<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
-------------------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
--------------------- --------------------------
Commission file number 0-19137
----------------------------------------------------------
AIRFUND II International Limited Partnership
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3057290
------------------------------------- --------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad St., Sixth Floor, Boston, MA 02110
- -------------------------------------- --------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
------------------------------
Securities registered pursuant to Section 12(b) of the Act NONE
----------------------
Title of each class Name of each exchange on which
registered
- -------------------------------------- --------------------------------------
- -------------------------------------- --------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
2,714,647 Units Representing Limited Partnership Interest
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes XX No
------ ------
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 1997 (Part I and II)
AIRFUND II International Limited Partnership
FORM 10-K
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for the Partnership's Securities and Related Security
Holder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 7
PART III
Item 10. Directors and Executive Officers of the Partnership 8
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 10
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K 13-15
<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 Equis Financial Group Limited Partnership (formerly American Finance
Group), a Massachusetts limited partnership ("EFG"). 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 is expected to terminate no later than December 31,
2005; however, the Partnership is a Nominal Defendant in a Class Action Lawsuit.
The outcome of the Class Action Lawsuit could alter the nature of the
Partnership's organization and its future business operations. See Note 7 to the
accompanying financial statements.
The Partnership has no employees; however, it is managed pursuant to a
Management Agreement with EFG or one of its affiliates (the "Manager"). The
Manager's role, among other things, is to (i) evaluate, select, negotiate, and
consummate the acquisition of aircraft, (ii) manage the leasing, re-leasing,
financing, and refinancing of aircraft, and (iii) arrange the resale of
aircraft. The Manager is compensated for such services as
-3-
<PAGE>
described in the Restated Agreement, as amended, in Item 13, herein and Note 4
to the financial statements included in Item 14, herein.
The Partnership's investment in commercial aircraft is, and will continue
to be, subject to various risks, including physical deterioration, technological
obsolescence and defaults by lessees. A principal business risk of owning and
leasing aircraft is the possibility that aggregate lease revenues and aircraft
sale proceeds will be insufficient to provide an acceptable rate of return on
invested capital after payment of all operating expenses. Consequently, the
success of the Partnership is largely dependent upon the ability of the General
Partner and its Affiliates to forecast technological advances, the ability of
the lessees to fulfill their lease obligations and the quality and marketability
of the aircraft at the time of sale.
In addition, the leasing industry is very competitive. Although all funds
available for acquisitions have been invested in aircraft, subject to
noncancellable lease agreements, the Partnership will encounter considerable
competition when the aircraft are re-leased or sold at the expiration of current
lease terms. The Partnership will compete with lease programs offered directly
by manufacturers and other equipment leasing companies, including lease programs
organized and managed similarly to the Partnership, and including other
EFG-sponsored partnerships and trusts, which may seek to re-lease or sell
aircraft within their own portfolios to the same customers as the Partnership.
Many competitors have greater financial resources and more experience than the
Partnership, the General Partner and the Manager.
In recent years, market values for certain models of used commercial jet
aircraft have deteriorated. Consistent price competition and other pressures
within the airline industry have inhibited sustained profitability for many
carriers. Most major airlines have had to re-evaluate their aircraft fleets and
operating strategies. Aircraft condition, age passenger capacity, distance
capability, fuel efficiency, and other factors 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, 1997, 1996 and 1995 is
incorporated herein by reference to Note 2 to the financial statements in the
1997 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the
Securities and Exchange Commission.
Default by a lessee under a lease may cause aircraft to be returned to the
Partnership at a time when the General Partner or the Manager is unable to
arrange for the re-lease or sale of such aircraft. This could result in the loss
of a material portion of anticipated revenues and significantly weaken the
Partnership's ability to repay related indebtedness.
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Partnership and several other
Direct-Participation equipment leasing programs sponsored or co-sponsored by
-4-
<PAGE>
EFG (the "Other Investment Programs"). The Company arranges to broker or
originate equipment leases, acts as remarketing agent and asset manager, and
provides leasing support services, such as billing, collecting, and asset
tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President and Chief Executive Officer. Equis Corporation also owns
a controlling 1% general partner interest in EFG's 99% limited partner, GDE
Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were
established in December 1994 by Mr. Engle for the sole purpose of acquiring the
business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not applicable.
Item 2. Properties.
Incorporated herein by reference to Note 3 to the financial statements in
the 1997 Annual Report.
Item 3. Legal Proceedings.
Incorporated herein by reference to Note 7 to the financial statements in
the 1997 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-5-
<PAGE>
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder
Matters.
(a) Market Information
There is no public market for the resale of the Units and it is not
anticipated that a public market for resale of the Units will develop.
(b) Approximate Number of Security Holders
At December 31, 1997, there were 3,913 record holders of Units in the
Partnership.
(c) Dividend History and Restrictions
Pursuant to Article VI of the Restated Agreement, as amended, the
Partnership's Distributable Cash From Operations and Distributable Cash From
Sales or Refinancings are determined and distributed to the Partners quarterly.
Distributions may be made to the General Partner prior to the end of the fiscal
quarter; however, the amount of such distribution reflects only amounts to which
the General Partner is entitled at the time such distribution is made. As the
General Partner attempts to remarket the Partnership's aircraft, the amount of
cash available for distribution fluctuates widely. The Partnership has been, and
may continue to be, required to incur significant costs to upgrade certain
aircraft to meet the standards of potential successor lessees. Accordingly, the
General Partner did not declare any distributions to the Partners in 1997 and
expects to continue to suspend such distributions between the periods
corresponding to major remarketing events.
Distributions declared in 1997 and 1996 were made as follows:
<TABLE>
<CAPTION>
General Recognized
Total Partner Owners
----------- ----------- -----------
<S> <C> <C> <C>
Total 1996 distributions $ 6,384,542 $ 276,587 $ 6,107,955
</TABLE>
"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.
"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
-6-
<PAGE>
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 1997 Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Incorporated herein by reference to the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1997 Annual Report.
Item 8. Financial Statements and Supplementary Data.
Incorporated herein by reference to the financial statements and
supplementary data included in the 1997 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
-7-
<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
- ----------------------- ------------------------------------- ----- ------------
<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member of the Until a
Executive Committee of EFG successor
and President and a Director is duly
of the General Partner 49 elected
and
qualified
Gary D. Engle President and Chief Executive
Officer and member of the
Executive Committee of EFG and a
Director of the General Partner 49
Gary M. Romano Executive Vice President and Chief
Operating Officer of EFG and
Clerk of the General Partner 38
James A. Coyne Executive Vice President of EFG 37
Michael J. Butterfield Vice President, Finance and Treasurer
of EFG and Treasurer of the
General Partner 38
James F. Livesey Vice President, Aircraft and Vessels
of EFG 48
Sandra L. Simonsen Senior Vice President, Information
Systems of EFG 47
Gail D. Ofgant Vice President, Lease Operations of
EFG 32
</TABLE>
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Partners,
Directors or Executive Officers.
-8-
<PAGE>
(e) Business Experience
Mr. MacDonald, age 49, is a co-founder, Chairman and a member of the
Executive Committee of EFG and President and a Director of the General Partner.
Mr. MacDonald was also a co-founder, Director and Senior Vice President of EFG's
predecessor corporation from 1980 to 1988. Mr. MacDonald is President of
American Finance Group Securities Corp. and a limited partner in Old North
Capital Limited Partnership ("ONC"). Prior to co-founding EFG's predecessors,
Mr. MacDonald held various executive and management positions in the leasing and
pharmaceutical industries. Mr. MacDonald holds an M.B.A. from Boston College and
a B.A. degree from the University of Massachusetts (Amherst).
Mr. Engle, age 49, is President and Chief Executive Officer and a
member of the Executive Committee of EFG and President of AFG Realty
Corporation. Mr. Engle is Vice President and a Director of certain of EFG's
affiliates and a Director of the General Partner. On December 16, 1994, Mr.
Engle acquired control of EFG, the General Partner and each of EFG's
subsidiaries. Mr. Engle is a limited partner in ONC. Mr. Engle is also
Chairman, Chief Executive Officer and a member of the Board of Directors of
Semele Group, Inc. ("Semele"). From 1987 to 1990, Mr. Engle was a principal
and co-founder of Cobb Partners Development, Inc., a real estate and mortgage
banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and
Chief Financial Officer of Arvida Disney Company, a large scale community
development company owned by Walt Disney Company. Prior to 1980, Mr. Engle
served in various management consulting and institutional brokerage
capacities. Mr. Engle has an M.B.A. from Harvard University and a B.S. degree
from the University of Massachusetts (Amherst).
Mr. Romano, age 38, is Executive Vice President and Chief Operating
Officer of EFG and certain of its affiliates and Clerk of the General
Partner. Mr. Romano is Vice President and Chief Financial Officer of Semele.
Mr. Romano joined EFG in November 1989 and was appointed Executive Vice
President and Chief Operating Officer in April 1996. Prior to joining EFG,
Mr. Romano was Assistant Controller for a privately-held real estate company
which he joined in 1987. Mr. Romano held audit staff and manager positions at
Ernst & Whinney (now Ernst & Young LLP) from 1982 to 1986. Mr. Romano is a
C.P.A. and holds a B.S. degree from Boston College.
Mr. Coyne, age 37, is Executive Vice President of EFG and President,
Chief Operating Officer and a member of the Board of Directors of Semele. Mr.
Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG in
November 1994. Mr. Coyne was appointed Executive Vice President of EFG in
September 1997. Mr. Coyne is a limited partner in ONC. From May 1993 through
November 1994, he was with the Raymond Company, a private investment firm,
where he was responsible for financing corporate and real estate
acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real
estate investment company and an equipment leasing company. Prior to 1985 he
was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He
has a BS in Business Administration from John Carroll University, a Masters
Degree in Accounting from Case Western Reserve University and is a Certified
Public Accountant.
Mr. Butterfield, age 38, joined EFG in June 1992 and became Vice
President, Finance and Treasurer of EFG and certain of its affiliates in
April 1996 and is Treasurer of the General Partner and Semele. Prior to
joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young LLP,
which he joined in 1987. Mr. Butterfield was employed in public accounting
and industry positions in New Zealand and London (U.K.) prior to coming to
the United States in 1987. Mr. Butterfield attained his Associate Chartered
Accountant (A.C.A.) professional qualification in New Zealand and has
completed his C.P.A. requirements in the United States. He holds a Bachelor
of Commerce degree from the University of Otago, Dunedin, New Zealand.
Mr. Livesey, age 48, is Vice President, Aircraft and Vessels, of EFG.
Mr. Livesey joined EFG in October, 1989, and was promoted to Vice President
in January 1992. Prior to joining EFG, Mr. Livesey held sales and marketing
positions with two privately-held equipment leasing firms. Mr. Livesey holds
an M.B.A. from Boston College and B.A. degree from Stonehill College.
Ms. Simonsen, age 47, joined EFG in February 1990 and was promoted to
Senior Vice President, Information Systems of EFG in April 1996. Prior to
joining EFG, Ms. Simonsen was Vice President, Information Systems with
Investors Mortgage Insurance Company which she joined in 1973. Ms. Simonsen
provided systems consulting for a subsidiary of American International Group
and authored a software program published by IBM. Ms. Simonsen holds a B.A.
degree from Wilson College.
-9-
<PAGE>
Ms. Ofgant, age 32, is Vice President, Lease Operations of EFG and certain
of its affiliates. Ms. Ofgant joined EFG in June 1989, and was promoted to
Manager, Lease Operations in April 1994. In April 1996, Ms. Ofgant was appointed
Vice President, Lease Operations. Prior to joining EFG, Ms. Ofgant was employed
by Security Pacific National Trust Company. Ms. Ofgant holds a B.S. degree in
Finance from Providence College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
See Item 10 (a-b) above.
Item 11. Executive Compensation.
(a) Cash Compensation
Currently, the Partnership has no employees. However, under the terms of
the Restated Agreement, as amended, the Partnership is obligated to pay all
costs of personnel employed full or part-time by the Partnership, including
officers or employees of the General Partner or its Affiliates. There is no plan
at the present time to make any partners or employees of the General Partner or
its Affiliates employees of the Partnership. The Partnership has not paid and
does not propose to pay any options, warrants or rights to the officers or
employees of the General Partner or its Affiliates.
(b) Compensation Pursuant to Plans
None.
(c) Other compensation
Although the Partnership has no employees, as discussed in Item 11(a),
pursuant to Section 10.4(c) of the Restated Agreement, as amended, the
Partnership incurs a monthly charge for personnel costs of the Manager for
persons engaged in providing administrative services to the Partnership. A
description of the remuneration paid by the Partnership to the 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:
-10-
<PAGE>
1. Amendment of the Restated Agreement;
2. Termination of the Partnership;
3. Removal of the General Partner; and
4. Approval or disapproval of the sale of all, or substantially all, of
the assets of the Partnership (except in the orderly liquidation of the
Partnership upon its termination and dissolution).
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,
1998.
The ownership and organization of EFG is described in Item 1 of this
report.
Item 13. Certain Relationships and Related Transactions.
The General Partner of the Partnership is AFG Aircraft Management
Corporation, an affiliate of EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
1997, 1996 and 1995, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Equipment management fees $ 161,231 $ 235,339 $ 329,292
Administrative charges 50,304 28,694 21,000
Reimbursable operating expenses
due to third parties 1,240,204 2,071,725 136,035
----------- ----------- ----------
Total $ 1,451,739 $ 2,335,758 $ 486,327
----------- ----------- ----------
</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.
-11-
<PAGE>
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, 1997, the
Partnership was owed $305,359 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in January 1998.
In 1990, EFG assigned its equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG. AF/AIP
Programs Limited Partnership also entered into a nonexclusive confirmatory
agreement with EFG's former majority owned subsidiary, AIRFUND Corporation
("AFC"), for the provision of aircraft remarketing services.
Old North Capital Limited Partnership ("ONC"), a Massachusetts Limited
Partnership, formed in 1995 and owned and controlled by certain principals of
EFG, owns 40,000 Units or 1.47% of the total outstanding units of the
Partnership. EFG owns a 49% limited partnership interest in ONC, which it
acquired in December 1996.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
See Item 13(a) above.
-12-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report:
(1) Financial Statements:
Report of Independent Auditors...............................*
Statement of Financial Position
at December 31, 1997 and 1996................................*
Statement of Operations
for the years ended December 31, 1997, 1996 and 1995.........*
Statement of Changes in Partners' Capital
for the years ended December 31, 1997, 1996 and 1995.........*
Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995.........*
Notes to the Financial Statements............................*
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K, as set
forth in Item 601 of Regulation S-K, are not applicable.
Exhibit
Number
-------
4 Amended and Restated Agreement and Certificate of Limited
Partnership included as Exhibit A to the Prospectus which is
included in Registration Statement on Form S-1 (No. 33-25334).
13 The 1997 Annual Report to security holders, a copy of which is
furnished for the information of the Securities and Exchange
Commission. Such Report, except for those portions thereof
which are incorporated herein by reference, is not deemed
"filed" with the Commission.
23 Consent of Independent Auditors.
99 (a) Lease agreement with Northwest Airlines, Inc. was filed in
the Registrant's Annual Report on Form 10-K for the period May
17, 1990 (commencement of operations) to December 31, 1990 as
Exhibit 28 (a) and is incorporated herein by reference.
-13-
<PAGE>
* Incorporated herein by reference to the appropriate portion of the 1997 Annual
Report to security holders for the year ended December 31, 1997 (see Part II).
-14-
<PAGE>
Exhibit
Number
-------
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 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 (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 (e) and is incorporated herein by reference.
99 (e) Lease agreement with American Trans Air, Inc. was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 as Exhibit 99 (f) and is incorporated herein
by reference.
99 (f) Lease agreement with Southwest Airlines, Inc. is filed in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 and is included herein.
99 (g) Lease agreement with Southwest Airlines, Inc. is filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 and is included herein.
99 (h) Lease agreement with Southwest Airlines, Inc. is filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 and is included herein.
99 (i) Lease agreement with Finnair OY is filed in the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997 and is included herein.
99 (j) Lease agreement with Finnair OY is filed in the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1997 and is included herein.
99 (k) Lease agreement with Transmeridian Airlines, Inc. is filed in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997 and is included herein.
(b) Reports on Form 8-K
None.
-15-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AIRFUND II International Limited Partnership
By: AFG Aircraft Management Corporation,
a Massachusetts corporation and the
General Partner of the Registrant.
By: /s/ Geoffrey A. MacDonald By: /s/ Gary D. Engle
-------------------------- --------------------------
Geoffrey A. MacDonald Gary D. Engle
Chairman and a member of the President and Chief Executive
Executive Committee of EFG and Officer and a member of the
President and a Director of the Executive Committee of EFG and a
General Partner Director of the General
Partner (Principal Executive Officer)
Date: March 31, 1998 Date: March 31, 1998
------------------------- -------------------------
By: /s/ Gary M. Romano By: /s/ Michael J. Butterfield
------------------------- --------------------------
Gary M. Romano Michael J. Butterfield
Executive Vice President and Chief Vice President, Finance and
Operating Officer of EFG and Clerk Treasurer of FG and Treasurer
of the General Partner of the General Partner
(Principal Financial Officer) (Principal Accounting Officer)
Date: March 31, 1998 Date: March 31, 1998
------------------------- -------------------------
-16-
<PAGE>
AIRFUND II International Limited Partnership
Annual Report to the Partners, December 31, 1997
<PAGE>
Dear Investor:
We are pleased to provide the Annual Report for AIRFUND II International Limited
Partnership which contains important information concerning the recent operating
results and current financial position of your investment program. Please refer
to the index on the following page for a listing of information contained in
this report.
If you have any questions about your investment program or, if you would like a
copy of Form 10-K for this program, please contact our Investor Services
Representatives at 1-800-247-3863.
Very truly yours,
/s/ GEOFFREY A. MACDONALD
Geoffrey A. MacDonald
Chairman and Co-founder
<PAGE>
AIRFUND II International Limited Partnership
INDEX TO ANNUAL REPORT TO THE PARTNERS
Page
----
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-7
FINANCIAL STATEMENTS:
Report of Independent Auditors 8
Statement of Financial Position
at December 31, 1997 and 1996 9
Statement of Operations
for the years ended December 31, 1997, 1996 and 1995 10
Statement of Changes in Partners' Capital
for the years ended December 31, 1997, 1996 and 1995 11
Statement of Cash Flows
for the years ended December 31, 1997, 1996 and 1995 12
Notes to the Financial Statements 13-22
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
-1-
<PAGE>
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For each of the years in the five year period ended December 31, 1997:
<TABLE>
<CAPTION>
Summary of
Operations 1997 1996 1995 1994 1993
- -------------------- --------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Lease revenue $ 3,224,618 $ 4,706,774 $ 6,585,836 $ 9,001,993 $ 7,976,109
Net loss $(1,762,752) $(3,649,940) $(5,286,053) $(1,474,819) $(4,686,207)
Per Unit:
Net loss $ (0.62) $ (1.28) $ (1.85) $ (0.52) $ (1.64)
Cash distributions
declared $ -- $ 2.25 $ 1.75 $ 2.50 $ 2.50
Financial Position
- --------------------
Total assets $ 9,765,106 $13,163,812 $21,432,133 $31,553,833 $40,195,205
Total long-term
obligations $ 2,677,520 $ 3,419,785 $ 1,432,396 $ -- $ --
Partners' capital $ 6,840,127 $ 8,602,879 $18,637,361 $28,924,079 $37,542,705
</TABLE>
-2-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1997 compared to the year ended
December 31, 1996 and the year ended December 31, 1996
compared to the year ended December 31, 1995
Certain statements in this annual report of AIRFUND II International
Limited Partnership (the "Partnership") that are not historical fact constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and are subject to a variety of risks and
uncertainties. There are a number of important factors that could cause actual
results to differ materially from those expressed in any forward-looking
statements made herein. These factors include, but are not limited to, the
outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements, and the ability of Equis Financial Group Limited
Partnership (formerly American Finance Group), a Massachusetts limited
partnership ("EFG"), to collect all rents due under the attendant lease
agreements and successfully remarket the Partnership's equipment upon the
expiration of such leases.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four digits to define the applicable year. The computer
programs of EFG were designed and written using four digits to define the
applicable year. As a result, EFG does not anticipate system failure or
miscalculations causing disruptions of operations. Based on recent assessments,
EFG determined that minimal modification of software is required so that its
network operating system will function properly with respect to dates in the
year 2000 and thereafter. EFG believes that with these modifications to the
existing operating system, the Year 2000 Issue will not pose significant
operational problems for its computer systems. EFG will utilize internal
resources to upgrade software for Year 2000 modifications and anticipates
completing the Year 2000 project by December 31, 1998, which is prior to any
anticipated impact on its operating system. The total cost of the Year 2000
project is expected to be insignificant and have no effect on the results of
operations of the Partnership.
Overview
As an equipment leasing partnership, the Partnership was organized to
acquire and lease a portfolio of commercial jet aircraft subject to lease
agreements with third parties. 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. Subsequently, all of the aircraft in the
Partnership's original portfolio have been re-leased, renewed, exchanged for
other aircraft or sold (see below). At December 31, 1997 the Partnership owned
three aircraft and proportionate interests in six additional aircraft. All of
the Partnership's aircraft are currently on lease. 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 EFG to
obtain the most advantageous economic benefit. Presently, the Partnership is a
Nominal Defendant in a Class Action Lawsuit. The outcome of the Class Action
Lawsuit could alter the nature of the Partnership's organization and its future
business operations. See Note 7 to the accompanying financial statements.
Results of Operations
For the year ended December 31, 1997, the Partnership recognized lease
revenue of $3,224,618 compared to $4,706,774 and $6,585,836 for the years ended
December 31, 1996 and 1995, respectively. The decrease in lease revenue from
1996 to 1997 was due primarily to the lease term expiration related to the
Partnership's Lockheed L-1011-100 aircraft which expired in September 1996 and
was subsequently re-leased in November 1997 and the sale of a 727-200 Advanced
aircraft in July 1996 (see discussions below). This decrease was partially
offset by the recognition of a full year's lease revenue related to both the
Partnership's Boeing 727-251 Advanced aircraft which was re-leased to
Transmeridian Airlines, Inc. ("Transmeridian") in September 1996 and its
interest in two McDonnell Douglas MD-82 aircraft which were acquired in March
1996 in connection with the like-kind exchange transaction. The Partnership
recognized lease revenue of approximately $640,000 and $433,000 related to the
two MD-82 aircraft during the years ended December 31, 1997 and 1996,
respectively. In
-3-
<PAGE>
aggregate, the five replacement aircraft generated approximately $1,017,000 of
lease revenue during the year ended December 31, 1997, compared to approximately
$811,000 in 1996 (see discussions below). The decrease in lease revenue from
1995 to 1996 was due primarily to lease term expirations related to both the
Partnership's Lockheed L-1011-100 aircraft and its proportionate interest in a
Lockheed L-1011-50 aircraft which expired in June 1996, and the sale of a Boeing
727-200 Advanced aircraft in July 1996 (see discussions below). This decrease
was partially offset by the effects of the Partnership's aircraft exchange 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 recognized from the
like-kind exchange.
The Partnership's Boeing 727-251 Advanced aircraft, formerly on a renewal
rental agreement with Northwest Airlines, Inc. ("Northwest") was returned upon
expiration of its lease term on November 30, 1995. This aircraft underwent heavy
maintenance at a cost of $984,000, all of which was expensed during the year
ended 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, to re-lease this aircraft for
aggregate rents over the lease term of approximately $1,941,000. This aircraft
generated approximately $972,000 of lease revenue during the year ended December
31, 1997, compared to approximately $293,000 and $716,000 during the years ended
December 31, 1996 and 1995, respectively.
The Partnership sold a Boeing 727-200 Advanced aircraft to Northwest
during the second half of 1996. In addition to sales proceeds, the Partnership
received 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. In
aggregate, this aircraft generated lease revenue of approximately $1,422,000 and
$1,717,000 for the years ended December 31, 1996 and 1995, respectively.
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 underwent heavy maintenance. The heavy maintenance on the Lockheed
L-1011-50 cost the Partnership approximately $400,000, the majority of which was
expensed during the year ended December 31, 1996. The Partnership entered into a
new 1-year lease agreement with Aer Lease Limited ("Aer Lease"), with respect to
its interest in the L-1011-50 aircraft, at a base rent to the Partnership of
$39,550 per month, beginning April 27, 1997. The Partnership recognized lease
revenue of approximately $320,000 related to this aircraft during the year ended
December 31, 1997 compared to $302,000 and $719,000 during the years ended
December 31, 1996 and 1995, respectively. Aer Lease has entered into an
agreement with the Partnership to purchase the L-1011-50 aircraft at the
expiration of the lease term. The Partnership is expected to receive proceeds of
approximately $554,000 related to the sale of its interest in this aircraft. The
heavy maintenance on the Lockheed L-1011-100 cost the Partnership approximately
$947,000, approximately $400,000 of which was previously expensed during the
year ended December 31, 1996. The Partnership entered into a new 3-year lease
agreement with Classic Airways Limited ("Classic") related to this aircraft with
a base rent to the Partnership of $80,000 per month, effective November 1, 1997.
In addition, Classic has been granted an option to purchase the aircraft for
$2,500,000 and $2,000,000 after two years and the entire term of the lease have
elapsed, respectively. 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 Lockheed L-1011 aircraft.
