<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-20031
------------------------
AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED
PARTNERSHIP
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3077437
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
88 BROAD STREET, 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:
796,161 UNITS REPRESENTING LIMITED PARTNERSHIP INTEREST
(Title of class)
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 1998 (Part I and II)
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<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 5
Item 3. Legal Proceedings............................................................................. 5
Item 4. Submission of Matters to a Vote of Security Holders........................................... 5
PART II
Item 5. Market for the Partnership's Securities and Related Security Holder Matters................... 6
Item 6. Selected Financial Data....................................................................... 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............................... 13-14
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS.
(a) General Development of Business
AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership, (the
"Partnership") was organized as a limited partnership under the Massachusetts
Uniform Limited Partnership Act (the "Uniform Act") on March 1, 1991 for the
purpose of acquiring and leasing to third parties a diversified portfolio of
capital equipment. Partners' capital initially consisted of contributions of
$1,000 from the General Partner (AFG Leasing VI Incorporated) and $100 from the
Initial Limited Partner (AFG Assignor Corporation). On May 31, 1991, the
Partnership issued 803,454.56 units of limited partnership interest (the
"Units") to 909 investors. Included in the 803,454.56 units are 7,293.56 bonus
units. The Partnership has one General Partner, AFG Leasing VI Incorporated, a
Massachusetts corporation formed in 1990 and an affiliate of Equis Financial
Group Limited Partnership (formerly known as American Finance Group), a
Massachusetts limited partnership ("EFG" or the "Manager"). The General Partner
is not required to make any other capital contributions except as may be
required under the Uniform Act and Section 6.1(b) of the Amended and Restated
Agreement and Certificate of Limited Partnership (the "Restated Agreement, as
amended").
(b) Financial Information About Industry Segments
The Partnership is engaged in only one industry segment: the business of
acquiring capital equipment and leasing the equipment to creditworthy lessees on
a full payout or operating lease basis. Full payout leases are those in which
aggregate undiscounted, noncancellable rents equal or exceed the acquisition
cost of the leased equipment. Operating leases are those in which the aggregate
undiscounted, noncancellable rental payments are less than the acquisition cost
of the leased equipment. Industry segment data is not applicable.
(c) Narrative Description of Business
The Partnership was organized to acquire a diversified portfolio of capital
equipment subject to various full payout and operating leases and to lease the
equipment to third parties as income-producing investments. More specifically,
the Partnership's primary investment objectives were to acquire and lease
equipment that would:
1. Generate quarterly cash distributions;
2. Preserve and protect Partnership capital; and
3. Maintain substantial residual value for ultimate sale.
The Partnership has the additional objective of providing certain federal
income tax benefits.
The Closing Date of the Offering of Units of the Partnership was May 31,
1991. Significant operations commenced coincident with the Partnership's initial
purchase of equipment and the associated lease commitments on May 31, 1991. The
acquisition of the equipment and its associated leases is described in Note 3 to
the financial statements included in Item 14, herein. The Restated Agreement, as
amended, provides that the Partnership will terminate no later than December 31,
2002. 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 8 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's role,
among other things, is to (i) evaluate, select, negotiate, and consummate the
acquisition of equipment, (ii) manage the leasing, re-leasing, financing, and
refinancing of equipment, and (iii) arrange the resale of equipment. The Manager
is compensated for
3
<PAGE>
such services as provided for in the Restated Agreement, as amended, described
in Item 13 herein, and in Note 5 to the financial statements included in Item
14, herein.
The Partnership's investment in equipment is, and will continue to be,
subject to various risks, including physical deterioration, technological
obsolescence and defaults by lessees. A principal business risk of owning and
leasing equipment is the possibility that aggregate lease revenues and equipment
sale proceeds will be insufficient to provide an acceptable rate of return on
invested capital after payment of all debt service costs and operating expenses.
In addition, the leasing industry is very competitive. The Partnership is
subject to considerable competition when equipment is re-leased or sold at the
expiration of primary lease terms. The Partnership must compete with lease
programs offered directly by manufacturers and other equipment leasing
companies, including limited partnerships and trusts organized and managed
similarly to the Partnership, and including other EFG-sponsored partnerships and
trusts, which may seek to re-lease or sell equipment within their own portfolios
to the same customers as the Partnership. Many competitors have greater
financial resources and more experience than the Partnership, the General
Partner and the Manager. In addition, default by a lessee under a lease may
cause equipment to be returned to the Partnership at a time when the General
Partner or the Manager is unable to arrange for the re-lease or sale of such
equipment. This could result in the loss of anticipated revenue.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1998, 1997 and 1996 is
incorporated herein by reference to Note 2 to the financial statements in the
1998 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the
Securities and Exchange Commission.
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle
established Equis Corporation and GDE LP in December 1994 for the sole purpose
of acquiring the business of AFG.
In January 1996, the Company sold certain assets of AFG relating primarily
to the business of originating new leases, and the name "American Finance
Group," and its acronym to a third party. AFG changed its name to Equis
Financial Group Limited Partnership after the sale was concluded. Pursuant to
terms of the sale agreements, EFG specifically reserved the rights to continue
using the name American Finance Group and its acronym in connection with the
Partnership and the Other Investment Programs and to continue managing all
assets owned by the Partnership and the Other Investment Programs.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not applicable.
4
<PAGE>
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 8 to the financial statements in
the 1998 Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
5
<PAGE>
PART II
ITEM 5. MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER
MATTERS.
(a) Market Information
There is no public market for the resale of the Units and it is not
anticipated that a public market for resale of the Units will develop.
(b) Approximate Number of Security Holders
At December 31, 1998, there were 863 record holders in the Partnership.
(c) Dividend History and Restrictions
Pursuant to Article VI of the Restated Agreement, as amended, the amount of
cash distributions to be declared and paid to the Partners is determined on a
quarterly basis. Each quarter's distribution may vary in amount and is made 95%
to the Limited Partners and 5% to the General Partner. Generally, cash
distributions are paid within 30 days after the completion of each calendar
quarter.
Distributions in 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
GENERAL LIMITED
TOTAL PARTNER PARTNERS
------------ --------- ------------
<S> <C> <C> <C>
Total 1998 distributions................................................... $ 634,306 $ 31,716 $ 602,590
Total 1997 distributions................................................... 792,883 39,644 753,239
------------ --------- ------------
Total................................................................ $ 1,427,189 $ 71,360 $ 1,355,829
------------ --------- ------------
------------ --------- ------------
</TABLE>
Distributions payable were $158,577 at both December 31, 1998 and 1997.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket equipment upon lease expiration. Liquidity is
especially important as the Partnership matures and sells equipment, because the
remaining equipment base consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining assets. In particular,
the Partnership must contemplate the potential liquidity risks associated with
its investment in commercial jet 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 an
interest in three Stage 2 aircraft having scheduled lease expiration dates of
December 31, 1999. 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 737s, can approach $2 million. Although the Partnership is not required
to retro-fit its aircraft with hush-kits, insufficient liquidity could
jeopardize the re-marketing of these aircraft and risk their disposal at a
depressed value at a time when a better economic return would be realized
6
<PAGE>
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,
particularly in connection with the Partnership's aircraft interests.
Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit
described in Note 8 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 that the level of future quarterly cash distributions paid by the
Partnership will be increased above amounts paid in the fourth quarter of 1998.
In addition, the proposed settlement, if effected, will materially change the
future organizational structure and business interests of the Partnership, as
well as its cash distribution policies. See Note 8 to the accompanying financial
statements.
Cash distributions consist of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings.
"Distributable Cash From Operations" means the net cash provided by the
Partnership's normal operations after general expenses and current liabilities
of the Partnership are paid, reduced by any reserves for working capital and
contingent liabilities to be funded from such cash, to the extent deemed
reasonable by the General Partner, and increased by any portion of such reserves
deemed by the General Partner not to be required for Partnership operations and
reduced by all accrued and unpaid Equipment Management Fees and, after Payout,
further reduced by all accrued and unpaid Subordinated Remarketing Fees.
Distributable Cash From Operations does not include any Distributable Cash From
Sales or Refinancings.
"Distributable Cash From Sales or Refinancings" means Cash From Sales or
Refinancings as reduced by (i)(a) amounts realized from any loss or destruction
of equipment which the General Partner determines shall be reinvested in similar
equipment for the remainder of the original lease term of the lost or destroyed
equipment, or in isolated instances, in other equipment, if the General Partner
determines that investment of such proceeds will significantly improve the
diversity of the Partnership's equipment portfolio, and subject in either case
to satisfaction of all existing indebtedness secured by such equipment to the
extent deemed necessary or appropriate by the General Partner, or (b) the
proceeds from the sale of an interest in equipment pursuant to any agreement
governing a joint venture which the General Partner determines will be invested
in additional equipment or interests in equipment and which ultimately are so
reinvested and (ii) any accrued and unpaid Equipment Management Fees and, after
Payout, any accrued and unpaid Subordinated Remarketing Fees.
"Cash From Sales or Refinancings" means cash received by the Partnership
from sale or refinancing transactions, as reduced by (i)(a) all debts and
liabilities of the Partnership required to be paid as a result of sale or
refinancing transactions, whether or not then due and payable (including any
liabilities on an item of equipment sold which are not assumed by the buyer and
any remarketing fees required to be paid to persons not affiliated with the
General Partner, but not including any Subordinated Remarketing Fees whether or
not then due and payable) and (b) general expenses and current liabilities of
the Partnership (other than any portion of the Equipment Management Fee which is
required to be accrued and the Subordinated Remarketing Fee) and (c) 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
7
<PAGE>
Sales or Refinancings, regardless of the treatment of such payments by the
Partnership for tax or accounting purposes. If the Partnership receives purchase
money obligations in payment for equipment sold, which are secured by liens on
such equipment, the amount of such obligations shall not be included in Cash
From Sales or Refinancings until the obligations are fully satisfied.
"Payout" is defined as the first time when the aggregate amount of all
distributions to the Limited Partners of Distributable Cash From Operations and
Distributable Cash From Sales or Refinancings equals the aggregate amount of the
Limited Partners' original capital contributions plus a cumulative annual
distribution of 11% (compounded quarterly and calculated beginning with the last
day of the month of the Partnership's Closing Date) on their aggregate
unreturned capital contributions. For purposes of this definition, capital
contributions shall be deemed to have been returned only to the extent that
distributions of cash to the Limited Partners exceed the amount required to
satisfy the cumulative annual distribution of 11% (compounded quarterly) on the
Limited Partners' 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.
8
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP.
(a-b) Identification of Directors and Executive Officers
The Partnership has no Directors or Officers. As indicated in Item 1 of this
report, AFG Leasing VI Incorporated is the sole General Partner of the
Partnership. Under the Restated Agreement, as amended, the General Partner is
solely responsible for the operation of the Partnership's properties. The
Limited Partners have no right to participate in the control of the
Partnership's general operations, but they do have certain voting rights, as
described in Item 12 herein. The names, titles and ages of the Directors and
Executive Officers of the General Partner as of March 15, 1999 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS
OF THE GENERAL PARTNER (SEE ITEM 13)
<TABLE>
<CAPTION>
NAME TITLE AGE TERM
- ------------------------------------ --------------------------------------------- --- ---------------------
<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member of the 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 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 Limited Partnership ("AALP") and Old North Capital Limited
Partnership ("ONC"). Prior to co-founding
9
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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.
10
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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 officers or employees of the General Partner or its
Affiliates employees of the Partnership. The Partnership has not paid and does
not propose to pay any options, warrants or rights to the officers or employees
of the General Partner or its Affiliates.
(b) Compensation Pursuant to Plans
None.
(c) Other Compensation
Although the Partnership has no employees, as discussed in Item 11(a),
pursuant to Section 9.4(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 5 to the financial
statements included in Item 14, herein.
(d) Compensation of Directors
None.
(e) Termination of Employment and Change of Control Arrangement
There exists no remuneration plan or arrangement with the General Partner or
its Affiliates which results or may result from their resignation, retirement or
any other termination.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
By virtue of its organization as a limited partnership, the Partnership has
outstanding no securities possessing traditional voting rights. However, as
provided in Section 10.2(a) of the Restated Agreement, as amended (subject to
Sections 10.2(b) and 10.3), a majority interest of the Limited Partners has
voting rights with respect to:
1. Amendment of the Restated Agreement;
2. Termination of the Partnership;
11
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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).
As of March 1, 1999, the following person or group owns beneficially more
than 5% of the Partnership's 803,454.56 outstanding Units:
<TABLE>
<CAPTION>
NAME AND AMOUNT PERCENT
TITLE ADDRESS OF OF BENEFICIAL OF
OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS
- ---------------------- ------------------------------------------- ------------------ -----------
<S> <C> <C> <C>
Units Representing Old North Capital Limited Partnership
Limited Partnership 88 Broad Street 124,065.23 Units 15.44%
Interests Boston, MA 02110
</TABLE>
Messrs. Engle, MacDonald and Coyne have ownership interests in ONC. The
general partner of ONC is controlled by Gary Engle. See Items 10 and 13 of this
report.
The ownership and organization of EFG is described in Item 1 of this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The General Partner of the Partnership is AFG Leasing VI Incorporated, an
affiliate of EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years ended December 31,
1998, 1997 and 1996, which were paid or accrued by the Partnership to EFG or its
Affiliates, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Equipment management fees.................................................... $ 113,260 $ 166,417 $ 140,227
Administrative charges....................................................... 68,052 63,870 40,295
Reimbursable operating expenses due to third parties......................... 386,856 136,800 151,051
---------- ---------- ----------
Total.................................................................. $ 586,168 $ 367,087 $ 331,573
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG is compensated by an
amount equal to 2.23% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenue and 2% of gross full payout lease rental revenue
received by the Partnership. Both acquisition and management fees are subject to
certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
9.4(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, one of its affiliates or from
third-party sellers. The Partnership's acquisition cost was determined by the
method described in Note 2 to the financial statements included in Item 14,
herein.
During 1997, the Partnership and certain affiliated investment programs
sponsored by EFG exchanged their ownership interests in certain vessels for
aggregate consideration of $11,565,375. The Partnership's share of such
consideration was $1,203,062 consisting of common stock in Semele valued at
12
<PAGE>
$313,146, a note receivable from Semele of $459,729 and cash of $430,187. For
further discussion, see Note 4, "Investment Securities--Affiliate / Note
Receivable--Affiliate to the financial statements included in Item 14 herein and
Item 10.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 1998, the Partnership was owed $50,767 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
1999.
During 1996, the Partnership received payment in full from EFG of a note and
accrued interest thereon which was beneficially assigned to the Partnership in
1994 by a former affiliate of AFG as partial consideration for the exchange of
certain intermodal cargo containers.
Certain affiliates of the General Partner own Units in the Partnership as
follows:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
AFFILIATE UNITS OWNED OUTSTANDING UNITS
- ------------------------------------------------------------- ------------ -------------------
<S> <C> <C>
Atlantic Acquisition Limited Partnership..................... 16,536 2.06%
Old North Capital Limited Partnership........................ 124,065.23 15.44%
</TABLE>
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital
Limited Partnership ("ONC") are both Massachusetts Limited Partnerships formed
in 1995 and affiliates of EFG. The general partners of AALP and ONC are
controlled by Gary 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. 33-35148).
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 Gearbulk Shipowning Ltd. was filed in the Registrant's Annual Report on Form10-K
for the year ended December 31, 1995 as Exhibit 99 (c) and is incorporated herein by reference.
99(b) Lease agreement with General Motors Corporation was filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996 as Exhibit 99 (d) and is incorporated herein by reference.
99(c) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1996 as Exhibit 99 (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 Southwest Airlines, 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, 1996 as Exhibit 99 (g) and is incorporated herein by reference.
99(f) 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 (h) and is incorporated herein by reference.
99(g) 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(h) Lease agreement with The Helen Mining Company 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(i) Lease agreement with Reno Air, Inc. is filed in the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1998 and is included herein.
99(j) Lease agreement with Trans Ocean Corporation, Inc. is filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998 and is included herein.
</TABLE>
(b) Reports on Form 8-K
None.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
<TABLE>
<S> <C> <C>
AMERICAN INCOME FUND I-C,
a Massachusetts Limited Partnership
By: AFG Leasing VI Incorporated,
-----------------------------------------
a Massachusetts corporation and the
General Partner of the Registrant.
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ GEOFFREY A. MACDONALD By: /s/ GARY D. ENGLE
---------------------------------------- ----------------------------------------
Geoffrey A. MacDonald Gary D. Engle
CHAIRMAN AND A MEMBER OF THE EXECUTIVE PRESIDENT AND CHIEF EXECUTIVE OFFICER AND
COMMITTEE OF EFG AND PRESIDENT AND A A MEMBER OF THE EXECUTIVE COMMITTEE OF
DIRECTOR OF THE GENERAL PARTNER EFG (PRINCIPAL EXECUTIVE OFFICER)
Date: March 31, 1999 Date: March 31, 1999
By: /s/ GARY M. ROMANO By: /s/ MICHAEL J. BUTTERFIELD
---------------------------------------- ----------------------------------------
Gary M. Romano Michael J. Butterfield
EXECUTIVE VICE PRESIDENT AND CHIEF SENIOR VICE PRESIDENT, FINANCE AND
OPERATING OFFICER OF EFG AND CLERK OF THE TREASURER OF EFG AND TREASURER OF THE
GENERAL PARTNER (PRINCIPAL FINANCIAL GENERAL PARTNER (PRINCIPAL ACCOUNTING
OFFICER) OFFICER)
Date: March 31, 1999 Date: March 31, 1999
</TABLE>
16
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS 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..................... 3-9
FINANCIAL STATEMENTS:
Report of Independent Auditors............................................................................ 10
Statement of Financial Position at December 31, 1998 and 1997............................................. 11
Statement of Operations for the years ended December 31, 1998, 1997 and 1996.............................. 12
Statement of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996............ 13
Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................. 14
Notes to the Financial Statements......................................................................... 15-27
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed..................... 28
Statement of Cash and Distributable Cash From Operations, Sales and Refinancings.......................... 29
Schedule of Costs Reimbursed to the General Partner and its Affiliates as Required by Section 9.4 of the
Amended and Restated Agreement and Certificate of Limited Partnership................................... 30
</TABLE>
1
<PAGE>
SELECTED FINANCIAL DATA
The following data should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
financial statements.
For each of the five years in the period ended December 31, 1998:
<TABLE>
<CAPTION>
SUMMARY OF OPERATIONS 1998 1997 1996 1995 1994
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Lease revenue........................ $ 2,463,373 $ 4,068,381 $ 4,130,156 $ 4,648,578 $ 7,199,896
Net income (loss).................... $ 623,010 $ 1,574,944 $ 552,157 $ (779,251) $ (22,729)
Per Unit:
Net income (loss).................. $ 0.74 $ 1.86 $ 0.65 $ (0.92) $ (0.03)
Cash distributions................. $ 0.75 $ 0.94 $ 1.38 $ 2.00 $ 2.88
<CAPTION>
FINANCIAL POSITION
- -------------------------------------
<S> <C> <C> <C> <C> <C>
Total assets......................... $ 11,565,735 $ 12,142,868 $ 13,848,889 $ 12,687,300 $ 16,390,469
Total long-term obligations.......... $ 3,459,289 $ 4,401,753 $ 6,547,519 $ 4,574,713 $ 5,323,875
Partners' capital.................... $ 7,592,086 $ 7,488,561 $ 6,821,321 $ 7,432,059 $ 9,902,794
</TABLE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1997
COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Certain statements in this annual report of American Income Fund I-C, a
Massachusetts 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 8 to the accompanying
financial statements, the collection of all rents due under the Partnership's
lease agreements and the remarketing of the Partnership's equipment.
YEAR 2000 ISSUE
The Year 2000 Issue generally refers to the capacity of computer programming
logic to correctly identify the calendar year. Many companies utilize computer
programs or hardware with date sensitive software or embedded chips that could
interpret dates ending in "00" as the year 1900 rather than the year 2000. In
certain cases, such errors could result in system failures or miscalculations
that disrupt the operations of the affected businesses. The Partnership uses
information systems provided by EFG and has no information systems of its own.
EFG has adopted a plan to address the Year 2000 Issue that consists of four
phases: assessment, remediation, testing, and implementation and has elected to
utilize principally internal resources to perform all phases. EFG completed
substantially all of its Year 2000 project by December 31, 1998 at an aggregate
cost of less than $50,000 and at a di minimus cost to the Partnership. Remaining
items are expected to be minor and be completed by March 31, 1999. All costs
incurred in connection with EFG's Year 2000 project have been expensed as
incurred.
EFG's primary information software was coded by IBM at the point of original
design to use a four digit field to identify calendar year. All of the
Partnership's lease billings, cash receipts and equipment remarketing processes
are performed using this proprietary software. In addition, EFG has gathered
information about the Year 2000 readiness of significant vendors and third party
servicers and continues to monitor developments in this area. All of EFG's
peripheral computer technologies, such as its network operating system and
third-party software applications, including payroll, depreciation processing,
and electronic banking, have been evaluated for potential programming changes
and have required only minor modifications to function properly with respect to
dates in the year 2000 and thereafter. EFG understands that each of its and the
Partnership's significant vendors and third-party servicers are in the process,
or have completed the process, of making their systems Year 2000 compliant.
Substantially all parties queried have indicated that their systems would be
Year 2000 compliant by the end of 1998.
Presently, EFG is not aware of any outside customer with a Year 2000 Issue
that would have a material effect on the Partnership's results of operations,
liquidity, or financial position. The Partnership's equipment leases were
structured as triple net leases, meaning that the lessees are responsible for,
among other things, (i) maintaining and servicing all equipment during the lease
term, (ii) ensuring that all equipment functions properly and is returned in
good condition, normal wear and tear excepted, and (iii) insuring the assets
against casualty and other events of loss. Non-compliance with lease terms on
the part of a lessee, including failure to address Year 2000 Issues, could
result in lost revenues and impairment of residual values of the Partnership's
equipment assets under a worst-case scenario.
EFG believes that its Year 2000 compliance plan will be effective in
resolving all material Year 2000 risks in a timely manner and that the Year 2000
Issue will not pose significant operational problems with respect to its
computer systems or result in a system failure or disruption of its or the
Partnership's business operations. However, EFG has no means of ensuring that
all customers, vendors and third-party
3
<PAGE>
servicers will conform ultimately to Year 2000 standards. The effect of this
risk to the Partnership is not determinable.
OVERVIEW
The Partnership was organized in 1991 as a direct-participation equipment
leasing program to acquire a diversified portfolio of capital equipment subject
to lease agreements with third parties. The value of the Partnership's equipment
portfolio decreases over time due to depreciation resulting from age and usage
of the equipment, as well as technological changes and other market factors. In
addition, the Partnership does not replace equipment as it is sold; therefore,
its aggregate investment value in equipment declines from asset disposals
occurring in the normal course of business. Presently, the Partnership is a
Nominal Defendant in a Class Action Lawsuit, the outcome of which could
significantly alter the nature of the Partnership's organization and its future
business operations. See Note 8 to the accompanying financial statements.
Pursuant to the Restated Agreement, as amended, the Partnership is scheduled to
be dissolved by December 31, 2002.
RESULTS OF OPERATIONS
For the year ended December 31, 1998, the Partnership recognized lease
revenue of $2,463,373 compared to $4,068,381 and $4,130,156 for the years ended
December 31, 1997 and 1996, respectively. The decrease in lease revenue from
1996 to 1998 reflects the effects of lease term expirations and the sale or
exchange of equipment, including the vessel exchange in 1997 discussed below. In
1997 and 1996, the Partnership had recognized lease revenue from the vessel of
$534,796 and $543,909, respectively. Partially offsetting the decrease from 1996
to 1997 was the effects of an aircraft exchange which concluded in March 1996.
As a result of the aircraft exchange, the Partnership replaced its ownership
interest in a Boeing 747-SP aircraft leased to United Air Lines, Inc. (the
"United Aircraft"), having aggregate quarterly lease revenues of $213,302, with
interests in six other aircraft (three Boeing 737 aircraft leased by Southwest
Airlines, Inc., two McDonnell Douglas MD-82 aircraft leased by Finnair OY and
one McDonnell Douglas MD-87 aircraft leased by Reno Air, Inc.), having aggregate
quarterly lease revenues of $326,254. The Finnair Aircraft and the Reno Aircraft
were exchanged into the partnership on March 25, and March 26, 1996,
respectively. Accordingly, 1997 was the first year the Partnership recognized a
full year's revenue related to its interest in all six of these aircraft.
The Partnership's equipment portfolio includes certain assets in which the
Partnership holds a proportionate ownership interest. In such cases, the
remaining interests are owned by an affiliated equipment leasing program
sponsored by EFG. Proportionate equipment ownership enabled the Partnership to
further diversify its equipment portfolio at inception by participating in the
ownership of selected assets, thereby reducing the general levels of risk which
could have resulted from a concentration in any single equipment type, industry
or lessee. The Partnership and each affiliate individually report, in proportion
to their respective ownership interests, their respective shares of assets,
liabilities, revenues, and expenses associated with the equipment.
Interest income for the year ended December 31, 1998 was $195,264 compared
to $86,836 and $117,337 for the years ended December 31, 1997 and 1996,
respectively. Interest income is typically generated from temporary investment
of rental receipts and equipment sale proceeds in short-term instruments.
Interest income in 1998 and 1997 included $45,973 and $9,067, respectively,
earned on a note receivable from Semele Group, Inc. (formerly Banyan Strategic
Land Fund II) ("Semele") (see Note 4 to the financial statements herein). During
1996, interest income included $18,531 earned on a note receivable from EFG
resulting from the settlement with ICCU Containers, S.p.A. (see Note 5 to the
financial statements herein). In 1996, the Partnership also earned interest
income of $44,994 on cash held in a special-purpose escrow account in connection
with the aircraft exchange transactions. The amount of future interest income is
expected to fluctuate in relation to prevailing interest rates, the collection
of lease revenue, and the proceeds from equipment sales.
During the year ended December 31, 1998, the Partnership sold equipment
having a net book value of $15,660 to existing lessees and third parties. These
sales resulted in a net gain, for financial statement
4
<PAGE>
purposes, of $119,724 compared to a net gain in 1997 of $652,413 on equipment
having a net book value of $359,061 and a net gain in 1996 of $356,452 on
equipment having a net book value of $336,314.
In 1997, the Partnership also exchanged its interest in a vessel with an
original cost and net book value of $2,605,381 and $1,180,755, respectively. In
connection with this exchange, the Partnership realized proceeds of $802,431,
which resulted in a net loss, for financial statement purposes, of $378,324. In
addition, as this vessel was disposed of prior to the expiration of the related
lease term, the Partnership received prepayment of the remaining contracted rent
due under the vessel's lease agreement in the amount of $400,631. See below for
further discussion related to the vessel.
On April 30, 1997, the vessel partnerships, in which the Partnership and
certain affiliated investment programs are limited partners and through which
the Partnership and the affiliated investment programs shared economic interests
in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd
(formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged
their ownership interests in the Vessels for aggregate consideration of
$11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of
common stock in Semele, a purchase money note of $8,219,500 (the "Note") and
cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987
and has its common stock listed on NASDAQ (NASDAQ SmallCap Market effective
January 5, 1999). At the date of the exchange transaction, the common stock of
Semele had a net book value of approximately $1.50 per share and closing market
value of $1.00 per share. Semele has one principal real estate asset consisting
of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho
Malibu").
The exchange was organized through an intermediary company (Equis Exchange
LLC, 99% owned by Semele and 1% owned by EFG), which was established for the
sole purpose of facilitating the exchange. There were no fees paid to EFG by
Equis Exchange LLC or Semele or by any other party that otherwise would not have
been paid to EFG had the Partnership sold its beneficial interest in the Vessels
directly to the Lessee. The Lessee prepaid all of its remaining contracted
rental obligations and purchased the Vessels in two closings occurring on May 6,
1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery
of a $4,419,500 note from Semele (the "Semele Note").
As a result of the vessel exchange transaction and its original 33.85%
beneficial ownership interest in Dove Arrow, one of the three Vessels, the
Partnership received $430,187 in cash and became the beneficial owner of 208,764
shares of Semele common stock (valued at $313,146 ($1.50 per share) at the time
of the exchange transaction) and received a beneficial interest in the Semele
Note of $459,729. The Semele Note bears an annual interest rate of 10% and will
be amortized over three years with mandatory principal reductions, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
Rancho Malibu.
Cash equal to the amount of the Semele Note was held in escrow for the
benefit of Semele in a segregated account pending the outcome of certain
shareholder proposals. Specifically, as part of the exchange, Semele sought
consent ("Consent") from its shareholders to: (1) amend its certificate of
incorporation and by-laws; (2) make additional amendments to restrict the
acquisition of its common stock in a way to protect Semele's net operating loss
carry-forwards, and (3) engage EFG to provide administrative services to Semele,
which services EFG will provide at cost. On October 21, 1997, such Consent was
obtained from Semele's shareholders. The Consent also allowed for (i) the
election of a new Board of Directors nominated by EFG for terms of up to three
years and an increase in size of the Board to as many as nine members, provided
a majority of the Board shall consist of members independent of Semele, EFG or
any affiliate; and (ii) an amendment extending Semele's life to perpetual and
changing its name from Banyan Strategic Land Fund II. Contemporaneously with the
Consent being obtained, Semele declared a $0.20 per share dividend to be paid on
all shares, including those beneficially owned by the Partnership. A dividend of
$41,752 was paid to the Partnership on November 17, 1997. This dividend
represented a return of equity to the Partnership, which proportionately reduced
the Partnership's investment in Semele. Subsequent to the exchange transaction,
Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the
Board of Directors and appointed Chief Executive Officer of Semele and James A.
5
<PAGE>
Coyne, Executive Vice President of EFG was appointed Semele's President and
Chief Operating Officer, and elected to the Board of Directors.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Partnership, as such transactions will be
dependent upon the condition and type of equipment being sold and its
marketability at the time of sale. In addition, the amount of gain or loss
reported for financial statement purposes is partly a function of the amount of
accumulated depreciation associated with the equipment being sold.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time. EFG attempts to monitor these changes in order to identify
opportunities which may be advantageous to the Partnership and which will
maximize total cash returns for each asset.
The total economic value realized upon final disposition of each asset is
comprised of all primary lease term revenue generated from that asset, together
with its residual value. The latter consists of cash proceeds realized upon the
asset's sale in addition to all other cash receipts obtained from renting the
asset on a re-lease, renewal or month-to-month basis. The Partnership classifies
such residual rental payments as lease revenue. Consequently, the amount of gain
or loss reported in the financial statements is not necessarily indicative of
the total residual value the Partnership achieved from leasing the equipment.
Depreciation expense was $1,083,372, $2,099,722 and $3,163,960 for the years
ended December 31, 1998, 1997 and 1996, respectively. For financial reporting
purposes, to the extent that an asset is held on primary lease term, the
Partnership depreciates the difference between (i) the cost of the asset and
(ii) the estimated residual value of the asset at the date of primary lease
expiration on a straight-line basis over such term. For the purposes of this
policy, estimated residual values represent estimates of equipment values at the
date of primary lease expiration. To the extent that equipment is held beyond
its primary lease term, the Partnership continues to depreciate the remaining
net book value of the asset on a straight-line basis over the asset's remaining
economic life.
Interest expense was $318,530 or 12.9% of lease revenue in 1998, $387,553 or
9.5% of lease revenue in 1997 and $556,255 or 13.5% of lease revenue in 1996.
Interest expense in future years is expected to decline in amount and as a
percentage of lease revenue as the principal balance of notes payable is reduced
through the application of rent receipts to outstanding debt
Management fees were approximately 4.6% of lease revenue for the year ended
December 31, 1998, compared to 4.1% and 3.4% of lease revenue during the years
ended December 31, 1997 and 1996, respectively. Management fees are based on 5%
of gross lease revenue generated by operating leases and 2% of gross lease
revenue generated by full payout leases.
Write-down of investment securities-affiliate was $185,281 for the year
ended December 31, 1998. The General Partner determined that the decline in
market value of the Semele common stock was other-than-temporary at December 31,
1998. As a result, the Partnership wrote down the cost of the Semele common
stock from $15 per share to $4.125 per share (the quoted price of Semele stock
on NASDAQ at December 31, 1998).
Operating expenses were $454,908, $200,670 and $191,346 for the years ended
December 31, 1998, 1997 and 1996, respectively. During the year ended December
31, 1998, the Partnership incurred or accrued approximately $298,200 for certain
legal and administrative expenses related to the Class Action Lawsuit described
in Note 8 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 printing, distribution and remarketing
expenses. In certain cases, equipment storage or repairs and maintenance costs
may be incurred in connection with equipment being remarketed.
LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS
The Partnership by its nature is a limited life entity. As an equipment
leasing program, the Partnership's principal operating activities derive from
asset rental transactions. Accordingly, the Partnership's
6
<PAGE>
principal source of cash from operations is 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 $2,165,077, $3,241,188
and $3,646,728 for the years ended 1998, 1997 and 1996 respectively. Future
renewal, re-lease and equipment sale activities will cause a decline in the
Partnership's lease revenue and corresponding sources of operating cash.
Overall, expenses associated with rental activities, such as management fees,
and net cash flow from operating activities will also continue to decline as the
Partnership experiences a higher frequency of remarketing events.
Cash expended for equipment acquisitions and cash realized from asset
disposal transactions are reported under investing activities on the
accompanying Statement of Cash Flows. During 1998, the Partnership realized net
proceeds of $135,384, compared to $1,041,030 and $692,766 in 1997 and 1996,
respectively. Future inflows of cash from asset disposals will vary in timing
and amount and will be influenced by many factors including, but not limited to,
the frequency and timing of lease expirations, the type of equipment being sold,
its condition and age, and future market conditions. In 1996, the Partnership
completed the replacement of the United Aircraft with the acquisitions of an
11.87% ownership interest in the Finnair Aircraft and a 21.31% ownership
interest in the Reno Aircraft at a total cost to the Partnership of $3,322,913
and $2,894,892, respectively. To acquire the ownership interest in the Finnair
Aircraft, the Partnership paid $1,110,980 in cash and obtained financing of
$2,211,933 from a third-party lender. To acquire the ownership interest in the
Reno Aircraft, the Partnership paid $494,780 in cash and obtained financing of
$2,400,112 from a third-party lender. The Partnership utilized $1,562,463
(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
$43,297 was expended from the Partnership's cash reserves. The remaining
ownership interests of 88.13% and 78.69% of the Finnair Aircraft and Reno
Aircraft, respectively, are held by affiliated equipment leasing programs
sponsored by EFG. There were no equipment acquisitions in 1998 or 1997.
At December 31, 1998, the Partnership was due aggregate future minimum lease
payments of $4,617,590 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 $3,459,289 (see Note 6 to the financial statements).
