplemental Rent, interest at the Overdue
Rate on any part of any installment of Basic Rent not paid when due for any
period for which the same shall be overdue and, to the extent permitted by
Applicable Law, on any payment of Supplemental Rent not paid when due for the
period until the same shall be paid.
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SECTION 7. DISCLAIMER OF WARRANTIES AND MANUFACTURERS' WARRANTIES.
-------------------------------------------------------
7.1 Disclaimer. THE AIRCRAFT IS TO BE LEASED HEREUNDER "AS IS" AND
----------
"WHERE IS." LESSOR HAS NOT AND SHALL NOT BE DEEMED TO HAVE MADE (WHETHER BY
VIRTUE OF HAVING LEASED THE AIRCRAFT UNDER THIS LEASE, OR HAVING ACQUIRED THE
AIRCRAFT, OR HAVING DONE OR FAILED TO DO ANY ACT, OR HAVING ACQUIRED OR FAILED
TO ACQUIRE ANY STATUS UNDER OR IN RELATION TO THIS LEASE OR OTHERWISE), AND
LESSOR HEREBY SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR
IMPLIED, AS TO THE TITLE (EXCEPT AS HEREIN BELOW PROVIDED), CONDITION, DESIGN,
OPERATION. MERCHANTABILITY, FREEDOM FROM CLAIMS OF INTERFERENCE OR INFRINGEMENT
OR THE LIKE, OR FITNESS FOR USE FOR A PARTICULAR PURPOSE OF THE AIRCRAFT, OR AS
TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE AIRCRAFT, THE ABSENCE
THEREFROM OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, OR AS TO ANY
OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED (INCLUDING ANY
IMPLIED WARRANTY ARISING FROM A COURSE OF PERFORMANCE OR DEALING OR USAGE OF
TRADE), WITH RESPECT TO THE AIRCRAFT AND LESSEE HEREBY WAIVES, RELEASES,
RENOUNCES AND DISCLAIMS EXPECTATION OF OR RELIANCE UPON ANY SUCH WARRANTY OR
WARRANTIES. LESSOR SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY TO LESSEE OR
ANY OTHER PERSON, WHETHER ARISING IN CONTRACT OR TORT OUT OF ANY NEGLIGENCE OR
STRICT LIABILITY OF LESSOR OR OTHERWISE, FOR (1) ANY LIABILITY, LOSS OR DAMAGE
CAUSED OR ALLEGED TO BE CAUSED DIRECTLY OR INDIRECTLY BY THE AIRCRAFT OR ANY
ENGINE OR BY ANY INADEQUACY THEREOF OR DEFICIENCY OR DEFECT THEREIN OR BY ANY
OTHER CIRCUMSTANCE IN CONNECTION THEREWITH, (II) THE USE, OPERATION OR
PERFORMANCE OF THE AIRCRAFT OR ANY RISKS RELATING THERETO, (ITT) ANY
INTERRUPTION OF SERVICE, LOSS OF BUSINESS OR ANTICIPATED PROFITS OR
CONSEQUENTIAL DAMAGES OR (IV) THE DELIVERY, OPERATION, SERVICING, MAINTENANCE,
REPAIR, IMPROVEMENT OR REPLACEMENT OF THE AIRCRAFT. THE WARRANTIES AND
REPRESENTATIONS SET FORTH IN THIS SECTION 7.1 ARE EXCLUSIVE AND IN LIEU OF ALL
OTHER REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, AND LESSOR
SHALL NOT BE DEEMED TO HAVE MADE ANY OTHER WARRANTIES, EXCEPT AND ONLY TO THE
EXTENT OF THOSE WARRANTIES SET FORTH IN SECTION 4 OF THIS LEASE.
7-1
<PAGE>
7.2 Other Warranties. So long as no Event of Default shall have
----------------
occurred, Lessor agrees that if there are any outstanding warranties of
manufacturers and suppliers relating to the Aircraft or any of the Engines which
would otherwise inure to the benefit of or be enforceable by Lessor during the
Term, they shall, notwithstanding title to the Airframe and Engines being vested
in Lessor, inure to the benefit of Lessee throughout the Term and Lessor agrees
to authorize Lessee to exercise for the account of Lessor such rights as Lessor
may have under such warranties.
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<PAGE>
SECTION 8. USE OPERATION AND MAINTENANCE.
-----------------------------
8.1 General. Unless otherwise provided herein, Lessee, at its own
-------
cost and expense, shall service, repair, maintain and overhaul or cause the same
to be done to the Airframe and each Engine under the Maintenance Program (as
defined in Section 8.3) for so long as the Airframe is operated and leased
hereunder by Lessee in the same manner and with the same care as used by Lessee
with similar aircraft and engines. By way of expansion and not in limitation of
the foregoing, Lessee agrees to (i) keep the Airframe and each Engine in as good
operating condition as when delivered to Lessee hereunder, ordinary wear and
tear excepted, (ii) keep the Aircraft in such condition as is necessary to
enable the airworthiness certification of the Aircraft to be maintained in good
standing at all times under the Federal Aviation Act, (iii) maintain the Manuals
and Technical Records in the English language in accordance with such
Maintenance Program and in a manner acceptable to the FAA and (iv) cause the
Aircraft to be maintained in a manner which will not discriminate against the
Aircraft compared with other Boeing 727 aircraft owned or leased by Lessee.
8.2 Operation and Use.
-----------------
(a) Lessee agrees not to operate or locate the Airframe or any
Engine, or suffer the Airframe or any Engine to be operated or located, in any
area (i) excluded from coverage by any insurance policy required to be
maintained hereunder with respect to the Airframe or Engines or (ii) in any
recognized or, in Lessor's reasonable judgment, threatened area of hostilities
unless fully covered by war risk insurance meeting the terms of Section 11
hereof, except in the case of a requisition by the United States government,
where Lessee obtains indemnity from the United States government against the
risks and in the amounts required by Section 11 hereof covering such area,
including insurance provided under Title XIII of the Federal Aviation Act.
Lessee agrees not to operate the Aircraft, or suffer the Aircraft to be operated
during the Term (x) unless the Aircraft is covered by insurance as required by
the provisions of Section 11 hereof or (y) contrary to the terms of such
insurance as required by the provisions of Section 11 hereof.
(b) Lessee agrees not to (i) operate the Aircraft or permit the
Aircraft to be operated during the Term except in a passenger configuration, in
commercial or other operations for which Lessee is duly authorized by the FAA or
the appropriate foreign authority, provided that Lessee shall be permitted to
transport cargo and mail in the cargo compartments of the Aircraft or (ii) use
or permit the Aircraft to be used for a purpose for which the Aircraft is not
designed or reasonably suitable. Lessee will not permit the Airframe or any
Engine to be maintained, used or operated during the
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<PAGE>
Term in knowing violation of any Applicable Law, or contrary to any
manufacturer's operating manuals or instructions.
8.3 Maintenance in General. Lessee agrees that it alone has the
----------------------
obligation to maintain and repair the Airframe and Engines in accordance with a
maintenance program which meets the FAA requirements for United States
commercial airline operations under Part 121 of the Federal Aviation Regulations
and which is approved or accepted by the appropriate FAA Flight Standards Air
Carrier District Office having responsibility for monitoring Lessee's operation
and maintenance of the Aircraft, and meets the non-discrimination requirements
set forth in Section 8.1 hereof (the "Maintenance Program"), so as to keep the
Aircraft in as good a condition during the Term as on the Delivery Date and
until the Aircraft is redelivered to Lessor pursuant to Section 9 hereof,
ordinary wear and tear excepted. Included within the obligation of maintenance
and repair is the obligation and affirmative undertaking by Lessee to replace
from time to time all worn or defective Parts to the extent required to cause
the Aircraft to be in an airworthy condition in all respects and to be covered
by an effective Standard Certificate of Airworthiness at all times except during
those periods when the Aircraft is undergoing maintenance or repairs as required
by this Lease.
8.4 Specific Items of Maintenance. Lessee agrees that maintenance and
-----------------------------
repairs shall include, but shall not be limited to, the following specific
items:
(a) to perform or have performed in accordance with Section 8.3
all routine maintenance work, including on-line maintenance on the Aircraft, and
to ensure that all such maintenance shall be in accordance with the regulations
and directives of the FAA or other government authority having jurisdiction over
Lessee's operations. Lessee shall have all maintenance and repairs performed at
Lessee's maintenance facilities or at other FAA Repair Stations selected by
Lessee;
(b) to correct promptly and diligently any deficiencies revealed
at any time by any inspection of Lessor which under the Maintenance Program
require proper repair, replacement, overhaul and adjustment;
(c) to maintain all Aircraft documentation, including, without
limitation, the Manuals and Technical Records, in compliance with FAA
regulations and in up-to-date status, and to make these available for review by
Lessor on reasonable notice at Lessee's principal maintenance base;
(d) If required by FAA regulations, Lessee shall notify Lessor
promptly of any modifications or configuration changes to the Airframe
which would
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have a material change to the detail specification and/or the manuals
relating to the Airframe (such as flight, operations and maintenance).
8.5 Parts.
-----
(a) Unless the Airframe or an Engine has suffered Total Loss,
Lessee, at its own cost and expense, will during the Term promptly replace all
Parts that may from time to time become worn out, lost, stolen, destroyed,
seized, confiscated, damaged beyond repair or permanently rendered unfit for use
for any reason whatsoever. 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 made by the same manufacturer and of the same model number and
modification status, or shall be FAA-approved substitutes normally used by
Lessee. 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, utility, and useful life at least equal to, the Parts replaced assuming
such replaced Parts were in the condition and repair required to be maintained
by the terms hereof.
(b) All Parts at any time removed from the Airframe or any Engine
shall remain the property of Lessor and subject to this Lease, no matter where
located, until such time as such Parts shall be replaced by Parts that have been
incorporated or installed in or attached to such Airframe or Engine and that
meet the requirements for replacement Parts specified in clause (a) of this
Section 8.5. Immediately upon any replacement Part becoming incorporated or
installed in or attached to such Airframe or Engine as provided in clause (a)
hereof, without further act, (i) title to such replacement Part shall thereupon
vest in Lessor, (ii) such replacement Part shall become subject to this Lease
and be deemed part of such Airframe or Engine, as the case may be, for all
purposes hereof to the same extent as the Parts originally incorporated or
installed in or attached to such Airframe or Engine, and (iii) title to the
replaced Part shall thereupon vest in Lessee, free and clear of all rights of
Lessor and shall no longer be deemed a Part hereunder.
(c) Title to all Parts incorporated or installed in or attached
or added to the Airframe or any Engine as the result of any alteration,
modification or addition effected by Lessee shall, without further act and
except as otherwise provided Section 8.6(c) hereof, vest in Lessor and become
subject to this Lease.
(d) Notwithstanding the foregoing provisions of this Section 8.5.
Lessor agrees that so long as no Event of Default shall have occurred and
be continuing,
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<PAGE>
Lessee may, at any time during the Term. remove any Part of the Aircraft
without replacement, provided that (i) such Part is in addition to. and not
in replacement or substitution for, any Part originally incorporated or
installed in or attached to the Aircraft at the Delivery Date hereunder or
any Part in replacement of, or substitution for, any such originally
incorporated or installed or attached Part, (ii) such Part is not required
to be incorporated or installed in or attached or added to the Aircraft
pursuant to the terms of this Section 5 and (iii) such Part can be removed
from the Aircraft without diminishing or impairing the value, utility,
condition or airworthiness which the Aircraft would have had at such time
had such alteration, modification or addition not occurred. Upon the
removal by Lessee of any such Part as provided in the preceding sentence,
title thereto shall, without further act, vest in Lessee and such Part
shall no longer be deemed part of the Aircraft (such a part is herein
called a "Removable Part"). Lessee, at its sole expense, shall repair any
damage to the Aircraft resulting from any such removal. Any Part not
removed by Lessee as above provided prior to the return of the Aircraft to
Lessor hereunder, whether pursuant to Section 9, Section 14 or otherwise,
shall remain the property of Lessor. If any Removable Part is (x) owned by
any third party and leased to Lessee or installed on the Aircraft under
license from Lessee, (y) sold to Lessee subject to a conditional sales
contract or other security interest or (z) leased to Lessee pursuant to a
lease which is subject to a security interest in favor of any third party,
then Lessor will not acquire or claim, as against such lessor, conditional
vendor or secured party, any right, title or interest in any such Removable
Part as the result of such Removable Part being installed in the Aircraft;
provided, however, (xx) that Lessor's inability to so acquire or claim is
subject to the express condition that such lessor, licensee, conditional
vendor or secured party shall not acquire or claim, as against Lessor, any
right, title or interest in the Aircraft, or any Part other than its
interest in such Removable Part by reason of such Removable Part being
installed thereon, and (yy) that any Removable Part not removed by Lessee
within sixty (60) days after an Event of Default, shall, at such time,
become the property of Lessor and be subject to this Lease.
8.6 Airworthiness Directives.
-------------------------
(a) During the Term hereof Lessee agrees at its sole cost and
expense to comply with any airworthiness directive, the Federal Aviation
Regulations and Special Federal Aviation Regulations, manufacturers' mandatory
service bulletins or any other mandatory regulation, directive or instruction
("Airworthiness Directive") which the FAA may from time to time issue and which
becomes due during the Term in order to meet the requirements of Applicable Law
related to the public transport of passengers and/or cargo by aircraft;
provided, however. that nothing in this Lease shall be deemed to require Lessee
or Lessor to bring the Aircraft into compliance with the Stage 3 noise standards
set forth in Part 36 of the Federal Aviation Regulations (14 C.F.R. Part 36).
All Airworthiness Directives shall be accomplished in accordance with all
applicable
8-4
<PAGE>
bulletins and manuals published by the manufacturer of the Airframe or Engines
or Parts.
(b) Lessor shall hold title to any Parts included in a new system
installed on the Aircraft pursuant to an Airworthiness Directive which is
required by such Airworthiness Directive to be installed during the Term.
(c) If Lessee would not normally perform an Airworthiness
Directive, or such other modification desired by Lessor, the terms of which
permit performance after the end of the Term, and Lessor requests Lessee, in
writing, to perform such Airworthiness Directive or modification, Lessee shall
perform such Airworthiness Directive or modification; provided, however, that
Lessee's obligations to perform such Airworthiness Directive or modification
pursuant to this Section 8.6(c) shall be subject to availability of the
necessary material, labor and facilities and shall not unreasonably interfere
with, or delay, Lessee's operation and are of the Aircraft. In the event Lessee
is unable to perform an Airworthiness Directive or modification requested by
Lessor under this Section 8.6(c) because of the lack of availability of
materials, labor or facilities or such performance will unreasonably interfere
with or delay Lessee's operation and use (including redelivery) of the Aircraft,
Lessee will cooperate with, and assist Lessor in the accomplishment of such work
by a FAA Repair Station. The costs of such performance shall be borne solely by
Lessor and shall be equal to the sum of material costs and the associated Direct
Labor Rate cost or labor costs, as the case may be.
8.7 Maintenance Agencies. To the extent that Lessee intends that any
--------------------
of the activities to be performed pursuant to this Section 8 with respect to the
Airframe or Engines are to be performed by any Person other than Lessee and not
pursuant to the Maintenance Program, such maintenance shall be performed to an
FAA-approved standard.
8.8 Corrosion Control. Lessee shall carry out such work as may be
-----------------
required for the control of corrosion, including, without limitation, periodic
inspections for penetration of fuel tanks, periodic inspections and clean-up
under galleys, forward and aft cargo pit areas and lavatories, periodic
treatment of all mild and moderate corrosion and correcting of all severe or
exfoliated corrosion, in accordance with the Maintenance Program.
8.9 Modifications.
-------------
(a) Lessee, at its own expense. may from time to time make such
alterations and modifications in and additions to the Airframe or any Engine as
Lessee
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<PAGE>
may deem desirable in the proper conduct of its business, including without
limitation, removal of Parts which Lessee deems no longer suitable or
appropriate for use in the Airframe or such Engine; provided, that no such
alteration, modification or addition shall diminish the value or utility of the
Airframe or such Engine, or impair the condition or airworthiness thereof, below
the value, utility, condition and airworthiness thereof prior to such
alteration, modification or addition assuming the Airframe or such Engine met
the requirements of this Lease prior to such alteration, modification or
addition. Notwithstanding the foregoing, Lessee shall not, without Lessor's
prior written consent, make any major modifications, alterations or additions to
the Aircraft, i.e., those costing in excess of $400,000. For the purposes of
----
this section "major modifications" shall exclude modifications required by
Applicable Law and modifications made by Lessee to standardize the Aircraft to
Lessee's fleet or modifications otherwise required by the terms of this Lease,
but shall include (1) changes relating to the Aircraft's structure or
performance and (2) changes which could adversely affect spare parts
interchangeability or replaceability. All major modifications shall be
accomplished by at Lessee's expense.
(b) If the Aircraft is not in Lessee's standard fleet
configuration, Lessor may require Lessee, at Lessee's sole expense, to remove
all modifications accomplished by Lessee and to reconstruct the modified areas
to Lessee's standard fleet configuration or to their original configuration in a
good and workmanlike manner prior to return of the Aircraft to Lessor.
(c) NOTWITHSTANDING ANY OTHER PROVISION OF THIS LEASE, NO
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.
