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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-19137
------------------------
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3057290
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
88 BROAD ST., SIXTH FLOOR, BOSTON, MA 02110
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
Securities registered pursuant to Section 12(b) of the Act NONE
------------------------
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
---------------------------------------- ---------------------------------
Securities registered pursuant to Section 12(g) of the Act:
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 /X/ No / /
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 1998 (Part I and II)
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INTERNATIONAL LIMITED PARTNERSHIP
AIRFUND II
FORM 10-K
TABLE OF CONTENTS
<TABLE>
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PAGE
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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....................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 8
Item 8. Financial Statements and Supplementary Data................................................... 8
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 8
PART III
Item 10. Directors and Executive Officers of the Partnership........................................... 9
Item 11. Executive Compensation........................................................................ 11
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 11
Item 13. Certain Relationships and Related Transactions................................................ 12
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 14-15
</TABLE>
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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 known as 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 undiscounted noncancellable rents equal or exceed the
acquisition cost of the aircraft. Operating leases are those in which the
aggregate undiscounted noncancellable rental payments are less than the
acquisition cost 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 were to acquire
and lease aircraft that would:
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 are
described in Note 3 to the financial statements included in Item 14, herein. The
Restated Agreement, as amended, provides that the Partnership will terminate no
later than December 31, 2005. However, the Partnership is a Nominal Defendant in
a Class Action Lawsuit, the outcome of which could significantly alter the
nature of the Partnership's organization and its future business operations. See
Note 7 to the accompanying financial statements.
The Partnership has no employees; however, it is managed pursuant to a
Management Agreement with EFG or one of its affiliates (the "Manager"). The
Manager's role, among other things, is to (i) evaluate, select, negotiate, and
consummate the acquisition of aircraft, (ii) manage the leasing,
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re-leasing, financing, and refinancing of aircraft, and (iii) arrange the resale
of aircraft. The Manager is compensated for such services as provided for in the
Restated Agreement, as amended, described 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. In addition, the
leasing industry is very competitive. The Partnership is subject to considerable
competition when the aircraft are re-leased or sold at the expiration of current
lease terms. The Partnership must 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 addition, 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 anticipated
revenues.
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, 1998, 1997 and 1996 is
incorporated herein by reference to Note 2 to the financial statements in the
1998 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the
Securities and Exchange Commission.
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
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The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle
established Equis Corporation and GDE LP in December 1994 for the sole purpose
of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym, to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not applicable.
ITEM 2. PROPERTIES.
Incorporated herein by reference to Note 3 to the financial statements in
the 1998 Annual Report.
ITEM 3. LEGAL PROCEEDINGS.
Incorporated herein by reference to Note 7 to the financial statements in
the 1998 Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER
MATTERS.
(a) Market Information
There is no public market for the resale of the Units and it is not
anticipated that a public market for resale of the Units will develop.
(b) Approximate Number of Security Holders
At December 31, 1998, there were 3,899 record holders of Units in the
Partnership.
(c) Dividend History and Restrictions
Pursuant to Article VI of the Restated Agreement, as amended, the amount of
cash distributions to be declared and paid to the Partners is determined on a
quarterly basis (see detail below).
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket equipment upon lease expiration. Liquidity is
especially important as the Partnership matures and sells equipment, because the
remaining equipment base consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining aircraft. The management
and remarketing of aircraft can involve, among other things, significant costs
and lengthy remarketing initiatives.
Although the Partnership's lessees are required to maintain the aircraft
during the period of lease contract, repair, maintenance, and/or refurbishment
costs at lease expiration can be substantial. For example, an aircraft that is
returned to the Partnership meeting minimum airworthiness standards, such as
flight hours or engine cycles, nonetheless may require heavy maintenance in
order to bring its engines, airframe and other hardware up to standards that
will permit its prospective use in commercial air transportation. Individually,
these repairs can cost in excess of $1 million and, collectively; they could
require the disbursement of several million dollars, depending upon the extent
of refurbishment. In addition, the Partnership's equipment portfolio includes
two Stage 2 aircraft as well as proportional ownership interests in three other
Stage 2 aircraft. These aircraft are prohibited from operating in the United
States after December 31, 1999 unless they are retro-fitted with hush-kits to
meet Stage 3 noise regulations promulgated by the Federal Aviation
Administration. The cost to hush-kit an aircraft, such as the Partnership's
Boeing 727s and Boeing 737s, can approach $2 million. Although the Partnership
is not required to retro-fit its aircraft with hush-kits, insufficient liquidity
could jeopardize the remarketing of these aircraft and risk their disposal at a
depressed value at a time when a better economic return would be realized from
refurbishing the aircraft and re-leasing them to another user. Collectively, the
aggregation of the Partnership's potential liquidity needs related to aircraft
and other working capital requirements could be significant. Accordingly, the
General Partner has maintained significant cash reserves within the Partnership
in order to minimize the risk of a liquidity shortage.
Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit
described in Note 7 to the accompanying financial statements. A preliminary
settlement agreement will allow the Partnership to invest in new equipment or
other activities, subject to certain limitations, effective March 22, 1999. To
the extent that the Partnership continues to own aircraft investments that could
require capital reserves, the General Partner does not anticipate that the
Partnership will invest in new assets, regardless of its authority to do so.
Until the Class Action Lawsuit is adjudicated, the General Partner does not
expect to declare any distributions to the Partners. In addition, the proposed
settlement, if effected, will materially change the
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future organizational structure and business interests of the Partnership, as
well as its cash distribution policies. See Note 7 to the accompanying financial
statements.
Cash distributions consist of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings.
"Distributable Cash From Operations" means the net cash provided by the
Partnership's normal operations after general expenses and current liabilities
of the Partnership are paid, reduced by any reserves for working capital and
contingent liabilities to be funded from such cash, to the extent deemed
reasonable by the General Partner, and increased by any portion of such reserves
deemed by the General Partner not to be required for Partnership operations and
reduced by all accrued and unpaid Equipment Management Fees and, after Payout,
further reduced by all accrued and unpaid Subordinated Remarketing Fees.
Distributable Cash From Operations does not include any Distributable Cash From
Sales or Refinancings.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings as reduced by (i) (a) 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 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
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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.
ITEM 6. SELECTED FINANCIAL DATA.
Incorporated herein by reference to the section entitled "Selected Financial
Data" in the 1998 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Incorporated herein by reference to the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
1998 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Incorporated herein by reference to the financial statements and
supplementary data included in the 1998 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP.
(a-b) Identification of Directors and Executive Officers
The Partnership has no Directors or Officers. As indicated in Item 1 of this
report, AFG 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. The
Recognized Owners have no right to participate in the control of the
Partnership's general operations, but they do have certain voting rights, as
described in Item 12 herein. The names, titles and ages of the Directors and
Executive Officers of the General Partner as of March 15, 1999 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS OF
THE GENERAL PARTNER (SEE ITEM 13)
<TABLE>
<CAPTION>
NAME TITLE AGE TERM
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<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member of the Executive Until a successor is
Committee of EFG and President and a Director duly elected and
of the General Partner 50 qualified
Gary D. Engle President and Chief Executive Officer and
member of the Executive Committee of EFG and
a Director of the General Partner 50
Gary M. Romano Executive Vice President and Chief Operating
Officer of EFG and Clerk of the General
Partner 39
James A. Coyne Executive Vice President of EFG 38
Michael J. Butterfield Senior Vice President, Finance and Treasurer
of EFG and Treasurer of the General Partner 39
Sandra L. Simonsen Senior Vice President, Information Systems of
EFG 48
Gail D. Ofgant Senior Vice President, Lease Operations of
EFG 33
</TABLE>
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Partners, Directors
or Executive Officers.
(e) Business Experience
Mr. MacDonald, age 50, is a co-founder, Chairman and a member of the
Executive Committee of EFG and President and a Director of the General Partner.
Mr. MacDonald was also a co-founder, Director, and Senior Vice President of
EFG's predecessor corporation from 1980 to 1988. Mr. MacDonald is President of
American Finance Group Securities Corp. and a limited partner in Atlantic
Acquisition
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Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC").
Prior to co-founding EFG's predecessors, Mr. MacDonald held various executive
and management positions in the leasing and pharmaceutical industries. Mr.
MacDonald holds a M.B.A. from Boston College and a B.A. degree from the
University of Massachusetts (Amherst).
Mr. Engle, age 50, is President and Chief Executive Officer of EFG and sole
shareholder and Director of its general partner, Equis Corporation and a member
of the Executive Committee of EFG and President of AFG Realty Corporation. Mr.
Engle joined EFG in 1990 as Executive Vice President and acquired control of EFG
and its subsidiaries in December 1994. Mr. Engle is Vice President and a
Director of certain of EFG's subsidiaries and affiliates, a limited partner in
AALP and ONC and controls the general partners of AALP and ONC. Mr. Engle is
also Chairman, Chief Executive Officer, and a member of the Board of Directors
of Semele Group, Inc. ("Semele"). From 1987 to 1990, Mr. Engle was a principal
and co-founder of Cobb Partners Development, Inc., a real estate and mortgage
banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and
Chief Financial Officer of Arvida Disney Company, a large-scale community
development company owned by Walt Disney Company. Prior to 1980, Mr. Engle
served in various management consulting and institutional brokerage capacities.
Mr. Engle has a MBA from Harvard University and a BS degree from the University
of Massachusetts (Amherst).
Mr. Romano, age 39, became Executive Vice President and Chief Operating
Officer of EFG, and Secretary of Equis Corporation in 1996 and is Secretary or
Clerk of several of EFG's subsidiaries and affiliates. Mr. Romano joined EFG in
November 1989, became Vice President and Controller in April 1993 and Chief
Financial Officer in April 1995. Mr. Romano assumed his current position in
April 1996. Mr. Romano is also Vice President and Chief Financial Officer of
Semele. Prior to joining
EFG, Mr. Romano was Assistant Controller for a privately held real estate
development and mortgage origination company that he joined in 1987. Previously,
Mr. Romano was an Audit Manager at Ernst & Whinney (now Ernst & Young LLP),
where he was employed from 1982 to 1986. Mr. Romano is a Certified Public
Accountant and holds a B.S. degree from Boston College.
Mr. Coyne, age 38, is Executive Vice President, Capital Markets of EFG and
President, Chief Operating Officer and a member of the Board of Directors of
Semele. Mr. Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG
in November 1994. In September 1997, Mr. Coyne was appointed Executive Vice
President of EFG. Mr. Coyne is a limited partner in AALP and ONC. From May 1993
through November 1994, he was employed by the Raymond Company, a private
investment firm, where he was responsible for financing corporate and real
estate acquisitions. From 1985 through 1989,
Mr. Coyne was affiliated with a real estate investment company and an equipment
leasing company. Prior to 1985, he was with the accounting firm of Ernst &
Whinney (now Ernst & Young LLP). He has a BS in Business Administration from
John Carroll University, a Masters Degree in Accounting from Case Western
Reserve University and is a Certified Public Accountant.
Mr. Butterfield, age 39, is Senior Vice President, Finance and Treasurer of
EFG and certain of its affiliates and is Treasurer of the General Partner and
Semele. Mr. Butterfield joined EFG in June 1992, became Vice President, Finance
and Treasurer of EFG and certain of its affiliates in April 1996 and was
promoted to Senior Vice President, Finance and Treasurer of EFG and certain of
its affiliates in July 1998. Prior to joining EFG, Mr. Butterfield was an Audit
Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was
employed in public accounting and industry positions in New Zealand and London
(UK) prior to coming to the United States in 1987. Mr. Butterfield attained his
Associate Chartered Accountant (A.C.A.) professional qualification in New
Zealand and has completed his CPA requirements in the United States. He holds a
Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand.
Ms. Simonsen, age 48, joined EFG in February 1990 and was promoted to Senior
Vice President, Information Systems of EFG in April 1996. Prior to joining EFG,
Ms. Simonsen was Vice President, Information Systems with Investors Mortgage
Insurance Company, which she joined in 1973.
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Ms. Simonsen provided systems consulting for a subsidiary of American
International Group and authored a software program published by IBM. Ms.
Simonsen holds a BA degree from Wilson College.
Ms. Ofgant, age 33, is Senior Vice President, Lease Operations of EFG and
certain of its affiliates. Ms. Ofgant joined EFG in July 1989, was promoted to
Manager Lease Operations in April 1994, and became Vice President of Lease
Operations in April 1996. In July 1998, Ms. Ofgant was promoted to Senior Vice
President of Lease Operations. Prior to joining EFG, Ms. Ofgant was employed by
Security Pacific National Trust Company. Ms. Ofgant holds a BS degree in Finance
from Providence College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
See Item 10 (a-b) above.
ITEM 11. EXECUTIVE COMPENSATION.
(a) Cash Compensation
Currently, the Partnership has no employees. However, under the terms of the
Restated Agreement, as amended, the Partnership is obligated to pay all costs of
personnel employed full or part-time by the Partnership, including officers or
employees of the General Partner or its Affiliates. There is no plan at the
present time to make any 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 has
voting rights with respect to:
1. Amendment of the Restated Agreement;
2. Termination of the Partnership;
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3. Removal of the General Partner; and
4. Approval or disapproval of the sale of all, or substantially all, of the
assets of the Partnership (except in the orderly liquidation of the
Partnership upon its termination and dissolution).
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, 1999.
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,
1998, 1997 and 1996, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Equipment management fees............................................... $ 156,535 $ 161,231 $ 235,339
Administrative charges.................................................. 53,676 50,304 28,694
Reimbursable operating expenses due to third parties.................... 1,762,271 1,240,204 2,071,725
------------ ------------ ------------
Total................................................................... $ 1,972,482 $ 1,451,739 $ 2,335,758
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG 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 5% of gross
operating lease rental revenues and 2% of gross full payout lease rental
revenues received by the Partnership. Both acquisition and management fees are
subject to certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG at actual cost.
All aircraft were purchased from EFG or one of its Affiliates. The
Partnership's acquisition cost was determined by the method described in Note 2
to the financial statements included in Item 14, herein.
All rents and proceeds from the sale of equipment are paid directly to EFG.
EFG temporarily deposits collected funds in a separate interest-bearing escrow
account prior to remittance to the Partnership. At December 31, 1998, the
Partnership was owed $71,178 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in January 1999.
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.
12
<PAGE>
Certain affiliates of the General Partner own Units in the Partnership as
follows:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
AFFILIATE UNITS OWNED OUTSTANDING UNITS
- ------------------------------------------------------------- ------------- -------------------
<S> <C> <C>
Old North Capital Limited Partnership........................ 40,000 1.47%
</TABLE>
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG. The general partner of ONC
is controlled by Gary D. Engle. In addition, the limited partnership interests
of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and
CEO of Semele.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Partnership
None.
(d) Transactions with Promoters
See Item 13(a) above.
13
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<S> <C> <C> <C>
(a) Documents filed as part of this report:
(1) Financial Statements:
Report of Independent Auditors................................................. *
Statement of Financial Position at December 31, 1998 and 1997.................. *
Statement of Operations for the years ended December 31, 1998, 1997 and 1996... *
Statement of Changes in Partners' Capital for the years ended December 31,
1998, 1997 and 1996............................................................ *
Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996... *
Notes to the Financial Statements.............................................. *
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601
of Regulation S-K, are not applicable.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
<C> <S>
4 Amended and Restated Agreement and Certificate of Limited Partnership included as Exhibit A to the
Prospectus, which is included in Registration Statement on Form S-1 (No. 33-25334).
13 The 1998 Annual Report to security holders, a copy of which is furnished for the information of the
Securities and Exchange Commission. Such Report, except for those portions thereof which are
incorporated herein by reference, is not deemed "filed" with the Commission.
23 Consent of Independent Auditors.
99(a) Lease agreement with Northwest Airlines, Inc. was filed in the Registrant's Annual Report on Form
10-K for the period May 17, 1990 (commencement of operations) to December 31, 1990 as Exhibit 28 (a)
and is incorporated herein by reference.
99(b) 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(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
(e) and is incorporated herein by reference.
</TABLE>
- ------------------------
* Incorporated herein by reference to the appropriate portion of the 1998
Annual Report to security holders for the year ended December 31, 1998 (see
Part II).
14
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------------
<C> <S>
99(d) Lease agreement with 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(e) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997 as Exhibit 99 (f) and is incorporated herein by reference.
99(f) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997 as Exhibit 99 (g) and is incorporated herein by reference.
99(g) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997 as Exhibit 99 (h) and is incorporated herein by reference.
99(h) Lease agreement with Finnair OY was filed in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997 as Exhibit 99 (i) and is incorporated herein by reference.
99(i) Lease agreement with Finnair OY was filed in the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997 as Exhibit 99 (j) and is incorporated herein by reference.
99(j) Lease agreement with Transmeridian Airlines, Inc. was filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997 as Exhibit 99 (k) and is incorporated herein by reference.
99(k) Lease agreement with Classic Airways Limited is filed in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998 and is included herein.
</TABLE>
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
<TABLE>
<S> <C> <C>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
By: AFG Aircraft Management Corporation,
-----------------------------------------
a Massachusetts corporation and the
General Partner of the Registrant.
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ GEOFFREY A. MACDONALD By: /s/ GARY D. ENGLE
---------------------------------------- ----------------------------------------
Geoffrey A. MacDonald Gary D. Engle
CHAIRMAN AND A MEMBER OF THE EXECUTIVE PRESIDENT AND CHIEF EXECUTIVE OFFICER AND
COMMITTEE OF EFG AND PRESIDENT AND A A MEMBER OF THE EXECUTIVE COMMITTEE OF
DIRECTOR OF THE GENERAL PARTNER EFG AND A DIRECTOR OF THE GENERAL PARTNER
(PRINCIPAL EXECUTIVE OFFICER)
Date: March 31, 1999 Date: March 31, 1999
By: /s/ GARY M. ROMANO By: /s/ MICHAEL J. BUTTERFIELD
---------------------------------------- ----------------------------------------
Gary M. Romano Michael J. Butterfield
EXECUTIVE VICE PRESIDENT AND CHIEF SENIOR VICE PRESIDENT, FINANCE AND
OPERATING OFFICER OF EFG AND CLERK OF THE TREASURER OF EFG AND TREASURER OF THE
GENERAL PARTNER (PRINCIPAL FINANCIAL GENERAL PARTNER (PRINCIPAL ACCOUNTING
OFFICER) OFFICER)
Date: March 31, 1999 Date: March 31, 1999
</TABLE>
16
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
ANNUAL REPORT TO THE PARTNERS, DECEMBER 31, 1998
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
INDEX TO ANNUAL REPORT TO THE PARTNERS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
SELECTED FINANCIAL DATA................................................................................... 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 3-10
FINANCIAL STATEMENTS:
Report of Independent Auditors............................................................................ 11
Statement of Financial Position at December 31, 1998 and 1997............................................. 12
Statement of Operations for the years ended December 31, 1998, 1997 and 1996.............................. 13
Statement of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996............ 14
Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................. 15
Notes to the Financial Statements......................................................................... 16-28
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed..................... 29
Statement of Cash and Distributable Cash From Operations, Sales and Refinancings.......................... 30
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................................... 31
</TABLE>
<PAGE>
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For each of the years in the five year period ended December 31, 1998:
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS 1998 1997 1996 1995 1994
- ------------------------- ------------- ------------- ------------- -------------------------- -------------
<S> <C> <C> <C> <C> <C>
Lease revenue............ $ 3,130,704 $ 3,224,618 $ 4,706,774 $ 6,585,836 $ 9,001,993
Net loss................. $ (1,208,085) $ (1,762,752) $ (3,649,940) $ (5,286,053) $ (1,474,819)
Per Unit:
Net loss............... $ (0.42) $ (0.62) $ (1.28) $ (1.85) $ (0.52)
Cash distributions
declared............. $ -- $ -- $ 2.25 $ 1.75 $ 2.50
<CAPTION>
FINANCIAL POSITION
- -------------------------
<S> <C> <C> <C> <C> <C>
Total assets............. $ 8,076,569 $ 9,765,106 $ 13,163,812 $ 21,432,133 $ 31,553,833
Total long-term
obligations............ $ 1,896,665 $ 2,677,520 $ 3,419,785 $ 1,432,396 $ --
Partners' capital........ $ 5,632,042 $ 6,840,127 $ 8,602,879 $ 18,637,361 $ 28,924,079
</TABLE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1998 compared to the year
ended December 31, 1997 and the year ended December 31, 1997
compared to the year ended December 31, 1996
Certain statements in this annual report of 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, the collection of all rents due under the Partnership's
lease agreements and remarketing of the Partnership's equipment.
YEAR 2000 ISSUE
The Year 2000 Issue generally refers to the capacity of computer programming
logic to correctly identify the calendar year. Many companies utilize computer
programs or hardware with date sensitive software or embedded chips that could
interpret dates ending in "00" as the year 1900 rather than the year 2000. In
certain cases, such errors could result in system failures or miscalculations
that disrupt the operations of the affected businesses. The Partnership uses
information systems provided by EFG and has no information systems of its own.
EFG has adopted a plan to address the Year 2000 Issue that consists of four
phases: assessment, remediation, testing, and implementation and has elected to
utilize principally internal resources to perform all phases. EFG completed
substantially all of its Year 2000 project by December 31, 1998 at an aggregate
cost of less than $50,000 and at a di minimus cost to the Partnership. Remaining
items are expected to be minor and be completed by March 31, 1999. All costs
incurred in connection with EFG's Year 2000 project have been expensed as
incurred.
EFG's primary information software was coded by IBM at the point of original
design to use a four digit field to identify calendar year. All of the
Partnership's lease billings, cash receipts and equipment remarketing processes
are performed using this proprietary software. In addition, EFG has gathered
information about the Year 2000 readiness of significant vendors and third party
servicers and continues to monitor developments in this area. All of EFG's
peripheral computer technologies, such as its network operating system and
third-party software applications, including payroll, depreciation processing,
and electronic banking, have been evaluated for potential programming changes
and have required only minor modifications to function properly with respect to
dates in the year 2000 and thereafter. EFG understands that each of its and the
Partnership's significant vendors and third-party servicers are in the process,
or have completed the process, of making their systems Year 2000 compliant.
Substantially all parties queried have indicated that their systems would be
Year 2000 compliant by the end of 1998.
Presently, EFG is not aware of any outside customer with a Year 2000 Issue
that would have a material effect on the Partnership's results of operations,
liquidity, or financial position. The Partnership's equipment leases were
structured as triple net leases, meaning that the lessees are responsible for,
among other things, (i) maintaining and servicing all equipment during the lease
term, (ii) ensuring that all equipment functions properly and is returned in
good condition, normal wear and tear excepted, and (iii) insuring the assets
against casualty and other events of loss. Non-compliance with lease terms on
the part of a lessee, including failure to address Year 2000 Issues, could
result in lost revenues and impairment of residual values of the Partnership's
equipment assets under a worst-case scenario.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with
3
<PAGE>
respect to its computer systems or result in a system failure or disruption of
its or the Partnership's business operations. However, EFG has no means of
ensuring that all customers, vendors and third-party servicers will conform
ultimately to Year 2000 standards. The effect of this risk to the Partnership is
not determinable.
OVERVIEW
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, 1998, the Partnership owned
three aircraft and proportionate interests in five additional aircraft. Upon
expiration of the current lease agreements, each aircraft will be re-leased or
sold depending on prevailing market conditions and the assessment of such
conditions by EFG to obtain the most advantageous economic benefit. Presently,
the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of
which could significantly alter the nature of the Partnership's organization and
its future business operations. See Note 7 to the accompanying financial
statements. Pursuant to the Restated Agreement, as amended, the Partnership is
scheduled to be dissolved by December 31, 2005.
RESULTS OF OPERATIONS
For the year ended December 31, 1998, the Partnership recognized lease
revenue of $3,130,704 compared to $3,224,618 and $4,706,774 for the years ended
December 31, 1997 and 1996, respectively. The decrease in the Partnership's
lease revenue from 1997 to 1998 was due primarily to the sale of the
Partnership's interest in a Lockheed L-1011-50 aircraft in April 1998 and a
scheduled reduction in the lease rent payable under the lease agreement related
to the Partnership's Boeing 727-251 Advanced aircraft. Such decrease was
partially offset by an increase in lease revenue recognized related to the
Partnership's Lockheed L-1011-100 aircraft. (See detailed discussion below).
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
to Classic Airways Limited ("Classic") 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 a like-kind exchange transaction. As a result of the
exchange, the Partnership replaced its ownership interest in a Boeing 747-SP
aircraft (the "United Aircraft"), having aggregate quarterly lease revenues of
$149,640, with interests in five other aircraft; three Boeing 737 aircraft
leased by Southwest Airlines, Inc. (the "Southwest Aircraft") and two McDonnell
Douglas MD-82 aircraft leased by Finnair OY (the "Finnair Aircraft") having
aggregate quarterly lease revenues of $254,373. The Southwest Aircraft and the
Finnair Aircraft were exchanged into the Partnership in 1995 and in March 1996,
respectively. In aggregate, the Partnership recognized lease revenue related to
the Southwest Aircraft of $377,568, in each of the years ended December 31,
1998, 1997 and 1996. The Partnership recognized lease revenue related to the
Finnair Aircraft of $639,923, $639,752 and $432,973 during the years ended
December 31, 1998, 1997 and 1996, respectively.
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
4
<PAGE>
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. This aircraft generated $876,666 of lease revenue
during the year ended December 31, 1998, compared to $971,500 and $293,333
during the years ended December 31, 1997 and 1996, respectively (see below for
discussion regarding litigation related to this aircraft).
The Partnership owns a Lockheed L-1011-100 aircraft formerly leased to
Cathay Pacific Airways Limited ("Cathay"). The Partnership's renewal lease
agreements with Cathay expired on February 14, 1996 and were extended until
April 11, 1996. Subsequent to this extension, Cathay again extended the lease
until September 30, 1996. Cathay subsequently returned the aircraft to the
Partnership upon the expiration of these lease extensions and the aircraft
underwent heavy maintenance. The heavy maintenance on the Lockheed L-1011-100
cost the Partnership approximately $947,000; approximately $400,000 of which was
expensed during the year ended December 31, 1996 with the balance expensed
during the year ended December 31, 1997. The Partnership entered into an
agreement with Classic Airways Limited ("Classic") to lease the Partnership's
Lockheed L-1011-100 aircraft for a period of three years with a base rent of
$80,000 per month, effective November 1, 1997. In addition, Classic was granted
an option to purchase the aircraft for $2,500,000 and $2,000,000 after two years
and the entire lease term has elapsed, respectively. Due to certain
refurbishments required to be performed by Classic, the Partnership agreed to
defer rents required under the attendant lease agreement for the three month
period ended March 31, 1998. The lease agreement was therefore extended three
months through January 31, 2001. The Partnership recognized lease revenue in the
amount of approximately $320,000 related to this aircraft during the year ended
December 31, 1998 compared to $145,000 and $1,117,463 during the years ended
December 31, 1997 and 1996, respectively (see additional discussion below).
In September 1998, Classic ceased paying rent to the Partnership with
respect to the Lockheed L-1011-100 aircraft. In October 1998, Classic filed for
receivership in the United Kingdom ("UK") and was placed in liquidation. Prior
to its liquidation, Classic had incurred and failed to pay significant airport
ground fees to BAA plc, Eurocontrol, and CAA (collectively, the "Airport
Authorities"). The failure of Classic to pay such charges resulted in detention
of the aircraft by the Airport Authorities. In addition, the Airport Authorities
have continued to charge incremental ground fees and expenses to the aircraft
and have grounded the aircraft pending collection of such amounts, which are
approximately $284,000 in total. Under UK law, the Airport Authorities have the
right not only to detain the aircraft, but to sell the aircraft at auction in
order to satisfy their outstanding fees. Accordingly, it is anticipated that the
Partnership will be required to pay at least a portion of the airport charges in
order to recover the aircraft. The General Partner has engaged counsel to
represent the Partnership's interests in the UK and; presently, counsel is
negotiating with the Airport Authorities to resolve the issue of the unpaid
charges so that the aircraft can be flown to the United States or otherwise
remarketed. The parties have not executed a final settlement agreement; however,
the Airport Authorities have indicated a willingness to reach a compromise.
Based upon recent discussions, the Partnership accrued and expensed
approximately $167,000 to cover the cost of settling the airport charges, all of
which was recorded in the fourth quarter of 1998. At the date of Classic's
liquidation, the Partnership had accrued $160,000 of rental income which had not
been collected from Classic and all of which was written-off as uncollectible in
the third quarter of 1998. The General Partner does not expect that any funds
are likely to be recovered from Classic in connection with this matter.