Such
-4-
<PAGE>
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 and Classic.
The Partnership's Boeing 727-208 Advanced aircraft is under a two year
renewal agreement with American Trans Air, Inc. ("ATA"). The renewal agreement,
scheduled to expire in January 1999, provides revenue of $63,500 per month to
the Partnership. The Partnership recognized lease revenue of approximately
$770,000 from this aircraft during the year ended December 31, 1997 compared to
$762,000 during each of the years ended December 31, 1996 and 1995.
The Partnership holds a proportionate ownership interest in the L-1011-50
aircraft, the Southwest aircraft and the 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, 1997 was $110,035 compared
to $265,820 and $172,530 for the years ended December 31, 1996 and 1995,
respectively. Generally, interest income is generated from temporary investments
of rental receipts and equipment sale proceeds in short-term instruments.
Interest income in 1996 included $39,346 earned on cash held in a
special-purpose escrow account in connection with the like-kind exchange
transactions and also reflected a temporary increase in the Partnership's cash
available for investment resulting from the receipt of sale proceeds associated
with the Boeing 727-200 Advanced aircraft.
During July 1996, the Partnership sold a Boeing 727-200 Advanced 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.
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 related to the Partnership's L-1011 aircraft, during
each of the years ended December 31, 1996 and 1995. The resulting charges,
$2,832,800 ($0.99 per limited partnership unit) in 1996 and $6,139,040 ($2.15
per limited partnership) in
-5-
<PAGE>
1995 were based on a comparison of estimated net realizable values and
corresponding carrying values for each of the Partnership's aircraft.
Net realizable values were estimated based on (i) third-party appraisals
of the Partnership's aircraft and (ii) EFG's assessment of prevailing market
conditions for similar aircraft. Market values for certain of the Partnership's
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. Aircraft condition,
age, passenger capacity, distance capability, fuel efficiency, and other factors
influence market demand and market values for passenger jet aircraft.
Notwithstanding the foregoing, the ultimate realization of residual value
for any aircraft 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 given time. Accordingly, EFG will attempt to monitor
changes in the airline industry in order to identify opportunities which may be
advantageous to the Partnership and which will maximize total cash returns for
each aircraft.
The total economic value realized upon final disposition of each aircraft
is comprised of all primary lease term 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 gain or loss reported in the financial statements is
not necessarily indicative of the total residual value the Partnership achieved
from leasing the aircraft
Interest expense was $268,916 or 8.3% in 1997, $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, which
were financed in December 1995 and March 1996, respectively. Interest expense in
future years 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 1997, 1996 and 1995 and
will not change as a percentage of lease revenue in future periods.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as insurance,
printing, distribution and remarketing expenses. The overall increase in
operating expenses from 1995 to 1997 was due primarily to increases in
administrative charges, professional service costs and remarketing expenses.
Operating costs in 1996 and 1997 included significant heavy maintenance expenses
to facilitate the remarketing of certain of the Partnership's aircraft,
discussed above. In addition, in 1996 and 1997 the Partnership incurred legal
costs associated with Transmeridian Airlines legal proceedings (see Note 7 to
the financial statements, herein). 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 $3,377,350,
$3,650,745 and $4,902,840 for the years ended December 31, 1997, 1996 and 1995,
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 $496,997,
$3,205,567 and $6,010,056 in 1997, 1996 and 1995, respectively. The expiration
of the Partnership's lease agreements, described above, have caused an overall
-6-
<PAGE>
decline in the Partnership's lease revenue and corresponding sources of
operating cash. This overall decline has been partially offset by rents
generated in connection with the Southwest and Finnair Aircraft and re-lease of
the aircraft to Transmeridian and Aer Lease (see Results of Operations). In
addition, the Partnership has expended substantial funds in connection with its
remarketing efforts related to its L-1011 and Boeing 727-251 Advanced aircraft
during 1997 and 1996. 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 the Boeing 727-200
Advanced aircraft. There were no equipment acquisitions or sales during 1997 or
1995. Future inflows of cash from asset disposals will vary in timing and amount
and will be influenced by many factors including, but not limited to, the
frequency and timing of lease expirations, the equipment's condition and age,
and future market conditions.
As described in Results of Operations, the Partnership obtained long-term
financing in connection with the like-kind exchange transactions involving the
Southwest Aircraft and the Finnair Aircraft. The corresponding note agreements
are recourse only to the specific equipment financed and to the minimum rental
payments contracted to be received during the debt amortization period. As
rental payments are collected, a portion or all of the rental payment will be
used to repay principal and interest. The Partnership also has 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 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 influenced by the
outcome of the Class Action Lawsuit described in Note 7 to the accompanying
financial statements. The General Partner anticipates that cash proceeds
resulting from upon the collection of contractual rents and the outcome of
residual activities will satisfy the Partnership's future expense obligations.
However, the amount of cash available for distribution in future periods is
expected to fluctuate widely as the General Partner attempts to remarket the
Partnership's aircraft and possibly upgrade certain aircraft to meet the
standards of potential successor lessees.
The Partnership has incurred significant heavy maintenance costs in
connection with its remarketing efforts related to the two L-1011 aircraft and
the Boeing 727-251 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, 1997 and 1996,
and the related statements of operations, changes in partners' capital, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AIRFUND II International
Limited Partnership at December 31, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the
basic financial statements taken as a whole. The Additional Financial
Information identified in the Index to Annual Report to the Partners is
presented for purposes of additional analysis and is not a required part of the
basic financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 1998
-8-
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF FINANCIAL POSITION
December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,102,494 $ 2,347,762
Rents receivable 65,120 --
Accounts receivable - affiliate 305,359 146,567
Equipment at cost, net of accumulated
depreciation of $43,339,081 and
$39,961,731 at December 31, 1997
and 1996, respectively 7,292,133 10,669,483
------------- -------------
Total assets $ 9,765,106 $ 13,163,812
============= =============
LIABILITIES AND PARTNERS' CAPITAL
Notes payable $ 2,677,520 $ 3,419,785
Accrued interest 29,618 35,929
Accrued liabilities 8,250 541,534
Accrued liabilities - affiliate 42,524 489,018
Deferred rental income 167,067 74,667
------------- -------------
Total liabilities 2,924,979 4,560,933
------------- -------------
Partners' capital (deficit):
General Partner (2,653,450) (2,565,312)
Limited Partnership Interests
(2,714,647 Units;
initial purchase price of $25 each) 9,493,577 11,168,191
------------- -------------
Total partners' capital 6,840,127 8,602,879
------------- -------------
Total liabilities and partners'
capital $ 9,765,106 $ 13,163,812
============= =============
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Income:
Lease revenue $ 3,224,618 $ 4,706,774 $ 6,585,836
Interest income 110,635 265,820 172,530
Gain on sale of equipment -- 460,969 --
Loss on exchange of equipment -- -- (497,014)
------------ ------------ ------------
Total income 3,335,253 5,433,563 6,261,352
------------ ------------ ------------
Expenses:
Depreciation 3,377,350 3,650,745 4,902,840
Write-down of equipment -- 2,832,800 6,139,040
Interest expense 268,916 264,200 19,198
Equipment management fees
- affiliate 161,231 235,339 329,292
Operating expenses - affiliate 1,290,508 2,100,419 157,035
------------ ------------ ------------
Total expenses 5,098,005 9,083,503 11,547,405
------------ ------------ ------------
Net loss $ (1,762,752) $ (3,649,940) $ (5,286,053)
============ ============ ============
Net loss
per limited partnership unit $ (0.62) $ (1.28) $ (1.85)
============ =========== ============
Cash distributions declared
per limited partnership unit $ -- $ 2.25 $ 1.75
============ ============ ============
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General
Partner Recognized Owners
------------------------
Amount Units Amount Total
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
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
Net loss - 1997 (88,138) -- (1,674,614) (1,762,752)
--------- --------- ---------- ----------
Balance at December 31, 1997 $(2,653,450) 2,714,647 $9,493,577 $6,840,127
=========== ========= ========== ==========
</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, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net loss $(1,762,752) $(3,649,940) $(5,286,053)
Adjustments to reconcile net loss
to net cash from operating activities:
Depreciation 3,377,350 3,650,745 4,902,840
Write-down of equipment -- 2,832,800 6,139,040
Gain on sale of equipment -- (460,969) --
Loss on exchange of equipment -- -- 497,014
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable (65,120) 169,906 (65,982)
Accounts receivable - affiliate (158,792) 169,872 19,004
Increase (decrease) in:
Accrued interest (6,311) 16,732 19,197
Accrued liabilities (533,284) 448,394 (178,101)
Accrued liabilities - affiliate (446,494) 430,866 33,241
Deferred rental income 92,400 (402,839) (70,144)
----------- ----------- -----------
Net cash from operating activities 496,997 3,205,567 6,010,056
----------- ----------- -----------
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 (742,265) (779,949) --
Distributions paid -- (7,098,923) (6,072,236)
----------- ----------- -----------
Net cash used in financing activities (742,265) (7,878,872) (6,072,236)
----------- ----------- -----------
Net decrease in cash and cash equivalents (245,268) (1,210,206) (62,180)
Cash and cash equivalents at beginning of year 2,347,762 3,557,968 3,620,148
----------- ----------- -----------
Cash and cash equivalents at end of year $ 2,102,494 $ 2,347,762 $ 3,557,968
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 275,227 $ 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, 1997
NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS
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 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. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
In 1990, EFG assigned its Equipment Management Agreement with the
Partnership to AF/AIP Programs Limited Partnership, and AF/AIP Programs Limited
Partnership entered into an identical management agreement with EFG.
-13-
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(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.
<TABLE>
<CAPTION>
Recognized
Closing Date Units Issued Purchase Price Owners
- ----------------- ------------ -------------- ------------
<S> <C> <C> <C>
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
============ ============== ============
</TABLE>
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.
Under the terms of a Management Agreement between the Partnership and EFG,
management services are provided by EFG to the Partnership at fees which the
General Partner believes to be competitive for similar services (see Note 4).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Cash Flows
The Partnership considers liquid investment instruments purchased with a
maturity of three months or less to be cash equivalents. From time to time, the
Partnership invests excess cash with large institutional banks in federal agency
discount notes and in reverse repurchase agreements with overnight maturities.
Under the terms of the agreements, title to the underlying securities passes to
the Partnership. The securities underlying the agreements are book entry
securities. At December 31, 1997 the Partnership had $1,988,158 invested in
federal agency discount notes and 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)
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
$4,914,573 are due as follow:
<TABLE>
<S> <C>
For the year ending December 31, 1998 $ 3,545,561
1999 1,369,012
-----------
Total $ 4,914,573
===========
</TABLE>
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1997, 1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -------
<S> <C> <C> <C>
Transmeridian Airlines, Inc.
(One Boeing 727-251ADV) $ 971,500 $ -- $ --
American Trans Air, Inc.
(One Boeing 727-208 ADV) $ 770,467 $ 762,000 $ 762,000
Finnair OY
(Two MD-82) $ 639,752 $ -- $ --
Southwest Airlines, Inc.
(Three Boeing 737-2H4) $ 377,568 $ -- $ --
Northwest Airlines, Inc.
(One Boeing 727-251 ADV and one
Boeing 727-200 ADV) $ -- $ 1,421,629 $2,493,823
Cathay Pacific Airways Limited
(Two Lockheed L-1011) $ -- $ 1,419,024 $2,775,726
</TABLE>
The Partnership entered into a new 1-year lease agreement with Aer Lease
Limited ("Aer Lease") for its proportionate interest in a Lockheed L-1011-50
aircraft at a base rent to the Partnership of $39,550 per month, beginning April
27, 1997. In addition, Aer Lease has entered into an agreement with the
Partnership to purchase the aircraft at the expiration of the lease term. The
Partnership is expected to receive proceeds of approximately $554,000 related to
the sale of its interest in this aircraft.
The Partnership entered into a new 3-year lease agreement with Classic
Airways Limited ("Classic") related to this aircraft with a base rent to the
Partnership of $80,000 per month, effective November 1, 1997. In addition,
Classic has been granted an option to purchase the aircraft for $2,500,000 and
$2,000,000 after two years and the entire term of the lease have elapsed,
respectively
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.
-15-
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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.
Accrued Liabilities - Affiliate
Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliate (see Note 4).
Allocation of Profits and Losses
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the
Recognized Owners and 5% to the General Partner). See Note 6 concerning
allocation of income or loss for income tax purposes.
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, 1997
and computed after allocation of the General Partner's 5% share of net loss and
applicable share of cash distributions (see Note 1).
-16-
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
Provision for Income Taxes
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Partnership at
December 31, 1997. Remaining Lease Term (Months), as used below, represents the
number of months remaining from December 31, 1997 under contracted lease terms.
In the opinion of EFG, the acquisition cost of the equipment did not exceed its
fair market value.
<TABLE>
<CAPTION>
Remaining
Lease Term Equipment
Equipment Type (Months) at Cost Location
- -------------------------------------- ---------- ------------ -----------
<S> <C> <C> <C>
One Lockheed L-1011-100 (Classic) 22 $ 15,879,518 Foreign
One Boeing 727-208 ADV (ATA) 13 12,928,710 IN
One Boeing 727-251 ADV (Transmeridian) 10 9,732,714 MN
One Lockheed L-1011-50 (Aer Lease) 4 6,013,492 Foreign
Two McDonnell-Douglas MD-82 (Finnair) 19 4,157,280 Foreign
Three Boeing 737-2H4 (Southwest) 24 1,919,500 TX
------------
Total equipment cost 50,631,214
Accumulated depreciation (43,339,081)
------------
Equipment, net of accumulated depreciation $ 7,292,133
============
</TABLE>
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.
In September 1995, the Partnership transferred its 23.19% ownership
interest in a Boeing 747-SP-21 commercial jet aircraft (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.
In March 1996, the Partnership completed the replacement of the United
Aircraft with a 14.85% ownership interest in two aircraft leased to Finnair OY
(the "Finnair Aircraft") at a total cost to the Partnership of $4,157,280. To
acquire the ownership interest in the two McDonnell-Douglas MD-82 commercial jet
aircraft (the "Finnair Aircraft"), the Partnership paid $1,389,942, including
the balance of the cash consideration, and obtained
-17-
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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.
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 $4,925,000 at December 31, 1997. (See Note
5.)
Generally, the costs associated with maintaining, insuring and operating
the Partnership's aircraft are incurred by the respective lessees pursuant to
terms specified in their individual lease agreements with the Partnership.
However, the Partnership has purchased supplemental insurance coverage to reduce
the economic risk arising from certain losses. Specifically, the Partnership is
insured under supplemental policies for "Aircraft Hull Total Loss Only" and
"Aircraft Hull Total Loss Only War and Other Perils."
As aircraft are sold to third parties, or otherwise disposed of, the
Partnership 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
proceeds realized upon sale or disposition. The ultimate realization of
estimated residual value in the aircraft is dependent upon, among other things,
EFG's ability to maximize proceeds from selling or re-leasing the aircraft upon
the expiration of the primary lease terms.
The Partnership recorded a write-down of aircraft carrying values,
representing impairments related to the Partnership's L-1011 aircraft, during
each of the years ended December 31, 1996 and 1995. The resulting charges,
$2,832,800 ($0.99 per limited partnership unit) in 1996 and $6,139,040 ($2.15
per limited partnership unit) in 1995 were based on a comparison of estimated
net realizable values and corresponding carrying values for each of the
Partnership's aircraft.
NOTE 4 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on
behalf of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during each of the three years in
the period ended December 31, 1997, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Equipment management fees $ 161,231 $ 235,339 $ 329,292
Administrative charges 50,304 28,694 21,000
Reimbursable operating
expenses due to third parties 1,240,204 2,071,725 136,035
------------ ------------ ------------
Total $ 1,451,739 $ 2,335,758 $ 486,327
============ ============ ============
</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
-18-
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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 December 31, 1997, the
Partnership was owed $305,359 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in January 1998.
Old North Capital Limited Partnership ("ONC"), a Massachusetts Limited
Partnership, formed in 1995 and owned and controlled by certain principals of
EFG, owns 40,000 Units or 1.47% of the total outstanding units of the
Partnership. EFG owns a 49% limited partnership interest in ONC, which it
acquired in December 1996.
NOTE 5 - NOTES PAYABLE
Notes payable at December 31, 1997 consisted of installment notes payable
to banks of $2,677,520. The installment notes are non-recourse, with interest
rates ranging between 8.65% and 8.89% and are collateralized by the equipment
and assignment of the related lease payments. All of the notes were originated
in connection with the Southwest Aircraft and the Finnair Aircraft. The
installment notes related to the Southwest Aircraft will be fully amortized by
noncancellable rents. The Partnership, has a balloon payment obligation at the
expiration of the primary lease term related to the Finnair Aircraft of
$1,411,035. The carrying amount of notes payable approximates fair value at
December 31, 1997.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<S> <C>
For the year ending December 31, 1998 $ 780,853
1999 1,896,667
------------
Total $ 2,677,520
============
</TABLE>
NOTE 6 - INCOME TAXES
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax reporting purposes, the Partnership allocates net income
or loss in accordance with such agreement. The Restated Agreement, as
-19-
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
amended, requires that upon dissolution of the Partnership, the General Partner
will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 1997, the General Partner had a negative tax capital account
balance of approximately $811,000.
The following is a reconciliation between net loss reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net loss $ (1,762,752) $ (3,649,940) $ (5,286,053)
Tax depreciation in excess
of financial statement
depreciation (2,136,596) (3,015,164) (1,959,389)
Write-down of equipment -- 2,832,800 6,139,040
Deferred rental income 92,400 (402,839) (70,144)
Other (998,111) 1,501,218 521,195
------------ ------------ ------------
Net loss for federal income tax
reporting purposes $ (4,805,059) $ (2,733,925) $ (655,351)
============ ============ ============
</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 certain maintenance reserves.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Partners' capital $ 6,840,127 $ 8,602,879
Add back selling commissions and organization
and offering costs 7,085,240 7,085,240
Cumulative difference between federal income
tax and financial statement income (loss) (1,208,656) 1,833,651
------------ ------------
Partners' capital for federal income tax
reporting purposes $ 12,716,711 $ 17,521,770
============ ============
</TABLE>
Cumulative difference between federal income tax and financial statement
income (loss) represents timing differences.
NOTE 7 - LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs")
filed a class and derivative action, captioned Leonard Rosenblum, et al. v.
Equis Financial Group Limited Partnership, et al., in the United States
District Court for the Southern District of Florida (the "Court") on behalf
of a proposed class of investors in 28 equipment leasing programs sponsored
by EFG, including the Partnership (collectively, the "Nominal Defendants"),
against EFG and a number of its affiliates, including the General Partner, as
defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on
or about June 24, 1997, had filed an earlier derivative action, captioned
Leonard Rosenblum, et al. v. Equis Financial Group Limited Partnership, et
al., in the Superior Court of the Commonwealth of Massachusetts on behalf of
the Nominal Defendants against the Defendants. Both actions are referred to
herein collectively as the "Class Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the
Securities Exchange Act of 1934, common law fraud, breach of contract, breach
of fiduciary duty, and violations of the partnership or trust agreements that
govern each of the Nominal Defendants. The Defendants have denied, and
continue to deny, that any of them have committed or threatened to commit any
violations of law or breached any fiduciary duties to the Plaintiffs or the
Nominal Defendants.
-20-
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
On March 9, 1998, counsel for the Defendants and the Plaintiffs
entered into a Memorandum of Understanding setting forth the terms pursuant
to which a settlement of the Class Action Lawsuit is intended to be achieved
and which, among other things, is expected to reduce the burdens and expenses
attendant to continuing litigation. The Memorandum of Understanding
represents a preliminary step towards a comprehensive Stipulation of
Settlement between the parties that must be presented to and approved by the
Court as a condition precedent to effecting a settlement. The Memorandum of
Understanding (i) prescribes a number of conditions necessary to achieving a
settlement, including providing the partners (or beneficiaries, as
applicable) of the Nominal Defendants with the opportunity to vote on any
settlement and (ii) contemplates various changes that, if effected, would
alter the future operations of the Nominal Defendants. With respect to the
Partnership and 10 affiliated partnerships (hereafter referred to as the
"Exchange Partnerships"), the Memorandum of Understanding provides for the
restructuring of their respective business operations into a single successor
company whose securities would be listed and traded on a national stock
exchange. The partners of the Exchange Partnerships would receive both
common stock in the new company and a cash distribution in exchange for their
existing partnership interests. Such a transaction would, among other
things, allow for the consolidation of the Partnership's operating expenses
with other similarly-organized equipment leasing programs. To the extent
that the parties agree upon a Stipulation of Settlement that is approved by
the Court, the complete terms thereof will be communicated to all of the
partners (or beneficiaries) of the Nominal Defendants to enable them to vote
thereon.
There can be no assurance that the parties will agree upon a
Stipulation of Settlement, or that it will be approved by the Court, or that
the outcome of the voting by the partners (or beneficiaries) of the Nominal
Defendants, including the Partnership, will result in a settlement finally
being effected or in the Partnership being included in any such settlement.
The General Partner and its affiliates, in consultation with counsel, concur
that there is a reasonable basis to believe that a Stipulation of Settlement
will be agreed upon by the parties and approved by the Court. In the absence
of a Stipulation of Settlement approved by the Court, the Defendants intend
to defend vigorously against the claims asserted in the Class Action Lawsuit.
The General Partner and its affiliates cannot predict with any degree of
certainty the ultimate outcome of such litigation.
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 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 is pending. 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
-21-
<PAGE>
AIRFUND II International Limited Partnership
Notes to the Financial Statements
(Continued)
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.
The Court extended the deadline to June 1, 1998 and placed this action on the
trial calendar for November/December 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 years ended December 31, 1997, 1996 and 1995
The Partnership classifies all rents from leasing aircraft as lease
revenue. Upon expiration of the primary lease terms, aircraft may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement. The proceeds generated from selling or re-leasing
the aircraft, in addition to any month-to-month revenue, represent the total
residual value realized for each aircraft. Therefore, the financial statement
gain or loss, which reflects the difference between the net book value of the
aircraft at the time of sale or disposition and the proceeds realized upon sale
or disposition may not reflect the aggregate residual proceeds realized by the
Partnership for such aircraft.
The following is a summary of cash excess associated with the aircraft
disposition which occurred in the year ended December 31, 1996. No aircraft were
disposed of during the years ended December 31, 1997 or 1995.
<TABLE>
<S> <C>
Rents earned prior to disposal of aircraft $ 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
============
</TABLE>
-23-
<PAGE>
AIRFUND II International Limited Partnership
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1997
<TABLE>
<CAPTION>
Sales and
Operations Refinancings Total
------------ ------------ ------------
<S> <C> <C> <C>
Net loss $ (1,762,752) $ -- $ (1,762,752)
Add:
Depreciation 3,377,350 -- 3,377,350
Management fees 161,231 -- 161,231
Less:
Principal repayment of notes
payable (742,265) -- (742,265)
------------ ------------ ------------
Cash from operations, sales
and refinancings 1,033,564 -- 1,033,564
Less:
Management fees (161,231) -- (161,231)
------------ ------------ ------------
Distributable cash from
operations, sales and
refinancings 872,333 -- 872,333
Other sources and uses of cash:
Cash at beginning of year -- 2,347,762 2,347,762
Net change in receivables and
accruals (872,333) (245,268) (1,117,601)
------------ ------------ ------------
Cash at end of year $ -- $ 2,102,494 $ 2,102,494
============ ============ ============
</TABLE>
-25-
<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, 1997
For the year ended December 31, 1997, the Partnership reimbursed the
General Partner and its Affiliates for the following costs:
<TABLE>
<S> <C>
Operating expenses $1,806,675
</TABLE>
-26-
<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
10, 1998, included in the 1997 Annual Report to the Partners of AIRFUND II
International Limited Partnership.
ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,102,494
<SECURITIES> 0
<RECEIVABLES> 370,479
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,472,973
<PP&E> 50,631,214
<DEPRECIATION> 43,339,081
<TOTAL-ASSETS> 9,765,106
<CURRENT-LIABILITIES> 247,459
<BONDS> 2,677,520
0
0
<COMMON> 0
<OTHER-SE> 6,840,927
<TOTAL-LIABILITY-AND-EQUITY> 9,765,106
<SALES> 0
<TOTAL-REVENUES> 3,335,253
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,829,089
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 268,916
<INCOME-PRETAX> 1,762,752
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,762,752
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,762,752
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
================================================================================
AIRCRAFT LEASE AGREEMENT
between
INVESTORS ASSET HOLDING CORP.,
as Owner Trustee,
Lessor
and
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
Lessee
Dated as of March 15, 1996
covering one Boeing model 727-251 Aircraft
equipped with Pratt & Whitney model JT8D-15A Engines
Serial No. 21159, Registration N280US
================================================================================
<PAGE>
LEASE AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION 1. DEFINITIONS ............................................................ 1
SECTION 2. LEASE AND DELIVERY OF THE AIRCRAFT ..................................... 6
2.1. LEASE, LESSEE'S OBLIGATIONS, AND CONDITIONS PRECEDENT ................... 6
2.1.1. EXECUTION OF OPERATIVE DOCUMENTS ................................. 7
2.1.2. EVIDENCE OF LEGAL AUTHORITY TO LEASE AND OPERATE THE AIRCRAFT .... 7
2.1.3. EVIDENCE OF CORPORATE AUTHORITY .................................. 7
2.1.4. EVIDENCE OF INSURANCE ............................................ 7
2.1.5. OPINION OF COUNSEL ............................................... 7
2.1.6. PAYMENT OF BASIC RENT AND SECURITY DEPOSIT ....................... 7
2.2. DELIVERY ................................................................ 7
SECTION 3. TERM AND RENT .......................................................... 8
3.1. TERM .................................................................... 8
3.1.1. INITIAL TERM ..................................................... 8
3.1.2. EXTENSIONS ....................................................... 8
3.2. BASIC RENT .............................................................. 8
3.3. METHOD OF PAYMENT ....................................................... 8
3.4. SUPPLEMENTAL RENT ....................................................... 9
3.5. SECURITY DEPOSIT ........................................................ 9
3.6. RESERVES ................................................................ 10
3.7. HUSHKITS ................................................................ 11
SECTION 4. REPRESENTATIONS, WARRANTIES AND MISCELLANEOUS COVENANTS ................ 11
4.1. THE LESSEE'S REPRESENTATIONS AND WARRANTIES ............................. 12
4.1.1. ORGANIZATION AND QUALIFICATION ................................... 12
4.1.2. CORPORATE AUTHORIZATION .......................................... 12
4.1.3. GOVERNMENT APPROVAL .............................................. 12
4.1.4. VALID AND BINDING AGREEMENTS ..................................... 13
4.1.5. LITIGATION ....................................................... 13
4.1.6. FINANCIAL CONDITION .............................................. 13
4.1.7. ACCURACY AND DISCLOSURE OF INFORMATION ........................... 13
4.2. REPRESENTATIONS AND WARRANTIES OF THE LESSOR ............................ 13
4.2.1. DUE ORGANIZATION ................................................. 13
4.2.2. DUE AUTHORIZATION: ENFORCEABILITY ................................ 13
4.2.3. NO VIOLATION ..................................................... 14
4.2.4. OWNERSHIP OF AIRCRAFT ............................................ 14
4.2.5. CONFIDENTIALITY OF LESSEE INFORMATION ............................ 14
4.3. DISCLAIMER AND ACKNOWLEDGEMENT OF DISCLAIMER;
WAIVER OF CONSEQUENTIAL DAMAGES ......................................... 14
4.4. LESSEE'S MISCELLANEOUS COVENANTS ........................................ 15
4.4.1. MAINTENANCE OF CORPORATE STATUS; NO MERGER OR CONSOLIDATION ...... 15
4.4.2. NOTICE OF DEFAULT OR ADVERSE OCCURRENCE .......................... 15
4.4.3. MAINTENANCE OF CONSENTS AND APPROVALS ............................ 15
<PAGE>
4.4.4. CHANGE OF LOCALE ................................................. 16
4.4.5. FINANCIAL INFORMATION AND REPORTS ................................ 16
4.4.6. EVIDENCE OF LEGAL AUTHORITY TO LEASE AND OPERATE THE AIRCRAFT .... 16
4.5. LESSOR'S COVENANT OF QUIET ENJOYMENT .................................... 16
SECTION 5. OPERATION, MAINTENANCE, POSSESSION ..................................... 17
5.1. TITLE ................................................................... 17
5.2. OPERATION ............................................................... 17
5.3. MAINTENANCE IN GENERAL .................................................. 17
5.3.1. LESSOR PROVISION OF SPARE ENGINE ................................. 18
5.4. PARTS ................................................................... 18
5.5. AIRWORTHINESS DIRECTIVES ................................................ 18
5.6. SERVICE BULLETINS ....................................................... 19
5.7. OPTIONAL MODIFICATIONS .................................................. 19
5.8. REPORTS ................................................................. 19
5.9. RIGHT TO INSPECT ........................................................ 20
5.10. DAMAGE AND REPAIRS ..................................................... 20
5.11. AIRCRAFT DOCUMENTS ..................................................... 20
5.11.1. AIRWORTHINESS DIRECTIVES ........................................ 21
5.11.2. LIFE LIMITED COMPONENTS ......................................... 21
5.11.3. DAMAGE AND REPAIRS .............................................. 21
5.12. POSSESSION ............................................................. 21
5.13. ASSIGNMENT OF WARRANTIES ............................................... 23
SECTION 6. RETURN OF THE AIRCRAFT ................................................. 23
6.1. RETURN .................................................................. 23
6.2. LEASE CONTINUES ......................................................... 23
6.3. RETURN OF ENGINES AND APPLIANCES ........................................ 24
6.4. CONDITION OF AIRCRAFT ................................................... 24
6.4.1. OPERATING CONDITION .............................................. 24
6.4.2. CLEANLINESS STANDARDS ............................................ 24
6.4.3. CERTIFICATE OF AIRWORTHINESS ..................................... 24
6.4.4. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS ........................ 25
6.4.5. DEFERRED MAINTENANCE ............................................. 25
6.4.6. CORROSION TREATMENT .............................................. 25
6.4.7. CONFIGURATION AND CONDITION ...................................... 25
6.5. CONDITION OF AIRFRAME ................................................... 25
6.5.1. C CHECK .......................................................... 25
6.5.2. D CHECK .......................................................... 26
6.5.3. PARTS ............................................................ 26
6.5.4. FUSELAGE WINDOWS AND DOORS ....................................... 26
6.5.5. WINGS AND EMPENNAGE .............................................. 26
6.5.6. INTERIOR ......................................................... 26
6.5.7. COCKPIT .......................................................... 26
6.6. CONDITION OF LANDING GEAR ............................................... 26
6.7. CONDITION OF AUXILIARY POWER UNIT ("APU") ............................... 27
6.8. CONDITION OF ENGINES .................................................... 27
6.9. HISTORICAL RECORDS; TREND MONITORING DATA ............................... 27
6.10. INSPECTIONS ............................................................ 27
6.11. ACCEPTANCE ............................................................. 28
6.12. DISCREPANCY CORRECTION; FINANCIAL SETTLEMENT ........................... 28
<PAGE>
6.13. AIRCRAFT DOCUMENTS ..................................................... 28
6.14. SERVICE BULLETIN KITS .................................................. 28
6.15. LESSEE'S SPECIAL EXTERIOR MARKINGS ..................................... 28
6.19. DISPUTES ............................................................... 29
SECTION 7. LIENS .................................................................. 29
SECTION 8. TAXES .................................................................. 29
8.1. TAX INDEMNITY ........................................................... 29
8.2. WITHHOLDING ............................................................. 31
8.3. AFTER-TAX PAYMENT ....................................................... 32
SECTION 9. RISK OF LOSS; EVENT OF LOSS; REQUISITION FOR USE ....................... 32
9.1. RISK OF LOSS ............................................................ 32
9.2. AIRFRAME EVENT OF LOSS .................................................. 32
9.3. ENGINE EVENT OF LOSS .................................................... 33
9.4. REQUISITION ............................................................. 33
SECTION 10. INSURANCE ............................................................. 33
10.1. REPORTS ................................................................ 33
10.2 LESSOR MAINTAINING INSURANCES ........................................... 34
10.3 INSURANCE PROCEEDS ...................................................... 34
10.4 PROPERTY INSURANCE ...................................................... 34
10.5. LIABILITY INSURANCE .................................................... 35
10.6. PROVISIONS RELATING TO ALL INSURANCES .................................. 35
SECTION 11. THE LESSOR'S RIGHT TO PERFORM FOR THE LESSEE .......................... 36
SECTION 12. FURTHER ASSURANCES .................................................... 37
SECTION 13. EVENTS OF DEFAULT ..................................................... 37
13.1. FAILURE TO PAY BASIC RENT .............................................. 37
13.2. FAILURE TO PAY SUPPLEMENTAL RENT ....................................... 37
13.3. FAILURE TO MAINTAIN INSURANCE .......................................... 37
13.4. MISREPRESENTATION OR BREACH OF WARRANTY ................................ 37
13.5. BANKRUPTCY, ETC. ....................................................... 37
13.6. GENERAL DEFAULT ........................................................ 38
13.7. LOSS OF AIRLINE OR CORPORATE AUTHORITY ................................. 38
13.8. OTHER OBLIGATIONS ...................................................... 38
13.9. GUARANTOR DEFAULT ...................................................... 38
SECTION 14. REMEDIES .............................................................. 38
14.1. RETURN AND REPOSSESSION ................................................ 38
14.2. SALE, USE, ETC ......................................................... 39
14.3. LIQUIDATED DAMAGES; FAIR MARKET RENTAL ................................. 39
14.4. CANCELLATION, TERMINATION, AND RESCISSION .............................. 39
14.5. OTHER REMEDIES ......................................................... 39
<PAGE>
SECTION 15. GENERAL INDEMNITY AND EXPENSES ........................................ 40
15.1. GENERAL INDEMNITY ...................................................... 40
15.2. LEGAL FEES AND EXPENSES ................................................ 41
SECTION 16. ASSIGNMENT AND ALIENATION ............................................. 41
SECTION 17. NOTICES ............................................................... 42
SECTION 18. NO SET-OFF, COUNTERCLAIM, ETC ......................................... 42
SECTION 19. GOVERNING LAW ......................................................... 43
19.1. CONSENT TO JURISDICTION ................................................ 43
19.2. CHOICE OF LAW .......................................................... 43
SECTION 20. MISCELLANEOUS ......................................................... 43
SECTION 21. TRUTH-IN-LEASING ...................................................... 45
EXHIBIT A: FORM OF LEASE SUPPLEMENT AND RECEIPT ................................... 46
EXHIBIT B: FORM OF AIRCRAFT RETURN RECEIPT AND LEASE
TERMINATION .................................................................. 52
EXHIBIT C: FORM OF LETTER OF CREDIT ............................................... 56
</TABLE>
<PAGE>
AIRCRAFT LEASE AGREEMENT
This AIRCRAFT LEASE AGREEMENT dated as of March 15, 1996 between
INVESTORS ASSET HOLDING CORP., a Massachusetts corporation, not in its
individual capacity but solely as owner trustee for the benefit of Airfund II
International Partnership, a Massachusetts limited partnership pursuant to a
Trust Agreement dated as of December 10, 1989, with its principal place of
business at 98 North Washington Street, Boston, Massachusetts 02114 ("Lessor"),
and PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES, a Texas corporation, with its
principal place of business at 2700 Post Oak Boulevard, Suite 2200, Houston,
Texas 77056 ("Lessee"),
WHEREAS, the Lessee desires to lease from the Lessor and the Lessor
is willing to lease to the Lessee the aircraft described herein upon and subject
to the terms and conditions of this Lease;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the Lessee and Lessor agree as follows:
SECTION 1. DEFINITIONS. The following terms shall have the following
meanings for all purposes of this Lease:
"AIRCRAFT" means the Airframe, Engines, Appliances, and the Aircraft
Documents. Engines and Appliances shall be deemed part of the "Aircraft" whether
or not from time to time attached to the Airframe or to another airframe or on
the ground.
"AIRCRAFT DOCUMENTS" has the meaning given such term in Section 5.11
hereof.
"AIRFRAME" means the Boeing model 727-251 airframe, manufacturer serial
number 21159, registration mark N280US, and component Parts thereof (including
landing gear) so long as such Parts shall be either incorporated or installed in
or attached to the Airframe or required to be subject to this Lease as provided
in Section 5 hereof.
"AIRWORTHINESS DIRECTIVE" means any airworthiness directive or other
mandatory regulation, directive or instruction that the Aviation Authority may
from time to time issue and that is required to be carried out on airframes,
engines or appliances of the same type as the Airframe, Engines, or Appliances
in order to meet the requirements of Aviation Law for the commercial
transportation of passengers or cargo.
"APPLIANCE" means any instrument, mechanism, equipment, apparatus,
appurtenance, or accessory, including communications equipment and auxiliary
power units, that is used or intended to be used in operating or controlling the
Aircraft in flight, and is installed in or attached to the Aircraft, but is not
part of the Airframe or Engines, and component Parts thereof, so long as the
same shall be either incorporated or installed in or attached to such Appliance
or required to be subject to this Lease as provided in Section 5 hereof.
<PAGE>
"APPLICABLE LAW" means, without limitation, all applicable laws, treaties,
international agreements, decisions and orders of any court, arbitration or
governmental agency or authority and rules, regulations, orders, directives,
licenses and permits of any governmental body, instrumentality, agency or
authority, including, without limitation, the law of the Commonwealth of
Massachusetts, and such laws of the United States which prohibit trade with
enemies of the United States.
"APPROVED MAINTENANCE PROGRAM" means the maintenance program of Sun
Country Airlines, or another maintenance program applicable to the Aircraft
meeting the respective Airframe, Engine, and Appliance manufacturer's
recommendations, encompassing scheduled maintenance, condition monitored
maintenance, and on-condition maintenance of Airframe, Engines and Appliances,
including, but not limited to, servicing, testing, preventive maintenance,
repairs, structural inspections, systems checks, approved modifications, service
bulletins, engineering orders, Airworthiness Directives, corrosion control
inspections and treatments, and which meets the Aviation Law requirements for
commercial airline passenger operations and is approved by the appropriate
Aviation Authority officer having responsibility for Lessee's operations and
maintenance of the Aircraft.
"AVIATION AUTHORITY" means the Federal Aviation Administration of the
United States Department of Transportation or any successor agency, or any such
other governmental authorities from time to time vested with the control and
supervision of the Aviation Law, or having jurisdiction over the registration,
airworthiness, operation of or other matters relating to the Aircraft or civil
aviation in the United States.
"AVIATION LAW" means the Applicable Law of United States including all
regulations promulgated by the Aviation Authority pursuant to Aviation Law, as
amended from time to time, respecting the ownership and operation of aircraft
registered or operated in the United States.
"BASIC RENT" means the rent payable for the Aircraft pursuant to Section
3.2 hereof.
"BENEFICIARY" means Airfund II International Partnership, a Massachusetts
limited partnership with its principal place of business at 98 North Washington
Street, Boston, Massachusetts 02114.
"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day on
which commercial banking institutions are authorized to be closed by Applicable
Law in Boston, Massachusetts, or Houston, Texas.
"C CHECK" means the inspection, overhaul, repair, preservation and
replacement of Parts of the Aircraft, including preventive maintenance,
identified as a full block C Check under the Airframe manufacturer's maintenance
manuals and planning documents. Such full block C Check shall include all
structural inspections, corrosion control and other work normally completed in
conjunction with each block C Check.
2
<PAGE>
"D CHECK" means the inspection, overhaul, repair, preservation and
replacement of Parts of the Aircraft, including preventive maintenance,
identified as a full block D Check under the Airframe manufacturer's maintenance
manuals and planning documents, which is also known as a "C 10" check in the
Boeing maintenance planning document. Such full block D Check shall include all
structural inspections, corrosion control and other work normally completed in
conjunction with such block D Check.
"DEFAULT" means an event which with the passage of time or the giving of
notice, or both, would constitute an Event of Default.
"DELIVERY DATE" has the meaning given such term in Section 2.2 hereof.
"DELIVERY LOCATION" has the meaning given such term in Section 2.2 hereof.
"ENGINE" means each of three Pratt & Whitney model JT8D-15A engines,
serial numbers 696494, 700820, and 696558, or any other engine which may from
time to time replace an Engine leased hereunder in accordance with the terms
hereof, and component Parts thereof, so long as the same shall be either
incorporated or installed in or attached to such Engine or required to be
subject to this Lease as provided in Section 5 hereof.
"EVENT OF DEFAULT" has the meaning given such term in Section 13 hereof.
"EVENT OF LOSS" shall mean any of the following events with respect to any
property:
(i) loss of such property due to theft, disappearance, destruction,
damage beyond economic repair or rendition of such property permanently
unfit for normal use for any reason;
(ii) any damage to such property which results in an insurance
settlement with respect to such property on the basis of an actual,
constructive, agreed, arranged, or compromised total loss; or
(iii) the condemnation, confiscation or seizure of, or requisition
of title to such property by private persons or by any governmental or
purported governmental authority (but excluding requisition for use or
hire not involving requisition of title, provided such requisition for use
or hire, does not continue for more than sixty days).
"EXPIRY" shall mean any of the following: (i) expiration of the Term
through the passage of time in accordance with the terms of this Lease, or (ii)
termination, cancellation, or rescission of the Lease in accordance with its
terms and in accordance with Applicable Law.
"GUARANTOR" means one or more guarantors reasonably satisfactory to the
Lessor.
3
<PAGE>
"GUARANTY" means a guaranty made by the Guarantor in favor of the Lessor
in form and substance reasonably satisfactory to the Lessor.
"INDEMNITEE" means (i) the Lessor; the Beneficiary and each partner
comprising the Beneficiary; (ii) any Lender; (iii) Equis Financial Group, a
Massachusetts general partnership, and (iv) their respective successors,
assigns, representatives, employees, officers, directors and agents, and each of
them.
"LEASE" shall mean this Aircraft Lease Agreement, as supplemented by the
Lease Supplement and Receipt, and as may be amended in accordance with Section
20 hereof.
"LEASE SUPPLEMENT AND RECEIPT" shall mean a Lease Supplement and Receipt,
substantially in the form of Exhibit A hereto.
"LENDER" shall mean any holder of a security interest in the Aircraft
and/or assignee of this Lease (or any interest therein), which security interest
and/or assignment was acquired in exchange for financing provided to Lessor to
acquire the Aircraft or to refinance Lessor's acquisition of the Aircraft.
"LESSOR LIENS" means Liens which result from claims against or affecting
the Lessor not related to the transactions contemplated by this Lease, or any
Lien which Lessor has caused to be placed on the Aircraft as permitted pursuant
to Section 19 hereof.
"LIEN" means any mortgage, security interest, lease or other charge or
encumbrance or claim or right of others, including, without limitation, rights
of others under any airframe, appliance or engine interchange or pooling
agreement.
"LIFE LIMITED COMPONENT" means any Part that is required either by the
Airframe, Engine, Appliance, or Part manufacturer or by the Aviation Authority
or by the Approved Maintenance Program to be overhauled or replaced after a
certain number of hours, calendar time, cycles, or landings, including without
limitation life-limited parts, rotables, and discard items.
"MAINTENANCE PROVIDER" means Sun Country Airlines, or a recognized
service, overhaul and repair agency fully qualified to service, repair and
overhaul the Airframe, Engines and Appliances approved by the Aviation
Authority, as selected by Lessee and approved in writing by Lessor.
"OPERATIVE DOCUMENTS" means this Lease (including a Lease Supplement and
Receipt), the Guaranty, the Other Lease, and any ancillary documents executed in
connection therewith.
"OTHER AIRCRAFT" means that certain Boeing model 727-251 aircraft,
manufacturer serial number 21160, and registration mark N281US, which Other
Aircraft is covered by the Other Lease.
4
<PAGE>
"OTHER LEASE" means that certain Aircraft Lease Agreement, dated as of
March 15, 1996, between First Security Bank of Utah, N.A., not in its individual
capacity but sole as owner trustee, as lessor, and Lessee, as lessee, covering
the Other Aircraft.
"OVERDUE PAYMENT RATE" means 18% per annum.
"PARTS" means all components, parts, instruments, appurtenances,
accessories, furnishings or other equipment of whatever nature (other than
complete engines or appliances) which may from time to time be incorporated or
installed in or attached to the Airframe or any Engine or any Appliance,
including replacement parts.
"PERMITTED LIENS" means: (i) Lessor Liens; (ii) Liens for Taxes; (iii)
materialmen's, mechanics', workmen's, repairmen's, employees' or other like
Liens arising in the ordinary course of business, including (without limitation)
Liens in respect of airport user and en route charges; and (iv) Liens arising
out of judgments or awards; provided, however, that with respect to foregoing
clauses (ii), (iii), and (iv), the payments associated with the Liens described
therein are either not yet due or being contested in good faith (and for the
payment of which adequate reserves have been provided) by appropriate
proceedings so long as such proceedings in the opinion of the Lessor do not
involve any danger of the sale, forfeiture, confiscation, seizure or loss of the
Airframe or any Engine or interest therein.
"RENT" means Basic Rent, Reserves, and Supplemental Rent.
"RENT PAYMENT DATE" means the day of each calendar month following the
Delivery Date which corresponds to the Delivery Date (or, if any such month does
not have such a corresponding day then the last day of such month) during the
Term.
"RESERVES" has the meaning given to such term in Section 3.6 hereof.
"RESERVE TASKS" has the meaning given to such term in Section 3.6 hereof.
"RETURN DATE" has the meaning given to such term in Section 6.1 hereof.
"RETURN LOCATION" has the meaning given to such term in Section 6.1
hereof.
"SECURITY DEPOSIT" has the meaning given to such term in Section 3.5
hereof.
"STIPULATED LOSS VALUE" has the meaning given to such term in Section
10.4.1 hereof.
"SUPPLEMENTAL RENT" means all amounts, liabilities, indemnifications and
obligations of any kind whatsoever (other than Basic Rent but including any
payment of Stipulated Loss Value or any amount calculated by reference thereto)
which the Lessee is obligated to pay in accordance with the terms of this Lease.
5
<PAGE>
"TAX" has the meaning given to such word in Section 8.1 hereof.
"TERM" means the Initial Term, as defined in Section 3.1.1 hereof,
together with any extensions provided in Section 3.1.2.
"US$ AND DOLLARS" means the lawful currency of the United States.
SECTION 2. LEASE AND DELIVERY OF THE AIRCRAFT.
2.1. LEASE, LESSEE'S OBLIGATIONS, AND CONDITIONS PRECEDENT.
The Lessor agrees to lease to the Lessee, and the Lessee agrees to lease
from the Lessor, the Aircraft, on the terms and conditions of this Lease.
(x) On or before the Delivery Date, the Lessor shall deliver the Aircraft
in the following condition: (1) fresh from C Check and D Check; (2) with Aging
Aircraft Modification Service Bulletins 55-71, 53-144, and 53-159 completed; (3)
current under an approved Corrosion Prevention and Control Program (4) with all
Airworthiness Directives cleared for no less than 3,000 hours or one year; (5)
with all installed Airframe Life Limited Components (excluding landing gear)
cleared for a minimum of 3,000 hours (or zero time in the case of an Airframe
Life Limited Component with a total useful life of less than 3,000 hours), or
365 days in the case of an Airframe Life Limited Component controlled by
calendar time, in each case as required by the Northwest Airlines maintenance
program; provided, however, that the Lessor shall not be responsible for delays
arising out of an occurrence of a force majeure.
(y) The Lessee's obligation to lease the Aircraft shall be conditioned
upon the Aircraft not having suffered an Event of Loss prior to the Delivery
Date, and being in the following condition (the "Conditions Precedent to
Lessee's Acceptance") at Lessor's expense: (1) with 170 same-class seats
installed; (2) with a refurbished passenger interior; (3) with windshear
detection installed; (4) with the fuselage painted all white and the wings
painted gray; (5) with an eleven parameter digital flight data recorder
installed; (6) with maximum take-off weight upgraded to 194,500 pounds and zero
fuel weight increased to 141,000 pounds; (7) with a current and valid
certificate of airworthiness issued by the Aviation Authority; and (8) with all
systems operating normally. The Lessee shall be entitled to a predelivery
inspection of the Aircraft that shall include a full borescope and power
assurance check on all Engines and the auxiliary power unit and a test flight,
all at Lessor's expense. At any such predelivery inspection and flight Lessee's
representatives may be accompanied by an Aviation Authority Designated
Airworthiness Representative. Lessor shall exercise reasonable efforts to cause
the Aircraft to meet the Conditions Precedent to Lessee's Acceptance on the
Delivery Date. In the event that the Aircraft does not meet the Conditions
Precedent to Lessee's Acceptance on the Delivery Date, then Lessee shall have
the right to terminate this agreement by written notice to Lessor. In no event
shall Lessor be liable to Lessee for breach of contract or consequential damages
if the Aircraft does not meet the Conditions Precedent to Lessee's Acceptance.
6
<PAGE>
The Lessor's obligation to lease the Aircraft shall be conditioned upon
the absence of any Default hereunder, the absence of any materially adverse
change in the Lessee's financial condition or prospects from the date of this
Lease to the Delivery Date, and the performance by Lessee of each of the
following obligations on or before the Delivery Date (unless a sooner date is
specified), all in form and substance satisfactory to Lessor and its counsel:
2.1.1. EXECUTION OF OPERATIVE DOCUMENTS. The Lessee shall have
executed and delivered this Lease, the Lease Supplement and Receipt (dated
the Delivery Date), and each other Operative Document to which it is a
party, and each Guarantor shall have executed and delivered the Guaranty,
including written directions for notices to the Guarantor;
2.1.2. EVIDENCE OF LEGAL AUTHORITY TO LEASE AND OPERATE THE
AIRCRAFT. [INTENTIONALLY OMITTED];
2.1.3. EVIDENCE OF CORPORATE AUTHORITY. The Lessee shall have
delivered to the Lessor certified resolutions of the board of directors of
the Lessee and each Guarantor, duly authorizing the execution, delivery
and performance of this Lease, the other Operative Documents to which the
Lessee or either Guarantor is a party, and other satisfactory evidence as
may be requested by Lessor that the Lessee and each Guarantor have taken
all corporate action necessary to authorize the Operative Documents and
the transactions contemplated hereby, together with an incumbency
certificate as to the person or persons authorized to execute and deliver
the same;
2.1.4. EVIDENCE OF INSURANCE. The Lessee shall have delivered to the
Lessor reports and certificates of insurance in compliance with the
requirements of Section 10 hereof;
2.1.5. OPINION OF COUNSEL. At Lessee's expense, the Lessor shall
have received a favorable opinion addressed to Lessor from counsel to
Lessee, dated the Delivery Date and in form and substance reasonably
satisfactory to the Lessor;
2.1.6. PAYMENT OF SECURITY DEPOSIT. Lessor shall have received
payment of the Security Deposit.