8.10 Possession. Lessee shall not sublease the Aircraft or otherwise
----------
in any manner deliver, relinquish or transfer possession of the Airframe or any
Engine to any Person or install any Engine, or permit any Engine to be
installed, on any airframe other than the Airframe, during the Term, without the
prior written consent of Lessor; provided, however, that so long as Lessee shall
comply with the provisions of Section 11 hereof Lessee may, without the prior
written consent of Lessor:
(a) enter into a contract, commonly referred to in the U.S.
airline industry as a "wet lease," under which Lessee has operational control of
the Aircraft in the ordinary course of Lessee's business (which shall not be
considered a transfer of possession hereunder), provided that Lessee's
obligations under this Lease shall continue in full force and effect
notwithstanding any such "wet lease" contract;
8-6
<PAGE>
(b) deliver possession of the Airframe or an Engine to the
manufacturer thereof or to a FAA Repair Station for testing or other similar
purposes or for service, repair, maintenance or overhaul work on the Airframe or
Engines or for alterations or modifications in or additions to the Airframe or
Engines, to the extent required or permitted by the terms of this Lease;
(c) subject any Engine to normal interchange or pooling
agreements or arrangements, in each case customary in the United States airline
industry applicable to other similar aircraft and engines operated by Lessee and
entered into by Lessee in the ordinary course of its business with any
Certificated Air Carrier; provided that (A) no such agreement or arrangement
contemplates or requires the transfer of title to such Engine, and (B) if
Lessor's title to any Engine shall be divested under any such agreement or
arrangement, such divestiture shall be deemed to be a Total Loss with respect to
such Engine and Lessee shall comply with Section 12.2 hereof in respect of such
Engine;
(d) install an Engine on an airframe owned by Lessee free and
clear of all Liens, except (i) Permitted Liens, and (ii) those which apply only
to the engines (other than Engines), appliances, parts, instruments,
appurtenances, accessories, furnishings and other equipment (other than Parts)
installed on such airframe (but not to the airframe as an entirety), and (C)
those created by the rights of other Certificated Air Carriers under normal
interchange or pooling agreements or arrangements customary in the airline
industry which do not contemplate, permit or require the transfer of title to
such airframe or engines installed thereon;
(e) install an Engine on an airframe leased to Lessee or
purchased by Lessee subject to a conditional sale or other security agreement;
provided that (i) such Airframe is free and clear of all liens except (A) the
rights of the parties to the lease, conditional sale or other security agreement
and (B) Liens of the type permitted by clause (d) above, and (ii) such lease,
conditional sale or other security agreement effectively provides that such
Engine shall not become subject to the Lien of such lease, conditional sale or
other security agreement, notwithstanding the installation thereof on such
airframe;
(f) install an Engine on an airframe owned by Lessee, leased by
Lessee or purchased by Lessee subject to a conditional sale or other security
agreement under circumstances where neither clause (d) nor clause (e) above is
applicable; provided that any divestiture of Lessor's title to such Engine
resulting from such installation shall be deemed a Total Loss with respect to
such Engines and Lessee shall comply with Section 12.2 hereof;
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<PAGE>
(g) transfer possession of the Airframe or any Engine to the
United States of America or any instrumentality thereof under to the Civil
Reserve Air Fleet Program authorized by 10 U.S.C. (S)9511, et seq., or any
------
substantially similar program provided such transfer of possession does not
exceed the Basic Term. If an Event of Default occurs under this Lease and Lessor
elects to pursue its remedies under Section 14 to terminate this Lease and
repossess the Aircraft (or Engine), Lessor will so notify the United States
Government by sending a written communication to:
Headquarters, AMC Contracting Office - XOKA, Scott Air Force Base, Illinois
62225-5007.
(h) transfer possession of the Airframe or any Engine to the
United States of America for a period that does not continue beyond the end of
the Basic Term when required by Applicable Law; provided that the rights of any
transferee who receives possession by reason of a transfer permitted by this
Section 8.10 (other than by a transfer of an Engine which is deemed a Total Loss
if substitution is being duly effected under Section 12.2 hereof) shall be
subject and subordinate to all the terms of this Lease.
In the event Lessor shall have received from a lessor or secured party of
any airframe leased to Lessee or purchased by Lessee subject to a conditional
sale or other security agreement, a written agreement which provides that such
lessor or secured party under such agreement shall not acquire or claim any
right, title or interest in any Engine, and such lease or conditional sale or
other security agreement covering such airframe also covers an engine or engines
owned by such lessor under such lease or subject to a security interest in favor
of such secured party under such conditional sale or other security agreement,
Lessor hereby agrees for the benefit of such lessor or secured party that Lessor
will not acquire or claim, as against such lessor or secured party, any right,
title or interest in any such engine as the result of such engine being
installed on the Airframe 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. The existence of a clause substantially
similar to the foregoing 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.
(i) Notwithstanding any transfers of possession of Engines
permitted pursuant to this Section 8.10, Lessee shall at all times during the
Term of this Lease remain fully liable and obligated to perform all of the terms
of this Lease to the same extent as if such transfer had not occurred.
8.11 Reports. Lessee shall furnish to Lessor, on an annual basis, the
-------
the Hours/Cycles operated for Airframe. Such reports shall be furnished no later
than 120 days following the end of each calendar year.
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8.12 Right to Inspect.
----------------
(a) Lessor and its agents shall have the right to inspect the
Aircraft 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 repaired and maintained in accordance with the requirements of this
Lease. Lessee shall, at the request of Lessor, provide Lessor with such
information concerning the location of the Aircraft as may be necessary to
facilitate such inspection and shall permit Lessor or its duly authorized
representative to be present during any overhaul or the performance of any major
scheduled maintenance check of the Aircraft; provided that Lessor inspections
conducted pursuant to this Section 8.12 shall not unreasonably interfere with,
or delay Lessee's operation and use of the Aircraft, any Engine or Part. 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 Lessor. All repairs which shall be shown by the inspection or survey
to be required shall be made at Lessee's expense in accordance with the
Maintenance Program. All required repairs shall be performed as soon as
practicable thereafter. In the event of a dispute between Lessor and Lessee as
to the proper performance by Lessee of the repairs required hereunder, the
decision of the manufacturer of the Airframe, Engine or Part, as the case may
be, shall control subject always to Lessee's need to comply with Applicable
Laws, including any rules, orders or directions of FAA or its duly authorized
inspectors. The non-prevailing party shall be responsible for payment of all
expenses of such manufacturer incurred in connection with the rendering of its
decision. Lessor shall have no duty to make any such inspection and shall not
incur any liability or obligation by reason of not making such inspection.
(b) Lessee shall make available to Lessor for its review (i) such
records as Lessee may have in its possession which Lessor may request pursuant
to Lessor's inspection rights set forth in subsection (a), above; (ii) such
other written communications with the FAA or any manufacturer as it may have in
its possession relating to defects or malfunctions of the Aircraft or Parts or
other matters; and (iii) Lessee's most recent FAA-approved operations
specifications, including any amendments or additions made thereto. All such
records shall be made available for inspection at Lessee's principal maintenance
facility and shall be deemed confidential. Lessor agrees to protect the
confidentiality of such records and to not disclose the same to any person,
except as otherwise required by law, without first obtaining Lessee's written
approval.
8.13 Repairs. Any repair to the Aircraft accomplished during the Term
-------
shall be accomplished where applicable pursuant to the appropriate
manufacturer's repair manual instructions or the Maintenance Program. Lessee
shall have all repairs accomplished on the Aircraft at Lessee's maintenance
facilities or by an FAA Repair Station, and such repairs shall be accomplished
with no less skill and care than repairs
8-9
<PAGE>
made on Lessee's other owned or operated Boeing 727-200 series aircraft. Such
repairs shall be made in a workmanlike manner so as to keep the Aircraft at all
times in the condition required by the Maintenance Program.
8.14 Aircraft Records. Lessee shall maintain all records (including
----------------
all Manuals and Technical Records) during the Term relating to the service,
inspection, maintenance, modification, repair and overhaul of the Airframe,
Engines and Parts installed therein which records will at all times be kept
current and up-to-date in order to facilitate Lessor's ability to periodically
inspect the Aircraft, monitor the maintenance of the Aircraft during the Term
and to facilitate the sale or release of the Aircraft to a third party at the
end of the Term.
8.15 Lessor's Disclaimer. Notwithstanding the rights of Lessor to
-------------------
inspect the Aircraft and receive reports on its condition and maintenance
contained in this Section 8 and elsewhere in this Lease, Lessor shall have no
obligation to any Person to ensure that Lessee maintains the Aircraft in an
airworthy condition or otherwise in accordance with the terms of this Lease.
8-10
<PAGE>
SECTION 9. RETURN OF AIRCRAFT
------------------
9.1 Return Location. At the end of the Term or upon termination of
---------------
this Lease pursuant to Section 14 hereof, Lessee shall return the Airframe and
Engines to Lessor at Lessee's principal maintenance facility at the Indianapolis
International Airport, Indianapolis, Indiana, or at such other location within
the continental United States as shall be agreed to by the parties (the "Return
Location"). The Aircraft at the time of its return shall be free and clear of
all Liens other than Lessor's Liens. At the time of return of the Aircraft to
Lessor, and provided Lessee is in compliance with the terms of this Lease,
Lessor and Lessee shall execute a Technical Acceptance Certificate (Return)
substantially in the form of Exhibit E. The payment of all costs, fees and taxes
related to the positioning of the Aircraft at the Return Location shall be for
the account of Lessee.
9.2 Return of Other Engines. In the event any engine not owned by
-----------------------
Lessor shall be returned with the Airframe, it shall be a Replacement Engine,
and 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 and shall provide such
other documents and instruments, opinions of counsel, and shall take such other
actions as Lessor may reasonably request in order that title to such Replacement
Engine shall be duly and properly vest in Lessor. Upon passage of title to
Lessor such Replacement Engine shall be deemed to be an Engine for all purposes
hereof and thereupon Lessor will transfer to Lessee, without recourse or
warranty except a warranty of tide excluding Lessor's Liens, all of Lessor's
right, title and interest in and to an Engine not installed on such Airframe at
the time of the return thereof.
9.3 Condition of Aircraft. The Aircraft at the time of the return
---------------------
to Lessor shall have been maintained and repaired in accordance with the
Maintenance Program and this Lease, and shall meet the following requirements:
(a) Operating Condition. The Aircraft shall be in at least as
-------------------
good operating condition as on the Delivery Date, ordinary wear and tear from
normal airline passenger operations excepted.
(b) Cleanliness Standards. The Aircraft shall be clean by
---------------------
United States commercial airline standards.
(c) Certificate of Airworthiness. The Aircraft shall have,
----------------------------
and be in compliance with a current valid Standard Certificate of Airworthiness
issued by the FAA without any corrections, repairs, modifications, alterations
or overhauls having to be
9-1
<PAGE>
performed by Lessor to meet such standards and rules, and shall comply with the
then current provisions of Part 121 of the Federal Aviation Regulations.
(d) Compliance with Governmental Requirements. The Aircraft
-----------------------------------------
shall be in compliance with all Airworthiness Directives affecting the Aircraft
and requiring performance during the Term. In the event Lessee has obtained a
waiver or deviation from the FAA suspending the need of having to comply with
any such Airworthiness Directives, which waiver or deviation is unique to the
Aircraft or Lessee's operation and use thereof and not of general, industry-wide
application, Lessee shall, irrespective of such waiver or deviation, fully
comply with all such Airworthiness Directive prior to the return of the Aircraft
to Lessor as if such waiver or deviation did not exist; provided, however, that
Lessee's obligations under this Section 9.3(d) shall be limited to the extent
that the aforesaid compliance cannot be accomplished because the materials
necessary to comply with or complete such Airworthiness Directive do not exist
in the marketplace or there is no accepted, industry-wide method for compliance
with such Airworthiness Directive and such conditions continue for a period of
six (6) months following the end of the Term. For the avoidance of doubt, should
required materials or a method of compliance become available prior to the end
of such six-month period, Lessee at its own expense shall either bring the
Aircraft into compliance with the Airworthiness Directive or pay Lessor the cost
thereof.
(e) Deferred Maintenance. The Aircraft shall have had
--------------------
accomplished thereon all outstanding deferred maintenance items and any
discrepancies indicated by the operational check flight conducted pursuant to
Section 9.12. 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.
(f) Corrosion Treatment. The Aircraft shall have been
-------------------
maintained by cleaning and treating of all mild corrosion and correcting of all
moderate and severe or exfoliated corrosion in accordance with the Lessee's
Maintenance Program.
(g) Configuration and Condition. The Aircraft shall be
---------------------------
returned having the same configuration and in the same or better condition with
all Parts installed therein as on the Delivery Date, excepting only
modifications, additions, replacements and substitution of Parts as may have
been properly made by Lessee pursuant to Section 8 and as specifically otherwise
set forth in this Section 9. At Lessor's request, and to the extent available,
Lessee shall provide Lessor with the last six reliability reports for its fleet
of Boeing 727-200 Aircraft as provided to the FAA.
9-2
<PAGE>
9.4 Specific Items. With respect to the Aircraft, the following
--------------
items of this Section 9.4 shall be in the following general condition or, to the
extent addressed in the Maintenance Program or maintenance procedures, in the
condition required by such manual or procedures.
The Aircraft shall:
(i) have installed the full complement of Engines and other equipment,
Parts and accessories as would remain installed on such aircraft if
the Aircraft were to remain in Lessee's service other than removal of
components pursuant to Section 8.5(d), and shall be in a condition
suitable for operation in commercial service;
(ii) comply with the Maintenance Program;
(iii) be in compliance with all outstanding Airworthiness Directives
affecting the Aircraft issued by the FAA or other regulatory
authority having jurisdiction over the Aircraft;
(iv) be free of fuel leaks;
(v) have been inspected and treated with respect to corrosion, in
accordance with the Maintenance Program, and shall be substantially
free from corrosion or shall be adequately treated and an approved
corrosion prevention program shall be in operation; and
(vi) be free from all fuel tank contamination and corrosion.
9.5 Condition of Airframe. The Airframe at the time of its return
---------------------
to Lessor shall meet the requirements set forth below, all at Lessee's expense,
except as otherwise provided herein:
(a) At the end of the Term, Lessee shall have performed
immediately prior to redelivery to Lessor a "C" check, including all phases and
multiples in accordance with the Maintenance Program, and will have corrected
any deficiencies revealed during such check and all "Deferred Maintenance" items
pursuant to Section 9.3(e);
(b) The cockpit shall be cleaned. Placards shall be replaced
if required by the Maintenance Program. Lessee shall insure that any items which
are
9-3
<PAGE>
reasonably found to be defective in the Aircraft's interior will be replaced
or repaired in accordance with the Maintenance Program;
(c) To the extent required by the Maintenance Program, Lessee
will permanently repair the fuselage, including but not limited to (i) dents,
abrasions, and scab patches; and (ii) loose or pulled rivets, impact damage to
the Aircraft caused by ground handling equipment or impact damage caused by
foreign objects during the Term.
(d) Except as otherwise provided in this Section 9, all Parts
shall be serviceable in accordance with FAA standards.
(e) At the time of return, the time remaining to the next
Major Structural Inspection ("MSS") under the Maintenance Program, expressed as
a percentage of the allowable interval between such inspections, will not be
less than the time remaining as of the Delivery Date as recorded in the
Technical Acceptance Certificate (delivery) (exhibit D), provided, however, that
the Airframe shall have at least one hundred (100) Hours remaining to the next
MSI. Subject to the minimum Hour limitation set forth in the immediately
preceding sentence, Lessor will accept the Airframe with less than the indicated
percentage of allowable interval between the MSIs subject to the Return
Condition Adjustment provided for in Section 9.8.
(f) The landing gear and other time-controlled components
shall be returned with the same times remaining until the next inspection or
removal as when delivered to Lessee, provided, however, that such equipment
shall have at least one hundred (100) Hours or Cycles (whichever is the
applicable and the most limiting standard) remaining until the next inspection
or removal. Subject to the Minimum Hour/Cycle limitation set forth in the
immediately preceding sentence, any deviation from the foregoing requirement
will be accepted by Lessor subject to the Return Condition Adjustment provided
for in Section 9.8. With respect to the landing gear only, the time remaining as
of the Delivery Date is recorded in the Technical Acceptance Certificate
(Delivery). With respect to the other time or calendar-controlled components
(other than Engines, landing gear and the APU) the total times, and actual times
remaining until the next limiting inspection/overhaul as of the Delivery Date
shall be those recorded in Items B-12 and/or B-14 of the Manuals and Technical
Records listed in Exhibit C.
9.6 APU and Engines. Each Engine and Auxiliary Power Unit ("APU")
---------------
shall be maintained in an "On Condition" program. On return of the Aircraft, the
APU shall be in operating condition within manufacturer's limits. Each Engine
shall be in the same aggregate Cycle/Hour configuration and exhaust gas
temperature ("EGT") margins on the return thereof as when accepted by Lessee on
the date of its delivery to Lessee. In order to determine the aggregate
Cycle/Hour configuration and EGT margin of each Engine as of such date, with
respect to the two (2) Engines having manufacturer's serial numbers 688224 and
688226, the parties shall use the data contained in paragraphs 5 and 6 of
Schedule 1 to the Technical Acceptance Certificate (Delivery) dated the date
hereof; with respect to the one (1) Engine having manufacturer's serial
9-4
<PAGE>
number 688127 (which was previously delivered to, and accepted by Lessee under
the Pooling Agreement between Lessee and Alaska), the parties shall utilize the
data recorded in note 1 of Schedule 1 to the aforesaid Technical Acceptance
Certificate (Delivery); and in the case of all Engines, the data referred to in
Section D (Engine Records) of the Exhibit C hereto. In all events, each Engine
shall have at least five hundred (500) Hours and two hundred fifty (250) Cycles
remaining to its next scheduled shop visit. Subject to such minimum limitation
on Hours/Cycles as of the return date, any deviation from the aggregate
Hour/Cycle configuration for any Engine will be accepted by Lessor subject to
the return condition adjustment provided for in Section 9.8.
9.7 Maintenance Program Conversion.
-------------------------------
(a) As of the Delivery Date, the Aircraft is being maintained
under the Alaska maintenance program. In order to convert Hour/Cycle or calendar
time requirements applicable to the Airframe, landing gears and other time-
controlled components (exclusive of Engines) under Alaska's maintenance program
as in effect on the Delivery Date to Lessee's Maintenance Program which shall be
applicable as of the return of the Aircraft, the parties agree to utilize the
percentage ratios prescribed by the FAA's Advisory Circular No. 121. lA, dated
June 26, 1973 (as illustrated by Method A set forth in Appendix 1 thereto,
entitled "Procedures for Converting Calendar Overhaul (Months) To Hours Since
Overhaul For Prorations Purposes") as amended or updated as the date the
Aircraft is returned to Lessor. For the purposes of this Section 9.7, the
normalized block "D" check interval under the Lessee's Maintenance Program shall
be 24,000 Hours.
(b) With respect to "hard time" components other than
Engines, landing gears and the APU, to the extent Lessee's Maintenance Program
differs from the Alaska maintenance program in terms of allowable
times/intervals to the next limiting inspection/overhaul, the return condition
requirements hereunder shall be the more restrictive of (i) the adjusted,
prorata percentage difference, if any, between the allowable time/intervals
under the Alaska maintenance program and Lessee's Maintenance Program and (ii)
the actual times remaining until the next limiting inspection/overhaul under the
Alaska maintenance program as such program was in effect on the Delivery Date.