Subsequent to the expiration of the last of several lease extensions on June
30, 1996, Cathay returned a Lockheed L-1011-50, in which the Partnership had an
ownership interest. Upon its return, the aircraft underwent heavy maintenance at
a cost to the Partnership of approximately $400,000, the majority of which was
expensed in 1996. The Partnership entered into a new 1-year lease agreement with
Aer Lease Limited ("Aer Lease") with respect to its interest in this aircraft,
at a base rent to the Partnership of $39,550 per month, beginning April 27,1997.
On April 28, 1998, at the expiration of this lease term, the Partnership sold
its interest in this aircraft to Aer Lease for net proceeds of $553,699. The
Partnership's interest in the aircraft had a net book value of $426,434 at the
time of disposal, resulting in a net gain for
5
<PAGE>
financial statement purposes of $127,265. The Partnership recognized aggregate
lease revenue of approximately $154,600, $320,000 and $302,000 related to this
aircraft during the years ended December 31, 1998, 1997 and 1996, respectively.
The demand for Lockheed 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 circumstances
have inhibited the remarketing of the Partnership's Lockheed L-1011 aircraft and
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"), scheduled to expire in
January 1999 (see discussion below). The Partnership recognized lease revenue of
$762,000 related to this aircraft during the year ended December 31, 1998
compared to $770,467 and $762,000 during the years ended December 31, 1997 and
1996, respectively.
During July 1996, the Partnership sold a Boeing 727-200 Advanced 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 addition to the 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
$1,421,629, during the year ended December 31, 1996. In the future, the
Partnership's aggregate lease, revenue is expected to decline due to Classic
situation, aircraft sales and the expiration of the lease terms related to the
Partnership's remaining aircraft.
The Partnership holds a proportionate ownership interest in 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, 1998 was $158,844 compared
to $110,635 and $265,820 for the years ended December 31, 1997 and 1996,
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.
Depreciation was $2,451,737, $3,377,350 and $3,650,745 for the years ended
December 31, 1998, 1997 and 1996, respectively. The Partnership also recorded a
write-down of aircraft carrying values, representing impairments related to the
Partnership's L-1011 aircraft, during the year ended December 31, 1996. The
resulting charge of $2,832,800 ($0.99 per limited partnership unit) was based on
a comparison of estimated net realizable value and corresponding carrying value
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
6
<PAGE>
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 $200,679 or 6.4% in 1998, $268,916 or 8.3% of lease
revenue in 1997 and $264,200 or 5.6% of lease revenue in 1996. 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 1998, 1997 and 1996 and will
not change as a percentage of lease revenue in future periods.
Operating expenses were $1,815,947, $1,290,508 and $2,100,419 for the years
ended December 31, 1998, 1997 and 1996, respectively. During the year ended
December 31, 1998, the Partnership incurred or accrued approximately $331,800
for certain legal and administrative expenses related to the Class Action
Lawsuit described in Note 7 to the accompanying financial statements.
Additionally, the increase in operating expenses from 1997 to 1998 was primarily
due to legal costs incurred in connection with the legal proceedings related to
Northwest and Classic and legal and other costs related to Transmeridian (refer
to Note 7 to the financial statements). Operating costs in 1996 and 1997
included significant heavy maintenance expenses incurred 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). Other operating expenses consist principally of administrative
charges, professional service costs, such as audit and other legal fees, as well
as insurance, printing, distribution and other remarketing expenses.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity. As an equipment
leasing program, the Partnership's principal operating activities derive from
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 $1,550,424, $496,997 and $3,205,567 in
1998, 1997 and 1996, respectively. The expiration of the Partnership's lease
agreements, and aircraft sales described above, have caused an overall 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 1998 related to the Partnership's
legal proceedings (see Note 7 to the financial statements) and in connection
with its remarketing efforts related to its Lockheed 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
7
<PAGE>
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 aircraft acquisitions and cash realized form aircraft
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. During the year ended December 31, 1998,
the Partnership sold its interest in a Lockheed L-1011-50 aircraft and realized
net cash proceeds of $553,699. During year ended December 31, 1996, the
Partnership realized $3,535,649 in proceeds from the sale of the Boeing 727-200
Advanced aircraft. In 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 in cash and obtained
financing of $2,767,338 from a third-party lender. The Partnership utilized
$1,317,392 (classified as Contractual Right for Equipment at December 31, 1995)
which had been deposited into a special-purpose escrow account through a
third-party exchange agent pending the completion of the aircraft exchange. The
balance of $72,550 was expended from the Partnership's cash reserves. The
remaining ownership interest of 85.15% in the Finnair Aircraft is held by
affiliated equipment leasing programs sponsored by EFG. The like-kind exchange,
involving the United, Southwest and Finnair Aircraft, was undertaken, in part,
to mitigate the Partnership's economic risk resulting from the United Aircraft
being returned to the Partnership upon its lease expiration in April 1996 and
remaining off-lease for an extended period. The exchange enabled the Partnership
to replace a specialized aircraft with other aircraft, which are used more
widely in the industry, and also to significantly extend its rental stream with
two creditworthy lessees. There were no equipment acquisitions during 1997 or
1998 and no equipment sales during 1997. Future inflows of cash from aircraft
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 condition and age of the aircraft, and future market conditions.
At December 31, 1998, the Partnership was due aggregate future minimum lease
payments of $1,444,692 from contractual lease agreements (see Note 2 to the
financial statements), a portion of which will be used to amortize the principal
balance of notes payable of $1,896,665 (see Note 5 to the financial statements).
At the expiration of the individual lease terms underlying the Partnership's
future minimum lease payments, the Partnership will sell the aircraft or enter
re-lease or renewal agreements when considered advantageous by the General
Partner and EFG. Such future remarketing activities will result in the
realization of additional cash inflows in the form of aircraft sale proceeds or
rents from renewals and re-leases, the timing and extent of which cannot be
predicted with certainty. This is because the timing and extent of remarketing
events often is dependent upon the needs and interests of the existing lessees.
Some lessees may choose to renew their lease contracts, while others may elect
to return the aircraft. In the latter instances, the aircraft could be re-leased
to another lessee or sold to a third party. Accordingly, as the terms of the
currently existing contractual lease agreements expire, the cash flows of the
Partnership will become less predictable. In addition, the Partnership will need
cash outflows to satisfy interest on indebtedness and to pay management fees and
operating expenses.
ATA has given the Partnership an irrevocable notice of its intention to
purchase the Partnership's Boeing 727-208 Advanced aircraft for $3.1 million in
April 1999, pursuant to a purchase option contained in the lease agreement.
Following the expiration of the current lease agreement in January 1999, ATA
will continue to lease the aircraft on a month-to-month basis at the existing
base rent until the date of sale. This aircraft was fully depreciated at
December 31, 1998. The Partnership's ability to remarket its Boeing 727-251 ADV
aircraft is being impeded due to Transmeridian's failure and refusal to repair
the substantial damage caused to the airframe of this aircraft as the result of
an on-ground accident at the airport in Caracas, Venezuela in October 1998. See
Note 7 to the accompanying financial statements for details regarding legal
action undertaken by the Partnership related to this situation.
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
8
<PAGE>
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).
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket equipment upon lease expiration. Liquidity is
especially important as the Partnership matures and sells equipment, because the
remaining equipment base consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining aircraft. The management
and remarketing of aircraft can involve, among other things, significant costs
and lengthy remarketing initiatives.
Although the Partnership's lessees are required to maintain the aircraft
during the period of lease contract, repair, maintenance, and/or refurbishment
costs at lease expiration can be substantial. For example, an aircraft that is
returned to the Partnership meeting minimum airworthiness standards, such as
flight hours or engine cycles, nonetheless may require heavy maintenance in
order to bring its engines, airframe and other hardware up to standards that
will permit its prospective use in commercial air transportation. Individually,
these repairs can cost in excess of $1 million and, collectively, they could
require the disbursement of several million dollars, depending upon the extent
of refurbishment. In addition, the Partnership's equipment portfolio includes
two Stage 2 aircraft as well as proportionate ownership interests in three Stage
2 aircraft. These aircraft are prohibited from operating in the United States
after December 31, 1999 unless they are retro-fitted with hush-kits to meet
Stage 3 noise regulations promulgated by the Federal Aviation Administration.
The cost to hush-kit an aircraft, such as the Partnership's Boeing 727s and
Boeing 737s, can approach $2 million. Although the Partnership is not required
to retro-fit its aircraft with hush-kits, insufficient liquidity could
jeopardize the remarketing of these aircraft and risk their disposal at a
depressed value at a time when a better economic return would be realized from
refurbishing the aircraft and re-leasing them to another user. Collectively, the
aggregation of the Partnership's potential liquidity needs related to aircraft
and other working capital requirements could be significant. Accordingly, the
General Partner has maintained significant cash reserves within the Partnership
in order to minimize the risk of a liquidity shortage.
Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit
described in Note 7 to the accompanying financial statements. A preliminary
settlement agreement will allow the Partnership to invest in new equipment or
other activities, subject to certain limitations, effective March 22, 1999. To
the extent that the Partnership continues to own aircraft investments that could
require capital reserves, the General Partner does not anticipate that the
Partnership will invest in new assets, regardless of its authority to do so.
Until the Class Action Lawsuit is adjudicated, the General Partner does not
expect to declare any distributions to the Partners. In addition, the proposed
settlement, if effected, will materially change the future organizational
structure and business interests of the Partnership, as well as its cash
distribution policies. See Note 7 to the accompanying financial statements.
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. No distributions were declared in either 1997 or 1998.
9
<PAGE>
The Partnership's capital account balances for federal income tax and for
financial reporting purposes are different primarily due to differing treatments
of income and expense items for income tax purposes in comparison to financial
reporting purposes (generally referred to as permanent or timing differences;
see Note 6 to the financial statements). For instance, selling commissions and
organization and offering costs pertaining to syndication of the Partnership's
limited partnership units are not deductible for federal income tax purposes,
but are recorded as a reduction of partners' capital for financial reporting
purposes. Therefore, such differences are permanent differences between capital
accounts for financial reporting and federal income tax purposes. Other
differences between the bases of capital accounts for federal income tax and
financial reporting purposes occur due to timing differences. Such items consist
of the cumulative difference between income or loss for tax purposes and
financial statement income or loss and the difference between distributions
(declared vs. paid) for income tax and financial reporting purposes, if any. The
principal component of the cumulative difference between financial statement
income or loss and tax income or loss results from different depreciation
policies for book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at December 31, 1998. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Restated Agreement,
as amended, requires that upon the dissolution of the Partnership, the General
Partner will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 1998, the General Partner had a negative tax capital account
balance of approximately $828,000.
The future liquidity of the Partnership will be influenced by, among other
factors, prospective market conditions, aircraft refurbishment requirements
(discussed above), the ability of EFG to manage and remarket the aircraft, and
many other events and circumstances, that could enhance or detract from
individual aircraft yields and the collective performance of the Partnership's
aircraft portfolio. However, the outcome of the Class Action Lawsuit described
in Note 7 to the accompanying financial statements will be the principal factor
in determining the future of the Partnership's operations.
10
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of AIRFUND II International Limited Partnership:
We have audited the accompanying statements of financial position of AIRFUND
II International Limited Partnership, as of December 31, 1998 and 1997, and the
related statements of operations, changes in partners' capital, and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of AIRFUND II International
Limited Partnership at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The Additional Financial Information
identified in the Index to Annual Report to the Partners is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
financial statements taken as a whole.
ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 1999
11
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 3,425,762 $ 2,102,494
Rents receivable................................................................... 39,933 65,120
Accounts receivable--affiliate..................................................... 71,178 305,359
Other assets....................................................................... 125,734 --
Equipment at cost, net of accumulated depreciation of $40,968,380 and $43,339,081
at December 31, 1998 and 1997, respectively...................................... 4,413,962 7,292,133
------------- -------------
Total assets................................................................... $ 8,076,569 $ 9,765,106
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable...................................................................... $ 1,896,665 $ 2,677,520
Accrued interest................................................................... 25,126 29,618
Accrued liabilities................................................................ 458,485 8,250
Accrued liabilities--affiliate..................................................... 16,254 42,524
Deferred rental income............................................................. 47,997 167,067
------------- -------------
Total liabilities.............................................................. 2,444,527 2,924,979
------------- -------------
Partners' capital (deficit):
General Partner.................................................................. (2,713,854) (2,653,450)
Limited Partnership Interests (2,714,647 Units; initial purchase price of $25
each).......................................................................... 8,345,896 9,493,577
------------- -------------
Total partners' capital........................................................ 5,632,042 6,840,127
------------- -------------
Total liabilities and partners' capital........................................ $ 8,076,569 $ 9,765,106
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
12
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Income:
Lease revenue...................................................... $ 3,130,704 $ 3,224,618 $ 4,706,774
Interest income.................................................... 158,844 110,635 265,820
Gain on sale of equipment.......................................... 127,265 -- 460,969
------------- ------------- -------------
Total income..................................................... 3,416,813 3,335,253 5,433,563
------------- ------------- -------------
Expenses:
Depreciation....................................................... 2,451,737 3,377,350 3,650,745
Write-down of equipment............................................ -- -- 2,832,800
Interest expense................................................... 200,679 268,916 264,200
Equipment management fees--affiliate............................... 156,535 161,231 235,339
Operating expenses--affiliate...................................... 1,815,947 1,290,508 2,100,419
------------- ------------- -------------
Total expenses................................................... 4,624,898 5,098,005 9,083,503
------------- ------------- -------------
Net loss............................................................. $ (1,208,085) $ (1,762,752) $ (3,649,940)
------------- ------------- -------------
------------- ------------- -------------
Net loss per limited partnership unit................................ $ (0.42) $ (0.62) $ (1.28)
------------- ------------- -------------
------------- ------------- -------------
Cash distributions declared per limited partnership unit............. $ -- $ -- $ 2.25
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
13
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
GENERAL RECOGNIZED OWNERS
PARTNER -------------------------
AMOUNT UNITS AMOUNT TOTAL
------------- ---------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995........................... $ (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
Net loss--1998....................................... (60,404) -- (1,147,681) (1,208,085)
------------- ---------- ------------- -------------
Balance at December 31, 1998........................... $ (2,713,854) 2,714,647 $ 8,345,896 $ 5,632,042
------------- ---------- ------------- -------------
------------- ---------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of
these financial statements.
14
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net loss............................................................. $ (1,208,085) $ (1,762,752) $ (3,649,940)
Adjustments to reconcile net loss to net cash from operating
activities:
Depreciation..................................................... 2,451,737 3,377,350 3,650,745
Write-down of equipment.......................................... -- -- 2,832,800
Gain on sale of equipment........................................ (127,265) -- (460,969)
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable................................................. 25,187 (65,120) 169,906
Accounts receivable--affiliate................................... 234,181 (158,792) 169,872
Other assets..................................................... (125,734) -- --
Increase (decrease) in:
Accrued interest................................................. (4,492) (6,311) 16,732
Accrued liabilities.............................................. 450,235 (533,284) 448,394
Accrued liabilities--affiliate................................... (26,270) (446,494) 430,866
Deferred rental income........................................... (119,070) 92,400 (402,839)
------------- ------------- -------------
Net cash from operating activities............................. 1,550,424 496,997 3,205,567
------------- ------------- -------------
Cash flow from (used in) investing activities:
Purchase of equipment.............................................. -- -- (72,550)
Proceeds from equipment sales...................................... 553,699 -- 3,535,649
------------- ------------- -------------
Net cash from investing activities............................. 553,699 -- 3,463,099
------------- ------------- -------------
Cash flow used in financing activities:
Principal payments--notes payable.................................. (780,855) (742,265) (779,949)
Distributions paid................................................. -- -- (7,098,923)
------------- ------------- -------------
Net cash used in financing activities.......................... (780,855) (742,265) (7,878,872)
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents
1,323,268 (245,268) (1,210,206)
Cash and cash equivalents at beginning of year....................... 2,102,494 2,347,762 3,557,968
------------- ------------- -------------
Cash and cash equivalents at end of year............................. $ 3,425,762 $ 2,102,494 $ 2,347,762
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............................. $ 205,171 $ 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.
15
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
December 31,1998
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
known as American Finance Group), a Massachusetts limited partnership ("EFG").
The common stock of the General Partner is owned by AF/AIP Programs Limited
Partnership. EFG and a wholly owned affiliate are the 99% limited partners and
AFG Programs, Inc., a Massachusetts corporation that 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, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). 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.
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.
16
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
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, 1998, the Partnership had $3,316,450 invested in
federal agency discount notes and in reverse repurchase agreements secured by
U.S. Treasury Bills or interests in U.S. Government securities.
REVENUE RECOGNITION
Rents are payable to the Partnership monthly or quarterly and no significant
amounts are calculated on factors other than the passage of time. The leases are
accounted for as operating leases and are
17
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
noncancellable. Rents received prior to their due dates are deferred. Future
minimum rents are $1,444,692 are due as follows:
<TABLE>
<C> <S> <C>
For the year ending December 31, 1999 ............................................. $1,015,910
2000 ............................................. 349,318
2001 ............................................. 79,464
----------
Total ............................................. $1,444,692
----------
----------
</TABLE>
In December 1998, the Partnership and the other affiliated leasing programs
owning interests in two McDonnell Douglas MD-82 aircraft entered into lease
extension agreements with Finnair OY. The lease extensions, effective upon the
expiration of the existing primary lease terms on April 28, 1999, extended the
leases for nine months and two years, respectively. In aggregate, these lease
extensions will provide additional lease revenue of approximately $876,000 to
the Partnership.
During the third quarter of 1998, Classic Airways Limited ("Classic"), a
lessee of the Partnership, ceased paying rents related to the Partnership's
Lockheed L-1011-100 aircraft. In October 1998, Classic was placed in
liquidation. The Partnership's future minimum rents exclude $2,000,000 scheduled
to be received from Classic under the existing lease agreement at December 31,
1998. The General Partner does not expect to collect any additional rents from
Classic (see Note 7 for additional information).
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1998, 1997 and 1996 is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ------------
<S> <C> <C> <C>
Transmeridian Airlines, Inc................................................ $ 876,667 $ 971,500 $ --
(One Boeing 727-251ADV)
American Trans Air, Inc.................................................... $ 762,000 $ 770,467 $ 762,000
(One Boeing 727-208 ADV)
Finnair OY................................................................. $ 639,923 $ 639,752 $ --
(Two MD-82)
Southwest Airlines, Inc.................................................... $ 377,568 $ 377,568 $ --
(Three Boeing 737-2H4)
Classic Airways Limited.................................................... $ 319,960 $ -- $ --
(One Lockhead L-1011-100)
Northwest Airlines, Inc.................................................... $ -- $ -- $ 1,421,629
(One Boeing 727-200 ADV)
Cathay Pacific Airways Limited............................................. $ -- $ -- $ 1,419,024
(Two Lockheed L-1011)
</TABLE>
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
EQUIPMENT ON LEASE
All aircraft were acquired from EFG or one of its Affiliates. Equipment Cost
means the actual cost paid by the Partnership to acquire the aircraft, including
acquisition fees. Equipment cost reflects the
18
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
actual price paid for the aircraft by EFG or the Affiliate plus all actual costs
incurred by EFG or the Affiliate while carrying the aircraft less, (a) for all
aircraft other than the Boeing 727-208 ADV aircraft, the amount of all rents
received by EFG or the Affiliate prior to selling the aircraft or, (b) with
respect to the Boeing 727-208 ADV aircraft, rents received from the date of the
commencement of the lease of the aircraft until the date of the sale to the
Partnership.
DEPRECIATION
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 aircraft is
dependent upon many factors, including EFG's ability to sell and re-lease
aircraft. 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.
19
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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, 1998
and computed after allocation of the General Partner's 5% share of net loss and
applicable share of cash distributions (see Note 1 for additional information).
PROVISION FOR INCOME TAXES
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.
NOTE 3--EQUIPMENT
The following is a summary of equipment owned by the Partnership at December
31, 1998. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 1998 under contracted lease terms. 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)........... 0 $ 16,644,138 Foreign
One Boeing 727-208 ADV (ATA)................ 1 12,928,710 IN
One Boeing 727-251 ADV (Transmeridian)...... 0 9,732,714 MN
Two McDonnell-Douglas MD-82 (Finnair)....... 13-28 4,157,280 Foreign
Three Boeing 737-2H4 (Southwest)............ 12 1,919,500 TX
-------------
Total equipment cost........................ 45,382,342
Accumulated depreciation (40,968,380)
-------------
Equipment, net of accumulated depreciation $ 4,413,962
-------------
-------------
</TABLE>
The costs of 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 1996, the Partnership completed the replacement of a Boeing 747 SP
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 in cash and obtained financing
of $2,767,338 from a third-party lender. The Partnership utilized $1,317,392
(classified as Contractual Right for Equipment at December 31, 1995) which had
been deposited into a special-purpose escrow account through a third-party
exchange agent pending the completion of the aircraft exchange. The balance of
$72,550 was expended from the Partnership's cash reserves. The remaining
ownership interest of 85.15% in the Finnair Aircraft is held by affiliated
equipment leasing programs sponsored by EFG.
20
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
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 $4,308,000 at December 31, 1998. (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
the year ended December 31, 1996. The resulting charge of $2,832,800 ($0.99 per
limited partnership unit) was based on a comparison of estimated net realizable
values and corresponding carrying values of the Partnership's aircraft.
At December 31, 1998, the Partnership's Lockheed L-1011-100, Boeing 727-208
ADV and its Boeing 727-251 ADV were held for sale. The Boeing 727-251 ADV is
fully depreciated and the Lockhead L-1011-100 had a book value of $106,275 at
December 31, 1998. See Note 7 for additional discussion regarding these two
aircraft. American Trans Air, Inc. ("ATA") has given the partnership irrevocable
notice of its intention to purchase the Partnership's Boeing 727-208 Advanced
aircraft for $3.1 million in April 1999, pursuant to a purchase option contained
in the lease agreement. Following the expiration of the current lease agreement
in January 1999, ATA will continue to lease the aircraft on a month-to-month
basis at the existing base rent until the date of sale. This aircraft was fully
depreciated at December 31, 1998.
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, 1998, which were paid or accrued by the
Partnership to EFG or its Affiliates, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Equipment management fees............................................... $ 156,535 $ 161,231 $ 235,339
Administrative charges.................................................. 53,676 50,304 28,694
Reimbursable operating expenses due to third parties.................... 1,762,271 1,240,204 2,071,725
------------ ------------ ------------
Total............................................................. $ 1,972,482 $ 1,451,739 $ 2,335,758
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG was compensated by an
amount equal to 3.07% of Equipment Base Price paid by the Partnership. For
21
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenue and 2% of gross full payout lease rental revenue
received by the Partnership. Both acquisition and management fees are subject to
certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Restated Agreement, as amended, for persons employed by EFG who
are engaged in providing administrative services to the Partnership.
Reimbursable operating expenses due to third parties represent costs paid by EFG
on behalf of the Partnership which are reimbursed to EFG at actual cost.
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,
Equipment on Lease.
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, 1998, the
Partnership was owed $71,178 by EFG for such funds and the interest thereon.
These funds were remitted to the Partnership in January 1999.
Certain affiliates of the General Partner own Units in the Partnership as
follows:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
AFFILIATE UNITS OWNED OUTSTANDING UNITS
- ------------------------------------------------------------- ------------- -------------------
<S> <C> <C>
Old North Capital Limited Partnership........................ 40,000 1.47%
</TABLE>
Old North Capital Limited Partnership ("ONC") is a Massachusetts limited
partnerships formed in 1995 and an affiliate of EFG. The general partner of ONC
is controlled by Gary D. Engle. In addition, the limited partnership interests
of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and
CEO of Semele.
NOTE 5--NOTES PAYABLE
Notes payable at December 31, 1998 consisted of installment notes payable to
banks of $1,896,665. 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, 1998.
All of the Partnership's installment notes payable mature during the year
ending December 31, 1999.
NOTE 6--INCOME TAXES
The Partnership is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Partnership.
For financial statement purposes, the Partnership allocates net income or
loss to each class of partner according to their respective ownership
percentages (95% to the Recognized Owners and 5% to the General Partner). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax reporting purposes, the Partnership allocates net income
or loss in accordance with such agreement. The Restated Agreement, as amended,
requires that upon dissolution of the Partnership, the General Partner
22
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
will be required to contribute to the Partnership an amount equal to any
negative balance which may exist in the General Partner's tax capital account.
At December 31, 1998, the General Partner had a negative tax capital account
balance of approximately $828,000.
The following is a reconciliation between net loss reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net loss............................................................. $ (1,208,085) $ (1,762,752) $ (3,649,940)
Tax depreciation in excess of financial statement depreciation....... (713,082) (2,136,596) (3,015,164)
Write-down of equipment.............................................. -- -- 2,832,800
Deferred rental income............................................... (119,070) 92,400 (402,839)
Other................................................................ 362,435 (998,111) 1,501,218
------------- ------------- -------------
$ (1,677,802) $ (4,805,059) $ (2,733,925)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The principal component of "Other" consists of the difference between the
tax gain or loss on aircraft disposals and the financial statement gain or loss
on aircraft 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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Partners' capital.................................................................. $ 5,632,042 $ 6,840,127
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)......................................................................... (1,678,373) (1,208,656)
------------- -------------
Partners' capital for federal income tax reporting purposes........................ $ 11,038,909 $ 12,716,711
------------- -------------
------------- -------------
</TABLE>
The cumulative difference between federal income tax and financial statement
income (loss) represents a timing difference.
NOTE 7--LEGAL PROCEEDINGS
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP
LIMITED PARTNERSHIP, ET AL., in the United States District Court for the
Southern District of Florida (the "Court") on behalf of a proposed class of
investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit".
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
23
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a
Stipulation of Settlement setting forth terms pursuant to which a settlement of
the Class Action Lawsuit is intended to be achieved and which, among other
things, is expected to reduce the burdens and expenses attendant to continuing
litigation. The Stipulation of Settlement was based upon and superseded a
Memorandum of Understanding between the parties dated March 9, 1998 which
outlined the terms of a possible settlement. The Stipulation of Settlement was
filed with the Court on July 23, 1998 and was preliminarily approved by the
Court on August 20, 1998 when the Court issued its "Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order").
Prior to issuing a final order, the Court will hold a fairness hearing that will
be open to all interested parties and permit any party to object to the
settlement. The investors of the Partnership and all other plaintiff class
members in the Class Action Lawsuit will receive a Notice of Settlement and
other information pertinent to the settlement of their claims that will be
mailed to them in advance of the fairness hearing. Since first executing the
Stipulation of Settlement, the Court has scheduled two fairness hearings, the
first on December 11, 1998 and the second on March 19, 1999, each of which was
postponed because of delays in finalizing certain information materials that are
subject to regulatory review prior to being distributed to investors.
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 15, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divides the
Class Action Lawsuit into two separate sub-classes that can be settled
individually. This revision is expected to expedite the settlement of one
sub-class by the middle of 1999. However, the second sub-class, involving the
Partnership and 10 affiliated partnerships (collectively referred to as the
"Exchange Partnerships"), is expected to remain pending for a longer period due,
in part, to the complexity of the proposed settlement pertaining to this class.
Specifically, the settlement of the second sub-class is premised on the
consolidation of the Exchange Partnerships' net assets (the "Consolidation"),
subject to certain conditions, into a single successor company ("Newco"). Under
the proposed Consolidation, the partners of the Exchange Partnerships would
receive both common stock in Newco and a cash distribution; and thereupon the
Exchange Partnerships would be dissolved. In addition, EFG would contribute
certain management contracts, operations personnel, and business opportunities
to Newco and cancel its current management contracts with all of the Exchange
Partnerships. Newco would operate as a finance company specializing in the
acquisition, financing and servicing of equipment leases for its own account and
for the account of others on a contract basis. Newco also would use its best
efforts to list its shares on the Nasdaq National Market or another national
exchange or market as soon after the Consolidation as Newco deems that market
conditions and its business operations are suitable for listing its shares and
Newco has satisfied all necessary regulatory and listing requirements. The
potential benefits and risks of the Consolidation will be presented in a
Solicitation Statement that will be mailed to all of the partners of the
Exchange Partnerships as soon as the associated regulatory review process is
completed and at least 60 days prior to the fairness hearing. A preliminary
Solicitation Statement was filed with the Securities and Exchange Commission on
August 24,
24
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
1998 and remains pending. Class members will be notified of the actual fairness
hearing date when it is confirmed.