At the expiration of the individual primary and renewal lease terms underlying
the Partnership's future minimum lease payments, the Partnership will sell the
equipment or enter re-lease or renewal agreements when considered advantageous
by the General Partner and EFG. Such future remarketing activities will result
in the realization of additional cash inflows in the form of equipment sale
proceeds or rents from renewals and re-leases, the timing and extent of which
cannot be predicted with certainty. This is because the timing and extent of
remarketing events often is dependent upon the needs and interests of the
existing lessees. Some lessees may choose to renew their lease contracts, while
others may elect to return the equipment. In the latter instances, the equipment
could be re-leased to another lessee or sold to a third party. Accordingly, as
the terms of the currently existing contractual lease agreements expire, the
cash flows of the Partnership will become less predictable. In addition, the
Partnership will have cash needs to satisfy interest on indebtedness and to pay
management fees and operating expenses.
The Partnership obtained long-term financing in connection with certain
equipment leases. The repayments of principal related to such indebtedness are
reported as a component of financing activities. Each note payable is recourse
only to the specific equipment financed and to the minimum rental payments
contracted to be received during the debt amortization period (which period
generally coincides with the lease rental term). As rental payments are
collected, a portion or all of the rental payment is used to repay the
associated indebtedness. In addition, during 1997 the Partnership utilized a
portion of its available cash to repay certain of its debt obligations. In
future years, the amount of cash used to repay debt obligations is scheduled to
decline as the principal balance of notes payable is reduced through the
collection and application of rents. In addition, the Partnership has balloon
payment obligations at the expiration of the respective primary lease terms
related to aircraft leased to Finnair OY and the Reno Air, Inc. of $1,127,840
and $679,276, respectively.
7
<PAGE>
As a result of the vessel exchange transaction (see Results of Operations)
the Partnership became the beneficial owner of 208,764 shares of Semele common
stock valued at $313,146 ($1.50 per share) at the date of the transaction. This
investment was reduced by a dividend of $41,752 received in November 1997
representing a return of equity to the Partnership. The Partnership also
received a beneficial interest in the Semele Note of $459,729 in connection with
the vessel exchange.
On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed
by a 30-for-1 forward stock split resulting in a reduction of the number of
shares of Semele common stock owned by the Partnership to 20,876 shares. In
accordance with the Financial Accounting Standard Board's Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are required to be carried at
fair value. During the year ended December 31, 1998, the Partnership decreased
the carrying value of its investment in Semele common stock to $4.125 per share
(the quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting
in an unrealized loss in 1998 of $70,460. In 1997, the Partnership recorded an
unrealized loss of $114,821 related to its Semele common stock. These losses
were reported as components of comprehensive income, included in partners'
capital. At December 31, 1998, the General Partner determined that the decline
in market value of the Semele common stock was other-than-temporary. As a
result, the Partnership wrote down the cost of the Semele common stock to $4.125
per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998)
for a total realized loss of $185,281 in 1998.
There are no formal restrictions under the Restated Agreement, as amended,
that materially limit the Partnership's ability to pay cash distributions,
except that the General Partner may suspend or limit cash distributions to
ensure that the Partnership maintains sufficient working capital reserves to
cover, among other things, operating costs and potential expenditures, such as
refurbishment costs to remarket equipment upon lease expiration. Liquidity is
especially important as the Partnership matures and sells equipment, because the
remaining equipment base consists of fewer revenue-producing assets that are
available to cover prospective cash disbursements. Insufficient liquidity could
inhibit the Partnership's ability to sustain its operations or maximize the
realization of proceeds from remarketing its remaining assets. In particular,
the Partnership must contemplate the potential liquidity risks associated with
its investment in commercial jet 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 an
interest in three Stage 2 aircraft having scheduled lease expiration dates of
December 31, 1999. 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 737s, can approach $2 million. Although the Partnership is not required
to retro-fit its aircraft with hush-kits, insufficient liquidity could
jeopardize the re-marketing 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, particularly in
connection with the Partnership's aircraft interests.
Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit
described in Note 8 to the accompanying financial statements. A preliminary
settlement agreement will allow the Partnership to
8
<PAGE>
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 that the level of future quarterly cash
distributions paid by the Partnership will be increased above amounts paid in
the fourth quarter of 1998. In addition, the proposed settlement, if effected,
will materially change the future organizational structure and business
interests of the Partnership, as well as its cash distribution policies. See
Note 8 to the accompanying financial statements.
Cash distributions to the General and Limited Partners are declared and
generally paid within fifteen days following the end of each calendar quarter.
The payment of such distributions is presented as a component of financing
activities. For the year ended December 31, 1998, the Partnership declared total
cash distributions of $634,306. In accordance with the Restated Agreement, as
amended, the Limited Partners were allocated 95% of these distributions, or
$602,590, and the General Partner was allocated 5%, or $31,716. The fourth
quarter 1998 cash distribution was paid on January 15, 1999.
Cash distributions paid to the Limited Partners consist of both a return of
and a return on capital. Cash distributions do not represent and are not
indicative of yield on investment. Actual yield on investment cannot be
determined with any certainty until conclusion of the Partnership and will be
dependent upon the collection of all future contracted rents, the generation of
renewal and/or re-lease rents, and the residual value realized for each asset at
its disposal date.
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 7 to the financial statements). For instance, selling commissions,
organization and offering costs pertaining to syndication of the Partnership's
limited partnership units are not deductible for federal income tax purposes,
but are recorded as a reduction of partners' capital for financial reporting
purposes. Therefore, such differences are permanent differences between capital
accounts for financial reporting and federal income tax purposes. Other
differences between the bases of capital accounts for federal income tax and
financial reporting purposes occur due to timing differences. Such items consist
of the cumulative difference between income or loss for tax purposes and
financial statement income or loss, the difference between distributions
(declared vs. paid) for income tax and financial reporting purposes, and the
treatment of unrealized gains or losses on investment securities, if any, for
book and tax purposes. The principal component of the cumulative difference
between financial statement income or loss and tax income or loss results from
different depreciation policies for book and tax purposes.
For financial reporting purposes, the General Partner has accumulated a
capital deficit at December 31, 1998. This is the result of aggregate cash
distributions to the General Partner being in excess of its capital contribution
of $1,000 and its allocation of financial statement net income or loss.
Ultimately, the existence of a capital deficit for the General Partner for
financial reporting purposes is not indicative of any further capital
obligations to the Partnership by the General Partner. The Amended and Restated
Agreement and Certificate of Limited Partnership requires that upon the
dissolution of the Partnership, the General Partner will be required to
contribute to the Partnership an amount equal to any negative balance which may
exist in the General Partner's tax capital account. At December 31, 1998, the
General Partner had a positive tax capital account balance.
The future liquidity of the Partnership will be influenced by, among other
factors, prospective market conditions, technological changes, the ability of
EFG to manage and remarket the assets, and many other events and circumstances,
that could enhance or detract from individual asset yields and the collective
performance of the Partnership's equipment portfolio. However, the outcome of
the Class Action Lawsuit described in Note 8 to the accompanying financial
statements will be the principal factor in determining the future of the
Partnership's operations
9
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Partners of American Income Fund I-C,
a Massachusetts Limited Partnership:
We have audited the accompanying statements of financial position of
American Income Fund I-C, a Massachusetts Limited Partnership, as of December
31, 1998 and 1997, and the related statements of operations, changes in
partners' capital, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of American Income Fund I-C, a
Massachusetts 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
10
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents.......................................................... $ 3,243,631 $ 2,519,940
Rents receivable................................................................... 361,283 246,877
Accounts receivable--affiliate..................................................... 50,767 296,505
Note receivable--affiliate......................................................... 459,729 459,729
Investment securities--affiliate................................................... 86,113 156,573
Equipment at cost, net of accumulated depreciation of $8,610,088 and $8,365,735 at
December 31, 1998 and 1997, respectively......................................... 7,364,212 8,463,244
------------- -------------
Total assets................................................................... $ 11,565,735 $ 12,142,868
------------- -------------
------------- -------------
LIABILITIES AND PARTNERS' CAPITAL
Notes payable...................................................................... $ 3,459,289 $ 4,401,753
Accrued interest................................................................... 26,620 30,468
Accrued liabilities................................................................ 259,500 9,200
Accrued liabilities--affiliate..................................................... 14,751 28,925
Deferred rental income............................................................. 54,912 25,384
Cash distributions payable to partners............................................. 158,577 158,577
------------- -------------
Total liabilities.............................................................. 3,973,649 4,654,307
------------- -------------
Partners' capital (deficit):
General Partner.................................................................. (502,935) (508,111)
Limited Partnership Interests (803,454.56 Units; initial purchase price of $25
each).......................................................................... 8,095,021 7,996,672
------------- -------------
Total partners' capital........................................................ 7,592,086 7,488,561
------------- -------------
Total liabilities and partners' capital........................................ $ 11,565,735 $ 12,142,868
------------- -------------
------------- -------------
</TABLE>
11
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS 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......................................................... $ 2,463,373 $ 4,068,381 $ 4,130,156
Interest income....................................................... 149,291 77,769 98,806
Interest income--affiliate............................................ 45,973 9,067 18,531
Gain on sale of equipment............................................. 119,724 652,413 356,452
Loss on exchange of equipment......................................... -- (378,324) --
------------ ------------ ------------
Total income........................................................ 2,778,361 4,429,306 4,603,945
------------ ------------ ------------
Expenses:
Depreciation.......................................................... 1,083,372 2,099,722 3,163,960
Interest expense...................................................... 318,530 387,553 556,255
Equipment management fees--affiliate.................................. 113,260 166,417 140,227
Write-down of investment securities--affiliate........................ 185,281 -- --
Operating expenses--affiliate......................................... 454,908 200,670 191,346
------------ ------------ ------------
Total expenses...................................................... 2,155,351 2,854,362 4,051,788
------------ ------------ ------------
Net income.............................................................. $ 623,010 $ 1,574,944 $ 552,157
------------ ------------ ------------
------------ ------------ ------------
Net income per limited partnership unit................................. $ 0.74 $ 1.86 $ 0.65
------------ ------------ ------------
------------ ------------ ------------
Cash distributions declared per limited partnership unit................ $ 0.75 $ 0.94 $ 1.38
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
12
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
GENERAL LIMITED PARTNERS
PARTNER --------------------------
AMOUNT UNITS AMOUNT TOTAL
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.............................. $ (510,936) 803,454.56 $ 7,942,995 $ 7,432,059
Net income--1996........................................ 27,608 -- 524,549 552,157
----------- ------------ ------------ ------------
Comprehensive income...................................... 27,608 -- 524,549 552,157
----------- ------------ ------------ ------------
Cash distributions declared............................... (58,145) -- (1,104,750) (1,162,895)
----------- ------------ ------------ ------------
Balance at December 31, 1996.............................. (541,473) 803,454.56 7,362,794 6,821,321
Net income--1997........................................ 78,747 -- 1,496,197 1,574,944
Unrealized loss on investment securities................ (5,741) -- (109,080) (114,821)
----------- ------------ ------------ ------------
Comprehensive income...................................... 73,006 -- 1,387,117 1,460,123
----------- ------------ ------------ ------------
Cash distributions declared............................... (39,644) -- (753,239) (792,883)
----------- ------------ ------------ ------------
Balance at December 31, 1997.............................. (508,111) 803,454.56 7,996,672 7,488,561
Net income--1998........................................ 31,151 -- 591,859 623,010
Unrealized loss on investment securities................ (3,523) -- (66,937) (70,460)
Less: reclassification adjustment for write-down of
investment securities................................. 9,264 -- 176,017 185,281
----------- ------------ ------------ ------------
Comprehensive income...................................... 36,892 -- 700,939 737,831
----------- ------------ ------------ ------------
Cash distributions declared............................... (31,716) -- (602,590) (634,306)
----------- ------------ ------------ ------------
Balance at December 31, 1998.............................. $ (502,935) 803,454.56 $ 8,095,021 $ 7,592,086
----------- ------------ ------------ ------------
----------- ------------ ------------ ------------
</TABLE>
13
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income........................................................... $ 623,010 $ 1,574,944 $ 552,157
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation..................................................... 1,083,372 2,099,722 3,163,960
Gain on sale of equipment........................................ (119,724) (652,413) (356,452)
Write-down of investment securities--affiliate................... 185,281 -- --
Loss on exchange of equipment.................................... -- 378,324 --
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable................................................. (114,406) 222,213 247,567
Accounts receivable--affiliate................................... 245,738 (206,966) (75,887)
Note receivable--affiliate....................................... -- -- 210,144
Increase (decrease) in:
Accrued interest................................................. (3,848) (49,284) 37,243
Accrued liabilities.............................................. 250,300 (13,550) (134,252)
Accrued liabilities--affiliate................................... (14,174) (4,142) 9,723
Deferred rental income........................................... 29,528 (107,660) (7,475)
------------- ------------- -------------
Net cash from operating activities............................. 2,165,077 3,241,188 3,646,728
------------- ------------- -------------
Cash flows from (used in) investing activities:
Dividend received.................................................. -- 41,752 --
Purchase of equipment.............................................. -- -- (43,297)
Proceeds from equipment sales...................................... 135,384 1,041,030 692,766
------------- ------------- -------------
Net cash from investing activities............................. 135,384 1,082,782 649,469
------------- ------------- -------------
Cash flows used in financing activities:
Principal payments--notes payable.................................. (942,464) (2,145,766) (2,639,239)
Distributions paid................................................. (634,306) (845,742) (1,268,613)
------------- ------------- -------------
Net cash used in financing activities.......................... (1,576,770) (2,991,508) (3,907,852)
------------- ------------- -------------
Net increase in cash and cash equivalents............................ 723,691 1,332,462 388,345
Cash and cash equivalents at beginning of year....................... 2,519,940 1,187,478 799,133
------------- ------------- -------------
Cash and cash equivalents at end of year............................. $ 3,243,631 $ 2,519,940 $ 1,187,478
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the year for interest............................... $ 322,378 $ 436,837 $ 519,012
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Supplemental disclosure of non-cash investing and financing activities:
See Note 4 to the financial statements regarding the reduction of the
Partnership's carrying value of its investment securities--affiliate. Also, see
Note 3 to the financial statements.
14
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1--ORGANIZATION AND PARTNERSHIP MATTERS
American Income Fund I-C, a Massachusetts Limited Partnership (the
"Partnership") was organized as a limited partnership under the Massachusetts
Uniform Limited Partnership Act (the "Uniform Act") on March 1, 1991, for the
purpose of acquiring and leasing to third parties a diversified portfolio of
capital equipment. Partners' capital initially consisted of contributions of
$1,000 from the General Partner (AFG Leasing VI Incorporated) and $100 from the
Initial Limited Partner (AFG Assignor Corporation). On May 31, 1991, the
Partnership issued 803,454.56 units of limited partnership interests (the
"Units") to 909 investors. Included in the 803,454.56 units were 7,293.56 bonus
units. The Partnership's General Partner, AFG Leasing VI Incorporated, is a
Massachusetts corporation formed in 1990 and an affiliate of 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 and
Certificate of Limited Partnership (the "Restated Agreement, as amended").
Significant operations commenced on May 31, 1991 when the Partnership made
its initial equipment acquisition. Pursuant to the Restated Agreement, as
amended, Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings will be allocated 95% to the Limited Partners and 5% 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 5).
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Manager or Advisor to the Partnership and several other
direct-participation equipment leasing programs sponsored or co-sponsored by EFG
(the "Other Investment Programs"). The Company arranges to broker or originate
equipment leases, acts as remarketing agent and asset manager, and provides
leasing support services, such as billing, collecting, and asset tracking.
The general partner of EFG, with a 1% controlling interest, is Equis
Corporation, a Massachusetts corporation owned and controlled entirely by Gary
D. Engle, its President, Chief Executive Officer and sole Director. Equis
Corporation also owns a controlling 1% general partner interest in EFG's 99%
limited partner, GDE Acquisition Limited Partnership ("GDE LP"). 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.
15
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
As of January 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
the display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Partnership's net income or partners'
capital. Statement 130 requires unrealized gains or losses on the Partnership's
available-for-sale securities, which prior to adoption were reported separately
in partners' capital to be included in comprehensive income. At December 31,
1997, the cumulative amount of other comprehensive losses was $114,821.
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 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 $3,133,600 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, quarterly or semi-annually and
no significant amounts are calculated on factors other than the passage of time.
The leases are accounted for as operating leases and are noncancellable. Rents
received prior to their due dates are deferred. Future minimum rents of
$4,617,590 are due as follows:
<TABLE>
<C> <S> <C>
For the year ending December 31, 1999 ...................................... $1,727,568
2000 ...................................... 1,058,857
2001 ...................................... 824,871
2002 ...................................... 761,356
2003 ...................................... 244,938
----------
Total ...................................... $4,617,590
----------
----------
</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 $700,000 to
the Partnership.
16
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
Finnair OY................................................................ $ 511,496 $ 511,496 $ --
Southwest Airlines, Inc................................................... $ 413,280 $ 413,280 $ 413,280
Reno Air, Inc............................................................. $ 375,103 $ -- $ --
General Motors Corporation................................................ $ 329,924 $ -- $ 516,616
Trans Ocean Corporation................................................... $ 279,106 $ -- $ --
Gearbulk Shipowning Ltd................................................... $ -- $ 534,796 $ 543,909
The Helen Mining Company.................................................. $ -- $ 430,000 $ --
</TABLE>
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
EQUIPMENT ON LEASE
All equipment was acquired from EFG, one of its Affiliates or from
third-party sellers. Equipment Cost means the actual cost paid by the
Partnership to acquire the equipment, including acquisition fees. Where
equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the
actual price paid for the equipment by EFG or the Affiliate plus all actual
costs incurred by EFG or the Affiliate while carrying the equipment, including
all liens and encumbrances, less the amount of all primary term rents earned by
EFG or the Affiliate prior to selling the equipment. Where the seller of the
equipment was a third party, Equipment Cost reflects the seller's invoice price.
DEPRECIATION
The Partnership's depreciation policy is intended to allocate the cost of
equipment over the period during which it produces economic benefit. The
principal period of economic benefit is considered to correspond to each asset's
primary lease term, which term generally represents the period of greatest
revenue potential for each asset. Accordingly, to the extent that an asset is
held on primary lease term, the Partnership depreciates the difference between
(i) the cost of the asset and (ii) the estimated residual value of the asset on
a straight-line basis over such term. For purposes of this policy, estimated
residual values represent estimates of equipment values at the date of primary
lease expiration. To the extent that an asset is held beyond its primary lease
term, the Partnership continues to depreciate the remaining net book value of
the asset on a straight-line basis over the asset's remaining economic life.
Periodically, the General Partner evaluates the net carrying value of equipment
to determine whether it exceeds estimated net realizable value. Adjustments to
reduce the net carrying value of equipment are recorded in those instances where
estimated net realizable value is considered to be less than net carrying value.
To the extent that such adjustments have been recorded, they are reflected
separately on the accompanying Statement of Operations as Write-Down of
Equipment.
The ultimate realization of residual value for any type of equipment is
dependent upon many factors, including EFG's ability to sell and re-lease
equipment. Changing market conditions, industry trends,
17
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
technological advances, and many other events can converge to enhance or detract
from asset values at any given time.
INVESTMENT SECURITIES--AFFILIATE
The Partnership's investment in Semele Group, Inc. is considered to be
available-for-sale and as such is carried at fair value with unrealized gains
and losses reported as a component of comprehensive income (loss) included in
Partner's Capital. Other-than-temporary declines in market value are recorded as
write down of investment in the Statement of Operations (see Note 4).
ACCRUED LIABILITIES--AFFILIATE
Unpaid operating expenses paid by EFG on behalf of the Partnership and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities--Affiliate (see Note 5).
ALLOCATION OF PROFITS AND LOSSES
For financial statement purposes, net income or loss is allocated to each
Partner according to their respective ownership percentages (95% to the Limited
Partners and 5% to the General Partner). See Note 7 for allocation of income or
loss for income tax purposes.
NET INCOME (LOSS) AND CASH DISTRIBUTIONS PER UNIT
Net income (loss) and cash distributions per Unit are based on 803,454.56
Units outstanding during each of the three years in the period ended December
31, 1998 and computed after allocation of the General Partner's 5% share of net
income (loss) and cash distributions.
PROVISION FOR INCOME TAXES
No provision or benefit from income taxes is included in the accompanying
financial statements. The Partners are responsible for reporting their
proportionate shares of the Partnership's taxable income or loss and other tax
attributes on their tax returns.
NOTE 3--EQUIPMENT
The following is a summary of equipment owned by the Partnership at December
31, 1998. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 1998 under contracted lease terms and is
presented as a range when more than one lease agreement is contained in the
stated equipment category. A Remaining Lease Term equal to zero reflects
equipment
18
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
either held for sale or re-lease or being leased on a month-to-month basis. In
the opinion of EFG, the acquisition cost of the equipment did not exceed its
fair market value.
<TABLE>
<CAPTION>
REMAINING
LEASE TERM EQUIPMENT
EQUIPMENT TYPE (MONTHS) AT COST LOCATION
- -------------------------------------------- ------------- ------------- ---------------------------------------
<S> <C> <C> <C>
Aircraft.................................... 13-48 $ 8,318,862 NV/TX
Materials handling.......................... 0-20 3,221,423 CA/CO/GA/IA/IL/MI/MN/MO/NY
OH/OR/PA/TX/Foreign
Trailers/intermodal containers.............. 48-54 1,977,006 CA/OK
Tractors and heavy duty trucks.............. 0 1,210,968 CA/IL/IN/MI/OR
Retail store fixtures....................... 3 517,488 FL
Construction and mining..................... 0 426,263 IL
Motor vehicles.............................. 0 215,603 MI
Communications.............................. 0 51,469 TX
Manufacturing............................... 0 35,218 MI
-------------
Total equipment cost 15,974,300
Accumulated depreciation (8,610,088)
-------------
Equipment, net of accumulated depreciation $ 7,364,212
-------------
-------------
</TABLE>
In 1996, the Partnership completed the replacement of a Boeing 747-SP
aircraft with the acquisitions of an 11.87% ownership interest in the Finnair
Aircraft and a 21.31% ownership interest in the Reno Aircraft at a total cost to
the Partnership of $3,322,913 and $2,894,892, respectively. To acquire the
ownership interest in the Finnair Aircraft, the Partnership paid $1,110,980 in
cash and obtained financing of $2,211,933 from a third-party lender. To acquire
the ownership interest in the Reno Aircraft, the Partnership paid $494,780 in
cash and obtained financing of $2,400,112 from a third-party lender. The
Partnership utilized $1,562,463 (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 $43,297 was expended from the Partnership's
cash reserves. The remaining ownership interests of 88.13% and 78.69% of the
Finnair Aircraft and Reno Aircraft, respectively, are held by affiliated
equipment leasing programs sponsored by EFG.
In certain cases, the cost of the Partnership's equipment represents a
proportionate ownership interest. The remaining interests are owned by EFG or an
affiliated equipment leasing program sponsored by EFG. The Partnership and each
affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment. Proportionate equipment ownership
enabled the Partnership to further diversify its equipment portfolio at
inception by participating in the ownership of selected assets, thereby reducing
the general levels of risk which could have resulted from a concentration in any
single equipment type, industry or lessee. At December 31, 1998, the
Partnership's equipment portfolio included equipment having a proportionate
original cost of $10,813,352, representing approximately 68% of total equipment
cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of $8,318,862 and a net
book value of $6,419,779 at December 31, 1998 (see Note 6).
19
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
Generally, the costs associated with maintaining, insuring and operating the
Partnership's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Partnership.
As equipment is sold to third parties, or otherwise disposed of, the
Partnership recognizes a gain or loss equal to the difference between the net
book value of the equipment at the time of sale or disposition and the proceeds
realized upon sale or disposition. The ultimate realization of estimated
residual value in the equipment is dependent upon, among other things, EFG's
ability to maximize proceeds from selling or re-leasing the equipment upon the
expiration of the primary lease terms. The summary above includes equipment held
for sale or re-lease with a cost of approximately $70,000, which had been fully
depreciated at December 31, 1998. The General Partner is actively seeking the
sale or re-lease of all such equipment. In addition, the summary above also
includes equipment being leased on a month-to-month basis.
NOTE 4--INVESTMENT SECURITIES--AFFILIATE/NOTE RECEIVABLE--AFFILIATE
On April 30, 1997, the vessel partnerships, in which the Partnership and
certain affiliated investment programs are limited partners and through which
the Partnership and the affiliated investment programs shared economic interests
in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd
(formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged
their ownership interests in the Vessels for aggregate consideration of
$11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of
common stock in Semele Group, Inc. ("Semele") (formerly Banyan Strategic Land
Fund II), a purchase money note of $8,219,500 (the "Note") and cash of $365,375.
Semele is a Delaware corporation organized on April 14, 1987 and has its common
stock listed on NASDAQ (NASDAQ SmallCap Market effective January 5, 1999). At
the date of the exchange transaction, the common stock of Semele had a net book
value of approximately $1.50 per share and closing market value of $1.00 per
share. Semele has one principal real estate asset consisting of an undeveloped
274 acre parcel of land near Malibu, California ("Rancho Malibu").
The exchange was organized through an intermediary company (Equis Exchange
LLC, 99% owned by Semele and 1% owned by EFG), which was established for the
sole purpose of facilitating the exchange. There were no fees paid to EFG by
Equis Exchange LLC or Semele or by any other party that otherwise would not have
been paid to EFG had the Partnership sold its beneficial interest in the Vessels
directly to the Lessee. The Lessee prepaid all of its remaining contracted
rental obligations and purchased the Vessels in two closings occurring on May 6,
1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery
of a $4,419,500 note from Semele (the "Semele Note").
As a result of the exchange transaction and its original 33.85% beneficial
ownership interest in Dove Arrow, one of the three Vessels, the Partnership
received $430,187 in cash and became the beneficial owner of 208,764 shares of
Semele common stock (valued at $313,146 ($1.50 per share) at the time of the
exchange transaction) and received a beneficial interest in the Semele Note of
$459,729. The Semele Note bears an annual interest rate of 10% and will be
amortized over three years with mandatory principal reductions, if and to the
extent that net proceeds are received by Semele from the sale or refinancing of
Rancho Malibu. The Partnership recognized interest income of $45,973 and $9,073
related to the Semele Note during the years 1998 and 1997, respectively. The
Partnership's interest in the vessel had an original cost and net book value of
$2,605,381 and $1,180,755, respectively. The proceeds realized by the
Partnership of $802,431 resulted in a net loss, for financial statement
purposes, of $378,324. In addition, as
20
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
this vessel was disposed of prior to the expiration of the related lease term,
the Partnership received a prepayment of the remaining contracted rent due under
the vessel's lease agreement of $400,631.
Cash equal to the amount of the Semele Note was held in escrow for the
benefit of Semele in a segregated account pending the outcome of certain
shareholder proposals. Specifically, as part of the exchange, Semele sought
consent ("Consent") from its shareholders to: (1) amend its certificate of
incorporation and by-laws; (2) make additional amendments to restrict the
acquisition of its common stock in a way to protect Semele's net operating loss
carry-forwards, and (3) engage EFG to provide administrative services to Semele,
which services EFG will provide at cost. On October 21, 1997, such Consent was
obtained from Semele's shareholders. The Consent also allowed for (i) the
election of a new Board of Directors nominated by EFG for terms of up to three
years and an increase in size of the Board to as many as nine members, provided
a majority of the Board shall consist of members independent of Semele, EFG or
any affiliate; and (ii) an amendment extending Semele's life to perpetual and
changing its name from Banyan Strategic Land Fund II. Contemporaneously with the
Consent being obtained, Semele declared a $0.20 per share dividend to be paid on
all shares, including those beneficially owned by the Partnership. A dividend of
$41,752 was paid to the Partnership on November 17, 1997. This dividend
represented a return of equity to the Partnership, which proportionately reduced
the Partnership's investment in Semele. Subsequent to the exchange transaction,
Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the
Board of Directors and appointed Chief Executive Officer of Semele and James A.
Coyne, Executive Vice President of EFG was appointed Semele's President and
Chief Operating Officer, and was elected to the Board of Directors.
On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed
by a 30-for-1 forward stock split resulting in a reduction of the number of
shares of Semele common stock owned by the Partnership to 20,876 shares. In
accordance with the Financial Accounting Standard Board's Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
equity securities classified as available-for-sale are required to be carried at
fair value. During the year ended December 31, 1998, the Partnership decreased
the carrying value of its investment in Semele common stock to $4.125 per share
(the quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting
in an unrealized loss in 1998 of $70,460. In 1997, the Partnership recorded an
unrealized loss of $114,821 related to its Semele common stock. These losses
were reported as components of comprehensive income, included in partners'
capital. At December 31, 1998, the General Partner determined that the decline
in market value of the Semele common stock was other-than-temporary. As a
result, the Partnership wrote down the cost of the Semele common stock to $4.125
per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998)
for a total realized loss of $185,281 in 1998.
NOTE 5--RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Partnership are paid by EFG on behalf
of the Partnership and EFG is reimbursed at its actual cost for such
expenditures. Fees and other costs incurred during the years
21
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
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.................................................... $ 113,260 $ 166,417 $ 140,227
Administrative charges....................................................... 68,052 63,870 40,295
Reimbursable operating Expenses due to third parties......................... 386,856 136,800 151,051
---------- ---------- ----------
Total.................................................................... $ 568,168 $ 367,087 $ 331,573
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
As provided under the terms of the Management Agreement, EFG is compensated
for its services to the Partnership. Such services include acquisition and
management of equipment. For acquisition services, EFG is compensated by an
amount equal to 2.23% of Equipment Base Price paid by the Partnership. For
management services, EFG is compensated by an amount equal to 5% of gross
operating lease rental revenue and 2% of gross full payout lease rental revenue
received by the Partnership. Both acquisition and management fees are subject to
certain limitations defined in the Management Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
9.4(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, one of its Affiliates or from
third-party sellers. The Partnership's Purchase Price is determined by the
method described in Note 2.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Partnership.
At December 31, 1998, the Partnership was owed $50,767 by EFG for such funds and
the interest thereon. These funds were remitted to the Partnership in January
1999.
During 1996, the Partnership received payment in full from EFG of a note and
accrued interest thereon which was beneficially assigned to the Partnership in
1994 by a former affiliate of AFG as partial consideration for the exchange of
certain intermodal cargo containers.
Certain affiliates of the General Partner own Units in the Partnership as
follows:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
AFFILIATE UNITS OWNED OUTSTANDING UNITS
- --------------------------------------------------------------------------------- ------------ -----------------
<S> <C> <C>
Atlantic Acquisition Limited Partnership......................................... 16,536 2.06%
Old North Capital Limited Partnership............................................ 124,065 15.44%
</TABLE>
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital
Limited Partnership ("ONC") are both Massachusetts Limited Partnerships formed
in 1995 and affiliates of EFG. The general partners of AALP and ONC are
controlled by Gary 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.
22
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
NOTE 6--NOTES PAYABLE
Notes payable at December 31, 1998 consisted of installment notes of
$3,459,289 payable to banks and institutional lenders. The installment notes
bear interest rates ranging between 8.65% and 8.89%, except one note which bears
a fluctuating interest rate based on LIBOR (5.54% at December 31, 1998) plus a
margin. All of the installment notes are non-recourse and are collateralized by
the equipment and assignment of the related lease payments. Generally, the
installment notes will be fully amortized by noncancellable rents. However, the
Partnership has balloon payment obligations at the expiration of the respective
primary lease terms related to the Finnair Aircraft and the Reno Aircraft of
$1,127,840 and $679,276, respectively. The carrying value of notes payable
approximates fair value at December 31, 1998.
The annual maturities of the installment notes payable are as follows:
<TABLE>
<C> <S> <C>
For the year ending December 31, 1999 ...................................... $1,894,362
2000 ...................................... 284,916
2001 ...................................... 308,121
2002 ...................................... 292,614
2003 ...................................... 679,276
----------
Total ...................................... $3,459,289
----------
----------
</TABLE>
NOTE 7--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 Limited Partners and 5% to the General Partner). This
convention differs from the income or loss allocation requirements for income
tax and Dissolution Event purposes as delineated in the Restated Agreement, as
amended. For income tax purposes, the Partnership allocates net income or net
loss in accordance with the provisions of such agreement. The Restated
Agreement, as amended, requires that upon dissolution of the Partnership, the
General Partner will be required to contribute to the Partnership an amount
equal to any negative balance which may exist in the General Partner's tax
capital account. At December 31, 1998, the General Partner had a positive tax
capital account balance.
The following is a reconciliation between net income reported for financial
statement and federal income tax reporting purposes for the years ended December
31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------- ------------
<S> <C> <C> <C>
Net income.............................................................. $ 623,010 $ 1,574,944 $ 552,157
Financial statement depreciation less than tax depreciation........... (741,889) (244,130) (67,047)
Deferred rental income................................................ 29,528 (107,660) (7,475)
Other................................................................. 193,981 (445,123) 404,699
----------- ------------- ------------
Net income for federal income tax reporting purposes.................... $ 104,630 $ 778,031 $ 882,334
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
23
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
The principal component of "Other" consists of the difference between the
tax gain or loss on equipment disposals and the financial statement gain or loss
on disposals.
The following is a reconciliation between partners' capital reported for
financial statement and federal income tax reporting purposes for the years
ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Partners' capital................................................................... $ 7,592,086 $ 7,488,561
Unrealized loss on investment securities.......................................... -- 114,821
Add back selling commissions and organization and offering costs.................. 2,234,203 2,234,203
Financial statement distributions in excess of tax distributions.................. 7,929 7,929
Cumulative difference between federal income tax and financial statement income
(loss).......................................................................... (1,872,635) (1,354,255)
------------- -------------
Partners' capital for federal income tax reporting purposes......................... $ 7,961,583 $ 8,491,259
------------- -------------
------------- -------------
</TABLE>
Unrealized loss on investment securities, financial statement distributions
in excess of tax distributions and cumulative difference between federal income
tax and financial statement income (loss) represent timing differences.
NOTE 8--LEGAL PROCEEDINGS
In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and
derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP
LIMITED PARTNERSHIP, ET AL., in the United States District Court for the
Southern District of Florida (the "Court") on behalf of a proposed class of
investors in 28 equipment leasing programs sponsored by EFG, including the
Partnership (collectively, the "Nominal Defendants"), against EFG and a number
of its affiliates, including the General Partner, as defendants (collectively,
the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had
filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS
FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the
Commonwealth of Massachusetts on behalf of the Nominal Defendants against the
Defendants. Both actions are referred to herein collectively as the "Class
Action Lawsuit."
The Plaintiffs have asserted, among other things, claims against the
Defendants on behalf of the Nominal Defendants for violations of the Securities
Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary
duty, and violations of the partnership or trust agreements that govern each of
the Nominal Defendants. The Defendants have denied, and continue to deny, that
any of them have committed or threatened to commit any violations of law or
breached any fiduciary duties to the Plaintiffs or the Nominal Defendants.
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
24
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
will be open to all interested parties and permit any party to object to the
settlement. The investors of the Partnership and all other plaintiff class
members in the Class Action Lawsuit will receive a Notice of Settlement and
other information pertinent to the settlement of their claims that will be
mailed to them in advance of the fairness hearing. Since first executing the
Stipulation of Settlement, the Court has scheduled two fairness hearings, the
first on December 11, 1998 and the second on March 19, 1999, each of which was
postponed because of delays in finalizing certain information materials that are
subject to regulatory review prior to being distributed to investors.