The foregoing shall not apply to components which are maintained in an "on
condition basis under the Lessee's Maintenance Program. Such components shall be
returned to Lessor in an airworthy condition.
9-5
<PAGE>
9.8 Return Condition Adjustment.
----------------------------
(a) Any provisions of this Section 9 to the contrary
notwithstanding, in the event there are any differences between the return
conditions of the Aircraft, including any Engine (subject to the minimum
Hour/Cycle limitations set forth in paragraphs (e) and (f) of Section 9.5 and
Section 9.6), the landing gears, and other time-controlled components installed
thereon or associated therewith, required by this Section 9 of the Lease and the
actual condition of the Aircraft on the return, such differences (including both
those in favor of Lessee and Lessor) shall be subject to financial adjustment
(the "Return Condition Adjustment") as provided by this Section 9.8. The
monetary value of any differences measured by Hours, Cycles, or calendar times
to, or since the prescribed overhauls and/or inspections mandated by the
Maintenance Program, or any applicable Federal Aviation Regulations, and any
Airworthiness Directives or other, emergency orders of the FAA, shall be
determined as of the date the Aircraft is returned to Lessor by taking the
average of the price quotations of three independent, FAA Repair Stations
located in the continental United States, for the conduct of the overhauls
and/or inspection services required to bring the Aircraft, Engines, landing
gears and other time-controlled components into compliance with the return
conditions required by this Section 9. For the purpose of obtaining such price
quotations, Lessee shall select the repair stations or overhaul agencies subject
to the approval of Lessor which approval shall not be unreasonably withheld. At
least five (5) Business Days prior to the return of the Aircraft, Lessee shall
furnish Lessor with a preliminary estimate of the Return Condition Adjustment
applicable to the Aircraft, if any. All amounts owed hereunder by either Lessee
or Lessor shall be settled on a net basis on the return of the Aircraft.
(b) The provisions of Section 6.2 and paragraph (a) of this
Section 9.8 to the contrary notwithstanding, beginning on the one hundred
eightieth (180th) day, but no later than the one hundred twentieth (120th) day,
prior to the end of the Term, Lessee shall provide Lessor a written report
setting forth an estimate, based on contemporaneous and projected utilization
rates for the Airframe and each Engine, of the differences, if any, between the
return conditions of the Airframe and Engines, the landing gear and other time-
controlled components installed thereon or associated therewith as when accepted
by Lessee on the Delivery Date and as of the then-expected date of return at the
end of the Term. Should such estimate indicate that Lessor will be required to
make a Return Condition Adjustment in favor of Lessee as provided by paragraph
(a) of this Section 9.8, Lessee's obligation to make further payments of Basic
Rent shall be abated by the estimated amount of such Return Condition Adjustment
up to a maximum of two hundred thousand dollars ($200,000); provided, however,
that any amounts then due to Lessor as Supplemental Rent shall have been fully
paid by Lessee, and provided, further, that any abatement of Basic Rent pursuant
to this paragraph (b) of
9-6
<PAGE>
Section 9.8 shall be subject to a final accounting and adjustment based on the
actual condition of the Aircraft on its return to Lessor at the end of the Term.
Any abatement of Basic Rent pursuant to this paragraph (b) of Section 9.8 shall
satisfy in full Lessor's obligation to make a Return Condition Adjustment in
favor of Lessee under this Lease.
9.9 Engine Inspections. A borescope inspection shall be performed
------------------
under the surveillance of Lessor at Lessee's expense at the time of the
Aircraft's return, and Lessee shall provide evidence satisfactory to Lessor that
no discrepancies exist beyond the applicable Pratt & Whitney shop repair limits
including no abnormal repetitive inspection limits.
9.10 Inspection.
-----------
(a) Lessor may, from time to time, wish to make the Aircraft
available for inspection to designated representatives or technical teams
evaluating the Aircraft for use after the Term. Lessor agrees to give Lessee not
less than five (5) Business Days' advance notice of such inspection and Lessee
agrees to cooperate with Lessor's requests in making the Aircraft and the
Manuals and Technical Records available to such authorized technical teams and
Lessor agrees that such requests will be reasonable and will be coordinated with
Lessee so as to minimize disturbance to its personnel. No such inspection shall
interfere with or delay Lessee's normal operations or the operations and use of
the Aircraft.
(b) The Aircraft and the Manuals and Technical Records to be
returned therewith shall be made available to Lessor for ground inspection by
Lessor while the "C" check or its equivalent required by Section 9.5(a) is being
performed. During the "C" check required by Section 9.5(a), while Lessee has
removed the Aircraft from scheduled service and opened the areas of the Aircraft
as required by the applicable routine cards, Lessee shall allow Lessor to
accomplish its inspection in order to determine that the Aircraft (including the
Manuals and Technical Records) is in the condition required by the provisions of
this Section 9. Lessee at its sole cost and expense shall promptly correct any
discrepancies from the condition required by the provisions of this Section 9.
9.11 Operational Ground Check. Promptly after completion of any
------------------------
corrections required under Section 9.10, Lessee shall conduct an operational
ground check in accordance with the requirements of the Maintenance Program and
shall correct any discrepancies disclosed by such check.
9.12 Operational Check Flight. Promptly after completion of all
------------------------
corrections required under Sections 9.10 and 9.11 above, the Aircraft shall be
check
9-7
<PAGE>
flown by Lessee at Lessee's expense, using qualified flight personnel for the
purpose of demonstrating to Lessor the satisfactory operation of the Aircraft
and its equipment and systems for normal passenger use. Such check flight shall
not exceed two (2) hours' duration and shall be conducted in accordance with the
specifications set forth in Exhibit E. Up to two (2) duly qualified Lessor
employees or representatives may participate in such flight as observers.
Lessee's flight crew shall be in command of the Aircraft. Upon completion of
such operational check flight, the representatives of Lessee and Lessor
participating in such flight shall agree in writing upon any discrepancies in
such Aircraft required to be corrected by Lessee in order to comply with
provisions of this Section 9 and Lessee shall promptly correct or cause to be
corrected at Lessee's expense any such discrepancies. If any of the
discrepancies referred to in Sections 9.11 and 9.12 or 9.13 continue to persist,
Lessor may (but shall not be obligated to) accept delivery of the Aircraft and
apply the procedure set forth in Section 9.14 for such discrepancies.
9.13 Acceptance. Unless otherwise mutually agreed, the operational
----------
check flight shall take place at the Return Location. Upon completion of the
operational check flight or after Lessee has corrected the discrepancies as
required to comply with this Section, the Aircraft shall be technically accepted
by Lessor's representatives at the Return Location.
9.14 Deferred Return Condition Discrepancy Correction. If,
-------------------------------------------------
notwithstanding Lessee's best efforts to fully comply with the provisions of
Section 9 hereof, any return condition discrepancies are found during the ground
inspection, operational ground check and operational check flight set forth in
Sections 9.10, 9.11 and 9.12 above, which were not corrected by Lessee prior to
return of the Aircraft to Lessor, such discrepancies may be corrected by Lessor
or its designee after return of the Aircraft and Lessee shall reimburse Lessor
for all reasonable costs and expenses incurred by Lessor or its designee for
accomplishing such discrepancy corrections. Lessee shall, within 30 days of the
receipt of Lessor's invoice, pay Lessor for all such costs and expenses. Any
late payments shall be subject to interest at the Overdue Rate. Notwithstanding
the other provisions of this Section 9.14 to the contrary, Lessee shall fully
perform the "C" check required pursuant to Section 9.5(a) hereof prior to the
return of the Aircraft to Lessor.
9.15 Flight Cost. All flights pursuant to Section 9.12 shall be made
-----------
at Lessee's expense and Lessee shall pay for any and all costs associated with
such flights including, but not limited to, costs for crew, fuel, oil, airport
fees, insurance, takeoff/landing fees, airway communication fees, and ground
handling fees, if any. With respect to any flight made pursuant to Section 9.12,
Lessee's obligations will be (i) to maintain the insurance required under this
Lease with respect to the Aircraft, proceeds of which shall be payable as
provided herein, and (ii) to indemnify Lessor pursuant to
9-8
<PAGE>
Section 15 hereof. All other obligations and risks with respect to the Aircraft
under this Lease or otherwise shall be Lessor's from and after technical
acceptance by Lessor under Section 9.13, except as otherwise expressly provided
herein.
9.16 Manuals and Technical Records. Lessee shall return to Lessor,
-----------------------------
at the time the Aircraft is returned to Lessor, all of the Manuals and Technical
Records and other data described in Exhibit C hereto, originally received from
Lessor, and subject to FAA retention time limits, updated and maintained by
Lessee through the date of return of the Aircraft. In addition, Lessee shall
also provide Lessor, at the time the Aircraft is returned to Lessor, all
records, documents, manuals, authorizations, drawings and data in English (or
with English translations thereof) which were developed or caused to be
developed by Lessee and required by the FAA, updated and maintained by Lessee
for the Aircraft and through the date of return of the Aircraft in an accurate
and correct condition. (All documentation, of any type, referred to in the
preceding two sentences or otherwise listed in Exhibit C hereto, is herein
individually and collectively referred to as the "Aircraft Documentation".) At
the time of return of the Aircraft Documentation for the Aircraft to Lessor and
provided the Aircraft Documentation is in the condition it is required to be in,
Lessee and Lessor shall execute an aircraft documentation return receipt.
9.17 [Intentionally Left Blank)
9.18 Lessee's Special Exterior Markings. At the time of the return
----------------------------------
of the Aircraft, Lessee shall remove or paint over, at Lessor's election, all of
Lessee's logos and other exterior markings painted on the Aircraft so that such
logos and markings shall match the color of the adjacent areas and such work
shall be accomplished in a workmanlike manner. 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 within 30 days
of the receipt of Lessor's invoice pay Lessor's reasonable costs and expenses
for such removal. Any late payments shall be subject to interest at the Overdue
Rate.
9.19 Ownership. Subject to the provisions of Section 8.5(d), any
---------
documents, equipment and any other items returned to Lessor pursuant to this
Section 9 which are not already owned by Lessor shall thereupon and without
further act become the property of Lessor.
9.20 Parking of Aircraft Upon Return. Upon the written request of
-------------------------------
Lessor given at least 15 Business Days prior to the end of the Term, Lessee, at
Lessor's expense and subject to the availability of manpower and facilities,
shall provide parking
9-9
<PAGE>
facilities for the Aircraft at the return location for a period not to exceed 90
days (the "Parking Period"). During the Parking Period, Lessee shall carry
insurance on the Aircraft as though the Aircraft were to remain in Lessee's
fleet in a non-flight status and Lessor agrees to reimburse Lessee for the
additional premium, if any, for such insurance coverage. At Lessor's request and
expense, Lessee shall ferry the Aircraft to a location within the continental
United States designated by the Lessor and in connection therewith obtain such
permits and insurances as may be required.
9-10
<PAGE>
SECTION 10. TITLE; REGISTRATION; LIENS.
---------------------------
10.1 Title. Lessee acknowledges that full legal title to the Aircraft shall
-----
remain vested in Lessor, notwithstanding the possession and use thereof by
Lessee, and Lessee shall do all acts and things Lessor may reasonably require to
evidence the interest of Lessor in the Aircraft or to protect such interest
against the claims of any other person. Lessee shall not attempt to hold itself
out as having any power to sell or dispose of the Aircraft or any Engine.
10.2 Registration. Lessee acknowledges that, throughout the Term, the
------------
Aircraft shall be registered in the name of Lessor and Lessee shall not do, and
shall further use its best endeavors to ensure that no third party does, any act
or things which might prejudice or cancel such registration.
10.3 Liens. Lessee shall not directly or indirectly create, incur, assume
-----
or suffer to exist any Lien on or with respect to the Airframe or any Engine
other than Permitted Liens. Lessee shall promptly, at its own expense, take such
action as may be necessary to duly discharge any Lien other than a Permitted
Lien if the same shall arise at any time, which obligations of the Lessee shall
survive the termination of this Agreement.
10.4 Notice of Ownership. As soon as practicable after the Delivery Date
-------------------
but in any event within ten Business Days after the Delivery Date, Lessee shall
affix in a reasonably prominent position on the flight deck or cockpit, and on
each of the Engines, a reasonably legible notice reading as follows:
"Investors Asset Holding Corp., as Trustee,
Owner and Lessor
Leased to AMERICAN TRANS AIR, INC.,
Lessee"
Once affixed as aforesaid, such notice shall not be defaced, covered or
removed during the Term, unless Lessor instructs Lessee to change such notice.
Lessee will not allow the name of any person other than Lessor to be placed on
the Airframe or any Engine as a designation that might be interpreted as a claim
of ownership or any interest therein, provided, however, that Lessee may operate
the Aircraft in its livery, including its name and logo.
10-1
<PAGE>
SECTION 11. INSURANCE.
----------
On or before the Delivery Date and throughout the Term, Lessee shall without
cost or expense to Lessor obtain, maintain and keep in full force and effect the
following insurances with respect to the Aircraft, carried with insurers of
recognized and good reputations in the aviation industry.
11.1 All-Risk Insurance. "All-risk" hull, ground and flight insurance on
------------------
the Aircraft (with flight, taxiing and ingestion coverage) in an amount not less
than the Stipulated Loss Value. In addition, Lessor may request such greater
amounts of coverage as Lessor may determine necessary or desirable from time to
time (and for which Lessor shall reimburse Lessee for its cost of increased
premium, if any, for such greater amounts of insurance), provided that such
insurance is obtainable without limiting the insurance which Lessee carries to
cover its interest in the Aircraft. The insurances required hereby shall also
cover Engines or engines and Parts temporarily removed from the Airframe pending
installation of the same or similar Engines, engines or Parts on the Airframe in
an aggregate amount not less than their replacement cost.
11.2 War Risk Insurance. War risk and allied perils insurance on the
------------------
Aircraft in an amount not less than the Stipulated Loss Value covering the
perils of:
(a) war, invasion, acts of foreign enemies, hostilities (whether war
be declared or not), civil war, rebellion, revolution, insurrection, martial
law, military or usurped power, or attempts at usurpation of power;
(b) strikes, riots, civil commotions or labor disturbances;
(c) any act of one or more persons, whether or not agents of a
sovereign power, for political or terrorist purposes and whether the loss or
damage therefrom is accidental or intentional;
(d) any malicious act or act of sabotage;
(e) confiscation, nationalization, seizure, restraint, detention,
appropriation, requisition of title or use by or under the order of any
government (whether civil, military or de facto) or public or local authority
other than the government or any public or local authority of the country of
registration; and
(f) hijacking or any unlawful seizure or wrongful seizure or wrongful
exercise of control of the Aircraft or crew in flight (including any attempt at
11-1
<PAGE>
such seizure or control) made by any person or persons on board the Aircraft
acting without the consent of Lessee.
11.3 Deductibles. For the insurances required by Sections 11.1 and 11.2
-----------
hereof, Lessee may self-insure for events that are not a Total Loss in amounts
not more than $500,000 or such other amount that becomes the industry standard,
as set by the insurers, for insurance usually carried by corporations engaged in
the same or similar business, similarly situated with Lessee and owning and
operating similar aircraft or engines, and covering risks of the kind
customarily insured against by such corporations.
11.4 Liability Insurance. Public liability insurance for a combined
-------------------
single limit of not less than $400,000,000 per occurrence or such greater
amounts as Lessee may carry from time to time on other Boeing 727-200 aircraft
in its fleet, which shall:
(a) include public liability insurance, passenger liability insurance
and property damage liability insurance; and
(b) provide that all the provisions thereof, except the limits of
liability, shall operate in the same manner as if there were a separate policy
covering each such insured.
In the event that Lessee increases its public liability insurance coverage,
it shall do so with respect to the Aircraft contemporaneously with increasing
its insurance coverage on other aircraft which it owns or operates.
11.5 Additional Requirements; Loss Payment. The insurance required under
-------------------------------------
this Section 11 shall be provided on an agreed value basis, and the policies
shall:
(a) name Lessor and Beneficiary as additional insureds and as loss
payees for the account of all interests for up to the Stipulated Loss Value for
a Total Loss of the Aircraft and, provided that no Event of Default has occurred
and is continuing, name Lessee as loss payee for any additional insurance
carried by Lessee above the Stipulated Loss Value;
(b) provide that the insurance shall not be invalidated by any action
or inaction by Lessee and insure the interest of Lessor regardless of any breach
or violation by Lessee or any other named insured of any warranty, declaration
or condition contained in such policies;
(c) provide that the insurers shall waive any right of subrogation to
any right of Lessor or against Lessor:
11-2
<PAGE>
(d) provide that in the event of separate insurance being arranged to
cover the all-risk hull insurance and the war risk and allied perils insurance,
the underwriters subscribing to such insurance agree to a 50/50 claim funding
arrangement in the event of any dispute as to which insurance is applicable;
(e) be primary and without right of contribution from other insurance
which may be available to Lessor;
(f) extend to, and the underwriters thereof have agreed to insure,
the indemnification provided in Section 15.1 hereof to the extent that such
insurance is available and carried by Lessee and subject to the exclusions and
limitations of Lessee's policies;
(g) be of the type usually carried by corporations engaged in the
same or a similar business, similarly situated with Lessee and owning and
operating similar aircraft and engines in commercial air transportation
operations, and covering risks of the kind customarily insured against by such
corporations;
(h) provide that Lessor shall have not liability for premiums,
commissions, calls or assessments with respect to such policies; and
(i) provide in the case of the insurance required by Sections 11.1
and 11.2 hereof that so long as the insurers shall not have received written
notice that a Default or an Event of Default has occurred and is continuing, any
proceeds of less than $1,000,000 shall be payable to Lessee, and any proceeds in
excess of $1,000,000, and any and all proceeds in respect of a Total Loss, or if
the insurers shall have received written notice that a Default or an Event of
Default has occurred and is continuing, any single loss regardless of the
amount, shall be payable to Lessor.
11.6 No Set-off. Each insurance policy to be maintained under this Section
----------
11 shall contain a waiver of any right of the insurers to any set-off or
counterclaim or any other deduction against Lessee or Lessor.