One of the principal objectives of the Consolidation is to create a company
that would have the potential to generate more value for the benefit of existing
limited partners than other alternatives, including continuing the Partnership's
customary business operations until all of its assets are disposed in the
ordinary course of business. To facilitate the realization of this objective,
the Amended Stipulation provides, among other things, that commencing March 22,
1999, the Exchange Partnerships may collectively invest up to 40% of the total
aggregate net asset values of all of the Exchange Partnerships in any
investment, including additional equipment and other business activities that
the general partners of the Exchange Partnerships and EFG reasonably believe to
be consistent with the anticipated business interests and objectives of Newco,
subject to certain limitations, including that the Exchange Partnerships retain
sufficient cash balances to pay their respective shares of the cash distribution
referenced above in connection with the proposed Consolidation.
In the absence of the Court's authorization to enter into such activities,
the Partnership's Restated Agreement, as amended, would not permit new
investment activities without the approval of limited partners owning a majority
of the Partnership's outstanding Units. Accordingly, to the extent that the
Partnership invests in new equipment, the Manager (being EFG) will (i) defer,
until the earlier of the effective date of the Consolidation or December 31,
1999, any acquisition fees resulting therefrom and (ii) limit its management
fees on all such assets to 2% of rental income. In the event that the
Consolidation is consummated, all such acquisition and management fees will be
paid to Newco. To the extent that the Partnership invests in other business
activities not consisting of equipment acquisitions, the Manager will forego any
acquisition fees and management fees related to such investments. In the event
that the Partnership has acquired new investments, but the Partnership does not
participate in the Consolidation, Newco will acquire such new investments for an
amount equal to the Partnership's net equity investment plus an annualized
return thereon of 7.5%. Finally, in the event that the Partnership has acquired
new investments and the Consolidation is not effected, the General Partner will
use its best efforts to divest all such new investments in an orderly and timely
fashion and the Manager will cancel or return to the Partnership any acquisition
or management fees resulting from such new investments.
The Amended Stipulation and previous Stipulation of Settlement prescribe
certain conditions necessary to effecting final settlements, including providing
the partners of the Exchange Partnerships with the opportunity to object to the
participation of their partnership in the Consolidation. Assuming the proposed
settlement is effected according to present terms, the Partnership's share of
legal fees and expenses related to the Class Action Lawsuit is estimated to be
approximately $76,200 all of which was accrued and expensed by the Partnership
in 1998. In addition, the Partnership's share of fees and expenses related to
the proposed Consolidation is estimated to be approximately $255,600, all of
which was accrued and expensed by the Partnership in 1998.
While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order permits the partners to transfer Units to family members or as a
result of the divorce, disability or death of the partner. No other transfers
are permitted pending the Court's final determination of whether the settlement
should be approved. The provision of the August 20 Order which enjoined the
General Partners of the Exchange Partnerships from, among other things,
recording any transfers not in accordance with the Court's order remains
effective.
25
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
There can be no assurance that settlement of either sub-class of the Class
Action Lawsuit will receive final Court approval and be effected. There also can
be no assurance that all or any of the Exchange Partnerships will participate in
the Consolidation because if limited partners owning more than one-third of the
outstanding Units of a partnership object to the Consolidation, then that
partnership will be excluded from the Consolidation. The General Partner and its
affiliates, in consultation with counsel, concur that there is a reasonable
basis to believe that final settlements of each sub-class will be achieved.
However, in the absence of final settlements approved by the Court, the
Defendants intend to defend vigorously against the claims asserted in the Class
Action Lawsuit. Neither the General Partner nor its affiliates can predict with
any degree of certainty the cost of continuing litigation to the Partnership or
the ultimate outcome.
In addition to the foregoing, the Partnership is a party to other lawsuits
that have arisen out of the conduct of its business, principally involving
disputes or disagreements with lessees over lease terms and conditions. The
following actions had not been finally adjudicated at December 31, 1998:
ACTION INVOLVING CLASSIC AIRWAYS LIMITED
In September 1998, a lessee of the Partnership, Classic Airways Limited
("Classic"), ceased paying rent to the Partnership with respect to an L-1011-100
aircraft. In October 1998, Classic filed for receivership in the United Kingdom
("UK") and was placed in liquidation. Prior to its liquidation, Classic had
incurred and failed to pay significant airport ground fees to BAA plc,
Eurocontrol, and CAA (collectively, the "Airport Authorities"). The failure of
Classic to pay such charges resulted in detention of the aircraft by the Airport
Authorities. In addition, the Airport Authorities have continued to charge
incremental ground fees and expenses to the aircraft and have grounded the
aircraft pending collection of such amounts, which are approximately $284,000 in
total. Under UK law, the Airport Authorities have the right not only to detain
the aircraft, but to sell the aircraft at auction in order to satisfy their
outstanding fees. Accordingly, it is anticipated that the Partnership will be
required to pay at least a portion of the airport charges in order to recover
the aircraft. The General Partner has engaged counsel to represent the
Partnership's interests in the UK and; presently, counsel is negotiating with
the Airport Authorities to resolve the issue of the unpaid charges so that the
aircraft can be flown to the United States or otherwise remarketed. The parties
have not executed a final settlement agreement; however, the Airport Authorities
have indicated a willingness to reach a compromise. Based upon recent
discussions, the Partnership accrued and expensed approximately $167,000 to
cover the cost of settling the airport charges, all of which was recorded in the
fourth quarter of 1998. At the date of Classic's liquidation, the Partnership
had accrued $160,000 of rental income which had not been collected from Classic
and all of which was written-off as uncollectible in the third quarter of 1998.
The General Partner does not expect that any funds are likely to be recovered
from Classic in connection with this matter.
ACTION INVOLVING NORTHWEST AIRLINES, INC.
On September 22, 1995, Investors Asset Holding Corp. and First Security
Bank, N.A., trustees of the Partnership and certain affiliated investment
programs (collectively, the "Plaintiffs"), filed an action in United States
District Court for the District of Massachusetts against a lessee of the
Partnership, Northwest Airlines, Inc. ("Northwest"). The Complaint alleges that
Northwest did not fulfill its maintenance obligations under its Lease Agreements
with the Plaintiffs and seeks declaratory judgment concerning Northwest's
obligations and monetary damages. Northwest filed an Answer to the Plaintiffs'
Complaint and a motion to transfer the venue of this proceeding to Minnesota.
The Court denied Northwest's motion. On June 29, 1998, a United States
Magistrate Judge recommended entry of partial summary judgment in
26
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
favor of the Plaintiffs. Northwest appealed this decision and a hearing was
scheduled for January 1999 by the District Judge to consider arguments and
review the Magistrate's recommendation. A ruling by the District Judge remains
pending. The General Partner believes that the Plaintiff's claims ultimately
will prevail and that the Partnership's financial position will not be adversely
affected by the outcome of this action.
FIRST ACTION INVOLVING TRANSMERIDIAN AIRLINES
On October 11, 1996, Prime Air Inc. d/b/a Transmeridian Airlines (the
"Plaintiff") filed an action in the 61st Judicial District Court of Harris
County, Texas (the "Court") entitled PRIME AIR, INC. D/B/A TRANSMERIDIAN
AIRLINES V. INVESTORS ASSET HOLDING CORP., AS TRUSTEE FOR AIRFUND II
INTERNATIONAL LIMITED PARTNERSHIP, PLM INTERNATIONAL, AND NAVCOM AVIATION, INC.
(collectively, the "Defendants"). In that action, the Plaintiff claimed damages
of more than $3 million for alleged breach of contract, fraud, civil conspiracy,
tortious interference of business relations, negligent misrepresentation,
negligence and gross negligence, and punitive damages against the Defendants in
connection with Transmeridian's lease of a Boeing 727-251 ADV jet aircraft from
the Partnership. On November 7, 1996, PLM removed the action to United States
District Court for the Southern District of Texas. On February 14, 1997, the
Defendants answered the Plaintiff's Complaint denying the allegations made
therein and asserting various defenses. Extensive discovery has been taken and
is continuing. The Court has placed this action on the trial calendar for
July/August, 1999.
On July 31, 1998, the Court granted IAHC's motion to strike Plaintiff's
fraud and negligent misrepresentation claims due to failure to plead with
particularity; however, the Court dismissed IAHC's motion for summary judgment.
The Plaintiff has provided a revised expert report claiming actual damages of
approximately $8.5 million and is seeking punitive damages and both pre-judgment
and post-judgment interest. The General Partner believes that the Plaintiff's
claims are without merit and intends to defend such action vigorously. While
there is no certainty as to the outcome of this litigation, the General Partner,
in consultation with counsel, does not believe that the Plaintiff ultimately
will obtain a successful judgment against IAHC or PLM. Therefore, the General
Partner does not believe that the outcome of this litigation will adversely
affect the Partnership's financial position. See Note 8, Subsequent Event.
SECOND ACTION INVOLVING TRANSMERIDIAN AIRLINES
On November 9, 1998, Investors Asset Holding Corp., as Trustee for the
Partnership (the "Plaintiff"), filed an action in Superior Court of the
Commonwealth of Massachusetts in Suffolk County against Prime Air, Inc. d/b/a
Transmeridian Airlines ("Transmeridian"), Atkinson & Mullen Travel, Inc., and
Apple Vacations, West, Inc., both d/b/a Apple Vacations, asserting various
causes of action for declaratory judgment and breach of contract. The action
subsequently was removed to United States District Court for the District of
Massachusetts. The Plaintiff has filed an Amended Complaint asserting claims for
breaches of contract and covenant of good faith and fair dealing against
Transmeridian and breach of guaranty against Apple Vacations.
In October 1998, an aircraft leased by Transmeridian (being the same
aircraft in the above-referenced "First action involving Transmeridian
Airlines") was damaged in an on-ground accident at the Caracas, Venezuela
airport. The aircraft currently is undergoing repairs at a repair facility in
Louisiana; however, it is anticipated that the repairs will not be completed for
several months and are likely to extend into late summer 1999. The cost to
repair the aircraft is estimated to be at least $350,000. The Plaintiff alleges
that Transmeridian, among other things, has impeded the Partnership's ability to
terminate two engine lease
27
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
(CONTINUED)
contracts between the Partnership and a third party. The Plaintiff intends to
pursue insurance coverage and also to enforce written guarantees issued by Apple
Vacations that absolutely and unconditionally guarantee Transmeridian's
performance under the lease and is seeking recovery of all costs, lost revenue
and monetary damages in connection with this matter. Discovery has not yet
commenced, and although the General Partner plans to vigorously pursue this
action, it is too early to predict the Plaintiff's likelihood of success. The
aircraft was fully depreciated at December 31, 1998 for financial reporting
purposes.
NOTE 8--SUBSEQUENT EVENT
On March 19, 1999, the Court referenced in connection with the "First action
involving Transmeridian Airlines" described in Note 7 herein, issued its
preliminary order dismissing all of the Plaintiff's claims against Investors
Asset Holding Corporation and PLM International, Inc.
28
<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, 1998, 1997 AND 1996
The Partnership classifies all rents from leasing aircraft as lease revenue.
Upon expiration of the primary lease terms, aircraft may be sold, rented on a
month-to-month basis or re-leased for a defined period under a new or extended
lease agreement. The proceeds generated from selling or re-leasing the aircraft,
in addition to any month-to-month revenue, represent the total residual value
realized for each aircraft. Therefore, the financial statement gain or loss,
which reflects the difference between the net book value of the aircraft at the
time of sale or disposition and the proceeds realized upon sale or disposition
may not reflect the aggregate residual proceeds realized by the Partnership for
such aircraft.
The following is a summary of cash excess (deficiency) associated with the
aircraft disposition which occurred in the years ended December 31, 1998 and
1996. No aircraft were disposed of during the year ended December 31, 1997.
<TABLE>
<CAPTION>
1998 1996
------------ ------------
<S> <C> <C>
Rents earned prior to disposal of aircraft............................................ $ 4,150,170 $ 11,072,532
Sale proceeds realized upon disposition of aircraft................................... 553,699 3,535,649
------------ ------------
Total cash generated from rents and aircraft sale proceeds............................ 4,703,869 14,608,181
Original acquisition cost of aircraft disposed........................................ 5,248,872 11,164,679
------------ ------------
Excess (deficiency) of total cash generated to cost of aircraft disposed.............. $ (545,003) $ 3,443,502
------------ ------------
------------ ------------
</TABLE>
29
<PAGE>
AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
SALES AND
OPERATIONS REFINANCINGS TOTAL
------------- ------------- -------------
<S> <C> <C> <C>
Net income (loss).................................................... $ (1,335,350) $ 127,265 $ (1,208,085)
Add:
Depreciation....................................................... 2,451,737 -- 2,451,737
Management fees.................................................... 156,535 -- 156,535
Book value of disposed equipment................................... -- 426,434 426,434
Less:
Principal repayment of notes payable............................... (780,855) -- (780,855)
------------- ------------- -------------
Cash from operations, sales and refinancings....................... 492,067 553,699 1,045,766
Less:
Management fees.................................................... (156,535) -- (156,535)
------------- ------------- -------------
Distributable cash from operations, sales and refinancings......... 335,532 553,699 889,231
Other sources and uses of cash:
Cash at beginning of year.......................................... -- 2,102,494 2,102,494
Net change in receivables and accruals............................. 434,037 -- 434,037
------------- ------------- -------------
Cash at end of year.................................................. $ 769,569 $ 2,656,193 $ 3,425,762
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
30
<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, 1998
For the year ended December 31, 1998, the Partnership reimbursed the General
Partner and its Affiliates for the following costs:
<TABLE>
<S> <C>
Operating expenses................... $1,381,437
</TABLE>
31
<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, 1999, included in the 1998 Annual Report to the Partners of AIRFUND II
International Limited Partnership.
ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 1999
<PAGE>
================================================================================
LEASE AGREEMENT (MSN 1118)
dated as of July 22, 1997
between
Investors Asset Holding Corp.
Lessor
and
Classic Airways, Ltd.
Lessee
---------------------
Lockheed L-1011-100
Aircraft
Manufacturers Serial No. 1118
and
Three Rolls Royce RB211-22B Engines
and Related Parts and Records
<PAGE>
TABLE OF CONTENTS
SECTION 1. DEFINITIONS ...................................................... 1
SECTION 2. AGREEMENT TO LEASE; TERM ......................................... 7
2.1. Leasing of Aircraft ................................................ 7
2.2. Delivery of Aircraft ............................................... 7
2.3. Term ............................................................... 7
SECTION 3. LESSEE'S REPRESENTATIONS, WARRANTIES AND COVENANTS ............... 8
3.1. Organization; Good Standing; Certification ......................... 8
3.2. Authority; Consent ................................................. 8
3.3. Legal, Valid and Binding ........................................... 8
3.4. Compliance with Other Instruments .................................. 8
3.5. Governmental Consents .............................................. 8
3.6. No Adverse Agreements .............................................. 8
3.7. No Defaults or Violations .......................................... 9
3.8. Litigation ......................................................... 9
3.9. Tax Returns ........................................................ 9
3.10. Filing or Recordation .............................................. 9
3.11. Principal Place of Business ........................................ 9
3.12. Financial Statements ............................................... 10
3.13. Financial and Other Information to be Supplied ..................... 10
3.14. Maintenance of Corporate Status; No Merger or Consolidation ........ 11
3.15. Notice of Default or Adverse Occurrence ............................ 11
3.16. Maintenance of Consents and Approvals .............................. 11
SECTION 4. LESSOR REPRESENTATIONS, WARRANTIES AND AGREEMENTS ................ 12
SECTION 5. CONDITIONS PRECEDENT ............................................. 12
5.1. Conditions Precedent to Obligation of Lessor to Lease Aircraft ..... 12
5.2. Conditions Precedent to Obligation of Lessee to Lease the Aircraft . 14
5.3. Acceptance for Lease ............................................... 15
5.4. Non-fulfillment of Conditions Precedent under Section 5.2 .......... 15
SECTION 6. PAYMENTS ......................................................... 15
6.1. Basic Rent ......................................................... 15
6.2. NET LEASE; NO SET-OFF OR DEDUCTIONS ................................ 16
6.3. Immediately Available Funds ........................................ 17
6.4. Supplemental Rent .................................................. 17
6.5. Security Deposit ................................................... 17
6.6. Reserves ........................................................... 18
SECTION 7. DISCLAIMER OF WARRANTIES AND MANUFACTURERS' WARRANTIES ........... 20
7.1. Disclaimer ......................................................... 20
7.2. Other Warranties ................................................... 21
SECTION 8. USE, OPERATION AND MAINTENANCE ................................... 21
<PAGE>
8.1. General ............................................................ 21
8.2. Operation and Use .................................................. 22
8.3. Maintenance in General ............................................. 22
8.4. Specific Items of Maintenance ...................................... 23
8.5. Parts .............................................................. 23
8.6. Airworthiness Directives ........................................... 24
8.7. Service Bulletins .................................................. 25
8.8. Allocation of Certain Costs ........................................ 25
8.9. Modification Payments by the Government ............................ 26
8.10. Corrosion Control .................................................. 26
8.11. Modifications ...................................................... 26
8.12. Possession ......................................................... 27
8.13. Reports ............................................................ 28
8.14. Right to Inspect ................................................... 29
8.15. Aircraft Records ................................................... 29
SECTION 9. RETURN OF AIRCRAFT ............................................... 30
9.1. Return Location, Notices, Costs, Taxes and Fees .................... 30
9.2. Return of Other Engines ............................................ 30
9.3. Condition of Aircraft .............................................. 31
9.4. Condition of Airframe .............................................. 32
9.5. APU ................................................................ 33
9.6. Engine Condition ................................................... 33
9.7. Borescope Inspection ............................................... 33
9.8. Inspection ......................................................... 33
9.9. Operational Ground Check ........................................... 34
9.10. Operational Check Flight ........................................... 34
9.11. Acceptance ......................................................... 34
9.12. Deferred Return Condition Discrepancy Correction ................... 35
9.13. Costs .............................................................. 35
9.14. Manuals and Technical Records ...................................... 35
9.15. Lessee's Special Exterior Markings ................................. 35
9.16. Ownership .......................................................... 36
9.17. Parking of Aircraft Upon Return .................................... 36
9.18. Lease Continues .................................................... 36
SECTION 10. TITLE; REGISTRATION; LIENS ...................................... 36
10.1. Title .............................................................. 36
10.2. Registration ....................................................... 37
10.3. Liens .............................................................. 37
10.4. Notice of Ownership ................................................ 37
SECTION 11. INSURANCE ....................................................... 37
11.1. All-Risk Insurance ................................................. 38
11.2. War Risk Insurance ................................................. 38
11.3. Liability Insurance ................................................ 38
11.4. Additional Requirements; Loss Payment .............................. 39
11.5. No Set-off ......................................................... 40
<PAGE>
11.6. Notice of Material Alteration or Cancellation ...................... 40
11.7. Application of Hull Insurance Proceeds ............................. 40
11.8. Insurance for Own Account .......................................... 40
11.9. Reports ............................................................ 41
11.10. Continuing Insurance .............................................. 41
SECTION 12. LOSS, DAMAGE OR REQUISITION ..................................... 41
12.1. Total Loss of Airframe ............................................. 41
12.2. Total Loss of Engine ............................................... 42
12.3. Repairable Damage; Use of Insurance Proceeds ....................... 43
12.4. Payment from Governmental Authorities for Requisition of Title or
Use; Requisition ................................................... 43
12.5. Application of Payments During Existence of Event of Default ....... 44
12.6. Risk of Loss ....................................................... 44
SECTION 13. EVENT OF DEFAULT ................................................ 44
13.1. Failure to Make Payments ........................................... 44
13.2. Failure to Obtain or Maintain Insurance ............................ 44
13.3. Failure to Perform Other Obligations ............................... 44
13.4. Representations and Warranties Untrue .............................. 44
13.5. Cross-Default ...................................................... 44
13.6. Guaranty Default ................................................... 45
13.7. Other Defaults ..................................................... 45
13.8. Insolvency or Bankruptcy ........................................... 45
13.9. Loss of License .................................................... 46
SECTION 14. REMEDIES ........................................................ 46
SECTION 15. INDEMNITIES ..................................................... 48
15.1. General Indemnification and Waiver of Certain Claims ............... 48
15.2. Taxes and Other Charges ............................................ 50
15.3. Continuing Indemnification ......................................... 50
SECTION 16. TRANSFER, ASSIGNMENT AND SUBLEASE ............................... 51
16.1. Assignment or Encumbrance by Lessor ................................ 51
16.2. Sublease of Aircraft or Assignment by Lessee ....................... 51
16.3. Consolidation, Merger or Transfer by Lessee ........................ 51
16.4. Nonrecourse As to Trustee .......................................... 51
SECTION 17. OPTION TO PURCHASE .............................................. 52
SECTION 18. NOTICES ......................................................... 52
SECTION 19. LESSOR'S RIGHT TO PERFORM FOR LESSEE ............................ 53
SECTION 20. MISCELLANEOUS ................................................... 53
20.1. Federal Bankruptcy Code ............................................ 53
20.2. Waivers, Headings .................................................. 54
20.3. Counterparts ....................................................... 54
20.4. Agreement to Lease ................................................. 54
20.5. Governing Law ...................................................... 54
20.6. Benefit and Binding Effect ......................................... 54
20.7. Further Assurances ................................................. 55
20.8. Capitalized or Boldface Provisions ................................. 55
<PAGE>
20.9. Venue .............................................................. 55
20.10. Entire Agreement .................................................. 55
EXHIBIT A - DESCRIPTION OF AIRCRAFT ......................................... 57
EXHIBIT B - AIRCRAFT DOCUMENTS .............................................. 1
EXHIBIT C - ACCEPTANCE CERTIFICATE (DELIVERY) ............................... 1
EXHIBIT D - ACCEPTANCE CERTIFICATE (RETURN) ................................. 1
EXHIBIT E - FORM OF BROKERS' LETTER OF UNDERTAKING .......................... 1
<PAGE>
LEASE AGREEMENT (MSN 1118)
This LEASE AGREEMENT (MSN 1118), dated as of July 22, 1997, ("Lease"), is
by and between Investors Asset Holding Corp., a Massachusetts corporation,
having its principal place of business at c/o Equis Financial Group, 88 Broad
Street, Boston, MA 02110, solely as trustee of the AFG/Cathay Pacific 1989-3
Trust and not in its individual capacity ("Lessor", which term shall include any
successor to Investors Asset Holding Corp. as such trustee.), and Classic
Airways, Ltd., a corporation organized and existing under the laws of the United
Kingdom, having its principal place of business at 4 Allyington Way, Worth,
Sussex, RH6 10AO, U.K. ("Lessee");
WITNESSETH
WHEREAS, Lessor desires to lease the Aircraft to Lessee and Lessee desires
to lease the Aircraft from Lessor in each case pursuant to the terms and
conditions of this Lease;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows.
SECTION 1. DEFINITIONS.
The following terms shall have the following respective meanings for all
purposes of this Agreement:
"Acceptance Certificate (Delivery)" means a certificate in
substantially the form of Exhibit C hereto, to be signed by Lessor and Lessee on
the Delivery Date as required under Section 2.2.
"Acceptance Certificate (Return)" means a certificate in
substantially the form of Exhibit D hereto, to be signed by Lessor and Lessee
upon the return of the Aircraft to Lessor as required by Section 9.1 hereof.
"ACMI Lease" means any arrangement whereby Lessee agrees to furnish
the Aircraft to a third party pursuant to which (i) Lessee's crew at all times
shall maintain full operational control of the Aircraft, (ii) the Aircraft shall
be operated solely by regular employees of Lessee possessing all current
appropriate CAA certificates and licenses, (iii) the insurance required under
Section 11 shall remain in full force and effect, (iv) the Aircraft shall be
maintained in accordance with the Approved Maintenance Program as required by
the terms of this Lease and (v) the term of any such ACMI Lease does not extend
beyond the Term.
-1-
<PAGE>
"Aircraft" means (A) the Airframe identified and described in
Exhibit A hereto (including all Parts, including, without limitation, the APU,
comprising such Airframe) together with the three Engines delivered in
connection therewith as identified and described in Exhibit A hereto (or any
engine substituted for any of said Engines pursuant to Section 9.2 or Section
12.2 of this Lease), whether or not any of such initial Engines or substitute
engines may from time to time be installed on such Airframe or may be installed
on any other airframe or on any other aircraft; and (B) where the context
permits, the Manuals and Technical Records.
"Airframe" means the Aircraft except the Engines or engines from
time to time installed thereon and the Manuals and Technical Records.
"Airworthiness Directive(s)" has the meaning given the 8.6 hereof.
"Applicable Law" means all applicable laws and treaties of any
government and applicable, legally adopted rules, regulations, and orders of any
governmental body, instrumentality, agency or authority.
"Approved Maintenance Program" has the meaning given in Section 8.3
hereof. As provided in Section 8.3, the Approved Maintenance Program must be
approved by the CAA.
"APU" means the auxiliary power unit installed on the Airframe from
time to time.
"Basic Rent" means the rent payable on Rent Payment Dates throughout
the Basic Term for the Aircraft pursuant to 6.1 of the Lease.
"Basic Rent Commencement Date" has the meaning specified in Section
6.1.
"Basic Term" means the period during which Lessee shall lease the
Aircraft in accordance with this Lease, which shall be a period commencing on
the Delivery Date and continuing for the period ending 36 calendar months
following the Basic Rent Commencement Date.
"Business Day(s)" means any day other than a Saturday, a Sunday or a
day on which commercial banking institutions are authorized by law to be closed
in any city where the principal business office of Lessee and Lessor are
located.
"CAA" means the Civil Aviation Authority of the United Kingdom.
"C Check" means the inspection, overhaul, repair, preservation and
replacement of Parts of the Aircraft, including preventive maintenance,
identified as a C Check under the Approved Maintenance Program. Such C Check
shall
-2-
<PAGE>
include all structural inspections, corrosion control and other work normally
completed in conjunction with each C Check.
"Certificated Air Carrier" means an "air carrier" duly authorized
under the laws of the United Kingdom or any other jurisdiction having the
authority to regulate Lessee's operations of the Aircraft in the manner
contemplated by this Lease.
"Claims" has the meaning given in Section 15.1(a) hereof.
"Cycle" means one take-off and landing of the Aircraft.
"Day" means one calendar day when used to measure intervals in the
Approved Maintenance Program relating to hard time calendar controlled Parts.
"Delivery Date" means the date on which Lessee signs and delivers to
Lessor an Acceptance Certificate (Delivery) for the Aircraft, in accordance with
Section 2.2 hereof.
"Direct Labor Rate" means Lessee's cost, without giving any account
for overhead charges or profit, per hour of productive labor.
"Dollars" or "$" means United States dollars.
"Engine" means any of the Rolls-Royce RB211-22B engines identified
and described in Exhibit A, whether or not from time to time installed on the
Airframe or installed on any other airframe; and any engine that may from time
to time be substituted, pursuant to Section 9.2 or Section 12.2 of this Lease,
for such Engine and constituting a Replacement Engine.
"Event of Default" has the meaning given in Section 13 hereof.
"FAA" means the Federal Aviation Administration of the United States
of America.
"Hour(s)" means Aircraft flight time, expressed in hours, between
take-off and landing.
"Indemnified Person" has the meaning given in Section 15.1(a)
hereof.
"Lease" means this Lease Agreement as the same may be modified,
amended or supplemented from time to time pursuant to the terms hereof.
"Lease Commencement Date" means the date designated for the
commencement of the Lease as set forth on the Acceptance Certificate (Delivery).
-3-
<PAGE>
"Lease Documents" means the Lease with attachments and schedules and
those documents in the form of Exhibits A through D hereto.
"Lessee" means Classic Airways, Ltd., a corporation organized and
existing under the laws of the United Kingdom.
"Lessor" means Investors Asset Holding Corp., a Massachusetts
corporation, not in its individual capacity but solely as trustee of the Trust,
and its successors and assigns.
"Lessor's Lien" means any Lien arising as a result of (i) claims
against Lessor not related to the transactions contemplated by this Lease, (ii)
any act or omission of Lessor which is not related to the transactions
contemplated by this Lease or is in violation of any of the terms of this Lease,
or (iii) arising out of claims against Lessor with respect to Taxes against
which Lessee is not required to indemnify Lessor.
"Lien" means any mortgage, pledge, lien, charge, encumbrance, lease
or security interest relating to the Aircraft, the Lease or any Part, as the
context may require.
"Manuals and Technical Records" means all such manuals, technical
data, log books and other records pertaining to the Aircraft (including, without
limitation, the technical manuals and aircraft records listed in Exhibit B
hereto) to be maintained by Lessee as shall be required to comply with the
requirements of the CAA or otherwise by Applicable Law.
"Modification Payment" has the meaning given in Section 8.9 hereof.
"Officer's Certificate" means as to any company a certificate signed
by any officer duly authorized to execute such certificate.