On March 15, 1999, counsel for the Plaintiffs and the Defendants entered
into an amended stipulation of settlement (the "Amended Stipulation") which was
filed with the Court on March 15, 1999. The Amended Stipulation was
preliminarily approved by the Court by its "Modified Order Preliminarily
Approving Settlement, Conditionally Certifying Settlement Class and Providing
For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999
(the "March 22 Order"). The Amended Stipulation, among other things, divides the
Class Action Lawsuit into two separate sub-classes that can be settled
individually. This revision is expected to expedite the settlement of one
sub-class by the middle of 1999. However, the second sub-class, involving the
Partnership and 10 affiliated partnerships (collectively referred to as the
"Exchange Partnerships"), is expected to remain pending for a longer period due,
in part, to the complexity of the proposed settlement pertaining to this class.
Specifically, the settlement of the second sub-class is premised on the
consolidation of the Exchange Partnerships' net assets (the "Consolidation"),
subject to certain conditions, into a single successor company ("Newco"). Under
the proposed Consolidation, the partners of the Exchange Partnerships would
receive both common stock in Newco and a cash distribution; and thereupon the
Exchange Partnerships would be dissolved. In addition, EFG would contribute
certain management contracts, operations personnel, and business opportunities
to Newco and cancel its current management contracts with all of the Exchange
Partnerships. Newco would operate as a finance company specializing in the
acquisition, financing and servicing of equipment leases for its own account and
for the account of others on a contract basis. Newco also would use its best
efforts to list its shares on the Nasdaq National Market or another national
exchange or market as soon after the Consolidation as Newco deems that market
conditions and its business operations are suitable for listing its shares and
Newco has satisfied all necessary regulatory and listing requirements. The
potential benefits and risks of the Consolidation will be presented in a
Solicitation Statement that will be mailed to all of the partners of the
Exchange Partnerships as soon as the associated regulatory review process is
completed and at least 60 days prior to the fairness hearing. A preliminary
Solicitation Statement was filed with the Securities and Exchange Commission on
August 24, 1998 and remains pending. Class members will be notified of the
actual fairness hearing date when it is confirmed.
One of the principal objectives of the Consolidation is to create a company
that would have the potential to generate more value for the benefit of existing
limited partners than other alternatives, 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
25
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
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 $82,000, 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 $216,200, all of
which was accrued and expensed by the Partnership in 1998.
While the Court's August 20 Order enjoined certain class members, including
all of the partners of the Partnership, from transferring, selling, assigning,
giving, pledging, hypothecating, or otherwise disposing of any Units pending the
Court's final determination of whether the settlement should be approved, the
March 22 Order permits the partners to transfer Units to family members or as a
result of the divorce, disability or death of the partner. No other transfers
are permitted pending the Court's final determination of whether the settlement
should be approved. The provision of the August 20 Order which enjoined the
General Partners of the Exchange Partnerships from, among other things,
recording any transfers not in accordance with the Court's order remains
effective.
There can be no assurance that settlement of either sub-class of the Class
Action Lawsuit will receive final Court approval and be effected. There also can
be no assurance that all or any of the Exchange Partnerships will participate in
the Consolidation because if limited partners owning more than one-third of the
outstanding Units of a partnership object to the Consolidation, then that
partnership will be excluded from the Consolidation. The General Partner and its
affiliates, in consultation with counsel, 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.
26
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1998 (CONTINUED)
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 action had not been finally adjudicated at December 31, 1998:
ACTION INVOLVING NATIONAL STEEL CORPORATION
EFG, on behalf of the Partnership and certain affiliated investment programs
(collectively, the "Plaintiffs"), filed an action in the Commonwealth of
Massachusetts Superior Court, Department of the Trial Court in and for the
County of Suffolk on July 27, 1995, for damages and declaratory relief against a
lessee of the Partnership, National Steel Corporation ("National Steel"). The
Complaint seeks reimbursement from National Steel of certain sales and/or use
taxes paid to the State of Illinois in connection with equipment leased by
National Steel from the Plaintiffs and other remedies provided under the Master
Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of
Removal, which removed the case to United States District Court, District of
Massachusetts. On September 7, 1995, National Steel filed its Answer to the
Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and
sought declaratory relief, alleging breach of contract, implied covenant of good
faith and fair dealing, and specific performance. The Plaintiffs filed an Answer
to National Steel's Counterclaims on September 29, 1995. The parties discussed
settlement with respect to this matter for some time; however, the negotiations
were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint
alleging further default under the MLA and filed a motion for Summary Judgment
on all claims and Counterclaims. The Court held a hearing on the Plaintiff's
motion in December 1997 and later entered a decision dismissing certain of
National Steel's Counterclaims, finding in favor of the Plaintiffs on certain
issues and in favor of National Steel on other issues. In March 1999, the
Plaintiffs obtained payment for certain of the disputed items and have resumed
settlement discussions to resolve remaining issues. The General Partner does not
believe that the resolution of the remaining claims will have a material adverse
effect on the Partnership's financial position or results of operations.
27
<PAGE>
ADDITIONAL FINANCIAL INFORMATION
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
The Partnership classifies all rents from leasing equipment as lease
revenue. Upon expiration of the primary lease terms, equipment may be sold,
rented on a month-to-month basis or re-leased for a defined period under a new
or extended lease agreement. The proceeds generated from selling or re-leasing
the equipment, in addition to any month-to-month revenue, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition may not reflect the aggregate residual proceeds
realized by the Partnership for such equipment.
The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Rents earned prior to disposal of equipment, net of interest charges.... $ 1,360,555 $ 6,304,322 $ 2,585,344
Sale proceeds realized upon disposition of equipment.................... 135,384 1,041,030 692,766
------------ ------------ ------------
Total cash generated from rents and equipment sale proceeds............. 1,495,939 7,345,352 3,278,110
Original acquisition cost of equipment disposed......................... 854,679 6,190,551 3,249,160
------------ ------------ ------------
Excess of total cash generated to cost of equipment disposed............ $ 641,260 $ 1,154,801 $ 28,950
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
28
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS 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............................................................ $ 503,286 $ 119,724 $ 623,010
Add:
Depreciation........................................................ 1,083,372 -- 1,083,372
Management fees..................................................... 113,260 -- 113,260
Write-down of investment securities--affiliate...................... 185,281 -- 185,281
Book value of disposed equipment.................................... -- 15,660 15,660
Less:
Principal reduction of notes payable................................ (942,464) -- (942,464)
------------- ------------ -------------
Cash from operations, sales and refinancings........................ 942,735 135,384 1,078,119
Less:
Management fees..................................................... (113,260) -- (113,260)
------------- ------------ -------------
Distributable cash from operations, sales and refinancings.......... 829,475 135,384 964,859
Other sources and uses of cash:
Cash at beginning of year........................................... 2,324,652 195,288 2,519,940
Net change in receivables and accruals.............................. 393,138 -- 393,138
Less:
Cash distributions paid............................................. (303,634) (330,672) (634,306)
------------- ------------ -------------
Cash at end of year................................................... $ 3,243,631 $ -- $ 3,243,631
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
29
<PAGE>
AMERICAN INCOME FUND I-C,
A MASSACHUSETTS LIMITED PARTNERSHIP
SCHEDULE OF COSTS REIMBURSED TO THE
GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED
BY SECTION 9.4 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................................................ $ 211,817
</TABLE>
30
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of American Income Fund I-C, a Massachusetts Limited Partnership, of our
report dated March 10, 1999, included in the 1998 Annual Report to the Partners
of American Income Fund I-C, a Massachusetts Limited Partnership.
ERNST & YOUNG LLP
Boston, Massachusetts
March 10, 1999
<PAGE>
Original
AIRCRAFT LEASE AGREEMENT [49587]
between
OLIVIA CORP.,
LESSOR
and
RENO AIR, INC.,
LESSEE
dated as of November 16, 1995
AIRCRAFT: McDonnell Douglas MD-87
MANUFACTURER'S SERIAL NO.: 49587
FAA REGISTRATION NO.: N753RA
THE SINGLE EXECUTED ORIGINAL OF THIS LEASE, TOGETHER WITH ANY ORIGINAL LEASE
SUPPLEMENT DELIVERED PURSUANT HERETO, EACH MARKED "ORIGINAL," SHALL BE THE
"ORIGINAL" AND ALL OTHER COUNTERPARTS OF THIS LEASE AND ANY LEASE SUPPLEMENT
SHALL BE MARKED "DUPLICATE ORIGINAL." TO THE EXTENT THAT THIS LEASE AND ANY
LEASE SUPPLEMENT CONSTITUTES CHATTEL PAPER, AS SUCH TERM IS DEFINED IN THE
UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION, NO SECURITY
INTEREST MAY BE CREATED THROUGH TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER
THAN THE "ORIGINAL."
<PAGE>
TABLE OF CONTENTS
SECTION 1 DEFINITIONS ................................................... -1-
SECTION 2 LEASE OF AIRCRAFT ............................................ -13-
SECTION 3 DELIVERY AND ACCEPTANCE; TERM ................................ -13-
SECTION 4 LESSEE'S CONDITIONS PRECEDENT ................................ -15-
SECTION 5 RENT, SECURITY DEPOSIT AND MAINTENANCE RESERVES............... -17-
SECTION 6 REPRESENTATIONS AND WARRANTIES ............................... -20-
SECTION 7 POSSESSION, USE, MAINTENANCE,
TITLE AND REGISTRATION ....................................... -24-
SECTION 8 REPLACEMENT OF PARTS: ALTERATIONS,
MODIFICATIONS AND ADDITIONS .................................. -31-
SECTION 9 INSPECTION; FINANCIAL INFORMATION ............................ -35-
SECTION 10 COVENANTS OF LESSEE .......................................... -36-
SECTION 11 TAXES ........................................................ -38-
SECTION 12 EVENT OF LOSS ................................................ -40-
SECTION 13 INSURANCE .................................................... -43-
SECTION 14 INDEMNIFICATION .............................................. -47-
SECTION 15 LIENS ........................................................ -49-
SECTION 16 PERFECTION OF TITLE AND FURTHER ASSURANCES ................... -50-
SECTION 17 REDELIVERY OF AIRCRAFT AND RECORDS ........................... -51-
-i-
<PAGE>
SECTION 18 EVENTS OF DEFAULT ............................................ -54-
SECTION 19 REMEDIES ..................................................... -57-
SECTION 20 ALIENATION ................................................... -59-
SECTION 21 MISCELLANEOUS ................................................ -60-
SECTION 22 SUBLEASE; ASSIGNMENT; CRAF PROGRAM ........................... -63-
SECTION 23 RIGHT OF FIRST REFUSAL ....................................... -66-
SECTION 24 ENTIRE AGREEMENT ............................................. -66-
SECTION 25 CONFIDENTIALITY .............................................. -67-
EXHIBIT "A" AIRCRAFT SPECIFICATIONS ...................................... -69-
EXHIBIT "B" AIRCRAFT DOCUMENTATION ....................................... -70-
EXHIBIT "C" CERTIFICATE OF ACCEPTANCE .................................... -71-
EXHIBIT "D" LEASE SUPPLEMENT [49587] NO. 1 ............................... -73-
EXHIBIT "E" APPOINTMENT AS ATTORNEY-IN-FACT .............................. -78-
EXHIBIT "F" REDELIVERY CERTIFICATE ....................................... -80-
EXHIBIT "G" DELIVERY CONDITIONS .......................................... -82-
EXHIBIT "H" LEASE IDENTIFICATION ......................................... -84-
EXHIBIT "I" REDELIVERY CONDITIONS ........................................ -85-
EXHIBIT "J" CREDIT STANDARDS ............................................. -90-
EXHIBIT "K" ASSIGNMENT OF LEASE AND CONSENT .............................. -91-
-ii-
<PAGE>
AIRCRAFT LEASE AGREEMENT [49587]
THIS AIRCRAFT LEASE AGREEMENT [49587], made as of this 16th day of
November, 1995 (the "Lease"), by and between OLIVIA CORP., a corporation formed
under the laws of Delaware ("LESSOR"), and RENO AIR, INC., a corporation formed
under the laws of Nevada ("LESSEE").
WHEREAS, LESSEE desires to lease the Aircraft (as hereinafter
defined) from LESSOR and LESSOR is willing to lease the Aircraft to LESSEE, in
accordance with and subject to the terms and conditions of this Lease.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions contained herein and other good and valuable consideration, the
receipt and sufficiency of which is acknowledged by the parties hereto, LESSOR
and LESSEE agree as follows:
SECTION I
DEFINITIONS
The following terms shall have the following respective meanings for
all purposes of this Lease and shall be equally applicable to both the singular
and the plural forms of the terms herein defined. Any agreement referred to
below shall mean such agreement, as amended, supplemented and modified from time
to time:
"Act" shall mean Subtitle VII of Title 49 of the United States Code
and the rules and regulations promulgated thereunder.
"Affiliate" shall mean, with respect to any Person, any other Person
which, directly or indirectly, controls or is controlled by or is under common
control with such Person.
"Agreed Value" shall mean Fourteen Million Dollars ($14,000,000.00)
with respect to the Aircraft.
<PAGE>
"Air Authority" shall mean, as applicable, the DOT, the FAA and/or
the Administrator of the FAA, or any predecessor or successor thereto.
"Aircraft" shall mean the Airframe, together with the two (2)
Engines (or any Replacement Engine substituted for either of such Engines
hereunder), all as more particularly described on Exhibit "A" hereto, whether or
not any of such initial or Replacement Engines may, from time to time, be
installed on such Airframe or may be installed on any other airframe or any
other aircraft.
"Aircraft Documents" shall mean the items identified in Exhibit "B"
hereto.
"Airframe" means (i) the McDonnell Douglas model MD-87 aircraft
(excluding Engines or engines from time to time installed thereon) bearing U.S.
registration no. N753RA and manufacturer's serial no. 49587, and (ii) any and
all Parts, so long as the same shall be incorporated in such Airframe, and any
and all Parts removed from such Airframe, so long as title to such Parts shall
remain vested in LESSOR in accordance with the terms of Section 8(A).
"Airframe Reserve" shall have the meaning set forth in the Lease
Supplement.
"Approved Insure " shall mean any reputable insurance company or
insurance broker, approved by LESSOR, for the purpose of providing or confirming
the existence of any insurance required under this Lease.
"APU" means (i) the auxiliary power unit listed in the Lease
Supplement, (ii) any and all Parts, so long as such Parts are incorporated in,
installed on or attached to such auxiliary power unit or so long as title to
such Parts is vested in LESSOR in accordance with the terms of Section 8(A)
after removal from such auxiliary power unit, and (iii) insofar as the same
belong to LESSOR, all substitutions, replacements or renewals from time to time
made in or to such auxiliary power unit or to any of the Parts referred to in
clause (ii) above, as required or permitted under this Lease.
"Authorized Maintenance Performer" shall mean any FAA authorized
repair station or any authorized FAA Part 121 air carrier having the authority
to perform maintenance and repairs to aircraft of the same type as the Aircraft.
The identity of the Authorized Maintenance Performer and such other information
about such party shall be disclosed by LESSEE to LESSOR upon LESSOR's reasonable
request.
-2-
<PAGE>
"Basic Rent" shall mean the amount payable for the period commencing
on the First Basic Rent Date through the remaining period of the Term in
accordance with Section 5(A)(2) hereof and the Lease Supplement.
"Business Day" shall mean any day other than a Saturday, Sunday or
day on which banks are required or authorized to close in the States of New York
or Nevada.
"Certificate of Acceptance" shall mean the written certificate of
LESSEE, in substantially the form of Exhibit "C" hereto, pursuant to which
LESSEE accepts delivery of the Aircraft from LESSOR and confirms that the
Aircraft is in the condition required by this Lease.
"Code" shall mean the United States Internal Revenue Code of 1986,
as amended from time to time.
"Compensation" shall have the meaning set forth in Section 12(D)
hereof.
"Covered Maintenance" shall have the meaning set forth in Section
7(D)(iii) hereof.
"CRAF Program" shall mean the Civil Reserve Air Fleet Program
authorized under 10 U.S.C. ss. 9511 et seq.
"Credit Standards" shall have the meaning set forth on Exhibit "J"
hereto.
"Cycle" shall mean one takeoff and landing of the Aircraft, Airframe
or, with respect to any Engine not installed on the Airframe, of the airframe on
which such Engine is installed.
"Default" means any event which, upon the giving of notice or the
lapse of time would constitute an Event of Default.
"Delivery Location" shall mean Will Rogers Airport, Oklahoma City,
Oklahoma or such other location in the continental United States as may be
mutually agreed to by the parties.
"Dollars" or "$" shall mean the legal currency of the United States
of America.
-3-
<PAGE>
"DOT" shall mean the United States Department of Transportation or
any governmental person, agency or authority succeeding to the functions of such
Department of Transportation.
"Effective Date" shall mean the date on which LESSEE signs and
delivers to LESSOR Lease Supplement No. 1 to this Lease.
"Engine" means (i) each of the two (2) Pratt & Whitney model
JT8D-217C engines bearing manufacturer's serial numbers and otherwise as
described in the Certificate of Acceptance and Lease Supplement No. 1, whether
or not from time to time installed on the Airframe or installed on any other
airframe or any other aircraft, and (ii) any Replacement Engine, whether or not
from time to time installed on the Airframe or any other airframe or any other
aircraft, together, in each case, with any and all Parts incorporated in such
Engine and any and all Parts removed from such Engine, so long as title to such
Parts shall remain vested in LESSOR in accordance with the terms of Section
8(A). At such time as a Replacement Engine shall be substituted hereunder and
the Engine for which the substitution is made shall be released, such
Replacement Engine shall constitute an Engine hereunder and such replaced Engine
shall cease to be an Engine hereunder. The term "Engines" means, as of any date
of determination, all Engines leased hereunder.
"Engine Manufacture" means United Technologies Corporation, Pratt &
Whitney Group, Commercial Products Division, a Delaware corporation, in its
capacity as manufacturer of the Engines, and its successors and assigns.
"Engine Reserves" shall have the meaning set forth in the Lease
Supplement.
"Equipment Change" shall have the meaning set forth in Section 8(C)
hereof.
"Event of Default" shall have the meaning set forth in Section 18
hereof.
"Event of Loss" shall mean, with respect to the Aircraft, Airframe
or any Engine, any of the following events with respect to such property: (i)
loss of such property due to destruction, damage beyond repair or rendition of
such property unfit for normal use by LESSEE by any cause whatsoever, or any
damage to such property which results in an insurance settlement with respect to
such property on the basis of a total loss or a constructive total loss or a
compromised total loss; (ii) the disappearance, loss, theft,
-4-
<PAGE>
hijacking, condemnation, confiscation or seizure of, or requisition of use or
title of, such property for a period in excess of sixty (60) days, other than a
requisition for use by the U.S. Government, provided that such requisition of
use does not extend beyond the end of the Term; (iii) any divestiture of title
to an Engine treated as an Event of Loss pursuant to Section 12(B) or any other
provision hereof; or (iv) the operation or location of such property, while
under requisition for use by the U.S. Government, in any area excluded from
coverage by any insurance policy in effect with respect thereto required by the
terms of Section 13, if LESSEE shall be unable to obtain an indemnity in lieu
thereof from the U.S. Government on the terms provided in Section 13. An Event
of Loss with respect to the Aircraft shall be deemed to have occurred if an
Event of Loss occurs with respect to the Airframe, as set forth in Lease
Supplement No. 1.
"Expiration Date" shall mean the originally scheduled last day of
the Term, as set forth in Lease Supplement No. 1.
"FAA" shall mean the Federal Aviation Administration of the DOT or
any governmental person, agency or other authority succeeding to the functions
of the Federal Aviation Administration.
"FAR" shall mean the United States Federal Aviation Regulations
currently in effect or as hereafter amended or modified.
"First Basic Rent Date" shall mean January 15, 1996.
"First Interim Rent Date" shall mean the earlier of (i) the date the
Aircraft is placed in revenue service by the Lessee and (ii) fourteen (14) days
from the Effective Date.
"Flight Hour" shall mean each hour or fraction thereof elapsed from
the moment the wheels of the Aircraft leave the ground through the moment the
wheels of the Aircraft, Airframe or, with respect to any Engine not installed on
the Airframe, of the airframe on which such Engine is installed, touch down upon
the ground.
"Governmental Entity" shall mean and include: (i) any national
government and any political subdivision thereof or local jurisdiction therein;
(ii) any board, commission, department, division, organ, instrumentality, court
or agency of the foregoing, however constituted; and (iii) any association,
organization or institution of which any of the foregoing is a member, or to
whose jurisdiction any of the foregoing is subject, or in whose activities any
of the foregoing is a participant, but only to the extent
-5-
<PAGE>
that any such association, organization or institution has jurisdiction over the
Aircraft or its operations.
"Hourly Rent" shall mean Five Hundred ($500.00) Dollars for each
Flight Hour or fraction thereof that the Aircraft is operated for any period in
which Hourly Rent is required to be calculated hereunder.
"Indebtedness" shall mean, with respect to any Person, all
obligations of such Person for the payment or repayment of money, whether
present or future, actual or contingent.
"Indemnitee" means LESSOR, Mortgagee, their respective affiliated
entities (and the successors, assigns, directors, officers, shareholders,
employees and agents of such affiliated entities), successors and permitted
assigns and their respective directors, officers, shareholders, employees and
agents.
"Interim Period" shall mean the period commencing on the First
Interim Rent Date through and including January 14, 1996.
"Interim Rent" shall mean the amount payable by LESSEE to LESSOR
pursuant to Section 5(A)(1) hereof.
"Landing Gear" means (i) each of the three landing gear listed in
the Lease Supplement, (ii) any and all Parts, so long as such Parts are
incorporated in, installed on, attached to or appurtenant to any such landing
gear assemblies or so long as title to such Parts is vested in LESSOR in
accordance with the terms of Section 8(A) after removal from any such landing
gear, and (iii) all substitutions, replacements or renewals from time to time
made in or to any such landing gear or to any of the Parts referred to in clause
(ii) above as required or permitted under this Lease.
"Landing Gear Reserves" shall have the meaning set forth in the
Lease Supplement.
"Law" shall mean and include: (i) any statute, decree, constitution,
regulation, order or other directive of any Governmental Entity; (ii) any
treaty, pact, compact or other agreement to which any Governmental Entity is a
signatory or party; (iii) any judicial or administrative interpretation or
application of any of the foregoing; and (iv) any amendment or revision of any
of the foregoing.
-6-
<PAGE>
"Lease," "this Lease," "this Agreement," "hereby," "herein,"
"hereof," "hereunder" or other like words shall mean this Aircraft Lease
Agreement, as the same may be supplemented or amended, in writing, from time to
time.
"Lease Assignment" shall mean the Assignment of Lease and Consent
between Lessor, Lessee and Mortgagee, substantially in the form of Exhibit "K"
hereto.
"Lease Documents" shall mean this Lease, each Lease Supplement, the
Certificate of Acceptance, the Power of Attorney and the Lease Assignment.
"Lease Supplement" means a supplement to this Lease, substantially
in the form attached as Exhibit "D" hereto, subjecting the property described
therein to this Lease.
"LESSEE's Address" shall mean 220 Edison Way, Reno, Nevada 89502,
Attention: Paul H. Tate, Vice President Finance, Treasurer and Chief Financial
Officer; Telefax No.: +1-702-829-5754.
"LESSOR's Address" shall mean c/o Interadvice Anstalt, Landstrasse
25, FL-9490, Vaduz, Liechtenstein, Attention: Georg Kieber; Telefax No.:
+41-75-232-0542.
"LESSOR's Liens" means the Liens of any Person claiming by, through,
against or under LESSOR, which arise as a result of (i) claims by any such
Person not related to, or expressly permitted by, the Lease, (ii) any act or
omission of any Person claiming by, through, against or under LESSOR which is
not expressly permitted by the Lease, (iii) taxes or expenses imposed against
any such Person (or the consolidated group of taxpayers of which it is a member)
for which LESSEE is not obligated to indemnify pursuant to Section 11, or (iv)
claims against any such Person arising out of any transfer by such Person of its
interest in the Aircraft, other than a transfer resulting from LESSOR's exercise
of remedies, pursuant to Section 19, while an Event of Default has occurred and
is continuing.
"LIBID" means LIBOR minus 1/4%.
"LIBOR" means the rate per annum at which deposits in Dollars are
being offered to prime banks in the London interbank market at 11:00 a.m. in
London by the British Bankers' Association designated banks which appears on the
Telerate page 3750 on the second London Banking Day prior to any Rent Date for
the period of one month (or such other page as may replace the Telerate page
3750 on that system for the purpose
-7-
<PAGE>
of displaying London Interbank Offered Rates of leading reference banks). If the
LESSOR shall be unable to ascertain LIBOR when LIBOR is required to be
calculated hereunder, then LIBOR shall equal the rate per annum equal to
Lender's actual cost of funds in Dollars for the time remaining during the Term
measured from such Rent Date.
"Lien" shall mean any mortgage, pledge, lien, encumbrance, security
interest or other claim affecting the title to, or any interest in, property.
"Loan Agreement" means the Secured Loan Agreement dated as of
November __, 1995 between Lessor and Mortgagee pursuant to which the Mortgagee
has provided financing for the Aircraft.
"London Banking Day" shall mean any day (excluding a Saturday, a
Sunday or a day on which banks are required to close in London, England) on
which deposits in Dollars are being offered to prime banks in the London
interbank market by the British Bankers' Association designated banks.
"Maintenance Program" shall mean LESSEE's McDonnell Douglas MD-80
FAR Part 121 FAA-approved maintenance program encompassing scheduled
maintenance, condition-monitored maintenance and on-condition maintenance of
airframe, engines and components of the Aircraft, including, but not limited to,
servicing, testing, preventive maintenance, repairs, structural inspections,
system checks, overhauls, approved modifications, mandatory service bulletins,
mandatory engineering orders, airworthiness directives, corrosion control
inspections and treatments.
"Maintenance Reserve Date" means the 10th day after each Rent Date
(other than the First Interim Rent Date) and the date of the Return Occasion.
"Manufacturer" shall mean McDonnell Douglas Corporation, a Maryland
corporation, in its capacity as manufacturer of the Airframe, and its successors
and assigns.
"Minimum Basic Rent" shall have the meaning set forth in the Lease
Supplement.
"Minimum Liability Coverage" shall mean Three Hundred Fifty Million
($350,000,000.00) Dollars per occurrence.
-8-
<PAGE>
"Mortgage" shall mean that certain Aircraft Chattel Mortgage and
Security Agreement, dated as of the date of this Lease, made by LESSOR and
delivered to Mortgagee.
"Mortgagee" shall mean Credit Lyonnais/PK AIRFINANCE, New York
Branch ("AIRFINANCE"), a corporation formed under the laws of the Grand Duchy of
Luxembourg, or any transferee of AIRFINANCE in accordance with the terms of the
Loan Agreement.
"Officer's Certificate" shall mean a certificate signed by the
chairman, the president, any vice president, the treasurer, any assistant
treasurer, the secretary or any assistant secretary of the Person providing such
certificate.
"Overdue Rate" shall mean the rate of interest announced or
published from time to time by Citibank, N.A., New York, New York as its base or
prime lending rate plus three percent (3%) per annum.
"Parts" means all appliances, parts, instruments, avionics,
appurtenances, accessories, furnishings and other equipment or components, of
whatever nature (other than complete Engines or Engines and other than removable
Parts and any items owned by LESSEE or leased by LESSEE from a third party,
other than LESSOR, in accordance with Section 8(C)), which are, from time to
time, incorporated in the Airframe or any Engine, or so long as title to such
Parts shall remain vested in LESSOR, in accordance with Section 8(A) hereof,
after removal from the Airframe or any Engine.
"Passenger Convenience Equipment" shall mean components or systems
installed on, carried in or affixed to the Aircraft which are used to provide
individual air-to-ground telephone communications for hire or electronic
entertainment to passengers aboard the Aircraft and which were not originally
incorporated or installed in or attached to the Aircraft at the time of delivery
under this Lease.
"Permitted Liens" shall mean, with respect to the Aircraft, the
Airframe or any Engine (a) the respective rights of the parties under this Lease
and each Lease Supplement; (b) LESSOR's Liens; (c) (i) liens for taxes,
assessments or other governmental charges which are not yet due, or (ii) liens
for taxes, assessments or other governmental charges which are due and are being
contested in good faith by appropriate proceedings, so long as such proceedings
do not involve any material danger of the sale, forfeiture or loss of the
Aircraft, the Airframe or any Engine and so long as such liens, assessment or
governmental charges do not exceed $500,000.00 in the aggregate;
-9-
<PAGE>
provided, however, that in the event such liens, assessments or governmental
charges exceed $500,000.00 in the aggregate, same shall constitute a Permitted
Lien, provided that LESSEE posts a bond issued by a reputable surety or bonding
company in an amount equal to at least one and one-half (1-1/2) times the amount
of the lien, assessment or governmental charge claimed (including all penalties
and interest thereon) or, alternatively, provides LESSOR with security in an
amount and form reasonably acceptable to LESSOR; (d) (i) materialmen's,
mechanic's, worker's, repairer's, employee's or other like liens for amounts the
payment of which is not yet delinquent for more than thirty (30) days, or (ii)
materialmen's, mechanic's, worker's, repairer's, employee's or other like liens
which are being contested in good faith by appropriate proceedings, so long as
such proceedings do not involve any material danger of the sale, forfeiture or
loss of the Aircraft, the Airframe or any Engine and so long as such liens do
not exceed $500,000.00 in the aggregate; provided, however, that in the event
such liens exceed $500,000.00 in the aggregate, same shall constitute a
Permitted Lien, provided that LESSEE posts a bond issued by a reputable surety
or bonding company in an amount equal to at least one and one-half (1-1/2) times
the amount of the lien claimed (including all penalties and interest thereon)
or, alternatively, provides LESSOR with security in an amount and form
reasonably acceptable to LESSOR; (e) liens arising out of any judgment or award,
unless the judgment secured shall not, within thirty (30) days after entry
thereof, have been discharged or vacated or execution thereof stayed pending
appeal or shall not have been discharged, vacated or reversed within thirty (30)
days after the execution of such stay, and provided such lien presents no
material danger of the sale, forfeiture or loss of the Aircraft, the Airframe or
any Engine or of LESSOR's interest therein and so long as such liens do not
exceed $500,000.00 in the aggregate; provided, however, that in the event such
liens exceed $500,000.00 in the aggregate, same shall constitute a Permitted
Lien, provided that LESSEE posts a bond issued by a reputable surety or bonding
company in an amount equal to at least one and one-half (1-1/2) times the amount
of the lien claimed (including all penalties and interest thereon) or,
alternatively, provides LESSOR with security in an amount and form reasonably
acceptable to LESSOR; or (f) the Lien, created by the Mortgage and Lease
Assignment.
"Person" shall mean and include any individual, corporation,
partnership, firm, joint venture, trust, unincorporated organization,
association, Governmental Entity, or any organization or association of which
any of the foregoing is a member or participant.
"Power of Attorney" shall mean that certain power of attorney from
LESSEE to LESSOR and Mortgagee, to be executed in the form attached hereto as
Exhibit "E", pursuant to which LESSEE designates each of LESSOR and Mortgagee as
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attorney-in-fact, upon the occurrence and continuation of an Event of Default,
to do all things which LESSEE could do under this Lease in the event LESSEE
fails to fulfill such obligations hereunder, including, but not limited to,
executing and delivering such releases or terminations of this Lease upon the
occurrence and continuation of an Event of Default or at the Expiration Date, as
LESSOR or Mortgagee shall deem necessary or desirable.
"Redelivery Certificate" shall mean the written certificate of
LESSOR, in substantially the form of Exhibit "F" hereto, pursuant to which
LESSOR accepts redelivery of the Aircraft from LESSEE and confirms that the
Aircraft is in the condition required by this Lease on the Redelivery Occasion.
"Redelivery Location" shall mean Reno/Tahoe International Airport,
Reno, Nevada or such other location in the continental United States as may be
mutually agreed to by the parties.
"Redelivery Occasion" shall have the meaning set forth in Section
17(A) hereof.
"Related Aircraft" shall mean any or all of the aircraft leased by
LESSOR to LESSEE pursuant to the Related Lease Agreement.
"Related Lease Agreement" means the Aircraft Lease Agreement [49641]
to be entered into between Boxen Corp. and LESSEE with respect to the leasing by
Boxen Corp. to LESSEE of one (1) McDonnell Douglas MD-87 aircraft bearing
manufacturer's serial number 49641, as such aircraft is more particularly
described in such agreement and as such agreement may, from time to time, be
supplemented or amended pursuant to a written agreement entered into between
Boxen Corp. and LESSEE.
"Related Lease Default" shall mean a "Default," as defined in the
Related Lease Agreement.
"Related Lease Event of Default" shall mean an "Event of Default,"
as defined in the Related Lease Agreement, which shall occur and be continuing
in accordance with the terms of such Related Lease Agreement.
"Related Security Deposit" shall mean the "Security Deposit" payable
by LESSEE to Boxen Corp. in the Related Lease Agreement.
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"Rent" shall mean Interim Rent, Basic Rent and Supplemental Rent.
"Rent Adjustment" shall have the meaning set forth on the Lease
Supplement.
"Rent Date" shall mean each date on which a payment of Interim Rent
and Basic Rent, as the case may be, is due. The first Rent Date shall be the
First Interim Rent Date. If a Rent Date shall in any month not be a Business
Day, then the Rent Date shall be the immediately following Business Day.
"Rent Period" means any period commencing on any given Rent Date and
ending on the day immediately preceding the next succeeding Rent Date, provided,
however, that the last Rent Period shall end on the Expiration Date.
"Second Interim Rent Date" shall have the meaning set forth in
Section 5(A)(1)(i) hereof.
"Security Deposit" shall mean the amount set forth in the Lease
Supplement.
"Supplemental Rent" shall mean all amounts, liabilities and
obligations (other than Interim Rent and Basic Rent) which LESSEE assumes or
agrees to pay to LESSOR or any other Person hereunder, including, without
limitation, all amounts required to be paid by LESSEE under its indemnification
pursuant to Section 14 hereof.
"Taxes" shall mean any and all sales, withholding, use, excise,
personal property, ad valorem, value added, stamp, interest equalization or
other taxes levied upon LESSOR's or LESSEE's gross levies, customs or other
duties, or other charges of any nature, together with any penalties, fines or
interest thereon, imposed, levied or assessed by, or otherwise payable to, U.S.
Tax Authorities.
"Term" means the period commencing on the Effective Date and
expiring on the Expiration Date unless shortened in accordance with the
provisions of this Lease.
"U.S. Air Carrier" shall mean any air carrier operating under a
certificate of convenience and necessity issued by the Air Authority or, in the
event such certification is no longer issued to air carriers, an air carrier
permitted to engage in air transportation of passengers to, from or within the
United States.
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"U.S. Government" shall mean and include: (i) the Federal Government
of the United States of America and any political subdivision thereof or local
jurisdiction therein; (ii) any board, commission, department, division, organ,
instrumentality, court or agency of the foregoing, however constituted; and
(iii) any association, organization or institution of which any of the foregoing
is a member, or to whose jurisdiction any of the foregoing is subject, or in
whose activities any of the foregoing is a participant, but only to the extent
that any such association, organization or institution has jurisdiction over the
Aircraft or its operations.