11.7 Notice of Material Alteration or Cancellation. Each insurance policy
---------------------------------------------
to be maintained under this Section 11 shall provide that no cancellation or
lapse of coverage for nonpayment of premium or otherwise, and no substantial
change of coverage which adversely affects Lessor shall be effective as to
Lessor until not less than 30 days (seven (7) days in the case of war risk
policies, subject to exceptions uniformly applied in war risk policies then
available in commercially reasonable time) after sending written notice to
Lessor from the insurers of such cancellation, lapse or change.
11-3
<PAGE>
11.8 Application of Hull Insurance Proceeds. As between Lessor and
--------------------------------------
Lessee, any payments received under policies of insurance required to be
maintained by Lessee pursuant to Sections 11.1 or 11.2, shall be applied as
follows:
(a) if such payments are received by Lessor with respect to loss or
damage (including a Total Loss with respect to an Engine) not constituting a
Total Loss with respect to the Airframe such payments shall be paid over to
Lessee upon Lessee's performance of its repair or replacement obligations under
this Lease pursuant to Section 12.3 hereof; and
(b) if such payments are received with respect to a Total Loss with
respect to the Airframe, so much of such payments as shall not exceed the amount
required to be paid by Lessee pursuant to Section 12.1 hereof shall be applied
in reduction of Lessee's obligation to pay such amount if not already paid by
Lessee, and to reimburse Lessee if it shall have paid all or part of such
amount, and the balance, if any, of such payments shall be paid over to or
retained by Lessee.
11.9 Insurance for Own Account. Nothing in this Section 11 shall prohibit
-------------------------
Lessor or Lessee from obtaining insurance for its own account and any proceeds
payable thereunder shall be payable as provided in the insurance policy relating
thereto, provided that no such insurance may be obtained which would limit or
otherwise adversely affect the coverage or payment of any insurance required to
be obtained or maintained pursuant to this Section 11.
11.10 Reports. Lessee shall furnish to Lessor and Beneficiary not later
-------
than the Delivery Date a report signed by a firm of independent insurance
brokers satisfactory to Lessor stating the opinion of such firm that the
insurances then carried and maintained on the Aircraft comply with the terms
hereof. Lessee will during the Term furnish to Lessor evidence of renewal of the
insurance policies required pursuant to this Section 11 prior to the
cancellation, lapse or expiration of such insurance policies. Such evidence of
renewal shall consist of a certificate signed by a firm of independent aircraft
insurance brokers, certifying that the insurances required by this Section 11,
and the additional requirements related thereto are in full force and effect.
Lessee will cause such firm to advise Lessor in writing promptly of any default
in the payment of any premium and of any other act or omission on the part of
Lessee in which they have knowledge and which would in such firm's opinion
invalidate or render unenforceable, in whole or in any material part, any
insurance on the Aircraft. Lessee will also cause such firm to advise Lessor in
writing at least 30 days (seven (7) days in the case of war risk policies) prior
to the termination or cancellation of, or material adverse change in such
insurance carried and maintained on the Aircraft pursuant to this Section 11.
11-4
<PAGE>
11.11 Changes in Industry Practice. If there shall be fundamental change
----------------------------
in generally accepted industry-wide practice with respect to the insurance of
aircraft (whether relating to all or any of the types of insurance required to
be effected pursuant to the terms of this Section ii) and as a consequence
thereof Lessor shall be of the reasonable opinion that the insurance required
pursuant to the provisions of this Section 11 shall be insufficient to protect
the interests of Lessor, the insurance requirements set forth in this Section 11
shall be varied as may be mutually agreed so as to include such additional or
varied requirements to be effected pursuant to the terms of this Section II, and
as so varied, shall provide the same protection to Lessor as it would have done
had such change in generally accepted industry-wide practice not occurred. If
any such change in generally accepted industry-wide practice would enable
Lessee, but for the requirements in this Section 11, to reduce its expenditures
in relation to all or any of the types of insurance required to be effected
pursuant to the terms of this Section 11 without, in the reasonable opinion of
Lessor, prejudicing the interest of Lessor, the insurance requirements in this
Section 11 shall be amended to take account of such change in generally accepted
industry-wide practice to the extent required to enable Lessee to reduce such
expenditures; provided, however, that in no event shall Lessee reduce any of the
insurance required under this Section 11 without the written consent of the
Lessor.
11.12 Continuing Insurance. Subject to the provisions of this Section 11,
--------------------
Lessee's insurance coverage shall cover all liabilities which arise during the
Term, regardless of the date on which any claim is made with respect to such
occurrence. Lessee shall in any event be responsible for any and all liabilities
to which Lessor may be exposed as a result of Lessee's Lease, use, possession,
or operation of the Aircraft.
11-5
<PAGE>
SECTION 12. LOSS. DAMAGE OR REQUISITION.
----------------------------
12.1 Total Loss of Airframe.
-----------------------
Upon the occurrence of a Total Loss with respect to the Airframe
during the Term, Lessee shall give Lessor immediate written notice of such Total
Loss. Lessee shall pay or cause to be paid to Lessor in immediately available
funds within 30 days following the Total Loss, an amount equal to (A) the Basic
Rent, if any, due and payable on or before such payment date, plus (B) all
unpaid Supplemental Rent due on or before such payment date, (including the
Stipulated Loss Value for the Aircraft) plus (C) an amount equal to the daily
equivalent of Basic Rent for each day during the period commencing the day after
the last Rent Payment Date up to the date the payment required hereby is
actually made.
In the event of a payment in full of the Stipulated Loss Value for the
Aircraft and other Rent payable as provided above, (x) this Lease and the
obligations of Lessee to pay Basic Rent and Supplemental Rent (except for
Supplemental Rent obligations surviving pursuant to Sections 15 and 16 hereof or
which have otherwise accrued but not been paid as of the date of such payment)
shall terminate; (y) any remaining insurance proceeds held by Lessor (other than
proceeds of policies maintained by Lessor for its own account) shall be promptly
paid over to Lessee; and (z) Lessor shall convey to Lessee all of Lessor's
right, tide and interest, "as-is, where-is," without recourse or warranty,
express or implied, except to warrant that it is free and clear of liens placed
thereon by Lessor in and to the Airframe and Engines.
12.2 Engine Loss. Upon the occurrence during the Term of a Total Loss with
-----------
respect to an Engine whether or not installed on the Airframe and not involving
a Total Loss with respect to the Airframe, Lessee shall give Lessor written
notice thereof within ten (10) Business Days of such loss and shall within 90
days of the occurrence of such Total Loss and on at least five (5) days' prior
written notice to Lessor substitute a Replacement Engine for such Engine;
provided, however, under all circumstances a Replacement Engine shall be
substituted on or before the expiration of the Term. In such event, immediately
upon the effectiveness of such substitution on the date set forth in such notice
and without further act,
(1) tide to the Replacement Engine shall thereupon vest in Lessor
(subject only to Permitted Liens),
(2) tide to the replaced engine shall thereupon vest in Lessee in
"as-is, where-is" condition, free and clear of all rights of Lessor and shall no
longer be deemed an Engine hereunder, and
12-1
<PAGE>
(3) such Replacement Engine shall become subject to this Lease and be
deemed part of the Aircraft for all purposes hereof to the same extent as the
Engine originally installed on or attached to the Airframe.
Upon such substitution, Lessee shall execute and deliver to Lessor such bills
of sale, opinions of counsel and other documents and instruments as Lessor shall
reasonably request to evidence the interest of Lessor and conveyance to Lessor
of good and marketable tide to such Replacement Engine. Upon such substitution,
(x) Lessor shall execute and deliver to Lessee such bills of sale and other
documents and instruments, prepared at Lessee's expense as Lessee shall
reasonably request to evidence such transfer and vesting of tide in and to the
replaced Engine in Lessee, free and clear of all rights of Lessor and (y) Lessee
shall receive all insurance proceeds and proceeds in respect of any Total Loss
causing such replacement to the extent not previously applied to the purchase
price of the Replacement Engine as provided in Section 12.3 hereof. No Total
Loss with respect to an Engine under the circumstances contemplated by this
Section 12.2 shall result in any reduction of Lessee's obligations to pay Rent
hereunder.
12.3 Repairable Damage Use of Insurance Proceeds. In the event of
-------------------------------------------
repairable damage to the Aircraft or any of the Engines, or any Engine loss
(when no Total Loss of the Aircraft has occurred), Lessor shall forthwith pay
any insurance proceeds received by it to Lessee upon Lessee's furnishing (i)
evidence to Lessor that such damage has been made good or repaired such that the
condition of the Aircraft shall be at least equivalent to its condition
immediately prior to the event of damage or, (ii) in the case of an Engine loss,
evidence that Lessee has purchased or otherwise acquired and installed a
Replacement Engine.
12.4 Payment from Governmental Authorities for Requisition of Tide or Use.
--------------------------------------------------------------------
In the event of a requisition for use by any government, so long as it does not
constitute a Total Loss of the Airframe, Lessee shall promptly notify Lessor of
such requisition and all Lessee's obligations under this Lease shall continue to
the same extent as if such requisition had not occurred except to the extent
that any failure or delay in the performance or observance of each obligation by
Lessee shall have been prevented or delayed by such requisition; provided,
however, that Lessee's obligations for the payment of money and its obligations
under Section 11 hereof shall in no way be affected, reduced or delayed by such
requisition. Any payments received by Lessor or Lessee from such government with
respect to such requisition shall be paid over to or retained by, Lessee. In the
event of the requisition for use by a government of any Engine (but not the
Airframe), Lessee will replace such Engine hereunder by complying with the terms
of Section 12.2 hereof to the same extent as if a Total Loss had occurred with
respect to such Engine. Any payments received by Lessor or Lessee from such
government with respect to such requisition shall be paid over to, or retained
by, Lessor until Lessee's
12-2
<PAGE>
replacement of such Engine pursuant to Section 12.2 hereof, at which point they
shall be paid over to Lessee.
12.5 Application of Payments During Existence of Event of Default. Any
------------------------------------------------------------
amount referred to in Sections 11 or 12 hereof which is payable to Lessee shall
not be paid to Lessee, or, if it has been previously paid directly to Lessee,
shall not be retained by Lessee, if at the time of such payment an Event of
Default shall have occurred and be continuing, but shall be paid to and held by
Lessor as security for the obligations of Lessee under this Lease.
12.6 Prohibition of Use by the Government. The provisions of Section 6.2
------------------------------------
and this Section 12 to the contrary notwithstanding, upon the event of a Total
Loss resulting from a Prohibition of Use, either party may, upon the giving of
sixty (60) days' prior written notice to the other party (the "Early Termination
Notice"), terminate this Lease and the Aircraft shall thereupon be returned to
Lessor in accordance with the provisions of Section 9 hereof subject to the
terms, conditions and limitations of the rule, regulation, order or other action
of the FAA or other governmental body having jurisdiction, causing the
Prohibition of Use, including without limiting the generality hereof, any
suspension or cancellation by the FAA of the airworthiness certificate covering
the Aircraft, and upon such return Lessee shall pay to Lessor a special
termination payment equal to the balance of all Rent due under the Lease to the
end of the Term.
12-3
<PAGE>
SECTION 13. EVENT OF DEFAULT.
-----------------
Each of the following events shall be an Event of Default:
13.1 Failure to Make Payments. If Lessee shall fail to make any payment of
------------------------
Rent when due which failure shall not have been cured within five (5) Business
Days;
13.2 Failure to Obtain or Maintain Insurance. If Lessee fails to obtain or
---------------------------------------
insurance pursuant to the provisions of Section 11 of this Lease or operates or
locates or permits operation or location of the Airframe in violation of Section
8.2(a) hereof;
13.3 Failure to Perform Other Obligations. If Lessee fails to duly observe
------------------------------------
or maintain any perform any of its other obligations or agreements under any
Operative Document to which Lessee is a party and such failure shall not have
been remedied within a period of 20 days after the earlier of delivery of
written notice specifying the same from Lessor or the date upon which Lessee
knew or should have known such event had occurred;
13.4 Representations and Warranties Untrue. If any representation or
-------------------------------------
warranty made by Lessee in any Lease Document or in any document or certificate
furnished to Lessor in connection therewith shall prove to be untrue in any
material respect;
13.5 Insolvency or Bankruptcy.
------------------------
(a) If Lessee shall consent to the appointment of or taking
possession by a receiver, assignee, custodian, sequestrator, trustee or
liquidator (or other similar official) of itself or of a substantial part of its
property, or Lessee shall fail to pay its debts generally as they come due
(unless such debts are the subject of a bona fide dispute), or shall make a
general assignment for the benefit of its creditors, or Lessee shall commence a
voluntary case or other proceeding seeking liquidation, reorganization or other
relief with respect to itself or its debts under the Federal bankruptcy laws, as
now or hereafter constituted or any other applicable Federal or state
bankruptcy, insolvency or other similar laws or shall consent to the entry of an
order for relief in an involuntary case under any such law or Lessee shall file
an answer admitting the material allegations of a petition filed against Lessee
in any such proceedings or otherwise seek relief under the provisions of any now
existing or future Federal or state bankruptcy, insolvency or other similar laws
providing for the reorganization or winding-up of corporations, or providing for
an agreement, composition, extension or adjustment with its creditors.
13-1
<PAGE>
(b) If an order, judgment or decree shall be entered in
any proceedings by any court of competent jurisdiction appointing, without the
consent of Lessee, a receiver, trustee or liquidator of Lessee, or of any
substantial part of its property, or any substantial part of the property of
Lessee shall be sequestered, and any such order, judgment or decree or
appointment or sequestration shall remain in force, unstayed or unvacated for a
period of 60 days after the date of entry thereof;
(c) If a petition against Lessee in a proceeding or
case under the bankruptcy laws or other insolvency laws (as now or hereafter in
effect) shall be filed and shall not be withdrawn or dismissed within 60 days
thereafter, or, in case the approval of such petition by a court of competent
jurisdiction is required, the petition as filed or amended shall be approved by
such a court as properly filed and such approval shall not be withdrawn or the
proceeding dismissed within 60 days thereafter, or a decree or order for relief
in respect of Lessee shall be entered by a court of competent jurisdiction in an
involuntary case under the Federal bankruptcy laws, as now or hereafter
constituted, or any other applicable Federal or state bankruptcy, insolvency or
other similar laws, as now or hereafter constituted and such decree or order
shall remain unstayed in effect for a period of 60 days, or if, under the
provisions of any law providing for reorganization or winding-up of corporations
which may apply to Lessee any court of competent jurisdiction shall assume
jurisdiction, custody or control of Lessee or of any substantial part of its
property and such jurisdiction, custody or control shall remain in force
unrelinquished, unstayed or unterminated for a period of 60 days.
13.6 Loss of License. If Lessee shall cease to be a
---------------
Certificated Air Carrier.
13-2
<PAGE>
SECTION 14. REMEDIES.
--------
Upon the occurrence of any Event of Default and at any time thereafter
so long as the same shall be continuing, Lessor may, at its option, declare this
Lease to be in default; and at any time thereafter, Lessor may do, and Lessee
shall comply with, one or more of the following with respect to all or any part
of the Airframe and the Engines, as Lessor in its sole discretion shall elect:
(a) Cause Lessee, upon the written demand of Lessor and
at Lessee's expense, to, and Lessee shall, promptly return the Aircraft to
Lessor in accordance with all of the provisions of Section 9 hereof as if such
Airframe or such Engines were being returned at the end of the Term; or Lessor,
at its option, may enter upon the premises where the Airframe or any or all
Engines are located or believed to be located and take immediate possession of
and remove such Airframe or Engines without the necessity for first instituting
proceedings, or by summary proceedings or otherwise, and Lessee shall comply
therewith, all without liability to Lessor for or by reason of such entry or
taking possession, whether for the restoration or damage to property caused by
such taking or otherwise;
(b) Sell or otherwise dispose of the Aircraft, at
public or private sale and with or without notice to Lessee or advertisement, as
Lessor may determine or hold, use, operate, lease to others all or any part of
the Airframe or any Engine as Lessor, in its sole discretion, may determine, in
any such case free and clear of any rights of Lessee and without any duty to
account to Lessee with respect to such action or for any proceeds with respect
thereto except to the extent required by paragraph (d) below in the event Lessor
elects to exercise its rights under said paragraph in lieu of its rights under
paragraph (c) below;
(c) Whether or not Lessor shall have exercised, or
shall thereafter at any time exercise, any of its rights under paragraph (a) or
paragraph (b) of this Section 14, Lessor, by five (5) days written notice to
Lessee specifying a payment date, may demand that Lessee pay to Lessor, and
Lessee shall pay to Lessor, on the payment date specified in such notice, as
liquidated damages for loss of bargain and not as a penalty (in lieu of the
Basic Rent due for the period commencing after the date specified for payment in
such notice), any unpaid Rent for the Aircraft (prorated in the case of Basic
Rent on a daily basis) to and including the payment date specified in such
notice, plus an amount, equal to the greater of (i) one hundred twenty five
----
percent (125%) of the aggregate Basic Rent the period commencing on the payment
date specified by the aforesaid notice to the end of Term or (ii) six (6)
months' Basic Rent ($381,000).
14-1
<PAGE>
(d) Rescind this Lease as to the Aircraft or exercise
any other right or remedy which may be available under Applicable Law or proceed
by appropriate court action to enforce the terms hereof or to recover damages
for the breach hereof. In addition, Lessee shall be liable for any and all
Supplemental Rent due hereunder before or after any termination hereof,
including all costs and expenses (including reasonable attorneys' fees and
disbursements) incurred by reason of the occurrence of any Event of Default or
the exercise of Lessor's remedies with respect thereto including all costs and
expenses incurred in connection with the return of the Airframe or any Engine in
accordance with the terms of Section 9 hereof or any appraisal of the Aircraft.
No remedy referred to in this Section 14 is intended to be exclusive, but each
shall be cumulative and in addition to any other remedy referred to above or
otherwise available to Lessor at law or in equity; and the exercise or beginning
of exercise by Lessor of any one or more of such remedies shall not preclude the
simultaneous or later exercise by Lessor of any or all such other remedies. No
express or implied waiver by Lessor of any Event of Default hereunder shall in
any way be, or be construed to be, a waiver of any future or subsequent Event of
Default.
14-2
<PAGE>
SECTION 15. GENERAL INDEMNITIES.