"Operative Documents" means the Lease Documents, together with each
document provided by or entered into by Lessee and Lessor in conjunction with
this Lease.
"Optional Modifications" has the meaning given in Section 8.11(b)
hereof.
"Overdue Rate" means the rate of interest per annum, announced from
time to time by the Bank of Boston in Boston, Massachusetts as its "base" rate
of interest which serves as the basis on which effective rates of interest for
loans are calculated, plus 3.0 percentage points; each change in such base rate
shall cause an equal and corresponding change in the Overdue Rate on the day
specified is the Bank's public announcement of such change.
-4-
<PAGE>
"Parts" means all appliances, parts, instruments, appurtenances,
accessories, furnishings and other equipment of whatever nature (other than
Engines or engines) but including the APU, which may from time to time be
incorporated or installed in or attached to the Airframe or any Engine or so
long as title thereto shall remain vested in Lessor in accordance with Section
8.5 hereof after removal therefrom.
"Permitted Liens" means (a) the respective rights of Lessor and
Lessee as provided herein, including, without limitation, any encumbrance which
Lessor has caused to be placed on the Aircraft as permitted pursuant to Section
16.1 hereof; (b) the rights of others under agreements or arrangements to the
extent expressly permitted in Section 8.12 hereof; (c) Liens for Taxes either
not yet due or being contested in good faith (and for the payment of which
adequate reserves have been provided by Lessee) by appropriate proceedings so
long as such proceedings do not involve any material danger of the sale,
forfeiture or loss of the Airframe or any Engine; (d) material suppliers',
mechanics', workers', repairers', employees' or other like liens arising in the
ordinary course of business and for amounts the payment of which is not yet
delinquent or is being withstood in good faith by appropriate proceedings and so
long as such proceedings do not involve a material danger of the sale,
forfeiture or loss of the Airframe or any Engine (and in each case for the
payment of which adequate reserves have been provided by Lessee); and (e)
Lessor's Liens.
"Permitted Sublease" means a sublease entered into by Lessee with
the prior written consent of Lessor as to both the sublessee and the sublease
document. Lessor may require that a Permitted Sublease be assigned by Lessee to
Lessor as collateral security for the performance of Lessee's obligations under
this Lease, pursuant to an assignment satisfactory in form and substance to
Lessor.
"Permitted Sublessee" means any sublessee under a Permitted
Sublease.
"Person" means an individual, partnership, corporation, business
trust, joint venture, governmental authority or other entity of whatever nature.
"Pre-delivery Check" means the inspection to be performed on the
Aircraft immediately prior to the acceptance of the Aircraft for lease
hereunder.
"Rent" means Basic Rent and Supplemental Rent.
"Rent Payment Date" has the meaning given in Section 6.1 hereof.
"Rent Period" means the period of time between any Rent Payment Date
and the next succeeding Rent Payment Date, or between the last Rent Payment Date
and the expiration of the Term.
-5-
<PAGE>
"Replacement Engine" means an engine of the same or an improved
model as an Engine being replaced pursuant to Sections 9.2 or 12.2 hereof, which
is suitable for installation and use on the Airframe without impairing the value
or utility of the Aircraft and having a time status, modification status, value,
manufacturer's warranty status, condition and utility, as determined in good
faith by Lessor, at least equal to the Engine it is replacing (assuming such
Engine was in the modification status, condition, and repair required by the
terms hereof immediately prior to being replaced). Any such Replacement Engine
shall be an Engine hereunder.
"Required Modifications" has the meaning given in Section 8.11(a)
hereof.
"Reserve Tasks" has the meaning given to such term in Section 6.6
hereof.
"Reserves" has the meaning given to such term in Section 6.6 hereof.
"Return Location" has the meaning given in Section 9.1(a) hereof.
"Security Deposit" has the meaning given in Section 6.5 hereof.
"Service Bulletin" has the meaning given in Section 8.7 hereof.
"Stipulated Loss Value" for the Aircraft means $4,000,000.
"Supplemental Rent" means all monetary amounts, liabilities and
obligations (other than Basic Rent) which Lessee assumes or agrees to pay under
any Lease Document to Lessor including, without limitation, Stipulated Loss
Value and the purchase option price in the event of the exercise of Lessee's
option to purchase set forth in Section 17 hereof.
"Tax" means all license and registration fees and all taxes, levies,
imposts, duties, charges, assessments or withholdings of any nature whatsoever
together with any penalties, additions to tax, fines or interest thereon.
"Term" means the Basic Term pursuant to Section 2.3 and any
extension thereof as Lessor and Lessee may hereinafter agree in writing.
"Total Loss" with respect to the Aircraft, Airframe, any Engine or
Part means any of the following events with respect to such property; (i) loss
of such property or the use thereof due to theft or disappearance for more than
45 consecutive days; (ii) loss of such property or the use thereof due to
destruction, damage beyond economic repair or rendition of such property
permanently unfit for normal use; (iii) any event which should or does result in
the receipt of insurance proceeds with respect to such property on the basis of
a total loss, arranged total
-6-
<PAGE>
loss, constructive or agreed total loss; (iv) (A) the confiscation or seizure of
title to the Aircraft or Airframe (B) the condemnation, taking, confiscation or
seizure of the use of the Aircraft or Airframe for a period equal to the shorter
of 90 consecutive days or the date the Aircraft is required to be returned to
Lessor pursuant to Section 9 hereof by any government or agency or
instrumentality thereof; (v) with respect to any Engine, the taking of title or
requisition for use by any government and any divestiture of title deemed a
Total Loss pursuant to Section 12.2 of this Lease; or (vi) as a result of any
rule, regulation, order or other action (generally applicable to aircraft of the
same type as the Aircraft) by the CAA or other governmental body (including any
court) having jurisdiction, the use of the Aircraft for the commercial
transportation of persons is prohibited for a period of 180 consecutive days. A
Total Loss with respect to the Aircraft shall be deemed to occur if a Total Loss
occurs with respect to the Airframe.
"Trust" has the meaning given in Section 16.4 hereof.
SECTION 2. AGREEMENT TO LEASE; TERM
2.1. Leasing of Aircraft. Subject to the terms and conditions of the Lease
Documents, and in reliance upon the agreements, representations and warranties
therein contained and made pursuant hereto, Lessor agrees to lease the Aircraft
to Lessee hereunder on the Delivery Date, such leasing to be evidenced by Lessor
executing and delivering the Acceptance Certificate (Delivery) hereunder.
2.2. Delivery of Aircraft. The Aircraft shall be delivered to Lessee by
Lessor for purposes of this Lease at Piedmont Triad Airport, Greensboro, North
Carolina, U.S.A.
2.3. Term. Except as otherwise provided herein, the Aircraft shall be
leased for the Term which shall comprises the Basic Term and any extension
thereof pursuant to the terms hereof except that the Term shall end upon any
earlier termination of this Lease in accordance with its terms.
SECTION 3. LESSEE'S REPRESENTATIONS, WARRANTIES AND COVENANTS. Lessee
represents, warrants and agrees as follows:
3.1. Organization; Good Standing; Certification. Lessee is a corporation
duly incorporated, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has the corporate power and authority to own
or hold under lease its properties and to enter into and perform its obligations
hereunder. Lessee is duly qualified and authorized to do business wherever the
nature of its activities or properties requires such authorization. Lessee is as
of the date hereof and at all times during the Term shall remain a Certificated
Air Carrier.
-7-
<PAGE>
3.2. Authority; Consent. Lessee has the full power, authority and legal
right to execute, deliver and perform the terms of each of the Operative
Documents to which it is a party. The execution, delivery and performance of
each of the Operative Documents have been duly authorized by all necessary
corporate action of Lessee and do not require any stockholder approval or
approval or consent of, or notice to, any trustee or holders of any indebtedness
or obligations of Lessee.
3.3. Legal, Valid and Binding. Each of the Operative Documents to which
Lessee is a party has been duly executed and delivered by Lessee and constitutes
a legal, valid and binding obligation of Lessee, enforceable in accordance with
its terms.
3.4. Compliance with Other Instruments. Neither the execution, delivery or
performance by Lessee of the Operative Documents nor the consummation or
performance by Lessee of the transactions contemplated therein will conflict
with or result in any violation of, or constitute a default under, the
certificate of incorporation or by-laws of Lessee or any agreement, mortgage,
indenture, lease or other instrument or any Applicable Law by which Lessee or
its properties or assets are bound.
3.5. Governmental Consents. Neither the execution and delivery of any of
the Operative Documents nor the performance of any of the transactions
contemplated thereby by Lessee requires the consent or approval of, the giving
of notice to, the registration with, or the taking of any other action in
respect to the CAA, any other United Kingdom or foreign governmental authority
or agency, including any judicial body.
3.6. No Adverse Agreements. Lessee is not a party to any agreement or
instrument or subject to any charter or any corporate restriction, which if
performed in accordance with its terms, would materially and adversely affect
Lessee's financial condition, business or operations or the ability of Lessee to
perform its obligations under any of the Operative Documents.
3.7. No Defaults or Violations. Lessee is not now, and during the Term
will not, be in default under any mortgage, deed of trust, indenture or other
instrument or agreement to which Lessee is a party or by which it or any of its
properties or assets may be bound, or be in violation of any Applicable Law,
which default or violation would have a material adverse effect on the financial
condition, business or operations of Lessee or its ability to perform any of
their obligations under any of the Operative Documents to which it is a party.
3.8. Litigation. There are no pending or, to the best of Lessee's
knowledge after due inquiry, threatened actions or proceedings by or before any
court, administrative agency, regulatory authority or arbitrator that would if
decided against Lessee either individually or in the aggregate materially and
adversely
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affect the financial condition, business or operations of Lessee or the ability
of Lessee to perform its obligations under any of the Operative Documents.
3.9. Tax Returns. Lessee has filed or caused to be filed all tax returns
which are required to be filed by it, and has paid or caused to be paid all
taxes shown to be due or payable on said returns or on any assessment received
by Lessee, except as may be contested in good faith by appropriate proceedings.
There are no currently pending audits for any federal or state income taxes or
any other taxes for any period.
3.10. Filing or Recordation. Except for the filing made with the U.K.
Civil Aircraft register, no other filing or recording of this Lease with the
CAA, no further filing or recording of this Lease or of any other document and
no further action, are necessary or desirable in order to (A) fully protect and
establish Lessor's title to, and interest in, and property rights with respect
to the Aircraft as against Lessee or any third party claiming through Lessee and
to ensure that the property rights of Lessor therein will have priority in all
respects over the claims of all creditors of Lessee, or (B) ensure the validity,
effectiveness and enforceability of this Lease and the other Operative
Documents.
3.11. Principal Place of Business. Unless Lessee gives the notice provided
in this Section 3.11, Lessee shall maintain its principal place of business and
chief executive office and the office where it keeps its business and financial
records and files concerning the Lease Documents at the location specified in
Section 18 hereof. Lessee shall hold and preserve such records and files
concerning the Lease Documents as are required hereunder and shall permit
representatives of Lessor at any time during normal business hours upon
reasonable notice to inspect and make abstracts from such records and files.
Lessee shall give Lessor at least 30 days' prior written notice of any change in
Lessee's principal place of business and chief executive office, and shall
cooperate with Lessor in executing and delivering all such documents as Lessor
may reasonably request which are required or desirable as a result of such
change of principal place of business of Lessee. Notwithstanding any of the
foregoing provisions of this Section 3.11 to the contrary, Lessee shall not
maintain its principal place of business in any location which would cause
Lessee not to be a Certificated Air Carrier.
3.12. Financial Statements. The financial and business operations
information furnished by Lessee to Lessor in regards to Lessee and the persons
associated with Lessee (including without limitation an accountant's letter
regarding the financial resources of one of Lessee's investors and information
regarding a usage contract between Lessee and the tour operator IAG) are
accurate and complete and are not misleading. Since the dates of such
information furnished by Lessee to Lessor, there has been no material adverse
change in the financial condition, business, operations or prospects of Lessee.
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3.13. Financial and Other Information to be Supplied. Lessee agrees to
furnish to Lessor during the Term:
(a) As soon as possible and in any event within 5 days after the
occurrence of an Event of Default which is continuing, an Officer's Certificate
setting forth in detail the nature of such Event of Default and the action which
Lessee proposes to take with respect thereto;
(b) as soon as available, and in any event within 30 days after the
end of each calendar quarter falling during the Term, consolidated balance
sheets of Lessee as of the end of such quarter and related statements of income,
shareholders' equity and changes in financial condition of Lessee for the period
commencing at the end of the previous fiscal year and ending with the end of
such quarter, setting forth in each case in comparative form the corresponding
figures for the corresponding period in such other preceding fiscal year, all in
reasonable detail and duly certified (subject to year-end audit adjustments) by
a financial officer of Lessee, as applicable, as having been prepared in
accordance with generally accepted accounting principles and practices,
consistently applied.
(c) as soon as available, and in any event within 90 days after the
end of each of Lessee's fiscal years falling during the Term, a copy of the
annual report for such year for Lessee and its subsidiaries on a consolidated
basis, including therein consolidated balance sheets of Lessee as of the end of
such fiscal year and related statements of income, shareholders' equity and
changes in financial condition of Lessee for such fiscal year, in comparative
form with the preceding fiscal year, in each case certified by independent
certified public accountants of national standing as having been prepared in
accordance with generally accepted accounting principles and practices
consistently applied.
(d) in the event that Lessee becomes a publicly-held company,
promptly upon the sending or filing thereof, copies of all such proxy
statements, financial statements and reports which Lessee or the affiliated
group of which Lessee is a member sends to its stockholders generally, and
copies of all regular periodic and special reports and all registration
statements which Lessee files with any governmental authority, or with any
national securities exchange or similar agency, of any nation;
(e) from time to time, such other information relating to its
financial, operational or business affairs or conditions as Lessor may
reasonably request.
3.14. Maintenance of Corporate Status; No Merger or Consolidation. Lessee
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
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not consolidate or merge with or into any other corporation or sell, convey,
transfer, lease or otherwise dispose of, whether in one transaction or a series
of related transactions, any of its assets if the aggregate value thereof
represents all or substantially all of its assets unless the surviving entity
has the same or greater net worth as that of Lessee immediately prior to any
such consolidation or merger and such surviving entity agrees in writing to
assume all of the obligations of Lessee under this Lease. Lessee shall not
voluntarily permit to be revoked, canceled or otherwise terminated all or
substantially all of the franchises, concessions, permits, rights or privileges
required for the conduct of business and operations of Lessee or the free and
continued use and exercise thereof.
3.15. Notice of Default or Adverse Occurrence. 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.
3.16. Maintenance of Consents and Approvals. Lessee shall obtain or cause
to be obtained, maintain in full force and effect and comply in all material
respects with the conditions and restrictions (if any) imposed on, or in
connection with, every consent, license, authorization, approval, filing and
registration obtained or effected in connection with this Lease, including
without limitation foreign exchange and transfer permits regarding Dollar
amounts due hereunder, or which may from time to time be necessary under
Applicable Law for the continued due performance of all obligations of the
Lessee under this Lease, including without limitation qualifications to operate
the Aircraft in accordance with Applicable Laws. Where it is required under
Applicable Law with respect to this Lease, consent, approval, sanction, to
stamp, file, register or attend to any act, matter or thing, Lessee will do so
promptly and within any applicable prescribed time period in respect thereof.
SECTION 4. LESSOR REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
Subject to certain disclaimers set forth in Section 7 hereof, Lessor
represents, warrants and agrees as follows:
4.1. Lessor covenants and agrees that provided no Event of Default has
occurred and remains unremedied, neither it nor anyone claiming exclusively by,
through or under Lessor will interfere with Lessee's quiet use and enjoyment of
the Aircraft during the Term.
4.2. Lessor is the legal owner of the Aircraft and the Aircraft is not
subject to any Lien.
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SECTION 5. CONDITIONS PRECEDENT.
5.1. Conditions Precedent to Obligation of Lessor to Lease Aircraft. The
obligation of Lessor to lease the Aircraft to Lessee under this Lease is subject
to the fulfillment to the satisfaction of Lessor, on or before the Delivery Date
or concurrently with Lessor's leasing of the Aircraft hereunder (unless waived
in writing by Lessor), of the following conditions precedent:
(a) Each of the Operative Documents and such other documents deemed
necessary or reasonably desirable by Lessor, shall have been duly authorized,
executed and delivered by the respective party or parties thereto and shall be
satisfactory in form and substance to Lessor, and an executed original or
conformed copy, as appropriate, of the Lease Documents and such other documents
deemed necessary or desirable by Lessor shall have been delivered to Lessor.
(b) On the Delivery Date, the following statements shall be true and
Lessor shall have received evidence in form and substance reasonably
satisfactory to it that:
(i) The Aircraft is duly registered with and certificated by the
FAA as to type and airworthiness in accordance with the terms
of this Lease;
(ii) The Lease and Acceptance Certificate (Delivery) shall be in
due form for recording and shall be duly filed pursuant to
Applicable Law;
(c) On the Delivery Date for the Aircraft (i) the representations
and warranties of Lessee contained in the Lease Documents shall be true and
accurate; (ii) nothing shall have occurred which materially and adversely has
affected or will affect the ability of Lessee to carry on its business and to
perform its obligations under the Lease Documents; and (iii) no event shall have
occurred and be continuing, or would result from the lease of the Aircraft,
which constitutes an Event of Default.
(d) Lessee shall have delivered an Officer's Certificate to Lessor
certifying as to the matters set forth with respect to Lessee in Section 5.1(c)
hereof.
(e) No change shall have occurred after the date of this Agreement
in Applicable Law that in the opinion of Lessor would make it illegal for Lessor
to maintain its interest in the Aircraft.
(f) in furtherance of and not in limitation of its rights set forth
in Section 5.1(a), Lessor shall have received the following, in each case in
form and substance satisfactory to it:
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(i) incumbency certificates of Lessee regarding the officers of
Lessee authorized to execute and deliver the Lease Documents,
respectively, and other documents and agreements delivered in
connection therewith, which incumbency certificates for the
applicable officers and entities shall be delivered
concurrently with the delivery of each of the Lease Documents
and such other documents and agreements;
(ii) an insurance broker's letter of undertaking in substantially
the form of Exhibit E hereto;
(iii) certified copies of all documents evidencing the corporate
actions of Lessee and the Board of Directors of Lessee, duly
authorizing the lease by Lessee of the Aircraft hereunder and
the execution, delivery and performance by Lessee of each of
the Lease Documents, which certified copies shall be delivered
concurrently with the delivery of this Lease;
(iv) such other documents and evidence with respect to Lessee as
Lessor may reasonably request in order to consummate the
transactions contemplated by the Lease Documents, the taking
of all corporate actions in connection therewith and
compliance with the conditions herein set forth.
(g) Lessor shall have received the Security Deposit, in cash, from
Lessee.
(h) a favorable opinion from Brooke North, counsel to Lessee,
covering such matters incident to the transactions contemplated hereby as it may
reasonably request.
5.2. Conditions Precedent to Obligation of Lessee to Lease the Aircraft.
The obligation of Lessee to lease the Aircraft from Lessor under this Lease is
subject to the fulfillment to the satisfaction of Lessee, on or before the
Delivery Date, of the following conditions precedent:
(a) Lessee shall have completed the Pre-delivery Check which may be
satisfied by having a representative of Lessee present at a check flight of the
Aircraft of at least two hours duration flown following the completion of the
Pre-delivery Check so that Lessee may be reasonably satisfied that the
Pre-delivery Check has been satisfactorily completed and that the Aircraft is
otherwise in the condition required by this Section 5.2. In the event the person
performing the Pre-delivery Check would not ordinarily perform such a check
flight, Lessor shall perform a check flight reasonably acceptable to Lessee at
Lessor's expense upon Lessee's request, which check flight shall not exceed two
hours duration without Lessor's consent.
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<PAGE>
(b) Each Engine shall have not less than 3,000 Hours and 1,500
Cycles remaining until such Engine's next limiter or next scheduled shop visit.
(c) The APU shall be serviceable.
(d) All systems, equipment and components of the Aircraft shall be
functioning properly, except that the passenger entertainment system (called the
MUX System) may not be fully operational. Lessor agrees to reimburse Lessee, up
to a maximum of $5,000, for the actual costs incurred by Lessee in making such
system fully operational, upon receipt of resonable evidence of such work and
the costs incurred.
(e) The Aircraft shall include all galley carts, LD3 containers and
copies of all relevant maintenance and operations manuals.
Provided that the foregoing conditions are satisfied, Lessee shall accept the
Aircraft in its "AS IS" condition. Any costs or expense required to be incurred
in order to place the Aircraft under Lessee's Approved Maintenance Program or in
order to obtain certification by the CAA shall be borne solely by Lessee except
as expressly provided in the next paragraph.
Lessee acknowledges that the Aircraft will require a pre-certification
check, MPB and/or CPCP work (Pre-Certification Work) prior to certification by
the CAA in the United Kingdom. Lessee shall cause the Pre-Certification Work to
be done at a shop reasonably approved by Lessor, and shall present such evidence
thereof (including as to cost) as is reasonably required by Lessor. Lessee shall
pay for all such Pre-Certification Work (and any other work, which must be
permitted hereby, as is performed at Lessee's order), but the actual costs to
Lessee of such Pre-Certification Work as is mandatory in order to obtain CAA
certification shall be credited against the installments of Basic Rent last due
under this Lease (that is, the final, then next to final, installment) up to the
aggregate amount of $160,000. Moreover, the amount of such credit shall be
increased by an amount equal to the cost of compliance with such Airworthiness
Directives (as defined in Section 8.6(a), if any, as to which the Aircraft is
not in compliance when such Pre-Certification Work is done. Promptly upon
completion of the Pre-Certification Work, Lessee shall provide Lessor with a
description thereof in reasonable detail, including the costs incurred and the
date such work was completed.
5.3. Acceptance for Lease. Upon the execution of the Acceptance
Certificate (Delivery), it shall be conclusively presumed that the conditions
set forth in Sections 5.1 and Section 5.2 have been met in full (or that any
discrepancies have been irrevocably waived by Lessee), and that the Aircraft
shall, by the execution of the Acceptance Certificate (Delivery), be accepted
for lease by Lessee for all purposes hereunder.
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<PAGE>
5.4. Non-fulfillment of Conditions Precedent under Section 5.2. In the
event that Lessor has failed to fulfill any or all of the conditions set out in
Section 5.2. hereof and Lessee has not waived such non-fulfillment, Lessee shall
be under no obligation to take the Aircraft on Lease and the parties hereto
shall be released from all obligations to each other hereunder save that Lessor
shall forthwith return to Lessee any installments of the Security Deposit paid
to it by Lessee.
SECTION 6. PAYMENTS.
6.1. Basic Rent. During the Basic Term on and after the Basic Rent
Commencement Date Lessee shall pay Lessor, in accordance with the provisions of
Section 6.3 hereof, Basic Rent in the amount of Eighty Thousand Dollars
($80,000) on each Rent Payment Date as hereinafter defined. Basic Rent in the
foregoing amount is due and payable on the Basic Rent Commencement Date and such
Basic Rent shall be due and payable thereafter on the same day of each month
during the Basic Term as the day of the month the Basic Rent Commencement Day
fell (each such day a "Rent Payment Date"). The term "Basic Rent Commencement
Date" shall mean the earlier of (i) the date the Pre-Certification Work referred
to in Section 5.2 is finished, and (ii) August 12, 1997.
6.2. NET LEASE; NO SET-OFF OR DEDUCTIONS. THIS LEASE IS A NET LEASE.
LESSEE ACKNOWLEDGES AND AGREES THAT ITS OBLIGATIONS TO PAY ALL RENT DUE AND
OWING UNDER THE TERMS HEREOF SHALL BE ABSOLUTE AND UNCONDITIONAL AND SHALL NOT
BE AFFECTED BY ANY CIRCUMSTANCE WHATSOEVER, INCLUDING, WITHOUT LIMITATION (A)
ANY SET-OFF, COUNTERCLAIM, RECOUPMENT, DEFENSE OR OTHER RIGHT WHICH LESSEE MAY
HAVE AGAINST LESSOR OR ANYONE ELSE FOR ANY REASON WHATSOEVER, (B) ANY DEFECT IN
THE TITLE, AIRWORTHINESS, ELIGIBILITY FOR REGISTRATION UNDER THE FAA OR THE CAA,
OR ANY DAMAGE TO OR LOSS OR DESTRUCTION OF, THE AIRCRAFT, OR ANY INTERFERENCE,
INTERRUPTION OR CESSATION IN OR PROHIBITION OF THE USE OR POSSESSION THEREOF BY
LESSEE FOR ANY REASON WHATSOEVER, INCLUDING, WITHOUT LIMITATION, ANY SUCH
INTERFERENCE, INTERRUPTION, CESSATION OR PROHIBITION RESULTING FROM THE ACT OF
ANY GOVERNMENTAL AUTHORITY, (C) ANY LIENS, ENCUMBRANCES OR RIGHTS OF OTHERS WITH
RESPECT TO THE AIRCRAFT, (D) THE INVALIDITY OR UNENFORCEABILITY OR LACK OF DUE
AUTHORIZATION OR OTHER INFIRMITY OF THIS LEASE OR ANY LACK OF RIGHT, POWER OR
AUTHORITY OF LESSOR OR LESSEE TO ENTER INTO THIS LEASE, (E) ANY INSOLVENCY,
BANKRUPTCY, REORGANIZATION OR SIMILAR PROCEEDINGS BY OR AGAINST LESSEE, LESSOR,
OR ANY OTHER PERSON, OR (F) ANY OTHER CAUSE WHETHER SIMILAR OR DISSIMILAR TO THE
FOREGOING, ANY PRESENT OR FUTURE LAW NOTWITHSTANDING, IT BEING THE INTENTION OF
THE PARTIES HERETO THAT ALL RENT
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PAYABLE BY LESSEE HEREUNDER SHALL CONTINUE TO BE PAYABLE IN ALL EVENTS IN THE
MANNER AND AT THE TIMES PROVIDED HEREIN. SUCH RENT SHALL NOT BE SUBJECT TO ANY
ABATEMENT AND THE PAYMENTS HEREOF SHALL NOT BE SUBJECT TO ANY SET-OFF OR
REDUCTION FOR ANY REASON WHATSOEVER, INCLUDING ANY PRESENT OR FUTURE CLAIMS OF
LESSEE AGAINST LESSOR UNDER THIS LEASE OR OTHERWISE. EACH RENT PAYMENT MADE
PURSUANT TO THIS LEASE BY LESSEE SHALL BE FINAL AND LESSEE WILL NOT SEEK TO
RECOVER ALL OR ANY PART OF SUCH PAYMENT FROM LESSOR OR FOR ANY REASON
WHATSOEVER. IF FOR ANY REASON WHATSOEVER THIS LEASE SHALL BE TERMINATED IN WHOLE
OR IN PART BY OPERATION OF LAW OR OTHERWISE, EXCEPT AS SPECIFICALLY PROVIDED
HEREIN OR AS OTHERWISE AGREED, LESSEE NONETHELESS AGREES TO PAY TO LESSOR AN
AMOUNT EQUAL TO EACH PAYMENT OF BASIC RENT AND SUPPLEMENTAL RENT DUE HEREUNDER
AT THE TIME SUCH PAYMENT WOULD HAVE BECOME DUE AND PAYABLE IN ACCORDANCE WITH
THE TERMS HEREOF HAD THIS LEASE NOT BEEN TERMINATED IN WHOLE OR IN PART. THE
OBLIGATION OF LESSEE IN THIS SECTION 6.2 SHALL SURVIVE THE EXPIRATION OR THE
TERMINATION OF THIS LEASE OTHER THAN IN ACCORDANCE WITH ITS TERMS. TO THE EXTENT
PERMITTED BY APPLICABLE LAW, LESSEE HEREBY WAIVES ANY RIGHTS WHICH IT MAY NOW
HAVE OR WHICH MAY BE CONFERRED UPON IT, BY STATUTE OR OTHERWISE, TO TERMINATE,
CANCEL, QUIT OR SURRENDER THIS LEASE EXCEPT IN ACCORDANCE WITH THE TERMS HEREOF.
THE FOREGOING LIMITATIONS SHALL NOT, HOWEVER, PRECLUDE LESSEE FROM SEEKING
REMEDIES AGAINST LESSOR, FOR MONEY DAMAGES AND/OR INJUNCTIVE RELIEF, BASED ON A
BREACH BY LESSOR OF LESSOR'S OBLIGATIONS UNDER THIS LEASE.