2.2. DELIVERY. The Aircraft shall be delivered to the Lessee "AS IS,"
"WHERE IS," AND SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND
REPRESENTATION AS SET FORTH IN SECTIONS 4.3 HEREOF. Lessee shall accept delivery
of the Aircraft at Smyrna Airport, Smyrna, Tennessee, or such other place as may
be mutually agreed upon in writing by the Lessor and Lessee (the "Delivery
Location") and on a date as soon as practicable (the "Delivery Date", which date
shall be the date of the Lease Supplement and Receipt). Upon tender of delivery
hereunder by the Lessor, Lessee shall immediately inspect the Aircraft and
accept delivery of the Aircraft. Upon acceptance of the Aircraft, the Lessee
shall execute and deliver the Lease Supplement and Receipt to the Lessor,
7
<PAGE>
which shall constitute, without further act, unconditional and irrevocable
acceptance by the Lessee of the Aircraft under, and for all purposes of, this
Lease and as being airworthy, in accordance with specifications, in good working
order and repair and without defect or inherent vice in condition, design,
operation or fitness for use, whether or not discoverable by the Lessee on the
Delivery Date. There shall be attached to the Lease Supplement and Receipt
Schedule 3.1 signed by both parties, setting forth qualifications affecting the
return conditions set forth in Section 6 hereof.
SECTION 3. TERM AND RENT.
3.1. TERM.
3.1.1. INITIAL TERM. The term for which the Aircraft is leased
hereunder (the "Term") shall be twenty-nine (29) months, commencing on the
Delivery Date, unless Expiry occurs sooner pursuant to the express
provisions of this Lease.
3.1.2. EXTENSIONS. Provided in each case that no Event of Default
has occurred and is continuing, that no material adverse change has
occurred to the financial condition of Lessee or either Guarantor, and
that Lessee has provided Lessor with irrevocable written notice sixty days
in advance, then Lessee, may, at its option, extend the Term beyond the
Initial Term as follows: (i) up to a time to coincide with the expiration
of the then-current C Check; and/or (ii) if the Lessee elects to install
hushkits in accordance with Section 3.7 hereof, for an additional sixty
(60) months from the first Rent Payment Date following hushkit
installation.
3.2. BASIC RENT. The Lessee shall pay to the Lessor monthly rental for the
Aircraft (the "Basic Rent"), payable in advance on each Rent Payment Date during
the Term, in the amount of Eighty Thousand United States Dollars (US$80,000) for
the second through the nineteenth months of the Term, and in the amount of
Seventy Thousand United States Dollars (US$70,000) for the twentieth through the
twenty-ninth months of the Term; provided, however, that if the Lessee elects to
install hushkits in accordance with Section 3.7 hereof, the Lessee shall pay
Basic Rent in the amount of One Hundred Fifteen Thousand United States Dollars
($115,000), subject to adjustment as set forth in Section 3.7, from the first
Rent Payment Date following hushkit installation for the remainder of the Term
(i.e., sixty months). Basic Rent to cover an extension of the Term less than a
calendar month to coincide with expiration of the then-current C Check shall be
calculated per diem. Basic Rent shall be abated during the first month of the
Term.
3.3. METHOD OF PAYMENT. All Rent hereunder shall be paid by the Lessee not
later than 2:00 P.M., North Carolina time, on the date due thereof in U.S.
Dollars and in immediately available funds to the Lessor by deposit to:
8
<PAGE>
National Westminster Bank
80 Pine Street
New York, New York 10005
ABA#021-000-322
Acct.#2181-01-7585
Acct. Name: Equis Financial Group
Reference: AFG TransMeridian
or to such other account as the Lessor shall specify to the Lessee in writing.
Any Rent due on a day which is not a Business Day shall be due on the next
Business Day.
3.4. SUPPLEMENTAL RENT. The Lessee also agrees to pay to the Lessor any
and all Supplemental Rent promptly as the same shall become due and owing. In
the event of any failure on the part of the Lessee to pay any Supplemental Rent,
the Lessor shall have all rights, powers and remedies provided for herein or by
law or equity in the case of nonpayment of Basic Rent. The Lessee will also pay,
on demand, as Supplemental Rent, an amount equal to interest at the Overdue
Payment Rate on any part of any payment of Rent not paid on the date it becomes
due for any period for which the same shall be overdue.
3.5. SECURITY DEPOSIT. Upon the execution of this Lease, Lessee shall make
a deposit, in cash, with Lessor or deliver to Lessor a letter of credit in favor
of Lessor, in an amount equal to One Hundred Sixty Thousand United States
Dollars (US$160,000) to serve as security for Lessee's full and faithful
performance of all of its obligations under this Lease (the "Security Deposit").
If Lessee fails to pay Rent or any other sums due or fails to perform any of the
other terms or provisions of this Lease or is otherwise in Default hereunder, in
addition to all other rights Lessor shall have, Lessor may use, apply or retain
all or any portion of the Security Deposit in partial payment for any sums it
may in its discretion advance as a result of a Default by the Lessee or to apply
toward losses or expenses Lessor may suffer or incur as a result of such
Default. If Lessor uses or applies all or any portion of the Security Deposit,
such application shall not be deemed a cure of any Default, and Lessee shall
immediately upon receipt of written demand from Lessor pay an amount necessary
to restore the Security Deposit to its required amount, and the failure to do so
shall be an Event of Default without further notice. In the event that the
Lessee does not make timely payments of Basic Rent in any two consecutive months
during the Term, the Lessor, without limitation to any other rights and remedies
hereunder, may on each such occasion require the Lessee to increase the Security
Deposit by an amount equal to one payment of Basic Rent.
3.5.1. The Security Deposit shall remain in effect until after the
Aircraft is returned in the condition required by this Lease. Any letter
of credit shall have a stated termination date thirty days after
expiration of the Term. Lessee shall not be entitled to off-set any Rent
against the Security Deposit. After the return of the Aircraft in the
condition required by this Lease, Lessor shall return the Security
Deposit, without interest, provided that Lessee has otherwise fulfilled
all its obligations hereunder.
9
<PAGE>
3.5.2. If Lessee shall provide a letter of credit, it must (A) be
issued or confirmed by a United States money center bank acceptable to
Lessor in its sole discretion; (B) provide that it is irrevocable; (C)
provide that it shall be automatically extended throughout the Term and
until thirty days after expiration of the Term, unless eighty days prior
to expiration of the letter of credit the issuing or confirming bank
notifies Lessor in writing by registered mail, return receipt requested,
that the letter of credit shall expire; (D) be available by sight payment;
(E) provide for partial draws; and (F) be substantially in the form
attached hereto as Exhibit C. Lessor shall be entitled to draw the entire
amount of the letter of credit (i) upon an Event of Default, including,
without limitation, failure of Lessee to accept delivery of or lease the
Aircraft in accordance herewith; or (ii) if it receives notice by the
issuing bank or Lessee that the letter of credit shall expire, or not be
renewed as required hereunder during the Term of this Lease and until
thirty days after expiration of the Term and it has not been replaced or
extended within sixty (60) days prior to its expiration. In addition to
any other amounts Lessee shall pay hereunder, Lessee shall pay all costs
of maintaining the letter of credit and pay Lessor any expenses incurred
in exercising its rights to draw on such letter of credit, including any
attorney's fees required to enforce its rights.
3.6. RESERVES. D Checks; C Checks; Engine HSI, EHM1 and EHM2; landing gear
overhauls; and APU shop visits are collectively and individually referred to as
"Reserve Tasks." In addition to monthly installments of Basic Rent, Lessee shall
pay to Lessor an hourly payment to be reserved for Reserve Tasks as follows:
3.6.1. The Lessee shall, on or before the 10th day of each month
during the Term of this Lease, submit to Lessor a true summary of the
Aircraft usage for the preceding month, specifying the number of flight
hours the Aircraft shall have flown in such month. Such usage shall be
determined by Lessee by reference to the Aircraft operating logs, subject
to audit and verification by Lessor. On or before the 15th day of each
month, Lessee shall pay to Lessor for each flight hour the Aircraft was
operated during the immediately preceding month the following amounts
applicable to the specified Reserve Tasks: for D Check, US$50; for C
Checks, US$50; for Engine HSI, EHM1 or EHM2 US$60 per Engine, and
applicable per specific Engine (a separate Engine Reserve shall be
established and maintained for each Engine); for complete landing gear
overhaul, US$12, combined for all landing gear; and for APU shop visits,
US$3. The foregoing amounts shall be collectively or individually referred
to as "Reserves." Reserves applicable to an Engine shall be payable only
for flight hours such Engine is operated; provided that Reserves shall be
applicable to the spare engine provided by Lessor pursuant to Section
5.3.1.
3.6.2. Lessee shall obtain Lessor's prior written approval of
Reserve Tasks and the cost thereof. Upon submission by Lessee to Lessor of
invoices or receipts evidencing the performance of a Reserve Task in
accordance with the provisions hereof, Lessor shall, provided that an
Event of Default shall not have occurred and be continuing, promptly
reimburse Lessee from Reserves corresponding to the Reserve Task, but not
10
<PAGE>
in an amount to exceed the actual invoices or receipts, and not in excess
of Reserves actually received for the corresponding Reserve Task, and not
for repairs arising as a result of foreign object damage, an insured
occurrence, or operational mishandling. Except as expressly set forth
below in subsection 3.6.4, if, on any occasion, Reserves actually received
are insufficient to pay for the corresponding Reserve Task, the shortfall
shall be for the account of the Lessee and may not be carried forward or
made the subject of any further claim for payment.
3.6.3. Reserves shall be and remain the property of the Lessor until
disbursed. All undisbursed Reserves, upon Expiry, shall be retained by
Lessor as additional Rent for the Aircraft. Lessor shall be under no
obligation to segregate Reserves, and may mingle Reserves with other
funds.
3.6.4. LESSOR CONTRIBUTION FOR RESERVE TASKS. Only for the first
Reserve Task for each Engine during the Term, the Lessor shall be
responsible for any expense in excess of Reserves actually received
necessary to restore the Engine to no less than 7,000 hours and 3,000
cycles. Lessor, at its option, may substitute a serviceable engine, which
shall become a replacement Engine, in lieu of bearing the expense for
restoring an Engine.
3.7. HUSHKITS. Lessee may elect to hushkit the Aircraft, subject to the
following terms and conditions: (i) Lessee shall provide Lessor with reasonably
advance irrevocable written notice of its election to hushkit the Aircraft after
the twenty-fourth month of the Term; (ii) no Event of Default shall have
occurred and be continuing; (iii) no material adverse change in the financial
condition of the Lessee or either Guarantor shall have occurred; (iv) the Lessor
shall pay for the acquisition and installation of the hushkits directly or shall
reimburse the Lessee for the same up to a maximum of Two Million Seven Hundred
Thousand Dollars ($2,700,000), and the Lessee shall pay any costs related to the
hushkits of the installation thereof in excess of such amount; (v) the Term
shall be extended in accordance with Section 3.1.2 above; (vi) the Basic Rent
shall be increased in accordance with Section 3.2 above; and (vi) title to the
hushkits shall transfer to Lessor. Provided, however, the Lessor's obligation to
purchase and install hushkits shall be conditioned upon the Lessor's ability to
acquire and install the hushkits for a total price to Lessor of $2,700,000 and
to finance 100 per cent of such price at an interest rate of Citibank prime plus
one over five years; further provided, that if the foregoing conditions
precedent are not met, the Lessor's obligation to purchase and install the
hushkits shall be subject to a mutually agreeable adjustment to the Basic Rent
amount following hushkit acquisition and installation. Provided Lessor has
approved in advance the schedule for installation of the hushkits, Rent shall be
abated during hushkit installation.
SECTION 4. REPRESENTATIONS; WARRANTIES AND MISCELLANEOUS COVENANTS.
11
<PAGE>
4.1. THE LESSEE'S REPRESENTATIONS AND WARRANTIES. The Lessee represents
and warrants as follows:
4.1.1. ORGANIZATION AND QUALIFICATION. The Lessee is a corporation
duly incorporated in and validly existing under the laws of Texas,
possessing perpetual corporate existence, having the capacity to sue and
be sued in its own name, has full power, legal right and authority
(corporate and otherwise) to carry on its business as currently conducted,
to own and hold under lease its properties and to execute, deliver and
perform and observe the provisions of this Lease and other Operative
Documents to which it is a party, and is duly qualified to do business in
good standing wherever the nature of its business makes such qualification
necessary.
4.1.2. CORPORATE AUTHORIZATION. The execution, delivery, and
performance by the Lessee of this Lease and each of the other Operative
Documents to which it is or will be a party (A) have been duly authorized
by all necessary corporate action on behalf of the Lessee, (B) do not
require the consent or approval of the Lessee's stockholders or of any
trustee or the holders of any indebtedness or obligations of the Lessee
(except such as have been obtained, and certified copies of which have
been furnished to the Lessor), (C) do not contravene any existing
Applicable Law to which the Lessee is subject, (D) do not conflict with or
result in any breach of any of the terms or constitute a default under any
document, instrument, or agreement to which the Lessee is a party or is
subject or by which it or any of its assets are bound, (E) do not
contravene the Lessee's charter or by-laws, or any other provisions of
Lessee's constitutive documents, and (F) do not and will not result in the
creation or imposition of or oblige Lessee to create any Lien on or over
the Aircraft other than any Permitted Lien.
4.1.3. GOVERNMENT APPROVAL. Excepting only requirements covered in
Section 4.4.6 below, every consent, authorization, and approval required
by the Lessee to enable it to carry on its business or required by it to
authorize or in connection with the execution, delivery, legality,
validity, priority, enforceability, admissibility in evidence, or
effectiveness of this Lease and the other Operative Documents to which
Lessee is or will be a party or the performance by it of any of its
obligations under this Lease and each of the other Operative Documents to
which it is or will be a party has been duly obtained or made and is in
full force and effect and there has been no default in observance or
performance of any of the conditions, restrictions (if any), imposed on or
in connection with any such consent or approval or sanction. At Delivery,
the Lessee will have and will thereafter maintain valid all necessary
certificates and licenses for the operation of (a) its business as an
airline operating scheduled or charter flights for the carriage of
passengers and cargo and (b) the Aircraft on such flights; the Lessee is
not exempt from the obtaining of any such certificates or licenses usually
required by commercial airline operators.
12
<PAGE>
4.1.4. VALID AND BINDING AGREEMENTS. This Lease constitutes the
legal, valid and binding obligations of the Lessee enforceable against the
Lessee in accordance with their respective terms.
4.1.5. LITIGATION. There are no unsatisfied judgements against
Lessee, and there is no pending or, to the best of the Lessee's knowledge,
threatened action or proceeding affecting the Lessee before any court,
tribunal, governmental agency or arbitrator which may materially adversely
affect the financial condition or operations of the Lessee or the ability
of the Lessee to perform its obligations under the Lease.
4.1.6. FINANCIAL CONDITION. The Lessee is not in default in the
performance of any of its obligations (A) for the payment of indebtedness
for borrowed money or any interest or premium thereon or (B) for the
payment of rent under any lease or agreement to lease real, personal or
mixed property. The Lessee has not taken nor proposes to take any
corporate action nor have any other steps or administrative or legal
proceedings been taken or started or threatened against it for the
winding-up, dissolution, reorganization or amalgamation of the Lessee or
for the appointment of a liquidator, administrator, receiver,
administrative receiver, trustee or similar officer of the Lessee or all
or any of its revenues or assets nor has the Lessee sought any other
relief under any applicable insolvency or bankruptcy law.
4.1.7. ACCURACY AND DISCLOSURE OF INFORMATION. All information
furnished by the Lessee to the Lessor in connection with this Lease and
the Operative Documents and the transactions contemplated hereby and
thereby, was and remains true and correct in all respects and there are no
other facts or considerations the omission of which would render any such
information misleading. The Lessee has fully disclosed in writing to the
Lessor all facts relating to the Lessee which the Lessee knows or should
reasonably know and which might reasonably be expected to influence the
Lessor in deciding whether or not to enter into this Lease and to lease
the Aircraft to the Lessee hereunder.
4.2. REPRESENTATIONS AND WARRANTIES OF THE LESSOR. The Lessor makes the
following representations and warranties:
4.2.1. DUE ORGANIZATION. The Lessor is a corporation duly organized
and validly existing in good standing under the laws of Massachusetts, and
has the power and authority to enter into and perform its obligations
under this Lease and the Lease Supplement and Receipt.
4.2.2. DUE AUTHORIZATION; ENFORCEABILITY. This Lease has been, and
the Lease Supplement and Receipt to which the Lessor is a party will be,
duly authorized, executed and delivered by the Lessor, and, assuming due
authorization, execution and delivery thereof by the other parties hereto
and thereto, are, or in the case of the Lease Supplement and Receipt will
be, legal, valid and binding obligations of the Lessor, enforceable in
accordance with their respective terms.
13
<PAGE>
4.2.3. NO VIOLATION. The execution and delivery by the Lessor of
this Lease are not, and the execution and delivery by the Lessor of the
Lease Supplement and Receipt will not be, and the performance by the
Lessor of its obligations under each of the foregoing documents will not
be, inconsistent with its partnership agreement or by-laws, do not and
will not contravene any law, governmental rule or regulation, judgment or
order applicable to it, and do not and will not contravene any provision
of, or constitute a default under, any indenture, mortgage, contract or
other instrument to which the Lessor is a party or by which it is bound or
require the consent or approval of, the giving of notice to, the
registration with or the taking of any action in respect of or by, any
Federal, state or local governmental authority or agency, except such as
have been obtained, given or accomplished.
4.2.4. OWNERSHIP OF AIRCRAFT. On the Delivery Date, the Lessor shall
have full legal title to the Aircraft, free and clear of all Liens except
any Lien which Lessor caused to be placed on the Aircraft as permitted
pursuant to Section 19 hereof.
4.2.5. CONFIDENTIALITY OF LESSEE INFORMATION. Except as required by
law, Lessor shall keep all Lessee's and the Guarantors' financial
information confidential and not to disclose or reveal any such financial
information to any person other than those employed by Lessor or on
Lessor's behalf who are actively and directly participating in the
evaluation of Lessee.
4.3. DISCLAIMER AND ACKNOWLEDGEMENT OF DISCLAIMER; WAIVER OF CONSEQUENTIAL
DAMAGES.
THE AIRCRAFT SHALL BE LEASED BY THE LESSOR TO THE LESSEE "AS IS" AND
"WHERE IS," WHICH IS ACKNOWLEDGED AND AGREED TO BY THE LESSEE. THE WARRANTIES
AND REPRESENTATIONS SET FORTH IN 4.2 ABOVE ARE EXCLUSIVE AND IN LIEU OF ALL
OTHER REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, AND LESSOR
HAS NOT MADE, SHALL NOT BE CONSIDERED TO HAVE MADE, AND SPECIFICALLY DISCLAIMS
(1) ANY EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY WITH RESPECT TO THE
AIRCRAFT, REGARDING CONDITION, DESIGN, OPERATION, MERCHANTABILITY, FREEDOM FROM
CLAIMS OF INFRINGEMENT OR THE LIKE, FITNESS FOR USE FOR A PARTICULAR PURPOSE,
QUALITY OF MATERIALS OR WORKMANSHIP, OR ABSENCE OF DISCOVERABLE OR
NONDISCOVERABLE DEFECTS; (2) ANY OTHER EXPRESS OR IMPLIED REPRESENTATION OR
WARRANTY WITH RESPECT TO THE AIRCRAFT (INCLUDING ANY IMPLIED WARRANTY ARISING
FROM A COURSE OF PERFORMANCE, COURSE OF DEALING, OR USAGE OF TRADE); AND (3) ANY
EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY WITH RESPECT TO CONDITIONS
PRECEDENT TO LESSEE'S ACCEPTANCE.
THE LESSEE HEREBY WAIVES, RELEASES, DISCLAIMS AND RENOUNCES ALL
EXPECTATION OF OR RELIANCE UPON ANY SUCH WARRANTY OR WARRANTIES.
14
<PAGE>
THE LESSOR SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY TO THE LESSEE
WHETHER ARISING IN CONTRACT OR TORT OUT OF ANY NEGLIGENCE OR STRICT LIABILITY OF
LESSOR OR OTHERWISE, AND LESSEE HEREBY DISCLAIMS AND WAIVES ANY RIGHT IT WOULD
OTHERWISE HAVE TO RECOVER FOR (1) ANY LIABILITY, LOSS OR DAMAGE CAUSED OR
ALLEGED TO BE CAUSED DURING THE TERM DIRECTLY OR INDIRECTLY BY THE AIRCRAFT OR
BY ANY INADEQUACY THEREOF OR DEFICIENCY OR DEFECT THEREIN; (2) THE USE,
OPERATION OR PERFORMANCE OF THE AIRCRAFT OR ANY RISKS RELATING TO IT; OR (3) ANY
CONSEQUENTIAL DAMAGES, INCLUDING THOSE FOR INTERRUPTION OF SERVICE, LOSS OF
BUSINESS OR ANTICIPATED PROFITS, OR FOR CONSEQUENTIAL DAMAGES AS A RESULT OF ANY
BREACH OR ALLEGED BREACH BY THE LESSOR OF ANY OF THE AGREEMENTS, REPRESENTATION,
OR WARRANTIES OF THE LESSOR CONTAINED IN THIS LEASE; PROVIDED, HOWEVER, THAT
NOTHING HEREIN SHALL RELIEVE LESSOR OF ANY RESPONSIBILITY OR LIABILITY TO LESSEE
FOR, OR CONSTITUTE A WAIVER BY LESSEE OF RIGHTS WITH RESPECT TO (a) ANY BREACH
BY LESSOR OF THE COVENANT SET FORTH IN SECTION 4.5 HEREOF, OR (b) LESSOR'S
OBLIGATIONS PURSUANT TO SECTIONS 3.6.4 AND 5.5 HEREOF.
4.4. LESSEE'S MISCELLANEOUS COVENANTS.
4.4.1. MAINTENANCE OF CORPORATE STATUS; NO MERGER OR CONSOLIDATION.
Lessee will preserve and maintain its corporate existence and such of its
rights, privileges, licenses and franchises in any jurisdiction where
failure to obtain such licensing or qualification would have a material
adverse effect upon Lessee. The Lessee shall not consolidate or merge with
or into any other corporation or sell, convey, transfer, lease or
otherwise dispose of, whether in one transaction or a series of related
transactions, any of its assets if the aggregate value thereof represents
all or substantially all of its assets. Lessee shall not (A) voluntarily
suspend its certificated operations; or (B) voluntarily or involuntarily
permit to be revoked, canceled or otherwise terminated all or
substantially all of the franchises, concessions, permits, rights or
privileges required for the conduct of business and operations of Lessee
or the free and continued use and exercise thereof.
4.4.2. NOTICE OF DEFAULT OR ADVERSE OCCURRENCE. The Lessee shall
promptly inform the Lessor of any occurrence of which it becomes aware
which might adversely affect its ability to perform any of its obligations
under this Lease and the other Operative Documents to which the Lessee is
a party or the ability of either Guarantor to perform its obligations
under the Guaranty and, without prejudice to the generality of the
foregoing, it will inform the Lessor of the occurrence of or the existence
of a Default forthwith upon becoming aware of such Default.
4.4.3. MAINTENANCE OF CONSENTS AND APPROVALS. The Lessee shall
obtain or cause to be obtained, maintain in full force and effect and
comply in all material respects with
15
<PAGE>
the conditions and restrictions (if any) imposed on, or in connection
with, every consent, license, authorization, approval, filing and
registration obtained or effected in connection with this Lease and the
Operative Documents, or which may from time to time be necessary under
Applicable Law for the continued due performance of all obligations of the
Lessee under this Lease, including without limitation qualifications to
operate the Aircraft in accordance with Aviation Law, and under the other
Operative Documents. Where it is required under Applicable Law with
respect to this Lease or under any Operative Document, consent, approval,
sanction, to stamp, file, register or attend to any act, matter or thing,
Lessee will do so promptly and within any applicable prescribed time
period in respect thereof.
4.4.4. CHANGE OF LOCALE. Lessee will not, without prior written
notice to Lessor, change its principal place of business or chief
executive office if there is more than one place of business.
4.4.5. FINANCIAL INFORMATION AND REPORTS, The Lessee shall provide
the Lessor (i) as soon as available after the end of each fiscal year of
each of the Lessee and each Guarantor, the Lessee's and each Guarantor's
respective consolidated balance sheet, together with related statements of
income, retained income and cash flows, all in reasonable detail and
prepared in accordance with Statements on Standards for Accounting and
Review Services issued by the American Institute of Certified Public
Accounts, and reviewed by an unaffiliated auditing firm; and (ii) with
such other information respecting the Lessee's or either Guarantor's
financial condition or operations as the Lessor may from time to time
reasonably request, including without limitation quarterly financial
information after a material adverse change in the financial condition of
Lessee or either Guarantor. The Lessee's fiscal year ends December 31.
Each Guarantor's fiscal year ends October 31.