-------------------
15.1 General Indemnification and Waiver of Certain Claims.
----------------------------------------------------
(a) Claims Defined. For the purposes of this Lease,
--------------
"Claims" shall mean any and all liabilities (including strict or absolute costs,
actions or suits and all legal proceedings whether civil or criminal, fines and
other sanctions), which may be imposed on, incurred by, suffered by, or asserted
against Lessor, and if Lessor is a trustee under any trust, a beneficiary,
trustee, or lender or any officer, director, employee, shareholder, partner or
affiliate of any of the foregoing (individually, an "Indemnified Person" for
purposes of this Section 15.1) and, except as otherwise expressly provided in
this Section 15.1, shall include all reasonable costs, disbursements and
expenses (including legal fees and expenses) of an Indemnified Person in
connection therewith or related thereto.
(b) Claims Indemnified. Subject to the exclusions
------------------
stated in subsection (c) below, Lessee agrees to indemnify, defend and hold
harmless each Indemnified Person against Claims resulting from, arising out of,
or related to:
(i) the operation, possession, use, non-use,
maintenance, storage, overhaul, testing or disposition of the Aircraft, Airframe
or any Engine, or any engine used in connection with the Airframe, or any part
thereof by Lessee or any other Person whatsoever, whether or not such operation,
possession, use, non-use, maintenance, storage, overhaul or testing is in
compliance with the terms of the Lease, including, without limitation, Claims
for death, personal injury or property damage or other loss or harm to any
Person whatsoever, including, without limitation, any passengers, shippers or
other persons wherever located, and Claims relating to any laws, rules or
regulations, including, without limitation, environmental control, noise and
pollution laws, rules or regulations;
(ii) the manufacture, design, sale, purchase,
acceptance, rejection, delivery, condition, repair, modification, servicing,
rebuilding, airworthiness, performance, nondelivery, sublease, merchantability,
fitness for use, substitution or replacement of the Airframe, an Engine or part
under the Lease, or other transfer of use or possession of the Aircraft,
Airframe, Engine or Part, and registration of the Aircraft, Airframe or any
Engine, including, without limitation, latent and other defects, whether or not
discoverable, and patent, trademark or copyright infringement; and
(iii) any breach of or failure to perform or
observe, or any other non-compliance with, any covenant or agreement to be
performed, or other obligation of Lessee under any Lease Document.
15-1
<PAGE>
(c) Claims Excluded. The following are excluded from
---------------
Lessee's agreement to indemnify under this Section 15.1:
(i) Claims attributable to acts or events
occurring after the return of the Aircraft to Lessor whether at the expiration
of the Basic Term or otherwise; and
(ii) Claims which are Taxes for which Lessee is
required to indemnify Lessor under Section 16 hereof.
(iii) Claims caused by, or arising out of the gross
negligence or willful misconduct of any Indemnified Person.
(d) Claims Procedure. An Indemnified Person shall
----------------
promptly notify Lessee of any Claim as to which indemnification is sought.
Lessee shall have the right to investigate and the right to defend, and with the
prior written consent of such Indemnified Party, such consent not to be
unreasonably withheld, compromise any Claim for which indemnification is sought
under this Section 15.1, and the Indemnified Person shall cooperate with all
reasonable requests of Lessee in connection therewith; provided that at such
time no Event of Default shall have occurred and be continuing. In discharging
its obligations under this Section 15.1 Lessee agrees to utilize counsel
reasonably acceptable to such Indemnified Person. An Indemnified Person may
participate at its own expense in any judicial proceeding controlled by Lessee
pursuant to the preceding provisions, and such participation shall not
constitute a waiver of the indemnification provided in this Section 15.1.
Nothing contained in this Section 15.1(d) shall be deemed to require an
Indemnified Person to contest any Claim or to assume responsibility for or
control of any judicial proceeding with respect thereto.
(e) Subrogation. To the extent that a Claim indemnified
-----------
by Lessee under this Section 15 is in fact paid in full by Lessee and/or an
insurer under a policy of insurance maintained by Lessee pursuant to Section 11
of the Agreement, Lessee and/or such insurer as the case shall be subrogated to
the rights and remedies of the Indemnified Person on whose behalf such Claim was
paid with respect to the transaction or event giving rise to such Claim. Should
an Indemnified Person receive any refund, in whole or in part, with respect to
any Claim paid by Lessee hereunder, it shall promptly pay the amount refunded
(but not an amount in excess of the amount Lessee has paid in respect of such
Claim) over to Lessee.
(f) Indemnification on After-Tax Basis. In the event
----------------------------------
Lessee is required to indemnify any Indemnified Person under this Section 15.1
Lessee shall pay to such Indemnified Person an amount which, after deduction of
all Taxes actually
15-2
<PAGE>
required to be paid by such Indemnified Person in respect of the receipt of such
amount under the Applicable Laws of any government or taxing jurisdiction (after
giving credit for any saving in respect of any such Taxes by reason of
allocations, allowances, credits, deductions or other tax benefits related to
the payment of the Claim indemnified against and the payment of related Taxes),
shall be equal to the amount of the indemnification required.
(g) Waiver of Certain Claims. Lessee hereby waives and
------------------------
releases any Claim now or hereafter existing against any Indemnified Person
arising out of death or personal injury to personnel of the Lessee, loss or
damage to property of Lessee, or the loss of use of any property of Lessee,
which may result from or arise out of the condition, use or operation of the
Aircraft during the term, including without limitation any latent or patent
defect whether or not discoverable.
(h) Conflicting Provisions. The general indemnification
----------------------
provisions of this Section 15.1 are not intended to waive or supersede any
specific provisions of this Lease to the extent such provisions apply to any
Claim.
15.2 Continuing Indemnification. The agreements and indemnities
--------------------------
contained in this Section 15 shall survive the end of the Term.
15-3
<PAGE>
SECTION 16. TAX INDEMNITY.
--------------
16.1 Taxes and Other Charges.
-----------------------
(a) Lessee shall pay, indemnify and hold Lessor
harmless from all Taxes which relate to the leasing of the Aircraft pursuant
hereto which may be, by any federal, state or local government in the United
States of America, foreign government, territory or possession of the United
States of America, or international taxing authority, or any subdivision or
taxing authority thereof (any such government, subdivision or authority, a
"Taxing Authority"), levied or assessed against, or imposed, prior to or during
the Term, on Lessor, the Aircraft or any part thereof upon or with respect to or
as a result of (i) the interest of Lessee or Lessor in the Aircraft, (ii) any
Rent, (iii) this Lease or the interest of Lessee or Lessor hereunder, (iv) the
manufacture, purchase, delivery, leasing, operation, return, possession, use,
occupancy, installation, construction, maintenance, repair, renewal or
modification of the Aircraft, the Airframe, the Engines, the Parts or any part
of any of the foregoing, (v) receipts from the Aircraft, or (vi) the earnings
arising from the possession, use or occupancy thereof. Without limitation of the
foregoing, Lessee shall also pay and discharge, as and when due and payable
without penalty, all Taxes which may be levied or assessed against or payable by
Lessee or Lessor on account of the ownership, leasing or use of the Aircraft,
and all Taxes or portions thereof imposed or levied upon or assessed against
Lessor in substitution for or in place of any other Tax required to be paid or
indemnified by Lessee pursuant to this Section 16.1(a). Notwithstanding the
foregoing provisions of this Section 16.1(a). Lessee shall not be required to
pay:
(A) Taxes imposed on Lessor by any Taxing
Authority in which Lessor's principal place of business is located or in which
Lessor is subject to such Tax (or required to file Tax returns) in relation to
activities other than the acquisition, ownership, financing, installation,
construction, leasing or use of the Aircraft;
(B) (i) Taxes imposed by the United States of
America, or any Taxing Authority thereof, upon, with respect to, based on or
measured by the gross or net income, receipts or gain of Lessor, or taxes in
----------------
lieu thereof (including, without limitation, taxes collected by withholding,
minimum or alternative minimum taxes, excess profit taxes and taxes on or
measured by any item of tax preference) (such Taxes, whether imposed by the
United States of America or any other Taxing Authority, "Income Taxes");
(ii) Income Taxes imposed by any state or
local government in the United States, or any Taxing Authority thereof;
16-1
<PAGE>
(iii) Income Taxes imposed by any foreign
government, international authority, or territory or possession of the United
States, or any Taxing Authority thereof, except to the extent such Income Taxes
are imposed on Lessor with respect to Lessee's operation of the Aircraft within
the jurisdiction of such Taxing Authority, provided, however, that the amount of
Income Taxes as to which indemnity is available under this exception shall be no
greater than an amount which bears the same ratio to Lessor's total Income Taxes
imposed by such Taxing Authority as Lessor's taxable income from Lessee subject
to such Income Taxes bears to Lessor's total taxable income subject to such
Income Taxes, and provided further, however, that no indemnity is available
under this exception for Income Taxes paid or payable by or on behalf of Lessor
to the jurisdiction of Lessor's residence, citizenship, incorporation or
organization.
(C) Taxes imposed as a result of (i) a voluntary
sale, transfer of tide, mortgaging, pledging, financing, voluntary transfer or
other voluntary disposition of the Aircraft, any part thereof or interest
therein, any interest in the rent to be paid hereunder or part thereof or any
interest in this Agreement or part thereof, unless such sale, transfer,
mortgage, pledge or disposition occurs by reason of the exercise of Lessor's
remedies under Section 14 hereof, or (ii) any involuntary transfer or
disposition of any of the foregoing interests in connection with any bankruptcy,
foreclosure, assignment for the benefit of creditors, or similar proceeding with
respect to Lessor unless such transfer or disposition occurs by reason of the
exercise by Lessor of its remedies under Section 14 hereof;
(D) Taxes on, based on or measured by any fees or
compensation received by Lessor (other than Rent) for services rendered in
connection with the transactions contemplated hereby; or
(E) Taxes relating to the Aircraft or any part
thereof, or interest therein, or to any of the actions set out in (C) above of
this Section 16.1(a) for or during any taxable period or portion thereof prior
to the earlier of (a) the Delivery Date or (b) the commencement of the Term or
after the later of (x) the expiration of the Term or (y) the redelivery of the
Aircraft in accordance with the Lease, except to the extent that any such Taxes
are imposed in connection with remedies exercised by Lessor under Section 14
hereof.
(b) Lessee shall furnish to Lessor, upon Lessor's
written request, proof of the payment of any such Tax which is payable by Lessee
pursuant to Section 16.1(a).
(c) Whenever the term "Lessor" is used in Section 16.1
and Sections 16.3 through 16.5 hereof, such term shall include Lessor, its
successors,
16-2
<PAGE>
transferees, assigns and partners therein, and if any Lessor is a trust, the
beneficiary and the owner of, and any lender to, such trust and the partners of
each such beneficiary and owner.
16.2 Certain Covenants.
-----------------
(a) Lessee agrees that neither it nor any corporation
controlled by it, in control of it, or under common control with it, directly or
indirectly, shall at any time take any action or file any returns or other
documents inconsistent with the foregoing and that each such corporation shall
file such returns, take such action and execute such documents as may be
reasonably necessary to facilitate accomplishment of the intent hereof. Lessee
agrees to keep and make available for inspection and copying by Lessor such
records regularly maintained by Lessee other than tax returns as will enable
Lessor to prepare its tax returns or to contest any proposed disallowance or
adjustment of any deduction arising from the Aircraft or this Lease.
(b) Lessee covenants that neither Lessee nor any
Affiliate will have claimed or will claim any depreciation deductions with
respect to the Aircraft.
(c) The undertakings made in this Section 16.2 are
expressly made for the benefit of, and shall be enforceable by, Lessor. Whenever
the term "Lessor" is used in this Section 16.2, such term shall include Lessor,
its successors, transferees, assigns and partners therein, and if any Lessor is
a trust, the beneficiary and the owner of such trust, any lender to such trust,
and the partners of each beneficiary and owner, provided that the rights of any
transferee shall not exceed the rights of Lessor which Lessor would have
retained had no transfer occurred.
16.3 Tax Savings.
-----------
If with respect to any amount paid or indemnified by Lessee
under Section 15 or this Section 16, Lessor shall realize any savings in respect
of any such amount by reason of deductions, credits, allocations, allowances or
other tax benefits (collectively, "Tax Benefits") therefor under the laws of any
Taxing Authority, Lessor shall promptly notify Lessee that it has realized such
Tax Benefit and shall pay to Lessee an amount equal to (i) the net reduction in
Taxes realized by Lessor as a result of such Tax Benefit under such laws and
(ii) the amount of any further net reduction in Taxes realized under such laws
as a result of payments pursuant to clause (i) of this sentence, in both cases
taking into account any tax detriment to Lessor attributable to such Tax Benefit
or payment and excluding any such net reduction otherwise taken into account in
calculating the amount of any payment by Lessee to Lessor as described in
Section 14 hereof; provided that such amount shall not be payable (x) before
such time as Lessee
16-3
<PAGE>
shall have made all payments or indemnities then due to or on behalf of Lessor
under this Lease, (y) during any time that Lessor may be exercising its remedies
under Section 14 hereof or (z) to the extent it exceeds the amount of all
payments made by Lessee with respect to such Taxes. If any Tax Benefit is taken
into account under this Section 16.3 and it is subsequently determined that
Lessor was not entitled thereto, the disallowance thereof shall be treated as a
Tax that is indemnifiable under this Section 16.
16.4 Payments.
--------
If a claim is made against Lessor for any Taxes, Lessor
shall promptly notify Lessee and in no event later than such time as would
permit Lessee timely to contest the imposition of such Taxes pursuant to Section
16.5 below; provided that Lessor shall not be required to notify Lessee prior to
the time that Lessor itself receives notice of a claim for Taxes. The failure
promptly to notify Lessee in accordance with the preceding sentence shall not
diminish Lessee's obligation hereunder unless such failure materially and
adversely affects Lessee's ability to require Lessor to contest the Tax. Any
amount payable as an indemnity to Lessor pursuant to this Section 16.4 is to be
paid to Lessor directly, in immediately available funds, within thirty (30) days
after receipt of a written demand therefor from Lessor, except that the payment
of such indemnity shall not be payable prior to the later of (a) the due date
for the payment of the indemnified Taxes and (1)) to the extent that such Taxes
are being contested in good faith pursuant to Section 16.5, the due date for the
payment of any Taxes that are the subject of such contest; provided, that in the
event that Lessor receives notice that Taxes related to such amount demanded are
due and payable within a period of 30 days or less following receipt of such
notice by Lessor and Lessor promptly makes a written demand on Lessee, then such
amount demanded shall be payable in no event after the later of (x) five (5)
business days after receipt of such demand by Lessee or (y) three (3) business
days prior to the due date of the related Taxes.
In the event Lessor makes a tax payment with respect to any
such Taxes (other than with funds advanced to Lessor on an interest-free basis
by Lessee pursuant to this Section 16), Lessee shall pay to Lessor interest on
the amount of such payment at the Prime Rate from the date of Lessor's payment
to the relevant taxing authority to the date of such payment by Lessee to
Lessor. In the event an amount is payable to Lessee under this Section 16,
Lessor shall pay interest on such amount at the Prime Rate from the date of
receipt by Lessor of any amount giving rise to such obligation to pay Lessee
until the date of payment to Lessee.
16-4
<PAGE>
16.5 Contests.
---------
If requested by Lessee in writing, Lessor shall upon receipt of
indemnity reasonably satisfactory to it and at the sole expense of Lessee
(including, without limitation, all out-of-pocket costs and expenses, legal and
accounting and investigatory fees and disbursements, additions to tax because of
underpayments of estimated Taxes, penalties, and interest (such amounts, without
limitation, the "Expenses")) in good faith contest (and not settle without
Lessee's written consent) or shall permit Lessee, if desired by Lessee, to
contest in the name of Lessee and/or Lessor the validity, applicability or
amount of Taxes indemnified hereunder (including, without limitation, 15.1 (f))
by (i) delaying payment thereof if practicable, (ii) not paying the same except
under protest with funds advanced by Lessee on an interest-free basis, if
protest is proper, and (iii) if payments are made, using reasonable efforts to
obtain a refund thereof in appropriate administrative and judicial proceedings;
provided, that Lessee shall not, without Lessor's consent, contest any Taxes
imposed against Lessor that are unrelated to the transactions contemplated by
the Agreement, provided further, that in no event shall Lessor settle any claim
for which Lessee has an indemnity obligation pursuant to Section 15 and this
Section 16 without Lessee's written consent, and provided further, that in each
such instance, Lessor shall not be required to undertake any contest or allow
Lessee to undertake any contest unless:
(i) Lessor shall not, at such time, be exercising its remedies under
Section 14 hereof;
(ii) prior to the commencement of any contest undertaken by Lessee or
any contest undertaken by Lessor, Lessee shall have delivered to Lessor a
written acknowledgment of its obligation to indemnify fully Lessor for Taxes
indemnified to the extent that the contest is not successful;
(iii) Lessee shall have made all payments then due under this
Agreement, including, without limitation, such payments then due under Section
15 and this Section 16;
(iv) Lessee shall have provided Lessor with an opinion of legal
counsel reasonably acceptable to Lessor to the effect that a reasonable basis
exists to contest such claim and, prior to the commencement of any appeal of an
adverse judicial decision, with an opinion of such tax counsel to the effect
that a reasonable basis exists to appeal such adverse judicial decision (which
opinions shall be obtained at Lessee's sole cost and expense);
16-5
<PAGE>
(v) if such contest is to be initiated by the payment by Lessor of,
and the claiming of a refund for, such Taxes, Lessee shall have advanced to
Lessor sufficient funds (on an interest-free basis) to make such payments, and
if Lessor is to undertake the related contest, Lessee shall have each month
advanced to Lessor the Expenses of such contest for the following month,
provided, that Lessee shall indemnify Lessor for any adverse tax consequences
resulting from any such advance; and
(vi) such proceedings do not involve any risk of an imposition of any
material risk or danger of the sale, forfeiture or loss of the Aircraft or any
part thereof or the creation of any Lien other than a Lien for taxes not yet due
or being contested in good faith by appropriate proceedings, and for the payment
of which such reserves, if any, as are required to be provided under generally
accepted accounting principles have been provided.