"U.S. Tax Authorities" shall mean and include: (i) the Internal
Revenue Service and any other taxing authority of the Federal Government of the
United States of America; and (ii) any taxing authority of any state, county,
city or local municipality of the United States of America.
"Wet Lease" shall mean any arrangement whereby LESSEE agrees to
furnish the Aircraft, Airframe or any Engine to a third party, pursuant to which
such Aircraft, Airframe or Engine (i) shall remain in the exclusive possession
and operational control of LESSEE's personnel, and (ii) shall be maintained
exclusively by LESSEE or an Authorized Maintenance Performer in accordance with
the maintenance provisions of this Lease.
SECTION 2
LEASE OF AIRCRAFT
LESSOR hereby agrees to lease the Aircraft to LESSEE, and LESSEE
hereby agrees to lease the Aircraft from LESSOR, pursuant to the provisions of
this Lease.
SECTION 3
DELIVERY AND ACCEPTANCE; TERM
(A) Date of Delivery. Subject to the Aircraft conforming to the
conditions set forth in Exhibit "G", LESSEE shall take delivery of the Aircraft
and Aircraft Documents on the Effective Date. Lessor shall deliver the Aircraft
to Lessee on no later than November 20, 1995. In the event LESSOR is unable to
deliver the Aircraft
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to LESSEE on or before November 20, 1995, and no other provision of this Lease
applies which would either excuse the delay or which would provide LESSOR with
any additional time to cause delivery of the Aircraft, then, in such event,
LESSEE may terminate this Lease without any liability or obligation to the other
hereunder.
(B) Place of Delivery and Acceptance. The Aircraft and Aircraft
Documents shall be delivered to and accepted by LESSEE at the Delivery Location,
unless LESSOR and LESSEE otherwise agree in writing upon another location
subsequent to the execution of this Lease. The parties agree that the Delivery
Location will be selected to minimize the possibility of taxes to be assessed
against LESSEE and/or LESSOR.
(C) Casualty to Aircraft Preceding Delivery.
(i) In the event that any Event of Loss occurs with respect to
the Aircraft prior to the Effective Date hereof, this Lease shall
terminate and neither the LESSOR nor LESSEE shall have any liability
or obligation to the other hereunder.
(ii) In the event that on the proposed Effective Date the
Aircraft fails to conform to the conditions set forth in Exhibit
"G", LESSOR shall, within thirty (30) days from the date of the
proposed Effective Date, take such reasonable action as shall be
necessary to repair the Aircraft so that it conforms to the
conditions set forth in Exhibit "G". If at the end of such thirty
(30) day period of time the Aircraft fails to conform to the
conditions set forth in Exhibit "G", notwithstanding LESSOR's
reasonable actions pursuant to the foregoing sentence, either LESSOR
or LESSEE shall have the right to terminate this Lease without any
liability or obligation to the other hereunder.
(D) Acceptance of Aircraft. The Aircraft to be leased hereunder
shall be delivered to LESSEE in its "AS IS," "WHERE IS" condition, SUBJECT TO
EACH AND EVERY DISCLAIMER OF WARRANTY AND REPRESENTATION AS SET FORTH IN
SUBSECTION 6(A) HEREOF, except that the Aircraft shall comply with the
conditions set forth on Exhibit "G". LESSEE shall indicate and confirm its
acceptance of the Aircraft by delivery to LESSOR of a (i) Lease Supplement, and
(ii) Certificate of Acceptance, dated on such Effective Date.
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(E) Term of Lease. The term of this Lease, as to the Aircraft, shall
be for the Term.
(F) No LESSOR Liability. LESSOR will not be liable for any loss or
expense, or any loss of profit, arising from any delay or failure in delivery to
LESSEE unless such delay or failure arises as a direct consequence of the
willful misconduct of LESSOR, and in no event will LESSOR be liable for any
delay or failure which is caused by any breach or delay on the part of
Manufacturer.
SECTION 4
LESSEE'S CONDITIONS PRECEDENT
LESSOR's obligation to lease the Aircraft hereunder to LESSEE shall
be subject to the receipt by LESSOR, on or before the Effective Date (or such
other date as provided for herein), of the following from LESSEE, all of which
shall be satisfactory in form and substance to LESSOR:
(1) Certified copy of a resolution of LESSEE's Board of Directors,
authorizing the entering into and performance of this Lease together with an
incumbency certificate as to the person or persons authorized to execute and
deliver this Lease and the other Lease Documents on behalf of LESSEE;
(2) LESSEE's articles or certificate of incorporation and by-laws
certified by an officer of LESSEE;
(3) A favorable opinion of counsel of LESSEE, addressed to LESSOR,
dated the Effective Date, as to the matters set forth in clauses (1) through (5)
and (7) of Subsection 6(D) hereof, provided however, the opinion shall be to the
best of such counsel's knowledge as to primarily factual matters;
(4) A favorable opinion of Daugherty, Fowler & Peregrin, special FAA
counsel, addressed to LESSOR, opining on such matters as LESSOR shall reasonably
require, including, but not limited to, that under the Act: (i) the Aircraft is
eligible for registration in the name of LESSOR; (ii) that this Lease and the
Lease Assignment are eligible for recording; and (iii) that this Lease and the
Lease Assignment have been filed for recording;
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(5) An Officer's Certificate of LESSEE, dated as of the Effective
Date, stating that to the best of such officer's knowledge after due inquiry and
investigation:
(a) The representations and warranties contained in Subsection
6(D) hereof are true and accurate on and as of such date as though
made on and at such time (except to the extent that such
representations and warranties relate solely to an earlier date);
and
(b) No event has occurred and is continuing, or would result
from the leasing of the Aircraft, which constitutes an Event of
Default or would constitute an Event of Default with the giving of
notice or the passage of time or both;
(6) Not less than three (3) Business Days prior to the Effective
Date, certificates signed by an Approved Insurer(s) as to due compliance with
the insurance provisions of Section 13 hereof with respect to the Aircraft;
(7) The Power of Attorney, fully signed, notarized and dated on the
Effective Date, together with an original certified copy of the resolutions of
LESSEE's Board of Directors (which resolutions shall be delivered on or before
December 31, 1995), pursuant to which the entering into of the Power of Attorney
by the holder thereof was authorized. LESSEE shall, on those dates which shall
be the second, fourth, sixth and seventh anniversary dates of the Effective
Date, deliver to LESSOR a currently dated replacement Power of Attorney and
original certified copy of resolutions of LESSEE's Board of Directors, in form
and substance satisfactory to LESSOR, whereupon LESSOR shall return to LESSEE
any Powers of Attorney previously delivered by LESSEE to LESSOR;
(8) Such UCC-1 financing statements as LESSOR shall reasonably
request;
(9) The Lease Assignment, as executed by LESSEE; and
(10) Such other documents which LESSOR or its counsel may reasonably
require.
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SECTION 5
RENT, SECURITY DEPOSIT AND MAINTENANCE RESERVES
(A) Rent. LESSEE covenants and agrees to pay to LESSOR, or to any of
LESSOR's assigns designated to LESSEE in writing by LESSOR, the Rent. Time is of
the essence with respect to each payment of Rent to be paid by LESSEE to LESSOR
hereunder.
(1) Interim Rent.
(i) Interim Rent shall equal the Hourly Rent for each
Rent Period during the Interim Period. Notwithstanding the
foregoing, in no event shall the Interim Rent be less than the
Minimum Basic Rent other than as set forth in paragraph (ii)
of this Section.
(ii) Minimum Basic Rent shall be paid by LESSEE to
LESSOR in respect of the Aircraft, in advance, on the First
Interim Rent Date. Thereafter, on the corresponding date in
the immediately following month (the "Second Interim Rent
Date"), LESSEE shall pay to LESSOR a pro rata portion of the
Minimum Basic Rent based on the number of days remaining in
the period from the Second Interim Rent Date through (but not
including) the First Basic Rent Date.
(iii) In addition to Minimum Basic Rent, LESSEE shall
pay to LESSOR the following: (a) no later than five days after
the Second Interim Rent Date, an amount equal to the
difference, if positive, between (x) the Minimum Basic Rent
and (y) Hourly Rent calculated for the period from the First
Interim Rent Date through (but excluding) the Second Interim
Rent Date; and (b) no later than five days after the First
Basic Rent Date, an amount equal to the positive difference,
if any, between: (x) the pro rated Minimum Basic Rent paid for
the previous Rent Period and (y) Hourly Rent calculated for
the period from the Second Interim Rent Date through (but
excluding) the First Basic Rent Date.
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(2) Basic Rent; Rent Adjustment. (i) Basic Rent shall be paid
by LESSEE to LESSOR in respect of the Aircraft, in advance,
commencing on the First Basic Rent Date and continuing on the
corresponding date in each consecutive month during the remainder of
the Term. Basic Rent shall be payable in the amount set forth on the
Lease Supplement, subject to the Rent Adjustment as set forth
therein.
(3) Supplemental Rent. LESSEE agrees to pay to LESSOR, or to
whomsoever shall be entitled thereto, any and all Supplemental Rent
promptly as 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 in
this Lease or by Law or equity or otherwise in the case of
nonpayment of Interim Rent or Basic Rent. LESSEE will also pay to
LESSOR, on demand, as Supplemental Rent, to the extent permitted by
applicable Law, interest at the Overdue Rate on any part of any
installment of Interim Rent or Basic Rent not paid within five
Business Days when due for the period from and including the Rent
Date to and including the date of actual payment in full, and on any
Supplemental Rent not paid when due or demanded by LESSOR for any
period for which the same shall be overdue.
(B) Security Deposit. LESSEE shall deliver to LESSOR the Security
Deposit, on the Effective Date, to secure LESSEE's obligations under the Lease.
Upon the occurrence and continuation of an Event of Default hereunder or a
Related Lease Event of Default, LESSOR may use all or any part of the Security
Deposit, in addition to the Related Security Deposit, together with all interest
accrued thereon, in the manner provided for in this Lease.
(C) Form of Payment. Payment of Rent, the Security Deposit and any
other payments due under this Lease, shall be made in Dollars by wire transfer
of immediately available funds to LESSOR or its assignee at such address and
account as LESSOR may specify in writing, provided that such address shall be an
address in the continental United States. Payment shall be made on the Rent
Date, or the Business Day thereafter if the Rent Date is not a Business Day, so
as to reach LESSOR or its designated depository not later than 1:00 p.m. local
time, New York, New York, on the Rent Date or the Business Day thereafter, as
the case may be.
(D) Rent Not Reduced by Taxes. LESSEE agrees that each payment of
Rent pursuant to this Lease shall be free of all Taxes and, in the event that
any such Taxes
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are imposed, levied, assessed by, or otherwise payable with respect to or
arising out of the leasing or operation of the Aircraft by LESSEE, LESSEE shall
pay such amounts as are necessary to enable LESSOR and each assignee of LESSOR
to whom payments of Rent are to be made by LESSEE, to receive each payment of
Rent hereunder, under any circumstances and in any event, in the full amounts
required hereunder on an after-tax basis, without any reduction whatsoever;
provided, however, that this Section 5(D) shall not apply to Taxes not
indemnified against pursuant to Section 11(B) hereof.
(E) Maintenance Reserve. LESSEE shall pay to LESSOR, on each
Maintenance Reserve Date, the Airframe Reserves, the Engine Reserves and the
Landing Gear Reserves for the previous Rent Period (each a "Reserve" and
collectively, the "Reserves"). Commencing on the first anniversary of the
Effective Date and continuing on the anniversary of the Effective Date in each
consecutive year during the Term, the per Cycle amount payable by LESSEE to
LESSOR with respect to Engine Reserves shall be increased by three and one-half
(3.5%) percent from the per Cycle amount of Engine Reserves payable in the
preceding year. All Reserves paid by LESSEE to LESSOR will be held by LESSOR in
separate accounts for each of the Airframe Reserves, Engine Reserves and Landing
Gear Reserves, respectively, and shall be disbursed by LESSOR only to pay for
Covered Maintenance pursuant to Section 7(D) hereof. Interest shall accrue on
the Reserves at a rate equal to LIBID minus one-quarter percent per annum (the
"Reserve Interest"). The Reserve Interest shall form a part of the Airframe
Reserves, Engine Reserves and Landing Gear Reserves, respectively.
Notwithstanding anything set forth herein to the contrary, if on any Maintenance
Reserve Date (i)(a) the Flight Hours for the Airframe, (b) the aggregate Cycles
with respect to the Engines, and (c) the aggregate Cycles for the Landing Gear,
in each case, respectively, remaining to the next scheduled overhaul (assuming
no change in intervals between checks under the Maintenance Program not approved
by LESSOR, such approval not to be unreasonably withheld) are more than on the
Effective Date, and (ii) LESSEE meets the Credit Standards, then LESSEE shall
not be required to pay any Reserves for such Rent Period with respect to such
category of Reserves. Time is of the essence with respect to the payment by
LESSEE to LESSOR of Reserves. Upon the termination of the Lease with respect to
the Aircraft, provided LESSEE has complied with Section 17 hereof and no Default
or Related Lease Default has occurred and is continuing, all Reserves held by
LESSOR and not used to reimburse LESSEE for Covered Maintenance shall become the
property of LESSEE.
(F) Net Lease, LESSEE's Obligations; No Set off or Counterclaim.
This is a net lease. It is the intent of the parties hereto that this Lease be a
"true lease" and an agreement treated as a "lease" under the provisions of the
Code. Except as otherwise
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provided herein (including, without limitation, in Section 5(C)), and without
limiting LESSEE's rights in the event of a breach of Section 21(G), LESSEE's
obligation to pay all Rent payable hereunder shall be absolute and unconditional
and shall not be affected by any circumstance, including, without limitation,
(i) any Set off, counterclaim, recoupment, defense or other right which LESSEE
may have against LESSOR; (ii) any defect in the title, airworthiness, condition,
design, operation or fitness for use of, or any damage to or loss or destruction
of, the Aircraft, Airframe or any Engine, or any interruption or cessation in
the use or possession thereof by LESSEE for any reason whatsoever; (iii) any
insolvency, bankruptcy, reorganization or similar proceedings by or against
LESSEE; or (iv) any restriction, prevention or curtailment of, or interference
with, any use of the Aircraft, Airframe or any Engine.
SECTION 6
REPRESENTATIONS AND WARRANTIES
(A) Disclaimer of Warranties. EXCEPT FOR THE EXPRESS REPRESENTATIONS
OF LESSOR SET FORTH IN SECTION 6(B), NEITHER LESSOR NOR ANY OF ITS DIRECTORS,
OFFICERS, EMPLOYEES OR REPRESENTATIVES HAS MADE OR WILL BE DEEMED TO HAVE MADE
ANY TERM, CONDITION, REPRESENTATION, WARRANTY OR COVENANT EXPRESS OR IMPLIED
(WHETHER STATUTORY OR OTHERWISE) AS TO (I) THE CAPACITY, AGE, AIRWORTHINESS,
VALUE, QUALITY, DURABILITY, CONFORMITY TO THE PROVISIONS OF THIS LEASE,
DESCRIPTION, CONDITION (WHETHER OF THE AIRCRAFT, ANY ENGINE, ANY PART THEREOF OR
THE AIRCRAFT DOCUMENTATION), DESIGN, WORKMANSHIP, MATERIALS, MANUFACTURE,
CONSTRUCTION, OPERATION, DESCRIPTION, STATE, MERCHANTABILITY, PERFORMANCE,
FITNESS FOR ANY PARTICULAR USE OR PURPOSE (INCLUDING THE ABILITY TO OPERATE OR
REGISTER THE AIRCRAFT OR USE THE AIRCRAFT DOCUMENTATION IN ANY OR ALL
JURISDICTIONS) OR SUITABILITY OF THE AIRCRAFT OR ANY PART THEREOF, AS TO THE
ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, KNOWN OR
UNKNOWN, APPARENT OR CONCEALED, EXTERIOR OR INTERIOR, (II) THE ABSENCE OF ANY
INFRINGEMENT OF ANY PATENT, TRADEMARK, COPYRIGHT OR OTHER INTELLECTUAL PROPERTY
RIGHTS, (III) ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF
DEALING OR USAGE OF TRADE OR (IV) ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS
OR
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IMPLIED, WITH RESPECT TO THE AIRCRAFT OR ANY PART THEREOF, ALL OF WHICH ARE
HEREBY EXPRESSLY EXCLUDED AND EXTINGUISHED.
(B) LESSOR's Representations. As an exception to the foregoing,
LESSOR represents, warrants and covenants as follows:
(1) LESSOR has the lawful right to lease the Aircraft to
LESSEE in accordance with the terms of this Lease;
(2) LESSOR is a corporation duly organized and existing in
good standing under the laws of Delaware and has the corporate power
and authority to carry on its business as presently conducted and to
execute, deliver and perform its obligations under this Lease and
all other Lease Documents to which LESSOR is a party;
(3) This Lease and all other Lease Documents to which LESSOR
is a party have been duly authorized by all necessary corporate
action on the part of LESSOR, do not require any approval of the
stockholder of LESSOR (or if such approval is required, such
approval has been obtained), and neither the execution and delivery
hereof nor the consummation of the transactions contemplated hereby
nor compliance by LESSOR with any of the terms and provisions hereof
will contravene any Law applicable to LESSOR or result in any breach
of, or constitute any default under, or result in the creation of
any Lien other than to the Mortgagee upon any property of LESSOR
under, any indenture, mortgage, chattel mortgage, deed of trust,
conditional sales contract, bank loan or credit agreement, corporate
charter or by-law, or other agreement or instrument to which LESSOR
is a party or by which LESSOR or its properties or assets may be
bound or affected;
(4) This Lease and all other Lease Documents to which LESSOR
is a party have been duly entered into and delivered by LESSOR and
constitute the valid, legal and binding obligations of LESSOR,
enforceable in accordance with their terms, except as such
enforceability may be limited by bankruptcy, moratorium,
reorganization and similar Laws and by general principles of equity,
whether considered in a proceeding at Law or in equity; and
(5) LESSOR has good title to the Aircraft.
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THE REPRESENTATIONS, WARRANTIES AND COVENANTS SET FORTH IN
THIS SECTION 6(B) CONSTITUTE THE SOLE EXCEPTION TO SUBSECTION 6(A)
AND ARE EXCLUSIVE AND IN LIEU OF ALL OTHER REPRESENTATIONS AND
WARRANTIES OF LESSOR EXPRESS OR IMPLIED.
(C) Manufacturer's Warranties. So long as LESSEE is not in default
under this Lease, LESSOR agrees to assign or otherwise make available to LESSEE
such rights as LESSOR may have under any warranty, express or implied, with
respect to the Aircraft made by the Manufacturer, Engine Manufacturer, any
subcontractor or supplier thereof, to the extent that the same may be assigned
or otherwise made available to LESSEE and, to the extent that the same may not
be assigned or otherwise made available to LESSEE, LESSOR agrees, upon the
written request of LESSEE, to exert its efforts, at LESSEE's sole cost and
expense, to enforce such rights as LESSOR may have with respect thereto for the
benefit of LESSEE; provided, however, that upon an Event of Default all such
rights shall, without further action or notice, immediately revert to LESSOR,
including all claims thereunder, whether or not perfected. On the date of the
Redelivery Occasion, the benefit of any warranty assigned by LESSOR to LESSEE
pursuant hereto will be reassigned automatically to LESSOR or its designee.
LESSEE's rights under such warranties (including LESSEE's claims and rights to
payment thereunder) will revert to LESSOR during any period in which an Event of
Default is continuing upon the provision of notice by LESSOR to LESSEE. LESSEE
at its own cost and expense will do all such things and execute such documents
as may be required for this purpose. LESSEE will diligently and promptly pursue
any valid claims it may have against Manufacturer and others under such
warranties with respect to the Aircraft and will provide notice of the same to
LESSOR.
(D) LESSEE's Representations and Warranties. LESSEE represents and
warrants, as of the Effective Date, and all such representations and warranties
being continuing, that:
(1) LESSEE is a corporation duly organized and existing in
good standing under the Laws of Nevada and has the corporate power and authority
to carry on its business as presently conducted and to perform its obligations
under this Lease;
(2) This Lease and all other Lease Documents to which LESSEE
is a party have been duly authorized by all necessary corporate action on the
part of LESSEE, does not require any approval of the stockholders of LESSEE (or
if such approval is required, such approval has been obtained), and neither the
execution and
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delivery hereof nor the consummation of the transactions contemplated hereby nor
compliance by LESSEE with any of the terms and provisions hereof will contravene
any Law applicable to LESSEE or result in any breach of, or constitute any
default under, or result in the creation of, any lien, charge or encumbrance
upon any property of LESSEE under any indenture, mortgage, chattel mortgage,
deed of trust, conditional sales contract, bank loan or credit agreement,
corporate charter or by-law, or other agreement or instrument to which LESSEE is
a party or by which LESSEE or its properties or assets may be bound or affected;
(3) LESSEE has received or has complied with every required
consent, approval, order, or authorization of, or registration with, or the
giving of prior notice to, any Governmental Entity having jurisdiction with
respect to the execution and delivery of this Lease and all other Lease
Documents to which LESSEE is a party or the validity and enforceability hereof
and thereof;
(4) This Lease and all other Lease Documents to which LESSEE
is a party have been duly entered into and delivered by LESSEE and constitutes a
valid, legal and binding obligation of LESSEE, enforceable in accordance with
its terms, except as enforceability may be limited by bankruptcy,
reorganization, moratorium or other similar Laws and by general principles of
equity, whether considered in a proceeding at Law or in equity;
(5) There are no suits or proceedings pending, or to the
knowledge of LESSEE, threatened against or affecting LESSEE, which are
reasonably expected to have a material adverse effect on the financial condition
or business of LESSEE or upon LESSEE's ability to perform its obligations
hereunder;
(6) LESSEE has filed or caused to be filed all material tax
returns which are required to be filed by LESSEE 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 those the validity of which is contested by LESSEE in
good faith by appropriate proceedings duly instituted and diligently prosecuted;
(7) LESSEE is an "air carrier operating under a certificate of
convenience and necessity," as such quoted language is used and defined under 11
U.S.C. ss. 1110 ("Section 1110"), and this Lease constitutes a "lease" under
Section 1110 and LESSEE is a Certificated Air Carrier pursuant to chapter 447 of
Title 49 of the United States Code;
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(8) The obligations of LESSEE under the Lease Documents
constitute direct, general and unconditional obligations of the LESSEE; and
(9) No event has occurred which constitutes, or with the
giving of notice or passage of time or both would constitute, an Event of
Default under this Lease.
(E) Notification. During the Term of this Lease, LESSEE shall notify
LESSOR in writing of any condition that materially changes the content of the
representations and warranties made as of the Effective Date under Section 6(D)
hereof, within five (5) days of LESSEE's knowledge thereof.
SECTION 7
POSSESSION, USE, MAINTENANCE, TITLE AND REGISTRATION
(A) Possession. Except as expressly provided in Subsection 8(B) and
Section 22, LESSEE shall not transfer possession of the Aircraft or any Engine
or part thereof to any Person without the prior written consent of LESSOR, which
consent shall not be unreasonably withheld, provided that, so long as no Default
shall have occurred and be continuing and so long as LESSEE shall comply with
the provisions of Section 13 hereof, LESSEE may, so long as the action to be
taken shall not deprive LESSOR of its title to and interest in the Aircraft, the
Airframe or any Engine and shall not adversely affect the registration of the
Aircraft under the Laws of the U.S. Government, without the prior written
consent of LESSOR, deliver possession of the Aircraft, the Airframe or any
Engine or other Part thereof to the Manufacturer, the Engine Manufacturer or
Authorized Maintenance Performer, as appropriate, for testing, service, repair,
maintenance or overhaul work on the Aircraft, the Airframe, any Engine or Part,
or for alterations, modifications, or additions thereto, to the extent required
or permitted by the terms of Subsection 7(D) hereof.
(B) Use. LESSEE shall use the Aircraft solely in commercial
passenger carrying operations and normal training, maintenance, ferry and other
such related operations in accordance with all Laws applicable to it and shall
not use or permit the Aircraft to be used for any purpose for which the Aircraft
is not designed or reasonably suited.
(C) Lawful Insured Operations. LESSEE shall not permit the Aircraft
to be maintained, used, or operated in violation of any Law of any Governmental
Entity
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having jurisdiction, or contrary to the Manufacturer's or Engine Manufacturer's
operating manuals and instructions, or in violation of any airworthiness
certificate, license, or registration relating to the Aircraft issued by the
U.S. Government, unless the validity thereof is being contested in good faith
and by appropriate proceedings duly instituted and diligently prosecuted, but
only so long as such proceedings will not result in the sale, forfeiture, loss
of valid insurance coverage upon, or loss of, the Aircraft, the Airframe, any
Engine or any Part. LESSEE shall comply with the foregoing at its sole cost and
expense and shall maintain the Aircraft in proper condition for operation under
such Laws. LESSEE agrees not to operate the Aircraft, or to permit or suffer the
Aircraft to be operated, within or into any geographic area:
(1) unless the Aircraft is at all such times covered by
insurance as required by the provisions of Section 13 hereof or the
indemnity given by the United States Government pursuant to Section
22(F) hereof;
(2) contrary to the terms of such insurance, as required by
the provisions of Section 13 hereof or the indemnity given by the
United States Government pursuant to Section 22(F) hereof; and
(3) in violation of any Law, rule, order or regulation of any
Governmental Entity.
LESSEE shall deliver to LESSOR such documents and assurances as LESSOR may
request under the provisions of Section 16 hereof to evidence compliance with
the foregoing.
(D) Maintenance.
(i) LESSEE, at its own cost and expense shall:
(a) service, repair, maintain, overhaul, test, or cause
the same to be done to the Aircraft so as to keep the Aircraft in as
good operating condition as when delivered to LESSEE hereunder,
ordinary wear and tear excepted, in accordance with Manufacturer's
type design and in such operating condition as required by the
Maintenance Program and as may be necessary to enable the United
States airworthiness certification of the Aircraft to be maintained
in good standing at all times under FAR Part 121 standards and the
applicable Laws of the U.S. Government;
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(b) perform all routine and non-routine services,
checks, inspections, including any structural inspections
requirements (SSID's) and "A", "B", "C," "15,000 Hour" or "30,000
Hour" checks (or the equivalent thereof) required by the
Maintenance Program or the FAA;
(c) maintain all records, logs and other materials
required by applicable Laws of any Governmental Entity and the FAA
to be maintained in respect of the Aircraft, including, but not
limited to, serviceable component tags required by the FAA;
(d) throughout the Term of this Lease, provide LESSOR
with not less than two weeks prior written notice of the scheduled
commencement date of each "C", "15,000 Hour" or "30,000 Hour" check
(or their equivalent) to be performed on the Aircraft and the
location where such checks will be performed;
(e) designate representatives to coordinate with LESSOR
or LESSOR's representatives on maintenance and warranty matters;
(f) incorporate in the Aircraft prior to the terminating
or compliance date all applicable airworthiness directives or
equivalent (referenced to in this Lease as "Airworthiness
Directives") of the FAA, all alert service bulletins of the
Manufacturer, Engine manufacturer and other vendors or manufacturers
of Parts incorporated on the Aircraft and any service bulletins
which must be performed in order to maintain the warranties on the
Aircraft, Engines and Parts;
(g) incorporate in the Aircraft all other service
bulletins of the Manufacturer, the Engine manufacturer and other
vendors which LESSEE schedules to adopt within the Term for the rest
of its MD87 aircraft fleet. It is the intent of the parties that the
Aircraft will not be discriminated from the rest of LESSEE's fleet
in service bulletin compliance (including method of compliance) or
other maintenance matters. LESSEE will not discriminate against the
Engines with respect to overhaul build standards and life limited
part replacements;
(h) incorporate in the Maintenance Program for the
Aircraft a corrosion prevention and control program as recommended
by Manufacturer and approved by the FAA, and correct any
discrepancies in
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accordance with the recommendations of Manufacturer and the
Structural Repair Manual. In addition, all inspected areas will be
properly treated with corrosion inhibitor as recommended by
Manufacturer;
(i) provide LESSOR will written summaries of all
sampling programs involving or affecting the Aircraft;
(j) properly document all repairs, modifications and
alterations and the addition, removal or replacement of equipment,
systems or components in accordance with the rules and regulations
of the FAA and reflecting such items in the Aircraft Documentation.
In addition, all repairs to the Aircraft will be accomplished in
accordance with Manufacturer's Structural Repair Manual (or
FAA-approved data supported by FAA Form 8110-3 or equivalent). All
modifications and alterations will also be accomplished in
accordance with FAA-approved data supported by FAA Form 8110-3 or
equivalent.
(ii) All maintenance of the Aircraft and Engines shall be
performed by an Authorized Maintenance Performer.
(iii) (A) "Covered Maintenance" means, at any time, (1) the
structural inspection portion (including CPCP) of the 15,000 Hour
and 30,000 Hour (or their equivalent) maintenance checks under the
Maintenance Program, (2) the performance restoration or replacement
of life limited parts or permanent repair of on-condition parts in
the bare Engine during completed shop visits and (3) the full
refurbishment of the landing gear (excluding maintenance in respect
of compliance with airworthiness directives and elective parts
replacement), respectively, pursuant to the Maintenance Program
including, in each case, without limitation, associated inspections,
breakdown and assembly occurring during such overhauls. The cost of
Covered Maintenance shall be limited to the actual cost of
replacement parts plus the cost of the associated labor at LESSEE's
in-house labor rates if the work is performed by LESSEE, excluding
any LESSEE charges for handling, packaging and shipping, or at
third-party cost charged to LESSEE if the work is performed by third
parties, and shall in no event include late charges, interest or
other similar amounts as a result of late payment.
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(B) Unless a Default or a Related Lease Default shall have
occurred and be continuing, the LESSOR shall pay to the LESSEE, within five
Business Days after receipt of:
(a) an invoice stating that Covered Maintenance has been
performed on the Airframe, an Engine or a Landing Gear,
respectively, and the cost thereof; and
(b) appropriate documentation with respect to such work
or payments, an amount equal to the actual cost of such work up to
the then current balance of the Airframe Reserves for such Covered
Maintenance on the Airframe, up to the then current balance of the
Engine Reserves for such Covered Maintenance on any Engine and up to
the then current balance of the Landing Gear Reserves for such
Covered Maintenance on a Landing Gear; provided, however, that at no
time shall the amount of any Reserve to be made available by LESSOR
for Covered Maintenance exceed the amount remaining in such Reserve.
(f) LESSEE agrees that it will not discriminate against
the Aircraft (as compared to other aircraft of the same type owned
or operated by LESSEE) in the performance of maintenance, including,
but not limited to, in contemplation of the expiration or
termination of this Lease with respect to the maintenance of the
Aircraft.
(E) Airworthiness Directives: Service Bulletins. If the FAA, the
Manufacturer or the Engine Manufacturer, or the manufacturer of any Parts,
publishes an airworthiness directive or mandatory service bulletin after the
Effective Date of this Lease, which has a useful life beyond the Term, requiring
completion or termination during the Term (a "Post-Effective Mandatory
Modification"), LESSEE shall as required in Section 7(D)(i) above take all such
action as is necessary to comply with such Post-Effective Mandatory Modification
prior to the return of the Aircraft by LESSEE to LESSOR. To the extent the cost
of completing or terminating any such Post-Effective Mandatory Modification
exceeds $50,000.00, LESSOR shall pay to LESSEE a portion of such excess equal to
the following:
(LESSEE's Cost - $50,000) x A/240
Where:
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A = 240 minus the number of months (rounded upward or
downward, as the case may be, to the nearest month) from
the date the relevant Post-Effective Mandatory
Modification was completed or terminated by LESSEE to
the Expiration Date.
Any amounts payable by LESSOR to LESSEE pursuant to this Section 7(E) shall not
be payable to the LESSEE until the later of (i) the Expiration Date, or (ii) the
date on which the LESSEE has complied with all the terms of this Lease.
(F) Title, Registration and Insignia. LESSEE acknowledges and agrees
that title to the Aircraft shall remain vested in LESSOR during the Term in
accordance with the terms of this Lease. The Aircraft shall, at all times during
the Term, be registered in the United States in the name of LESSOR or such
Person as LESSOR may designate, in accordance with the Laws of the U.S.
Government. LESSEE agrees that it shall take no action which shall cause the
Aircraft to cease to be so registered in the name of LESSOR with the FAA under
the Act. Unless otherwise requested, within fifteen (15) days of the Effective
Date, LESSEE shall fasten or cause to be fastened in the cockpit, in a location
reasonably adjacent to and not less prominent than the airworthiness certificate
for such Aircraft and on each Engine, an insignia plate supplied by LESSOR and
in the form set forth in Exhibit "H" hereto or in any other form subsequently
designated by LESSOR.
LESSEE will not allow the name of any Person to be placed on
the Aircraft or an Engine as a designation that might be interpreted as a claim
of ownership; provided, however, that LESSEE may cause the Aircraft to be
lettered in an appropriate manner for convenience of identification of the
interest of LESSEE therein, including but not limited to, the customary livery
of LESSEE.
(G) Maintenance Reports and Records.
(a) During the Term, LESSEE shall provide maintenance
information and reporting requirements to LESSOR and any other party
so designated by LESSOR including but not limited to: (i) written
notification within thirty (30) days after issuance of any
airworthiness directive or legal requirement affecting the Aircraft,
Airframe, Engines or Parts; (ii) annual and quarterly written
projections of scheduled Airframe, landing gear and Engine heavy
maintenance; (iii) prompt written notification of damage to the
Aircraft, Airframe, Engines or Parts where the estimated cost of
repair is in excess of $250,000 (iv) prompt written notification of
Engine removals,
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exchanges or foreign object damage (said report to include details
of circumstances and plan of action to repair); (v) reports of
Flight Hours and Cycles on a monthly basis; (vi) reporting of all
service bulletins completed; and (vii) copies of all material
reports sent to the FAA or Air Authority concerning the Aircraft.
(b) LESSEE will, during the Term, maintain all records, logs
and other materials required to be maintained with respect to the
Aircraft by Persons in operational control of the Aircraft under any
applicable rules, Laws or regulations and shall supply all such
records, logs and other materials to LESSOR or third parties as
reasonably requested by LESSOR and as shall be necessary in order to
implement the Maintenance Program and any and all warranties and
guarantees that apply to the Aircraft. LESSEE will provide LESSOR
with copies of all records of maintenance performed during the Term
as requested by LESSOR. All such records shall be kept as required
under FAR Part 121 and in English.
(H) Passenger Convenience Equipment. Notwithstanding any other
provision herein to the contrary, LESSEE may install or remove or permit to be
installed or removed aboard the Aircraft, without the prior written consent of
LESSOR, Passenger Convenience Equipment so long as the installation, use and
removal of such Passenger Convenience Equipment does not impair the value,
utility or airworthiness the Aircraft would have had at any time had the
installation, use or removal not occurred.