4.4.6. EVIDENCE OF LEGAL AUTHORITY TO LEASE AND OPERATE THE
AIRCRAFT. No later than thirty days after the Delivery Date, the Lessee
shall have obtained all licenses, permits and approvals required with
respect to the Aircraft by the Aviation Authority or Applicable Law for
the lease of the Aircraft, and for the commercial operation thereof by the
Lessee, and Lessee shall provide Lessor with certified copies of such;
provided, however, that if Lessee is unable to obtain the requisite
approvals by such date despite its diligent efforts to do so, such date
shall be extended, subject to Lessor's consent not to be unreasonably
withheld.
4.5. LESSOR'S COVENANT OF QUIET ENJOYMENT. The Lessor agrees that, so long
as no Event of Default shall have occurred and be continuing, neither the Lessor
nor anyone validly claiming through or under the Lessor will take (or fail to
take) any action, the taking (or failure to take)
16
<PAGE>
of which causes interference with the Lessee's peaceful and quiet use, operation
and possession of the Aircraft under this Lease.
SECTION 5. OPERATION, MAINTENANCE, POSSESSION
5.1. TITLE. Title to the Aircraft shall remain vested in Lessor.
5.2. OPERATION. Lessee agrees not to operate the Aircraft unless the
Aircraft is covered by insurance as required by the provisions of Section 10
hereof or contrary to the terms of such insurance. Lessee agrees not to (i)
operate the Aircraft except in a passenger configuration, in commercial or other
operations for which Lessee is duly authorized by the Aviation Authority; or
(ii) use or permit the Aircraft to be used for a purpose for which the Aircraft
is not designed or reasonably suitable. Lessee will not permit the Airframe, an
Engine or Appliance to be maintained, used or operated during the Term in
violation of any Applicable Law, or contrary to any manufacturer's operating
manuals or instructions. Lessee shall pay all costs incurred in the operation of
the Aircraft, including but not limited to flight crews, cabin personnel, fuel,
oil, lubricants, maintenance, insurance, landing and navigation fees, airport
charges, passenger service and any and all other expenses of any kind or nature,
arising directly or indirectly in connection with or related to the use,
movement and operation of the Aircraft by Lessee during the Term, with respect
to obligations incurred during the Term. The obligations of Lessee under this
provision shall survive the end of the Term.
5.3. MAINTENANCE IN GENERAL. Lessee, at its own cost and expense, shall
(i) service, repair, maintain and overhaul the Airframe, each Engine, and each
Appliance so as to keep the same in as good operating condition as when
delivered to Lessee hereunder, and in such operating condition as may be
necessary to enable the airworthiness certification of the Aircraft to be
maintained in good standing at all times under Aviation Law, and (ii) at a
minimum, give the Aircraft the same level of attention and maintenance as the
Lessee affords to the other aircraft in its fleet, including Airworthiness
Directive compliance and level of incorporation, improvements, repairs,
cleanliness, and correction of items of a cosmetic nature (such as hail damage),
and the "build standard" applicable to all Engine shop visits with regard to
both exhaust gas temperature and Life Limited Components, except where the terms
of this Lease dictate higher standards; and (iii) maintain the Aircraft in
compliance with the requirements of the Airframe manufacturer's aging aircraft
and corrosion control program document and supplemental inspection document as
periodically revised. Included within the obligation of maintenance and repair
is the obligation and affirmative undertaking by Lessee to replace from time to
time all worn or defective Parts, to the extent required to cause the Aircraft
to be in an airworthy condition in all respects, and covered by an effective
commercial passenger transport category certificate of airworthiness at all
times except during those periods when the Aircraft is undergoing maintenance or
repairs as required by this Lease. Selection of a Maintenance Provider shall be
subject to Lessor's prior written approval; provided, Lessor consents to Sun
Country Airlines as a Maintenance Provider. All maintenance (other than routine
flight line maintenance) shall be performed by the Maintenance Provider in
accordance with the Approved Maintenance Program, provided that C Checks shall
be supervised by the Maintenance Provider.
17
<PAGE>
5.3.1. LESSOR PROVISION OF SPARE ENGINE. For a period mutually
agreed to in advance in writing, Lessor shall provide at its expense a
spare engine suitable for installation on the Aircraft and on the Other
Aircraft to enable Lessee to accomplish the first Reserve Task on each
Engine and the first Reserve Task on each engine installed on the Other
Aircraft. The Lessee shall pay Reserves for each flight hour such spare
engine is operated in Lessee's service. Lessor, at its option, may
substitute a serviceable engine, which shall become a replacement Engine,
in lieu of providing a spare engine.
5.4. PARTS.
5.4.1. Unless the Airframe, an Engine or an Appliance has suffered
an Event of Loss, Lessee, at its own cost and expense, will during the
Term promptly replace all Parts that may from time to time become worn
out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair
or permanently rendered unfit for use for any reason whatsoever. In
addition, in the ordinary course of maintenance, service, repair, overhaul
or testing, Lessee may remove any Parts, whether or not worn out, lost,
stolen, destroyed, seized, confiscated, damaged beyond repair or
permanently rendered unfit for use, provided that Lessee shall replace
such Parts as promptly as practicable with replacement Parts. All
replacement Parts shall be of the same modification status, shall be free
and clear of all Liens except Permitted Liens and shall be in as good
operating condition as, and shall have a value and utility at least equal
to, the Parts replaced assuming such replaced Parts were in the condition
and repair required to be maintained by the terms hereof.
5.4.2. All Parts at any time removed from the Airframe, an Engine or
an Appliance shall remain the property of Lessor and subject to this
Lease, no matter where located, until such time as such Parts shall be
replaced by Parts that have been incorporated or installed in or attached
to such Airframe, Engine, or Appliance and that meet the requirements for
replacement Parts specified in this Section 5. Immediately upon any
replacement Part becoming incorporated or installed in or attached to such
Airframe, Engine, or Appliance, without further act, (i) title to such
replacement Part shall thereupon vest in Lessor; (ii) such replacement
Part shall become subject to this Lease and be deemed part of such
Airframe, Engine, or Appliance, as the case may be, for all purposes
hereof to the same extent as the Parts originally incorporated or
installed in or attached to such Airframe or Engine or Appliance; and
(iii) title to the replaced Part shall thereupon vest in Lessee, free and
clear of all rights of Lessor and shall no longer be deemed a Part
hereunder.
5.5. AIRWORTHINESS DIRECTIVES. Except as expressly provided below, Lessee
agrees to comply with all Airworthiness Directives which become due during the
Term. All Airworthiness Directives shall be accomplished in strict compliance
with all issuing agency's specific instructions. Lessee shall comply with all
Airworthiness Directives at its sole cost and expense up to a maximum of
US$15,000 per any one Airworthiness Directive and up to a maximum of US$100,000
in the aggregate for any twelve-month period during the Term. If the
18
<PAGE>
Lessee's cost of complying with any Airworthiness Directive that must be
accomplished during the Term exceeds the foregoing maximums, then Lessee may, by
written notice to Lessor, elect not to pay any portion of the cost of complying
with such Airworthiness Directive costing in excess of the foregoing maximums,
in which event Lessor shall have the right to comply with the Airworthiness
Directive at its own expense, or by written notice to the Lessee within 15 days
following receipt of such notice from Lessee, may advise Lessee that Lessor
shall not perform such Airworthiness Directive (the "Excepted AD"), in which
case the Lease shall terminate, effective upon the earlier of the end of the
Term or the final compliance date for the Excepted AD, whereupon the Lessee
shall return the Aircraft to the Lessor in accordance with the provisions of
Section 6 hereof, excepting only the Excepted AD and the C Check required by
Section 6.5.1.
5.6. SERVICE BULLETINS. Lessee agrees, at its sole cost and expense, to
incorporate into the Aircraft all those Airframe, Engine, and Appliance
manufacturer and other vendor service bulletins which Lessee plans to adopt
during the Term for the rest of its 727-200 aircraft fleet. The Aircraft, with
respect to the rest of Lessee's fleet, shall not be discriminated against in
service bulletin compliance or other maintenance matters.
5.7. OPTIONAL MODIFICATIONS. Lessee shall not, without Lessor's prior
written consent, make any major modifications, alterations or additions
(collectively, "Optional Modifications") to the Aircraft. For purposes of this
Section 5, the term Optional Modifications shall include, but shall not be
limited to, (i) changes to the Aircraft structure or performance, and (ii)
changes which could adversely affect spare parts, interchangeability or
replaceability. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, NO
OPTIONAL MODIFICATION SHALL BE MADE WHICH HAS THE EFFECT OF DECREASING THE
UTILITY OR VALUE OF THE AIRCRAFT OR ADVERSELY AFFECTS ITS AIRWORTHINESS OR USE
FOR TRANSPORTING PASSENGERS IN COMMERCIAL SERVICE. All Optional Modifications
shall be accomplished by Lessee at its own expense. Lessee shall provide advance
copies of all drawings and data to be used by Lessee in accomplishing such
Optional Modifications for Lessor's approval prior to such work. In the event
Lessor does not consent to certain Optional Modifications to the Aircraft
desired by Lessee, Lessor may give its qualified consent in writing to Lessee to
accomplish such modifications which are unacceptable to Lessor on the condition
that Lessee agrees to remove all such unacceptable modifications accomplished by
Lessee and to reconstruct the modified areas to their original configuration in
a good and workmanlike manner prior to return of the Aircraft to Lessor. In the
event of Lessor's granting such qualified consent in writing, Lessee shall, at
Lessee's sole expense, accomplish all such Optional Modifications, removal of
such modifications and required reconstruction necessary to return the Aircraft
to Lessor in its original configuration at the end of the Term.
5.8. REPORTS. Lessee shall furnish to Lessor the following reports on
monthly basis: (i) the hours and cycles operated by the Airframe; (ii) the hours
and cycles operated by each of the Engines (noting their location). Lessee shall
furnish to Lessor the following reports on quarterly basis: (iii) scheduled and
unscheduled Engine and Appliance changes; (iv) monthly aircraft
19
<PAGE>
maintenance planning sheet; (v) monthly deferred items carried forward; (vi)
damage reports; (vii) a list of those service bulletins, Airworthiness
Directives and engineering modifications issued during such month and applicable
to the Aircraft, whether or not incorporated on the Aircraft; (viii) copies of
any written communications with manufacturers with respect to defects or
malfunctions of the Aircraft or such other matters; and (ix) C Check, D Check,
and Engine shop visit scheduled dates. In addition, Lessee shall notify Lessor
of all accidents, cases of significant theft or vandalism, extended periods of
Aircraft grounding for cause, and insured occurrences as promptly as
practicable.
5.9. RIGHT TO INSPECT. Lessor and its agents shall have the right to
inspect the Aircraft or the Aircraft Documents at any reasonable time, upon
giving Lessee reasonable notice, to ascertain the condition of the Aircraft and
to satisfy Lessor that the Aircraft is being properly repaired and maintained in
accordance with the requirements of this Lease. All repairs which shall be shown
by the inspection or survey to be required shall be made at Lessee's expense in
accordance with the Approved Maintenance Program. All required repairs shall be
performed as soon as practicable after such inspection. In the event of a
dispute between Lessor and Lessee as to the proper performance by Lessee of the
repairs required hereunder, the decision of the manufacturer of the Airframe,
Engines, Appliances, or Part(s) (as applicable) shall control. Lessee shall be
responsible for payment of all expenses of the manufacturer incurred in
connection with the rendering of its decision. Lessor shall have no duty to make
any such inspection and shall not incur any liability or obligation by reason of
not making such inspection.
5.10. DAMAGE AND REPAIRS. All damage to the Aircraft shall be documented
and any repair to the Aircraft shall be documented and accomplished pursuant to
the applicable manufacturer's structural repair manual instructions and (where
applicable) the Approved Maintenance Program. Lessee shall have all repairs
accomplished on the Aircraft by an Aviation Authority-authorized and approved
agency. Such repairs shall be permanent. Repairs to the skin of the Aircraft
shall be flush and not merely patched, unless otherwise specified in the
Airframe manufacturer structural repair manual. Lessee shall notify Lessor and
the manufacturer of any repair to the structure or skin of the Aircraft or any
other repair costing in excess of One Hundred Thousand Dollars (US$ 100,000)
promptly after its being made (but in any event no later than fifteen (15)
calendar days thereafter); provided, however, that Lessor shall have no
liability to Lessee or third parties with regard to such repair or the quality
thereof and Lessee shall indemnify and hold Lessor harmless with regard thereto.
All technical and engineering data, calculations, drawings, and documentation
covering major repairs shall become a permanent part of the Aircraft Documents.
Any disagreement between Lessor and Lessee as to what constitutes a "major"
repair or a "permanent" repair shall be referred to the applicable manufacturer
and the Aviation Authority.
5.11. AIRCRAFT DOCUMENTS. Lessee, at its expense, will at all times
maintain and preserve all flight records, maintenance records, historical
records, modification records, overhaul records, manuals, logbooks,
authorizations, drawings and data required or recommended by the Airframe,
Engine, Appliance, or any Part manufacturer, or required from time to time by
the Aviation Authority with respect to the Aircraft, including without
limitation shop records
20
<PAGE>
detailing service checks, inspections, tests, repairs, or overhauls. All
documentation of any type referred to in the preceding sentence is herein
individually and collectively referred to as the "Aircraft Documents." Records
produced by electronic data processing or other automated means are not
acceptable, except as summary documents accompanied by original, or manual,
records, unless specifically approved by the Lessor in writing. Aircraft
Documents pertaining to maintenance shall contain verification of accomplishment
and quality assurance by actual identifiable signature. All Aircraft Documents
shall be the property of the Lessor. All Aircraft Documents shall be stored by
Lessee during the Term at a secure facility, and Lessee shall notify Lessor in
writing of the location of such facility. All Aircraft Documents will be at all
times kept current and up to date in order to facilitate Lessor's ability to
inspect periodically the Aircraft, monitor the maintenance of the Aircraft
during the Term and to facilitate the sale or re-lease of the Aircraft to a
third party at the end of the Term. The Lessee shall retain a revision service
for all Airframe, Engine, Appliance and Part manufacturer's manuals and
documentation, and the Aircraft Documents shall at all times contain the latest
issued revisions and reflect the current configuration and status of the
Airframe, Engines, Appliances, and Parts.
5.11.1. AIRWORTHINESS DIRECTIVES. Lessee shall include within the
Aircraft Documents all documentation necessary to establish the source
data, method of compliance, verification of accomplishment, quality
assurance, and all schedules of recurring action of any Airworthiness
Directive.
5.11.2. LIFE LIMITED COMPONENTS. AIRCRAFT DOCUMENTS FOR LIFE LIMITED
COMPONENTS INSTALLED DURING THE TERM SHALL ESTABLISH TOTAL SERVICE,
ORIGIN, AND AUTHENTICITY; SHALL BE "BACK-TO-BIRTH" WITH RESPECT TO ENGINE
LIFE-LIMITED PARTS AND BACK TO LAST OVERHAUL WITH RESPECT TO OTHER
LIFE-LIMITED COMPONENTS; AND SHALL ESTABLISH STRICT COMPLIANCE WITH THE
AIRCRAFT AVIATION AUTHORITY TYPE DATA SHEET AND WITH THE APPROVED
MAINTENANCE PROGRAM.
5.11.3. DAMAGE AND REPAIRS. All damage to the Aircraft, whether
repaired or not, and all repairs to the Aircraft shall be documented in
strict accordance with the manufacturer's structural repair manual.
5.12. POSSESSION. The Lessee will not, without the prior written consent
of the Lessor, which may be withheld in the sole and absolute discretion of
Lessor, assign any of its rights or obligations under this Lease or sublease or
otherwise in any manner deliver, transfer or relinquish possession or control
of, or transfer any right, title or interest in, the Airframe, any Engine,
Appliance or Part (whether through pooling or interchange agreements or
otherwise) or install any Engine or Appliance, or permit any Engine or Appliance
to be installed, on any airframe other than the Airframe, provided that the
Lessee may, without the prior written consent of the Lessor:
21
<PAGE>
5.12.1. deliver temporary possession and control of the Airframe, an
Engine, and Appliance or Part to the manufacturer or Maintenance Provider
thereof for testing, service, maintenance, overhaul or repair or, to the
extent permitted by this Section 5, for modifications or additions;
5.12.2. install an Engine or Appliance on an airframe owned by the
Lessee free and clear of all Liens except Permitted Liens;
5.12.3. install an Engine or Appliance on an airframe leased to the
Lessee or owned by the Lessee and subject to a security agreement under
which the Lessee is the debtor, PROVIDED THAT (A) such airframe is free
and clear of all Liens except the rights of the parties to such lease or
security agreement and except Permitted Liens, and (B) such lessor or
secured party agrees in writing that it shall not acquire any right, title
or interest in such Engine or Appliance;
5.12.4. in the ordinary course of testing, servicing, maintenance,
repair or overhaul, remove any Part from the Airframe, an Engine, or an
Appliance, provided that the Lessee replaces such Part as promptly as
possible with a Part which has a value and utility at least equal to the
Part being replaced and is owned by the Lessee free and clear of all Liens
except Permitted Liens; and any such replacement Part shall thereby become
subject to this Lease without necessity of further act; PROVIDED, however,
that any Part removed from the Airframe, an Engine, or an Appliance for
such purpose shall remain subject to this Lease until replaced by a
replacement Part as provided in this clause; and
5.12.5. enter into a wet lease (defined as a lease of the Aircraft
and flight crew, during which Lessee maintains exclusive operational
control of the Aircraft and during which lease Lessee continues to
maintain the Aircraft in accordance with Lessee's Approved Maintenance
Program) for the Aircraft with any third party PROVIDED, however, that the
term of such wet lease shall not extend beyond the end of the Term.
5.12.6. enter into a sublease of the Aircraft with a certificated
United States airline provided (i) the Lessee shall provide not less than
thirty days prior written notice to the Lessor; (ii) any Default or Event
of Default shall be cured simultaneously with such sublease; (iii) the
term of any such sublease shall not exceed the Term of this Lease; (iv)
the aircraft maintenance procedures of any sublessee shall be equivalent
to those of the Lessee; (v) the Lessee shall assign any such sublease to
the Lessor as security for Lessee's obligations under this Lease, provided
that so long as no Event of Default shall have occurred and be continuing,
(A) the Lessee, to the exclusion of the Lessor, may exercise all rights
and powers, and have all benefits, of the sublessor under any such
sublease, including, without limitation, the right to collect and retain
for the Lessee's own account all rent and other payments due from the
sublessee thereunder, and (B) Lessor shall not, without the prior written
consent of Lessee, amend, modify or terminate such sublease; (vi) any
sublessee shall be solvent and not seeking protection from its creditors;
(vii) any sublessee shall covenant not to
22
<PAGE>
sublease or part with possession of the Aircraft other than for
maintenance, required modifications, or repairs to comply with this Lease;
(viii) any sublessee shall agree in writing that such sublease shall be
subordinate to this Lease and all terms hereof, and shall terminate if
this Lease shall terminate; and (ix) the Lessee shall pay Lessor's
reasonable expenses, including attorney fees, in connection with any such
sublease.
No transfer of possession or control or other right afforded the Lessee pursuant
to this Section 5 shall in any manner affect any of the obligations of the
Lessee under this Lease or under the other Operative Documents, which
obligations shall remain primary and shall continue to the same extent as in the
absence of such transfer or other right. In the event that the Lessor shall have
received a written agreement or existing security agreement or lease complying
with the terms of clause 5.12.3, the Lessor hereby agrees for the benefit of the
lessor or secured party furnishing such agreement that the Lessor will not
acquire or claim, as against such lessor or secured party, any right, title or
interest in any engine owned by such lessor or in which such secured party has a
security interest by reason of such engine being installed on the Airframe.
5.13. ASSIGNMENT OF WARRANTIES. Lessor hereby assigns and agrees to assign
or otherwise make available to Lessee such rights as the Lessor may have under
any warranty (express or implied) or otherwise with respect to the Aircraft,
made by the manufacturer of the Aircraft or by any subcontractor or supplier of
such manufacturer, as the case may be, or made by a repair station or supplier
in respect to repair or overhaul of the Aircraft to the extent that the same
exist in favor of Lessor and is capable of being assigned or otherwise made
available.
SECTION 6. RETURN OF THE AIRCRAFT.
6.1. RETURN. Subject to any qualifications as may be set forth in a
Schedule 3 signed by both parties and attached to the executed Lease Supplement
and Receipt, on the last Business Day of the Term or earlier Expiry (the "Return
Date"), all of the terms of this Section 6 shall apply and the Lessee shall
return the Aircraft to the Lessor by delivering the same, at the Lessee's own
risk and expense, to Pinal County Airport, Marana, Arizona, or such other place
as may be mutually agreed upon in writing by the Lessor and Lessee (the "Return
Location"), fully equipped with all Engines installed thereon. The Aircraft at
the time of its return shall be in the condition set forth in this Section 6 and
shall be free and clear of all Liens other than Lessor Liens. At the time of
acceptance of return of the Aircraft to Lessor, Lessor and Lessee shall execute
an Aircraft Return Receipt and Lease Termination in the form attached hereto as
Exhibit B.
6.2. LEASE CONTINUES. In the event, for any cause, Lessee does not return
the Aircraft to Lessor on the last Business Day of the Term or earlier Expiry in
condition required hereunder, then all of the obligations of Lessee under this
Lease shall continue and such continued use shall not be considered a renewal of
the Term of this Lease or a waiver of any right of Lessee hereunder. During such
continued use, Rent shall continue to be paid by Lessee to Lessor and the other
performance and obligations of Lessee to Lessor shall continue hereunder and the
same shall be prorated at the rate of one thirtieth (1/30) of the monthly
installment of
23
<PAGE>
Basic Rent for each day until the Aircraft is actually delivered to Lessor, and
all other terms and conditions of this Lease shall remain in full force and
effect. Payment shall be made upon presentation of Lessor's invoice and any
failure to pay shall constitute an Event of Default of Lessee. Any discrepancies
found during the inspections hereinafter described that were not corrected by
Lessee prior to return of the Aircraft to Lessor may be corrected by Lessor or
its designee after return of the Aircraft and Lessee shall reimburse Lessor for
expenses incurred by Lessor or its designee for accomplishing such discrepancy
corrections. Lessee shall pay Lessor for such expenses incurred upon
presentation of Lessor's invoice therefor. Any late payments shall be subject to
interest at the Overdue Payment Rate.
6.3. RETURN OF ENGINES AND APPLIANCES. In the event any engine or
appliance not owned by Lessor shall be returned with the Airframe, Lessee will,
at its own expense and concurrently with such return, furnish Lessor with a full
warranty bill of sale, in form and substance satisfactory to Lessor, with
respect to each such replacement engine or appliance and shall take such other
action as Lessor may reasonably request in order that such replacement engine or
appliance shall be duly and properly titled in Lessor. Upon passage of title to
Lessor such replacement engine or appliance shall be deemed to be an Engine or
Appliance for all purposes hereof and thereupon Lessor will transfer to Lessee,
without recourse or warranty except a warranty against Lessor's Liens, all of
Lessor's right, title and interest in and to an Engine or Appliance not
installed on such Airframe at the time of the return thereof. Provided, however,
that any replacement engine or appliance shall, in the opinion of the Lessor,
have a value and utility at least equal to (and be in as good operating
condition as) such Engine or Appliance replaced, assuming compliance by the
Lessee with all of the terms of this Lease with respect to such Engine or
Appliance.
6.4. CONDITION OF AIRCRAFT. The Aircraft at the time of its return to
Lessor shall have been maintained and repaired in accordance with the Approved
Maintenance Program and this Lease with the same care and consideration for the
technical condition of the Aircraft as if it were to have been kept in continued
regular service by the Lessee, and shall meet the following requirements:
6.4.1. OPERATING CONDITION. The Aircraft shall be in as good
operating condition as on the Delivery Date, with all of the Aircraft
Engines, Appliances, Parts, equipment, components, and systems functioning
in accordance with their intended use irrespective of deviations or
variations authorized by the minimum equipment list or configuration
deviation list.
6.4.2. CLEANLINESS STANDARDS. The Aircraft shall be clean by
commercial airline standards and shall have received an exterior and an
interior deep cleaning since its last commercial flight.
6.4.3. CERTIFICATE OF AIRWORTHINESS. The Aircraft shall have, and be
in compliance with, a legal and valid transport-category certificate of
airworthiness for
24
<PAGE>
commercial passenger operations issued by the Aviation Authority, and
shall be airworthy according to manufacturer's specifications and Aviation
Authority regulations.
6.4.4. COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Subject only to
the express obligations of Lessor herein, the Aircraft shall be in
compliance with all Airworthiness Directives affecting the Aircraft which
have an effective date for compliance within the Term. In the event Lessee
has obtained a waiver or deviation from the Aviation Authority from having
to comply with any such Airworthiness Directives, Lessee shall,
irrespective of such waiver or deviation, fully comply with all such
Airworthiness Directives covered by such waiver or deviation prior to the
return of the Aircraft to Lessor as if such waiver or deviation did not
exist.
6.4.5. DEFERRED MAINTENANCE. The Aircraft shall have had
accomplished thereon all outstanding deferred maintenance items,
carry-over items, configuration deviation list items and flight
discrepancies. Items deferred because of maintenance concessions (i.e., an
exemption to operate beyond the normal limits by monitoring) shall be
brought up-to-date as if such maintenance concessions or exemptions did
not exist. Components whose time status exceeds the conditions or
requirements imposed by this Lease shall be brought into compliance with
such conditions or requirements.