If Lessor shall obtain a refund of all or any part of such Taxes paid by
Lessee, Lessor shall pay Lessee the amount of such refund less the amount of any
Taxes payable by Lessor in respect of the receipt of such refund after giving
credit to Lessee for any interest received by Lessor with respect to such Taxes
and for any savings by Lessor in respect to any such Taxes by reason of any Tax
Benefits in respect of the payment of any such Taxes; provided that such amount
shall not be payable (x) before such time as Lessee shall have made all payments
or indemnities then due to or on behalf of Lessor under this Agreement, (y)
while Lessor is exercising its remedies under Section 14 hereof, or (z) to the
extent it exceeds the amount of all payments made by Lessee with respect to such
Taxes. If in addition to such refund Lessor shall receive an amount representing
interest on amount of such refund, Lessee shall be paid that proportion of such
interest which is fairly attributable to Taxes paid by Lessee prior to the
receipt of such refund; provided, that no amount shall be payable under this or
the preceding sentence during any period in which Lessor is exercising its
remedies under Section 14 hereof unless this Lease has terminated and Lessee has
paid all amounts due Lessor hereunder. If any refund or Tax Benefit is taken
into account under this paragraph and it is subsequently determined that Lessor
was not entitled thereto, the return or cancellation thereof shall be treated as
a Tax that is indemnifiable under this Section 16.
Lessee shall, as provided above, indemnify Lessor for, or advance to
Lessor, the Expenses, absent manifest error in the amount or nature thereof.
If Lessee neither requests that Lessor contest a Tax indemnified hereunder,
nor notifies Lessor that Lessee desires to contest such Tax, Lessor may, at its
expense (including all Expenses), in good faith contest the validity,
applicability or amount of such Tax; provided, that Lessor shall consult with
Lessee from time to time on the
16-6
<PAGE>
conduct of such contest, and shall not settle any such contest without Lessee's
written consent.
Notwithstanding the foregoing, if a claim is made against Lessor for any
Taxes which, if successful, would result in the imposition of Taxes under
circumstances which would require Lessee to indemnify Lessor, Lessor shall be
released from its responsibility to contest such claim, or part thereof, if it
agrees in writing not to seek indemnification from Lessee in respect of the
claim, or such part thereof. In the event Lessor fails to contest, or refuses to
permit Lessee to contest, a claim or part thereof which Lessor has the
obligation to contest or to permit Lessee to contest under this Section 16, then
Lessee shall not be obligated to indemnify Lessor for such claim or such part
thereof.
16.6 Continuing Indemnification. The agreements and indemnities
--------------------------------
contained in this Section 16 shall survive the end of the Term.
16-7
<PAGE>
SECTION 17. [Intentionally Left Blank]
17-1
<PAGE>
SECTION 18. TRANSFER. ASSIGNMENT AND SUBLEASE.
----------------------------------
18.1 Assignment or Encumbrance by Lessor. Lessor may, without notice
-----------------------------------
to or the consent of Lessee, sell the Aircraft and assign any of its rights
hereunder whether as collateral security or otherwise, subject only to the
condition that any such assignment or security interest be expressly made
subject to Lessee's rights under Section 4.2 hereof. In connection with any such
assignment, Lessee further agrees to take all actions as may be reasonably
requested by Lessor to secure such assignee's interest, including without
limitation: (i) indemnifying any assignee to the same extent as Lessor under
Sections 15 and 16 hereof; (ii) adding any assignee as additional insureds and
loss payees to all insurance policies so naming the Lessor in accordance with
Section 11 hereof; (iii) executing, recording and filing all agreements,
certificates, financing statements and other documents or instruments as may be
reasonably necessary to recognize, evidence, secure or perfect any assignees
ownership or security interest in the Aircraft and this Lease; and (iv)
recognizing all rights of such any assignee to exercise any and all rights of
Lessor hereunder.
18.2 Sublease of Aircraft or Assignment by Lessee. No sublease of the
--------------------------------------------
Aircraft, including the Airframe or any of the Engines, shall be permitted, and
no assignment of the Aircraft or any of Lessee's rights under the Lease to any
other party shall be permitted in either case, without the prior written consent
of Lessor which consent, in the case of a sublease to a Certificated Air
Carrier, shall not be unreasonably withheld.
18.3 Consolidation. Merger or Transfer by Lessee. Lessee shall not,
-------------------------------------------
without the prior written consent of Lessor (which consent will not be
unreasonably withheld), consolidate with or merge into any other corporation or
convey, transfer or Lease all or substantially all of its assets as an entity to
any Person.
18.4 Limited Liability of Lessor. Notwithstanding anything herein
---------------------------
to the contrary, each and all of the representations, warranties, undertakings
and agreements herein made on the part of Lessor are made and intended not as
personal representations, warranties, undertakings and agreements of Investors
Asset Holding Corp. or for the purposes or with the intention of binding
Investors Asset Holding Corp. personally, but are made and intended for the
purpose of binding only the Trust Estate (as defined in the Trust Agreement),
and this Lease is executed and delivered by Investors Asset Holding Corp. solely
in the exercise of the powers expressly conferred upon Investors Asset Holding
Corp. as Owner Trustee under the Trust Agreement; and no personal liability or
personal responsibility is assumed by or shall at any time be asserted or
enforceable against Investors Asset Holding Corp. on account of any
representation, warranty, undertaking or agreement hereunder of Investors Asset
Holding Corp. as Lessor (except
18-1
<PAGE>
for its own willful misconduct or gross negligence) either express or implied,
all such personal liability, if any, being expressly waived and released by
Lessee and by all persons claiming by, through or under Lessee; provided,
however, that nothing contained in this Section shall be construed to limit the
liability of Investors Asset Holding Corp. in its individual capacity for any
breach of any representations, warranties or covenants made by Investors Asset
Holding Corp.
18-2
<PAGE>
SECTION 19. APPRAISALS.
-----------
19.1 If an independent appraisal of Fair Market Rental Value or Fair
Market Sales Value, as the case may be is required pursuant to this Lease, then
the independent appraisal shall be arrived at by mutual agreement of two
nationally recognized, independent Aircraft appraisers, one chosen by Lessor and
one chosen by Lessee, or, if such appraisers cannot agree on the amount of such
appraisal, their appraisals shall be treated in the manner described in
Subsection 19.2 with an appraisal arrived at by a third nationally recognized,
independent Aircraft appraiser chosen by the mutual consent of such two
appraisers; provided, however, that if either party shall fail to appoint an
appraiser within 15 Business Days after a written request to do so by the other
party, or if such two appraisers cannot agree on the amount of such appraisal
within 20 Business Days after the date of the appointment of the second of such
appraisers and fail to appoint a third appraiser within seven Business Days
after the expiration of such 20-day period, then either party may apply to the
American Arbitration Association located in Boston, Massachusetts to make such
appointment.
19.2 If two appraisers are chosen as provided in Subsection 19.1, and
such appraisers agree on the value, such value shall be final and binding upon
Lessor and Lessee. If three appraisers shall be appointed and the difference
between the determination which is further from the middle determination is more
than 125% of the difference between the middle determination and the third
determination, then such further determination shall be excluded, the remaining
two determinations shall be averaged, and a value equal to such average shall be
final and binding upon Lessor and Lessee. Otherwise a value equal to the average
of all three determinations shall be final and binding upon Lessor and Lessee.
19-1
<PAGE>
SECTION 20; NOTICES.
--------
Unless otherwise specifically provided herein, all notices required or
permitted by the terms hereof shall be in writing. Any written notice shall
become effective the earlier of when received or five (5) days after the deposit
of such notice into the U.S. mail. Any written notice shall either be mailed,
certified or registered mail, return receipt requested, with proper first class
postage prepaid, or sent in the form of a telex, telegram or telecopy, or by
overnight delivery service or delivered by hand. Any written notice shall be
addressed as follows:
If to Lessor:
Investors Asset Holding Corp. as Trustee of
the "Alaska/AFG 1989-1 Trust"
c/o American Finance Group
Exchange Place, 14th Floor
Boston, Massachusetts 02109
Attn: General Counsel
Fax: (617) 523-1410
If to Lessee:
American Trans Air, Inc.
Indianapolis International Airport
Indianapolis, Indiana 46231
Attention: Vice President, Fleet Sales and Development
Fax: (317) 240-7091
Such persons and addresses may be changed, from time to time, by means of a
notice given in the manner provided in this Section 20.
20-1
<PAGE>
SECTION 21. LESSOR'S RIGHT TO PERFORM FOR LESSEE.
-------------------------------------
If Lessee fails to make any payment of Rent required to be made by it
hereunder, or fails to perform or comply with any of its agreements contained
herein, then Lessor may itself make such payment or perform or comply with such
agreement, and the amount of such payment and the amount of the reasonable
expenses of Lessor incurred in connection with such payment or the performance
of or compliance with such agreement, as the case may be, together with interest
thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by
Lessee upon demand.
21-1
<PAGE>
SECTION 22. [Intentionally Left Blank]
22-1
<PAGE>
SECTION 23. MISCELLANEOUS.
-------------
23.1 Federal Bankruptcy Code. To the extent provided thereby (or to the
-----------------------
fullest extent it may lawfully so agree, whether or not provided thereby) Lessee
hereby agrees in accordance with 11 U.S.C. Section 1110, or any superseding
statute, as amended from time to time, that the title of Lessor to the Aircraft
and any right of Lessor to take possession of such Aircraft in compliance with
the provisions of this Lease shall not be affected by the provisions of 11
U.S.C. Sections 362 or 363, or other analogous part of any superseding statute,
as amended from time to time.
23.2 Waivers. Headings. 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 enforcement of the change, waiver,
discharge or termination is sought. The headings contained herein are for
convenience and reference only and are not intended to define or limit the scope
of any provisions of this Lease.
23.3 Counterparts. This Lease may be signed in one or more counterparts
------------
with the same effect as if the signatures to each counterpart were upon a single
instrument. All counterparts shall be considered an original of this Lease.
23.4 Agreement to Lease. This Lease shall constitute an agreement to
------------------
lease, and nothing contained herein shall be construed as conveying to Lessee
any right, title or interest in any Aircraft except as a lessee only.
23.5 Governing Law. This Lease has been delivered in the Commonwealth
-------------
of Massachusetts and shall in all respects be governed by, and construed in
accordance with, the laws of the Commonwealth of Massachusetts, including all
matters of construction, validity and performance. This Lease shall be effective
for all purposes as of the date first above written.
23.6 Benefit and Binding Effect. The terms and provisions of this Lease
--------------------------
shall inure to the benefit of and be binding on Lessor and Lessee and their
respective successors and permitted assigns.
23.7 Further Assurances. Lessor and Lessee shall, from time to time, do
------------------
and perform such other and further acts and execute and deliver any and all such
other and further instruments as may be required by law or reasonably requested
by the other party to establish, maintain and protect the respective rights and
remedies of the other party to carry out the intent and purpose of this Lease.
23-1
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee, each pursuant to due authority,
have each caused this Lease to be executed by their duly authorized officers as
of the day and year first above written.
LESSOR:
INVESTORS ASSET HOLDING CORP.,
not in its individual capacity but solely as
trustee of the Alaska/AFG 1989-1 TRUST
By [SIGNATURE APPEARS HERE]
------------------------------------------
Title Vice President
---------------------------------------
LESSEE:
AMERICAN TRANS AIR, INC.
By [SIGNATURE APPEARS HERE]
------------------------------------------
Title Vice President
---------------------------------------
-S-
<PAGE>
EXHIBIT A
to
Lease Agreement
---------------
SCHEDULE AND DESCRIPTION OF AIRCRAFT
------------------------------------
Basic
- -----
Aircraft Type B727-208
Date of Manufacture 4/80
Manufacturer Boeing
Registration Number N329A5
Serial Number 22295
Fuselage/Line Number 1622
Interior Configuration 12F/125Y
Extended Overwater Capability N/A
Noise Compliance Stage II
Approach Category CAT I
Operating Weights & Fuel Capacity
- ---------------------------------
Maximum Taxi Weight 191,000
Maximum Gross Takeoff Weight 190,500
Maximum Landing Weight 161,000
Zero Fuel Weight 140,000
Operator's Empty Weight 97,168.9
Fuel Capacity (gal.) 8,124
Airframe (As of 1/12/94)
- --------
Total Airframe Hours 34047
Total Airframe Cycles 18025
A-1
<PAGE>
Past Operator (s)
- -----------------
Check Name Interval Time Remaining
- ---------- -------- --------------
"C" 13 mos. 106 days
"D" 7 yrs. 1456 days
Engines
- -------
Type Pratt & Whitney JT8D-17
Thrust Rating 16,000/17,400 lbs.
#1 As of 1/12/94 #2 As of 1/12/94
Serial Number 688224 Serial Number 688226
Total Hours 32615 Total Hours 35370
Total Cycles 22494 Total Cycles 24856
Hour Limit (Item) 6858 (C2) Hour Limit (Item) 3108 (C2)
Cycle Limit (Item) 5129 (C7) Cycle Limit (Item) 10029 (C7)
#3 As of 11/17/93
Serial Number 688127
Total Hours 30970
Total Cycles 24210
Hour Limit (Item) 12270 (C-10, C-11)
Cycle Limit (Item) 6446 (C7)
APU Manufacturer and
- ---
Model Number: Garrett GTCP 85-98CK
Landing Gear
- ------------
Position Interval Hours Remaining
- -------- -------- ---------------
Nose 24,000 hrs. 6501 hrs.
Left 24,000 hrs. 6336 hrs.
Right 24,000 hrs. 6336 hrs.
A-2
<PAGE>
EXHIBIT B
to
Lease Agreement
---------------
LEASE SUPPLEMENT
----------------
LEASE SUPPLEMENT, dated January___, 1994, between INVESTORS ASSET HOLDING
CORP., not in its individual capacity but solely as trustee of the Alaska/AFG
19891 TRUST ("Lessor"), and AMERICAN TRANS AIR, INC., an Indiana corporation
("Lessee").
Lessor and Lessee have previously entered into that certain Lease
Agreement dated as of January , 1994 (herein called the "Lease" and the defined
terms therein being hereinafter used with the same meaning). The Lease provides
for the execution and delivery from time to time of a Lease Supplement
substantially in the form hereof for the purpose of leasing the aircraft
described below under the Lease as and when delivered by Lessor to Lessee in
accordance with the terms thereof.
The Lease relates to the Aircraft, Parts and Engines as more precisely
described below. A counterpart of the Lease is attached hereto and this Lease
Supplement and the Lease shall form one document.
In consideration of the premises and other good and sufficient
consideration, Lessor and Lessee hereby agree as follows:
1. Lessor hereby delivers and leases to Lessee under the Lease and
Lessee hereby accepts and leases from Lessor under the Lease, that certain
Boeing Model 727-208 ADV commercial jet Aircraft, Airframe and the three (3)
Pratt & Whitney JT8D-17 engines (each of which Engines has 750 or more rated
takeoff horsepower or the equivalent of such horsepower) described in Schedule 1
hereto ("Delivered Aircraft").
2. The Delivery Date of the Delivered Aircraft is the date of this
Lease Supplement set forth in the opening paragraph hereof.
3. The Term of the Lease shall commence on the Delivery Date and
shall end on the Expiration Date, which shall be the Thirty sixth (36th) monthly
anniversary of the Delivery Date.
B-1
<PAGE>
4. The monthly amount of Basic Rent for the Delivered Aircraft is
$63,500 and is payable in advance commencing on the date of this Lease
Supplement, which shall be the first Rent Payment Date, and to and including the
Thirty-Fifth (35th) monthly anniversary of the Delivery Date.
5. Lessee hereby confirms to Lessor that (i) the Delivered Aircraft and
each Engine installed thereon or belonging thereto have been duly marked in
accordance with the terms of Section 10.4 of the Lease, (ii) Lessee has accepted
the Delivered Aircraft for all purposes hereof and of the Lease, and (iii)
Lessee has inspected the Delivered Aircraft and the Delivered Aircraft satisfies
the conditions set forth in the Lease.
6. All of the terms and provisions of the Lease are hereby incorporated
by reference in this Lease Supplement to the same extent as if fully set forth
herein, each of the conditions precedent set forth in Section 5 of the Lease has
been performed or waived, and the representations and warranties of the parties
set forth in Sections 3 and 4 of the Lease are true and correct.
7. This Lease Supplement may be executed in any number of counterparts,
each of such counterparts shall for all purposes be deemed to be an original;
and all such counterparts shall together constitute but one and the same Lease
Supplement.
B-2
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to
be duly executed as of the day and year first above written.
LESSOR:
INVESTORS ASSET HOLDING CORP., not
in its individual capacity but solely as
trustee of the Alaska/AFG 1989-1 TRUST
By ____________________________________
Title _________________________________
LESSEE:
AMERICAN TRANS AIR, INC.
By ___________________________________
Title ________________________________
B-3
<PAGE>
SCHEDULE 1
TO
LEASE SUPPLEMENT
One Boeing 727-208 ADV
Airframe
Manufacturer's
Registration No. Serial No. Total Time* Total Cycles*
- ---------------- -------------- ----------- -------------
N329A5 22295 34047 Hrs 18025 Cycles
- ---------------- -------------- ----------- -------------
Pratt & Whitney
Engines
--------------------
Model No. Serial No. Total Time Total Cycles
- --------- ---------- ---------- ------------
JT8D-17 688224* 32615 Hrs 22494 Cycles
JT8D-17 688226* 35370 Hrs 24856 Cycles
JT8D-17 688127** 30970 Hrs 24210 Cycles
Each of the above-described Aircraft Engines is 750 or more rated takeoff
horsepower or its equivalent.
* The total time and total cycles referred to above are as of January 12, 1994.
Such times and cycles are within 2 hours and 2 cycles of the actual hours and
cycles at the time of this Lease Supplement.
** The total time and total cycles with respect to Engine S/N 688127 are as of
November 17, 1993.
B-4
<PAGE>
EXHIBIT C
to
Lease Agreement
---------------
AIRCRAFT DOCUMENTS
------------------
A. CERTIFICATES
1. FAA Certificate of Airworthiness (on board aircraft)
2. Current Certificate of Registration (on board aircraft)
B. AIRCRAFT STATUS SUMMARIES
1. Signed statement giving total hours flown, total landings and time
since last major check as of time of delivery
2. Aircraft record of flight time and cycles (listing of accumulated
hours and cycles as of specific dates)
3. F.A.R. Compliance Summary
4. Aircraft and Appliance Airworthiness Directive Applicability and
Compliance Report (giving date, time, method of compliance and status)
5. Service Bulletin Compliance Report
6. Supplemental Structural Inspection (SSID) Status (if applicable)
7. Corrosion Prevention and Control Program Task Status (if
applicable)
8. List of Operator Modifications Incorporated
9. List of Alterations and copies of Major Repairs
10. Signed Statement with Respect to Accident/Incident/Major Damage
to Aircraft
C-1
<PAGE>
11. List of Repetitive Inspections Resulting from Existing Known
Aircraft Defects (including inspection manhour requirement and
interval)
12. List and Status of Life Limited Components
13. Check/Inspection Status
14. List and Current Status of Time-Controlled Components
15. Serialized On-Condition/Condition Monitored Components Inventory
of Installed Units, if available.