Without further action of LESSEE or LESSOR, title to such
Passenger Convenience Equipment, upon installation, shall vest in LESSOR and
shall become subject to this Lease, free of all liens, charges and encumbrances,
provided, however, that so long as an Event of Default shall not have occurred
and be continuing during the Term, LESSEE may, at any time prior to return of
the Aircraft, remove such Passenger Convenience Equipment or component thereof,
at which time title thereto shall, without further act, vest in LESSEE, and such
Passenger Convenience Equipment or component thereof shall no longer be deemed
part of the Aircraft from which it was removed.
Notwithstanding the foregoing paragraph, if the Passenger
Convenience Equipment is (i) owned by any third party and leased to LESSEE, (ii)
sold to LESSEE subject to a conditional sales contract or other security
interest, (iii) leased to LESSEE pursuant to a lease which is subject to a
security interest in favor of any third party, or (iv) installed aboard the
Aircraft subject to a license granted by LESSEE to a
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Immediately upon any replacement Parts becoming incorporated or installed in or
attached to the Aircraft as above provided, and without further act:
(1) title to the removed Part shall vest in LESSEE, free and
clear of all rights of LESSOR;
(2) title to the replacement Parts shall vest in LESSOR, free
and clear of all rights of third parties, including, but not limited
to, LESSEE; and
(3) such replacement Parts shall become subject to this Lease
and shall be deemed part of the Aircraft into which such Parts were
incorporated or with respect to which such Parts were required, for
all purposes hereof to the same extent as the Parts originally
incorporated or installed in, or attached or related to such
Aircraft.
(B) Pooling; Etc.
(i) LESSEE may subject any Engine or APU to normal interchange
agreements customary in the United States domestic commercial
airline industry entered into by the LESSEE in the ordinary course
of its business, and may subject any Engine to pooling arrangements
customary in the United States domestic commercial airline industry
and entered into by the LESSEE in the ordinary course of its
business.
(ii) LESSEE may install an Engine or APU on an airframe owned
by the LESSEE provided such airframe is free and clear of all liens
and encumbrances, except
(a) Liens of the type or equivalent to those set forth in the
definition of "Permitted Liens"; and
(b) the rights of air carriers under normal interchange
arrangements which are customary in the United States domestic
commercial airline industry and which do not contemplate, permit or
require the transfer of title to the airframe or Engines installed
thereon.
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(iii) LESSEE may install an Engine or APU on an airframe
leased to, or purchased by the LESSEE, subject to a lease,
conditional sale, trust indenture or other security agreement, but
only if
(a) such airframe is clear of all liens and encumbrances,
except Permitted Liens or Liens of the type or equivalent to those
set forth in the definition of "Permitted Liens" and the rights of
the parties to the lease, conditional sale, trust indenture or other
security agreement covering such airframe; and
(b) LESSOR shall have received from the lessor, conditional
seller, indenture trustee, or secured party of such airframe, a
written agreement (which may be the lease, conditional sale, trust
indenture or other security agreement covering such airframe),
whereby such lessor, conditional seller, indenture trustee or
secured party expressly agrees that neither it nor its successors or
assigns will acquire or claim any right, title or interest in any
Engine or APU by reason of such Engine or APU being incorporated in
such airframe at any time while such Engine or APU is subject to
this Lease.
(iv) No permitted interchange or pooling agreement, transfer
or other relinquishment of possession permitted hereunder shall
affect the title to, or registration of or effect any transfer of
the Aircraft, Airframe, Engines or APU or shall constitute consent
to any action not permitted to the LESSEE in this Lease.
(v) LESSOR hereby agrees for the benefit of LESSEE and any
lessor, conditional vendor or secured party of any engine leased to
LESSEE, purchased by LESSEE pursuant to a conditional sale agreement
or owned by LESSEE subject to a security agreement that neither
LESSOR nor its assignees will acquire or claim, as against LESSEE,
such lessor, conditional vendor or secured party or any of their
respective assignees any right, title or interest in any engine
owned by such lessor under such lease, sold by such conditional
vendor under such conditional sale agreement or subject to a
security interest in favor of such secured party under such security
agreement as a result of such engine being installed on the
Airframe.
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(C) Equipment Changes. LESSEE, at its own expense, shall make such
alterations and modifications in and additions to ("Equipment Changes") the
Aircraft as may be required from time to time to meet the standards of the FAA
and the Air Authority and of the Governmental Entity in the jurisdiction of
which LESSEE elects to fly the Aircraft and whose approval or consent is
required to permit LESSEE to fly over and/or into any geographical area with
respect to which the Governmental Entity exercises authority. In addition, the
term "Equipment Changes" shall mean modifications to or additions to the
Aircraft that LESSEE, at its own expense, may from time to time deem desirable
in the proper conduct of its business, provided that no such Equipment Change
diminishes the value, utility, condition or airworthiness of the Aircraft below
the value, utility, condition and airworthiness thereof immediately prior to
such Equipment Change, assuming the Aircraft was then in the condition required
to be maintained by the terms of this Lease, and provided further that LESSEE
shall not change the configuration of the Aircraft during the Term (except the
passenger seating configuration) unless such configuration is approved by the
LESSOR and the Air Authority. Any Equipment Change other than the Equipment
Changes relating to the installation of TCAS, Windshear detection system and the
upgrade of the Engines from model JT8D-217C to JT8D-219 with an estimated cost
in excess of Two Hundred Fifty Thousand ($250,000.00) Dollars must be approved
in advance by LESSOR, which approval will not be unreasonably withheld.
Title to all Parts incorporated, installed in, attached or
added to the Aircraft as the result of any such Equipment Change shall, without
further act, vest in LESSOR; provided, however, that during the Term, LESSEE may
remove any such Part if: (1) such Part is in addition to any Part originally
incorporated or installed in or attached to such Aircraft at the time of
delivery thereof hereunder; and (2) such Part is not required to be
incorporated, installed in, attached or added to the Aircraft; and (3) such Part
can be removed from the Aircraft or can be replaced with a part of equal value
to the Part installed upon delivery without diminishing or impairing the value,
utility or airworthiness which the Aircraft would have had at such time, had
such Equipment Change not occurred. Upon the removal by LESSEE of any Part as
above provided, title thereto shall, without further act, vest in LESSEE and
such Part shall no longer be deemed part of the Aircraft from which it was
removed. Any Part not removed from the Aircraft by LESSEE as provided above
prior to a Redelivery Occasion shall remain the property of LESSOR.
LESSOR shall bear no liability in respect of, or cost for, any
Equipment Change, grounding of the Aircraft, suspension of certification
thereof, or loss of revenue therefrom.
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SECTION 9
INSPECTION; FINANCIAL INFORMATION
(A) During the Term, LESSEE shall furnish to LESSOR and Mortgagee
such information concerning the location, condition, use and operation of the
Aircraft as LESSOR or Mortgagee may reasonably request. LESSEE shall also
furnish to LESSOR and Mortgagee copies of its reports on Forms 10-K and 10-Q
promptly upon same becoming available for public distribution.
(B) The right of LESSOR and Mortgagee, or their designated
representatives, at LESSOR's expense, to inspect the Aircraft during any "C",
"15,000 Hour" or "30,000 Hour" check or equivalent (as defined in the
Maintenance Program), performed by or on behalf of LESSEE during the Term shall
be absolute. LESSEE shall also provide LESSOR and Mortgagee with maintenance
schedules relating to the Aircraft upon the delivery of the Aircraft to LESSEE,
and from time to time as such maintenance schedules are adjusted or updated.
LESSEE further agrees to notify LESSOR and Mortgagee of any change in the date
of scheduled "C," "15,000 Hour" and "30,000 Hour" checks, which notice shall be
given within a reasonable time, to enable LESSOR and Mortgagee to inspect the
Aircraft at the time and place such checks occur. During such checks, LESSEE
agrees to allow LESSOR and Mortgagee, or their authorized representative, to
inspect any area of the Aircraft which LESSOR or Mortgagee requests to inspect
which would normally require inspection during such major checks. LESSEE also
shall permit any Person designated by LESSOR or Mortgagee in writing to:
(1) visit and inspect the Aircraft, its condition, use and
operation, and the records maintained in connection therewith;
(2) visit and inspect the properties of LESSEE;
(3) discuss, to the extent reasonable, the finances and
accounts of LESSEE with the principal officers of LESSEE,
(4) obtain such other financial information as LESSOR or
Mortgagee may reasonably request; in this regard, during the Term,
LESSEE shall deliver to LESSOR and Mortgagee annual financial
statements prepared in accordance with generally accepted accounting
principles consistently applied and audited by recognized,
independent
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certified public accountants reasonably satisfactory to LESSOR and
Mortgagee as soon as practicable and in any event within 120 days
after the end of LESSEE's fiscal year, as well as quarterly
unaudited financial statements, within 60 days following the close
of each of LESSEE's fiscal quarters; and
(5) inspect LESSEE's Maintenance Program for the Aircraft.
all at such times and frequencies as LESSOR and Mortgagee, or the assignee of
LESSOR or Mortgagee, may reasonably request without interfering with LESSEE's
normal business operations; neither LESSOR nor Mortgagee shall have any duty to
make any such inspection and neither LESSOR nor Mortgagee shall incur any
liability or obligation by reason of not making any such inspection.
LESSOR hereby agrees that if LESSOR or Mortgagee exercises any of the rights
listed in clauses (1) through (5) above, it shall do so at LESSOR's sole cost
and expense and in such a manner so as not to unreasonably interfere with the
business and operations of LESSEE.
Notwithstanding the foregoing, LESSOR and Mortgagee shall
incur no liability nor be deemed to have waived any of their rights under this
Lease by reason of LESSOR's or Mortgagee's failure to exercise any of its rights
under this Section 9(B).
(C) LESSEE shall also furnish any other information or records on
the Aircraft that LESSOR or Mortgagee may reasonably request.
SECTION 10
COVENANTS OF LESSEE
LESSEE represents, warrants, covenants and agrees that:
(A) Maintenance of Corporate Existence. LESSEE shall preserve and
maintain its existence, valid legal status, and all of its rights, privileges,
and franchises under the Laws of the U.S. Government necessary to the conduct of
its business.
(B) Payment of Taxes. LESSEE shall:
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(1) Pay or cause to be paid all taxes upon LESSEE or its
income or profits, or upon any property or assets belonging to or
used by it, prior to the date on which penalties attach thereto;
(2) Pay or otherwise discharge all lawful claims, which, if
not paid, might become a Lien or charge upon the property of LESSEE
(provided, however, that LESSEE shall not be required to pay any
such Taxes or claims, the payment of which is being contested in
good faith and by appropriate proceedings, except that LESSEE will
pay or cause to be paid all such Taxes or claims forthwith in the
event LESSEE is unable to stay or suspend enforcement or execution
of a warrant of restraint or foreclosure of any Liens which attach
as security therefor).
(C) Sale of Assets, Merger, etc. Without the prior written consent
of LESSOR, which consent shall not be unreasonably or arbitrarily withheld,
LESSEE will not sell, lease, assign, transfer or otherwise dispose of
substantially all of its assets, whether now owned or hereafter acquired, except
in the ordinary course of its business as presently conducted and for a full and
adequate consideration, and will not merge or consolidate with or into, or
acquire substantially all of the assets and assume substantially all of the
liabilities of, any corporation or other entity unless the surviving entity, as
a result of such sale, purchase, merger or consolidation, is the LESSEE or the
surviving entity (i) assumes this Lease; (ii) is a U.S. Air Carrier; and (iii)
has and will have, immediately following any such sale, purchase, merger or
consolidation, a tangible net worth (as determined in accordance with United
States generally accepted accounting practices) equal to or greater than that
which the LESSEE had immediately prior to such sale, merger or consolidation.
(D) U.S. Air Carrier. Throughout the Term, LESSEE shall, at all
times, be a U.S. Air Carrier.
(E) Communications.
(i) LESSEE shall promptly deliver to LESSOR any communications
received by LESSEE from the Air Authority which materially affects
the Aircraft and which are not applicable to all aircraft of the
same make and model as the Aircraft; and
(ii) LESSOR shall promptly deliver to LESSEE any
communications received by LESSOR from the Manufacturer which
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materially affects the maintenance, operation or airworthiness of
the Aircraft and which are not applicable to all aircraft of the
same make and model as the Aircraft.
(F) No Security Interests. LESSEE will not create or agree or permit
to arise any Lien (other than Permitted Liens) on or with respect to the
Aircraft, title thereto or any interest therein. LESSEE will forthwith, at its
own expense, take all action as may be necessary to discharge or remove any such
Lien if it exists at any time. LESSEE will promptly, but in no event later than
seventy-two (72) hours after becoming aware of the existence of any such Lien
give written notice thereof to LESSOR.
SECTION 11
TAXES
(A) LESSEE agrees to pay and to indemnify and hold harmless the
Indemnitees from all Taxes assessed against or upon any Indemnitee, LESSEE, the
Aircraft, or any part thereof during the Term and arising out of this Lease, or
upon the leasing, possession, use, operation, repair, maintenance, overhaul,
settlement of any insurance claim, or return thereof, or upon any Rent, receipts
or earnings arising from the operation thereof, or upon or with respect to this
Lease unless, and to the extent only that, any such Tax is being contested by
LESSEE in good faith and by appropriate proceedings duly instituted and
diligently prosecuted and only so long as such proceedings do not involve any
danger of the sale, forfeiture or loss of the Aircraft. Notwithstanding the
foregoing, Lessee shall not be liable to pay (1) any Taxes based solely on or
measured by the net income of any Indemnitee, (2) any Taxes imposed by any
taxing authority other than the United States of America or any political
subdivision thereof unless such Taxes would not have been imposed but for (a)
the operation or presence in such jurisdiction of the Aircraft, (b) the presence
in such jurisdiction of a permanent establishment or fixed place of business of
Lessee or any user or Person in possession of the Aircraft, or (c) the payment
from such jurisdiction of any amount due under this Lease. In case any report or
return is required to be made with respect to any obligation of LESSEE under or
arising out of this Section 11, LESSEE shall either make such report or return
in such manner as will show the ownership of the Aircraft in LESSOR and send a
copy of such report or return to LESSOR, or shall notify LESSOR of such
requirement and make such report or return in such manner as shall be
satisfactory to LESSOR. If claim is made against LESSOR for any Taxes arising
during the term of this Lease, LESSOR shall promptly notify LESSEE. LESSOR
shall, at LESSEE's expense, take such action as LESSEE may
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reasonably request in writing with respect to such asserted liability, and if
reasonably requested by LESSEE and upon the prior payment to LESSOR by LESSEE of
an amount equal to such Tax, any payment by LESSOR of such Tax shall be made
under protest. If payment is made, LESSOR shall, at LESSEE's expense, take such
action as LESSEE may reasonably request to recover such payment and shall, if
requested, permit LESSEE in LESSOR's name to file a claim or prosecute an action
to recover such payment. All of the obligations of LESSEE in this Section 11
with respect to Taxes imposed or accrued before the expiration or other
termination of this Lease shall continue in full force and effect
notwithstanding such expiration or other termination, and are expressly made for
the benefit of, and shall be enforceable by, LESSOR. LESSEE further agrees that,
with respect to any payment or indemnity hereunder, such payment or indemnity
shall include any amount necessary to hold the recipient of the payment or
indemnity harmless on an after-tax basis from all Taxes required to be paid by
such recipient with respect to such payment or indemnity under the Laws of any
Governmental Entity.
(B) In the event the LESSEE determines there is a substantial risk
of a change in the Code, or the Regulations issued pursuant thereto, which
clearly results in a Tax of the LESSOR indemnified against pursuant to this
Section 11 being imposed against an Indemnitee (a "Change"), the LESSEE shall
have the right to terminate this Lease and return the Aircraft to the LESSOR
pursuant to the provisions of Section 17. LESSEE shall notify LESSOR of any
Change and its intent to terminate the Lease in writing 270 days prior to the
date that the Lease is to be terminated and the Aircraft returned to LESSOR. If
LESSOR elects to waive any indemnification pursuant to this Section 11 in
respect of any Taxes which are attributable to such Change within 30 days of
such notice (a "LESSOR Waiver"), the Lease shall not be terminated but LESSEE
shall have no obligation under this Section 11 in respect of such Taxes arising
due to such Change. However, at any time subsequent to such LESSOR Waiver,
LESSOR may, on 270 days' prior notice to LESSEE, elect to terminate this Lease
and require the LESSEE to return the Aircraft to the LESSOR pursuant to the
provisions of Section 17, in which event LESSEE may elect to irrevocably
reinstate its indemnification pursuant to this Section 11 in respect of any
Taxes which are attributable to such Change, within 30 days of such notice from
LESSOR.
(C) LESSOR will act in good faith to minimize the obligations of the
LESSEE under this Section 11.
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SECTION 12
EVENT OF LOSS
(A) Event of Loss Regarding the Aircraft. In the event that an Event
of Loss occurs with respect to the Aircraft (other than a requisition of use by
the U.S. Government while the United States pays to LESSOR or LESSEE
compensation for such requisition in an amount equal to or in excess of the Rent
payable with respect to such Aircraft), LESSEE shall forthwith (and, in any
event, not later than five (5) days after the occurrence of the Event of Loss)
give LESSOR written notice of such Event of Loss and, not later than the earlier
of: (a) the ninetieth (90th) day following the occurrence of such Event of Loss;
or (b) the day of receipt of insurance proceeds in respect of such Event of
Loss; pay to LESSOR or its assignees, in funds of the type specified in
Subsection 5(B) hereof, the sum of all unpaid Rent and all other amounts due
hereunder with respect to such Aircraft and which have accrued through and
including the date of payment of the Agreed Value, plus an amount equal to the
Agreed Value. In the event of payment in full of such Agreed Value, together
with all such amounts due or accrued hereunder on or prior to the date of such
payment, the obligation of LESSEE to pay Rent with respect to the Aircraft as to
which such payments have been made shall terminate. LESSEE agrees that it shall
promptly file all necessary claim forms or other documents required by any
insurer in connection with any claim arising from an Event of Loss and shall
diligently pursue such claim.
Upon payment of all Rent due and the Agreed Value, LESSOR
shall transfer to LESSEE (subject to the rights of the Insurers) all of LESSOR's
right, title, and interest in and to: (i) the Aircraft which sustained such
Event of Loss, as well as all of LESSOR's right, title, and interest in and to
any Engines constituting part of such Aircraft; and (ii) all claims for damages
to such Aircraft and/or Engines, if any, against third Persons arising from such
Event of Loss (unless any insurance carrier requires that such claims be
assigned to it), without any representation, warranty, or recourse of any kind
whatsoever, express or implied, except a warranty that such Aircraft is free and
clear of any LESSOR Liens.
In the event of an Event of Loss involving the Aircraft
wherein one or more of the Engines are not attached to the Airframe, the
Aircraft, for purposes of this Section 12(A), shall be deemed to include all
Engines on lease hereunder and LESSOR shall cooperate in transferring title to
such non-attached Engines, free and clear of all LESSOR Liens, to the owner of
the engine attached to the Airframe at the time of the Event of Loss.
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(B) Event of Loss With Respect to an Engine. Upon any Event of Loss
with respect to an Engine not then installed on the Aircraft, or an Event of
Loss with respect to only an Engine installed on the Aircraft not involving an
Event of Loss to the Aircraft, LESSEE shall give LESSOR prompt written notice
thereof and LESSEE shall replace such Engine as soon as reasonably possible
after such Event of Loss by duly conveying to LESSOR, as a replacement for such
Engine, title to another engine owned by LESSEE of the same or an improved make
and model, which engine shall be free and clear of all Liens and shall have a
value and utility at least equal to, be in as good operating condition as
(including time in service, hours and cycles since new and hours and cycles
available to the next overhaul or scheduled removal), and be in equivalent or
better service bulletin and modification status than the Engine which sustained
such Event of Loss (assuming the Engine which sustained such Event of Loss was
maintained in the condition in which LESSEE was required to maintain such Engine
pursuant to this Lease). Such replacement engine, after approval and acceptance
by LESSOR, shall be deemed an "Engine" as defined herein. If the replacement
engine is in substantially better condition than the Engine which sustained such
Event of Loss, Lessor will consider an appropriate adjustment to the Engine
Reserves. LESSEE agrees to take such action as LESSOR may reasonably request in
order that any such replacement engine shall be duly and properly leased
hereunder to the same extent as the Engine subject to the Event of Loss and
shall be titled in LESSOR. LESSEE's obligation to pay Rent hereunder shall
continue in full force and effect regardless of the occurrence of an Event of
Loss with respect to an Engine, but LESSEE shall be entitled to be reimbursed by
LESSOR the amount of insurance or condemnation proceeds, if any, received by
LESSOR with respect to such Engine. Upon receipt of title by LESSOR to the
replacement engine as hereinabove provided, LESSOR shall convey to LESSEE, free
and clear of all LESSOR Liens, title to the Engine which sustained such Event of
Loss.
(C) Damage or Requisition Not Constituting an Event of Loss. In the
event of material damage or requisition of the Aircraft or any Engine not
constituting an Event of Loss, LESSEE shall promptly notify LESSOR in writing of
such damage or requisition and shall remain obligated to make all payments of
Rent in respect to such Aircraft or Engine which may become due hereunder in the
same manner as if such damage or requisition had not occurred. All payments at
any time received by LESSEE, or by LESSOR from any Person other than LESSEE,
with respect to any such damage or requisition shall be paid over to, or
retained by, LESSOR, and shall be paid to LESSEE upon repair of the Aircraft or
Engine.
(D) Receipt and Application of Compensation. Following an Event of
Loss with respect to which payments, including insurance proceeds, are made by
or are
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due from any Person (any such payments or proceeds being hereinafter referred to
as "Compensation"), LESSOR shall be entitled to receive, and shall receive, and
LESSEE hereby assigns to LESSOR any right or interest which LESSEE may have or
may hereafter acquire, in such Compensation, in trust, to be applied as follows:
(1) If such Compensation is received with respect to the
Aircraft under the circumstances described in Subsection 12(A), so
much thereof as shall not exceed the Agreed Value and other amounts
due under Subsection 12(A) shall be retained by LESSOR, in reduction
of LESSEE's obligation to pay such Agreed Value and other amounts
due as was not theretofore paid by LESSEE, or, if such Agreed Value
and other amounts have already been paid to LESSOR, such
Compensation shall be applied to reimburse LESSEE for its payment of
such Agreed Value, and may be paid to LESSEE.
(2) If such Compensation is received with respect to an Engine
under the circumstances described in Subsection 12(B), such
Compensation shall be held in an account established for LESSOR with
a bank or trust company as depository, as designated by LESSOR, such
sums to be held, invested and distributed as provided below. All of
LESSEE's interest in all monies and investments standing to the
credit of such account are hereby pledged to LESSOR, and LESSOR is
hereby granted a general lien upon and security interest in all of
LESSEE's interest in all such monies and investments as security for
the performance in full of all of LESSEE's covenants contained in
this Lease. The bank or trust company holding such Compensation
shall be deemed to be LESSOR's agent for the purpose of perfecting
LESSOR's security interest in such sums. If LESSEE shall replace
such Engine in accordance with the provisions of Subsection 12(B),
LESSOR shall, so long as no Event of Default or Default shall have
occurred and be continuing, return all monies and investments then
held in such account to LESSEE.
(E) Payments During Existence of an Event of Default. Any payment
referred to in Subsection 12(A), (B), (C) or (D) hereof which is payable to
LESSEE hereunder shall not be paid to LESSEE, or, if previously paid directly to
LESSEE, shall not be retained by LESSEE, if at the time of such payment a
Default or a Related Lease Default shall have occurred and be continuing, but
shall be paid to and retained by LESSOR as security for the obligations of
LESSEE under this Lease until such time as
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such a Default or a Related Lease Default shall have been remedied, whereupon
such payment shall be made to LESSEE.
SECTION 13
INSURANCE
(A) Public Liability and Property Damage Insurance. LESSEE will
carry and maintain in effect, at its own expense, with Approved Insurers, public
liability insurance (including, without limitation, contractual liability, and
passenger legal liability), and property damage insurance with respect to the
Aircraft, in amounts per occurrence of not less than the Minimum Liability
Coverage, or such greater amounts as LESSEE may carry from time to time on other
similar aircraft in its fleet. LESSEE shall not discriminate against the
Aircraft in providing such insurance. Each and any policy of insurance carried
in accordance with this Subsection (A), and each and any policy obtained in
substitution or replacement for any of such policies, (i) shall designate each
Indemnitee as additional insureds as their interests may appear (but without
imposing upon any obligation imposed upon the insured, including, without
limitation, the liability to pay any premiums for any such policies, but the
Indemnitees shall have the right to pay such premiums if it shall so elect), and
(ii) shall expressly provide that, in respect of the interests of the
Indemnitees in such policies, the insurance shall not be invalidated by any
action or inaction of the LESSEE or any other Person (other than the
Indemnitees, each for their respective interests), and shall insure, regardless
of any breach or violation by LESSEE or any other Person (other than the
Indemnitees, each for their respective interests) of any warranty, declaration
or condition contained in such policies, (iii) shall provide that if such
insurance is canceled for any reason whatsoever, or is adversely changed in any
way with respect to the interests of the Indemnitees, or if such insurance is
allowed to lapse for nonpayment of premium, such cancellation, change or lapse
shall not be effective as to the Indemnitees for thirty (30) days (seven (7)
days in the case of any war risks and allied perils coverage or such lesser time
which may be standard in the insurance industry and ten (10) days in the event
of nonpayment of premium), in each instance, after receipt by each of the
Indemnitees of written notice by such insurer or insurers sent to the
Indemnitees of such prospective cancellation, change or lapse, (iv) shall
include coverage for any country in which the Aircraft is located, (v) shall
provide that, as against the Indemnitees, the insurer shall waive any rights of
set-off, counterclaim or any other deduction, whether by attachment or
otherwise, and waives any rights it may have to be subrogated to any right of
any insured against the Indemnitees, with respect to the Aircraft, (vi) shall
provide war risk and allied perils coverage pursuant
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to the AVN52 extended coverage endorsement or its equivalent, and (vii) shall
insure (to the extent of the risks covered by the policies) the indemnity
provisions of Section 14. Each liability policy shall be primary without right
of contribution from any other insurance which may be carried by any Indemnitee,
and shall expressly provide that all of the provisions thereof (except the
limits of liability) shall operate in the same manner as if there were a
separate policy covering each insured. No liability policy shall permit any
deductible or self-insurance provision except for baggage as is customary in the
industry and such other deductibles only with the consent of the LESSOR, which
consent shall not be unreasonably withheld or delayed, which from time to time
LESSEE can demonstrate are standard in comprehensive liability insurance and, in
particular, public liability risks (including, inter alia, contractual liability
and passenger liability coverage) for U.S. Air Carriers in the then current
United States insurance market.
(B) Aircraft Hull War Risks and Allied Perils Insurance. LESSEE will
carry and maintain in effect with Approved Insurers, at its own expense, all
risks hull war risks and allied perils insurance on the Aircraft (which shall
include, but not be limited to, coverage for hijacking, declared or undeclared
war, insurrections, strikes, riots, commotions or labor disturbances, malicious
acts or acts of sabotage and unlawful seizure or wrongful exercise of control of
the Aircraft in flight by a person on board such Aircraft acting without the
consent of LESSEE) in an amount not less than the Agreed Value or such greater
amounts as LESSOR or Mortgagee may reasonably request 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) and covering those perils which, from
time to time, are customarily covered by similar insurance maintained by similar
carriers in the U.S. airline industry operating aircraft on international
routes.
(C) All Risks Hull Insurance. LESSEE, at its own expense, will
maintain in effect with Approved Insurers all risks ground and flight aircraft
hull insurance covering the Aircraft, and fire, transit, extended coverage,
spares and all risks war and allied perils insurance with respect to Engines and
Parts while not installed on such Aircraft or an aircraft, which in each case is
of the type maintained by U.S. Air Carriers similarly situated to LESSEE and
operating similar aircraft and engines which comprise LESSEE's fleet. At all
times while the Aircraft is subject to this Lease, such insurance shall be for
an amount not less than the Agreed Value or such greater amounts as LESSOR may
reasonably request from time to time (and for which LESSOR shall reimburse
LESSEE at its own cost of increased premium, if any, for such greater amounts of
insurance).
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Notwithstanding anything above, each and any policy of
insurance obtained and maintained pursuant to Subsection (B) and this Subsection
(C), and each and any policy obtained in substitution or replacement for any
such policies, (i) shall designate LESSOR as owner of the Aircraft covered
thereby, and shall designate each Indemnitee as additional insureds and
Mortgagee as sole loss payee, as their respective interests may appear (but
without imposing upon any Indemnitee any obligation imposed upon the insured,
including, without limitation, the liability to pay any premiums for any such
policies, but any Indemnitee shall have the right to pay such premiums if they
shall so elect), (ii) shall expressly provide that, in respect of the interests
of any Indemnitee in such policies, the insurance shall not be invalidated by
any action or inaction of LESSEE or any other Person (other than any Indemnitee,
each for their respective interests) and shall insure the Indemnitees,
regardless of any breach or violation of any warranty, declaration or condition
contained in such policies by LESSEE or any other Person (other than the
Indemnitees, each for their respective interests), (iii) shall provide that if
such insurance is cancelled for any reason whatsoever, or is adversely changed
in any way with respect to the interest of any Indemnitee, or if such insurance
is allowed to lapse for nonpayment of premium, such cancellation change or lapse
shall not be effective as to the Indemnitees, for thirty (30) days (seven (7)
days in the case of any war risks or allied perils coverage or such lesser time
which may be standard in the insurance industry and ten (10) days in the event
of nonpayment of premium) after receipt by the Indemnitees of written notice by
such insurer or insurers to the Indemnitees; as the case may be, of such
prospective cancellation, change or lapse, (iv) shall include coverage for the
territorial limits or any country in which such Aircraft may at any time be
located, (v) shall provide that, as against the Indemnitees, the insurer shall
waive any rights of set-off, counterclaim or any other deduction, whether by
attachment or otherwise, and waives any rights it may have to be subrogated to
any right of any insured against the Indemnitees, with respect to such Aircraft,
(vi) shall provide that in the event of any damage or loss which is an Event of
Loss hereunder and which results in a payment, such payment shall be payable
solely and directly to Mortgagee for the account of all interests, (vii) shall
provide that in the event of any damage or loss which is not an Event of Loss
hereunder and which results in a payment for any one occurrence in excess of
$500,000.00, such payment shall be payable solely and directly to Mortgagee for
the account of all interests, (viii) shall provide that payments for any one
occurrence not in excess of $500,000.00 shall be payable directly to LESSEE
provided there exists no Event of Default or Related Lease Event of Default by
LESSEE, and (ix) shall provide for a standard 50/50 clause between the all risks
hull and war risks underwriters. Each such policy shall be primary without right
of contribution from any other insurance which may be carried by the
Indemnitees.
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LESSEE shall have the right to carry insurance in excess of
the amounts required hereunder and the proceeds of such excess insurance shall
be payable to LESSEE. Similarly, LESSOR shall have the right to carry additional
and separate insurance for its own benefit at its own expense, without, however,
thereby limiting LESSEE's obligations under this Section 13.
LESSEE shall at all times maintain a deductible amount in its
all risks hull insurance policies which is no more than Seven Hundred Fifty
Thousand ($750,000.00) Dollars. There shall be no deductible under LESSEE's war
risks insurance policies.
(D) Application of Insurance Proceeds Not In Excess of $500,000.00.
LESSEE shall be entitled to receive any hull insurance proceeds not in excess of
Five Hundred Thousand ($500,000.00) Dollars as soon as such funds are paid by
the insurance company and shall promptly receive such additional insurance
proceeds, if any, upon presentation to Mortgagee of a vendor's invoice, provided
that such repair work is complete. All insurance proceeds received by LESSEE
pursuant to this Subsection 13(D) shall be used by the LESSEE for the repair of
any damage to the Aircraft or Engines on account of which the insurance proceeds
were paid. Any amount referred to in this Subsection 13(D) which is payable to
LESSEE shall not be paid to LESSEE if at the time of such payment any Default or
Related Lease Default shall have occurred and be continuing, but shall be held
by Mortgagee as security for the obligations of LESSEE under this Lease and such
amount shall be paid to LESSEE at such time as there shall not be continuing any
such Default or Related Lease Default.
(E) Application in Default. Any insurance proceeds referred to in
this Lease which are otherwise payable to LESSEE, or, if it has been previously
paid to LESSEE, and not yet applied by LESSEE as permitted or required
hereunder, shall be delivered from LESSEE to Mortgagee, if at the time of such
payment, a Default or Related Lease Default shall have occurred and be
continuing. In such case, all such amounts shall be paid to and held by
Mortgagee as security for the obligations of LESSEE hereunder.
(F) Certificates. Not less than three (3) Business Days prior to the
Effective Date, and thereafter on each renewal by the LESSEE of the insurance
required hereby, LESSEE will furnish to the Indemnitees a certificate and a
broker's letter of undertaking executed and delivered by the Approved Insurer,
appointed by LESSEE, describing in reasonable detail, and in accordance with
customary practice, insurance carried on the Aircraft and certifying that the
insurance then maintained on the Aircraft
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complies with the terms of this Lease. LESSEE will cause such Approved Insurer
to agree to hold all insurance contracts and slips for the benefit of the
Indemnitees and to advise the Indemnitees in writing at least thirty (30) days
(seven (7) days in the case of any war risk and allied perils coverage and ten
(10) days in the event of nonpayment of premium) prior to the non-renewal,
termination, or cancellation for any reason (including, without limitation,
failure to pay premiums therefor) of any such insurance.
In the event LESSEE shall fail to maintain insurance as herein
provided, LESSOR may at its option provide such insurance and, in such event,
LESSEE shall, upon demand, reimburse LESSOR, as Supplemental Rent for the cost
thereof.
(G) Changes in Industry Practice. If there shall be a fundamental
change in generally accepted industry-wide practice with respect to the
insurance of aircraft (whether relating to all or any of the types of insurance
required to be effected pursuant to the terms of this Section 13) and, as a
consequence thereof, LESSOR shall be of the reasonable opinion that the
insurance required pursuant to the provisions of this Section 13 shall be
insufficient to protect the interests of LESSOR, the insurance requirements set
forth in this Section 13 shall be varied as may be mutually agreed so as to
include such additional or varied requirements to be effected pursuant to the
terms of this Section 13, and as so varied, shall provide substantially the same
protection to LESSOR as it would have done had such change in generally accepted
industry-wide practice not occurred. If any such change in generally accepted
industry-wide practice would enable LESSEE, but for the requirements in this
Section 13, to reduce its expenditures in relation to all or any of the types of
insurance required to be effected pursuant to the terms of this Section 13
without, in the reasonable opinion of LESSOR, prejudicing the interest of
LESSOR, the insurance requirements in this Section 13 shall be amended to take
account of such change in generally accepted industry-wide practice to the
extent required to enable LESSEE to reduce such expenditures, provided, however,
that in no event shall such public liability insurance coverage set forth in
Section 13 be less than $350,000,000.00.