6.4.6. CORROSION TREATMENT. The Aircraft shall have been maintained
by cleaning and treating of all mild corrosion and correcting of all
moderate and severe or exfoliated corrosion in accordance with the
manufacturer's recommended corrosion prevention and control procedures and
the Approved Maintenance Program. Fuel tanks shall be free from
contamination and corrosion and in compliance with an approved tank
treatment program.
6.4.7. CONFIGURATION AND CONDITION. The Aircraft shall be returned
in the same configuration and condition with all Parts installed therein
as on the Delivery Date, excepting only modifications, additions,
replacements and substitution of Parts as may have been properly made by
Lessee pursuant to Section 5. Lessee shall, prior to such return of the
Aircraft, furnish Lessor a listing of all such modifications, additions,
or replacements made during the Term. Lessee shall provide Lessor with all
supporting paperwork, drawings, calculations and approvals associated with
all repairs and modifications to the Aircraft.
6.5. CONDITION OF AIRFRAME. The Airframe at the time of its returned to
Lessor shall meet the requirements as set forth below, all at Lessee's expense,
except as otherwise provided herein:
6.5.1. C CHECK. The Airframe shall be no more than three hundred
(300) hours out of a C Check, which C Check shall include the requirements
of FAA regulation Part 43, Appendix D, 100 Hour Inspection, and a
corrosion inspection and clean-up under
25
<PAGE>
galleys, forward and aft cargo pit areas and lavatories. Lessee will
correct any deficiencies revealed during such check and all deferred
maintenance items.
6.5.2. D CHECK. [INTENTIONALLY OMITTED]
6.5.3. PARTS. All Parts installed in the Aircraft shall be
serviceable in accordance with Aviation Authority standards and have a
value, modification status and condition equivalent to the Parts in the
Aircraft on the Delivery Date, ordinary wear and tear excepted, and all
installed Airframe Life Limited Components (excluding landing gear) shall
be cleared for a minimum of 3,000 hours (or 2,700 in the case of an
Airframe Life Limited Component with a total useful life of less than
3,000 hours), or 365 days in the case of an Airframe Life Limited
Component controlled by calendar time, in each case as required by the
Northwest Airlines maintenance program.
6.5.4. FUSELAGE, WINDOWS AND DOORS. The fuselage shall be free of
major dents and abrasions, scab patches and loose or pulled or missing
rivets. Paint will be touched up. Windows shall be free of delamination,
blemishes, crazing and shall be properly sealed. Doors shall be free
moving, correctly rigged and be fitted with serviceable seals.
6.5.5. WINGS AND EMPENNAGE. All leading edges shall be free from
damage. All unpainted surfaces shall be waxed and polished. All paint
shall be touched up. All unpainted cowlings and fairings shall be
polished. Wings shall be free of fuel leaks.
6.5.6. INTERIOR. Ceilings, sidewalls and bulkhead panels shall be
clean and free of cracks and stains. All floor panels shall be firm. All
window shades shall operate properly and be undamaged. All carpets and
seat covers shall be in good condition, clean and stain free and meet all
international fire resistance regulations. All seats shall be serviceable,
in good condition and repainted as necessary. Recline mechanism and table
operation shall be satisfactory, and table condition level, tight, and
undamaged. All signs and decals shall be in the English language, clean
and legible. All emergency equipment having a calendar life shall have a
minimum of one year or one hundred per cent of its total approved life
whichever is less, remaining.
6.5.7. COCKPIT. All decals shall be in the English language, clean,
secure and legible. All fairing panels shall be free of stains and cracks,
shall be clean, secure and repainted as necessary. Floor coverings shall
be clean and effectively sealed, and painted as necessary. Seat covers
shall be in good condition, clean and shall conform to all international
fire resistance regulations. Seats shall be fully serviceable and shall be
repainted as necessary. Wear areas will be painted or refurbished as
necessary.
6.5.8. CARGO COMPARTMENT. All panels and nets shall be in good
condition.
6.6. CONDITION OF LANDING GEAR. Each landing gear shall be clean, free of
leaks and repaired as necessary. All decals shall be in the English language,
clean, secure, and legible.
26
<PAGE>
6.7. CONDITION OF AUXILIARY POWER UNIT ("APU"). Lessee will return the
Aircraft's installed APU in good operating condition, in accordance with the
manufacturer's specifications. Any operational discrepancies of the APU shall be
corrected at Lessee's expense prior to the return of the Aircraft to Lessor.
6.8. CONDITION OF ENGINES. [INTENTIONALLY OMITTED]
6.9. HISTORICAL RECORDS; TREND MONITORING DATA. [INTENTIONALLY OMITTED]
6.10. INSPECTIONS. The following inspections shall be conducted utilizing
the standards and specifications of the applicable manufacturer maintenance
manual for the Airframe, Engines, Appliances, and component Parts thereof. Any
item or discrepancy noted during the inspections that is found to be
non-compliant with the tolerances and conditions of the applicable manufacturer
maintenance manual shall be classified as a condition of non-airworthiness and
shall be corrected or rectified by Lessee prior to return of the Aircraft.
6.10.1. The Aircraft (including the Aircraft Documents) shall be
made available to Lessor for ground inspection by Lessor at Lessee's
facilities where and while the C Check required by this Section 6 is being
performed. Lessee shall open areas of the Aircraft, including without
limitation galleys, lavatories, and cargo pits, as determined by Lessor,
and shall allow Lessor to accomplish its inspection in order to determine
that the Aircraft (including the Aircraft Documents) is in the condition
required by the provisions of this Section 6.
6.10.2. A full, videotaped borescope inspection of all Engine and
APU sections in accordance with manufacturer specifications (including
manufacturer service bulletins) shall be performed under the surveillance
of Lessor at Lessee's expense at the time of the Aircraft's return to
Lessor at the Return Location.
6.10.3. Lessee shall conduct an operational ground check in
accordance with the requirements of the Approved Maintenance Program.
6.10.4. The Aircraft shall be test flown by Lessee at Lessee's
expense for not more than two (2) hours on a non-commercial flight, for
the purpose of demonstrating to Lessor the airworthiness of the Aircraft
and the proper functioning of all systems, equipment, and Appliances. Five
(5) of Lessor's employees or representatives (or more if consented to by
Lessee) may participate in such flight as observers. Lessee's pilot shall
be in command of the Aircraft. Such flight shall be flown using standard
operational check flight procedures as specified by the Airframe
manufacturer's flight functional acceptance procedure or operational test
flight procedures to demonstrate full certificated performance without
limitation. Such test flight may be combined with a ferry flight to the
Return Location.
27
<PAGE>
6.11. ACCEPTANCE. Upon completion of the foregoing inspections and after
Lessee has corrected the discrepancies as required to comply with this Section
6, the return of the Aircraft shall be accepted by Lessor's representatives at
the Return Location. At the time of acceptance of return of the Aircraft to
Lessor, Lessor and Lessee shall execute an Aircraft Return Receipt and Lease
Termination in the form attached hereto as Exhibit B.
6.12. DISCREPANCY CORRECTION; FINANCIAL SETTLEMENT. Any discrepancies
found during the inspections set forth in Section 6. 10 above which are not
corrected by Lessee prior to return of the Aircraft to Lessor may be corrected
by Lessor or its designee after return of the Aircraft and Lessee shall
reimburse Lessor for all costs and expenses incurred by Lessor or its designee
for accomplishing such discrepancy corrections. Lessee shall pay Lessor for all
such costs and expenses incurred within ten (10) days of the date of Lessor's
invoice therefor. Any late payments shall be subject to interest at the Overdue
Payment Rate. In the event that the time since overhaul or check for the
Airframe, any Engine, Appliance or component Part thereof on the Return Date is
less than set forth above, Lessee shall pay Lessor a financial settlement to
account for the difference based upon (1) the then current interval between such
overhaul, check, or inspection prescribed by Lessee's Approved Maintenance
Program (provided that such interval shall not be greater than on the Delivery
Date), and (2) the then current cost to perform such overhaul or check
established by averaging the cost estimates for such overhaul or check by three
Aviation Authority-certified repair stations selected by Lessee and reasonably
acceptable to Lessor. In no event shall the time since overhaul or check for the
Airframe, any Engine, Appliance or component Part thereof exceed the minimums
set fort herein. Lessor shall not be obligated to compensate Lessee in the event
that the Aircraft is in better condition on the Return Date than required
hereunder.
6.13. AIRCRAFT DOCUMENTS. Lessee shall return to Lessor, at the time the
Aircraft is returned to Lessor, all of the Aircraft Documents, updated and
maintained by Lessee through the date of return of the Aircraft. In the event of
missing, incomplete, mutilated, or otherwise unacceptable Aircraft Documents,
the Lessee shall, at its sole cost and expense, re-accomplish the tasks
necessary to produce such Aircraft Documents in accordance with the provisions
of Section 5.11.
6.14. SERVICE BULLETIN KITS. All vendors' and manufacturers' service
bulletin kits ordered for the Aircraft but not installed therein shall be
returned with the Aircraft, as part of the Aircraft at the time of return, and
shall be loaded by Lessee on board the Aircraft as cargo.
6.15. LESSEE'S SPECIAL EXTERIOR MARKINGS. At the time of the return of the
Aircraft, Lessee shall, at Lessor's election, either remove or paint over
exterior markings painted on such Aircraft by Lessee and the area where such
markings were removed or painted over shall be refurbished by Lessee as
necessary to blend in with the surrounding surface. In the event that,
notwithstanding Lessee's obligation to do so, Lessee does not remove such
markings, Lessor shall have no obligation to remove such markings prior to the
sale, lease, or other disposition of the Aircraft by Lessor after its return;
however, if Lessor elects to remove such markings, Lessee shall pay Lessor's
costs and expenses for such removal within ten (10) days of the date
28
<PAGE>
of Lessor's invoice therefor. Any late payments shall be subject to interest at
the Overdue Payment Rate.
6.19. DISPUTES. Any dispute between Lessee and Lessor regarding the
condition of the Aircraft arising under this Lease shall be referred to and be
determined by the Airframe, Engine, or Appliance manufacturer, provided this
subsection shall not be construed as requiring binding arbitration. Lessee shall
not be required to correct at return conditions existing at delivery and noted
in Schedule 3 to the Lease Supplement and Receipt.
SECTION 7. LIENS. The Lessee will not create or suffer to exist any
Lien upon or with respect to the Aircraft, the Airframe, any Engine or any
Appliance, except for the rights of the Lessor and the Lessee hereunder and
Permitted Liens.
SECTION 8. TAXES.
8.1. TAX INDEMNITY. The Lessee agrees to pay, and to indemnify each
Indemnitee for all taxes, fees, levies, imposts, duties, charges and
withholdings of any nature (together with any and all fines, penalties,
additions to tax and/or interest thereon or computed by reference thereto)
(individually, a "Tax" and collectively, "Taxes") which are imposed by any
government, governmental. subdivision or other taxing authority of or in any
jurisdiction, or by any international organization, and which are imposed with
respect to or in connection with any of the following:
8.1.1. The Aircraft or any Engine or any part thereof or any
interest therein;
8.1.2. The acceptance, possession, ownership, delivery, use,
operation, location, leasing, subleasing, condition, maintenance, repair,
modification, overhaul, testing, storage, abandonment, repossession, or
return of the Aircraft or any Engine or any part thereof or any interest
therein;
8.1.3. The rentals, receipts or earnings arising from the Aircraft
or any Engine or any part thereof or any interest therein;
8.1.4. This Lease or any other Operative Document; any agreement or
instrument executed in connection with or pursuant to any of the
foregoing; any future amendment, supplement, waiver or consent requested
by Lessee with respect to any thereof, or the execution, delivery,
recording or performance of any thereof; or
8.1.5. Any payment made pursuant to this Lease or any other
Operative Document;
PROVIDED, however, that the Lessee shall not be required by this paragraph (a)
to indemnify an Indemnitee for any of the following:
29
<PAGE>
8.1.6. Taxes in respect of net or gross income, profits, gains,
capital or net worth imposed by the United States or any state or local
governments therein;
8.1.7. Taxes which would not have arisen but for delay or failure by
an Indemnitee in notifying the Lessee or in the filing of Tax Returns or
payment of Taxes assessed on such Indemnitee, which delay or failure shall
not have been consented to, caused by or requested by the Lessee;
8.1.8. Any Tax to the extent it results directly from any act or
omission on the part of the Lessor which constitutes a breach by the
Lessor of its express obligations to the Lessee under this Lease or any
Operative Document or otherwise constitutes willful misconduct or gross
negligence on the part of the Lessor;
8.1.9. Any Taxes to the extent properly attributable to any time or
period prior to the date of this Lease or after its Expiry;
8.1.10. In the event that the Lessor assigns, transfers or encumbers
in whole or in part its interest in the Aircraft or this Lease and/or the
proceeds thereof, any Taxes if and to the extent that such Taxes exceed
those which would have been imposed and in respect of which the Lessee
would have been liable to indemnify the Lessor under this Lease had the
Lessor not so assigned, transferred, or encumbered its interest;
8.1.11. Any Taxes which are caused by or arise out of or as a
consequence of a Lessor Lien;
8.1.12. Any Taxes in respect of ownership not attributable to
Lessee's acts or omissions under this Lease; or
8.1.13. Any Taxes (including, without limitation, sales, value added
or other transfer Taxes) which arise upon any sale, assignment, transfer
or other disposition of the Aircraft or any interest therein by the Lessor
or any other Indemnitee (or any sale, assignment, transfer or other
disposition by an Indemnitee of any interest in another Indemnitee).
If the Lessor becomes aware of any Taxes in respect of which the Lessee may be
required to make an indemnity or other payment pursuant to this Section 8.1, the
Lessor shall promptly notify the Lessee in writing accordingly. If reasonably
requested by the Lessee in writing, the Lessor shall, in good faith, diligently
contest (including pursuing all administrative appeals) in the name of the
Lessor or, if appropriate and requested by the Lessee, in the name of the Lessee
(and will permit the Lessee, if requested by the Lessee, to contest in the name
of the Lessee or the Lessor) the validity, applicability or amount of such Taxes
and shall (i) resist payment thereof if reasonably practicable; (ii) pay the
same only under protest, if protest is necessary or proper; and (iii) if payment
is made, seek a refund thereof in appropriate administrative or judicial
proceedings Provided that (aa) prior to any such action the Lessee shall have
agreed to
30
<PAGE>
indemnify the Lessor to the Lessor's reasonable satisfaction for all costs and
expenses which the Lessor may incur in connection with such contest, including
(without limitation) all reasonable legal and accountants' fees and
disbursements, and the amount of any interest or penalties which may be payable
as a result of the contest; and (bb) if the Lessor determines in its reasonable
discretion that such contest is to be initiated by the payment of (and the
claiming of a refund for) such Taxes, the Lessee shall have advanced to the
Lessor sufficient funds (on an interest-free basis and, if such advance
constitutes taxable income in the hands of the Lessor, on an after-tax basis) to
make such payment.
If the Lessor shall obtain a refund, rebate, credit or other relief in respect
of all or any part of any Taxes in respect of which the Lessee shall have made
payment pursuant to this Section 8.1, the Lessor shall, provided no Event of
Default shall have occurred and be continuing, promptly pay to the Lessee an
amount which is equal to the amount of the refund, rebate, credit or other
relief, plus any interest or other addition received on any refund, PROVIDED
always that any such payment by the Lessor shall leave the Lessor in no more and
no less favorable a position that it would have been in had the Lessee not been
required to make any payment in respect of such Taxes.
Lessee will pay all Taxes imposed upon it, or upon its income or profits, or
upon any property belonging to it, prior to the date on which penalties attach
thereto and prior to the date on which any lawful claim, if not paid, would
become a Lien upon any of the material property of Lessee. The Expiry of this
Lease shall not limit or modify the obligations of the Lessee with respect to
any indemnities contained in this Section 8.
8.2. WITHHOLDING. If the Lessee is required by Applicable Law to make any
withholding from any amount payable by the Lessee to or for the benefit of an
Indemnitee pursuant to this Lease or any related agreement, then, subject only
to such payee or Indemnitee being a United States person, the Lessee shall (i)
pay such additional amount as may be necessary to make the net amount actually
received by the person entitled to receive the payment, after all withholdings,
equal to the amount such person would have received if no withholding had been
required, and (ii) as soon as practicable thereafter, deliver to the Indemnitee
a receipt or other document reasonably satisfactory to the Indemnitee evidencing
the withholding and the payment of the amount withheld to the relevant
governmental authority.
8.2.1. If the Lessor receives the benefit of a Tax repayment,
set-off, credit, allowance or deduction resulting from a payment which
includes an additional amount paid by the Lessee under this Section 8.2
(or the Taxes deducted or withheld from such payment) it shall pay to the
Lessee a sum equal to the value to the Lessor of such benefit (account
being taken also of the value to the Lessor of any tax benefit arising by
reason of such payment) as in the opinion of the Lessor's auditors will
leave the Lessor (after such payment) in no more and no less favorable a
position than it would have been if no additional amount had been required
to be paid PROVIDED always that:
31
<PAGE>
8.2.1.1. The Lessor's auditors shall determine in their sole
discretion (acting in good faith) the amount of any such benefit and the
date on which it is received;
8.2.1.2. The Lessor shall have an absolute discretion as to the
order and manner in which it claims tax credits, allowances and deductions
available to it; and
8.2.1.3. The Lessor shall not be obliged to disclose to the Lessee
any information regarding its Tax affairs or Tax computations.
If and to the extent that the Lessor makes a payment to the Lessee on account of
a tax benefit and it subsequently transpires that the Lessor did not receive
such benefit, the Lessee shall pay to the Lessor such sum as the Lessor's
auditors may certify as being appropriate to restore the after-tax position of
the Lessor to that which it would have been if such tax benefit had been
received.
8.3. AFTER-TAX PAYMENT. Each indemnity pursuant to Section 15 or this
Section 8 shall be in an amount which, after taking into account all Taxes
required to be paid by the Indemnitee entitled to the indemnity as a result of
the receipt or accrual of the indemnity and any deductions, credits or other
benefits available to such Indemnitee in respect of such indemnity, shall be
equal to the total amount of the indemnity that the Lessee would be required to
pay if the Indemnitee were not subject to Taxes as a result of the receipt or
accrual of the indemnity.
SECTION 9. RISK OF LOSS; EVENT OF LOSS; REQUISITION FOR USE.
9.1. RISK OF LOSS. The Lessee will bear the entire risk of destruction,
loss, theft, requisition of tide, or use, confiscation, taking or damage of or
to the Aircraft from any cause during the period commencing when the Lease
Supplement and Receipt is executed and delivered by Lessee and ending when the
Aircraft Return Receipt and Lease Termination is executed and delivered by
Lessor.
9.2. AIRFRAME EVENT OF LOSS. If an Event of Loss shall occur with respect
to the Airframe, the Lessee will forthwith notify the Lessor thereof in writing
and will pay to the Lessor, in U.S. Dollars and in immediately available funds
(i) 60 days after the date of the occurrence of such Event of Loss, or (ii) the
date of receipt of insurance proceeds, whichever is earlier, an amount equal to
the Stipulated Loss Value of the Aircraft; PROVIDED, however, that if the date
such payment is made by the Lessee is not a Rent Payment Date, there shall be
deducted from the amount payable by the Lessee an amount equal to a pro rata
portion of the Basic Rent for the Aircraft computed on a daily basis from and
including the date such payment is made by the Lessee to but not including the
Rent Payment Date immediately following the date such payment is made by the
Lessee. In addition, the Lessee will pay in full when due, but without
duplication, the Basic Rent for the Aircraft payable on each Rent Payment Date
occurring prior to the date payment is made by the Lessee pursuant to the
immediately preceding
32
<PAGE>
sentence hereof. Upon payment in full by the Lessee of all amounts referred to
above in this Section 9.2, (i) the Lessee shall have no further obligation to
pay Basic Rent for such Aircraft due thereafter, (ii) upon payment in full of
any Supplemental Rent then owing this Lease shall terminate with respect to the
Aircraft and (iii) upon request of the insurers of the Aircraft, the Lessor will
transfer to such insurers title to the Airframe and each Engine, without any
recourse, representation or warranty on the part of the Lessor except that the
Airframe and Engines are free and clear of Lessor Liens.
9.3. ENGINE EVENT OF LOSS. If an Event of Loss shall occur with respect to
an Engine when not installed on the Airframe, the Lessee will forthwith notify
the Lessor thereof in writing and will, not later than 30 days after the
occurrence of such Event of Loss, duly convey to the Lessor (or cause to be
conveyed to the Lessor), as replacement for such Engine, title to another engine
of the same make and model which shall be owned by the Lessee free of all Liens
other than Permitted Liens and shall, in the opinion of the Lessor, have a value
and utility at least equal to (and be in as good operating condition as) such
Engine immediately prior to such Event of Loss, assuming compliance by the
Lessee with all of the terms of this Lease with respect to such Engine. At the
time of such conveyance the Lessee will (i) cause to be delivered to the Lessor
a favorable opinion of counsel for the Lessee reasonably acceptable to the
Lessor to the effect that the Lessor has acquired full title to such replacement
engine free and clear of all Liens except for Permitted Liens and that such
replacement engine is duly subjected to this Lease; (ii) cause a Lease
Supplement and Receipt to be duly executed by Lessee and to be filed for
recording pursuant to the Aviation Law and (iii) cause to be delivered to the
Lessor evidence satisfactory to the Lessor as to the due compliance by the
Lessee with the insurance provisions of Section 10 hereof with respect to such
replacement engine. Upon compliance by the Lessee with the foregoing terms of
this subsection within the 30-day period referred to above, the Lessor will (A)
upon request by the insurers of such Engine transfer title to such insurers of
the Engine so replaced without any recourse, representation or warranty on the
part of the Lessor except that such Engine is free and clear of any of the
Lessor Liens and (B) execute and deliver to the Lessee a partial release, in
recordable form, releasing such Engine from this Lease. Such replacement engine
shall thereupon constitute an "Engine" for all purposes hereof.
9.4. REQUISITION. [INTENTIONALLY OMITTED]
SECTION 10. INSURANCE. Throughout the Term and thereafter until the
Aircraft has been returned to the Lessor in compliance with Section 6, the
Lessee shall cause to be obtained maintained and kept in full force and effect
property and liability insurance (the "Insurances") with respect to the Aircraft
issued through brokers and with underwriters reasonably satisfactory to the
Lessor. Such Insurances shall name the Lessor as an additional insured and loss
payee for its interests and shall otherwise comply with the insurance
requirements set out in this Section 10.
10.1. REPORTS. On or before the Delivery Date, and not later than seven
(7) days prior to each renewal of the Insurances, the Lessee shall provide the
Lessor with evidence satisfactory to the Lessor that the Insurances are and will
continue in full force after the Delivery Date or
33
<PAGE>
the renewal date of the Insurances (as the case may be) for such period as shall
then be stipulated and the Lessee shall produce to the Lessor upon request
receipts in respect of payment of the premiums required by the policies relating
to the Insurances (or installments thereof) or other evidence reasonably
acceptable to the Lessor of the payment thereof. In addition, the Lessee shall
furnish or cause to be furnished to the Lessor, as and when reasonably required
by the Lessor, (i) insurance certificates, and (ii) an opinion of a firm of
independent insurance brokers satisfactory to Lessor (the "Approved Broker")
stating the opinion of the Approved Broker that the insurance then carried and
maintained on the Aircraft complies with the terms hereof. If any material
variation is made to the terms of the Insurances, the Lessee shall forthwith
give notice to the Lessor of such variation and shall provide such further
details in relation thereto (excluding details relating to premiums) as the
Lessor may reasonably require. The Lessee shall pay or cause to be paid all
additional premiums or surcharges necessary in order to maintain in full force
and effect the Insurances.
10.2 LESSOR MAINTAINING INSURANCES. If the Insurances are not kept in full
force and effect the Lessor, without prejudice to any other rights it may have
on the occurrence of an Event of Default, shall be entitled (but not bound) to
pay the premiums due to or to take out and maintain new insurances and any sums
so expended by the Lessor shall become immediately due and payable to the Lessor
by the Lessee together with interest thereon from the date of expenditure by the
Lessor until the date of reimbursement thereof by the Lessee at the Overdue
Rate. In addition, the Lessor may at any time while the Insurances are not
maintained in full force and effect and if such Insurances cannot be procured by
the Lessor, as the case may be, require the Aircraft to be grounded or, subject
to the Aircraft being adequately insured, require the Aircraft to proceed to and
remain at an airport designated by the Lessor until the provisions of this
Section shall be fully complied with.
10.3 INSURANCE PROCEEDS. Until such time as the Approved Broker is
notified of an Event of Default hereunder, all insurance proceeds in respect of
repairable damage to the Aircraft not amounting to an Event of Loss shall be
payable by the insurers directly to such party or parties as may be necessary to
repair the Aircraft unless otherwise agreed between the Lessor, the Lessee and
the insurers in accordance with Lloyd's Endorsement AVN67B and shall be applied
to the cost of restoration, repair or replacement of the Aircraft hereunder. To
the extent that such insurance proceeds may be insufficient to pay the cost or
the estimated cost of completing such restoration, repair or replacement, the
Lessee will pay or procure the payment of such deficiency. All insurance
proceeds in circumstances resulting from an Event of Loss or if the Approved
Broker has been notified in writing of an Event of Default hereunder shall be
payable by the insurers directly to the Lessor unless and until such insurers
shall be notified in writing that such Event of Default is no longer continuing.