C. AIRCRAFT MAINTENANCE RECORDS
Airframe inspection, maintenance, modification, and repair documents with
maintenance and/or inspection signatures (as required) and description of
work done.
1. Last "A," "B," "C" and "D" Checks (or equivalents). (In the event that
a check is performed in phases, all phases necessary to constitute a
complete block check are required. In the event that check content
varies by multiples of the check, all multiples necessary to
constitute a complete cycle are required.)
2. F.A.R., Airworthiness Directive, Service Bulletin and Modification
compliance documents including engineering orders, drawings, shop
cards, etc., as necessary to establish method of compliance, and
approval authority.
3. Documentation of Major Repairs and Alterations including
engineering orders, drawings, Supplemental Type Certificates, Master
Change Notice, etc., as necessary to define work done, certification
basis, and approval authority.
4. Aircraft weigh records.
D. ENGINE RECORDS (for each engine)
1. Signed Statement giving Engine Total Hours and Cycles and Time Since
Last Shop Visit as of Time of Delivery
C-2
<PAGE>
2. Engine Airworthiness Directive Applicability and Compliance Report
(giving date, time, method of compliance and status)
3. Service Bulletin Compliance Report
4. List of Operator Modifications Incorporated, if any, with
Accomplishment Instructions
5. List of Repetitive Inspections Resulting from Existing Known
Engine Defects (including inspection manhour requirement and interval)
6. List and Current Status of Life Limited Components
7. Check/Inspection Status
8. List and Status of Time Controlled Components and Record of Last
Overhaul
9. Serialized On-Condition/Condition Monitored Components List of
Installed Units, if available
10. Engine Build Specifications
11. Repair, overhaul and inspection documents including FAA Form 337s
(as required)
12. Documents necessary to establish current total time in service on all
life-limited parts.
13. Test Cell Records for last test
E. APU RECORDS
1. APU Log Book (or equivalent documentation)
2. Airworthiness Directive Applicability and Compliance Report
3. Manufacturer Service Bulletin Compliance Report
4. List and Current Status of Life Limited Components
C-3
<PAGE>
5. List and Status of Time Controlled Components
6. Serialized On-Condition/Condition Monitored Components Inventory
of Installed Units, if available
7. Repair, overhaul and inspection documents including FAA Forms 337
F. COMPONENT RECORDS
1. Time Controlled Component Historical Records with installation and
serviceable tags
2. Installation records and serviceable tags for Serialized On--
Condition/Condition Monitored Components, if available
G. MANUALS
1. FAA Approved Airplane Flight Manual (paper copy)
2. Weight and Balance Manual Chapter 1 (paper copy)
3. Weight and Balance Report Chapter 2 (paper copy)
4. Weight and Balance Manual (paper copy)
5. Maintenance Manual (microfilm)
6. Wiring Diagram Manual (microfilm)
7. Wire Lists and Hookup Charts (microfilm)
8. Power Plant Buildup Manual (paper copy)
9. Illustrated Parts Catalog (microfilm)
10. Structural Repair Manual (microfilm)
11. Flight Crew Operating Manual (paper copy)
12. Any supplements to the manual set forth in items 1 and 3 through
10 above, if available.
C-4
<PAGE>
H. MISCELLANEOUS TECHNICAL DOCUMENTS
1. Interior Configuration Layout Drawing
2. Aircraft Readiness Log (manufacturer delivery document), if
available.
3./1/Master reference copies of Aircraft operators Engineering Orders
and repairs applicable to the Aircraft, airframe, engines and
appliances, to include drawings, data packages, and approval
authority.
4. Master reference copies of operator Unique Component Maintenance
Manuals that have been altered by the operator as allowed under the
authority granted to operators with a continuous airworthiness
maintenance and inspection program, if available.
5. Master reference copies of any operator obtained master change
Service Bulletins for the Aircraft, airframe, engine and appliances,
if available.
6. All available records required by F.A.R. Parts 121.380 and 121.380a to
the extent not otherwise provided and requested by Lessee.
- ---------------
/1/ Documents referred to in Item H.3 above shall be provided upon written
request of ATA to Alaska Airlines, Inc., where required by ATA to satisfy any
law (including without limitation, any rule, order or demand of the FAA), or the
proper performance of ATA's Maintenance Program. ATA shall reimburse Alaska for
the reasonable costs of copying such documents.
C-5
<PAGE>
EXHIBIT D
to
Lease Agreement
---------------
TECHNICAL ACCEPTANCE CERTIFICATE
--------------------------------
(DELIVERY)
----------
AMERICAN TRANS AIR, INC. ("Lessee") hereby acknowledges that on the __ day
of January, 1994, INVESTORS ASSET HOLDING CORP., not in its individual capacity
but solely as trustee of the Alaska/AFG 1989-1 TRUST ("Lessor"), caused Alaska
Airlines, Inc. ("Alaska") to deliver for inspection to Lessee one (1) Boeing
727-208 Aircraft, bearing Manufacturer's Serial Number 22295 and Federal
Aviation Administration Registration No. N329AS, together with three (3) Pratt &
Whitney JT8D-17 Engines, bearing manufacturer's serial numbers ______, ______,
and ______ together with all instruments, parts, and other equipment attached
thereto or installed therein ("Parts"), in accordance with the Lease Agreement
between Lessor and Lessee, dated as of January ___, 1994 (the "Lease").
The undersigned hereby further acknowledges that: (i) it did conduct an
inspection of the aforementioned Aircraft, Engines, and Parts as evidenced by
Schedule 1 hereto; (ii) the same are technically acceptable to it and in the
condition for delivery and acceptance as required under the Lease; and (iii) the
execution and delivery of this Technical Acceptance Certificate signifies the
technical acceptance by Lessee of the Aircraft, Engines, and Parts under the
Lease as reflected by Schedule 1. Any outstanding discrepancies between the
condition of the Aircraft at delivery and the condition of the Aircraft as
required by the Lease and the Redelivery and Acceptance Agreement as described
in the Lease are noted in Schedule 2 hereto.
IN WITNESS WHEREOF, this Technical Acceptance Certificate has been executed
and delivered at Seattle-Tacoma International Airport, Seattle, Washington, this
___ day of January, 1994.
AMERICAN TRANS AIR, INC. (Lessee)
By:
----------------------------------------
Title:
-------------------------------------
D-1
<PAGE>
SCHEDULE I
TO
TECHNICAL ACCEPTANCE CERTIFICATE
Aircraft Status
Just Prior to Delivery Date
---------------------------
1. Airframe Heaviest Check ("D" Check or Equivalent):
--------------------------------------------------
Interval:
Time Remaining:
2. Airframe "C" Check (or Equivalent): (Phase C)
---------------------------------------------
Interval:
Time Remaining:
3. Landing Gear Overhaul:
----------------------
Interval:
Time Remaining:
Hrs. Left Gear
Hrs. Right Gear
Hrs. Nose Gear
4. Engines:
--------
Interval: On Condition
Hot Section Inspection ("HSI"):
===================================================
S/N Time Since HSI* Cycles Since HSI*
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
===================================================
* Times and cycles since acceptance Borescope
<PAGE>
Interval: On Condition
Cold Section Inspection ("CSI"):
===================================================
S/N Time Since CSI* Cycles Since CSI*
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
===================================================
* Times and cycles since Acceptance Borescope
5. Engines Time Remaining to First Restriction/1/
----------------------------------------------
Engine S/N: Limiter:
------
Hours:
------ -----
Cycles:
------ -----
Engine S/N: Limiter:
------
Hours:
------ -----
Cycles:
------ -----
Engine S/N: Limiter:
------
Hours:
------ -----
Cycles:
------ -----
6. Other Engine Data: Exhaust Gas Temperature ("EGT") Margins:
-----------------------------------------------------------
Engine S/N: EGT Margin:
--------- ---------
--------- ---------
--------- ---------
- -----------------
/1/ The third Engine subject to the lease (Engine S/N 688127) was
delivered to, and accepted by Lessee on November 19, 1993, and the data relevant
thereto (as of 11/17/93) is as follows:
Engine S/N: 688127 Limiter:
------ ------------
Hours: 12270 C10, Cl1
Cycles: 6446 C7
EGT Margin: 16(degree)C
D-3
<PAGE>
7. Auxiliary Power Unit: On Condition
---------------------
Time Since Last APU Heavy Shop Visit: ____________
Date of Last APU Heavy Shop Visit: ____________
D-4
<PAGE>
SCHEDULE 2
TO
TECHNICAL ACCEPTANCE CERTIFICATE
(DELIVERY)
Discrepancies (Append additional pages as required and initial each such page):
- -------------
FOR: ALASKA AIRLINES, INC. FOR: AMERICAN TRANS AIR, INC.
By By
----------------------- -----------------------
Title Title
----------------------- -----------------------
Date Date
----------------------- -----------------------
D-5
<PAGE>
EXHIBIT E
to
Lease Agreement
---------------
TECHNICAL ACCEPTANCE CERTIFICATE
--------------------------------
(RETURN)
-------
INVESTORS ASSET HOLDING CORP., not in its individual capacity but solely
as trustee of the Alaska/AFG 1989-1 TRUST ("Lessor"), hereby acknowledges that
on the __ day of ______ 199_, AMERICAN TRANS AIR, INC. ("Lessee't) did deliver
for inspection to Lessor one (1) Boeing 727-208 Aircraft, bearing Manufacturer's
Serial Number 22295 and Federal Aviation Administration Registration No. N329AS,
together with three (3) Pratt & Whitney JT8D-17 engines, bearing manufacturer's
serial numbers ________ __________ and _________, together with all instruments,
parts, and other equipment attached thereto or installed therein ("Parts") in
accordance with the Lease Agreement made between Lessor and Lessee, dated as of
January ___, 1994 (the "Lease").
The undersigned hereby further acknowledges that: (1) it did conduct an
inspection of the aforementioned Airframe, engines, Parts and the loose
equipment as evidenced by Schedule I hereto; (ii) the same are technically
acceptable to it and in the condition for delivery and acceptance as required
under the Lease; and (iii) the execution and delivery of this Technical
Acceptance Certificate signifies the technical acceptance by Lessor of the
Aircraft under the Lease as reflected by Schedule 1. Any outstanding
discrepancies between the condition of the Aircraft upon return and the
condition of the Aircraft as required under the Lease are noted in Schedule 2
hereto.
IN WITNESS WHEREOF, this Technical Acceptance Certificate has been
executed and delivered at Indianapolis International Airport, Indianapolis,
Indiana, this day of __________, 199_.
INVESTORS ASSET HOLDING CORP., not in its
individual capacity but solely as trustee of the
Alaska/AFG 1989-I TRUST
By:
-----------------------------------
Title:
--------------------------------
E-1
<PAGE>
SCHEDULE 1
TO
TECHNICAL ACCEPTANCE CERTIFICATE
(RETURN)
Aircraft Status
Just Prior to Return
--------------------
1. Airframe Heaviest Check ("D" Check or Equivalent):
--------------------------------------------------
Interval:
Time Remaining:
2. Airframe "C" Check (or Equivalent): (Phase C)
---------------------------------------------
Interval:
Time Remaining:
3. Landing Gear Overhaul:
---------------------
Interval:
Time Remaining:
Hrs. Left Gear
Hrs. Right Gear
Hrs. Nose Gear
4. Engines:
--------
Interval: On Condition
Hot Section Inspection ("HSI"):
===================================================
S/N Time Since HSI* Cycles Since HSI*
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
===================================================
* Times and cycles since Acceptance Borescope
<PAGE>
Interval: On Condition
Cold Section Inspection ("CSI"):
===================================================
S/N Time Since CSI* Cycles Since CSI*
- ---------------------------------------------------
- ---------------------------------------------------
- ---------------------------------------------------
===================================================
* Times and cycles since Acceptance Borescope
5. Engines Time Remaining to First Restriction:
--------------------------------------------
Engine S/N: Limiter:
-----
Hours:
----- -----
Cycles:
----- -----
Engine S/N: Limiter:
-----
Hours:
----- -----
Cycles:
----- -----
Engine S/N: Limiter:
-----
Hours:
----- -----
Cycles:
----- -----
6. Other Engine Data: Exhaust Gas Temperature ("EGT") Margins
----------------------------------------------------------
Engine S/N: EGT Margin:
-------- -------
-------- -------
-------- -------
7. Auxiliary Power Unit: On Condition
--------------------
Time Since Last APU Heavy Shop Visit:
------------------
Date of Last APU Heavy Shop Visit:
------------------
E-3
<PAGE>
SCHEDULE 2
TO
TECHNICAL ACCEPTANCE CERTIFICATE
(RETURN)
Discrepancies (Append additional pages as required and initial each such page):
- --------------
FOR: INVESTORS ASSET HOLDING CORP., FOR: AMERICAN TRANS AIR, INC.
not in its individual capacity
but solely as trustee of the
Alaska/AFG 1989-1 TRUST
By By
------------------------------- --------------------------
Title Title
---------------------------- ------------------------
Date Date
----------------------------- -------------------------
E-4
<PAGE>
EXHIBIT F
to
Lease Agreement
---------------
ACCEPTANCE FLIGHT REPORT
------------------------
DATE_________ STATION _____TIME OUT________ IN________ AIRCRAFT NO.___________
REASON FOR FLIGHT_____________________________________________________________
______________________________________REQUESTED BY ___________________________
CHECK ITEMS AND RECORD DATA APPROPRIATE TO FLIGHT AND TYPE.
INDICATE CHECKS PERFORMED WITH "(CHECK MARK)" IF SATISFACTORY OR "X" IF
UNSATISFACTORY.
PREFLIGHT
- ---------
1. BATTERY(IES) AND EMERGENCY/STANDBY POWER CHECK ....................... ___
2. FIRE/O'HEAT WARNING TEST.............................................. ___
3. FUELING, CONTROLS AND INDICATORS...................................... ___
==============================================================
4. FUEL QUANTITY/TEMP __________
- --------------------------------------------------------------
TANK STICK EXT.GAGE F/S GAGE
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
TOTAL
==============================================================
=========================== ========================
5. ALTIMETERS (SET QNH) 6. HYDRAULIC FLUID
- --------------------------- ------------------------
QNH SYSTEM QUANTITY
- --------------------------- ------------------------
FIELD ELEV.
- --------------------------- ------------------------
CAPT. #1
- --------------------------- ------------------------
CAPT. #2
- --------------------------- ------------------------
STANDBY
- --------------------------- ========================
F/O
- ---------------------------
CAPT. RADIO
- ---------------------------
F/O RADIO
===========================
=========================== ========================
7. OIL 8. APU
- --------------------------- ------------------------
ENGINE QUANTITY EGT
- --------------------------- ------------------------
1 N1/N2
- --------------------------- ------------------------
2 VOLTS
- --------------------------- ------------------------
3 FREQ.
=========================== ------------------------
LOAD
------------------------
========================
F-1
<PAGE>
======================= =======================
9. OXYGEN PRESS 10. RAIN REPELLENT
- ----------------------- -----------------------
CREW
- ----------------------- -----------------------
PAX
======================= =======================
========================================
11. RECORDER VOICE FLT
- ----------------------------------------
OPERATION
- ----------------------------------------
TAPE
========================================
12. ADI SLIP INDICATORS
========= ===========
========= ===========
CAPT. CAPT.