SECTION 14
INDEMNIFICATION
(A) LESSEE agrees to indemnify, reimburse, and hold harmless the
Indemnitees from and against any and all claims, damages, losses, liabilities,
demands, suits, judgments, causes of action, legal proceedings, whether civil or
criminal, penalties, fines, other sanctions, and any reasonable costs and
expenses in connection herewith,
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including attorney's fees and expenses (any and all of which are hereafter
referred to as "Claims") which in any way may result from, pertain to, or arise
in any manner out of, or are in any manner related to the Aircraft or this
Lease, arising out of events occurring on or subsequent to the Effective Date,
or the breach of any representation, warranty or covenant made by LESSEE
hereunder, including, but not limited to, (i) the condition, manufacture,
delivery, lease, acceptance, rejection, possession, return, disposition, use, or
operation of the Aircraft (including, but not limited to, latent and other
defects whether or not discoverable by LESSEE or LESSOR) either in the air or on
the ground; or (ii) any defect in the Aircraft arising from the material or any
articles used therein or from the design, testing, or use thereof or from any
maintenance, service, repair, overhaul, or testing of such Aircraft, regardless
of when such defect shall be discovered, whether or not such Aircraft is at the
time in the possession of LESSEE, and regardless of where such Aircraft may then
be located; or (iii) this Lease or any other transaction, approval, or document
contemplated hereby or given or entered into in connection herewith; provided,
however, that LESSEE shall be subrogated to all rights and remedies which LESSOR
may have against the Manufacturer or Engine Manufacturer.
LESSEE hereby waives and releases any claim now or hereafter
existing against any Indemnitee, on account of any Claims for or on account of
or arising or in any way connected with injury to or death of personnel of
LESSEE or loss or damage to property of LESSEE or the loss of use of any
property which may result from or arise in any manner out of or in relation to
the leasing, condition, use, or operation of the Aircraft, either in the air or
on the ground during the Term, or which may be caused during the Term by any
defect in such Aircraft from any material or any article used therein or from
the design or testing thereof, or use thereof or from any maintenance, service,
repair, overhaul, or testing of such Aircraft regardless of when such defect may
be discovered, whether or not such Aircraft is at the time in the possession of
LESSEE, and regardless of the location of such Aircraft at any such time.
Without limitation upon LESSEE's liability under this Section
14, LESSEE hereby agrees to indemnify, reimburse, and hold each Indemnitee
harmless from any Claims in any manner imposed upon or accruing against each
Indemnitee because of the manufacture, use, or operation of the Aircraft, any
design, article, or material therein or relating thereto, because of
infringement of patent or any other right. LESSEE hereby agrees, and shall have
the right, to assume and conduct promptly and diligently at its sole cost and
expense, the entire defense of any Indemnitee against any such claim, and any
claim, suit, or action for which any Indemnitee is required to assume liability
and to settle such claims and pay any amounts in connection with such agreed
upon settlement.
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LESSOR agrees to give LESSEE prompt notice of any claims
hereunder following LESSOR's actual knowledge of such Claims, but the failure of
LESSOR to give the notice required by this Section 14 shall not constitute a
release by LESSOR or the Indemnitees of any obligations of LESSEE to any
Indemnitees in respect of any such Claim, unless LESSEE is materially adversely
affected solely by such failure of LESSOR to give such notice. Without the prior
consent of LESSEE, LESSOR shall not settle or compromise any Claims that LESSEE,
within a reasonable time after notice from LESSOR, has either (i) confirmed to
LESSOR are subject to indemnification pursuant to this Clause 14, or (ii) agreed
to assume, and to conduct promptly and diligently at its sole cost and expense,
the entire defense thereof.
The indemnifications contained in this Section 14 shall
continue in full force and effect notwithstanding any expiration or other
termination of this Lease and are expressly made for the benefit of and shall be
enforceable by each Indemnitee.
(B) Exceptions. In no event shall the indemnity provided for in
Section 14(A) extend to any Claim or disbursement of any Indemnitee resulting
from, pertaining to or arising in any manner out of, or in any manner relating
to the willful misconduct of any Indemnitee; or to the extent accruing either
before the Effective Date or after the Aircraft has been returned to or
repossessed by LESSOR; or which is a cost or expense required to be paid by
LESSOR hereunder; or which would not have been incurred by LESSOR if LESSOR had
not been in breach of its representations, warranties and covenants in this
Lease; or which results from LESSOR's Liens or Taxes (without prejudice to
LESSEE's obligations set forth in this Lease concerning Taxes).
SECTION 15
LIENS
LESSEE shall not directly or indirectly create, incur, assume, or
suffer to exist any Lien on or with respect to the Aircraft, title thereto, or
any interest therein, except Permitted Liens. LESSEE shall promptly, at its own
expense, take such action as may be necessary to duly discharge any Lien (except
for Permitted Liens) directly or indirectly created, incurred, assumed or
suffered to exist by LESSEE if the same shall arise at any time with respect to
the Aircraft, title thereto or any interest therein.
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SECTION 16
PERFECTION OF TITLE AND FURTHER ASSURANCES
(A) Except through the action or inaction of LESSOR, if, at any
time, any filing or recording is reasonably necessary to protect the interest of
Mortgagee or LESSOR, LESSEE shall, at its own cost and expense, cause this
Lease, the Lease Assignment financing statements with respect hereto, and any
and all additional instruments which shall be executed pursuant to the terms
hereof, so far as permitted by applicable Law, to be kept, filed and recorded
and to be re-executed, re-filed and re-recorded at all times in the appropriate
office pursuant or in relation to any Laws of any Governmental Entity, as LESSOR
or Mortgagee may request, to perfect, protect, and/or preserve the rights and
interests of LESSOR or Mortgagee hereunder and in the Aircraft, and LESSEE shall
furnish to LESSOR evidence satisfactory to LESSOR and Mortgagee of each such
filing, re-filing, recordation and re-recordation.
(B) Without limiting the foregoing, LESSEE shall do or cause to be
done, at LESSEE's cost and expense, any and all acts and things which may be
required under the terms of the Convention on the International Recognition of
Rights in Aircraft ("Mortgage Convention") to perfect and preserve the title of
LESSOR to the Aircraft within the jurisdiction of any signatory which has
ratified the Mortgage Convention, as LESSOR may reasonably request. LESSEE shall
also do or cause to be done, at its own expense, any and all acts and things
which may be required under the terms of any other Law involving any
jurisdictions in which LESSEE will operate, or any and all acts and things which
LESSOR may reasonably request to perfect and preserve LESSOR's ownership rights
regarding the Aircraft within any such jurisdiction and Mortgagee's first
priority lien and security interest in and to the Aircraft and Lease as
evidenced by the Mortgage and Lease Assignment.
(C) LESSEE will not suffer any matter or thing whatsoever whereby
the LESSOR's title in and to the Aircraft may be impaired on account of LESSEE's
or any transferee's lease or operation of the Aircraft.
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SECTION 17
REDELIVERY OF AIRCRAFT AND RECORDS
(A) Redelivery. Upon termination of the Lease with respect to the
Aircraft, or pursuant to Section 19 hereof (such event being hereinafter
referred to as a "Redelivery Occasion"), LESSEE, at its own expense prior to the
Redelivery Occasion, shall return such Aircraft to LESSOR at the Redelivery
Location or such other location as may be mutually agreed upon by LESSOR and
LESSEE, fully equipped as delivered or modified as provided hereunder with all
required Engines installed thereon.
(B) Records. Upon a Redelivery Occasion applicable to the Aircraft,
LESSEE, at its own expense, shall deliver to LESSOR all Aircraft Documents
listed in Exhibit "B", as updated, amended or supplemented along with such other
records and documents in such form as are necessary to qualify the Aircraft for
the issuance of a Certificate of Airworthiness by the FAA and to be eligible to
operate under FAR Part 121 specifications issued by the FAA. Such records and
manuals shall be current and shall constitute an accurate representation of the
condition of the Aircraft.
(C) Condition of Aircraft. Upon a Redelivery Occasion applicable to
the Aircraft, LESSEE shall return the Aircraft to LESSOR in such condition that
the Aircraft shall: (1) comply with each and every return condition requirement
set forth in Exhibit "I" hereto; (2) have a valid certificate of airworthiness
or, at LESSOR's request, a valid certificate of airworthiness for export to a
jurisdiction designated by LESSOR; and (3) shall be free and clear of all Liens,
except LESSOR's Liens.
(D) Final Inspection. Upon or next preceding a Redelivery Occasion
with respect to the Aircraft hereunder, LESSEE shall make such Aircraft
available to LESSOR and Mortgagee not more than five (5) days or less than three
(3) days prior to the date of the Redelivery Occasion for detailed inspection in
order to verify that the condition of such Aircraft complies with the
requirements set forth above (such inspection being hereinafter referred to as
the "Final Inspection"). Such Final Inspection may be scheduled at an
appropriate maintenance facility of the Authorized Maintenance Performer then
performing maintenance of such Aircraft, pursuant to Subsection 7(D) hereof, and
LESSEE shall give LESSOR and Mortgagee not less than ten (10) days' prior
written notice of the location and commencement date of such Final Inspection.
The last "C" Check (or the equivalent thereof under the Maintenance Program) and
the period allowed for the Final Inspection shall have such duration as to
permit LESSOR to inspect the Aircraft and the Aircraft Documents in accordance
with this Section 17 and Exhibit "I".
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(E) No more than three (3) of LESSOR's and Mortgagee's
representatives shall be permitted to attend each phase of activity required to
be conducted during the last "C" Check and the Final Inspection. The Final
Inspection shall commence on the dates designated pursuant to Sections 17(D) and
17(G) with respect to the Aircraft and Aircraft Documents, respectively, and
shall continue on consecutive days until all activity required above to be
performed during the Final Inspection has been concluded. During the maintenance
checks performed immediately prior to the Redelivery Occasion and at the actual
return of the Aircraft, LESSOR, Mortgagee and/or their representatives will have
an opportunity to conduct a complete inspection of the Aircraft's physical
condition including a full operational inspection of the Aircraft systems,
including the opening, in order to verify any aspect, of the condition of any
area of the Aircraft which would normally be accessible during the maintenance
check being performed, or at LESSOR's request and expense any other area,
provided that the Final Inspection, excluding time to correct deficiencies, does
not extend for more than seventy-two (72) hours beyond the Final Inspection. In
addition, a maintenance record review may also be performed to evaluate the
extent to which the Aircraft has been maintained in an airworthy condition in
accordance with requirements of this Lease. Any deficiencies from the Aircraft
return condition requirements set forth in this Section 17 and in Exhibit "I"
will be corrected by LESSEE at its cost prior to the Acceptance Flight as
hereinafter defined. Immediately prior to the proposed redelivery of the
Aircraft, LESSEE will carry out for LESSOR, Mortgagee and/or LESSOR's
representatives an Aircraft acceptance flight (the "Acceptance Flight") (which
may be the ferry flight to the Return Location) in accordance with LESSEE's
comprehensive test flights procedures or, if agreed to in writing by LESSOR, in
accordance with an airline acceptance flight procedure, either of which will be
for the duration necessary to perform such check flight procedures but in any
event not more than one and one-half (1 1/2) hours. Flight costs and fuel will
be furnished by and at the expense of LESSEE. Any deficiencies from the Aircraft
return condition requirements set forth in this Section 17 and Exhibit "I" will
be corrected by LESSEE at its cost prior to return of the Aircraft.
(F) To the extent that any portion of the Final Inspection extends
beyond the date of a Redelivery Occasion, the Term shall be deemed to be
automatically extended, and the LESSEE shall be obligated to continue to insure
the Aircraft, in accordance with the provisions of this Lease, and to pay Rent
hereunder, on a daily basis, calculated at a daily rate equal to 100% of the per
diem Basic Rent for the first five days and at a daily rate equal to 150% of the
per diem Basic Rent thereafter until the Final Inspection shall have been
concluded. All storage expenses attributable to any extension of the Term
pursuant to the preceding sentence shall be payable by LESSEE. Notwithstanding
the foregoing, in the event that the Final Inspection evidencing that the
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Aircraft and Aircraft Documents are in conformity with the provisions of this
Lease has not been or, in LESSOR's reasonable judgment, will not be concluded by
the tenth (10th) day from the scheduled end of the Term, then, in such event,
LESSOR shall have the right to elect to take possession of the Aircraft and
Aircraft Documents and perform, or cause to be performed, such repairs as are
necessary to bring the Aircraft and Aircraft Documents into conformity with the
provisions of this Lease with respect to redelivery of the Aircraft and Aircraft
Documents on a Redelivery Occasion. In the event LESSOR makes the election set
forth in the immediately preceding sentence, then, in such event, (i) the Term
shall be deemed extended until the Aircraft and Aircraft Documents are in
conformity with the provisions of this Lease with respect to redelivery but the
obligation of LESSEE to pay Rent hereunder shall terminate, except that LESSEE
shall pay Supplemental Rent in an amount equal to the costs reasonably incurred
by LESSOR to bring the Aircraft and Aircraft Documents into conformity with the
provisions of this Lease; and (ii) the amount of Supplemental Rent payable by
LESSEE to LESSOR may, at the election of LESSOR, be deducted from the Security
Deposit or Related Security Deposit then held by LESSOR and, to the extent that
such Security Deposit or Related Security Deposit is insufficient to pay such
Supplemental Rent (or if LESSOR has not elected to apply such Security Deposit
or Related Security Deposit as provided for herein), LESSEE shall, upon demand
made by LESSOR, pay to LESSOR such additional amounts as shall be necessary to
fully pay the Supplemental Rent.
(G) Aircraft Documentation. In order to enable LESSOR to prepare for
its Final Inspection of the Aircraft, (i) upon LESSOR's request, LESSEE will
make copies available of (a) drawings of the interior configuration of the
Aircraft both as it presently exists and as it will exist at return, (b)
airworthiness directive status list, (c) service bulletin incorporation list,
(d) rotable controlled, hard time and life limited component listings, (e)
interior material burn certificates, (f) complete workscope for the checks,
inspections and other work to be performed prior to return, and (g) current
Engine disk sheets, and (ii) LESSEE agrees to make available at LESSEE's
maintenance base to LESSOR, not later than ten (10) days prior to the
commencement of such Final Inspection, the Aircraft Documents listed in Exhibit
"B" hereto, together with such other documentation regarding the condition, use,
maintenance, operation and history of the Aircraft as LESSOR may request.
(H) LESSEE's Correction and Subsequent Corrections. To the extent
that the Aircraft, any Engine or any of the Aircraft Documents fails upon a
Redelivery Occasion to conform to any requirement imposed by Section 17 hereof,
LESSOR may, at its option:
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(1) continue the Lease in effect in the manner provided for in
Subsection 17(F) above with regard to automatic extension with
respect to such Aircraft until such time as the nonconforming items
are corrected; or
(2) request LESSEE to pay, and LESSEE shall pay to LESSOR, an
amount equal to the amount required (labor and materials) by the
then current Authorized Maintenance Performer or any other Person,
as the case may be, agreed upon by LESSOR and LESSEE on the date of
such Redelivery Occasion, to correct such nonconforming items. Any
such amount payable by LESSEE to LESSOR for such correction shall
become Supplemental Rent, payable by LESSEE within five (5) days
following the submission of a written statement by LESSOR to LESSEE
identifying the items corrected or to be corrected and setting forth
the expense of such correction. LESSEE's obligation to pay such
Supplemental Rent shall survive the passage of the early termination
of the Term or other termination of this Lease. In addition to the
preceding, and under the same payment terms, LESSEE, with regard to
any time-limited component installed on such Aircraft which does not
satisfy the return condition requirements of this Section 17 upon a
Redelivery Occasion, LESSEE shall pay LESSOR, at the time of a
Redelivery Occasion, an amount equal to the amount which would be
required to be paid to the Person selected by the then current
Authorized Maintenance Performer or any other person, as the case
may be, agreed upon by Lessor and Lessee on the date of such
Redelivery occasion, for putting such item in such condition.
(I) Dispute as to Compliance with Return Conditions. Should there be
any dispute as to whether the Aircraft meets the return conditions, the matter
shall be resolved by an independent knowledgeable aviation maintenance expert
reasonably acceptable to both parties. The standard to be applied in
ascertaining compliance with the redelivery conditions set out in this Section
17 shall be that applied after taking into account the levels of tolerance set
out in the Maintenance Program.
SECTION 18
EVENTS OF DEFAULT
Each of the following events shall constitute an Event of Default:
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(A) LESSEE shall fail to make any payment of Rent when due under
this Lease and such payment shall be overdue for a period of three (3) Business
Days after written notice by Lessor to Lessee;
(B) LESSEE shall fail to carry and maintain insurance on or with
respect to the Aircraft and this Lease in accordance with the provisions of
Section 13 hereof or shall operate the Aircraft or permit the Aircraft to be
operated in violation of any insurance policy required to be provided pursuant
to Section 13 hereof;
(C) Except as otherwise expressly provided in this Section 18 and
Subsection 18(B) above for which no notice is required, LESSEE shall fail to
perform or observe any covenant, condition or agreement to be performed or
observed by LESSEE under the Lease or any other Lease Document to which LESSEE
is a party and such failure shall continue for a period of thirty (30) days
after written notice thereof from LESSOR to LESSEE, provided that such right of
remedy shall only exist in respect of not more than three (3) cumulative
failures (not including any breach or default by the LESSEE of performance of
its obligations under Subsection 18(L) after the date hereof);
(D) Any representation or warranty made by LESSEE herein, or in any
notice, certificate or other document furnished by or on behalf of LESSEE herein
to LESSOR or its assigns, shall prove to have been incorrect in any material
respect when made;
(E) LESSEE shall consent to the appointment of a receiver, trustee
or liquidator for itself or for a substantial part of its property, or LESSEE
shall admit in writing its inability to pay its debts generally as they become
due, or shall make a general assignment for the benefit of creditors, or LESSEE
shall file a voluntary petition in bankruptcy or a voluntary petition or answer
seeking reorganization in a proceeding under any Laws dealing with bankruptcy,
insolvency, moratorium or creditors' rights generally (any or all of which are
hereinafter referred to as "Bankruptcy Laws"), or an answer admitting the
material allegations of a petition filed against LESSEE in any such proceeding,
or LESSEE shall by voluntary petition, answer or consent to or seek relief under
the provisions of any Bankruptcy Laws;
(F) An order, judgment or decree shall be entered by any court of
competent jurisdiction appointing, without the consent of LESSEE, a receiver,
trustee or liquidator for LESSEE or any substantial part of its property, or any
substantial part of the property of LESSEE shall be sequestered, and any such
order, judgment, decree or
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appointment, or sequestration, shall remain in force undismissed, unstayed or
unvacated for a period of sixty (60) days after the date of entry thereof;
(G) A petition against LESSEE in a proceeding under the Bankruptcy
Laws of any Governmental Entity shall be filed and shall not be withdrawn or
dismissed within sixty (60) days thereafter, or if, under the provisions of any
Bankruptcy Laws which may apply to LESSEE, any court of competent jurisdiction
shall assume jurisdiction, custody or control of LESSEE or of any substantial
part of its property, and such jurisdiction, custody or control shall remain in
force unrelinquished, unstayed or unterminated for a period of ninety (90) days;
(H) LESSEE shall be dissolved or liquidated, shall terminate its
existence or suspend its operations, shall lose any right, privilege or
franchise necessary to maintain its corporate existence, or shall dispose of all
or substantially all of its properties to any Person (in each case, except as
otherwise permitted hereunder);
(I) LESSEE shall make or permit any assignment or transfer of this
Lease or of possession of the Aircraft other than as permitted hereunder;
(J) Any license, permit, authorization, consent, approval,
notification, registration or filing now or hereafter necessary to enable LESSEE
to perform or comply with its obligations under the Lease shall fail to be
timely issued, granted or made, or shall expire or lapse and shall not be
forthwith renewed or extended or shall be revoked, withdrawn, withheld or
adversely modified, or shall cease to be in full force and effect;
(K) All or a substantial part of the properties of LESSEE shall be
condemned, seized or otherwise appropriated for custody or control, or such
property shall be assumed by any Governmental Entity or any court or other
Person purporting to act under the authority of any Governmental Entity, or
LESSEE shall be prevented from exercising normal control over all or a
substantial part of its properties, if such events as set forth in this
Subsection 18(K) are not remedied within sixty (60) days after they occur;
(L) The LESSEE fails to pay any Indebtedness exceeding $500,000.00
individually or in the aggregate when due (giving affect to all applicable grace
periods) or any Indebtedness exceeding $500,000.00 individually or in the
aggregate of the LESSEE becomes or is declared to be due and is accelerated,
unless LESSEE is contesting its liability in respect of such Indebtedness by
proceedings being contested in good faith and diligently prosecuted and for
which appropriate reserves have been made by the LESSEE,
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all as evidenced to the reasonable satisfaction of the LESSOR, and the LESSOR is
reasonably of the view that its interest in the Aircraft is not adversely
prejudiced thereby;
(M) This Lease or any Lease Document is or becomes wholly or partly
invalid, ineffective or unenforceable and the LESSOR determines that such
invalidity, ineffectiveness or unenforceability will or may have a material
adverse effect upon the rights of the LESSOR or the ability of the LESSEE to
perform its obligations under this Lease or such Lease Document and alternative
arrangements satisfactory to the LESSOR are not entered into by the LESSEE; or
(N) If any Related Lease Event of Default shall occur and be
continuing.
SECTION 19
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, so long as
LESSEE shall not have remedied any outstanding Event of Default, LESSOR may
exercise one or more of the following remedies with respect to the Aircraft as
LESSOR in its sole discretion shall elect, to the extent available and permitted
by, and subject to compliance with, any mandatory requirements of applicable Law
then in effect; provided, however, that upon the occurrence of any Event of
Default specified in paragraphs (F), (G) or (H) of Section 18, LESSOR shall be
entitled automatically, as of the day prior to such occurrence, to exercise any
of the following remedies without declaring this Lease to be in default or
making demand or giving notice or the taking of any other action:
(A) Demand that LESSEE, and LESSEE shall, upon the written demand of
LESSOR, at LESSEE's expense, return the Aircraft and Aircraft Documents promptly
to LESSOR in the manner and condition required by, and otherwise in accordance
with all of the provisions of, Section 17 hereof; or LESSOR, at its option and
to the extent permitted by applicable Law, may enter upon the premises where all
or any part of the Aircraft and Aircraft Documents are located and take
immediate possession of and remove the same, by summary proceedings or
otherwise, all without liability accruing to LESSOR for or by reason of such
entry or taking of possession, whether for the restoration of damage to property
caused by such taking or otherwise;
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(B) Sell the Aircraft at public or private sale, as LESSOR may
determine, or otherwise dispose of, hold, use, operate, lease to others, or keep
idle the Aircraft, as LESSOR in its sole discretion may determine, all 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;
(C) Demand (whether or not LESSOR, pursuant to Subsection 19(B)
hereof, may have sold the Aircraft) that LESSEE pay LESSOR, and LESSEE shall
upon such demand pay to LESSOR, as liquidated damages for loss of a bargain and
not as a penalty (in lieu of the Rent for such Aircraft due after such payment
occurs), any accrued and unpaid Rent for such Aircraft due up to the time LESSOR
demands such payment, plus the amount by which the Agreed Value of such Aircraft
exceeds the net cash proceeds of any sale of such Aircraft, together with
interest at the Overdue Rate on such Agreed Value or portion thereof and such
unpaid Rent from the date of LESSOR's demand to the date such payment is made;
(D) Proceed by appropriate court action or actions, either at Law or
in equity, to enforce performance by LESSEE of the applicable covenants of this
Lease (including, but not limited to, LESSEE's obligation to pay Rent for the
Term) and to recover damages for the breach thereof, or to rescind this Lease as
to the Aircraft (which rescission shall not release LESSEE from its financial
obligations hereunder);
(E) Terminate this Lease or any of LESSEE's rights hereunder by
written notice, and repossess the Aircraft and Aircraft Documents, provided such
termination shall not release LESSEE from its financial obligations hereunder;
(F) Use and apply the Security Deposit or the Related Security
Deposit to satisfy any of the obligations of LESSEE set forth in this Lease or
in the Related Lease Agreement;
(G) Should the LESSEE fail to return the Aircraft and Aircraft
Documents upon termination of the Lease for any reason whatsoever except due to
an Event of Loss and as set forth in Subsection 17(D)(3) without prejudice to
LESSOR's rights hereunder to demand return of the Aircraft in the condition
required by this Section, LESSEE shall continue to pay Rent to LESSOR for each
day the Aircraft remains in LESSEE's possession at the rate of 1/ 15 of the
monthly Basic Rent then in effect.
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In addition, LESSEE shall be liable for any and all unpaid
Rent due hereunder before or during the exercise of any of the foregoing
remedies and for the time remaining in the Term without giving effect to any
early termination of this Lease, together with interest thereon at the Overdue
Rate from the date such Rent was due, and for all reasonable attorneys' fees,
legal expenses and other costs and expenses 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 Aircraft, in accordance with the terms of Section 17 hereof, or with
placing such Aircraft in such condition.
Except as otherwise expressly provided above, no remedy
referred to in this Section 19 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 under any applicable Law, and the exercise or commencement
of exercising 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 shall in any way
be, or be construed to be, a waiver of any future or subsequent Event of
Default. LESSEE hereby agrees that, except as provided in this Section 19, any
financing profit or savings accruing to LESSOR by virtue of LESSEE's default and
LESSOR's subsequent sale, re-letting, or award shall in no way reduce, offset or
mitigate the damages for which LESSEE is liable hereunder.
If the Lease is terminated in accordance with Subsection
19(E), LESSEE hereby appoints LESSOR as LESSEE's irrevocable agent and
attorney-in-fact, as set forth in Exhibit "E", to execute all documents deemed
necessary to release, terminate and void LESSEE's interest in the Aircraft
leased hereunder, and to file said documents for recordation with the Air
Authority and the appropriate Governmental Entity following the occurrence of an
Event of Default, where LESSOR, at its sole discretion, may deem use of such
agency necessary to effect any remedy which LESSOR chooses to exercise.
SECTION 20
ALIENATION
(A) There shall be no restriction upon LESSOR's right to assign,
sell, transfer, pledge, hypothecate or encumber any interest of LESSOR
(hereinafter referred to generally as "Alienation") to the Mortgagee in the
Aircraft, this Lease, and or the
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proceeds thereof and hereof, subject to rights of the LESSEE under the
provisions of the Lease Assignment. Any other assignment by LESSOR hereunder
shall be subject to the prior written consent of LESSEE which consent shall not
be unreasonably withheld or delayed. To effect or facilitate any such
assignment, sale, transfer, pledge, hypothecation or encumbrance, LESSEE agrees
to provide LESSOR or LESSOR's designee or assignee with such agreements,
consents, conveyances or documents as may be reasonably requested by LESSOR. The
agreements, covenants, obligation and liabilities contained herein, including,
but not limited to, all obligations to pay Rent and indemnify LESSOR, are made
for the benefit of LESSOR, Mortgagee and their respective successors and
assigns, notwithstanding the possibility that any such Person was not originally
a party to this Lease or may, at the time such enforcement is sought, not be a
party to this Lease.
(B) In the case of any Alienation or assignment by LESSOR pursuant
to the provisions of Section 20, LESSEE shall execute and deliver to LESSOR
promptly (at LESSOR's cost except that LESSEE shall pay the cost of its
attorney), upon request of LESSOR, any consents or agreements required for the
perfection of such assignment provided that such consent or other documents does
not affect LESSEE's rights under Subsection 21(G) below.
SECTION 21
MISCELLANEOUS
(A) Severability. Amendment and Construction. Any provision of this
Lease which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof, and any
such prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. No term or
provision of this Lease may be changed, waived, discharged, or terminated
orally, but only by an instrument in writing expressed to be a supplement to
this Lease, signed by an officer of the party against which the enforcement of
the change, waiver, discharge or termination is sought. This Lease shall
constitute an agreement of lease for the Term of the Lease, and nothing herein
shall be construed as conveying to LESSEE any right, title or interest in the
Aircraft, the Airframe, any Engine or Part except as a LESSEE only, for such
Term. The headings in this Lease are for convenience of reference only and shall
not define or limit any of the terms or provisions hereof. Unless the context
otherwise requires, all references in this instrument to designated Sections or
other subdivisions hereof are to such designated Sections or subdivisions; and
the words
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"herein", "hereof', "hereto", "hereunder", and other words of similar import
refer to this instrument as a whole and not to any particular Section or
subdivision. In construing any provision of this Lease, no account shall be
taken as to the party who drafted same and no presumption shall arise or result
therefrom.
(B) Governing Law. This Lease shall in all respects be governed by
and construed in accordance with the Laws of the State of New York applicable to
contracts entered into in such State by residents thereof and to be performed
entirely within such State.
(C) Waiver of Jury Trial. LESSEE AND LESSOR HEREBY WAIVE, TO THE
FULLEST EXTENT PERMITTED UNDER APPLICABLE LAW, ALL RIGHT TO A TRIAL BY JURY IN
ANY ACTION, SUIT OR PROCEEDING BROUGHT BY EITHER PARTY HERETO WITH RESPECT TO
THE CONSTRUCTION OR ENFORCEMENT OF THIS LEASE OR OF ANY PROVISION HEREOF.
(D) Notice. Except as otherwise specified herein, notice, requests,
demands, consents or other communications to, upon or by the respective parties
hereto shall be in the English language and in writing, sent by express courier
or telefax, and shall be deemed to have been duly given or made when received by
the party if sent by telefax or when received by the party, if sent by express
courier, addressed to the party to which such notice, request, demand or other
communication is required or permitted to be given or made hereunder, at the
LESSEE'S Address or LESSOR'S Address, as the case may be, or at such other
address of which such Person shall have notified in writing the party giving
such notice. Copies of all notices to the LESSOR shall also be sent to the
Mortgagee pursuant to the Lease Assignment and to Feltman, Karesh, Major &
Farbman, 152 West 57th Street, New York, New York 10019, Attn.: Loren M. Dollet,
Esq., Telefax No.: (212) 586-0951.
(E) LESSOR's Right to Perform for LESSEE. If LESSEE fails to make
any payment of Supplemental Rent or fails to perform or comply with any
covenant, agreement or obligation contained herein, LESSOR shall have the right,
but not the obligation, to make such payment or perform or comply with such
agreement, covenant or obligation, and the amount of such payment and the amount
of the reasonable expenses of LESSOR incurred in connection with such payment or
the performance thereof or compliance therewith, together with interest thereon
at the Overdue Rate, shall be deemed Supplemental Rent, payable by LESSEE upon
demand. The taking of any such action by LESSOR pursuant to this Subsection
21(E) shall not constitute a waiver or release of any
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obligation of LESSEE under the Lease, nor a waiver of any Event of Default which
may arise out of LESSEE's nonperformance of such obligation, nor an election or
waiver by LESSOR of any remedy or right available to LESSOR under or in relation
to this Lease.
(F) Counterparts. This Lease may be executed simultaneously in one
or more counterparts, all of which together shall constitute one and the same
Lease. To the extent that this Lease constitutes chattel paper in any
jurisdiction, no security interest herein may be created through the transfer of
possession of any counterpart other than the counterpart marked "Original."
Other than the counterpart of this Lease marked "Original," all other original
executed counterparts of this Lease shall be marked "Duplicate Original."
(G) Quiet Enjoyment and Lessor Covenant. LESSOR covenants that if,
and as long as, LESSEE keeps and performs each and every covenant and agreement
to be performed or observed by it hereunder and/or no Event of Default has
occurred and is continuing, LESSEE shall quietly enjoy the Aircraft without
interference by LESSOR or by any Person claiming by, through or against LESSOR,
including, but not limited to, Mortgagee and any other security assignee of
LESSOR, and none of the LESSOR or any Person claiming by, through or against
LESSOR, including, but not limited to, any assignee of LESSOR, will, as long as
LESSEE keeps and performs each and every covenant to be performed or observed by
it hereunder, take any action which adversely affect the registration of the
Aircraft. LESSOR further covenants that it will maintain all legal right, power
and authority, and all licenses and authorizations, necessary to lease the
Aircraft for the Term.
(H) Brokers. LESSOR and LESSEE each agree that there has been no
third party as broker or finder involved in this Lease and each party hereby
indemnifies the other party from liability for fees, commissions or other claims
made upon such other party due to such claims arising through it.
(I) Jurisdiction. Service of Process. The parties hereto hereby
expressly submit to the non-exclusive jurisdiction of the United States District
Court for the Southern District of New York or the Supreme Court of the State of
New York in the Borough of Manhattan, City of New York with respect to any
action arising out of or relating to this Lease. The parties hereto, to the
fullest extent available under applicable Law, waive any claim that venue or
jurisdiction is improper in such courts or that such courts constitute an
inconvenient forum. Service of summons, complaint and other legal process on
LESSOR or LESSEE with respect to any action arising out of or relating to this
Lease may be made by mailing (registered mail, return receipt requested) a copy
of
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any summons or other legal process to said Party at the LESSEE's address or
LESSOR's address, as the case may be, or by any other procedure permitted under
the Laws of the United States of America.
The mailing, as herein provided, of such summons or other
legal process shall be deemed personal service and accepted by LESSEE or LESSOR
as such, and shall be legal, effective and binding upon LESSEE or LESSOR for all
the purposes of the suit.
Nothing in this Subsection 21(I) shall in any way be deemed to
limit the ability of LESSOR or LESSEE to serve any such summonses or legal
process in any other manner permitted by applicable Law or to obtain
jurisdiction over the other party in such other jurisdictions, and in such
manner, as may be permitted by applicable Law.
SECTION 22
SUBLEASE; ASSIGNMENT; CRAF PROGRAM
(A) LESSEE shall not sublease the Aircraft or assign its rights in
this Lease to any other party without the prior written consent of LESSOR which
consent shall not be unreasonably withheld or delayed. LESSEE agrees that it
will be reasonable for LESSOR to withhold its consent if such sublease or
assignment will impair or adversely affect Mortgagee's security interest in the
Aircraft.
(B) Any sublease or assignment consented to by LESSOR shall contain,
among other things, the following terms and conditions:
(1) That such sublease or assignment is subject to and
subordinate to this Lease;
(2) The sublease or assignment shall not relieve the LESSEE of
its obligations under this Lease and the LESSEE shall continue to be primarily
liable hereunder; and
(3) The rights of the LESSOR in any sublease shall be assigned
to LESSOR as security for the performance of the obligations of LESSEE under
this Lease and further assigned by LESSOR to Mortgagee.
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(C) In connection with any request by LESSEE to LESSOR to sublease
the Aircraft or assign its rights in this Lease to any other party, LESSEE
agrees to pay on demand to LESSOR all reasonable costs and expenses incurred by
LESSOR in connection with such request, including, but not limited to, legal
fees and expenses of counsel to LESSOR (such legal fees for which LESSEE shall
be responsible shall include, but not be limited to, the cost of counsel
reviewing all documents which LESSEE proposes to enter into in connection with
such sublease or assignment).
(D) All of LESSEE's obligations hereunder may be performed by any
approved sublessee or assignee, provided however that the LESSEE shall not be
released from its obligations hereunder.
(E) LESSEE may subject the Aircraft to a Wet Lease without LESSOR's
prior written consent.