6.3. Immediately Available Funds. All Rent shall be paid in United States
Dollars by wire transfer in immediately available funds by 12:00 noon EST or
EDT, as the case may be, on the day it is due and payable hereunder to Lessor at
Fleet Bank, N.A., 80 Pine Street, New York, NY, ABA No. 021200339, Account No.
2181-01-7572, Re: AFG Rent Escrow, with sufficient information to identify the
source and application of such funds. If any Rent is due on a day which is not a
Business Day, it shall be due on the immediately preceding Business Day.
6.4. Supplemental Rent. Lessee also agrees to pay to Lessor, in accordance
with the provisions of Section 6.3 hereof, any and all Supplemental Rent when
the same shall become due and owing, and in the event of any failure on the part
of Lessee to pay any Supplemental Rent, Lessor shall have all rights, powers and
remedies provided for herein or by law or equity in the case of nonpayment of
Basic Rent. Lessee will also pay, on demand, as Supplemental Rent, interest at
the Overdue Rate on any part of any installment of Basic Rent not paid when due
for any period for which the same shall be overdue and, to the extent permitted
by
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Applicable Law, on any payment of Supplemental Rent not paid when due for the
period until the same shall be paid.
6.5. Security Deposit. On or before the acceptance of the Aircraft for
lease hereunder, Lessee shall deposit with Lessor in an amount in cash equal to
Two Hundred Forty Thousand Dollars ($240,000) to serve as security for Lessee's
full and faithful performance of all of its obligations under this Lease (the
"Security Deposit"). The Security Deposit may be in cash or in the form of an
irrevocable standby letter of credit in form and substance satisfactory to
Lessor and issued by a U.S. bank acceptable to Lessor.
6.5.1. Lessor hereby acknowledges receipt of $50,000 as the initial
installment of the Security Deposit. The balance of the Security Deposit,
$190,000, shall be payable by Lessee to Lessor concurrently with the
signing of this Lease. In the event Lessor has satisfied the conditions
precedent set forth in Section 5.2 hereof and Lessee fails to accept the
Aircraft for lease hereunder, Lessor may retain the Security Deposit in
its possession as liquidated damages for loss of bargain and not as a
penalty. In the event Lessor fails to satisfy the conditions precedent set
forth in Section 5.2 hereof within 30 days after written notice from
Lessee thereof, Lessor shall return the Security Deposit (or whatever
portion thereof Lessor has received) to Lessee.
6.5.2. If Lessee fails to pay Rent or any other sums due or fails to
perform any of the other terms or provisions of this Lease or is otherwise
in default hereunder, in addition to all other rights Lessor shall have,
Lessor may use, apply or retain all or any portion of the Security Deposit
in partial payment for any sums it may in its discretion advance as a
result of a default by the Lessee or to apply toward losses or expenses
Lessor may suffer of incur as a result of such Default. If Lessor uses or
applies all or any portion of the Security Deposit, such application shall
not be deemed a cure of any default, and Lessee shall immediately upon
receipt of written demand from Lessor pay an amount necessary to restore
the Security Deposit to its required amount, and the failure to do so
shall be an Event of Default without further notice. In the event that the
Lessee does not make timely payments of Basic Rent in any two consecutive
months during the Term, the Lessor, without limitation to any other rights
and remedies hereunder, may on each such occasion require the Lessee to
increase the Security Deposit by an amount equal to one payment of Basic
Rent. The Security Deposit shall remain in effect until after the Aircraft
is returned in the condition required by this Lease. Lessee shall not be
entitled to off-set any Rent against the Security Deposit. After the
return of the Aircraft in the condition required by this Lease, Lessor
shall return the Security Deposit, without interest, provided that Lessee
has otherwise fulfilled all its obligations hereunder.
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6.5.3. Provided Lessee has duly exercised its option to purchase
under Section 17 hereof, Lessor shall retain the entire Security Deposit
as part of the purchase price of the Aircraft. In the event Lessee has not
exercised its option to purchase under Section 17 and the Aircraft has
been returned to Lessor in accordance with the provisions of Section 9
hereof, the Security Deposit shall be refunded to Lessee without interest
within 30 days following the expiration of the Basic Term.
6.6. Reserves. C Checks, Engine maintenance requiring scheduled shop
repair (that is, overhaul, hot section inspection, replacement of Internal Life
Limited Components that have reached their applicable hour or cycle limits,
disassembly, assembly and testing required thereof), landing gear overhauls, and
auxiliary power unit overhauls are collectively and individually referred to as
"Reserve Tasks." In addition to monthly installments of Basic Rent, Lessee shall
pay to Lessor a payment to be reserved for Reserve Tasks as follows:
6.6.1. The Lessee shall, on or before the 10th day following the
second and each subsequent Rent Payment Date and the 10th day following
the expiration of the Basic Term if Lessee has not exercised its option
under Section 17, submit to Lessor a true summary of the Aircraft usage
for the preceding Rent Period, specifying the number of Hours the Aircraft
shall have flown, the number of Cycles incurred in such Rent Period and
the number of Hours flown for each Cycle. Such usage shall be determined
by Lessee by reference to the Aircraft operating logs, subject to audit
and verification by Lessor. On or before the 15th day following the second
and subsequent Rent Payment Dates and the 15th day following the
expiration of the Basic Term if Lessee has not exercised its option under
Section 17, Lessee shall pay to Lessor for the Rent Period with respect to
which such usage data applies: $425 for each Hour the Aircraft was
operated and $1,500 for each Cycle. In the event that the ratio of Hours
to Cycles exceeds 5 Hours/1 Cycle, Lessee will pay an additional $50 per
Hour for each excess hour or fraction thereof. The following amounts shall
be applicable to the specified Reserve Tasks: for C Checks, $400 per Hour;
for Engine maintenance requiring scheduled shop repair (that is, overhaul,
hot section inspection, replacement of internal Life Limited Components
that have reached their applicable hour or cycle limits, disassembly,
assembly and testing required thereof) requiring shop repair, $500 per
Cycle for each of the 3 engines; for complete landing gear overhaul, $15
per Hour, for all landing gear; and for complete auxiliary power unit
overhaul, $10 per Hour. The foregoing amounts shall be collectively or
individually referred to as "Reserves."
6.6.2. Lessee shall obtain Lessor's prior written approval of any
Reserve Tasks to be undertaken, the company and shop which is to do such
work and the cost thereof (including proforma invoices), such consent not
to be unreasonably withheld. Upon submission by Lessee to Lessor of
invoices
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or receipts evidencing the performance of a Reserve Task in accordance
with the provisions hereof, Lessor shall, provided than an Event of
Default shall not have occurred and be continuing, pay the invoices
directly or reimburse Lessee, as applicable, from Reserves corresponding
to the Reserve Task, but not in an amount to exceed the actual invoice or
receipts, and not in excess of Reserves actually received for the
corresponding Reserve Task. Under no circumstance shall Reserves be used
to reimburse Lessee for the cost of repairs arising as a result of foreign
object damage, an insured occurrence, or operational mishandling. If, on
any occasion, Reserves actually received are insufficient to pay for the
corresponding Reserve Task, the shortfall shall be paid by Lessee and may
not be carried forward or made the subject of any further claim for
payment.
6.6.3. Reserves shall be and remain the property of the Lessor until
disbursed. Except as otherwise set forth in Section 12.1(a) hereof, all
undisbursed Reserves, upon the expiration or earlier termination of this
Lease, shall be retained by Lessor as additional Rent for the Aircraft
unless Lessee has exercised its option to purchase under Section 17 hereof
in which case the amount of any then remaining Reserves shall be paid to
Lessee at the time title to the Aircraft is transferred to Lessee pursuant
to Section 17.
6.6.4. Payments for reserves shall be paid in the same manner as
Basic Rent, but to Fleet Bank, N.A., 80 Pine Street, New York, New York
10005, ABA #021 200 339, Account #2173-00-2089, Account Name:
Equis/Lockheed 1118 Maintenance Reserve (the "Reserve Account"). Reserves
shall be kept segregated from other moneys of Lessor in the Reserve
Account. The Reserve Account shall be interest-bearing and interest earned
shall become part of the Reserves.
SECTION 7. DISCLAIMER OF WARRANTIES AND MANUFACTURERS' WARRANTIES.
7.1. Disclaimer. UPON THE ACCEPTANCE OF THE AIRCRAFT FOR LEASE HEREUNDER
IT SHALL BE DEEMED TO BE LEASED HEREUNDER "AS IS" AND "WHERE IS." LESSOR HAS NOT
AND SHALL NOT BE DEEMED TO HAVE MADE (WHETHER BY VIRTUE OF HAVING LEASED THE
AIRCRAFT UNDER THIS LEASE, OR HAVING ACQUIRED THE AIRCRAFT, OR HAVING DONE OR
FAILED TO DO ANY ACT, OR HAVING ACQUIRED OR FAILED TO ACQUIRE ANY STATUS UNDER
OR IN RELATION TO THIS LEASE OR OTHERWISE), AND LESSOR HEREBY SPECIFICALLY
DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE,
CONDITION, DESIGN, OPERATION, MERCHANTABILITY, FREEDOM FROM CLAIMS OF
INTERFERENCE OR INFRINGEMENT OR THE LIKE, OR FITNESS FOR USE FOR A PARTICULAR
PURPOSE OF THE AIRCRAFT, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF
THE
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AIRCRAFT, THE ABSENCE THEREFROM OF LATENT OR OTHER DEFECTS, WHETHER OR NOT
DISCOVERABLE, OR AS TO ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS
OR IMPLIED (INCLUDING ANY IMPLIED WARRANTY ARISING FROM A COURSE OF PERFORMANCE
OR DEALING OR USAGE OF TRADE), WITH RESPECT TO THE AIRCRAFT; AND LESSEE HEREBY
WAIVES, RELEASES, RENOUNCES AND DISCLAIMS EXPECTATION OF OR RELIANCE UPON ANY
SUCH WARRANTY OR WARRANTIES. LESSOR SHALL NOT HAVE ANY RESPONSIBILITY OR
LIABILITY TO LESSEE OR ANY OTHER PERSON, WHETHER ARISING IN CONTRACT OR TORT OUT
OF ANY NEGLIGENCE OR STRICT LIABILITY OF LESSOR OR OTHERWISE, FOR (I) ANY
LIABILITY, LOSS OR DAMAGE CAUSED OR ALLEGED TO BE CAUSED DIRECTLY OR INDIRECTLY
BY THE AIRCRAFT OR ANY ENGINE OR BY ANY INADEQUACY THEREOF OR DEFICIENCY OR
DEFECT THEREIN OR BY ANY OTHER CIRCUMSTANCE IN CONNECTION THEREWITH, (II) THE
USE, OPERATION OR PERFORMANCE OF THE AIRCRAFT OR ANY RISKS RELATING THERETO,
(III) ANY INTERRUPTION OF SERVICE, LOSS OF BUSINESS OR ANTICIPATED PROFITS OR
CONSEQUENTIAL DAMAGES OR (IV) THE DELIVERY, OPERATION, SERVICING, MAINTENANCE,
REPAIR, IMPROVEMENT OR REPLACEMENT OF THE AIRCRAFT. THE WARRANTIES AND
REPRESENTATIONS SET FORTH IN THIS SECTION 7.1 ARE EXCLUSIVE AND IN LIEU OF ALL
OTHER REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, AND LESSOR
SHALL NOT BE DEEMED TO HAVE MADE ANY OTHER WARRANTIES, EXCEPT AND ONLY TO THE
EXTENT OF THOSE WARRANTIES SET FORTH IN SECTION 4 OF THIS LEASE.
7.2. Other Warranties. So long as no Event of Default shall have occurred,
Lessor agrees that if there are any outstanding warranties of manufacturers and
suppliers relating to the Aircraft or any of the Engines which would otherwise
inure to the benefit of or be enforceable by Lessor during the Term, they shall,
notwithstanding title to the Airframe and Engines being vested in Lessor, inure
to the benefit of Lessee throughout the Term and Lessor agrees to authorize
Lessee to exercise for the account of Lessor such rights as Lessor may have
under such warranties.
SECTION 8. USE, OPERATION AND MAINTENANCE
8.1. General. Lessee, at its own cost and expense, shall during the Term
service, repair, maintain and overhaul or cause the same to be done to the
Airframe and each Engine under the Approved Maintenance Program for so long as
the Aircraft is in the possession of Lessee or subject to this Lease with the
same or better care as used by Lessee at a minimum, give the Aircraft the same
level of attention and maintenance as the Lessee affords to the other aircraft
in its fleet, including Airworthiness Directive compliance and level of
incorporation,
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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. By way of
expansion and not in limitation of the foregoing, Lessee agrees to (i) keep the
Airframe and each Engine in as good operating condition as it was upon
completion of the Pre-Certification Work, ordinary wear and tear excepted, (ii)
keep the Aircraft in such condition as is necessary to enable the airworthiness
certification of the Aircraft to be maintained in good standing at all times
under Applicable Law, (iii) maintain the Manuals and Technical Records in the
English language in accordance with such Approved Maintenance Program and in a
manner acceptable to the CAA and (iv) cause the Aircraft to be maintained in a
manner which will not discriminate against the Aircraft compared with other
similar aircraft owned or leased by Lessee.
8.2. Operation and Use.
(a) Lessee agrees not to operate or locate the Airframe or any
Engine, or suffer the Airframe or any Engine to be operated or located, in any
area (i) excluded from coverage by any insurance policy required to be
maintained hereunder or (ii) in any recognized or, in Lessor's reasonable
judgment, threatened area of hostilities unless fully covered by war risk
insurance meeting the terms of Section 11 hereof, except in the case of a
requisition by the United Kingdom government, where Lessee obtains indemnity
from the United Kingdom government against the risks and in the amounts required
by Section 11 hereof covering such area. Lessee agrees not to operate the
Aircraft, or suffer the Aircraft to be operated during the Term (1) unless the
Aircraft is covered by insurance as required by the provisions of Section 11
hereof or (2) contrary to the terms of such insurance as required by the
provisions of Section 11 hereof.
(b) Lessee agrees not to (i) operate the Airframe or any Engine or
permit the Airframe or any Engine to be operated during the Term except in a
passenger configuration, in commercial or other operations for which Lessee is
duly authorized by the CAA or otherwise in accordance with Applicable Law; or
(ii) use or permit the Aircraft to be used for a purpose for which the Aircraft
is not designed or reasonably suitable. Lessee will not permit the Airframe or
any Engine to be maintained, used or operated during the Term in violation of
any Applicable Law, or contrary to any manufacturer's operating manuals or
instructions.
8.3. Maintenance in General. Lessee agrees it solely has the obligation to
maintain and repair the Airframe and Engines in accordance with a maintenance
program which meets the CAA requirements for commercial airline operations under
the relevant laws and regulations of the United Kingdom, and meets the
nondiscrimination requirements set forth in Sections 8.1, 8.4(d) and 8.7 hereof
(the "Approved Maintenance Program"), so as to keep it in at least as good a
condition
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during the Term as it was upon completion of the Pre-Certification Work and
until the Aircraft is redelivered to Lessor pursuant to Section 9 hereof,
ordinary wear and tear excepted. Included within the obligation of maintenance
and repair under the Approved Maintenance Program is the obligation and
affirmative undertaking by Lessee to replace from time to time all worn or
defective Parts, to the extent required to cause the Aircraft to be in an
airworthy condition in all respects and to be covered by an effective
Certificate of Airworthiness at all times.
8.4. Specific Items of Maintenance. Lessee agrees that maintenance and
repairs shall include, but shall not be limited to, the following specific
items:
(a) to perform or have performed in accordance with Section 8.3 all
routine maintenance work, including on-line maintenance on the Aircraft, and to
ensure that all such maintenance shall be in accordance with the regulations and
directives of the CAA or other applicable government authority. Lessee shall
have all maintenance and repairs performed at repair facilities approved by the
CAA;
(b) to correct promptly any non-compliance with the Approved
Maintenance Program revealed at any time by any inspection of Lessor;
(c) to maintain all Aircraft documentation, including, without
limitation, the Manuals and Technical Records, in compliance with CAA
regulations and in up-to-date status, (if necessary, through manufacturers'
revision service) and to make these available for review and copying by Lessor
on reasonable notice at Lessee's principal maintenance base;
(d) to incorporate into the Aircraft all those Airframe, Engine, and
Parts manufacturer and other vendor service bulletins which Lessee plans to
adopt during the Term for the Term for the rest of its Lockheed L-1011 aircraft
fleet. The Aircraft, with respect to the rest of Lessee's fleet, shall not be
discriminated against in service bulletin compliance or other maintenance
matters.
8.5. Parts
(a) Unless the Airframe or an Engine has suffered a Total Loss,
Lessee, at its own cost and expense, will during the Term promptly replace all
Parts that may from time to time become worn out, lost, stolen, destroyed,
seized, confiscated, damaged beyond repair or permanently rendered unfit for use
for any reason whatsoever and shall replace such Parts as promptly as
practicable with replacement Parts. Otherwise, Lessee shall not remove parts
from the Aircraft except with the prior written approval of Lessor. All
replacement Parts shall be made by the same manufacturer and of the same model
number and modification status, or be CAA-approved substitutes normally used by
Lessee, shall be free and clear of all Liens except Permitted Liens and shall be
in at least as good operating condition as, and shall have a value, utility, and
useful life at least equal to, the
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Parts replaced assuming such replaced Parts were in the condition and repair
required to be maintained by the terms hereof.
(b) All Parts at any time removed from the Airframe or any Engine
shall remain the property of Lessor and subject to this Lease, no matter where
located, until such time as such Parts shall be replaced by Parts that have been
incorporated or installed in or attached to such Airframe or Engine and that
meet the requirements for replacement Parts specified in clause (a) of this
Section 8.5. Immediately upon any replacement Part becoming incorporated or
installed in or attached to such Airframe or Engine as provided in clause (a)
hereof, without further act, (i) title to such replacement Part shall thereupon
vest in Lessor; (ii) such replacement Part shall become subject to this Lease
and be deemed part of such Airframe or Engine, as the case may be, for all
purposes hereof to the same extent as the Parts originally incorporated or
installed in or attached to such Airframe or Engine; and (iii) title to the
replaced Part shall thereupon vest in Lessee, free and clear of all rights of
Lessor and shall no longer be deemed a Part hereunder.
(c) Title to all Parts incorporated or installed in or attached or
added to the Airframe or any Engine as the result of any alteration,
modification or addition effected by Lessee shall, without further act vest in
Lessor and become subject to this Lease.
8.6. Airworthiness Directives.
(a) During the Term hereof Lessee agrees at its sole cost and
expense (except as otherwise stated) to comply with any CAA airworthiness
directive, manufacturers' mandatory service bulletin or any other mandatory
regulation, directive or instruction ("Airworthiness Directive") which the CAA
or other competent regulatory authority may from time to time issue (whether
prior to or subsequent to the commencement of the Term) and with respect to
which compliance is required during the Term in order to meet the requirements
of Applicable Law for the public transport of passengers and/or cargo. All
Airworthiness Directives shall be accomplished in accordance with the Approved
Maintenance Program.
(b) Lessor shall hold title to any Parts included in a new system
installed on the Aircraft pursuant to an Airworthiness Directive which is
required by such Airworthiness Directive to be installed during the Term.
(c) If Lessee would normally perform the terminating action
specified by an Airworthiness Directive, the terms of which permit performance
after the end of the Term, prior to the end of the Term on its entire fleet of
Lockheed L-1011 aircraft pursuant to its schedule for performing such
Airworthiness Directive applicable to its fleet of such aircraft, Lessee shall
perform
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such Airworthiness Directive during the Term in accordance with Section 8.6(a),
above.
(d) If Lessee would not normally perform the terminating action
specified by an Airworthiness Directive, the terms of which permit performance
after the end of the Term, pursuant to its schedule for performing such
Airworthiness Directive applicable to its fleet of Lockheed L-1011 aircraft, but
Lessor requests Lessee, in writing, to perform such Airworthiness Directive
during the Term, Lessee shall perform such Airworthiness Directive during the
Term, provided, however, that Lessee's obligations to perform such Airworthiness
Directive pursuant to this Section 8.6(d) shall be subject to availability of
the necessary material, labor and facilities to perform such Airworthiness
Directive during the Term. The costs of such performance shall be borne solely
by Lessor and shall be equal to the sum of material costs and the associated
Direct Labor Rate cost of performing such Airworthiness Directive.
(e) Except as expressly set forth in Section 8.6(d) and Section 8.8,
Lessee shall be solely responsible for the expense of complying with each
particular Airworthiness Directive.
8.7. Service Bulletins. Lessee agrees, at its sole cost and expense, to
incorporate into the Aircraft, all Lockheed, Rolls-Royce and other vendor
service bulletins ("Service Bulletins") which Lessee adopts and incorporates
during the Term into its Lockheed L-1011 aircraft fleet.
8.8. Allocation of Certain Costs. As to any Airworthiness Directive or
Service Bulletin requiring compliance during the Term, Lessee shall give notice
thereof to Lessor, including the costs expected to be incurred and the
maintenance company and shop proposed by Lessee to do the work, which
maintenance company and shop and costs shall be subject to Lessor's prior
written approval. The cost of compliance therewith shall be divided between
Lessee and Lessor as set forth in this Section 8.8. The first $50,000 of cost of
compliance with any single Airworthiness Directive or Service Bulletin shall be
paid solely by Lessee. Any such cost of compliance with any single Airworthiness
Directive or Service Bulletin in excess of $50,000 (the "Excess Amount") shall
be allocated between Lessee and Lessor as follows: Lessee shall pay the portion
of such Excess Amount as is equal to such Excess Amount times a fraction, the
numerator of which fraction is the remaining number of months in the Term (going
to the right of the decimal point for any fractional month) and the denominator
of which fraction is 60, such computation being made as of the date of the
Airworthiness Directive or Service Bulletin; and the remainder of such Excess
Amount shall be paid by Lessor; provided, however, that Lessee's total expense
for complying with any single Airworthiness Directive or Service Bulletin shall
not exceed $150,000. In the event that the total expense to Lessee or Lessor of
paying its obligations with respect to any single Airworthiness Directive or
Service Bulletin shall exceed $150,000, such
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party shall have the option of terminating this Lease on the last day for
compliance with such Airworthiness Directive of Service Bulletin by giving not
less than 30 days written notice thereof to the non-terminating party; provided,
however, that such non-terminating party shall have the right to negate such
termination of this Lease by undertaking in writing to pay any such excess
amount over $150,000.
8.9. Modification Payments by the Government. In the event that, during
the Term, Applicable Law shall provide for the payment to Lessee from a
governmental entity (a "Modification Payment") with respect to a modification of
the Aircraft, including without limitation, in whole or in part with respect to
the retrofitting or replacement of Engines installed on any Lockheed L-1011
aircraft operated by Lessee in order for Lessee to comply with any laws or
regulations relating to emissions, noise, or other pollution, environmental or
fuel economy standards and requirements, Lessee shall comply with such law or
regulation by performing upon the Aircraft such modifications as are required
thereby, and only under such circumstances may Lessee retain such Modification
Payment. In the event that Lessee is not required by such law or by this
Agreement to perform any such modification upon the Aircraft and Lessee has not
theretofore given to Lessor its irrevocable written commitment to perform such
modification, Lessee shall pay Lessor, within 30 days of Lessee's receipt
thereof the Modification Payment.
8.10. Corrosion Control. Lessee shall carry out such work as may be
required for the control or corrosion, including, without limitation, periodic
inspections for penetration of fuel tanks, periodic inspections and clean-up
under galleys, forward and aft cargo pit areas and lavatories, periodic
treatment of all mild and moderate corrosion and correcting of all severe or
exfoliated corrosion, all in accordance with the Approved Maintenance Program.
8.11. Modifications.
(a) Lessee, at its own expense, shall make such alterations and
modifications in and additions to the Airframe or any Engine pursuant to Section
8.6 hereof as may be required to be made from time to time by Applicable Law
during the Term regardless upon whom such requirements are, by their terms,
nominally imposed, as required by Section 8.6 hereof ("Required Modifications").
(b) Lessee, at its own expense, may from time to time make such
alterations and modifications in and additions to the Airframe or any Engine as
Lessee may deem desirable in the proper conduct of its business provided that no
such alteration, modification or addition shall diminish, in Lessor's sole
judgment, the value or utility of the Aircraft, or impair the condition or
airworthiness thereof, below the value, utility, condition and airworthiness
thereof prior to such alteration, modification or addition assuming the Aircraft
met the requirements of this Lease prior to such alteration, modification or
addition. In addition, Lessee may, at any time during the Term remove any Part
pursuant to this paragraph,
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provided that (1) such Part is in addition to, and not in replacement of or
substitution for, any part originally incorporated or installed in or attached
to the Aircraft at the time of delivery thereof hereunder or any Part in
replacement of, or substitution for any such Part, and (2) such Part can be
removed from the Aircraft without diminishing or impairing the value, utility,
condition or airworthiness required to be maintained by the terms of this Lease
which the Aircraft would have had at such time had such alteration, modification
or addition not occurred. Notwithstanding the foregoing, Lessee shall not,
without Lessor's prior written consent, make any major modifications,
alterations or additions, (collectively, "Optional Modifications") to the
Aircraft. For the purposes of this section Optional Modifications shall exclude
the Required Modifications and modifications or required by the terms of this
Lease, but shall include all modifications to the Aircraft with a cost of
$100,000 or more. All Optional Modifications shall be accomplished by Lessee at
its own expense.
(c) NOTWITHSTANDING ANY OTHER PROVISION OF THIS LEASE, NO OPTIONAL
MODIFICATION SHALL BE MADE WITHOUT LESSOR'S PRIOR WRITTEN CONSENT (WHICH CONSENT
MAY BE WITHHELD FOR ANY GOOD FAITH REASON) IF ANY OPTIONAL MODIFICATION HAS THE
EFFECT OF DECREASING (AS DETERMINED BY LESSOR IN GOOD FAITH) THE UTILITY OR
VALUE OF THE AIRCRAFT OR ADVERSELY AFFECTS ITS AIRWORTHINESS OR USE FOR
TRANSPORTING PASSENGERS IN COMMERCIAL SERVICE.
8.12. Possession. Lessee shall not sublease the Aircraft or otherwise in
any manner deliver, relinquish or transfer possession of the Airframe or any
Engine to any Person or install any Engine, or permit any Engine to be
installed, on any airframe other than the Airframe, during the Term, without the
prior written consent of Lessor, provided, however, that so long as Lessee shall
comply with the provisions of Section 11 hereof Lessee may, without the prior
written consent of Lessor:
(a) enter into an ACMI Lease in the ordinary course of Lessee's
business;
(b) deliver possession of the Airframe or an Engine to the
manufacturer thereof for testing or other similar purposes or to any
organization for service, repair, maintenance or overhaul work on the Airframe
or Engines or for alterations or modifications in or additions to the Airframe
or Engines, provided such organization is qualified and duly licensed to perform
such work and otherwise to the extent required or permitted by the terms of this
Lease;
(c) subject any Engine to normal interchange or pooling agreements
or arrangements, in each case customary in the European airline industry
applicable to other similar aircraft and engines operated by Lessee, if any, and
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entered into by Lessee in the ordinary course of its business with any
Certificated Air Carrier, provided that (i) no such agreement or arrangement
contemplates or requires the transfer of title to any Engine, and (ii) if
Lessor's title to any Engine shall be divested under any such agreement or
arrangement, such divestiture shall be deemed to be a Total Loss with respect to
such Engine and Lessee shall comply with Section 12.2 hereof in respect of such
Engine;
(d) install an Engine on an airframe owned by Lessee provided that
following such installation such Engine shall be free and clear of all liens,
except (i) Permitted Liens, and (ii) those which apply only to the engines
(other than Engines), appliances, parts, instruments, appurtenances,
accessories, furnishings and other equipment (other than Parts) installed on
such airframe (but not to the airframe as an entirety), and (C) those created by
the rights of other Certificated Air Carriers under normal interchange or
pooling agreements or arrangements customary in the airline industry which do
not contemplate, permit or require the transfer of title to such airframe or
engines installed thereon;
(e) install an Engine on an airframe leased to Lessee or purchased
by Lessee subject to a conditional sale or other security agreement, provided
that (i) such airframe is free and clear of all liens except (A) the rights of
the parties to the lease, conditional sale or other security agreement and (B)
Liens of the type permitted by clause (d) above, and (ii) such lease,
conditional sale or other security agreement effectively provides that such
Engine shall not become subject to the Lien of such lease, conditional sale or
other security agreement, notwithstanding the installation thereof on such
airframe;
(f) Notwithstanding any transfers of possession of the Airframe or
any Engine permitted pursuant to this Section 8.12, Lessee shall at all times
during the Term of this Lease remain fully liable and obligated to perform all
of the terms of this Lease to the same extent as if such transfer had not
occurred.