13. AIRCRAFT GENERAL
A. EXTERIOR CONDITION, AERODYNAMIC CLEANNESS AND APPEARANCE......... ______
B. INTERIOR CONDITION AND APPEARANCE................................ ______
C. SEATS, BELTS AND HARNESSES....................................... ______
D. WINDOWS, WINDSHIELDS, VISORS AND SHADES.......................... ______
E. DOORS, HATCHES, STAIRS AND SLIDES................................ ______
F. GALLEYS AND LAVATORIES........................................... ______
G. LANDING GEAR VIEWERS AND INDICATORS.............................. ______
H. PLACARDS, DOCUMENTS, MANUALS, LOGBOOKS, CHARTS AND CHECKLISTS.... ______
I. EMERGENCY EQUIPMENT.............................................. ______
J. OXYGEN MASKS AND OPERATION....................................... ______
K. LIGHTS, NORMAL AND EMERGENCY..................................... ______
L PROBES, SENSORS, VORTEX GENERATORS AND STATIC DISCHARGERS........ ______
M. PITOT/STATIC PORTS, DRAINS AND BLOWOUT DISCS..................... ______
14. LANDING GEAR, BRAKES AND ACCUMULATORS............................ ______
15. FLIGHT CONTROLS, TRIM FLAPS AND SLATS (MTC)...................... ______
16. ELECTRICAL SYSTEM................................................ ______
17. HYDRAULIC SYSTEM................................................. ______
18. FUEL SYSTEM...................................................... ______
19. AIR CONDITIONING/BLEEDS/PRESSURIZATION........................... ______
20. ICE AND RAIN PROTECTION.......................................... ______
21. ALTITUDE ALERT SYSTEM............................................ ______
22. GPWS TEST........................................................ ______
23. STALL WARNING.................................................... ______
24. AURAL WARNINGS................................................... ______
25. COMMUNICATIONS................................................... ______
26. INSTRUMENTS AND SWITCHING........................................ ______
27. NAVIGATION SYSTEMS............................................... ______
28. AFCS............................................................. ______
F-2
<PAGE>
ENGINE START / TAXI
- -------------------
1. ENGINE START AND IDLE
OAT _____PA___APU START AIR PRESS___
================================================================================
MIN STARTER EGT OIL OIL FLT
ENG AIR CUTOUT PEAK/STABLE N1 N2 F/F PRES TEMP IDLE CDE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
================================================================================
2. HYDRAULICS AND BRAKES........................................... ______
3. STEERING CONTROL WHEEL AND RUDDER PEDAL......................... ______
4. YAW DAMPERS..................................................... ______
5. FLIGHT CONTROLS AND POSITION INDICATORS......................... ______
6. WING TAI GROUND TEST............................................ ______
7. PRESSURIZATION.................................................. ______
8. AUTO PACK TRIP.................................................. ______
9. CSD OIL COOLER.................................................. ______
10. T.O. CONFIGURATION WARNING...................................... ______
11. EPR/N1 COMPUTER................................................. ______
12 ENGINE ACCELERATION CHECK....................................... ______
============
ENG. SECS. NOTE:
------------
1 . TIME TO 90% N1
------------
2 . BLEEDS OFF
------------
3 . ONE SECOND THROTTLE ADVANCE
============
TAKEOFF AND CLIMB
- -----------------
1. TAKEOFF OAT._______ PA_____________ CHART EPR/N1____________
========================================================
OIL OIL
ENG EPR N1 EGT N2 F/F PRESS TEMP BLEED
- --------------------------------------------------------
- --------------------------------------------------------
- --------------------------------------------------------
========================================================
=============
THROTTLE
STAGGER
- -------------
- -------------
- -------------
1 2 3
- -------------
F-3
<PAGE>
2. GEAR RETRACTION _____ SECS. TAIL SKID _______ ................... ______
3. ENGINE ANTI-ICE.................................................. ______
4. WINGS/TAIL ANTI-ICE.............................................. ______
5. INSTRUMENT SWITCHING............................................. ______
6. FLIGHT CONTROLS, NORMAL/ABNORMAL OPERATION AND TRIM.............. ______
7. YAW DAMPERS...................................................... ______
8. PRESSURIZATION................................................... ______
9. FUEL SYSTEM AND HEAT............................................. ______
10. ALTERNATE STATIC SOURCES......................................... ______
11. COMPASS HEADINGS................................................. ______
===============================
CAPT HSI 090 180 270 360
-------------------------------
F/O HSI
-------------------------------
STANDBY
===============================
CRUISE AND DESCENT
- ------------------
1. STABILIZE AT NORMAL CRUISE M ________ FL3l0 OR ABOVE A/P ON
PA _______ GW _______ RAT/TAT ______ SAT______
CHART EPR ______ N1 ______ IAS ______
CAPT IAS _____ M _____ CAPT #1 ALT_____ F/O ALT _____
F/O IAS ______ M ______ CAPT #2 ALT ______ STDBY ALT ______
======================================================== =============
OIL OIL THROTTLE
ENG EPR N1 EGT N2 F/F PRESS TEMP BLEED STAGGER
- -------------------------------------------------------- -------------
- -------------------------------------------------------- -------------
- -------------------------------------------------------- -------------
1 2 3
======================================================== -------------
2. ELECTRICAL
================================================== ===================
KW IDG/CSD
-------
AC LOAD KVAR VOLTS FREQ IN R DC VOLTS LOAD
- -------------------------------------------------- -------------------
1
- -------------------------------------------------- -------------------
2
- -------------------------------------------------- -------------------
3
================================================== -------------------
-------------------
-------------------
===================
F-4
<PAGE>
3. HYDRAULIC 4. PRESSURIZATION
===================== ============================================
SYS PRESS QUAN AUTO (ISOBARIC)
- --------------------- --------------------------------------------
AUTO MAX/STDBY
--------------------------------------------
RELIEF
--------------------------------------------
ALTITUDE WARNING
--------------------------------------------
ALTITUDE LIMITING
--------------------------------------------
RATE CONTROL
--------------------------------------------
ALTITUDE SEL CALIBRATION
============================================
NOTE: IF OXYGEN MASK DROP REQUIRED TAPE
DOORS (B727)
5. CABIN LEAKAGE CHECK, SINGLE PACK OPERATION....................... ______
6. AIR CONDITIONING, AUTO, MANUAL AND DISTRIBUTION.................. ______
7. APFDS, TURNS, MANUAL, HEADING, NAV CAP AND TRACK................. ______
8. NAVIGATION, VOR, ADF............................................. ______
9. FLIGHT INSTRUMENTS............................................... ______
10. COMMUNICATIONS, VHF, HF AND SELCAL............................... ______
11. ATC TRANSPONDERS, ALT REPORTING.................................. ______
12. AIRCRAFT TRIM........CLEAN CONFIGURATION......................... ______
.FUEL LOAD BALANCED AND THRUST EVEN
.TRIM AIRCRAFT TO FLY HANDS OFF....SPOILERS FLUSH? ______
.RECORD TRIM POSITIONS (CIRCLE L or R)
.AILERON _____ UNIT(S) L R...RUDDER _____ UNIT(S) L R
.IF MORE THAN ONE UNIT AILERON OR RUDDER TRIM
REQUIRED..........PERFORM FOLLOWING CHECK AND RECORD DATA
================================================================================
USE CAPT BOTH TRIM ZERO RUDDER TRIM ZERO AILERON TRIM ZERO
ADI BALL CONTROL WHEEL TILT AILERON TRIM (UNITS) RUDDER TRIM (UNITS)
- --------------------------------------------------------------------------------
___. L R WING DOWN ___. L R WING DOWN ___. L R NOSE
200 K ---------------------------------------------------------------------
- --------------------------------------------------------------------------------
___. L R WING DOWN ___. L R WING DOWN ___. L R NOSE
250 K ---------------------------------------------------------------------
- --------------------------------------------------------------------------------
___. L R WING DOWN ___. L R WING DOWN ___. L R NOSE
300 K ---------------------------------------------------------------------
================================================================================
F-5
<PAGE>
13. MMO/VMO WARNING... KIAS 14. STICK SHAKER KIAS
OW _________
=================================== ===================================
FL 350 TO 300 BELOW FL 250 FLAPS CHART CAPT F/O
- ----------------------------------- -----------------------------------
ALT____ CHART____ ALT___ CHART___
- ----------------------------------- -----------------------------------
CAPT A CAPT A
- ----------------------------------- -----------------------------------
B B
- ----------------------------------- -----------------------------------
F/O A F/O A
- ----------------------------------- -----------------------------------
B B
=================================== ===================================
15. SPEED BRAKES.................................................. ______
16. DESCENT ENGINE IDLE AND ACCELERATION.......................... ______
17. RADAR, STABILIZATION, PITCH, MAPPING.......................... ______
APPROACH / LANDING / TAXI
- -------------------------
1. WARNING HORNS AND CUTOUTS..................................... ______
2. ALTERNATE LANDING GEAR EXTENSION.............................. ______
3. ALTERNATE ___ RET ___......................................... ______
4. SPEED COMMAND, SRS, AUTOTHROTTLES............................. ______
5. APFDS, APPROACH AND AUTOLAND.................................. ______
6. RADIO ALTIMETERS.............................................. ______
7. GPWS.......................................................... ______
8. WINDSHIELD WIPERS/WASHERS AND RAIN REPELLENT.................. ______
9. RUDDER LIMITING............................................... ______
10. NORMAL GEAR EXTENSION AND NOSE STEERING....................... ______
11. SPOILER ACTUATION............................................. ______
12. BRAKES, AUTO, ANTI-SKID, ALTERNATE............................ ______
13. THRUST REVERSERS.............................................. ______
14. APU........................................................... ______
15. PARKING BRAKES, APPLICATION AND RELEASE....................... ______
16. TOTAL FUEL REMAINING.......................................... ______
================================================================================
FLIGHT CREW COMMENTS CORRECTIVE ACTION ACCOMPLISHED BY:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
================================================================================
FLIGHT CREW COMMENTS CORRECTIVE ACTION ACCOMPLISHED BY:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
====================================================----------------------------
ALL ITEMS SIGNED
============================
COMPLETED BY:
-------------------------------------
APPROVED BY:
--------------------------------------
<PAGE>
EXHIBIT G
to
Lease Agreement
---------------
STIPULATED LOSS VALUE TABLE
---------------------------
AFTER AFTER
RENT STIPULATED RENT STIPULATED
PAYMENT LOSS PAYMENT LOSS
DATE VALUE DATE VALUE
- ------------ ----- ------------- -----
Prior to 1 9,800,000 30 8,357,922
1 9,758,138 31 8,302,034
2 9,716,129 32 8,245,570
3 9,673,722 33 8,188,523
4 9,630,912 34 8,130,886
5 9,587,694 35 8,072,650
6 9,544,062 36 8,000,000
7 9,500,011
8 9,455,535
9 9,410,630
10 9,365,290
11 9,319,509
12 9,273,281
13 9,226,601
14 9,179,462
15 9,131,860
16 9,083,788
17 9,035,240
18 8,986,210
19 8,936,692
20 8,886,679
21 8,836,165
22 8,785,144
23 8,733,610
24 8,681,555
25 8,628,973
26 8,575,858
27 8,522,202
28 8,467,998
29 8,413,241
<PAGE>
LEASE SUPPLEMENT
----------------
LEASE SUPPLEMENT, dated January 27, 1994, between INVESTORS ASSET HOLDING
CORP., not in its individual capacity but solely as trustee of the Alaska/AFG
1989-1 TRUST ("Lessor"), and AMERICAN TRANS AIR, INC., an Indiana corporation
("Lessee").
Lessor and Lessee have previously entered into that certain Lease Agreement
dated as of January 27, 1994 (herein called the "Lease" and the defined terms
therein being hereinafter used with the same meaning). The Lease provides for
the execution and delivery from time to time of a Lease Supplement substantially
in the form hereof for the purpose of leasing the aircraft described below under
the Lease as and when delivered by Lessor to Lessee in accordance with the terms
thereof.
The Lease relates to the Aircraft, Parts and Engines as more precisely
described below. A counterpart of the Lease is attached hereto and this Lease
Supplement and the Lease shall form one document.
In consideration of the premises and other good and sufficient
consideration, Lessor and Lessee hereby agree as follows:
1. Lessor hereby delivers and leases to Lessee under the Lease and Lessee
hereby accepts and leases from Lessor under the Lease, that certain Boeing Model
727-208 ADV commercial jet Aircraft, Airframe and the three (3) Pratt & Whitney
JT8D-17 engines (each of which Engines has 750 or more rated takeoff horsepower
or the equivalent of such horsepower) described in Schedule 1 hereto ("Delivered
Aircraft").
2. The Delivery Date of the Delivered Aircraft is the date of this Lease
Supplement set forth in the opening paragraph hereof.
3. The Term of the Lease shall commence on the Delivery Date and shall end
on the Expiration Date, which shall be the Thirty-sixth (36th) monthly
anniversary of the Delivery Date.
4. The monthly amount of Basic Rent for the Delivered Aircraft is $63,500
and is payable in advance commencing on the date of this Lease Supplement, which
shall be the first Rent Payment Date, and to and including the Thirty-Fifth
(35th) monthly anniversary of the Delivery Date.
5. Lessee hereby confirms to Lessor that (i) the Delivered Aircraft and
each Engine installed thereon or belonging thereto have been duly marked in
accordance with
<PAGE>
the terms of Section 10.4 of the Lease, (ii) Lessee has accepted the Delivered
Aircraft for all purposes hereof and of the Lease, and (iii) Lessee has
inspected the Delivered Aircraft and the Delivered Aircraft satisfies the
conditions set forth in the Lease.
6. All of the terms and provisions of the Lease are hereby incorporated by
reference in this Lease Supplement to the same extent as if fully set forth
herein, each of the conditions precedent set forth in Section 5 of the Lease has
been performed or waived, and the representations and warranties of the parties
set forth in Sections 3 and 4 of the Lease are true and correct.
7. This Lease Supplement may be executed in any number of counterparts,
each of such counterparts shall for all purposes be deemed to be an original;
and all such counterparts shall together constitute but one and the same Lease
Supplement.
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to
be duly executed as of the day and year first above written.
LESSOR:
INVENTORS ASSET HOLDING CORP., not in its
individual capacity but solely as trustee of the
Alaska/AFG 1989-1 TRUST
By [SIGNATURE APPEARS HERE]
-------------------------------------
Title Vice President
----------------------------------
LESSEE:
AMERICAN TRANS AIR, INC.
By [SIGNATURE APPEARS HERE]
-------------------------------------
Title Vice President
----------------------------------
<PAGE>
SCHEDULE 1
TO
LEASE SUPPLEMENT
One Boeing 727-208 ADV
Airframe
Manufacturer's
Registration No. Serial No. Total Time* Total Cycles*
- ---------------- ---------- ------------ -------------
N329AS 22295 34047 Hrs 18025 Cycles
--------------- ---------- ------------ -------------
Pratt & Whitney
Engines
--------------------
Model No. Serial No. Total Time Total Cycles
- --------- ---------- ---------- ------------
JT8D-17 688224* 32615 Hrs 22494 Cycles
JT8D-17 688226* 35370 Hrs 24856 Cycles
JT8D-17 688127** 30970 Hrs 24210 Cycles
Each of the above-described Aircraft Engines is 750 or more rated takeoff
horsepower or its equivalent.
* The total time and total cycles referred to above are as of January 12, 1994.
Such times and cycles are within 2 hours and 2 cycles of the actual hours and
cycles at the time of this Lease Supplement.
** The total time and total cycles with respect to Engine SIN 688127 are as of
November 17, 1993
<PAGE>
LEASE AMENDMENT NO. 1(22295)
This Lease Amendment No. 1 (22295) dated as of November 25, 1996
("Amendment") amends in part that certain Lease Agreement dated as of January
27, 1994 between Investors Asset Holding Corp., not in its individual capacity
but solely as Trustee of the "Alaska/AFG 1989-1 Trust" as Lessor and American
Trans Air, Inc. as Lessee recorded with the Federal Aviation Administration on
February 11, 1994 as Conveyance No. VV005838 ("Lease").
WHEREAS, Lessee has been leasing the Aircraft from Lessor pursuant to the
Lease; and
WHEREAS, Lessee wishes to extend the Lease for the Extension Term as
defined in and pursuant to the terms and conditions set forth in that certain
Lease Extension Agreement (22295) dated as of September 17, 1996; and
WHEREAS, Lessor and Lessee wish to amend the Lease solely as it relates to
such Extension Term.
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements set forth herein, Lessor and Lessee hereby agree as follows:
1. The following shall be included as Section 1.20 of the Lease:
"Extension Term" shall mean the renewal term of the Lease commencing
immediately upon the end of the Basic Term and ending January 26, 1999."
2. Section 1.57 of the Lease is hereby amended and restated in its
entirety to read as follows:
"Stipulated Loss Value" for the Aircraft means $4,300,000."
3. Lessee hereby reaffirms its representations and warranties set forth
in Section 3 of the Lease as of the date of this Amendment.
<PAGE>
4. Section 2.4 of the Lease is hereby amended by substituting the word
"Extension" for the word "Basic" in the second line thereof.
5. Section 3.14 of the Lease is hereby amended by substituting "1996" for
"1993" in the last sentence thereof.
6. Section 4.1 of the Lease is hereby amended by deleting "Section 101(16)
of the Federal Aviation Act" wherever found and substituting in its place "49
USC 40102(a)(15)".
7. Section 6.1 of the Lease is hereby amended and restated in its entirety
to read as follows:
"During the Extension Term, Lessee shall pay Lessor (in accordance with
Section 6.3 hereof) Basic Rent in the amount of $63,500 per month. Basic
Rent shall commence on the Extension Term commencement date (prorated to
reflect the remaining portions of such month in which the Extension Term
commences) and continue thereafter on a monthly basis with Basic Rent
payable on the first day of each month during the Extension Term ("Rent
Payment Date"); provided, however, that if the last month of the Extension
Term shall not be a full month, the last payment of Basic Rent should be
prorated to reflect that portion of such month included in the Extension
Term."
8. The first paragraph of Section 6.3 of the Lease is hereby amended and
restated in its entirety to read as follows: "All Rent shall be paid in United
States Dollars by wire transfer in immediately available funds by 4:00 p.m. EST
or EDT, as the case may be, on the day in question to Lessor at Fleet Bank,
N.A., 80 Pine Street, New York, NY, ABA No. 021-200-339, Account No. 2181-01-
7572,. Rent Escrow Account, Ref. ATA Lease Supplement No. 1, with sufficient
information to identify the source and application of such funds. If any Rent is
due on a day which is not a Business Day, it shall be due on the next succeeding
Business Day."
9. Section 20 of the Lease is hereby amended by deleting the notice
address of the Lessor and substituting in its place the following:
<PAGE>
"Investors Asset Holding Corp. as Trustee of the
"Alaska/AFG 1989-1 Trust"
c/o Equis Financial Group
98 North Washington Street
Boston, MA 02114
Attn: Vice President, Aircraft and Marine
Fax: (617) 523-1410"
10. The following shall be added as Section 22 of the Lease:
"Option to Purchase.
-------------------
Provided no Event of Default nor any event which with the passage of
time or the giving of notice or both would constitute an Event of
Default has occurred and is continuing, Lessee, upon 90 days prior
written notice to Lessor may purchase the Aircraft on the last day of
the Extension Term for a purchase price of $3,300,000 together with
all taxes arising out of such purchase and all other sums then due and
owing Lessor under the Lease. Once given, Lessee's notice shall be
irrevocable. On the last day of the Extension Term, Lessor shall
transfer its entire right, title and interest in the Aircraft to
Lessee without representation or warranty of any kind except only that
the Aircraft is free and clear of liens and encumbrances placed
thereon by Lessor or arising prior to Lessee's operation thereof.
<PAGE>
IN WITNESS WHEREOF, Lessor and Lessee have executed this Amendment as of
the date first above written.
INVESTORS ASSET HOLDING CORP., not in
its individual capacity, but solely as Trustee of
the "Alaska/AFG 1989-1 Trust"
By: [SIGNATURE APPEARS HERE]
-------------------------------------------
Title: Vice President
----------------------------------------
AMERICAN TRANS AIR, INC.
By: [SIGNATURE APPEARS HERE]
-------------------------------------------
Title: Secretary
----------------------------------------
The undersigned Amtran, Inc., the Guarantor of the Lessee's obligations
under the above-referenced Lease pursuant to that certain Guaranty of
Obligations of American Trans Air, Inc. dated as of January 27, 1994 hereby
reaffirms that the Guaranty remains in full force and effect with respect to the
Lease as amended pursuant to this Amendment.
IN WITNESS WHEREOF, the undersigned has executed this Agreement by its duly
authorized representative.
AMTRAN,INC.
By: /s/ Kenneth K. Wolff
----------------------------------------
Title: Executive Vice President
----------------------------------------