(F) So long as no Default or Event of Default shall have occurred
and be continuing under this Lease, LESSEE may transfer possession of the
Aircraft to the U.S. Government pursuant to the CRAF Program. In the event of
(i) a requisition for use by the U.S. Government of the Aircraft during the Term
for the purpose of an Air Mobility Command Solicitation pursuant to the CRAF
Program (a "CRAF Requisition") or (ii) notice to the LESSEE from the Government
to the effect that the Aircraft may be subject to a CRAF Requisition (a "CRAF
Activation"), LESSEE shall promptly notify LESSOR and Mortgagee and, except as
otherwise specified herein, all of LESSEE's obligations under this Lease shall
continue to the same extent as if such CRAF Requisition or CRAF Activation had
not occurred. LESSEE agrees that no CRAF Requisition or CRAF Activation shall
continue beyond the end of the Term and that, if the Airframe or any Engine is
not returned by the U.S. Government prior to the end of the Term, then:
(1) such failure shall constitute an Event of Loss, and LESSEE
and LESSOR shall comply with the provisions of Section 12; and
(2) the Term (including LESSEE's obligation to pay Basic Rent)
shall be deemed extended to, and shall not expire until, the date
LESSEE performs fully its obligations pursuant to Section 12.
(G) Notwithstanding any provision in this Lease to the contrary,
LESSOR and LESSEE hereby expressly acknowledge and agree that during any CRAF
Requisition or CRAF Activation:
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(1) the Aircraft shall be registered in the United States;
(2) LESSEE may transfer possession of the Aircraft to the U.S.
Government, provided that the rights of any transferee of the
Aircraft shall be subject and subordinate to all of the terms of
this Lease and the Mortgage, including the right of LESSOR and
Mortgagee to terminate this Lease and immediately repossess the
Aircraft following an Event of Default;
(3) LESSEE shall have exclusive control of the Aircraft and
shall remain primarily liable for the performance of all of the
terms of this Lease to the same extent as if such CRAF Requisition
or CRAF Activation had not occurred;
(4) there shall be no limitation on the geographic area in
which the Aircraft may be operated; and
(5) LESSEE shall provide LESSOR and Mortgagee with the name
and address of the Contracting Office Representative for the
Military Airlift Command of the United States Air Force to whom
notice must be given in connection with the enforcement of remedies
under this Lease, and LESSOR shall give such representative prior
written notice of its enforcement of any remedies under this Lease.
(H) LESSOR shall accept U.S. Government indemnification in lieu of
insurance during a CRAF Requisition or CRAF Activation, and LESSEE's failure to
maintain insurance in accordance with Section 13 hereof during a CRAF
Requisition or CRAF Activation shall not constitute an Event of Default,
provided, however, that in the event that LESSEE is able to maintain existing
insurance coverage on the Aircraft during a CRAF Requisition or CRAF Activation,
as the case may be, and the maintenance of such existing insurance during a CRAF
Requisition or CRAF Activation will not result in any additional cost to Lessee
which is materially in excess of the cost for the existing insurance coverage on
the Aircraft immediately prior to the CRAF Requisition or CRAF Activation, as
the case may be, Lessee shall not take any action or inaction which results in
the termination or cancellation of such insurance. LESSEE shall promptly notify
LESSOR and Mortgagee as to the existence of such indemnification and promptly
furnish to LESSOR and Mortgagee a copy of such indemnification agreement and a
certificate of its independent aircraft insurance brokers certifying that such
indemnification and other insurance maintained by LESSEE is in full compliance
with all the requirements of
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Section 13. All payments received by LESSOR or LESSEE from the U.S. Government
for the use of the Aircraft during or after the Term shall be paid over to or
retained by LESSEE unless (i) an Event of Default has occurred and is continuing
hereunder, or (ii) a deemed Event of Loss has occurred hereunder and LESSEE has
not complied with all of its obligations set forth in Section 12 hereof, in
either of which cases such payments shall be paid over to or retained by LESSOR
to be applied in satisfaction of LESSEE's obligations hereunder.
SECTION 23
RIGHT OF FIRST REFUSAL
If LESSOR proposes to sell the Aircraft, which LESSOR may choose to
do or not to do in LESSOR's sole discretion, and LESSOR agrees on the terms of
such sale with an unaffiliated third party, then LESSOR shall send LESSEE a
written notice (the "LESSOR Notice") specifying the proposed terms of such sale.
LESSEE shall have the option to purchase the Aircraft on the same terms as
specified in the LESSOR Notice by exercising such option in a written notice to
be delivered to LESSOR within fifteen (15) Business Days of receipt of the
LESSOR Notice by LESSEE, including to post within such 15 days period any
deposits for performance. If the LESSEE fails to accept the offer in accordance
with this Section 23 within the 15 days period, the LESSEE shall conclusively be
deemed to have rejected such offer and the LESSOR may, at any time within three
months thereafter, sell the Aircraft on the terms of the offer. If the LESSEE
accepts the offer, LESSOR and LESSEE shall negotiate in good faith to sell the
Aircraft by not later than 30 days after the LESSEE's acceptance.
SECTION 24
ENTIRE AGREEMENT
This Lease (including all Exhibits hereto) embodies the entire
agreement and understanding between LESSOR and LESSEE relating to the subject
matter hereof and supersedes all prior agreements and understandings relating
hereto and neither of the parties hereto shall be bound by or charged with any
oral or written agreements, representations, warranties, statements, promises or
understandings not specifically set forth herein. This Lease may not be changed
and no right granted or obligation imposed
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hereunder may be waived orally, but only by an instrument in writing signed by
the party against whom enforcement of any waiver, change, modification or
discharge is sought.
SECTION 25
CONFIDENTIALITY
LESSOR and LESSEE agree to keep this Lease and all Lease Documents
and any and all documents of a financial or proprietary nature received pursuant
to the provisions of this Lease confidential, and shall not disclose the
existence or any portion of this Lease and any Lease Document and any and all
documents of a financial or proprietary nature received pursuant to the
provisions of this Lease to any person or entity, except in accordance with the
terms hereof. LESSOR and LESSEE may disclose this Lease and any Lease Document
on a need to know basis to: (i) its counsel, accountants, banks, financial
institutions, maintenance providers, independent insurance advisors or other
advisors or agents who are under a duty to or agree to hold such information
confidential, (ii) if the document or information was filed as a matter of
public record with a Governmental Entity or was generally available to the
public at the time of disclosure (other than as a result of a disclosure by such
person or entity), or (iii) as may be required by any statute, court or
administrative order or decree or governmental rule or regulation or by any
regulatory or supervisory governmental authority or agency or by generally
accepted accounting principles.
[signature page follows]
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<PAGE>
IN WITNESS WHEREOF, LESSOR and LESSEE, each pursuant to due
corporate authority, have caused this Aircraft Lease Agreement [49587] to be
executed by their duly authorized officers as of the day and year first above
written.
LESSOR: LESSEE:
OLIVIA CORP. RENO AIR, INC.
By: /s/ Aaron Mendelsohn By:
------------------------- ----------------------------
Name: Aaron Mendelsohn Name:
Title: President Title:
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<PAGE>
IN WITNESS WHEREOF, LESSOR and LESSEE, each pursuant to due
corporate authority, have caused this Aircraft Lease Agreement [49587] to be
executed by their duly authorized officers as of the day and year first above
written.
LESSOR: LESSEE:
OLIVIA CORP. RENO AIR, INC.
By: By: /s/ Robert M. Rowen
------------------------- ----------------------------
Name: Name: Robert M. Rowen
Title: Title: Vice President and General Counsel
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<PAGE>
EXHIBIT "A"
AIRCRAFT SPECIFICATIONS
Manufacturer: McDonnell Douglas
Model MD-87
Serial No. 49587
Line No. N/A
Reg. No. N753RA
Date of Mfgr. 1988
AIRFRAME STATUS
Time as of 11/16/95
Total Hours 14129
Total Cycles 7448
Time Since Last C Ck 13321 hours
Time to Next Overhaul N/A hours/
ENGINE STATUS
Model # Serial # REMAINING Limiter
------- -------- --------- -------
#1. Pratt & Whitney 708147 3155 cyc LPT Shaft
JT8D-217C
#2. Pratt & Whitney 708177 5704 cyc LPT Shaft
JT8D-217C
LANDING GEAR STATUS
Hrs. Remaining Cycles Remaining
-------------- ----------------
Nose N/A N/A
Main N/A N/A
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EXHIBIT "B"
AIRCRAFT DOCUMENTATION
Delivery of Manuals/Documents
o AD Status
o Present Certificate of Airworthiness
o Copy of Original Certificate of Airworthiness or Export ex USA
o Copy of Noise Certificate
o Copy of Radio Lisence
o Packing Sheet from MDC
o Engine Records and Modification Status
o Status Engine S.B., ASB, AD
o Test Cell Run Sheets
o Inventory of Loose Equipment at Date of Delivery
o Weight and Balance Records (Status at Delivery)
o Weight and Balance Manual
o S.B., AOL, I.A. - Status
o Time controlled Component Inventory List (PA 061 INVORT)
o Historical records:
o Log Books
o OTI'S, OTA'S, EO's and AD's
o None Routine Job Cards
o Briefing Cards
o HIL-Lists/Line Maintenance/Heavy Maintenance
o FAA/FAO approved Flight Manual
o Wiring Diagram Manual (Microfilm)
o IPC (Microfilm)
o MAI (Microfilm)
o Last X-Ray Pictures
o APU Log Book/Shop Findings ex UTA
o AOM (Operational Manual)
o Certificate of Airworthiness for Export issued by Swiss Federal Air Office
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EXHIBIT "C"
CERTIFICATE OF ACCEPTANCE
This Certificate of Acceptance is delivered on and as of the date set
forth below by RENO AIR, INC. (hereinafter referred to as "LESSEE") to OLIVIA
CORP. (hereinafter referred to as "LESSOR") pursuant to that Aircraft Lease
Agreement [49587] dated as of November _, 1995 between LESSOR and LESSEE
(hereinafter referred to as the "Agreement"):
A. Details of Acceptance
LESSEE hereby indicates and confirms to LESSOR, its successors and
assigns, that the LESSEE has at ______ o'clock _.M., at this __ day of November,
1995, at Zurich International Airport, Zurich, Switzerland, accepted the
following in accordance with the provisions of the Agreement:
1. (a) McDonnell Douglas Model: NM-87
(b) Manufacturer's Serial No.: 49587
(c) U.S. FAA Registration Number: N753RA
Manufacturer
Engine Model Number Total Total Hours Cycles
No. Serial Number Hours Cycles Remaining Remaining
--- ------------- ----- ------ --------- ---------
(1) Pratt & Whitney
JT8D-217C
708147
(2) Pratt & Whitney
JT8D-217C
708177
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Each of the above-described Engines having 750 or more rated take-off horsepower
or the equivalent thereof.
Airframe
Total Time: ____ hrs.
Total Cycles: ____ Cycles
Fuel
____ lbs.
B. Confirmation of Undertakings
LESSEE confirms that the above described Aircraft and Engines have
been examined by its duly appointed and authorized representative(s), that such
Aircraft and Engines conform to the information set forth above, that there have
been fixed to the Aircraft the markings required by the Agreement (or that such
markings shall be affixed to the Aircraft within fifteen (15) days of the date
hereof). LESSEE confirms and acknowledges that the date set forth above
constitutes the Effective Date, as such term is defined in the Agreement, and
that LESSEE's execution and delivery of this Certificate represents LESSEE's
acceptance of the above described Aircraft and Engines for all purposes of the
Agreement.
IN WITNESS WHEREOF, LESSEE has caused this Certificate of Acceptance to be
executed in its name, by its duly authorized officer(s) or representative(s),
pursuant to due corporate authority, all as of the date written in Section A
above.
LESSEE: RENO AIR, INC.
By:_________________________
Title:______________________
Date:_______________________
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<PAGE>
EXHIBIT "D"
LEASE SUPPLEMENT [49587] NO. 1
LEASE SUPPLEMENT [49587] NO. 1, dated November _, 1995, between OLIVIA
CORP. ("LESSOR") and RENO AIR, INC. ("LESSEE").
LESSOR and LESSEE have heretofore entered into that certain Aircraft Lease
Agreement [49587], dated as of November _, 1995, relating to one (1) McDonnell
Douglas MD-87 Aircraft (herein called the "Lease" and the defined terms therein
being hereinafter used with the same meanings). The Lease provides for the
execution and delivery of a Lease Supplement for the purpose of subjecting the
Aircraft and other property described in such Lease Supplement (collectively,
the "Equipment"), as and when delivered by LESSOR to LESSEE, to the terms of the
Lease.
The Lease relates to the Equipment described below and a counterpart of
the Lease is attached hereto and made a part hereof, and this Lease Supplement,
together with such attachment, is being filed for recordation on the date hereof
with the FAA as one document.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, LESSOR and LESSEE hereby agree as follows:
1. LESSOR hereby delivers and leases to LESSEE under the Lease, and LESSEE
hereby accepts delivery of and leases from LESSOR under the Lease, the following
described Equipment, which Equipment, as of the date hereof, is acknowledged and
accepted by LESSEE:
(i) Airframe: one (1) McDonnell Douglas MD-87 airframe, bearing
FAA Registration No. N753RA and Manufacturer's Serial No.
49587;
(ii) Engines: two (2) Pratt & Whitney Model JT8D-217C aircraft
engines, each of which has 750 or more rated takeoff
horsepower and bearing Manufacturer's Serial Nos. 708147 and
708177, respectively; and
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<PAGE>
(iii) The Aircraft Documents.
2. The Effective Date for the Equipment is the date of this Lease
Supplement set forth in the opening paragraph hereof.
3. The Term is from the date of this Lease Supplement through and
including January 15, 2003.
4. LESSEE hereby confirms it has paid the Security Deposit to LESSOR in
the amount set forth on Schedule "1" attached hereto and forming a part hereof.
5. LESSEE hereby confirms its agreement to pay LESSOR Interim Rent and
Basic Rent, as applicable, for the Equipment throughout the Term, in the
installments and in the amounts provided for on Schedule "1", on each Rent Date.
6. LESSEE hereby confirms its agreement to pay LESSOR Reserves on each
Maintenance Reserve Date, subject to the provisions of 5(E) and in the amounts
provided for on Schedule "1".
7. LESSEE hereby confirms to LESSOR that LESSEE has accepted the Equipment
for all purposes hereof and of the Lease.
8. All of the terms and provisions of the Lease are hereby incorporated by
reference in this Lease Supplement to the same extent as if fully set forth
herein.
9. This Lease Supplement may be executed by the parties hereto in separate
counterparts, each of which, when so executed and delivered, shall be an
original, but all such counterparts shall together constitute but one and the
same instrument.
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<PAGE>
IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement
[49587] No. 1 to be duly executed and delivered as of the date and year first
above written.
LESSOR: LESSEE:
OLIVIA CORP. RENO AIR, INC.
By:_____________________________ By:_____________________________
Name: Name:
Title: Title:
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<PAGE>
Schedule "1"
1. Security Deposit. The Security Deposit shall equal $300,000.
2. Interim Rent. Interim Rent shall be payable by LESSEE to LESSOR in the amount
set forth in Section 5(A) of the Lease. The Minimum Basic Rent shall equal
$40,000.
3. Basic Rent.
(i) Basic Rent shall be paid by LESSEE to LESSOR, in advance, as set forth
in Section 5(A)(ii) of the Lease.
(ii) The monthly Basic Rent for each Rent Period during the periods set
forth below shall equal the amounts set forth next to such periods assuming that
LIBOR for such Rent Period is 5.8% per annum:
January 15, 1996 - July 14, 1996 - $87,500
July 15, 1996 - Expiration Date - $150,000
To the extent LIBOR on any given Rent Date (provided, however, if
such Rent Date is not a London Banking Day, then on the immediately following
London Banking Day), on which Basic Rent is to be paid is less than or greater
than 5.8% per annum, the Basic Rent payable by LESSEE to LESSOR on the next Rent
Date shall be adjusted upward (in the event that LIBOR is greater than 5.8% per
annum) or downward (in the event that LIBOR is less than 5.8% per annum) in
accordance with the following formula (the "Rent Adjustment"):
((L-5.8) x A) + B
L = the actual 30-day LIBOR rate for the preceding Rent
Date, however, L shall never be greater than 8.0 nor
less than 3.6
B = the Basic Rent
A = an adjustment factor equal to the amount set forth
below corresponding to the relevant Rent Period:
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Rent Period A
----------- -
Jan-15-1996 to Jan-14-1997 7,450
Jan-15-1997 to Jan-14-1998 6,700
Jan-15-1998 to Jan-14-1999 5,800
Jan-15-1999 to Jan-14-2000 4,900
Jan-15-2000 to Jan-14-2001 3,850
Jan-15-2001 to Jan-14-2002 2,750
Jan-15-2002 to Jan-15-2003 1,550
Notwithstanding anything set forth herein to the contrary, with
respect to the Basic Rent payable for the last Rent Period, the Rent Adjustment
shall be made on the Expiration Date. To the extent the Basic Rent is adjusted
upward for such Rent Period, LESSEE shall pay the Rent Adjustment to LESSOR on
the Expiration Date. To the extent the Basic Rent is adjusted downward for such
period and provided no Default or Related Lease Default has occurred and is
continuing, LESSOR shall pay LESSEE the Rent Adjustment on the later of the
Expiration Date or the date on which LESSEE has complied with all provisions
hereof.
4. Reserves.
(i) The Airframe Reserves shall be payable in an amount equal to thirty
($30.00) Dollars for each Flight Hour incurred on the Airframe for the previous
Rent Period;
(ii) The Engine Reserves shall be payable in an amount equal to seventy
($70.00) Dollars per each Cycle incurred on each Engine for the previous Rent
Period; and
(iii) the Landing Gear Reserves shall be ten ($10.00) Dollars per each
Cycle incurred on the Landing Gear for the previous Rent Period.
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EXHIBIT "E"
APPOINTMENT AS ATTORNEY-IN-FACT
Pursuant to the terms of Subsection 19 of the Lease (as hereinafter
defined), RENO AIR, INC. ("Reno") hereby irrevocably appoints OLIVIA CORP.
("LESSOR"), or its representatives, agents or assigns, as its true and lawful
attorney-in-fact, to act in all respects, do such acts and take such actions as
Reno could do or authorize itself under the Lease with respect to the use,
operations, maintenance and possession of the McDonnell Douglas MD-87 Aircraft,
Serial Number 49587, U.S. Registration No. N753RA (the "Aircraft"), which LESSOR
has leased to Reno by Aircraft Lease Agreement [49587] dated as of November _,
1995 (the "Lease"). The appointment is made as part of and in consideration of
the leasing of the Aircraft to Reno by LESSOR and shall remain in full force and
effect until all obligations of Reno under the Lease shall be fully discharged
or satisfied. The power given to LESSOR herein may only be exercised upon the
occurrence and continuation of an Event of Default under the Lease but LESSOR
shall not be required to deliver any evidence to any party as to the existence
of such Event of Default in connection with the exercise of the power hereunder.
Executed this ___ day of November, 1995.
RENO AIR, INC.
By:_______________________
Name:
Title:
Attested by:
__________________________
(PLACE CORPORATE Secretary
SEAL HERE)
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<PAGE>
STATE OF )
) ss.:
COUNTY OF )
On the __ day of _________, 199_, before me personally came
__________________, to me known, who, being by me duly sworn, did depose and say
that he resides at _____________________; that he is the ________ of
_______________, the corporation described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the seal affixed to
said instrument is such corporate seal; that it was so affixed by order of the
Board of Directors of said corporation, and that he signed his name thereto by
like order.
______________________________
Notary Public
[Seal]
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<PAGE>
EXHIBIT "F"
REDELIVERY CERTIFICATE
This Redelivery Certificate is delivered on and as of the date set forth
below by Olivia Corp. (hereinafter referred to as "LESSOR"), to Reno Air, Inc.
(hereinafter referred to as "LESSEE") pursuant to the Aircraft Lease Agreement
[49587], dated as of November __, 1995, between LESSOR and LESSEE (hereinafter
referred to as the "Agreement"):
A. Details of Redelivery. LESSOR hereby indicates and confirms to LESSEE,
its successors and assigns, that the LESSOR has, at ____ o'clock _.M., on this
__ day of _________, 199_, at ____________, accepted the following in accordance
with the provisions of the Agreement:
1. (a) McDonnell Douglas Model: MD-87;
(b) Manufacturer's Serial No.: 49587; and
(c) U.S. FAA Registration No.: N753RA.
Manufacturer
Engine Model Number Total Total Hours Cycles
No. Serial Number Hours Cycles Remaining Remaining
--- ------------- ----- ------ --------- ---------
(1) Pratt & Whitney
JT8D-219
[_____]
(2) Pratt & Whitney
JT8D-219
[_____]
Each of the above-described Engines having 750 or more rated take-off horsepower
or the equivalent thereof.
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Airframe
Total Time: ____ hrs.
Total Cycles: ____ Cycles
Fuel
_____ lbs.
B. Confirmation of Acceptance. LESSOR confirms that the above-described
Aircraft and Engines have been examined by its duly appointed and authorized
representative(s) and that such Aircraft and Engines conform to the information
set forth above. LESSOR's execution and delivery of this Redelivery Certificate
represents LESSOR's acceptance of the above-described Aircraft and Engines for
all purposes of this Agreement.
IN WITNESS WHEREOF, LESSOR has caused this Redelivery Certificate to be
executed in its name, by its duly authorized officer(s) or representative(s),
pursuant to due corporate authority, all as of the date written in Section A
above.
LESSOR:
OLIVIA CORP.
By:___________________________
Name:
Title:
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EXHIBIT "G"
DELIVERY CONDITIONS
Upon delivery of the Aircraft to the LESSEE, the Aircraft shall comply
with the following (except to the extent any such items are to be accomplished
during the "C" check to be performed by LESSEE immediately following the
delivery of the Aircraft):
1. The Aircraft shall be delivered in an airworthy condition and have a
valid Swiss Aviation Authority certificate of airworthiness for export.
2. There shall be no deferred maintenance items on the Airframe or
Engines.
3. All AD notes and mandatory service bulletins modifications due for
compliance as of the Effective Date shall have been performed.
4. Immediately prior to delivery, LESSOR shall, at its cost, perform a
test flight of the Aircraft, not to exceed one and one-half (1 1/2) hours in
duration, for the purpose of demonstrating the serviceability of the Aircraft
and its systems. To the extent that any of the systems of the Aircraft which
affect the airworthiness thereof are not functioning in accordance with the
standards of the Manufacturer, LESSOR shall, at its sole cost and expense,
repair, or cause to be repaired, such systems.
5. As of the Effective Date, each Engine will have not less than 3,000
Cycles remaining until the next scheduled removal in accordance with Swissair's
standard engine maintenance program and no discrepancies noted in a borescope
inspection. In computing the time remaining with respect to the Engines, at any
time when same is required to be calculated under the provisions of this Lease,
the most time limited component shall be used as the measure.
6. All life limited components, other than Engine components, installed on
the Aircraft shall have not less than 12 months or 2,000 Cycles remaining, as
determined under the Swissair maintenance program.
7. All technical records and manuals will be up to date and complete and
in English with no deferred maintenance items.
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8. Any modifications necessary to integrate the Aircraft into LESSEE's
fleet shall be performed by LESSEE and LESSEE shall be solely responsible for
all such costs.
9. All documents listed on Exhibit "B" hereof shall have been delivered to
Lessee and any other documents necessary to obtain a United States Certificate
of Airworthiness and to be operable in compliance with Part 121.
10. Lessee shall pay Lessor for all fuel on board the Aircraft at delivery
of the Aircraft on the Effective Date.
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EXHIBIT "H"
LEASE IDENTIFICATION
OWNER: Olivia Corp.
LESSEE: Reno Air, Inc.
MORTGAGEE: Credit Lyonnais/PK AIRFINANCE, New York Branch
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<PAGE>
LEASE SUPPLEMENT [49587] NO. 1
LEASE SUPPLEMENT [49587] NO. 1, dated November 16, 1995, between OLIVIA
CORP. ("LESSOR") and RENO AIR, INC. ("LESSEE").
LESSOR and LESSEE have heretofore entered into that certain Aircraft Lease
Agreement [49587], dated as of November 16, 1995, relating to one (1) McDonnell
Douglas MD-87 Aircraft (herein called the "Lease" and the defined terms therein
being hereinafter used with the same meanings). The Lease provides for the
execution and delivery of a Lease Supplement for the purpose of subjecting the
Aircraft and other property described in such Lease Supplement (collectively,
the "Equipment"), as and when delivered by LESSOR to LESSEE, to the terms of the
Lease.
The Lease relates to the Equipment described below and a counterpart of
the Lease is attached hereto and made a part hereof, and this Lease Supplement,
together with such attachment, is being filed for recordation on the date hereof
with the FAA as one document.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, LESSOR and LESSEE hereby agree as follows:
1. LESSOR hereby delivers and leases to LESSEE under the Lease, and LESSEE
hereby accepts delivery of and leases from LESSOR under the Lease, the following
described Equipment, which Equipment, as of the date hereof, is acknowledged and
accepted by LESSEE:
(i) Airframe: one (1) McDonnell Douglas MD-87 airframe, bearing
FAA Registration No. N753RA and Manufacturer's Serial No.
49587;
(ii) Engines: two (2) Pratt & Whitney Model JT8D-217C aircraft
engines, each of which has 750 or more rated takeoff
horsepower and bearing Manufacturer's Serial Nos. 708147 and
708177, respectively; and
(iii) The Aircraft Documents.
2. The Effective Date for the Equipment is the date of this Lease
Supplement set forth in the opening paragraph hereof.
<PAGE>
3. The Term is from the date of this Lease Supplement through and
including January 15, 2003.
4. LESSEE hereby confirms it has paid the Security Deposit to LESSOR in
the amount set forth on Schedule "1" attached hereto and forming a part hereof.
5. LESSEE hereby confirms its agreement to pay LESSOR Interim Rent and
Basic Rent, as applicable, for the Equipment throughout the Term, in the
installments and in the amounts provided for on Schedule "1", on each Rent Date.
6. LESSEE hereby confirms its agreement to pay LESSOR Reserves on each
Maintenance Reserve Date, subject to the provisions of 5(E) and in the amounts
provided for on Schedule "1".
7. LESSEE hereby confirms to LESSOR that LESSEE has accepted the Equipment
for all purposes hereof and of the Lease.
8. All of the terms and provisions of the Lease are hereby incorporated by
reference in this Lease Supplement to the same extent as if fully set forth
herein.
9. This Lease Supplement may be executed by the parties hereto in separate
counterparts, each of which, when so executed and delivered, shall be an
original, but all such counterparts shall together constitute but one and the
same instrument.
2
<PAGE>
IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement
[49587] No. 1 to be duly executed and delivered as of the date and year first
above written.
LESSOR: LESSEE:
OLIVIA CORP. RENO AIR INC.
By: /s/ Aaron Mendelsohn By:
--------------------------- ---------------------------
Name: Aaron Mendelsohn Name:
Title: President Title:
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IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement
[49587] No. 1 to be duly executed and delivered as of the date and year first
above written.
LESSOR: LESSEE:
OLIVIA CORP. RENO AIR INC.
By: By: /s/ Robert M. Rowen
--------------------------- ---------------------------
Name: Name: Robert M. Rowen
Title: Title: Vice President and General Counsel
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Schedule "1"
1. Security Deposit. The Security Deposit shall equal $300,000.
2. Interim Rent. Interim Rent shall be payable by LESSEE to LESSOR in the
amount set forth in Section 5(A) of the Lease. The Minimum Basic Rent shall
equal $40,000.
3. Basic Rent.
(i) Basic Rent shall be paid by LESSEE to LESSOR, in advance, as set forth
in Section 5(A)(ii) of the Lease.
(ii) The monthly Basic Rent for each Rent Period during the periods set
forth below shall equal the amounts set forth next to such periods assuming that
LIBOR for such Rent Period is 5.8% per annum:
January 15, 1996 - July 14, 1996 - $87,500
July 15, 1996 - Expiration Date - $150,000
To the extent LIBOR on any given Rent Date (provided, however, if
such Rent Date is not a London Banking Day, then on the immediately following
London Banking Day), on which Basic Rent is to be paid is less than or greater
than 5.8% per annum, the Basic Rent payable by LESSEE to LESSOR on the next Rent
Date shall be adjusted upward (in the event that LIBOR is greater than 5.8% per
annum) or downward (in the event that LIBOR is less than 5.8% per annum) in
accordance with the following formula (the "Rent Adjustment"):
((L-5.8) x A) + B
L = the actual 30-day LIBOR rate for the preceding Rent
Date, however, L shall never be greater than 8.0 nor
less than 3.6
B = the Basic Rent
A = an adjustment factor equal to the amount set forth
below corresponding to the relevant Rent Period:
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Rent Period A
----------- -
Jan-15-1996 to Jan-14-1997 7,450
Jan-15-1997 to Jan-14-1998 6,700
Jan-15-1998 to Jan-14-1999 5,800
Jan-15-1999 to Jan-14-2000 4,900
Jan-15-2000 to Jan-14-2001 3,850
Jan-15-2001 to Jan-14-2002 2,750
Jan-15-2002 to Jan-15-2003 1,550
Notwithstanding anything set forth herein to the contrary, with
respect to the Basic Rent payable for the last Rent Period, the Rent Adjustment
shall be made on the Expiration Date. To the extent the Basic Rent is adjusted
upward for such Rent Period, LESSEE shall pay the Rent Adjustment to LESSOR on
the Expiration Date. To the extent the Basic Rent is adjusted downward for such
period and provided no Default or Related Lease Default has occurred and is
continuing, LESSOR shall pay LESSEE the Rent Adjustment on the later of the
Expiration Date or the date on which LESSEE has complied with all provisions
hereof.
4. Reserves.
(i) The Airframe Reserves shall be payable in an amount equal to thirty
($30.00) Dollars for each Flight Hour incurred on the Airframe for the previous
Rent Period;
(ii) The Engine Reserves shall be payable in an amount equal to seventy
($70.00) Dollars per each Cycle incurred on each Engine for the previous Rent
Period; and
(iii) the Landing Gear Reserves shall be ten ($10.00) Dollars per each
Cycle incurred on the Landing Gear for the previous Rent Period.
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EXHIBIT "I"
REDELIVERY CONDITIONS
A. The Aircraft will be redelivered in accordance with Section 17 of the
Lease and in accordance with the following provisions:
1) The Aircraft shall have a valid U.S. Certificate of Airworthiness or,
at LESSOR's request, a valid U.S. Certificate of Airworthiness for Export to a
jurisdiction designated by Lessor. If the Aircraft is to be registered in a
country other than in the United States after return from LESSEE, LESSOR may in
it's discretion require that LESSEE at its expense (to the extent such expense
is no greater than that LESSEE would have incurred in connection with this
subparagraph A(l), with any additional expense for LESSOR's account) put the
Aircraft in a condition to meet the requirements for issuance of a certificate
of airworthiness of the aviation authority of the next country of register,
provided, however, in the event that the foregoing causes a delay in the
redelivery of the Aircraft to Lessor, Lessee shall not be liable for any costs
associated with the delay in redelivery.
2) The Aircraft shall be in good operating condition and airworthy in
accordance with the Maintenance Program applicable to the Aircraft and the
Manufacturer's structural repair manual. All of the Aircraft equipment,
components, and systems shall be functioning in accordance with the Maintenance
Program.
3) The Aircraft shall be in passenger cabin configuration with 12F and
105Y seats.
4) The Aircraft shall be clean by international commercial airline
standards.
5) No special or unique Manufacturer, Engine manufacturer or FAA
inspection or check requirements which are specific to the Aircraft or Engines
(as opposed to all aircraft or engines of their types) will exist with respect
to the Airframe, Engines and Aircraft equipment, components and systems unless
there is no terminating action rectification available from any source.
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6) All Airworthiness Directives and other instructions of the FAA
applicable to the Aircraft which are issued prior to the date of return of the
Aircraft and require compliance (either by means of repetitive inspections,
modifications or terminating action) prior to return of the Aircraft to LESSOR
will have been complied with on the Aircraft on a terminating action basis.
Airworthiness Directives and instructions which do not have a terminating action
will be accomplished at the level of inspection or modification required to
clear the Aircraft for the lesser of the longest available interval between
inspections or one (1) year after the Expiration Date. If, after using best
efforts, LESSEE is unable to acquire the material, parts or components necessary
to accomplish such Airworthiness Directive, LESSEE will pay to LESSOR upon
return of the Aircraft the estimated cost of terminating such Airworthiness
Directive. If the estimated cost cannot be mutually agreed upon by LESSEE and
LESSOR, LESSEE and LESSOR will each obtain a reasonable estimate from reputable
FAA approved maintenance facility and the estimated cost will be the average of
the two estimates.
7) The Aircraft will be in compliance with Manufacturer's Corrosion
Prevention and Control Program (CPCP) specified for the model type by
Manufacturer.
8) All no-charge vendor and Manufacturer's service bulletin kits received
by LESSEE for the Aircraft but not installed thereon will be on board the
Aircraft as cargo. At LESSOR's request, any other service bulletin kit which
LESSEE paid for will also be delivered to LESSOR on board of the Aircraft, but
LESSOR will reimburse LESSEE for its actual out-of-pocket costs for such kit.
9) The Aircraft will be free of any system-related leaks and any damage
resulting therefrom. All repairs will have been performed on a permanent basis
in accordance with the applicable manufacturer's instructions.
10) If any waivers, alternate means of compliance (unless there exists no
permanent terminating action repair and such alternate means of compliance is
transferrable to other operators of the Aircraft), dispensations, extensions or
carry-overs with respect to Airworthiness Directives or operating or maintenance
requirements are granted by the FAA or permitted by the Maintenance Program,
LESSEE at its sole cost and expense will nonetheless perform such Airworthiness
Directives and other operating or maintenance requirements on a terminating
action basis as if such waivers, alternate means of compliance, dispensations or
extensions did not exist, provided, however, if such waivers, alternative means
of compliance, dispensations or extensions are generally available to operators
of MD-87 aircraft, Lessee shall not be required to terminate such Airworthiness
Directives and/or other operating or maintenance requirements but shall be
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required to perform such maintenance and inspections as it is performing on its
MD-87 fleet on a non-discriminatory basis.
11) At LESSOR's request, LESSEE will provide LESSOR with a written summary
of all sampling programs involving or affecting the Aircraft.
12) Lessee's livery shall be removed and the Aircraft shall be painted
over white.
13) At the time of redelivery of the Aircraft, the Aircraft shall:
(a) have installed the full complement of Engines, which Engines
shall be Pratt & Whitney JT8D-219 Engines, and Parts and other equipment,
accessories and loose equipment as would remain installed in such Aircraft and
shall be in a condition suitable for operation in commercial service;
(b) have performed, within the last 500 Flight Hours, by an
FAA-approved repair station, a full and complete zonal, systems and structural
check ("C" or its equivalent), the corresponding lower checks ("A" and "B" or
equivalent) and any other maintenance and inspections tasks, all in accordance
with the Maintenance Program. LESSEE will also weigh the Aircraft. Any
discrepancies revealed during such inspection will be corrected in accordance
with Manufacturer's maintenance and repair manuals or FAA-approved data. LESSEE
agrees to perform during such check any other work reasonably required by LESSOR
(and not otherwise required under this Lease) and LESSOR will reimburse LESSEE
for such work at LESSEE's preferred customer rates. LESSEE shall pay LESSOR
$25.00 per Flight Hour incurred on the Aircraft since the last "C" check.