8.13. Reports. Lessee shall furnish to Lessor the following reports on a
monthly basis: (i) the Hours and Cycles operated by the Airframe as required
pursuant to Section 6.6 hereof (including the number of Hours flown for each
Cycle); (ii) the Hours and Cycles operated by each of the Engines (noting their
location) as required pursuant to Section 6.6 hereof; (iii) scheduled and
unscheduled Engine and Parts changes; (iv) monthly aircraft maintenance planning
sheet; (v) monthly deferred items carried forward; (vi) damage reports; (vii) a
list of those service bulletins, Airworthiness Directives and engineering
modifications issued during such month and applicable to the Aircraft, whether
or not incorporated on the Aircraft and whether or not compliance therewith is
required under the Approved Maintenance Program; (viii) copies of any written
communications with the manufacturers with respect to defects or malfunctions of
the Aircraft or such other matters; and (ix) C Check, Engine shop visit, APU and
landing gear overhaul scheduled dates. In addition, Lessee shall notify Lessor
of all accidents, cases of
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significant theft or vandalism, extended periods of Aircraft grounding for
cause, and insured occurrences as practicable.
8.14. Right to Inspect.
(a) Lessor and its agents shall have the right to inspect the
Aircraft and the maintenance records of Lessee (including as to other aircraft
operated by Lessee) at any reasonable time without interrupting Lessee's
commercial operation of the Aircraft, upon giving Lessee reasonable notice, to
ascertain the condition of the Aircraft and to satisfy Lessor that the Aircraft
is being repaired and maintained in accordance with the requirements of this
Lease. Lessee shall, at the request of Lessor, provide Lessor with such
information concerning the location of the Aircraft as may be necessary to
facilitate such inspection and shall permit any duly authorized representative
of Lessor to be present during any overhaul or the performance of any major
scheduled maintenance check of the Aircraft. The cost of the inspection or
survey shall be paid by Lessee if the Aircraft, or any part thereof, is not in
the condition required by this Lease but shall otherwise be for the account of
Lessor. All repairs which shall be shown by the inspection or survey to be
required shall be made at Lessee's expense in accordance with the Approved
Maintenance Program. All required repairs shall be performed as soon as
practicable thereafter. In the event of a dispute between Lessor and Lessee as
to the proper performance by Lessee of the repairs required hereunder, the
decision of a publicly-recognized aircraft appraiser selected by Lessor and
reasonably acceptable to Lessee of the Airframe, Engine or Part, as the case may
be, shall control. The non-prevailing party shall be responsible for payment of
all expenses of such appraiser incurred in connection with the rendering of its
decision. Lessor shall have no duty to make any such inspection and shall not
incur any liability or obligation by reason of not making such inspection.
(b) Lessee shall make available to Lessor for its review (i) such
records as it may have in its possession which Lessor may request in the course
of an inspection by Lessor as contemplated by subsection (a), above; (ii) such
other written communications with the CAA or other regulatory authority or any
manufacturer as it may have in its possession relating to defects or
malfunctions of the Aircraft or Parts or any other matters relating to the
Aircraft; and (iii) Lessee's most recent CAA-approved operations specifications,
including any amendments or additions made thereto.
8.15. Aircraft Records. Lessee shall maintain all Manuals and Technical
Records during the term of this Lease relating to the service, inspection,
maintenance, modification, repair and overhaul of the Airframe, Engines and
Parts installed therein as required by the CAA and the Approved Maintenance
Program which records will at all times be "back to birth" (except as to
anything which was part of the Aircraft as of the Delivery Date but for which
"back to birth" records were not delivered to Lessee) and be kept current and
up-to-date. Aircraft records
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for life limited Parts shall establish total service, origin and authenticity
back to the original manufacturer thereof and shall establish strict compliance
with the CAA type data sheet and with the Approved Maintenance Program.
SECTION 9. RETURN OF AIRCRAFT
9.1. Return Location. Notices. Costs. Taxes and Fees. The return of the
Aircraft at the expiration or earlier termination of this Lease shall be subject
to the following provisions:
(a) At the end of the Term or upon the earlier termination of this
Lease pursuant to Section 14 hereof, Lessee shall return the Airframe and
Engines to Lessor at a location in the United Kingdom approved in writing by
Lessor (the "Return Location"). Concurrently with such return, Lessee shall pay
to Lessor an amount, determined in good faith by Lessor, adequate to pay all
costs to Lessor (including without limitation crew, fuel and insurance) to ferry
the aircraft to Marana, Arizona, U.S.A. (whether or not such location is the
actual destination to which Lessor ferries the Aircraft). The Aircraft at the
time of its return shall be free and clear of all Liens other than Lessor's
Liens. At the time of return of the Aircraft to Lessor, and provided Lessee is
in compliance with the terms of this Lease, Lessor and Lessee shall execute an
Acceptance Certificate (Return) at the Return Location.
(b) Lessee and Lessor agree that Lessee shall pay all costs of
returning the Aircraft to Lessor including, but not limited to, fuel, oil, crew,
inspections, insurance, maintenance, repairs, service and other costs of the
Aircraft to the Return Location.
(c) Lessee shall pay all Taxes and fees, if any, arising out of the
return of the Aircraft at the Return Location.
9.2. Return of Other Engines. In the event at the time the Aircraft is
returned to Lessor pursuant to the terms of this Section 9 and an Engine fails
to meet the return conditions for such Engine as set forth herein, Lessee may
return installed on the Airframe a Rolls-Royce RB211-22B engine not owned by
Lessor but meeting all of the standards set forth in this Section 9; any such
engine shall be a Replacement Engine, and Lessee shall, at its own expense and
concurrently with such return, furnish Lessor with a full warranty bill of sale,
in form and substance satisfactory to Lessor, with respect to each such
Replacement Engine and shall take such other actions conveying title to the
Replacement Engine to Lessor free and clear of all liens other than Lessor's
Liens and such additional documents, including an opinion of counsel acceptable
to Lessor, as Lessor may request in order that title to such Replacement Engine
shall be duly and properly vested in Lessor. Any Replacement Engine shall, at
the time it replaces an Engine, have a fair market value at least as great as
the Engine it replaces and no such Replacement Engine
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shall, prior to its installation on the Airframe and the return of the Aircraft
to Lessor, have had any disk, module or other Part removed and replaced with a
disk, module or other part of lesser value than that it replaced. Upon passage
of title to Lessor such Replacement Engine shall be deemed to be an Engine for
all purposes hereunder and thereupon Lessor shall transfer to Lessee, without
recourse or warranty except a warranty of title excluding Lessor's Liens, all of
Lessor's right, title and interest in and to any Engine not installed on the
Airframe at the time of the return thereof to Lessor.
9.3. Condition of Aircraft. The Aircraft at the time of the return to
Lessor shall have been maintained and repaired in accordance with the Approved
Maintenance Program and this Lease, and shall meet the following requirements:
(a) Operating Condition. The Aircraft shall be in at least as good
operating condition as it was upon completion of the Pre-Certification Work,
ordinary wear and tear from normal airline passenger operations excepted. The
Aircraft shall be fully qualified for commercial passenger operations under
Lessee's operational and Approved Maintenance Programs.
(b) Cleanliness Standards. The Aircraft shall be clean by commercial
airline standards and shall have received an exterior wash and an interior deep
cleaning since its last commercial flight.
(c) Certificate of Airworthiness. The Aircraft shall have, and be in
compliance with a current valid Standard Certificate of Airworthiness issued by
the CAA without any corrections, repairs, modifications, alterations or
overhauls having to be performed by Lessor to meet such standards and rules, and
shall comply with the then current provisions of the applicable CAA rules and
regulations. If required by Lessor, Lessee shall at Lessee's expense request in
the name of Lessor a Certificate of Airworthiness for Export so as to allow
Lessor to place the Aircraft on a registry other than that of the United
Kingdom, including without limitation the FAA.
(d) Compliance with Governmental Requirements. The Aircraft shall be
in compliance with all Airworthiness Directives affecting the Aircraft and
requiring performance during the Term, or as otherwise required under this
Lease. In the event Lessee has obtained a waiver or deviation from the CAA from
having to comply with any such Airworthiness Directives, Lessee shall,
irrespective of such waiver or deviation, fully comply with all such
Airworthiness Directives covered by such waiver or deviation prior to the return
of the Aircraft to Lessor as if such waiver or deviation did not exist.
(e) Deferred Maintenance. The Aircraft shall have had because of
maintenance concessions (i.e., an exemption to operate beyond the accomplished
thereon all outstanding deferred maintenance items. Items deferred
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normal limits by monitoring) shall be brought up-to-date as if such maintenance
concessions or exemptions did not exist. Parts whose time status exceeds the
conditions or requirements imposed by this Lease shall be brought into
compliance with such conditions or requirements.
(f) Corrosion Treatment. The Aircraft shall have been maintained by
cleaning and treating of all mild corrosion and correcting of all moderate and
severe or exfoliated corrosion in accordance with Approved Maintenance Program.
All fuel tanks shall be free of leaks.
(g) Configuration and Condition. The Aircraft shall be returned
having the same configuration and in the same or better condition with all Parts
installed therein as on the Delivery Date, excepting only Modifications,
additions, replacements and substitution of Parts as may have been properly made
by Lessee pursuant to Section 8 and as specifically otherwise set forth in this
Section 9.
9.4. Condition of Airframe. The Airframe at the time of its return to
Lessor shall meet the requirements set forth below, all at Lessee's expense,
except as otherwise provided herein:
(a) At the end of the Term, the condition of the Aircraft must allow
at least 5 months until the next C Check, including all phases and multiples in
accordance with the Approved Maintenance Program. Items deferred because of
maintenance concessions (i.e., an exemption to operate beyond the normal limits
by monitoring) shall be brought up-to-date as if such maintenance concessions or
exemptions did not exist. Components whose time status exceeds the conditions or
requirements imposed by this Lease shall be brought into compliance with such
conditions or requirements;
(b) The cockpit shall be clean by normal airline standards. The
Aircraft's interior will be replaced or repaired in accordance with the Approved
Maintenance Program;
(c) Lessee shall permanently repair the fuselage, including but not
limited to (i) dents, abrasions, and scab patches; and (ii) loose or pulled
rivets, impact damage to the Aircraft caused by ground handling equipment or
impact damage caused by foreign objects. The exterior of the Airframe shall be
clear of all names, logos and other special markings, which markings the Lessee
shall remove.
(d) All life limited time controlled Airframe Parts based on the
Approved Maintenance Program (except for the landing gear and APU) shall be
serviceable in accordance with CAA standards and have a value, modification
status and time since overhaul or replacement equivalent to the Parts installed
in the Aircraft when accepted by Lessee for lease hereunder, reasonable wear and
tear excepted.
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9.5. APU. Lessee will return the Aircraft's installed APU in good and
efficient operating condition in accordance with the Approved Maintenance
Program. Immediately prior to the return of the Aircraft the APU shall be
inspected, and any operational discrepancies of the APU shall be corrected in
accordance with the Approved Maintenance Program at Lessee's expense prior to
the return of the Aircraft to Lessor.
9.6. Engine Condition. Upon return of the Aircraft there shall be
installed on the Aircraft three Rolls Royce RB211-22B Engines. Each Engine shall
meet both the Engine manufacturer specifications and the Approved Maintenance
Program parameters for acceptable exhaust gas temperature margin, engine
pressure ratio maximum rated thrust and fuel flow at maximum certificated rated
thrust.
9.7. Borescope Inspection. A full videotaped borescope inspection on all
Engine and APU sections in accordance with manufacturer's specification shall be
performed in the presence of a representative of Lessor at Lessee's expense at
the time of the Aircraft's return, but prior to any parking pursuant to Section
9.17, and Lessee shall provide evidence satisfactory to Lessor that no
discrepancies exist beyond the applicable shop repair limits of the manufacturer
of the Engines including no abnormal repetitive inspection limits.
9.8. Inspection.
(a) Lessor may, from time to time, wish to make the Aircraft
available for inspection to Persons evaluating the Aircraft for use after the
Term provided always that such inspection does not interfere with Lessee's
commercial operation of the Aircraft. Lessor agrees to give Lessee not less than
3 Business Days' advance notice of any such inspection and Lessee agrees to
cooperate with Lessor's requests in making the Aircraft and the Manuals and
Technical Records available to such Persons.
(b) The Aircraft (including the Manuals and Technical Records to be
returned therewith as set forth in this Section 9) shall be made available to
Lessor for ground inspection by Lessor at Lessee's facilities where the C Check
required by Section 9.4(a) is being performed, while such C Check is being
performed. During the C Check required by Section 9.4(a), while Lessee has
removed the Aircraft from service and opened the areas of the Aircraft needed to
perform such C Check, Lessee shall allow Lessor to accomplish its inspection in
order to determine that the Aircraft (including the Manuals and Technical
Records) is in the condition required by the provisions of this Section 9.
Lessee at its sole cost and expense shall promptly correct any discrepancies
from the condition required by the provisions of this Section 9.
9.9. Operational Ground Check. Promptly after completion of any
corrections required under Section 9.8, Lessee shall conduct an operational
ground
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check in accordance with the requirements of the Approved Maintenance Program
and shall correct any discrepancies disclosed by such check.
9.10. Operational Check Flight. Promptly after completion of all
corrections required under Sections 9.8 and 9.9 above, the Aircraft shall be
check flown by Lessee at its expense, using qualified flight personnel
demonstrating to Lessor the satisfactory operation of the Aircraft and its
equipment and systems. Lessor's employees or representatives may participate in
such flight as observers. Such flight shall be flown using standard air carrier
operational check flight procedures requested by Lessor's representative and be
sufficient to demonstrate the proper operation of all systems for normal
passenger use. Upon completion of such operational check flight, the
representatives of Lessee and Lessor participating in such flight shall agree in
writing upon any discrepancies in such Aircraft required to be corrected by
Lessee in order to comply with provisions of this Section 9 and Lessee shall
promptly correct or cause to be corrected at Lessee's expense any such
discrepancies. If any of the discrepancies referred to in Sections 9.8 and 9.9
or 9.10 continue to persist, Lessor may (but shall not be obligated to) accept
delivery of the Aircraft and apply the procedure set forth in Section 9.12 for
such discrepancies.
9.11. Acceptance. Upon completion of the operational check flight
specified in Section 9.10, after Lessee has corrected the discrepancies as
specified therein and after Lessee has delivered the Aircraft to the Return
Location and the Aircraft is in the condition required by this Section 9, the
Aircraft shall be technically accepted by Lessor's representatives at the Return
Location and Lessor's representative shall thereupon execute the Acceptance
Certificate (Return).
9.12. Deferred Return Condition Discrepancy Correction. If,
notwithstanding Lessee's best efforts to fully comply with the provisions of
Section 9 hereof, any return condition discrepancies are found during the ground
inspection, operational ground check and operational check flight set forth in
Sections 9.8, 9.9 and 9.10 above, which were not corrected by Lessee prior to
return of the Aircraft to Lessor, at the election of Lessor such discrepancies
may be corrected by Lessor or its designee after return of the Aircraft and
Lessee shall reimburse Lessor for all costs and expenses incurred by Lessor or
its designee for accomplishing such discrepancy corrections or, in the
alternative, Lessor may reasonably determine the cost of performing such
maintenance and repairs and in either event Lessee shall, upon receipt of
Lessor's invoice, pay Lessor for all such costs and expenses. Any late payments
shall be subject to interest at the Overdue Rate.
9.13. Costs. All flights pursuant to Sections 9.10 shall be made at
Lessee's expense and Lessee shall pay for any and all costs associated with such
flights including, but not limited to, costs for crew, fuel, oil, airport fees,
insurance, takeoff/landing fees, airway communication fees, and ground handling
fees. At the option of Lessor, Lessee's obligations under this Lease, including
but not limited to Lessee's obligations under Sections 11 and 15 hereof and its
obligation to pay Basic
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Rent shall remain in effect until the execution of the Acceptance Certificate
(Return).
9.14. Manuals and Technical Records. Lessee at its sole cost and expense
shall return to Lessor, at the time the Aircraft is returned to Lessor, all of
the Manuals and Technical Records and other data described in Exhibit B hereto,
originally received from Lessor, and subject to CAA retention time limits,
updated and maintained by Lessee through the date of return of the Aircraft. In
addition, Lessee shall also provide Lessor, at the time the Aircraft is returned
to Lessor, all records, documents, manuals, authorizations, drawings and data in
English (or with English translations thereof) which were developed or caused to
be developed by Lessee and required by the CAA or any other regulatory entity
having authority over the Aircraft, updated and maintained by Lessee for the
Aircraft and through the date of return of the Aircraft in an accurate and
correct condition. At the time of return of the Manuals and Technical Records
for the Aircraft and the other documents required to be delivered by Lessee
pursuant to this Section 9.14 to Lessor and provided such documents are in the
condition they are required to be in hereunder, Lessee and Lessor shall execute
the Acceptance Certificate (Return).
9.15. Lessee's Special Exterior Markings. At the time of the return of the
Aircraft, Lessee shall, at Lessor's election, remove and paint over all of
Lessee's logos and other exterior markings painted on the Aircraft by Lessee,
all in good and workmanlike manner. In the event that, notwithstanding Lessee's
obligation to do so, Lessee does not remove such markings, Lessor shall have no
obligation to remove such markings prior to the sale, lease, or other
disposition of the Aircraft by Lessor after its return.
9.16. Ownership. Any documents, equipment and any other property returned
to Lessor pursuant to this Section 9 which are not already owned by Lessor shall
thereupon and without further act become the property of Lessor.
9.17. Parking of Aircraft Upon Return. Upon the written request of Lessor
given at least 15 Business Days prior to the end of the Term, Lessee, at
Lessee's expense shall provide parking facilities for the Aircraft at the Return
Location or at such other location as Lessor shall designate, for a period not
to exceed 30 days. During the period referred to in the preceding sentence,
Lessee shall continue to bear the risk of loss of the Aircraft and shall pay all
maintenance costs, ground insurance costs, and other costs with respect to the
Aircraft.
9.18. Lease Continues. In the event, for any cause, Lessee does not return
the Aircraft to Lessor on the last Business Day of the Term or earlier
termination of the Lease in the condition required hereunder, then all of the
obligations of Lessee under this Lease shall continue and such continued use
shall not be considered a renewal of the Term of this Lease or a waiver of any
right of Lessor hereunder. During such continued use, Rent shall continue to
be paid by Lessee to Lessor and
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the other performance and obligations of Lessee to Lessor shall continue
hereunder and the same shall be prorated at the rate of one thirtieth (1/30) of
125% of the monthly installment of Basic Rent for each day until the Aircraft is
actually delivered to Lessor, and all other terms and conditions of this Lease
shall remain in full force and effect. Payment shall be made upon presentation
of Lessor's invoice and any failure to pay shall constitute an Event of Default
of Lessee.
SECTION 10. TITLE, REGISTRATION, LIENS.
10.1. Title. Lessee acknowledges that legal title to the Aircraft shall
remain vested in Lessor, notwithstanding the possession and use thereof by
Lessee, and Lessee shall do all acts and things Lessor may reasonably require to
evidence the interest of Lessor in the Aircraft or to protect such interest
against the claims of any other person. Lessee shall not attempt to hold itself
out as having any power to sell or dispose of the Aircraft or any Engine.
10.2. Registration. The Aircraft shall be registered with the FAA in the
name of Lessor as owner on the Delivery Date. At the sole cost of Lessee, Lessee
shall cause the re-registration of the Aircraft with the CAA in the name of
Lessor as owner, and Lessor shall sign such documents as may be necessary and
appropriate in connection with such re-registration. Lessee acknowledges that,
throughout the Term, the Aircraft shall be registered on the U.K. Civil Aircraft
Register and Lessor shall be stated on such Register to be lessor and Lessee
shall not do, and shall further use its best endeavors to ensure that no third
party does, any act or things which might prejudice or cancel such registration.
10.3. Liens. Lessee shall not directly or indirectly create, incur, assume
or suffer to exist any Lien on or with respect to the Airframe or any Engine
other than Permitted Liens. Lessee shall promptly, at its own expense, take such
action as may be necessary to duly discharge any Lien other than a Permitted
Lien if the same shall arise at any time, which obligations of the Lessee shall
survive the termination of this Lease.
10.4. Notice of Ownership. Within 10 Business Days after the Delivery
Date, Lessee shall (i) remove from the Aircraft all notices of the ownership
interest of any prior owner or mortgagee of the Aircraft and (ii) affix in a
reasonably prominent position on the flight deck or cockpit, and on each of the
Engines, a legible notice supplied by Lessor reading as follows:
"Investors Asset Holding Corp., as Trustee,
Owner and Lessor
Leased to Classic Airways, Ltd.
Lessee"
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Once affixed as aforesaid, such notice shall not be defaced, covered or
removed during the Term, unless Lessor instructs Lessee to change such notice.
Lessee shall not allow the name of any person other than Lessor or any assignee
of Lessor's interest hereunder to be placed on the Airframe or any Engine as a
designation that might be interpreted as a claim of ownership or any interest
therein, provided, however, that Lessee may operate the Aircraft in its livery,
including its name and logo.
SECTION 11. INSURANCE.
On or before the Delivery Date and throughout the Term, Lessee shall
without cost or expense to Lessor obtain, maintain and keep in full force and
effect the following insurance with respect to the Aircraft, carried with
responsible insurers acceptable to Lessor of recognized and good reputation in
the aviation industry.
11.1. All-Risk Insurance. "All-risk" hull, ground and flight insurance on
the Aircraft (with flight, taxiing and ingestion coverage) in an amount not less
than the Stipulated Loss Value with any deductible amount being subject to
Lessor's prior written approval. In addition, Lessor may request such greater
amounts of coverage as Lessor may determine necessary or desirable from time to
time (and for which Lessor shall reimburse Lessee for its cost of increased
premium, if any, for such greater amounts of insurance). Such hull insurance
shall cover Engines or engines and Parts temporarily removed from the Airframe
pending installation of the same or similar Engines, engines or Parts on the
Airframe in an aggregate amount not less than their replacement cost.
11.2. War Risk Insurance. War risk and allied perils insurance on the
Aircraft in an amount not less than the Stipulated Loss Value covering the
perils of:
(a) war, invasion, acts of foreign enemies, hostilities (whether war
be declared or not), civil war, rebellion, revolution, insurrection, martial
law, military or usurped power, or attempts at usurpation of power;
(b) strikes, riots, civil commotions or labor disturbances;
(c) any act of one or more persons, whether or not agents of a
sovereign power, for political or terrorist purposes and whether the loss or
damage therefrom is accidental or intentional;
(d) any malicious act or act of sabotage;
(e) confiscation, nationalization, seizure, restraint, detention,
appropriation, requisition of title or use by or under the order of any
government (whether civil, military or de facto) or public or local authority
other than the government or any public or local authority of the country of
registration; and
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(f) hijacking or any unlawful seizure or wrongful seizure or
wrongful exercise of control of the Aircraft or crew in flight (including any
attempt at such seizure or control) made by any person or persons on board the
Aircraft acting without the consent of Lessee.
11.3. Liability Insurance. Public liability insurance for a combined
single limit of not less than $500,000,000 per occurrence or such greater
amounts as Lessee may carry from time to time on other aircraft in its fleet
similar to the Aircraft, which shall:
(a) include public liability insurance, passenger liability
insurance and property damage liability insurance; and
(b) provide that all the provisions thereof, except the limits of
liability, shall operate in the same manner as if there were a separate policy
covering each such insured.
In the event that Lessee increases its public liability insurance
coverage, it shall do so with respect to the Aircraft contemporaneously with
increasing its insurance coverage on other aircraft similar to the Aircraft
which it owns or operates.
11.4. Additional Requirements: Loss Payment. The insurance required under
this Section 11 shall be provided on an agreed value basis, and the policies
shall:
(a) name Lessor, and any assignee of its interests hereunder as
additional insured and (with respect to Lessor) as sole loss payee for up to the
Stipulated Loss Value for total loss of the Aircraft;
(b) provide that the insurance shall not be invalidated by any
action or inaction by Lessee and insure the interest of Lessor regardless of any
breach or violation by Lessee or any other named insured of any warranty,
declaration or condition contained in such policies;
(c) provide that in the event of separate insurance being arranged
to cover the all-risk hull insurance and the war risk and allied perils
insurance, the underwriters subscribing to such insurance agree to a 50/50 claim
funding arrangement in the event of any dispute as to which insurance is
applicable;
(d) with respect to the liability coverage required hereunder, be
primary and without right of contribution from other insurance which may be
available to Lessor;
(e) extend to, and the underwriters thereof have agreed to insure,
the indemnification provided in Section 15.1 hereof to the extent of the
insurance;
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(f) be of the type usually carried by corporations engaged in the
same or a similar business, similarly situated with Lessee and owning and
operating similar aircraft and engines, and covering risks of the kind
customarily insured against by such corporations;
(g) provide that Lessor shall have no liability for premiums,
commissions, calls or assessments with respect to such policies; and
(h) provide in the case of the insurance required by Sections 11.1
and 11.2 hereof that, so long as the insurers shall not have received written
notice that an Event of Default has occurred and is continuing, any proceeds of
less than $250,000 shall be payable to Lessee; and any proceeds in excess of
$250,000, and any and all proceeds in respect of a Total Loss, or if the
insurers shall have received written notice that an Event of Default has
occurred and is continuing, any single loss regardless of the amount, shall be
payable to Lessor.
11.5. No Set-off. Each insurance policy to be maintained under this
Section 11 shall contain a waiver of any right of the insurers to any set-off or
counterclaim or any other deduction against Lessee or Lessor.
11.6. Notice of Material Alteration or Cancellation. No cancellation or
lapse of coverage for nonpayment of premium or otherwise, and no substantial
change of coverage which adversely affects Lessor shall be effective as to
Lessor until not less than 30 days (7 days in the case of war risk policies,
subject to exceptions uniformly applied in war risk policies then available
commercially) after sending written notice to Lessor from the insurers (or
Lessee's insurance broker) of such cancellation, lapse or change.
11.7. Application of Hull Insurance Proceeds. As between Lessor and
Lessee, any payments received under policies of insurance required to be
maintained by Lessee pursuant to Sections 11.1 or 11.2, shall be applied as
follows:
(a) if such payments are received by Lessor with respect to loss or
damage (including a Total Loss with respect to an Engine) not constituting a
Total Loss with respect to the Airframe such payments shall be paid over to
Lessee upon Lessee's performance of its repair or replacement obligations under
this Lease pursuant to Section 12.3 hereof; and
(b) if such payments are received with respect to a Total Loss with
respect to the Airframe, so much of such payments as shall not exceed the amount
required to be paid by Lessee pursuant to Section 12.1 hereof shall be applied
in reduction of Lessee's obligation to pay such amount if not already paid by
Lessee, and to reimburse Lessee if it shall have paid all or part of such
amount, and the balance, if any, of such payments shall be paid over to or
retained by Lessor.
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11.8. Insurance for Own Account. Nothing in this Section 11 shall prohibit
Lessor or Lessee from obtaining insurance for its own account and any proceeds
payable thereunder shall be payable as provided in the insurance policy relating
thereto, provided that no such insurance may be obtained which would limit or
otherwise adversely affect the coverage or payment of any insurance required to
be obtained or maintained pursuant to this Section 11.
11.9. Reports. Lessee shall furnish to Lessor not later than the Delivery
Date a report signed by a firm of aircraft insurance brokers reasonably
satisfactory to Lessor an undertaking of such firm in substantially the form of
Exhibit E hereto. Lessee shall during the Term furnish to Lessor evidence of
renewal of the insurance policies required pursuant to this Section 11 prior to
the cancellation, lapse or expiration of such insurance policies and, on the
renewal dates of the insurance policies carried by Lessee pursuant to this
Section 11, a report similar to that required by the preceding sentence.
11.10. Continuing Insurance. Lessee's insurance coverage shall cover all
liabilities from an occurrence which arises during the Term, regardless of the
date on which any claim is made with respect to such occurrence and Lessee at
Lessor's request shall provide evidence of the existence of such insurance
following the expiration or earlier termination of this Lease. Lessee shall in
any event be responsible for any and all liabilities to which Lessor may be
exposed as a result of Lessee's lease, use, possession, or operation of the
Aircraft.
SECTION 12. LOSS. DAMAGE OR REQUISITION.