10.4 PROPERTY INSURANCE. The Lessee shall ensure that there is obtained
and maintained with respect to the Aircraft:
34
<PAGE>
10.4.1. "All Risks" hull insurance on the Aircraft (including all
flight and ground risks and ingestion coverages) in an amount not less
than Three Million Seven Hundred Fifty Thousand Dollars (US$3,750,000)
(the "Stipulated Loss Value").
10.4.2. "All Risks" insurance on the Engines while not installed on
any Airframe in an amount not less than replacement cost thereof.
10.4.3. "War Risks" and related insurance covering the following
perils on the Aircraft in an amount not less than the Stipulated Loss
Value: (i) war, invasion, acts of foreign enemies, hostilities (whether
war be declared or not), civil war, rebellion, revolution, insurrection,
martial law, military or usurped power, or attempts at usurpation of
power; (ii) strikes, riots, civil commotions or labor disturbances; (iii)
any act of one or more persons, whether or not agents of a sovereign
power, for political or terrorist purposes and whether the loss or damage
resulting therefrom is accidental or intentional; (iv) any malicious act
or act of sabotage; (v) confiscation, nationalization, deprivation,
seizure, restraint, detention, appropriation, requisition for title or use
by or under the order of any government (whether civil, military or de
facto) and/or public or local authority other than the government of the
United States; and (vi) hijacking or any unlawful seizure or wrongful
exercise of control of such Aircraft or crew in flight (including any
attempt at such seizure or control) made by any person or persons on board
such Aircraft acting without consent of the Lessee.
10.4.4 The Insurances required under this Subsection 10.4 shall
(except for the insurance referenced in paragraph 10.4.2) be provided on
an agreed value basis and shall: (i) include, in the event of separate
insurances being arranged to cover the "All Risk" hull insurance and the
"War Risk" and related insurance, a 50/50 claims funding arrangement in
the event of any dispute as to whether a claim is covered by the "All
Risks" or "War Risks" policy; and (ii) be subject to a deductible no
greater than Five Hundred Thousand Dollars ($500,000).
10.5. LIABILITY INSURANCE. The Lessee shall obtain and maintain or procure
that there is obtained and maintained a policy or policies of insurance covering
third party liability, bodily injury and property damage, passenger legal
liability and cargo legal liability for a combined single limit of not less than
Three Hundred Fifty Million Dollars (US$350,000,000) for any one occurrence. The
policies evidencing the Insurances required under this Section 10.5 shall: (i)
include the Indemnitees as additional insureds; (ii) provide that all the
provisions thereof, except the limits of liability, shall operate to give each
insured the same protection as if there were a separate policy covering each
such person; (iii) be primary and without right of contribution from other
insurance which may be available to the Indemnitees; and (iv) not provide
coverage to the Indemnitees with respect to claims arising out of their legal
liability as manufacturer, repairer or servicing agent of the Aircraft or any
Part thereof.
10.6. PROVISIONS RELATING TO ALL INSURANCES. The policies evidencing the
Insurances with respect to the Aircraft required under Subsection 10.4 and 10.5
shall:
35
<PAGE>
10.6.1. specifically reference this Agreement and shall provide that
the insurers agree that the coverage under the policies is extended (to
the extent of the risks covered by the policies) to insure such Aircraft
in accordance with the terms of this Agreement;
10.6.2. provide for worldwide coverage (subject only to such
exceptions in the War Risks and related insurance as are imposed by the
insurers);
10.6.3. provide that the Lessor has no operational interest in the
Aircraft;
10.6.4. provide that the Insurances shall not be invalidated, so far
as concerns the Indemnitees by any act or omission (including
misrepresentation and non-disclosure) by the Lessee or any other person
which results in a breach of any term, condition or warranty of such
Insurances provided that the Indemnitees have not caused, contributed to
or knowingly condoned such act or omission;
10.6.5. provide that the Lessor shall not be liable for any premiums
in respect thereof, and that the insurers waive any right of set-off or
counterclaim against the Lessor except in respect of outstanding premiums
in respect of the Aircraft;
10.6.6. provide that upon payment of any loss or claim to or on
behalf of an Indemnitee, the insurers shall to the extent and in respect
of such payment be thereupon subrogated to all legal and equitable rights
of the Indemnitees. The insurers shall not exercise such rights without
the consent of those indemnified, such consent not to be unreasonably
withheld. At the expense of the insurers, such persons shall do all things
reasonably necessary to assist the insurers to exercise such subrogated
rights; and
10.6.7. provide that the Insurances provided under such policy may
only be cancelled or materially altered in a manner adverse to the
interests of the Lessor by the giving of not less than thirty (30) days'
notice in writing to the Lessor except that in the case of War Risks
insurance for which seven (7) days' notice (or such lesser period as may
be customarily available in respect of war risks or allied perils
insurance) will be given or in the case of war between any of the five (5)
great powers or nuclear peril for which termination is automatic. Lessee
will cause the Approved Broker to advise Lessor in writing promptly of any
default in the payment of any premium and of any other act of omission on
the part of Lessee of which they have knowledge and which would in the
Approved Broker's opinion invalidate or render unenforceable, in whole or
in any material part, any insurance on the Aircraft.
SECTION 11. THE LESSOR'S RIGHT TO PERFORM FOR THE LESSEE. If the
Lessee fails
36
<PAGE>
to make any payment required hereunder or fails to perform or comply with any of
its other agreements contained herein, the Lessor may make such payment or
perform or comply with such agreement, including, but not limited to, the
placement of insurance required by this Lease, and the amount of such payment
and the amount of its out-of-pocket costs and expenses incurred in connection
with the performance of or compliance with such agreement (together with
interest thereon at the Overdue Payment Rate) shall be payable by the Lessee on
demand as Supplemental Rent.
SECTION 12. FURTHER ASSURANCES. The Lessee at its expense will
promptly and duly execute and deliver such documents and assurances and take
such action as may be necessary or desirable, or as the Lessor may from time to
time reasonably request, in order to more effectively carry out the intent and
purpose of this Lease and the other Operative Documents and to establish and
protect the Lessor's title to the Aircraft and its rights and remedies created
or intended to be created under this Lease and the other Operative Documents, in
form and substance satisfactory to the Lessor, in such jurisdictions as the
Lessor may reasonably request.
SECTION 13. EVENTS OF DEFAULT. The following events shall constitute
Events of Default (whether any such event shall be voluntary or involuntary or
arise by operation of law or pursuant to or in compliance with any judgment,
decree, order, rule or regulation of any court or any administrative or
governmental body):
13.1. FAILURE TO PAY BASIC RENT. The Lessee shall fail to make any payment
of Basic Rent or Stipulated Loss Value within three Business Days after such
payment shall become due; or
13.2. FAILURE TO PAY SUPPLEMENTAL RENT. The Lessee shall fail to make any
other payment of Rent of any kind and such failure shall continue unremedied for
a period of ten Business Days after written demand therefor by the Lessor to the
Lessee; or
13.3. FAILURE TO MAINTAIN INSURANCE. The Lessee shall fail to maintain
insurance in accordance with Section 10 hereof;
13.4. MISREPRESENTATION OR BREACH OF WARRANTY. Any representation or
warranty made by the Lessee or any Guarantor in this Lease or in any other
Operative Document or in any document or certificate furnished by the Lessee or
any Guarantor in connection herewith or therewith shall have been incorrect in
any material respect at the time made; or
13.5. BANKRUPTCY, ETC. The Lessee shall generally not pay its debts as
such debts become due, or shall admit in writing its inability to pay its debts
generally, or shall make a general assignment for the benefit of creditors; or
any proceeding shall be instituted by or against the Lessee under the laws of
any country seeking to adjudicate it a bankrupt or insolvent, or seeking
liquidation, winding up, reorganization, arrangement, adjustment, protection,
relief or composition of it or its debts under any law of any country relating
to
37
<PAGE>
bankruptcy, insolvency or reorganization or relief of debtors, or seeking the
entry of an order for relief or the appointment of a receiver, trustee, or other
similar official for it or for any substantial part of its property and either
such proceeding shall remain undismissed or unstayed for a period of 45 days or
any of the actions sought in such proceeding (including, without limitation, the
entry of an order for relief against it or the appointment of a receiver,
trustee, custodian or other similar official for it or for any substantial part
of its property) shall occur; or the Lessee shall take any corporate action to
authorize any of the actions set forth above in this subsection 13.5; or
13.6. GENERAL DEFAULT. The Lessee fails to duly observe or perform any of
its other obligations under this Lease and such failure shall not have been
remedied within a period of ten (10) Business Days after delivery of written
notice specifying the same from Lessor, including without limitation failure to
maintain the Aircraft as required by this Lease or the Aviation Authority or
failure to protect or preserve Lessor's title to the Aircraft and, if
applicable, the Lien of any Lender thereon; or
13.7. LOSS OF AIRLINE OR CORPORATE AUTHORITY. Lessee shall cease to be a
commercial airline, or the franchises, concessions, permits, rights or
privileges required for the conduct of the business and operations of Lessee
shall be revoked, canceled or otherwise terminated or the free and continued use
and exercise thereof curtailed or prevented, and as a result thereof the
preponderant business activity of Lessee shall cease to be that of a commercial
airline; or
13.8. OTHER OBLIGATIONS. An event of default shall have occurred under the
Other Lease or under any agreement wherein Lessee is a debtor or a lessee with
respect to aircraft or aircraft engines; or a judgment or judgments for the
payment of money shall be rendered against Lessee and such judgment shall not be
effectively stayed; or Lessee shall fail to pay any portion of any indebtedness
or other obligation of Lessee in excess of the value of US$250,000, or there
shall occur a declaration of default, an acceleration or any exercise of
remedies with respect to any obligation or liability of Lessee in or relating to
an amount in excess of the value of US$250,000; or
13.9. GUARANTOR DEFAULT. An "Event of Default," as defined therein, shall
have occurred under a Guaranty.
SECTION 14. REMEDIES. Upon the occurrence of any Event of Default
and at any time thereafter so long as the same shall be continuing, the Lessor
may, at its option, declare in writing to the Lessee that this Lease is in
default; and at any time thereafter, so long as the Lessee shall not have
remedied all outstanding Events of Default, the Lessor may do one or more of the
following as the Lessor in its sole discretion shall elect, to the extent
permitted by Applicable Law then in effect:
14.1. RETURN AND REPOSSESSION. Lessor may in writing demand the prompt
return, and the Lessee hereby agrees that it shall return promptly, the Aircraft
to the Lessor in the
38
<PAGE>
manner and condition required by, and otherwise in accordance with all the
provisions of, Section 6 as if the Aircraft were being returned at the end of
the Term, or the Lessor or the Lessor's agent, at its option, may, but shall be
under no obligation to, enter upon the premises where all or any part of the
Airframe or any Engine or Appliance is located and take immediate possession of
and remove the same by summary proceedings or otherwise, all without liability
accruing to the Lessor or the Lessor's agent for or by reason of such entry or
taking of possession or removal whether for the restoration of damage to
property caused by such action or otherwise.
14.2. SALE, USE, ETC. Lessor may sell the Aircraft at public or private
sale, as the Lessor may determine, or otherwise dispose of, hold, use, operate,
lease to others or keep idle the Aircraft as the Lessor may determine, all free
and clear of any rights or claims of the Lessee and without any duty to account
to the Lessee with respect to such action or inaction or for any proceeds with
respect thereto.
14.3. LIQUIDATED DAMAGES: FAIR MARKET RENTAL. The Lessor, by written
notice to the Lessee specifying a payment date which shall be a Rent Payment
Date not earlier than ten days from the date of such notice, may cause the
Lessee to pay to the Lessor, and the Lessee shall pay to the Lessor, on the
payment date specified in such notice, as liquidated damages for loss of a
bargain and not as a penalty (in lieu of the Basic Rent for the Aircraft due on
Rent Payment Dates occurring on and after the payment date specified for payment
in such notice), any unpaid Basic Rent for the Aircraft due (or which would have
been due in the absence of the Expiry) prior to the payment date specified in
such notice, plus an amount equal to the present value (computed as of the
payment date specified in such notice and using 6%) of the total Basic Rents due
for what would have been the remainder of the Term in the absence of the Expiry
("Liquidated Rental") (together with interest on all amounts payable by the
Lessee under this subsection 14.3 at the Overdue Payment Rate from such
specified payment date until the date of actual payment); and upon such payment
of Liquidated Rental and the payment of all other Rent then due hereunder,
Lessor shall proceed to exercise its best efforts to lease the Aircraft for what
would have been the remainder of the Term in the absence of Expiry and shall pay
over to Lessee an amount equal to the present value of the rents due for the
remainder of the term under the new lease agreement (after deducting from such
rents, all costs and expenses whatsoever incurred by Lessor in connection
therewith and all other amounts which may become payable to Lessor) up to the
amount of Liquidated Rental actually paid.
14.4. CANCELLATION, TERMINATION, AND RESCISSION. The Lessor may cancel,
terminate, or rescind this Lease, or may exercise any other right or remedy
which may be available to it under Applicable Law or proceed by court action
to enforce the terms hereof or to recover damage for the breach hereof,
including without limitation Lessee's agreement to lease the Aircraft for the
Term and to pay Rent.
14.5. OTHER REMEDIES. In addition, the Lessee shall be liable, except as
otherwise provided above, for any and all unpaid Rent due hereunder before,
after or during the
39
<PAGE>
exercise of any of the foregoing remedies and for all legal fees and other costs
and expenses incurred by reason of the occurrence of any Event of Default or the
exercise of remedies with respect thereto, including all costs and expenses
incurred in connection with any retaking of the Aircraft or in placing the
Aircraft in the condition and airworthiness required by Sections 5 and 6. At any
sale of the Aircraft pursuant to this Section 14 the Lessee may bid for and
purchase such property. No remedy referred to in this Section 14 is intended to
be exclusive, but each shall be cumulative and in addition to any other remedy
referred to above or otherwise available to the Lessor at law or in equity,
including without limitation the Uniform Commercial Code of the Commonwealth of
Massachusetts; and the exercise or beginning of exercise by the Lessor of any
one or more of such remedies shall not preclude the simultaneous or later
exercise by the Lessor of any or all of such other remedies. No express or
implied waiver by the Lessor of any Event of Default or Default shall in any way
be, or be construed to be, a waiver of any future or subsequent Event of Default
or Default. To the extent permitted by Applicable Law, the Lessee hereby waives
any rights now or hereafter conferred by statute or otherwise which may require
the Lessor to sell, lease or otherwise use the Aircraft in mitigation of the
Lessor's damages except as set forth in this Section 14 or which may otherwise
limit or modify any of the Lessor's rights or remedies under this Section 14.
SECTION 15. GENERAL INDEMNITY AND EXPENSES.
15.1. GENERAL INDEMNITY.
15.1.1. The Lessee agrees to indemnify, reimburse, and hold harmless each
Indemnitee from and against all claims, damages, losses, liabilities, demands,
suits, judgments, causes of action, civil and criminal legal proceedings,
penalties, fines, and other sanctions, and any attorney fees and other
reasonable costs and expenses, arising or imposed with or without the Lessor's
fault or negligence or under the doctrine of strict liability (collectively,
"Claims"), relating to or arising in any manner out of:
15.1.1.1. This Lease or the breach of any representation, warranty,
or covenant made by the Lessee under this Lease;
15.1.1.2. Manufacture, lease, delivery, nondelivery, acceptance,
rejection, ownership, possession, use, operation, or return of the
Aircraft;
15.1.1.3. The Aircraft's condition or any discoverable or
nondiscoverable defect in it arising from its design, testing, or
construction; any article used in the Aircraft; or any maintenance,
service or repair, whether or not the Aircraft is in the Lessee's
possession and regardless of where the Aircraft is located; or
15.1.1.4. Any transaction, approval, or document contemplated by
this Lease.
40
<PAGE>
15.1.2. The Lessee waives and releases each Indemnitee from any existing
or future Claims in any way connected with injury to or death of the Lessee's
personnel, loss or damage of the Lessee's property, or loss of use of any
property, which may:
15.1.2.1. Result from or arise in any manner out of the ownership,
leasing, condition, use or operation of the Aircraft; or
15.1.2.2. Be caused by any defect in the Aircraft; its design,
testing, or construction; any article used in the Aircraft; or any
maintenance, service, or repair, whether or not the Aircraft is in the
Lessee's possession and regardless of where the Aircraft is located.
15.1.3. The indemnities described in this Section will continue in full
force and effect notwithstanding the expiration or other termination of this
Lease and are expressly made for the benefit of and will be enforceable by each
Indemnitee.
15.2. LEGAL FEES AND EXPENSES. The Lessee agrees to pay legal fees, costs
and expenses of Lessor in connection with in connection with the enforcement of
this Lease, any other Operative Document and the other documents to be delivered
hereunder or thereunder.0
SECTION 16. ASSIGNMENT AND ALIENATION. Lessor shall have the right
to assign, sell or encumber any interest of Lessor in the Aircraft or this Lease
and/or the proceeds hereof subject to the rights of Lessee under the provisions
of this Lease. To effect or facilitate any such assignment, sale or encumbrance,
Lessee agrees to provide such agreements, consents, conveyances or documents as
may be reasonably requested by Lessor, which shall include, without limitation,
a commercially standard estoppel certificate and an unrestricted release of
Lessor from its obligations under this Lease. Lessee hereby agrees that it will
not assert against an assignee any claim or defense which it may have against
Lessor. The agreements, covenants, obligations and liabilities contained herein
including, but not limited to, all obligations to pay Rent and indemnify each
Indemnitee are made for the benefit of each Indemnitee and their respective
successors and assigns; provided, however, that no assignment, sale or
encumbrance shall increase the aggregate financial exposure under the indemnity
obligations of Lessee under this Lease as compared to what such obligations
would have been had such assignment, sale or encumbrance not occurred. In the
event this Lease is assigned, sold or encumbered by Lessor, any assignee,
transferee or mortgagee shall agree as a condition precedent thereto not to
disturb or otherwise interfere with the quiet enjoyment of Lessee of the
Aircraft so long as not Event or Default shall have occurred and be continuing.
41
<PAGE>
SECTION 17. NOTICES. All notices required under the terms and
provisions hereof shall be in writing in the English language, and any such
notice shall become effective when received by the other party, by hand, by
registered mail with proper postage for airmail prepaid, by overnight courier
service, or, if in the form of a telecopy, upon confirmation of receipt thereof,
in each case addressed (i) if to the Lessee:
TransMeridian Airlines
2700 Post Oak Boulevard, Suite 2200
Houston, Texas 77056
Attention: Managing Director
Telecopier: 713 840 2099
with copies to each Guarantor at the address provided in writing to Lessor on
the Delivery Date, or to such other address as the Lessee shall from time to
time designate in writing to the Lessor, or (ii) if to the Lessor:
Investors Asset Holding Corp.
98 North Washington Street
Boston, Massachusetts 02114
Attention: Jim Livesey
Telecopier: 617 523 1410
or to such other address as the Lessor shall from time to time designate in
writing to Lessee.
SECTION 18. NO SET-OFF, COUNTERCLAIM, ETC. Subject only to the
Lessor's compliance with its express obligations hereunder, the Lessee's
obligation to pay all Rent payable hereunder shall be absolute and unconditional
and shall not be affected by any circumstance, including, without limitation,
(i) any set-off, counterclaim, recoupment, defense or other right which the
Lessee may have against the Lessor, any partner comprising the Lessor, the
manufacturer of the Airframe or of any Engine or Appliance or anyone else for
any reason whatsoever (whether in connection with the transactions contemplated
hereby or in connection with any unrelated transaction), (ii) any defect in the
airworthiness, eligibility for registration, condition, design, operation, or
fitness for use of, or any damage to or loss or destruction of, or any Lien
upon, the Aircraft, or any interruption or cessation in the use or possession
thereof by the Lessee (iii) any insolvency, bankruptcy, reorganization or
similar proceedings by or against the Lessee, the Lessor or any other person,
(iv) the invalidity or unenforceability of this Lease or any absence of right,
power, or authority of the Lessor or Lessee to enter into this Lease, or (v) any
other circumstance, happening or event whatsoever, whether or not similar to any
of the foregoing. The Lessee hereby waives, to the extent permitted by
Applicable Law, any and all rights which it may now have or which at any time
hereafter may be conferred upon it, by Applicable Law to
42
<PAGE>
terminate, cancel, quit or surrender this Lease, or any obligation imposed on
the Lessee by this Lease. Nothing in this Section 18 shall be construed to
preclude the Lessee from bringing any suit at law or in equity against any
person which it would otherwise be entitled to bring for breach of any
representation, warranty, covenant or duty hereunder.
SECTION 19. GOVERNING LAW.
19.1. CONSENT TO JURISDICTION. Each of the Lessor and the Lessee
irrevocably agrees that any legal suit, action or proceeding arising out of or
relating solely to this Lease or any other Operative Document, or any of the
transactions contemplated hereby or thereby or any document referred to herein
or therein, may be instituted in the state or Federal courts in the Commonwealth
of Massachusetts, and it hereby irrevocably waives, to the fullest extent
permitted by law, any objection which it may have now or hereafter to the laying
of the venue or the jurisdiction or the convenience of the forum of any such
legal suit, action or proceeding and irrevocably submits generally and
unconditionally to the jurisdiction of any such court but only in any such suit,
action or proceeding. Final judgment against the Lessee or the Lessor in any
suit shall be conclusive, and may be enforced in other jurisdictions by suit on
the judgment, a certified or true copy of which shall be conclusive evidence of
the fact and of the amount of any indebtedness or liability of the Lessee or the
Lessor, as the case may be, therein described; provided always that the
plaintiff may at its option bring suit, or institute other judicial proceedings,
against the Lessee or the Lessor, as the case may be, or any of its assets in
the courts of any country or place where the Lessee or the Lessor, as the case
may be, or such assets may be found.
19.2. CHOICE OF LAW. THIS LEASE HAS BEEN NEGOTIATED AND DELIVERED IN THE
COMMONWEALTH OF MASSACHUSETTS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS,
INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE.
SECTION 20. MISCELLANEOUS. This Lease constitutes the entire
agreement of the parties. Any provision of this Lease which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibitions or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction. To the extent permitted by applicable law, each of
Lessor and the Lessee hereby waives any provision of Applicable Law which
renders any provision hereof prohibited or unenforceable in any respect.
This Lease shall constitute an agreement of lease, and nothing herein
shall be construed as conveying to the Lessee any right, title or interest in
the Aircraft except as a lessee only.
43
<PAGE>
This Lease, including all agreements, covenants, representations and
warranties, shall be binding upon and inure to the benefit of, and may be
enforced by, (1) Lessor and its agents, servants and personal representatives
and, to the extent permitted hereby, assigns and (2) Lessee and its successors
and, to the extent permitted hereby, assigns. The section and subsection
headings in this Lease are for convenience of reference only and shall not
modify, define, expand or limit any of the terms or provisions hereof. This
Lease may be executed by the parties hereto in separate counterparts, each of
which when so executed and delivered shall be an original, but all such
counterparts shall together constitute but one and the same instrument.
44
<PAGE>
No term or provision of this Lease may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which the enforcement of the change, waiver, discharge or
termination is sought.
SECTION 21. TRUTH-IN-LEASING
LESSEE REPRESENTS AND WARRANTS THAT IT IS AN AIR CARRIER, CERTIFICATED
UNDER THE FEDERAL AVIATION ACT OF 1958, AS AMENDED, AND THAT THIS LEASE, ANY
LEASE SCHEDULE THERETO, AND ANY RENEWAL SCHEDULE THEREOF IS EXCEPTED FROM THE
FAA TRUTH-IN-LEASING REQUIREMENTS. THE LESSEE CERTIFIES THAT THE LESSEE, AND
NOT THE LESSOR, IS RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT UNDER
THIS LEASE DURING THE TERM HEREOF. THE LESSEE FURTHER CERTIFIES THAT THE LESSEE
UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION
REGULATIONS. THE LESSEE FURTHER CERTIFIES THAT THE AIRCRAFT WILL BE MAINTAINED
AND INSPECTED UNDER PART 121 OF THE FEDERAL AVIATION REGULATIONS FOR OPERATIONS
TO BE CONDUCTED UNDER THIS LEASE. THE LESSEE UNDERSTANDS THAT AN EXPLANATION OF
FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FAA REGULATIONS CAN BE
OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE.
IN WITNESS WHEREOF, the Lessor and the Lessee have each caused this
Lease to be duly executed as of the date and year first above written.
INVESTORS ASSET HOLDING CORP., not in its
individual capacity but solely as owner trustee
under that certain Trust Agreement dated as of
December 10, 1989,
the Lessor
By: James F. Livesey
Title: Vice President
PRIME AIR, INC., dba TRANSMERIDIAN
AIRLINES
the Lessee
By: [Illegible]
Title: Exec VP.
45
<PAGE>
EXHIBIT A: FORM OF LEASE SUPPLEMENT AND RECEIPT
LEASE SUPPLEMENT AND RECEIPT dated ________, 1996 between INVESTORS
ASSET HOLDING CORP., not in its individual capacity but solely as owner trustee
for the benefit of Airfund 11 International Partnership, a Massachusetts limited
partnership, pursuant to a Trust Agreement dated as of December 10, 1989 (the
"Lessor"), and PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES (the "Lessee").