12.1. Total Loss of Airframe.
(a) Upon the occurrence of a Total Loss with respect to the Airframe
during the Term, Lessee shall give Lessor immediate written notice of such Total
Loss. Lessee shall pay or cause to be paid to Lessor in immediately available
funds on the earlier of 60 days following the Total Loss or the date hull
insurance proceeds are received with respect to such Total Loss, an amount equal
to (i) the Basic Rent, if any, due and payable on or before such payment date,
plus (ii) all unpaid Supplemental Rent due on or before such payment date,
(including the Stipulated Loss Value for the Aircraft) plus (iii) an amount
equal to the daily equivalent of Basic Rent for each day during the period
commencing the day after the last Rent Payment Date up to and including such
payment date. Upon its receipt of the foregoing amounts, Lessor shall promptly
remit to Lessee all Reserves then held by it.
(b) In the event of a payment in full of the Stipulated Loss Value
for the Aircraft and other Rent payable as provided above, (i) this Lease and
the obligations of Lessee to pay Basic Rent and Supplemental Rent (except for
Supplemental Rent obligations surviving pursuant to Section 15 hereof or which
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have otherwise accrued but not been paid as of the date of such payment and the
insurance to be provided pursuant to Section 11.10) shall terminate; and (ii)
Lessor shall convey to Lessee all of Lessor's right, title and interest, as-is,
where-is without recourse or warranty, express or implied, except to warrant
that it is free and clear of liens placed thereon by Lessor, in and to the
Airframe and Engines.
(c) In the event Lessee has itself paid the amounts specified in
Section 12.1(a)(i), (ii) and (iii) above and Lessor thereafter receives the hull
insurance policy proceeds with respect to the Total Loss in question, Lessor
shall promptly remit such proceeds to Lessee.
12.2. Total Loss of Engine.
(a) Upon the occurrence during the Term of a Total Loss with respect
to an Engine whether or not installed on the Airframe and not involving a Total
Loss with respect to the Airframe, Lessee shall give Lessor written notice
thereof within 10 Business Days of such loss and shall within 60 days of the
occurrences of such Total Loss and on at least 5 days' prior written notice to
Lessor substitute a Replacement Engine for such Engine, provided, however, under
all circumstances a Replacement Engine shall be substituted on or before the
expiration of the Term. In such event, immediately upon the effectiveness of
such substitution on the date set forth in such notice and without further act,
(i) title to the Replacement Engine shall thereupon vest in Lessor
(subject only to Permitted Liens),
(ii) title to the replaced engine shall thereupon vest in Lessee, in
as-is, where-is condition, free and clear of all rights of Lessor and shall no
longer be deemed an Engine hereunder, and
(iii) such Replacement Engine shall become subject to this Lease and
be deemed part of the Aircraft for all purposes hereof to the same extent as the
Engine originally installed on or attached to the Airframe.
(b) Upon such substitution, Lessee shall execute and deliver to
Lessor such bills of sale, opinions of counsel and other documents and
instruments as Lessor shall reasonably request, in form and substance acceptable
to Lessor, to evidence the interest of Lessor and conveyance to Lessor of good
and marketable title to such Replacement Engine. Upon such substitution, (i)
Lessor shall execute and deliver to Lessee such bills of sale and other
documents and instruments, prepared at Lessee's expense, as Lessee shall
reasonably request to evidence such transfer and vesting of title in and to the
replaced Engine in Lessee, free and clear of all rights of Lessor and (ii)
Lessee shall receive all insurance proceeds and proceeds in respect of any Total
Loss causing such replacement to the extent not previously applied to the
purchase price of the Replacement Engine as provided in Section 12.3 hereof. No
Total Loss with respect to an Engine under the
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circumstances contemplated by this Section 12.2 shall result in any reduction of
Lessee's obligations to pay Rent hereunder.
12.3. Repairable Damage: Use of Insurance Proceeds. In the event of
repairable damage to the Aircraft or any of the Engines, or any Engine loss
(when no Total Loss of the Aircraft has occurred), Lessor shall forthwith either
pay any insurance proceeds received by it to Lessee upon Lessee's furnishing
evidence to Lessor that such damage has been made good or repaired such that the
condition of the Aircraft shall be at least equivalent to its condition,
assuming compliance with the provisions of this Lease, immediately prior to the
event of damage or, in the case of an Engine loss, evidence that Lessee has
purchased or otherwise acquired and installed a Replacement Engine. All damage
to the Aircraft shall be documented and any repair to the Aircraft shall be
documented and accomplished pursuant to the applicable manufacturer's structural
repair manual instructions and (where applicable) the Approved Maintenance
Program. Such repairs shall be permanent. Repairs to the skin of the Aircraft
shall be flush and not merely patched, unless otherwise specified in the
Airframe manufacturer structural repair manual. Lessee shall notify Lessor of
any repair to the structure or skin of the Aircraft or any other repair costing
in excess of One Hundred Thousand Dollars ($100,000) promptly after its being
made (but in any event no later than fifteen (15) calendar days thereafter);
provided, however, that Lessor shall have no liability to Lessee or third
parties with regard to such repair or the quality thereof and Lessee shall
indemnify and hold Lessor harmless with regard thereto. All technical and
engineering data, calculations, drawings, and documentation covering major
repairs shall become a permanent part of the Aircraft documents.
12.4. Payment from Governmental Authorities for Requisition of Title or
Use: Requisition. In the event of a requisition for use by any government, so
long as it does not constitute a Total Loss of the Airframe, Lessee shall
promptly notify Lessor of such requisition and all Lessee's obligations under
this Lease shall continue to the same extent as if such requisition had not
occurred; including, without limitation, that Lessee's obligations for the
payment of Rent and its obligations under Section 11 hereof shall in no way be
affected, reduced or delayed by such requisition. In the circumstances described
in the preceding sentence, any payments received by Lessor or Lessee from such
government with respect to such requisition shall be paid over to or retained
by, Lessee. In the event of the requisition for use by a government of any
Engine (but not the Airframe), Lessee shall replace such Engine hereunder by
complying with the terms of Section 12.2 hereof to the same extent as if a Total
Loss had occurred with respect to such Engine. Any payments received by Lessor
or Lessee from such government with respect to such requisition shall be paid
over to, or retained by, Lessor until Lessee's replacement of such Engine
pursuant to Section 12.2 hereof, at which point it shall be paid over to Lessee.
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12.5. Application of Payments During Existence of Event of Default. Any
amount referred to in Sections 11 or 12 hereof which is payable to Lessee shall
not be paid to Lessee, or, if it has been previously paid directly to Lessee,
shall not be retained by Lessee, if at the time of such payment an Event of
Default shall have occurred and be continuing, but shall be paid to and held by
Lessor as security for the obligations of Lessee under this Lease.
12.6. Risk of Loss. The Lessee will bear the entire risk of destruction,
loss, theft, requisition of title, or use, confiscation, taking or damage of or
to the Aircraft from any cause during he period commencing when the Acceptance
Certificate (Delivery) is executed and delivered by Lessee and ending when the
Acceptance Certificate (Return) is executed and delivered by Lessor.
SECTION 13. EVENT OF DEFAULT.
Each of the following events shall be an Event of Default:
13.1. Failure to Make Payments. If Lessee shall fail to make any payment
of Rent when due within three Business Days following written notice from Lessor
of its failure to pay such Rent;
13.2. Failure to Obtain or Maintain Insurance. If Lessee fails to obtain
or maintain any insurance required by Section 11 of this Lease or operates or
locates or permits operation or location of the Airframe in violation of Section
8.2(a) hereof;
13.3. Failure to Perform Other Obligations. If Lessee fails to duly
observe or perform any of its other obligations or agreements under any Lease
Document and such failure shall not have been remedied within a period of 20
days (5 days with respect to Lessee's agreement in Section 10.3 of this Lease)
after written notice specifying the same from Lessor;
13.4. Representations and Warranties Untrue. If any representation or
warranty made by Lessee in any Operative Document or in any document or
certificate furnished to Lessor in connection therewith shall prove to be untrue
in any material respect when made;
13.5. Cross-Default. If any default shall have occurred and be continuing
after the giving of any applicable notice and the expiration of any applicable
cure period under any other lease between Lessee, as lessee, and Lessor, Equis
Financial Group, or any subsidiary or affiliate of Equis Financial Group
(including without limitation any such entity acting in a trustee capacity or as
the general partner of a partnership), as lessor;
13.6. Guaranty Default. If any guarantor of Lessee's obligations under
this Lease is in default of its obligations under its guaranty.
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13.7. Other Defaults. If Lessee shall fail to make any payment in excess
of $250,000 of indebtedness (other than Rent payable hereunder) for money
borrowed or indebtedness wider any capitalized lease or other purchase money
obligation or shall fail to perform the terms of any agreement relating to such
indebtedness and such default shall continue, without having been duly cured,
waived or consented to, beyond the period of grace, if any, therein specified,
or any such indebtedness shall be accelerated or declared due and payable prior
to the stated maturity thereof.
13.8. Insolvency or Bankruptcy
(a) If any action is taken by any person to appoint, an
administrator, administrative receiver, assignee, custodian, sequestrator,
trustee or liquidator (or other similar official) of Lessee or the taking
possession by any such person of a substantial part of the property of any of
them, or Lessee shall fail to pay its debts generally as they come due, or shall
admit in writing its inability to pay its debts as they become due, or shall
make a general assignment for the benefit of its creditors, or Lessee shall
commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under the
bankruptcy laws of the United Kingdom, as now or hereafter constituted or any
other applicable bankruptcy, insolvency or other similar laws or shall consent
to the entry of an order for relief in an involuntary case under any such law or
Lessee shall file an answer admitting the material allegations of a petition
filed against Lessee in any such proceedings or otherwise seek relief under the
provisions of any now existing or future bankruptcy, insolvency or other similar
laws providing for the reorganization or winding-up of corporations, or
providing for an agreement, composition, extension or adjustment with its
creditors.
(b) If an order, judgment or decree shall be entered in any
proceedings by any court of competent jurisdiction appointing, without the
consent of Lessee, a receiver, trustee or liquidator of Lessee, or of any
substantial part of its property, or any substantial part of the property of
Lessee shall be sequestered, and any such order, judgment or decree or
appointment or sequestration shall remain in force undismissed, unstayed or
unvacated for a period of 60 days after the date of entry thereof;
(c) If a petition against Lessee in a proceeding or case under the
bankruptcy laws or other insolvency laws shall be filed and shall not be
withdrawn or dismissed within 60 days thereafter, or, in case the approval of
such petition by a court of competent jurisdiction is required, the petition as
filed or amended shall be approved by such a court as properly filed and such
approval shall not be withdrawn or the proceeding dismissed within 60 days
thereafter, or a decree or order for relief in respect of Lessee shall be
entered by a court of competent jurisdiction in an involuntary case under the
bankruptcy laws of the United Kingdom, as now or hereafter constituted, or any
other applicable bankruptcy,
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insolvency or other similar laws, as now or hereafter constituted and such
decree or order shall remain unstayed in effect for a period of 60 days, or if,
under the provisions of any law providing for reorganization or winding-up of
corporations which may apply to Lessee any court of competent jurisdiction shall
assume jurisdiction, custody or control of Lessee or of any substantial part of
their property and such jurisdiction, custody or control shall remain in force
unrelinquished, unstayed or unterminated for a period of 60 days.
13.9. Loss of License. Lessee or a Permitted Sublessee shall cease to be a
Certificated Air Carrier.
SECTION 14. REMEDIES.
Upon the occurrence of any Event of Default and at any time thereafter so
long as the same shall be continuing, Lessor may, at its option, declare this
Lease to be in default; and at any time thereafter, Lessor may do, and Lessee
shall comply with, any one or more of the following with respect to all or any
part of the Aircraft, as Lessor in its sole discretion shall elect:
(a) Cause Lessee, upon the written demand of Lessor and at Lessee's
expense, to, and Lessee shall, promptly return the Aircraft to Lessor at such
location in the continental United States of America selected by Lessor in the
manner and condition required by, and otherwise in accordance with all of the
provisions of, Section 9 hereof as if such Airframe or such Engines were being
returned at the end of the Term; or Lessor, at its option, may enter upon the
premises where the Airframe or any or all Engines are located or believed to be
located and take immediate possession of and remove such Airframe or Engines
without the necessity for first instituting proceedings, or by summary
proceedings or otherwise, and Lessee shall comply therewith, all without
liability to Lessor for or by reason of such entry or taking possession, whether
for the restoration of damage to property caused by such taking or otherwise;
(b) Sell or otherwise dispose of the Aircraft at a commercially
reasonable market price, at public or private sale and with or without notice to
Lessee or advertisement, as Lessor may determine or hold, use, operate, lease to
others or keep idle all or any part of the Airframe or any Engine as Lessor, in
its sole discretion, may determine, in any such case free and clear of any
rights of Lessee and without any duty to account to Lessee with respect to such
action or inaction or for any proceeds with respect thereto except to the extent
required by paragraph (d) below in the event Lessor elects to exercise its
rights under said paragraph in lieu of its rights under paragraph (c) below;
(c) Whether or not Lessor shall have exercised, or shall thereafter
at any time exercise, any of its rights under paragraph (a) or paragraph (b)
above with respect to the Aircraft, Lessor, by written notice to Lessee
specifying a
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payment date may cause Lessee to pay to Lessor, and Lessee shall pay to Lessor,
on the payment date specified in such notice, as liquidated damages for loss of
a bargain and not as a penalty, any installment of Basic Rent and any payment
for Reserves with respect to the Aircraft due on or before such payment date
plus an amount equal to all amounts of Basic Rent to be paid during the balance
of the Term, together with interest at the Overdue Rate on such amount from such
payment date specified pursuant to this paragraph (c) to the date such amount is
actually received by Lessor in cash;
(d) In the event Lessor, pursuant to paragraph (b) above, shall have
sold the Aircraft, Lessor, in lieu of exercising its rights under paragraph (c)
above with respect to the Aircraft, may, if it shall so elect, cause Lessee to
pay Lessor, and Lessee shall pay to Lessor, on the date of such sale, as
liquidated damages for loss of a bargain and not as a penalty (in lieu of the
Basic Rent for the Aircraft due after the date on which such sale occurs but in
addition to any installment of Basic Rent for this Aircraft due on or up to the
date on which such sale occurs), the amount of any deficiency of the net
proceeds of such sale below the Stipulated Loss Value of the Aircraft,
determined as of the date of such sale, together with interest at the Overdue
Rate on the amount of such deficiency from the date as of which such Stipulated
Loss Value is determined to the date such amount is actually received by Lessor
in cash; or
(e) Rescind this Lease as to the Aircraft or exercise any other
right or remedy which may be available under Applicable Law or proceed by
appropriate court action to enforce the terms hereof or to recover damages for
the breach hereof. In addition, Lessee shall be liable for any and all
Supplemental Rent due hereunder before or after any termination hereof,
including all costs and expenses (including reasonable attorneys' fees and
disbursements) incurred by reason of the occurrence of any Event of Default or
the exercise of Lessor's remedies with respect thereto including all costs and
expenses incurred in connection with the return of the Airframe or any Engine in
accordance with the terms of Section 9 hereof or any appraisal of the Aircraft.
No remedy referred to in this Section 14 is intended to be exclusive, but each
shall be cumulative and in addition to any other remedy referred to above or
otherwise available to Lessor at law or in equity, including, without
limitation, those remedies set forth in Article 2A-523(1) of the Uniform
Commercial Code; and the exercise or beginning of exercise by Lessor of any one
or more of such remedies shall not preclude the simultaneous or later exercise
by Lessor of any or all such other remedies. No express or implied waiver by
Lessor of any Event of Default hereunder shall in any way be, or be construed to
be, a waiver of any future or subsequent Event of Default.
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SECTION 15. INDEMNITIES.
15.1. General Indemnification and Waiver of Certain Claims.
(a) For the purposes of this Lease, "Claims" shall mean any and all
liabilities (including strict or absolute liability and costs, actions or suits
and all legal proceedings whether civil or criminal, fines and other sanctions,
which may be imposed on, incurred by, suffered by, or asserted against Lessor
its successors and assigns and the officers, directors, agents, partners and
employees of Lessor, its successors and assigns, and in addition if Lessor is a
trustee under any trust, the beneficiaries of any such trust and its or their
officers, directors, agents, partners and employees, their successors and
assigns (individually, an "Indemnified Person" for purposes of this Section
15.1) and, except as otherwise expressly provided in this Section 15.1, shall
include all reasonable costs, disbursements and expenses (including attorneys'
fees and expenses) of an Indemnified Person in connection therewith or related
thereto.
(b) Lessee agrees to indemnify, defend and hold harmless each
Indemnified Person against Claims resulting from, arising out of, or related to:
(i) the operation, possession, use, non-use, maintenance,
storage, overhaul, testing or disposition of the Aircraft,
Airframe or any Engine, or any engine used in connection with
the Airframe, or any Part or part thereof by Lessee or any
other Person whatsoever, whether or not such operation,
possession, use, non-use, maintenance, storage, overhaul or
testing is in compliance with the terms of the Lease,
including, without limitation, Claims for death, personal
injury or property damage or other loss or harm to any Person
whatsoever, including, without limitation, any passengers,
shippers or other persons wherever located, and Claims
relating to any laws, rules or regulations, including, without
limitation, environmental control, noise and pollution laws,
rules or regulations;
(ii) the sale, purchase, acceptance, rejection, delivery,
condition, repair, modification, servicing, rebuilding,
airworthiness, performance, nondelivery, sublease,
merchantability, fitness for use, substitution or replacement
of the Airframe, an Engine or part under the Lease, or other
transfer of use or possession of the Aircraft, Airframe,
Engine or Part, and registration of the Aircraft, Airframe or
any Engine, including, without limitation, latent and other
defects, whether or not discoverable; and
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(iii) any breach of or failure to perform or observe, or any other
non-compliance with, any covenant or agreement to be
performed, or other obligation of Lessee under any Lease
Document.
(c) An Indemnified Person shall notify Lessee of any Claim as to
which indemnification is sought. Lessee shall have the right to investigate and
the right to defend, and with the prior written consent of such Indemnified
Party, such consent not to be unreasonably withheld, compromise any Claim for
which indemnification is sought under this Section 15.1, and the Indemnified
Person shall cooperate with all reasonable requests of Lessee in connection
therewith; provided that at such time no Event of Default shall have occurred
and be continuing. In discharging its obligations, under this Section 15.1
Lessee agrees to utilize counsel reasonably acceptable to such Indemnified
Person. An Indemnified Person may participate at its own expense in any judicial
proceeding controlled by Lessee pursuant to the preceding provisions, and such
participation shall not constitute a waiver of the indemnification provided in
this Section 15.1. Nothing contained in this Section 15.1(c) shall be deemed to
require an Indemnified Person to contest any Claim or to assume responsibility
for or control of any judicial proceeding with respect thereto.
(d) In the event Lessee is required to indemnify any Indemnified
Person under this Section 15.1, Lessee shall pay to such Indemnified Person an
amount which, after deduction of all taxes actually required to be paid by such
Indemnified Person in respect of the receipt of such amount under the Applicable
Laws of any government or taxing jurisdiction, shall be equal to the amount of
the indemnification required.
(e) Lessee hereby waives and releases any Claim now or hereafter
existing against any Indemnified Person arising out of death or personal injury
to personnel of the Lessee, loss or damage to property of Lessee, or the loss of
use of any property of Lessee, which may result from or arise out of the
condition, use or operation of the Aircraft during the Term, including without
limitation any latent or patent defect whether or not discoverable unless caused
by the negligence or willful misconduct of Lessor, its employees or agents or on
the part of any Indemnified Person.
(f) The general indemnification provisions of this Section 15.1 are
not intended to waive or supersede any specific provisions of this Lease to the
extent such provisions apply to any Claim.
15.2. Taxes and Other Charges.
(a) Lessee shall pay, indemnify and hold Lessor harmless from all
Taxes which relate to the leasing of the Aircraft pursuant hereto which may be
levied or assessed against, or imposed on Lessor, the Aircraft or any Part or
part
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thereof upon or with respect to or as a result of (i) the interest of Lessee or
Lessor in the Aircraft, (ii) any Rent, (iii) this Lease or the interest of
Lessee or Lessor hereunder, (iv) the manufacture, purchase, delivery, leasing,
operation, return, possession, use, occupancy, installation, construction,
maintenance, repair, renewal or modification of the Aircraft, the Airframe, the
Engines, the Parts or any part of any of the foregoing, (v) receipts from the
Aircraft, or (vi) the earnings arising from the possession, use or occupancy
thereof. Without limitation of the foregoing, Lessee shall also pay and
discharge, as and when due and payable without penalty, all Taxes which may be
levied or assessed against or payable by Lessee or Lessor on account of the
ownership, leasing, or use of the Aircraft. Notwithstanding the foregoing
provisions of this Section 15.2(a), Lessee shall not be required to pay any Tax
levied or based on Lessor's net income, profits or gains and imposed on Lessor
by any taxing jurisdiction in which Lessor is subject to such tax solely by
reason of activities unrelated to the acquisition, ownership, financing,
installation, construction, leasing or use of the Aircraft unless any such Tax
or a portion thereof is imposed or levied upon or assessed against Lessor in
substitution for or in place of any other Tax required to be paid by Lessee
pursuant to this Section 15.2.
(b) Lessee shall furnish to Lessor, upon Lessor's written request,
proof of the payment of any such Tax which is payable by Lessee pursuant to
Section 15.2(a).
(c) Whenever the term "Lessor" is used in this Section 15.2, such
term shall include every Indemnified Person, Lessor, its successors,
transferees, assigns and partners, and if any Lessor is a trust, the beneficiary
and the owner of such trust and the partners of each such beneficiary and owner.
In addition, the indemnities in this Section 15.2 shall apply to any Taxes which
at any time prior to or during the Term may be levied or assessed against, or
imposed on, Lessor, Lessee, the Aircraft or any part thereof upon or with
respect to or as a result of any of the items described in the clauses (i)
through (vi) of the first sentence of Section 15.2(a) and the second sentence of
Section 15.2(a).
15.3. Continuing Indemnification. The agreements and indemnities contained
in this Section 15 shall survive the end of the Term.
SECTION 16. TRANSFER. ASSIGNMENT AND SUBLEASE.
16.1. Assignment or Encumbrance by Lessor. Lessor may, without notice to
or the consent of Lessee, at its expense sell the Aircraft or assign any of its
rights hereunder whether as collateral security or otherwise, subject only to
the condition that any such assignment or security interest be expressly made
subject to Lessee's rights under Section 4 hereof and provided that such
assignment shall not materially increase the aggregate financial exposure of
Lessee under this Lease. In connection with any such assignment, Lessee further
agrees to take all actions as may be reasonably requested by Lessor to secure
such assignee's interest, including
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without limitation: (i) indemnifying any assignee to the same extent as Lessor
under Section 15 hereof; (ii) adding any assignee as additional insureds and
loss payees to all insurance policies so naming the Lessor in accordance with
Section 11 hereof; (iii) executing, recording and filing all consents,
agreements, certificates, financing statements, opinions and other documents or
instruments as may be reasonably necessary or desirable to recognize, evidence,
secure or perfect any assignees ownership or security interest in the Aircraft
and this Lease; (iv) permit the Liens created by security interests granted
pursuant hereto; and (v) to recognize all rights of such any assignee to
exercise any and all rights of Lessor hereunder.
16.2. Sublease of Aircraft or Assignment by Lessee. Without the prior
written consent of Lessor, Lessee may not sublease of the Aircraft, including
the Airframe or any of the Engines, to any person. LESSEE MAY NOT WITHOUT THE
PRIOR WRITTEN CONSENT OF LESSOR ASSIGN TO ANY OTHER PERSON THE AIRCRAFT OR ANY
OF LESSEE'S RIGHTS OR OBLIGATIONS HEREUNDER.
16.3. Consolidation. Merger or Transfer by Lessee. Lessee shall not,
without the prior written consent of Lessor, consolidate with or merge into any
other corporation or convey, transfer or lease all or substantially all of its
assets as an entity to any Person.
16.4. Nonrecourse As to Trustee. Neither the Lessor nor any entity acting
as successor trustee shall be personally liable for, or for any loss in respect
of, any of the statements, representations, warranties, agreements, actions,
failures to act or obligations of Lessor hereunder; Lessee hereby agrees to look
solely to the trust estate of the owner trust created by the trust agreement
pursuant to which the Aircraft and this Lease are held by Lessor ("Trust") in
the event of any default by Lessor of its obligations hereunder or otherwise.
SECTION 17. OPTIONS TO PURCHASE.
Provided no Event of Default has occurred and is continuing, Lessee upon
not less than 90 days prior written notice to Lessor may purchase the Aircraft
(i) effective as of the last day of the 24th month of the Basic Term for a
purchase price equal to $2,500,000, or (ii) effective as of the last day of the
Basic Term for a purchase price equal to $2,000,000. All Taxes, levied or
assessed on the transfer of title pursuant to Lessee's exercise of its option to
purchase shall be for the account of Lessee. Lessor shall retain the Security
Deposit and on the date for such purchase Lessor shall transfer title to the
Aircraft and the Reserves then held by Lessor to Lessee or its designee against
Lessor's receipt in good funds of the applicable purchase price less the
Security Deposit then held by Lessor. Upon the transfer of title to the
Aircraft, Lessor shall warrant to Lessee that it holds good and marketable title
to the Aircraft, free and clear of all liens and encumbrances placed thereon by
Lessor but otherwise that title is transferred "AS IS" and
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"WHERE IS" without additional warranty of any kind. Lessee agrees to provide the
insurance specified in Section 11.3 for period of two years following the
transfer of title to the Aircraft.
SECTION 18. NOTICES.
Unless otherwise specifically provided herein, all notices required or
permitted by the terms hereof shall be in writing. Any written notice shall
become effective the earlier of when received or five days after the deposit of
such notice by first class airmail (or its equivalent in the United Kingdom).
Any written notice shall be sent by mail (as specified in the preceding
sentence) or sent in the form of a facsimile message, or by overnight delivery
service or delivered by hand. Any written notice shall be addressed as follows:
If to Lessor:
c/o Equis Financial Group Limited Partnership
88 Broad Street
Boston, MA 02110, U.S.A.
Attn: Vice President Aircraft Management
Tel: (617) 854-5800
Fax: (617) 695-0596
If to Lessee:
4 Allyington Way
Worth, Sussex, RH6 1OAO, U.K.
Attention: Paul Richards
Tel:
Fax: 011 44 129 388 9325
Such persons and addresses may be changed, from time to time, by means of a
notice given in the manner provided in this Section 18.
SECTION 19. LESSOR'S RIGHT TO PERFORM FOR LESSEE. If Lessee fails to make
any payment of Rent required to be made by it hereunder, or fails to perform or
comply with any of its agreements contained herein, then Lessor may itself make
such payment or perform or comply with such agreement, and the amount of such
payment and the amount of the reasonable expenses of Lessor incurred in
connection with such payment or the performance of or compliance with such
agreement (including reasonable attorneys' fees), as the case may be, together
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with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent,
payable by Lessee upon demand.
SECTION 20. MISCELLANEOUS.
20.1. Federal Bankruptcy Code. To the extent provided thereby (or to the
fullest extent it may lawfully so agree, whether or not provided thereby) Lessee
hereby agrees in accordance with 11 U.S.C. Section 1110, or any superseding
statute, as amended from time to time, that the title of Lessor to the Aircraft
and any right of Lessor to take possession of such Aircraft in compliance with
the provisions of this Agreement shall not be affected by the provisions of 11
U.S.C. Sections 362 or 363, or other analogous part of any superseding statute,
as amended from time to time.
20.2. Waivers, Headings. No term or provision of this Lease may be
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by Lessor and Lessee or their respective successors and permitted
assigns. The headings contained herein are for convenience and reference only
and are not intended to define or limit the scope of any provisions of this
Lease.
20.3. Counterparts. This Lease may be signed in one or more counterparts
with the same effect as if the signatures to each counterpart were upon a single
instrument.
20.4. Agreement to Lease. This Lease shall constitute an agreement to
lease, and nothing contained herein shall be construed as conveying to Lessee
any right, title or interest in any Aircraft except as a lessee only. In
recognition of the fact that a court of competent jurisdiction could determine
that this Lease constitutes a "lease intended as security" under applicable law
(including under Section 1-201(37) of the Uniform Commercial Code) Lessee hereby
grants to Lessor to secure Lessee's performance of its obligations under this
Lease a first priority security interest in the Aircraft and all replacements,
substitutions accessions thereto and proceeds (cash and non-cash) thereof,
including the proceeds of all insurance policies on the Aircraft. Lessee agrees
that, with respect to the Aircraft, Lessor shall have all the rights and
remedies of a first priority secured party under the UCC.
20.5. Governing Law. This Lease has been delivered in the Commonwealth of
Massachusetts and shall in all respects be governed by, and construed in
accordance with, the laws of The Commonwealth of Massachusetts, including all
matters of construction, validity and performance but without giving effect to
its choice of law provisions and including Article 2A of the Uniform Commercial
Code in effect in The Commonwealth of Massachusetts, Lessor and Lessee intend
that this Lease be characterized as a "finance lease" within the meaning of
Article 2A-
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103(1)(g), whether or not each requirement of the definition thereof has been
technically or strictly met, and this Lease is to be so construed if permitted
by law.
20.6. Benefit and Binding Effect. The terms and provisions of this Lease
shall inure to the benefit of and be binding on Lessor its successors and
assigns and Lessee and its successors and permitted assigns.
20.7. Further Assurances. Lessor and Lessee shall, from time to time, do
and perform such other and further acts and execute and deliver any and all such
other and further instruments as may be required by law or reasonably requested
by the other party to establish, maintain and protect the respective rights and
remedies of the other party and to carry out the intent and purpose of this
Lease. In furtherance of and not in limitation of the foregoing and
notwithstanding any breach or alleged breach by Lessor of its obligations
hereunder, Lessee agrees that unless Lessee has exercised its rights under
Section 17 hereof upon the expiration or earlier termination of this Lease to
promptly execute upon Lessor's request a lease termination certificate or
similar instrument in a form suitable for recordation with the CAA.
20.8. Capitalized or Boldface Provisions. Capitalized or boldfaced items
in this Agreement are conspicuous, in writing and specific. Lessee understands
all such items and has read, understood and concurred in all Sections of this
Agreement.
20.9. Venue. Lessor and Lessee hereby agree that any legal action or
proceeding with respect to this Lease, or to enforce any judgment obtained
against the Lessee, shall be brought in the courts of The Commonwealth of
Massachusetts, in the United Stated federal courts in The Commonwealth of
Massachusetts or in the courts of any other appropriate jurisdiction as Lessor
may elect, and Lessee hereby irrevocably submits to such jurisdiction. In
addition, with respect to any action or proceeding within the jurisdictions of
the courts of The Commonwealth of Massachusetts and of the United States federal
courts in The Commonwealth of Massachusetts, the Lessee hereby irrevocably
consents to the service of process out of said Massachusetts or United States
courts in any such action or proceeding by the mailing thereof by United States
registered mail to it at its address set forth in Section 18 hereof.
20.10. Entire Agreement. This Agreement (together with all schedules and
attachments hereto) constitutes the entire agreement between Lessor and Lessee.
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Lease Agreement (MSN1118) dated
as of July 22, 1997
IN WITNESS WHEREOF, Lessor and Lessee have executed this Agreement as of
the date first set forth above.
LESSOR:
By: /s/ James F. [ILLEGIBLE]
-------------------------------
Title: Vice President
----------------------------
LESSEE:
By: /s/ [ILLEGIBLE]
-------------------------------
Title: Commercial Director
----------------------------
THIS LEASE IS COUNTERPART NO. 1 OF THREE SERIALLY NUMBERED ORIGINAL
EXECUTED COUNTERPART COPIES OF THIS LEASE. TO THE EXTENT, IF ANY, THAT THIS
LEASE CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM
COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION), NO SECURITY
INTEREST IN THIS LEASE MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY
COUNTERPART OTHER THAN THE ORIGINAL EXECUTED COUNTERPART MARKED COUNTERPART
NO. 1.
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EXHIBIT A
DESCRIPTION OF AIRCRAFT
Model Serial
Manufacturer Configuration Number
- ------------ ------------- ------
Lockheed L-1011-100 1118
Martin
Corporation
Number and Type Serial
of Engines Number
---------- ------
3 Rolls Royce 10067
RB211-22B 10181
10508
A-1
<PAGE>
EXHIBIT B
to
Lease Agreement (MSN1118)
AIRCRAFT DOCUMENTS
A. CERTIFICATES
1. Certificate of Airworthiness (on board aircraft), FAA on delivery of
Aircraft to Lessee, CAA on return of Aircraft to Lessor, or returned
to the Lessor if Aircraft is delivered to another country.
2. Current Certificate of Registration (on board aircraft), or proof of
deregistration of the Aircraft to be submitted to the authorities in
subsequent country of registration.
3. Noise Certificate affirming that the aircraft meet Chapter III noise
standards.
4. Radio Certificate affirming the current approved radio equipment is
installed.
B. AIRCRAFT STATUS SUMMARIES
1. Signed statement giving total hours flown, total landings, and the
time and landings since the last major check, average utilization
stated as average Hours per month and average Cycles per month.
2. Regulation Compliance Summary (FAA on delivery of Aircraft to
Lessee, CAA on return of Aircraft to Lessor).
3. Record for the most recent 90 days of operation showing Hours and
Cycles.
4. Summary of Airworthiness Directives accomplished on the aircraft,
engines and appliances including the date, time and/or cycles and
the method of accomplishment.
5. Summary of all Service Bulletins accomplished to aircraft, engines
and appliances including the date, time and/or cycles and the method
of accomplishment.
B-1
<PAGE>
6. A record of the Supplemental Structural Inspections (SSID)
accomplished, including a copy of the approved document that
authorizes the SSID program.
7. A record of the Corrosion Prevention Control Program (CPCP)
accomplished, including a copy of the approved document that
authorizes the CPCP program.
8. A record of Lessee modifications, with reference documents issued by
the Lessee that authorize the modifications.
9. A record of all alterations and repairs made beyond the Structural
Repair Manual including the date, Hours and/or Cycles when the
repair was done, and reference to the document used to accomplish
the repair including Designated Engineering Representative Approval
or equivalent.
10. Signed Statement with Respect to Accident/Incident/Major Damage to
Aircraft
11. List of Repetitive Inspections Resulting from Existing Known
Aircraft Defects (including inspection man-hour requirement and
interval)
12. List and Status of Life Limited Components
13. Check/Inspection Status
14. A current summary and status of all time/cycles controlled
components, showing time and type of maintenance - "Hard Time",
"On-Condition" or "Condition Monitored" and the time and/or cycles
since the last overhaul or major shop visit.
15. Serialized On-Condition/Condition Monitored Components Inventory of
Installed Units.
C. AIRCRAFT MAINTENANCE RECORDS
Airframe inspection, maintenance, modification, and repair documents with
maintenance and/or inspection signatures (as required) and description of
work done.
B-2
<PAGE>
1. Last "A", "B", and "Segment C" Checks (or equivalents). (In the
event that a check is performed in phases, all phases necessary to
constitute a complete block check are required. In the event that
check content varies by multiples of the check, all multiples
necessary to constitute a complete cycle are required.)
2. Airworthiness Directive, Service Bulletin and Modification
compliance documents including engineering orders, drawings, shop
cards, etc., as necessary to establish method of compliance, and
approval authority.
3. Documentation of Major Repairs and Alterations including engineering
orders, drawings, Supplemental Type Certificates, Master Change
Notice, etc., as necessary to define work done, certification basis,
and approval authority.
4. Aircraft weigh records, including cabin layout and equipment list.
D. ENGINE RECORDS (for each engine)
1. Signed Statement giving Engine Total Hours and Cycles and Time Since
Last Shop Visit as of Time of Delivery
2. Engine Airworthiness Directive Applicability and Compliance Report
(giving date, time, method of compliance and status)
3. Service Bulletin Compliance Report
4. List of Operator Modifications Incorporated, if any, with
Accomplishment Instructions
5. List of Repetitive Inspections Resulting from Existing Known Engine
Defects (including inspection man-hour requirement and interval)
6. List and Current Status of Life Limited Components including "back
to birth" history
7. Check/Inspection Status
8. List and Status of Time Controlled Components and Record of Last
Module Overhaul
9. Serialized On-Condition/Condition Monitored Components List of
Installed Units, if available
B-3
<PAGE>
10. Engine Build Specifications
11. Repair, overhaul and inspection documents
12. Documents necessary to establish current total time in service on
all life-limited parts.
13. Test Cell Records for last test
E. APU RECORDS
1. APU Log Book (or equivalent documentation)
2. Airworthiness Directive Applicability and Compliance Report
3. Manufacturer Service Bulletin Compliance Report
4. List and Current Status of Life Limited Components
5. List and Status of Time Controlled Components
6. Serialized On-Condition/Condition Monitored Components Inventory of
Installed Units, if available
7. Repair, overhaul and inspection documents including FAA Forms 337
(on delivery of Aircraft to Lessee, including CAA equivalent
documents on return of Aircraft to Lessor)
F. COMPONENT RECORDS
1. Time Controlled Component Historical Records
2. Installation records and serviceable tags for Serialized
On-Condition/Condition Monitored Components.
G. MANUALS
1. Approved (FAA on delivery of Aircraft to Lessee; CAA on return of
Aircraft to Lessor) Airplane Flight Manual to current revision
(paper copy)
B-4
<PAGE>
2. Weight and Balance Manual Chapter 1 to current revision (paper copy)
3. Weight and Balance Report Chapter 2 to current revision (paper copy)
4. Weight and Balance Manual to current revision (paper copy)
5. Maintenance Manual to current revision (microfilm)
6. Wiring Diagram Manual to current revision (microfilm)
7. Wire Lists and Hookup Charts to current revision (microfilm)
8. Power Plant Buildup Manual to current revision (paper copy)
9. Illustrated Parts Catalog to current revision (microfilm)
10. Structural Repair Manual to current revision (microfilm)
11. Flight Crew Operating Manual to current revision (paper copy)
12. Any supplements to the manual set forth in items 1 and 3 through 10
above.
13. Copy of the Approved Maintenance Program under which the Aircraft
was operated for bridging the Approved Maintenance Program to the
next Lessee.
14. Fueling Manual to current revisions.
H. MISCELLANEOUS TECHNICAL DOCUMENTS
1. Interior Configuration Layout Drawing
2. Aircraft Readiness Log (manufacturer delivery document).
3. Master reference copies of Aircraft operators Engineering Orders and
repairs applicable to the Aircraft, airframe, engines and
appliances, to include drawings, data packages, and approval
authority
4. Master reference copies of Operator Unique Component Maintenance
Manuals, to current revision, which have been altered by the
operator
B-5
<PAGE>
as allowed under the authority granted to operators with a
continuous airworthiness maintenance and inspection program.
5. Master reference copies of any operator obtained master change
Service Bulletins for the Aircraft, airframe, engine and appliances.
B-6
<PAGE>
EXHIBIT C
to
Lease Agreement (MSN 1118)
ACCEPTANCE CERTIFICATE
(DELIVERY)
Classic Airways, Ltd. ("Lessee") and Investors Asset Holding Corp., not in
its individual capacity but solely as trustee of the AFG/Cathay Pacific 1989-3
Trust ("Lessor") have heretofore entered into that certain Lease Agreement
(MSN1118) dated as of July 22, 1997 (herein called the "Lease" and the defined
terms therein being hereinafter used with the same meanings), relating to
Lockheed L-1011-100, manufacturer's serial number 1118. The Lease provides for
the execution and delivery of this Acceptance Certificate (Delivery).
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, Lessor and Lessee hereby agree as follows:
A. DELIVERY DATE. The date of this Acceptance Certificate (Delivery) is
July __, 1997 and the parties confirm that the Delivery Date is the date of this
Acceptance Certificate (Delivery).
B. THE AIRCRAFT. Lessee hereby certifies that the Aircraft described in
Schedule 1 hereto, consisting of __ pages (including attachments) and made a
part hereof, and the Aircraft Documents described in Exhibit B to the Lease,
have been delivered to Lessee, inspected by Lessee, found to be in good order
and accepted hereunder, and for all purposes of, the Lease, all on the date
hereof. Any qualifications to the return conditions set forth in Lease Section 9
are attached hereto in Schedule 2 hereto, consisting of __ pages (including
attachments) and made a part hereof. Lessee accepts delivery of the Aircraft "AS
IS", "WHERE IS", AND SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND
REPRESENTATION AS SET FORTH IN SECTION 7.1 OF THE LEASE.
C. REPRESENTATIONS BY THE LESSEE. Lessee hereby represents and warrants to
Lessor that on the date hereof:
1. The representations and warranties of 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. 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.
Acceptance Certificate (Delivery)
(MSN 1118)
Page 1
<PAGE>
3. No default or Event of Default under the Lease has occurred and is
continuing on the date hereof.
4. 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.
IN WITNESS WHEREOF, this Acceptance Certificate has been executed and
delivered at Piedmont Triad Airport, Greensboro, North Carolina, U.S.A., this
18th day of July, 1997.
INVESTORS ASSETS HOLDING CLASSIC AIRWAYS, LTD. (Lessee)
CORP., as trustee (Lessor)
By: By:
------------------------------- -------------------------------
Title: Title:
---------------------------- ----------------------------
Acceptance Certificate (Delivery)
(MSN 1118)
Page 2
<PAGE>
SCHEDULE 1 TO ACCEPTANCE CERTIFICATE (DELIVERY) (MSN1118)
AIRCRAFT DESCRIPTION
Airframe: Lockheed model L1011-100, mfgr. serial number 1118, US registration
mark N___________ US.
Total Hours: ________ Total Cycles: _________
Engine: Rolls Royce model RB211-22B engine, manufacturer serial number 10067:
Total Hours: ________ Total Cycles: _________
Remaining on limiter: _______ (Cycles)
Time since last shop visit: _____ (Hours) ___ (Cycles)
Engine: Rolls Royce model RB211-22B engine, manufacturer serial number 10181:
Total Hours: ________ Total Cycles: _________
Remaining on limiter: _______ (Cycles)
Time since last shop visit: _____ (Hours) ___ (Cycles)
Engine: Rolls Royce model RB211-22B engine, manufacturer serial number 10508:
Total Hours: ________ Total Cycles: _________
Remaining on limiter: _______ (Cycles)
Time since last shop visit: _____ (Hours) ___ (Cycles)
Landing Gear time since overhaul (Hours): L____________; R ____________; N
____________.
Auxiliary power unit: manufacturer ____________, serial number _________
Avionics (specified by manufacturer): see Attachment 1 consisting of one (1)
page.
Interior configuration:__________________.
Loose equipment which is property of Lessor:
1. Galley Equipment including ovens with inserts, coffee makers, food
carriers and trolleys.
2. Full compliment of emergency equipment as required by emergency
equipment location drawing.
3. Life vests and rafts.
4. LD-3 Containers.
Acceptance Certificate (Delivery)
(MSN 1118)
Page 3
<PAGE>
Operating weights: Maximum ramp weight: __________
Maximum gross take-off weight: __________
Maximum landing weight: __________
Zero fuel weight: __________
Acceptance Certificate (Delivery)
(MSN 1118)
Page 4
<PAGE>
ATTACHMENT 1 TO
SCHEDULE 1 TO LEASE ACCEPTANCE CERTIFICATE (DELIVERY)
AIRCRAFT DESCRIPTION
List of Avionics:
Acceptance Certificate (Delivery)
(MSN 1118)
Page 5
<PAGE>
SCHEDULE 2 TO LEASE ACCEPTANCE CERTIFICATE (DELIVERY):
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 9 of the Lease:
Acceptance Certificate (Delivery)
(MSN 1118)
Page 6
<PAGE>
EXHIBIT D
to
Lease Agreement (MSN1118)
ACCEPTANCE CERTIFICATE
(RETURN)
Investors Asset Holding Corp., not in its individual capacity but solely
as trustee of the AFG/Cathay Pacific 1989-3 Trust ("Lessor") and Classic
Airways, Ltd. ("Lessee") have entered into that certain Lease Agreement
(MSN1118) dated as of July 22, 1997 (herein called the "Lease" and the defined
terms therein being hereinafter used with the same meanings), relating to one
(1) Lockheed L-1011-100 Airframe, bearing Manufacturer's Serial Number 1118,
together with three (3) Rolls Royce RB211-22B Engines, bearing manufacturer's
serial numbers 10067, 10181 and 10508, together with all instruments, parts, and
other equipment attached hereto or installed therein ("Parts").
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: Lockheed model L1011-100, manufacturer serial number 1118.
Total Hours: ________ Total Cycles: _________
Time since C check: ______ Time since D check: ______
Engine: Rolls Royce model RB211-22B engine, manufacturer serial number 10067:
Total Hours: ________ Total Cycles: _________
Remaining on limiter: _____ (Cycles)
Time since last shop visit: ______ (Hours) _____ (Cycles)
Confirm borescope: ______ all compressor sections ______ all turbine
sections
Engine: Rolls Royce model RB211-22B engine, manufacturer serial number 10181:
Total Hours: ________ Total Cycles: _________
Remaining on limiter: ______ (Cycles)
Time since last shop visit: ______ (Hours) ______ (Cycles)
Confirm borescope: _____ all compressor sections ______ all turbine sections
Acceptance Certificate (Return)
(MSN 1118)
Page 1
<PAGE>
Engine: Rolls Royce model RB211-22B engine, manufacturer serial number 10508:
Total Hours: ________ Total Cycles: _________
Remaining on limiter: ______ (Cycles)
Time since last shop visit: ______ (Hours) ______ (Cycles)
Confirm borescope: _____ all compressor sections ______ all turbine sections
Landing gear time since overhaul: L ____________ Hours, R ________Hours,
N_______ Hours
Auxiliary power unit: manufacturer _____ serial number _____
Avionics (specified by manufacturer): see attachment consisting of______ pages
Interior configuration:
Loose equipment: [SPECIFY GALLEY EQUIPMENT, EXTRA SEATS, ETC.]
Discrepancies in components returned (see Schedule 1 to Lease Acceptance
Certificate Delivery):
Discrepancies in Aircraft Documents (see Schedule 2 to Lease Acceptance
Certificate Delivery):
Discrepancies in Aircraft return condition (see Lease Section 9):
Confirm that all [specify here specific time requirements, if any] in each
case as required by the _________Approved Maintenance Program. Yes ____ No ____
Lessor and Lessee each agree with the other in respect to said Aircraft:
1. Lessee shall execute and deliver a CAA Aircraft Registry Lease Termination
in the [ILLEGIBLE] and substance reasonably satisfactory to Lessor if the
Lease had been registered with the CAA.
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 the expiration of the Lease, the Lease is hereby terminated.
Acceptance Certificate (Return)
(MSN 1118)
Page 2
<PAGE>
IN WITNESS WHEREOF, this Acceptance Certificate has been executed and
delivered at _________________ this ___ day of ______________.
INVESTORS ASSETS HOLDING CLASSIC AIRWAYS, LTD. (Lessee)
CORP., as trustee (Lessor)
By: By:
------------------------------- -------------------------------
Title: Title:
---------------------------- ----------------------------
Acceptance Certificate (Return)
(MSN 1118)
Page 3
<PAGE>
EXHIBIT E
to
Lease Agreement (MSN 1118)
FORM OF BROKERS' LETTER OF UNDERTAKING
To: Investors Asset Holding Corp., as trustee of the AFG/Cathay Pacific
1989-3 Trust
and
The persons named as additional insureds
in the Schedule hereto
Dear Sirs,
We confirm that insurances are in effect on and in respect of the Lockheed
L-1011-100 aircraft whose manufacturer's serial number is 1118 and whose
registration mark is N556WP (the "Aircraft") for the risks set out in the
attached Certificate of Insurance and that all premiums due at the date hereof
in respect of such insurance have been paid in full. We also confirm that those
named in the Schedule to this letter are named as additional or joint
insured(s), as the case may be, on the insurance policies evidenced in the
attached Certificate of Insurance for the period stipulated therein.
We further undertake:
1. to advise you in writing immediately of any material changes
notified to us which are proposed to be made in the terms of the
insurance which might adversely affect your interests or are
inconsistent with the terms of Section 11 a Lease Agreement
(MSN1118) dated July [ILLEGIBLE] 1997 made between Investors Asset
Holding Corp., as trustee, and Classic Airways, Ltd. (the "Lessee")
(and not to effect any such changes without giving you at least
thirty (30) days prior written notice) and to notify you subject to
Automatic Termination Clause and the Amendment of Terms Clause at
least thirty (30) days prior to the expiry of these insurances if we
have not received renewal instructions from the Lessee and in the
event of our receiving instructions to renew to advise you promptly
of the details thereof;
<PAGE>
2. to pay to IAHC without any set-off or deduction of any kind for any
reason, any and all proceeds from the physical damage insurances
collected from underwriters except as might be otherwise permitted
in the relevant Loss Payable Clause;
3. to advise you promptly in writing:
(a) if any underwriter or insurer cancels or gives notice of
cancellation of this insurance, or in the case of any
non-renewal, termination or other cancellation, at least
thirty (30) days (except that in respect of War and Allied
Risks policies not less than seven (7) days' prior written
notice shall be given (subject to exceptions uniformly
provided in War and Allied Risk policies then available on
commercial reasonable terms)) before such cancellation is to
take effect as to any named insured;
(b) of any act of omission or of any event of which we have any
knowledge and which might invalidate or render unenforceable
in whole or in part this insurance.
The above undertakings are given:
(1) subject to our lien, if any, on the policies referred to above for
premiums due under such Policies in respect of the Aircraft (but no other
aircraft) and subject to underwriters' right of cancellation on default in
payment of such premiums, but we undertake to advise you immediately if
such premiums are not paid to us by the due date and to give you a
reasonably opportunity of paying such amounts of such premiums outstanding
before notification of non-payment of premiums to underwriters or
notification of cancellation on behalf of underwriters;
(2) subject to our continuing appointment for the time being as insurance
brokers to the Lessee and through whom any claim or claims shall be
collected from underwriters;
(3) in [ILLEGIBLE] of your approving us as brokers for the insurance on the
above aircraft.
We also undertake for the consideration aforesaid to advise you immediately if
we cease to be insurance brokers to the Lessee.
<PAGE>
This letter shall be governed and construed in all respects in accordance with
Massachusetts law.
Yours faithfully,
__________________________________
Director
<PAGE>
ACCEPTANCE CERTIFICATE
(DELIVERY)
Classic Airways, Ltd. ("Lessee") and Investors Asset Holding Corp., not in
its individual capacity but solely as trustee of the AFG/Cathay Pacific 1989-3
Trust ("Lessor") have heretofore entered into that certain Lease Agreement
(MSN1118) dated as of July 22, 1997 (herein called the "Lease" and the defined
terms therein being hereinafter used with the same meanings), relating to
Lockheed L-1011-100, manufacturer's serial number 1118. The Lease provides for
the execution and delivery of this Acceptance Certificate (Delivery).
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, Lessor and Lessee hereby agree as follows:
A. DELIVERY DATE. The date of this Acceptance Certificate (Delivery) is
July 23, 1997 and the parties confirm that the Delivery Date is the date of this
Acceptance Certificate (Delivery).
B. THE AIRCRAFT. Lessee hereby certifies that the Aircraft described in
Schedule 1 hereto, consisting of 3 pages (including attachments) and made a part
hereof, and the Aircraft Documents described in Exhibit B to the Lease, have
been delivered to Lessee, inspected by Lessee, found to be in good order and
accepted hereunder, and for all purposes of, the Lease, all on the date hereof.
Any qualifications to the return conditions set forth in Lease Section 9 are
attached hereto in Schedule 2 hereto, consisting of 1 page (including
attachments) and made a part hereof. Lessee accepts delivery of the Aircraft "AS
IS", "WHERE IS", AND SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND
REPRESENTATION AS SET FORTH IN SECTION 7.1 OF THE LEASE.
C. REPRESENTATIONS BY THE LESSEE. Lessee hereby represents and warrants to
Lessor that on the date hereof:
1. The representations and warranties of 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. Lessee has satisfied or complied with all requirements set forth in the
Lease to be satisfied or complied with on or prior to the date thereof.
3. No default or Event of Default under the Lease has occurred and is
continuing on the date hereof.
4. 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.
Acceptance Certificate (Delivery)
(MSN 1118)
<PAGE>
IN WITNESS WHEREOF, this Acceptance Certificate has been executed and
delivered at Piedmont Triad Airport, Greensboro, North Carolina, U.S.A., this 23
day of July, 1997.
INVESTORS ASSETS HOLDING CLASSIC AIRWAYS, LTD. (Lessee)
CORP., as trustee (Lessor)
By: /s/ James F [ILLEGIBLE] By: /s/ [ILLEGIBLE]
------------------------------- -------------------------------
Title: Vice President Title: CHIEF ENGINEER
---------------------------- ----------------------------
Acceptance Certificate (Delivery)
(MSN 1118)
Page 2
<PAGE>
SCHEDULE 1 TO ACCEPTANCE CERTIFICATE (DELIVERY) (MSN1118)
AIRCRAFT DESCRIPTION
Airframe: Lockheed model L1011-100, mfgr. serial number 1118, US registration
mark N556WP US.
Total Hours: 49,578.17 Total Cycles: 24,499
Engine: Rolls Royce model RB211-22B engine, manufacturer serial number 10067:
Total Hours: 43,763 Total Cycles: 21,423
Remaining on limiter: 1,652 (Cycles)
Time since last shop visit: 19 (Hours) 4 (Cycles)
Engine: Rolls Royce model RB211-22B engine, manufacturer serial number 10181:
Total Hours: 37,542 Total Cycles: 18,965
Remaining on limiter: 1,899 (Cycles)
Time since last shop visit: 504 (Hours) 242 (Cycles)
Engine: Rolls Royce model RB211-22B engine, manufacturer serial number 10508:
Total Hours: 40,245 Total Cycles: 20,459
Remaining on limiter: 1,657 (Cycles)
Time since last shop visit: 19 (Hours) 4 (Cycles)
Landing Gear time since overhaul (Hours): L 8,690; R 7,646; N 6,899.
Auxiliary power unit: manufacturer Pratt & Whitney, serial number HB55060
Avionics (specified by manufacturer): see Attachment 1 consisting of one (1)
page.
Interior configuration: 362.
Loose equipment which is property of Lessor:
* 1. Galley Equipment including ovens with inserts, coffee makers, food
carriers and trolleys.
2. Full compliment of emergency equipment as required by emergency
equipment location drawing.
3. Life vests and rafts.
4. LD-3 Containers (15)
* See page 4
Acceptance Certificate (Delivery)
(MSN 1118)
Page 3
<PAGE>
Operating weights: Maximum ramp weight: 468,000 lbs.
Maximum gross take-off weight: 466,000 lbs.
Maximum landing weight: 368,000 lbs.
Zero fuel weight: 338,000 lbs.
* Fwd Galley
2 ovens
no inserts
2 coffee maker
Mid Galley
5 ovens 1 with inserts
4 no inserts
4 coffee maker
Aft Galley
2 coffee maker
Lower Galley
5 ovens 32 inserts
Acceptance Certificate (Delivery)
(MSN 1118)
Page 4
<PAGE>
ATTACHMENT 1 TO
SCHEDULE 1 TO LEASE ACCEPTANCE CERTIFICATE (DELIVERY)
AIRCRAFT DESCRIPTION
List of Avionics:
AUTO PILOT COLLINS FCES/AFCS
VHF COM COLLINS 822-0731-001
522-4089-004
622-1181-006
VHF NAV COLLINS 2775-019-28
MARKER BENDIX 2987821-2809
ADF COLLINS 777-1492-004
DME COLLINS 522-4209-002
KING KDM7000
TRANSPONDER BENDIX/KING TRA-67
RADIO ALT. COLLINS 522-3698-011
FLT. DIR. COLLINS 562A-SF4
GROUND PROX ALLIED SIGNAL MKVII
965-0876-030-BO5/BO8
TCAS BENDIX/KING 066-50000-C108
WINDSHEAR ALLIED SIGNAL MKVII
965-0876-030-BO/BO8
CVR FAIRCHILD
DFDR LOCKHEED MS313100 10077A500-107
HF COLLINS 622-3371-001
INS AERO PRODUCTS LTN72R
Acceptance Certificate (Delivery)
(MSN 1118)
Page 5
<PAGE>
SCHEDULE 2 TO LEASE ACCEPTANCE CERTIFICATE (DELIVERY):
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 9 of the Lease:
NONE
Acceptance Certificate (Delivery)
(MSN 1118)
Page 6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,425,762
<SECURITIES> 0
<RECEIVABLES> 111,111
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,662,607
<PP&E> 45,382,342
<DEPRECIATION> 40,968,380
<TOTAL-ASSETS> 8,076,569
<CURRENT-LIABILITIES> 0
<BONDS> 1,896,665
0
0
<COMMON> 0
<OTHER-SE> 5,632,042
<TOTAL-LIABILITY-AND-EQUITY> 8,076,569
<SALES> 0
<TOTAL-REVENUES> 3,416,813
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 200,679
<INCOME-PRETAX> (1,208,085)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,208,085)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,208,085)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