The Lessor and the Lessee have heretofore entered into that certain
Aircraft Lease Agreement, dated as of March 15, 1996 (herein called the "Lease"
and the defined terms therein being hereinafter used with the same meanings),
relating to one Boeing model 727-251 aircraft, manufacturer serial number 21159.
The Lease provides for the execution and delivery of a Lease Supplement and
Receipt.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, the Lessor and the Lessee hereby agree as follows:
A. THE LEASE. The Lease and all related Operative Documents to be
executed by the Lessee have been duly authorized, executed and delivered by
Lessee and constitute valid, legal and binding agreements, enforceable in
accordance with their terms. All of the terms and provisions of the Lease are
hereby incorporated by reference in this Lease Supplement and Receipt to the
same extent as if fully set forth herein. The parties confirm that the Delivery
Date is the date of this Lease Supplement and Receipt.
B. THE AIRCRAFT. The Lessee hereby certifies that the Aircraft
described Schedule 1 hereto, consisting of __ pages (including attachments) and
made a part hereof, and the Aircraft Documents described in Schedule 2 hereto,
consisting of __ pages (including attachments) and made a part hereof, have been
delivered to the Lessee, inspected by the Lessee, found to be in good order and
accepted under, and for all purposes of, the Lease, all on the date hereof. Any
qualifications to the return conditions set forth in Lease Section 6 are
attached hereto in Schedule 3. Lessee accepts delivery of the Aircraft "AS IS,"
"WHERE IS," AND SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND
REPRESENTATION AS SET FORTH IN SECTIONS 4.3 OF THE LEASE.
C. REPRESENTATIONS BY THE LESSEE. The Lessee hereby represents and
warrants to the Lessor that on the date hereof:
1. The representations and warranties of the Lessee set forth in the
Lease are true and correct in all material respects as though made on and
as of the date hereof.
2. The Lessee has satisfied or complied with all requirements set
forth in the Lease to be satisfied or complied with on or prior to the
date thereof, including without limitation affixing nameplates as required
by Lease Section 5.13.
46
<PAGE>
3. No default or Event of Default under the Lease has occurred and
is continuing on the date hereof.
4. The Lessee has obtained, and there are in full force and effect,
such insurance policies with respect to the Aircraft as are required to be
obtained under the terms of the Lease.
5. The balance sheet and statement of income of the Lessee or any
consolidated group of companies of which the Lessee is a member,
heretofore delivered to the Lessor, have been prepared in accordance with
generally accepted accounting principles, and fairly represent the
financial position of the Lessee or any consolidated group of companies of
which the Lessee is a member, on and as of the date thereof and the
results of its or their operations for the period or periods covered
thereby. Since the date of such balance sheet, there has been no material
adverse change in the financial or operating condition of the Lessee, or
any consolidated group of companies of which Lessee is a member.
This Lease Supplement and Receipt may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same instrument.
IN WITNESS WHEREOF, the Lessor and the Lessee have caused this Lease
Supplement and Receipt to be duly executed as of the date and year first above
written.
INVESTORS ASSET HOLDING CORP.,
not in its individual capacity but solely as owner trustee under that
certain Trust Agreement dated as of December 10, 1989,
the Lessor
By:
Title:
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
the Lessee
By:
Title:
47
<PAGE>
SCHEDULE 1 TO LEASE SUPPLEMENT AND RECEIPT: AIRCRAFT DESCRIPTION
Airframe: Boeing model 727-251, manufacturer serial number 21159, US
registration mark
N280US
Total hours:___ Total cycles:___
Time since C 10 check:___
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
696494.
Total hours:___ Total cycles:___
Time remaining on limiter:___ (hours)___ (cycles)
Time since last shop visit:___ (hours)___ (cycles)
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
700820.
Total hours:___ Total cycles:___
Time remaining on limiter:___ (hours)___ (cycles)
Time since last shop visit:___ (hours)___ (cycles)
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
696558.
Total hours:___ Total cycles:___
Time remaining on limiter:___ (hours)___ (cycles)
Time since last shop visit:___ (hours)___ (cycles)
Landing gear time since overhaul: L___ hours, R___ hours, N___ hours
Auxiliary power unit: manufacturer___ serial number___
Avionics (specified by manufacturer): see attachment consisting of ___ pages
Interior configuration:
Loose equipment: [SPECIFY GALLEY EQUIPMENT, EXTRA SEATS, EMERGENCY EQUIPMENT,
ETC.]
Operating weights: Maximum ramp weight:
Maximum gross take-off weight:
Maximum landing weight:
Zero fuel weight:
48
<PAGE>
SCHEDULE 2 TO LEASE SUPPLEMENT AND RECEIPT: AIRCRAFT DOCUMENTS
See attachment consisting of __ pages.
*AIRCRAFT DOCUMENTS CHECKLIST
1 Aircraft Description and Status Summary
2. Cockpit Installation Drawings
3. Emergency Equipment Installation Drawings
4. Avionics Installation List
5. Original Manufacturer's Inventory List
6. Current Component Inventory List
7. Service Bulletin (SB) Accomplishment List
8. List of Equipment to be removed prior to Delivery
9. List of Equipment not provided with U.S. Technical Standard Orders (TSO)
or otherwise unapproved for U.S. operation
10. Record of last Compass Swing
11. List of Oils and Fluids
12. FAA Approved Airplane Flight Manual (AFM)
13. Manufacturer's Flight Crew Operating Manual (FCOM)
14. Releasing Operator's Flight Crew Operating Manual
15. Weight and Balance Manual; last weighing
16. Minimum Equipment List (MEL)
17. MEL Procedures Manual
18. Maintenance Manuals
19. Wiring Diagram Manual; Termination and Equipment Lists
20. System Schematics
21. Fault Isolation Manuals
22. Non-Destructive Test (NDT) Manual
23. Structural Repair Manual (SRM)
24. Illustrated Parts Catalog (IPC)
25. Inspection Procedures Manual (IPM); FAR 145 Repair Station
26. Aircraft/Cockpit Log Books
27. Engine Log Books
28. Auxiliary Power Unit (APU) Log Book
29. Original Export Airworthiness Certificate
30. Current Export Airworthiness Certificate
31. Current, or last, Airworthiness Certificate
32. Current, or last, Noise Certificate
33. Current, or last, Registration
34. Current, or last, Radio License
35. Flight Manual Certificate
36. Supplemental Type Certificates (STC)
37. Certificate of Sanitary Construction, Galleys
49
<PAGE>
38. Modification Records
39. Form 337, Major Repair and Alteration
40. Major and Minor Repair Records
41. Airworthiness Directive (AD) Accomplishment List
42. Airworthiness Directive (AD) Records and Documentation
43. Quality Control Statements:
i) .... Maintenance Program Certification or Approval
ii) ... Automated Record System Procedures and Security Controls
iii)... Operator's Standards of Maintenance
iv) ... List of supporting FAR 145 Repair Stations
v) .... Accidents and Incidents
vi) ... Assistance in acquiring outstanding records
vii) ...Identification of signatures, initials, stamps, etc., utilized in
the verification and authentication of records
viii)...Specific List of all Records and Documentation transferred with
the equipment
44. Cross Reference List; Operator/Manufacturer Part Number and Serial Number
45. Scheduled Maintenance Program; Maintenance Requirements Manual - Function
List
46. Maintenance Requirements Item List
47. Aging Aircraft Program
i) ...Aging Aircraft Service Action Requirements
ii)...Corrosion Prevention and Control
iii)..Supplemental Inspection Program (SID)
iv) ..Aging Aircraft Repair Assessment Program
v) ...Aging Aircraft Maintenance Planning
48. Time Controlled Component (TCC) List, history and status
49. Life Limited Part (LLP) List, history and status
50. Scheduled Maintenance Check Status
51. Total Time and Cycle Justification
52. Maintenance Records
50
<PAGE>
SCHEDULE 3 TO LEASE SUPPLEMENT AND RECEIPT:
QUALIFICATIONS TO RETURN CONDITIONS
Lessor and Lessee hereby agree that the following particulars of the
condition of the Aircraft shall be qualifications to the return conditions set
forth in Section 6 of the Lease.
IN WITNESS WHEREOF, the Lessor and the Lessee have caused this
Schedule 3 to Lease Supplement and Receipt to be duly executed as of ____, 1996.
INVESTORS ASSET HOLDING CORP., not in its individual capacity but
solely as owner trustee under that certain Trust Agreement dated as of December
10, 1989,
the Lessor
By:
Title:
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
the Lessee
By:
Title:
51
<PAGE>
EXHIBIT B: FORM OF AIRCRAFT RETURN RECEIPT AND LEASE TERMINATION
The undersigned INVESTORS ASSET HOLDING CORP., not in its individual
capacity but solely as owner trustee for the benefit of Airfund 11 International
Partnership, a Massachusetts limited partnership, pursuant to a Trust Agreement
dated as of December 10, 1989 ("Lessor") has inspected the following described
Aircraft in conjunction with its return to the Lessor under the Aircraft Lease
Agreement dated as of March 15, 1996 (the "Lease") by and between Lessor and
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES ("Lessee"). Lessor hereby certifies
that said Aircraft has been found to be in the condition required by the Lease,
except for the discrepancies agreed to by the parties, listed below. Lessor
hereby accepts return of the Aircraft from Lessee and acknowledges receipt
thereof.
Airframe: Boeing model 727-251, manufacturer serial number 21159, US
registration mark N280US
Total hours:___ Total cycles:___ Time since C check:___ Time since D check:___
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
696494. Total hours:___ Total cycles:___ Time remaining on limiter:___
(hours)___ (cycles) Time since last shop visit:___ (hours)___ (cycles) Confirm
borescope:___ all compressor sections___ all turbine sections
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
700820. Total hours:___ Total cycles:___ Time remaining on limiter:___
(hours)___ (cycles) Time since last shop visit:___ (hours)___ (cycles) Confirm
borescope:___ all compressor sections___ all turbine sections
Engine: Pratt & Whitney model JT8D-15A engine, manufacturer serial number
696558. Total hours:___ Total cycles:___ Time remaining on limiter:___
(hours)___ (cycles) Time since last shop visit:___ (hours)___ (cycles) Confirm
borescope:___ all compressor sections___ all turbine sections
Landing gear time since overhaul: L___ hours, R___ hours, N___ hours
Auxiliary power unit: manufacturer ___ serial number ___
Avionics (specified by manufacturer): see attachment consisting of __ pages
Interior configuration:
52
<PAGE>
Loose equipment: [SPECIFY GALLEY EQUIPMENT, EXTRA SEATS, ETC.]
Discrepancies in components returned (see Schedule 1 to Lease Supplement and
Receipt):
Discrepancies in Aircraft Documents (see Schedule 2 to Lease Supplement and
Receipt):
Discrepancies in Aircraft return condition (see Lease Section 6):
Confirm that all installed Airframe Life Limited Components (excluding landing
gear) are cleared for a minimum of 3,000 hours (or zero time in the case of an
Airframe Life Limited Component with a total useful life of less than 3,000
hours), or 365 days in the case of an Airframe Life Limited Component controlled
by calendar time, in each case as required by the Northwest Airlines maintenance
program. Yes__ No__
53
<PAGE>
Lessor and Lessee each agree with the other in respect to said Aircraft:
1. Lessee shall execute and deliver an FAA Aircraft Registry Lease Termination
in the form attached hereto as Schedule 1.
2. Subject to the foregoing discrepancies and subject to all covenants and
indemnities of Lessee under the Lease which, by the terms of the Lease, survive
Expiry of the Lease, the Lease is hereby terminated.
Executed this ___ day of ___, 1996, at __________.
INVESTORS ASSET HOLDING CORP.,
not in its individual capacity but solely as owner trustee under that
certain Trust Agreement dated as of December 10, 1989,
the Lessor
By:
Title:
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
the Lessee
By:
Title:
54
<PAGE>
EXHIBIT B SCHEDULE 1
FAA AIRCRAFT REGISTRY
TERMINATION OF LEASE
The undersigned INVESTORS ASSET HOLDING CORP., not in its individual
capacity but solely as owner trustee under that certain Trust Agreement dated as
of December 10, 1989 ("Lessor"), and PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES
("Lessee") are parties to that certain Aircraft Lease Agreement dated as of
March 15, 1996 (as amended, the "Lease") by and between Lessor and Lessee, which
Lease was recorded by the FAA Aircraft Registry on ________ as conveyance number
_______, and which Lease covers Boeing model 727-251 airframe, serial number
______, registration mark N ______, equipped with three Pratt & Whitney model
JT8D-15A engines, serial numbers ______, ______, and ______ (collectively, the
"Aircraft").
The Lease has been terminated on ______, 199_, and the Aircraft is no
longer subject to the terms and provisions thereof.
INVESTORS ASSET HOLDING CORP.,
not in its individual capacity but solely as owner trustee under that certain
Trust Agreement dated as of December 10, 1989,
the Lessor
By:
Title:
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
the Lessee
By:
Title:
55
<PAGE>
EXHIBIT C: FORM OF LETTER OF CREDIT
Standby Irrevocable Letter of Credit US$______
Date: , 1996
BENEFICIARY:
Equis Financial Group
as agent for Airfund II International Partnership
98 North Washington Street
Boston, Massachusetts 02114
Attn: Corporate Treasurer
Gentlemen:
We hereby issue our Standby Irrevocable Letter of Credit in your favor and
authorize you to draw on us for the account of _______ (the "Account Party") up
to an aggregate amount of United States Dollars _______ and no/100 available by
draft(s) at sight.
We engage with you that all drafts drawn under and in compliance with the terms
of this Credit will be duly honored if presented to _______________ (name of US
Bank) on or before ______________ (the "Expiration Date"); provided, however, it
is a condition of this Letter of Credit that it shall be automatically extended
for additional periods of one year from the present expiration date, unless
eighty (80) days prior to such Expiration Date, we notify you in writing by
registered mail, return receipt requested, that we will not renew this Letter of
Credit for such additional one year term. If this Letter of Credit is not
renewed, extended or replaced at least sixty (60) days prior to the Expiration
Date you shall be entitled to draw upon us for the account of the Account Party
for an amount up to the full amount of our liability hereunder as set forth
above without submission of the certificate described above and irrespective of
any default as described above.
Partial drawings are permitted. This credit is transferrable. We hereby confirm
the credit and hereby undertake to honor each draft drawn and presented.
This Letter of Credit is subject to the Uniform Customs and Practice for
Documentary Credits (1993 revision), International Chamber of Commerce,
Publication No. 500.
56
<PAGE>
LEASE SUPPLEMENT AND RECEIPT dated JUNE 13,, 1996 between INVESTORS
ASSET HOLDING CORP., not in its individual capacity but solely as owner trustee
for the benefit of Airfund II International Partnership, a Massachusetts limited
partnership, pursuant to a Trust Agreement dated as of December 10, 1989 (the
"Lessor"), and PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES (the "Lessee").
The Lessor and the Lessee have heretofore entered into that certain
Aircraft Lease Agreement, dated as of March 15, 1996 (herein called the "Lease"
and the defined terms therein being hereinafter used with the same meanings),
relating to one Boeing model 727-251 aircraft, manufacturer serial number 21159.
The Lease provides for the execution and delivery of a Lease Supplement and
Receipt.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, the Lessor and the Lessee hereby agree as follows:
A. THE LEASE. The Lease and all related Operative Documents to be
executed by the Lessee have been duly authorized, executed and delivered by
Lessee and constitute valid, legal and binding agreements, enforceable in
accordance with their terms. All of the terms and provisions of the Lease are
hereby incorporated by reference in this Lease Supplement and Receipt to the
same extent as if fully set forth herein. The parties confirm that the Delivery
Date is the date of this Lease Supplement and Receipt.
B. THE AIRCRAFT. The Lessee hereby certifies that the Aircraft
described Schedule 1 hereto, consisting of 3 pages (including attachments) and
made a pail hereof, and the Aircraft Documents described in Schedule 2 hereto,
consisting of 3 pages (including attachments) and made a part hereof, have been
delivered to the Lessee, inspected by the Lessee, found to be in good order and
accepted under, and for all purposes of, the Lease, all on the date hereof. Any
qualifications to the return conditions set forth in Lease Section 6 are
attached hereto in Schedule 3. Lessee accepts delivery of the Aircraft "AS IS,"
"WHERE IS," AND SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND
REPRESENTATION AS SET FORTH IN SECTIONS 4.3 OF THE LEASE.
C. REPRESENTATIONS BY THE LESSEE. The Lessee hereby represents and
warrants to the Lessor that on the date hereof:
1. The representations and warranties of the Lessee set forth in the
Lease are true and correct in all material respects as though made on and
as of the date hereof.
2. The Lessee has satisfied or complied with all requirements set
forth in the Lease to be satisfied or complied with on or prior to the
date thereof, including without limitation affixing nameplates as required
by Lease Section 5.13.
<PAGE>
3. No default or Event of Default under the Lease has occurred and
is continuing on the date hereof.
4. The Lessee has obtained, and there are in full force and effect,
such insurance policies with respect to the Aircraft as are required to be
obtained under the terms of the Lease.
5. The balance sheet and statement of income of the Lessee or any
consolidated group of companies of which the Lessee is a member,
heretofore delivered to the Lessor, have been prepared in accordance with
generally accepted accounting principles, and fairly represent the
financial position of the Lessee or any consolidated group of companies of
which the Lessee is a member, on and as of the date thereof and the
results of its or their operations for the period or periods covered
thereby. Since the date of such balance sheet, there has been no material
adverse change in the financial or operating condition of the Lessee, or
any consolidated group of companies of which Lessee is a member.
This Lease Supplement and Receipt may be executed by the parties
hereto in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same instrument.
IN WITNESS WHEREOF, the Lessor and the Lessee have caused this Lease
Supplement and Receipt to be duly executed as of the date and year first above
written.
INVESTORS ASSET HOLDING CORP.,
not in its individual capacity but solely as owner trustee under that certain
Trust Agreement dated as of December 10, 1989,
the Lessor
By: /s/ James F. Livesey
Title: Vice President
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
the Lessee
By: /s/ Robert E. Shelton 6/13/96
Title: Vice President
<PAGE>
SCHEDULE 1 TO LEASE SUPPLEMENT AND RECEIPT: AIRCRAFT DESCRIPTION
Airframe: Boeing model 727-251, manufacturer serial number 21159, US
registration mark N280US
Total hours: ___ 50587 ___ Total cycles: ___ 35722 ___
Time since C10 check ___ 3 ___ (hours)
Engine: Pratt & Whitney JT5D-15A, manufacturer serial number 696494
Total hours:___ 42164 ___ Total cycles: ___ 28677 ___
Time remaining on limiter ___ 4015 ___ (hours) ___ 2956 ___ (cycles)
Time since last shop visit ___ 5 ___ (hours) ___ 3 ___ (cycles)
Engine: Pratt & Whitney JT8D-15A, manufacturer serial number 700820
Total hours: ___ 30361 ___ Total cycles: ___ 19015 ___
Time remaining on limiter ___ 3214 ___ (hours) ___ 3046 ___ (cycles)
Time since last shop visit ___ 5 ___ (hours) ___ 3 ___ (cycles)
Engine: Pratt & Whitney JT8D-15A, manufacturer serial number 696558
Total hours: ___ 40321 ___ Total cycles: ___ 27123 ___
Time remaining on limiter ___ 3159 ___ (hours) ___ 3050 ___ (cycles)
Time since last shop visit ___ 5 ___ (hours) ___ 3 ___ (cycles)
Landing gear time since overhaul; L-18294, R 7:00, N 10078 (hours)
Auxiliary power unit: manufacturer Garrett serial number P36279
Avionics (specified by manufacturer): see attachment 1, 1 page
Interior configuration: 170Y Galleys 1,2,3,4 & 4A
Loose equipment: (SPECIFY GALLEY EQUIPMENT, EXTRA SEATS, EMERGENCY EQUIPMENT,
ETC.) See attachment 2, 1 page
Operating weights: Maximum ramp weight: 177500
Maximum gross take-off weight: 176500
Maximum landing weight: 150000
Zero fuel weight: 138000
<PAGE>
ATTACHMENT 1 TO SCHEDULE 1
280US AVIONICS LIST
AUTO PILOT 1 SPERRY SP50
VHF COMM 3 COLLINS 618-M3
BENDIX 2070945-4301
VHF NAV 3 COLLINS 522-4280-XXX
MARKER 1 BENDIX 2087821-2811
ADF 1 BENDIX 2087786-7300
DME 2 COLLINS 622-2920-001
TRANSPONDER 2 COLLINS MODE S TPR720
621-A6
RADAR 1 BENDIX 2067157-0103
RADIO ALT 1 BENDIX 2067631-5315
FLT DIR 2 COLLINS 562A-5F4
GROUND PROX 1 BENDIX 2041033-8313
TCAS 1 HONEYWELL 4066010-904
WINDSHEAR 1 HONEYWELL 4061048-904
HF 2 COLLINS 522-1501-000
GPS 2 HONEYWELL/TRIMBLE 81845-3101-005
CVR 1 FAIRCHILD A152
DFDR 1 COLLINS 980-410O-GQUS
<PAGE>
ATTACHMENT 2 TO SCHEDULE 1
A/C 280 Loose Equipment
Full complement of galley equipment including ovens with inserts, coffee makers,
food carriers.
Full complement of emergency equipment as required by emergency equipment
location drawing.
Life vests and life rafts are the property of TransMeridian.
- ----------------------------------RES 6/13/96-----------------------------------
All Warranties for Service, by NAV Com Aviation Inc., Related to N280US will be
assigned to TransMeridian.
By P.L.M. RES 6/13/96
<PAGE>
SCHEDULE 2 TO LEASE SUPPLEMENT AND RECEIPT: AIRCRAFT DOCUMENTS
See attachment consisting of 2 pages.
<PAGE>
ATTACHMENT 1 TO SCHEDULE 2
RECORD INVENTORY 13 Boxes
B727-251 SN21159 N280US
BOX 1 Film cartridges 1 thru 4 NWA 727 IPC R4
Film Cartridges 1 thru 3 NWA 727 MM R1036
Film Cartridge 1 NWA 727 WD R58
Film Cartridge 1 Boeing SRM R79
Film Cartridge 1 P&W JT8D-1thru17AR MM R110
Film Cartridge 1 P&W JT8D-1thru17AR IFC R129
1 B727 Cockpit operating manual R4-95
2 Volumes FAA AFM R14-95
1 Volume NWA Aircraft Operating Manual R4-95
BOX 2 JT8D-15A 696494
JT8D-15A 696558
BOX 3 JT8D-15A 700280
BOX 4 JT8D-15A 696558
5 Packs 3C check 12/92
Box 5 Logs & NonRoutine 11/94 thru 11/95
Misc (FCs & Misc cards)
A/C Readiness Log, Misc Back to Birth A/C records
Miscellaneous Brochure, Rigging Brochure (BTB)
Box 6 2 Packs EAs
Misc NRs (Retain for record)
Service C Check
Engr Modification
Box 7 4 Packs Work control cards
ADs Repetitive & Terminated
Box 8 C-2 check 9/5/91
Box 9 C-1 check 5/17/90
Box 10 8 Packs C check 6/94
Lt MLG 1/89, NLG 2/92, APU Log
Rt MLG 11/95
1 Pack APU data SN 36279
Print out - Forecast
A/C Daily Log 8/95 to 10/95
NWA Maint time limit document
SDR reports
Discrepancy history 8/95 to 11/95
Wt & Bal data
2 Wt & Bal manuals
<PAGE>
Box 11 Print out Removal history/shop findings
3 folders engine BTB records 696494,700820,696558
Decommission check pack w/engine changes & Rt MLG
Gearbox 40415 w/engine 696494
Box 12 Certified AD reports
Certified SB reports
Certified Rotable component report
Certified AD reports Engines 696494,7OO82O,696558
Certified SB reports Engines 696494,700820,696558
Certified AD run for APU
Certified DUJJX report
Box 13 Maintenance accomplished at NavCom 5/96 consisting of
Boeing C10, Structural inspection and Aging Aircraft
Modifications, Interior refurbishment, as well as
TransMeridian required SunCountry Bridging maintenance.
<PAGE>
SCHEDULE 3 TO LEASE SUPPLEMENT AND RECEIPT:
QUALIFICATIONS TO RETURN CONDITIONS
Lessor and Lessee hereby agree that the following particulars of the
condition of the Aircraft shall be qualifications to the return conditions set
forth in Section 6 of the Lease. Suspect #2 spoiler float not corrected. Lessor
correct.
Roll computer SN D971032 DN 2505005 2 on loan to TransMeridian by Prestige
Airways.
Correction to exterior paint to be at the Lessor's expense.
________________________________RES 6/13/96_____________________________________
All warranties offered to P.L.M., by NAVCom Aviation Inc., for N280US service,
shall be assigned to TransMeridian Airways.
RES 6/13/96
IN WITNESS WHEREOF, the Lessor and the Lessee have caused this Schedule 3
to Lease Supplement and Receipt to be duly executed as of June 13, 1996.
INVESTORS ASSET HOLDING CORP.,
not in its individual capacity but solely as owner trustee under that certain
Trust Agreement dated as of December 10, 1989,
the Lessor
By: /s/ James F. Livesey
Title: Vice President
PRIME AIR, INC., dba TRANSMERIDIAN AIRLINES,
the Lessee
By: /s/ Robert E. Shelton
Title: Vice President 6/13/96