(c) have had performed on it when required an internal and external
corrosion inspection in accordance with the CPCP and correct any discrepancies
in accordance with the recommendations of Manufacturer and the Structural Repair
Manual. In addition, all inspected areas will be properly treated with corrosion
inhibitor as recommended by Manufacturer; and
(d) comply with the Manufacturer's and Engine Manufacturer's
original specifications therefor and/or supported by relevant documentation
approved by the Manufacturer and Engine Manufacturer, as the case may be.
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<PAGE>
14) The Aircraft shall, on the Redelivery Occasion, meet the requirements
of FAR Part 36, Appendix C, Stage 3 noise regulations without the need to obtain
a waiver or exemption therefrom.
15) LESSEE shall, at its sole cost and expense, immediately prior to
return of the Aircraft, perform a borescope inspection of the Engines (hot and
cold sections). All items beyond the applicable Engine Manufacturer's
maintenance manual limits will be rectified at LESSEE's sole cost and expense.
No Engine will be "on watch" for any reason requiring special or out of sequence
inspection.
16) In accordance with the applicable maintenance manual, accomplish a
maximum power assurance run and condition, acceleration and bleed valve
scheduling checks on the Engines. LESSEE will record and evaluate the Engine
performance, with LESSOR and/or its representative entitled to be present. The
performance and all operating parameters of each Engine will be within the
limits specified in the Manufacturer's maintenance manual.
17) Each APU shall be delivered in a serviceable condition having
completed a hot section inspection not earlier than during the last "C" check.
18) Each of the Engines shall have the same number of Cycles remaining
until the next scheduled removal as when the Engines were delivered to LESSEE.
The Aircraft shall be returned with the same Engines as installed at delivery
(except as otherwise permitted by the Lease). To the extent that the number of
Cycles remaining until the next scheduled removal of the Engines are either
fewer than or greater than the amount of Cycles remaining on such Engines as
existed on the Effective Date for same, a financial adjustment of $70.00 per
Cycle difference will be made by the party receiving the benefit to the other
party hereunder. Notwithstanding the foregoing, LESSOR shall not be obligated to
pay compensation for more than 500 Cycles. In computing the time remaining with
respect to the Engines, at any time when same is required to be calculated under
the provisions of this Lease, the most time limited component shall be used as
the measure.
19) Each Landing Gear will have not less than 6 months or 2,000 Cycles
remaining to operate pursuant to the Maintenance Program. To the extent that the
number of Cycles remaining to operate the Landing Gear are either fewer than or
greater than the amount of Cycles remaining on the Landing Gear as existed on
the Effective Date for same, a financial adjustment of $10.00 per Cycle
difference will be made by the party receiving the benefit to the other party
hereunder.
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<PAGE>
20) Each component or Part of the Aircraft which has a hard time limit to
overhaul and each life-limited component or Part will have not less than the
lesser of (a) twelve (12) months or 2,000 Cycles remaining to operate pursuant
to the Maintenance Program, or (b) 100% of its total approved life remaining to
operate as of the "C" Check immediately preceding the Return Occasion.
21) Each component or Part which has a calendar limit will have remaining
to operate as of the "C" check immediately preceding redelivery at least (i) one
year from the date of return of the Aircraft to LESSOR or (ii) 100% of its total
approved life, whichever is less, pursuant to the Maintenance Program, except
that emergency equipment will have remaining to operate at least six (6) months
from the date of return of the Aircraft or 100% of its total approved life as of
the "C" check immediately preceding redelivery, whichever is less.
22) To the extent, on the Redelivery Occasion, the number of Flight Hours
on the Aircraft until the next "15,000 Hour" and "30,000 Hour" (or their
equivalent) heavy maintenance checks is either less than or greater than the
number of Flight Hours on the Aircraft on the Effective Date until the next
"15,000 Hour" and "30,000 Hour" heavy maintenance checks (assuming no change
after the Effective Date in the intervals between such checks not approved by
LESSOR), a financial adjustment of (i) $20.00 per Flight Hour difference with
respect to the next "30,000 Hour" check, and (ii) $10.00 per Flight Hour
difference with respect to the next "15,000 Hour" check, will be made by the
party receiving the benefit to the other party hereunder.
23) The Aircraft fluid reservoirs (including oil, oxygen, hydraulic and
water) will be serviced to full and the waste tank serviced in accordance with
Manufacturer's instructions. Each fuel tank will be at least as full as at
Delivery. Lessor will compensate Lessee for the fuel on board the Aircraft on
the Redelivery Occasion.
24) All technical records and manuals shall be up to date, in English and
with no deferred maintenance items outstanding unless normally deferred until
the next heavy maintenance visit under the Maintenance Program.
25) The Aircraft shall be equipped with TCAS and windshear alert systems.
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EXHIBIT "J"
CREDIT STANDARDS
LESSEE shall be deemed to have satisfied the Credit Standards provided
LESSEE maintains (1) a Fixed Charge Coverage Ratio equal to not less than 1.05.
The "Fixed Charge Coverage Ratio" shall be the ratio of net income (excluding
any extraordinary or one-time items) before interest, taxes, depreciation,
amortization and operating lease rentals divided by the sum of interest expense,
operating lease rentals and mandatory principal payments on debt classified as
long term, all determined in accordance with Generally Accepted Accounting
Principles consistently applied and on a rolling twelve month basis, and (2) a
minimum tangible net worth of $4,000,000 at the end of each month in the rolling
twelve month period.
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EXHIBIT "K"
ASSIGNMENT OF LEASE AND CONSENT
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ASSIGNMENT OF LEASE AND CONSENT
This ASSIGNMENT OF LEASE AND CONSENT dated as of November 16, 1995 (this
"Agreement") among OLIVIA CORP., a Delaware corporation (hereinafter "Lessor"),
CREDIT LYONNAIS/PK AIRFINANCE, New York Branch, a Luxembourg corporation
(hereinafter the "Lender"), and RENO AIR, INC., a Nevada corporation
(hereinafter "Lessee").
RECITALS:
(1) Pursuant to that certain Aircraft Lease Agreement [49587] dated as of
November 16, 1995 between Lessor and Lessee (the "Lease"), which Lease is being
filed with the Aircraft Registry of the Federal Aviation Administration
simultaneously herewith, Lessor has agreed to lease to Lessee, among other
things, the following:
Airframe: One (1) McDonnell Douglas Model MD-87 Aircraft;
Registration No.: N753RA
Manufacturer's Serial No.: 49587; and
Engines: Two (2) Pratt & Whitney JT8D-217C engines;
Manufacturer's Serial Nos.: 708147 and 708177;
(collectively, the "Aircraft"); and
(2) Lessor has obtained financing from the Lender in connection with the
Aircraft which is the subject of the Lease; and
(3) In order to secure the performance by Lessor of its obligations under,
among other things, that certain Secured Loan Agreement dated as of November 16,
1995 between the Lessor, as borrower, and the Lender, as lender (the "Loan
Agreement") and the Promissory Note (the "Note") made by Lessor and delivered to
the Lender in connection with the making of the loan pursuant to the Loan
Agreement, the Lender has required Lessor to, among other things, assign to the
Lender all of Lessor's right, title and interest in and to the Lease (but none
of its obligations) including, but not limited to, all amounts payable by Lessee
to Lessor under the Lease.
Transaction No. RNO51
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NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agree as follows:
1. Capitalized terms used but not defined in this Agreement shall have the
meaning ascribed to such terms in the Lease.
2. To secure the payment of the principal of, all interest and other sums
payable under the Loan Agreement, as from time to time amended or supplemented,
the Note and that certain Aircraft Chattel Mortgage and Security Agreement dated
as of November 16, 1995, between the Lender, as mortgagee, and Lessor, as
mortgagor, as from time to time amended or supplemented (the "Mortgage"), and
all other documents executed in connection therewith or contemplated thereby,
and the performance of, and compliance with, all of the terms of the Loan
Agreement and the Mortgage, Lessor hereby assigns, transfers, conveys and sets
over to the Lender, all of the Lessor's right, title and interest in, to and
under the Lease (but except as expressly set forth in Sections 6 and 7 below
none of its obligations thereunder) except for Lessor's right, title and
interest in Excluded Amounts (as defined in the Mortgage), including, without
limitation, the right to collect all rental payments, Reserves, the Security
Deposit, income, proceeds (including, but not limited to insurance proceeds),
awards, revenues and other sums payable by Lessee to Lessor pursuant to the
Lease and all of the Lessor's rights under Section 1110 of the U.S. Bankruptcy
Code 11 U.S.C. ss.ss. et seq. or any subsequently enacted statute of similar
import and, after an Event of Default (as defined in the Mortgage) has occurred
and is continuing, to enforce all of Lessor's rights and remedies under the
Lease.
3. The Lessee hereby acknowledges and consents, in accordance with the
terms hereof, to the assignment as herein provided of Lessor's rights under the
Lease to the Lender.
4. Lessor hereby directs Lessee and Lessee hereby agrees to pay directly
to the Lender, until such time as the Lender otherwise directs in writing, to
the account listed below all sums which are due and subsequently will become due
and payable by the Lessee to Lessor in accordance with the terms of the Lease.
All such payments shall be made by wire transfer in good, immediately available
funds to:
Credit Lyonnais, New York
Federal Routing No.: 026008073
Account No.: 01-22403-0001-00
In Favor Of: CL/PK AIRFINANCE
UID No.: 357771
Reference: RNO51
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5. Lessee hereby represents, warrants and agrees as follows:
(a) The Lease and the other Lease Documents (as defined in the
Lease) constitute the entire agreement of lease with respect to the Aircraft and
the Lease has not been amended, modified or supplemented;
(b) the Lease is in full force and effect;
(c) there is no Default or Event of Default under the Lease;
(d) there has been no prepayment of any Rent (as defined in the
Lease) payable under the Lease and the Rent is payable in the amounts set forth
in the Lease;
(e) Lessee will not permit any written amendments or waivers to the
Lease or permit any material provisions thereof to be amended or waived without
the prior, written consent of Lender, which will not be unreasonably withheld or
delayed;
(f) Lessee will promptly send to Lender all notices or demands which
Lessee shall be permitted or required to send to Lessor under the provisions of
the Lease or which Lessee receives from Lessor;
(g) Lessee acknowledges that the Lender has not made any
representations or warranties of any kind, nature or description in respect of
the Aircraft and that the Lender has not assumed any of the Lessor's duties or
obligations under the Lease and the Lessee shall continue to look solely to
Lessor for the performance and fulfillment of the terms, covenants and
conditions on Lessor's part to be performed under the Lease;
(h) Lessee will make all of the payments required to be paid under
the Lease in accordance with the terms of the Lease to the Lender as required in
paragraph 4 hereof;
(i) the Lender shall be entitled to the benefit of all
representations, warranties, covenants, indemnities and obligations to be made
or performed by Lessee pursuant to the Lease to the same extent as if the Lender
was originally named as "Lessor" in the Lease; and
(j) This Agreement has been duly authorized by all necessary action
and constitutes a valid, legal and binding obligation of the Lessee enforceable
in accordance with its terms, except as enforceability may be limited by
bankruptcy, reorganization,
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moratorium or other similar laws and by general principles of equity, whether
considered in a proceeding at law or in equity.
6. Lender and Lessee agree as follows: (a) wherever in the Lease rights
are granted to the Lender, whether as "Lender" or "Mortgagee" under the Lease,
the Lender hereby shall be entitled directly to exercise such rights in
accordance with the terms of the Lease and without relying on its rights as a
third party beneficiary; and (b) wherever in the Lease the consent of the Lessor
is required but is provided not to be unreasonably withheld by the Lessor, if
the Lessor requires the consent of the Lender in such matter under the Loan
Agreement, the Mortgage or any other document, such consent of the Lender shall
not be unreasonably withheld.
7. The Lender confirms to and agrees with the Lessee that the Lender's
rights and remedies as respects the Aircraft are subject in all respects to the
rights of the Lessee under the Lease and that so long as no Event of Default (as
defined in the Lease) has occurred and is continuing, neither the Lender nor any
person claiming by, through or under the Lender will disturb Lessee in the quiet
use, possession and enjoyment of the Aircraft in accordance with the Lease. The
Lender agrees that the terms and conditions of the Lease shall apply to, and be
binding upon, the Lender to the same extent as Lessor. The Lender shall not be
deemed to have assumed any obligations of Lessor under the Lease and Lender's
right to exercise any rights under the Lease shall not be adversely affected by
any failure of Lessor to have fulfilled its obligations thereunder; provided,
however, that in order for the Lender to exercise any right under the Lease, the
Lender shall be required to comply with all of the terms of the Lease pertaining
to the exercise of such right which would otherwise be binding on Lessor.
8. In the event that Lessor shall pay and discharge all of its obligations
under the Loan Agreement, Note and Mortgage, then at the request of Lessor,
Lender hereby agrees to send written notice to Lessee directing Lessee to make
all payments due and payable under the Lease to Lessor or such other party as
Lessor shall advise Lessee of in writing.
9. In the event that the Lender sends any notice to Lessor required to be
sent in accordance with the terms of the Loan Agreement in connection with a
Default or an Event of Default thereunder, Lender shall send a copy of any such
notice to Lessee.
10. (a) Every notice or demand under this Agreement shall be in writing
and may be given or made by telefax or by internationally recognized overnight
courier service.
(b) Every notice or demand under this Agreement or to the Lender
under the Lease shall be sent, in the case of overnight courier, to the Lender,
Lessor or Lessee,
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at their respective addresses and in the case of telefax, to their respective
telefax numbers, as follows:
To Lender:
Credit Lyonnais/PK AIRFINANCE, New York Branch
152 West 57th Street
New York, NY 10019
Attention: Mr. Anders Hebrand
Vice President Contracts
Telephone No.: 212-245-2575
Telefax No.: 212-397-9393
To Lessor or Lessee: to their address, telephone number and
telefax number as set forth in Section 21(D) of the Lease.
(c) Every notice or demand shall, except so far as otherwise
expressly provided by this Agreement, be deemed to have been received, in the
case of a telefax, at the time of actual receipt thereof, and in the case of an
internationally recognized overnight courier service, upon acknowledgment of
receipt or as of the date on which receipt of such notice delivered by overnight
courier is refused or such courier advises that such letter is not deliverable
at the address set out in paragraph 9(b).
(d) Lessor, Lessee or Lender may change its address by giving notice
in accordance with this paragraph 9.
A copy of every notice sent to Lender shall be sent to:
Credit Lyonnais/PK AIRFINANCE
10 rue de la Greve
L-1643 Luxembourg
Attention: Vice President Contracts
Telephone No.: 011-352-402-1721
Telefax No.: 011-352-482-544
Feltman, Karesh, Major & Farbman
152 West 57th Street
New York, New York 10019
Attention: Loren M. Dollet, Esq.
Telephone No.: 212-586-3800
Telefax No.: 212-586-0951
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(e) Lessor and Lessee agree that where the Lease permits actions to
be taken or notices to be given by the "Mortgagee", the Lessee shall be entitled
to rely that any such action or notice taken or given by the "Mortgagee" is
taken or given in accordance with the Loan Documents (as defined in the Loan
Agreement) and may be treated by the Lessee as the action or notice of the
Lessor.
11. This Agreement may be executed in one or more counterparts, each of
which shall constitute an original and all of such counterparts shall constitute
one and the same Agreement.
12. LENDER, LESSOR AND LESSEE HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT
OF ANY LITIGATION BASED HEREON OR ARISING OUT OF OR IN CONNECTION WITH THE
TRANSACTION CONTEMPLATED BY THIS AGREEMENT OR THE ACTIONS OF ANY OF THE PARTIES
HERETO.
13. This Agreement and the rights and obligations evidenced hereby shall
be binding upon and inure to the benefit of the successors and permitted assigns
of the parties hereto. Neither the Lessor nor Lessee may assign any of their
rights or obligations hereunder without the express prior written consent of the
Lender.
14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS ENTERED INTO IN AND BY
RESIDENTS OF THE STATE OF NEW YORK AND TO BE PERFORMED ENTIRELY WITHIN THE STATE
OF NEW YORK. The Lessor, Lessee and Lender consent to the jurisdiction and venue
of the New York State Supreme Court for the Borough of Manhattan, New York
County, New York and the United States District Court for the Southern District
of New York, in any action arising out of or connected in any way with this
Agreement, and the parties hereto further agree that the service of process or
of any other papers upon them or any of them by certified or registered mail,
return receipt requested, at their respective addresses set forth herein shall
be deemed good, proper and effective service upon them. The parties hereto
expressly consent to the jurisdiction of and venue in each of the aforementioned
courts and expressly waive any claim to lack of jurisdiction thereof or that
either such court is an inconvenient forum or that venue therein is improper.
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IN WITNESS WHEREOF, Lessor, Lessee and Lender have caused this Assignment
Of Lease and Consent to be duly executed by their duly authorized officers as of
the day and year first above written.
CREDIT LYONNAIS/PK AIRFINANCE OLIVIA CORP.
NEW YORK BRANCH
By:__________________________ By:_______________________
Title:_______________________ Title:____________________
RENO AIR, INC.
By:_______________________
Title:____________________
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LEASE SUPPLEMENT [49587] NO. 1
LEASE SUPPLEMENT [49587] NO. 1, dated November 16,1995, between OLIVIA
CORP. ("LESSOR") and RENO AIR, INC. ("LESSEE").
LESSOR and LESSEE have heretofore entered into that certain Aircraft Lease
Agreement [49587], dated as of November 16, 1995, relating to one (1) McDonnell
Douglas MD-87 Aircraft (herein called the "Lease" and the defined terms therein
being hereinafter used with the same meanings). The Lease provides for the
execution and delivery of a Lease Supplement for the purpose of subjecting the
Aircraft and other property described in such Lease Supplement (collectively,
the "Equipment"), as and when delivered by LESSOR to LESSEE, to the terms of the
Lease.
The Lease relates to the Equipment described below and a counterpart of
the Lease is attached hereto and made a part hereof, and this Lease Supplement,
together with such attachment, is being filed for recordation on the date hereof
with the FAA as one document.
NOW, THEREFORE, in consideration of the premises and other good and
sufficient consideration, LESSOR and LESSEE hereby agree as follows:
1. LESSOR hereby delivers and leases to LESSEE under the Lease, and LESSEE
hereby accepts delivery of and leases from LESSOR under the Lease, the following
described Equipment, which Equipment, as of the date hereof, is acknowledged and
accepted by LESSEE:
(i) Airframe: one (1) McDonnell Douglas MD-87 airframe, bearing
FAA Registration No. N753RA and Manufacturer's Serial No.
49587;
(ii) Engines: two (2) Pratt & Whitney Model JT8D-217C aircraft
engines, each of which has 750 or more rated takeoff
horsepower and bearing Manufacturer's Serial Nos. 708147 and
708177, respectively; and
(iii) The Aircraft Documents.
2. The Effective Date for the Equipment is the date of this Lease
Supplement set forth in the opening paragraph hereof.
<PAGE>
3. The Term is from the date of this Lease Supplement through and
including January 15, 2003.
4. LESSEE hereby confirms it has paid the Security Deposit to LESSOR in
the amount set forth on Schedule "1" attached hereto and forming a part hereof.
5. LESSEE hereby confirms its agreement to pay LESSOR Interim Rent and
Basic Rent, as applicable, for the Equipment throughout the Term, in the
installments and in the amounts provided for on Schedule "1", on each Rent Date.
6. LESSEE hereby confirms its agreement to pay LESSOR Reserves on each
Maintenance Reserve Date, subject to the provisions of 5(E) and in the amounts
provided for on Schedule "1".
7. LESSEE hereby confirms to LESSOR that LESSEE has accepted the Equipment
for all purposes hereof and of the Lease.
8. All of the terms and provisions of the Lease are hereby incorporated by
reference in this Lease Supplement to the same extent as if fully set forth
herein.
9. This Lease Supplement may be executed by the parties hereto in separate
counterparts, each of which, when so executed and delivered, shall be an
original, but all such counterparts shall together constitute but one and the
same instrument.
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IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement
[49587] No. 1 to be duly executed and delivered as of the date and year first
above written.
LESSOR: LESSEE:
OLIVIA CORP. RENO AIR INC.
By: /s/ Aaron Mendelsohn By:
--------------------------- ---------------------------
Name: Aaron Mendelsohn Name:
Title: President Title:
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IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement
[49587] No. 1 to be duly executed and delivered as of the date and year first
above written.
LESSOR: LESSEE:
OLIVIA CORP. RENO AIR INC.
By: By: /s/ Robert M. Rowen
--------------------------- ---------------------------
Name: Name: Robert M. Rowen
Title: Title: Vice President and General Counsel
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Schedule "1"
1. Security Deposit. The Security Deposit shall equal $300,000.
2. Interim Rent. Interim Rent shall be payable by LESSEE to LESSOR in the
amount set forth in Section 5(A) of the Lease. The Minimum Basic Rent shall
equal $40,000.
3. Basic Rent.
(i) Basic Rent shall be paid by LESSEE to LESSOR, in advance, as set forth
in Section 5(A)(ii) of the Lease.
(ii) The monthly Basic Rent for each Rent Period during the periods set
forth below shall equal the amounts set forth next to such periods assuming that
LIBOR for such Rent Period is 5.8% per annum:
January 15, 1996 - July 14, 1996 - $87,500
July 15, 1996 - Expiration Date - $150,000
To the extent LIBOR on any given Rent Date (provided, however, if
such Rent Date is not a London Banking Day, then on the immediately following
London Banking Day), on which Basic Rent is to be paid is less than or greater
than 5.8% per annum, the Basic Rent payable by LESSEE to LESSOR on the next Rent
Date shall be adjusted upward (in the event that LIBOR is greater than 5.8% per
annum) or downward (in the event that LIBOR is less than 5.8% per annum) in
accordance with the following formula (the "Rent Adjustment"):
((L-5.8) x A) + B
L = the actual 30-day LIBOR rate for the preceding Rent
Date, however, L shall never be greater than 8.0 nor
less than 3.6
B = the Basic Rent
A = an adjustment factor equal to the amount set forth
below corresponding to the relevant Rent Period:
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Rent Period A
----------- -
Jan-15-1996 to Jan-14-1997 7,450
Jan-15-1997 to Jan-14-1998 6,700
Jan-15-1998 to Jan-14-1999 5,800
Jan-15-1999 to Jan-14-2000 4,900
Jan-15-2000 to Jan-14-2001 3,850
Jan-15-2001 to Jan-14-2002 2,750
Jan-15-2002 to Jan-15-2003 1,550
Notwithstanding anything set forth herein to the contrary, with
respect to the Basic Rent payable for the last Rent Period, the Rent Adjustment
shall be made on the Expiration Date. To the extent the Basic Rent is adjusted
upward for such Rent Period, LESSEE shall pay the Rent Adjustment to LESSOR on
the Expiration Date. To the extent the Basic Rent is adjusted downward for such
period and provided no Default or Related Lease Default has occurred and is
continuing, LESSOR shall pay LESSEE the Rent Adjustment on the later of the
Expiration Date or the date on which LESSEE has complied with all provisions
hereof
4. Reserves.
(i) The Airframe Reserves shall be payable in an amount equal to thirty
($30.00) Dollars for each Flight Hour incurred on the Airframe for the previous
Rent Period;
(ii) The Engine Reserves shall be payable in an amount equal to seventy
($70.00) Dollars per each Cycle incurred on each Engine for the previous Rent
Period; and
(iii) the Landing Gear Reserves shall be ten ($10.00) Dollars per each
Cycle incurred on the Landing Gear for the previous Rent Period.
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<PAGE>
EXHIBIT 99.J
THIS IS COUNTERPART NO. TWO (DUPLICATE) OF TWO COUNTERPARTS. TO THE EXTENT THIS
AGREEMENT CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM
COMMERCIAL CODE IN EFFECT IN ANY APPLICABLE JURISDICTION), NO SECURITY INTEREST
HEREIN MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART
OTHER THAN COUNTERPART NO. ONE.
MARINE SHIPPING CONTAINER
VARIABLE LEASE
(COMBINED CONTAINER SET IV)
THIS MARINE SHIPPING CONTAINER VARIABLE LEASE (the "AGREEMENT") made as of
the 17th day of April, 1995 by and between TRANS OCEAN CONTAINER CORPORATION, a
Delaware corporation, whose head office is located at 851 Traeger Avenue, San
Bruno, CA 94066 (hereinafter called the "Lessee") and Investors Asset Holding
Corp., a Massachusetts corporation, not in its individual capacity but solely as
Trustee of the "AFG/ICCU Trust," having a principal place of business c/o
American Finance Group, Exchange Place, Boston, MA 02109 (hereinafter called the
"Lessor").
W I T N E S S E T H:
WHEREAS, the Lessor has agreed to purchase from the Lessee approximately
2500 TEU's (as defined below) of maritime shipping containers, including dry
cargo, open top, and collapsible flat rack containers, which containers shall be
more fully described in Bills of Sale issued pursuant to that certain Purchase
and Sale Agreement of even date herewith (the "Purchase and Sale Agreement")
between the parties (said containers are hereafter called the "Containers");
WHEREAS, the Lessee is engaged in the business of leasing and operating
containers; and
WHEREAS, the Lessor desires to lease the Containers to the Lessee and the
Lessee is willing to lease the Containers from the Lessor, all on the terms and
conditions set forth herein.
NOW, THEREFORE, the parties hereby agree as follows:
1. Lessor-Lessee Relationship
(a) The Lessor hereby leases the Containers to the Lessee, and the Lessee
hereby leases the Containers from the Lessor, in accordance with the terms and
conditions set forth below.
(b) In order to further evidence the relationship of lessor
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(1) the Lessor has and shall retain exclusive legal and beneficial
ownership of the Containers, and the Lessee shall not have any right, title or
interest in the Containers, except as provided in this Agreement;
(2) in the conduct of its business, the Lessee will not hold itself
out as an owner of the Containers or take any action that would be inconsistent
with the ownership of the Containers by the Lessor or that would otherwise be
inconsistent with, or outside the scope of, the lease created under this
Agreement; and
(3) Lessor and Lessee agree to treat the transactions provided for
in this Agreement as a lease of the Containers by the Lessor to the Lessee for
United States federal income tax purposes and to take positions consistent with
such treatment in filing the respective United States federal income tax
returns, if any, required to be filed thereby.
(c) The Lessee and the Lessor expressly recognize and acknowledge that
this Agreement does not create a partnership, joint venture or other entity
among or between the Lessor, the Lessee, and/or any other person, and is
intended only to set forth the terms and conditions of the lessor/lessee
relationship between the Lessor and the Lessee with respect to the matters
specifically contained herein.
(d) The Lessee acknowledges and agrees that:
(i) LESSOR IS NOT A MANUFACTURER OF THE CONTAINERS OR A MERCHANT OR
DEALER IN PROPERTY OF SUCH KIND;
(ii) ON OR BEFORE THE PURCHASE DATE OF EACH CONTAINER, THE LESSEE
WILL HAVE ACCEPTED THE CONTAINER INTO ITS FLEET OF MANAGED, OWNED AND LEASED
INTERMODAL MARINE CONTAINERS; AND
(iii) LESSOR HAS NOT MADE, AND DOES NOT HEREBY MAKE, ANY
REPRESENTATION, WARRANTY, OR COVENANT, EXPRESS OR IMPLIED, WITH RESPECT TO THE
MERCHANTABILITY, CONDITION, QUALITY, DURABILITY, DESIGN, OPERATION, FITNESS FOR
USE, OR SUITABILITY OF THE CONTAINERS OR ANY COMPONENT THEREOF IN ANY RESPECT
WHATSOEVER OR IN CONNECTION WITH OR FOR THE PURPOSES AND USES OF THE LESSEE, AND
THE LESSOR HAS NOT MADE AND DOES NOT HEREBY MAKE ANY OTHER REPRESENTATIONS,
WARRANTIES, OR COVENANTS OF ANY KIND AND CHARACTER, EXPRESS OR IMPLIED WITH
RESPECT THERETO, AND SHALL NOT BE LIABLE FOR ANY ACTUAL, INCIDENTAL,
CONSEQUENTIAL, OR OTHER DAMAGES OF OR TO ANY PERSON WHATSOEVER, WITH RESPECT
THERETO, AND THE LESSEE IS LEASING THE CONTAINERS "AS IS AND WITH ALL FAULTS."
(e) Lessee represents, warrants and certifies to the Lessor as of the date
of execution and delivery of this Agreement:
(i) Lessee is duly organized, validly existing and in
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<PAGE>
good standing under the laws of the state of its incorporation, with full power
to enter into and to pay and perform its obligations under this Agreement, and
is duly qualified and in good standing in all other jurisdictions in the United
States in which the nature of its business or the ownership of its properties,
or both, make such qualification necessary and where failure to so qualify would
materially adversely affect its financial condition or the conduct of its
business or the performance of its obligations under or the enforceability of
this Agreement.
(ii) This Agreement and all related documents have been duly
authorized, executed and delivered by Lessee, are valid, legal and binding
obligations of Lessee, are enforceable against Lessee in accordance with their
terms and do not and will not contravene any provisions of or constitute a
default under Lessee's organizational documents or its by-laws, any agreement to
which it is a party or by which it or its property is bound, or any law,
regulation or order of any governmental authority;
(iii) Lessor's right, title and interest in and to this Agreement
and the Containers and the rentals therefrom will vest in Lessor on the Purchase
Date for such Containers and will not be affected or impaired by the terms of
any agreement or instrument by which Lessee or its property is bound except for
Lessee's rights under this Agreement and the rights of the sublessees under the
applicable subleases of such Containers;
(iv) no approval of, or filing with, any governmental authority or
other person is required in connection with Lessee's entering into, or the
payment or performance of its obligations under, this Agreement except for the
filing of UCC-l financing statements as contemplated by Section 4 of the
Purchase and Sale Agreement;
(v) there are no suits or proceedings pending or, to the knowledge
of Lessee, threatened, before any court or governmental agency against Lessee
which, if decided adversely to Lessee, would materially adversely affect
Lessee's business or financial condition or its ability to perform any of its
obligations under this Agreement;
(vi) there has been no material adverse change to the Lessee's
financial condition or results from its operations since the date of its most
recent audited financial statements delivered to Lessor; and
(vii) the address stated in the preamble to this Agreement as
Lessee's head office is the principal place of business and chief executive
office of Lessee; and Lessee does not conduct business under a trade, assumed or
fictitious name except as follows: Trans Ocean, Trans Ocean Leasing, and TOL.
3
<PAGE>
2. The Lessee's Duties
In consideration of the right to use and operate the Containers as lessee
pursuant to this Agreement, the Lessee agrees that it will, during the term
hereof, perform the following duties, using a level or standard of care no less
than the Lessee would use with respect to containers it owns, leases or operates
for others:
(a) accept delivery of the Containers;
(b) place such marks upon the Containers, register the Containers in
accordance with such tariffs as required for their operation in marine shipping
service, paint the Containers any appropriate color, and place on the Containers
such markings or legends as the Lessee deems required or appropriate;
(c) take all reasonable and customary steps as may be required to provide
for the sublease of the Containers under short, medium and long term leases on
such terms and conditions as it may deem satisfactory, in its sole discretion
(except as otherwise specifically provided for in this Agreement);
(d) pay to the Lessor the Fixed Rent or the Variable Rent (as defined in
Section 6(c)(6)), as the case may be, on the last day of each calendar quarter
immediately following the calendar quarter for which such Fixed Rent or Variable
Rent is payable;
(e) pay all Operating Expenses (as defined below) and file all applicable
tax returns and other reports with respect to ad valorem, gross receipts and
property taxes attributable to the Set Containers (as defined below);
(f) on behalf of Lessor, sell or otherwise dispose of Containers that
become subject to Casualty Occurrences or Ordinary Disposal Occurrences, as
described in Section 4(b) below (for this purpose, a Casualty Occurrence shall
include a "Casualty Occurrence" (as defined below) that occurs prior to the
Purchase Date but that becomes known to Lessee after the Purchase Date);
(g) perform all administrative and related functions necessary for the
operation and subleasing of the Containers, including but not limited to:
(i) maintaining and servicing (or causing the sublessees to maintain
and service) the Containers in a condition that meets the then current general
interchange standards of the International Institute of Container Lessors, Guide
for Container Equipment Inspection, and in such condition as may be required by
any applicable law or the rules or regulations of any governmental body having
jurisdiction over the Containers and as maybe necessary or appropriate to make
the Containers suitable for rental in international commerce;
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<PAGE>
(ii) supervising all maintenance and repair of each Container,
whether performed by the Lessee, an employee of a depot operator, or other third
party, to ensure such maintenance satisfies the highest of the following
standards:
(A) any standard required or set forth for the Containers or
equipment of a similar class under any applicable industry convention or
governmental law or regulation;
(B) any standard set by any insurance policy under which the
Containers shall from time to time be insured; and
(C) good commercial practice;
(iii) performing periodic inspections and surveys of the Containers
in the possession of depot operators to ensure maintenance of the Containers in
a seaworthy and safe operating condition;
(iv) maintaining records with respect to the rental of the
Containers, locations of the Containers when off-hire, repair and maintenance
history and repair and maintenance activity; and
(v) monitoring the location of the Containers while off-lease.
In performing such administrative and related functions hereunder, the
Lessee shall not knowingly discriminate against or in favor of the Containers
in seeking subleases; and
(h) defend, indemnify and hold the Lessor and any party or parties from
whom Lessor obtained financing for the Containers (the "Lenders") harmless from
and against any claims asserted against them arising out of the possession or
operation of the Containers (including, but not limited to, injury to persons or
loss of or damage to lading or other property), provided that the costs of such
defense, indemnification and holding harmless shall be an Operating Expense for
purposes of Section 6 (excluding, however, those costs or expenses that result
from the gross negligence or willful misconduct of the Lessee).
3. Covenant of Quiet Enjoyment
The Lessor shall not disturb the Lessee's quiet enjoyment of the
Containers provided Lessor is not entitled to terminate this Agreement pursuant
to Section 4(c).
4. Duration
(a) Initial Term; Extension Options. Except as provided below, the term of
this Agreement as to each of the Containers shall
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<PAGE>
commence on the date such Container is included in the Container Set (as defined
below) as determined under Section 6(b)(4), and shall remain in full force and
effect until June 30, 2003 (the "Stated Term"), provided that the Lessor is
hereby granted an option to extend the Stated Term of this Agreement on the same
terms and conditions for up to four one-year renewal periods. The Lessor must
provide written notice to Lessee of its election to exercise this renewal option
not less than ninety (90) days prior to the expiration of the Stated Term of
this Agreement or each subsequent renewal period.
(b) Termination due to a Casualty Occurrence or an Ordinary Disposal
Occurrence. Notwithstanding Section 4(a), this Agreement shall terminate as to
any Container upon the total loss or destruction of that Container (a "Casualty
Occurrence") or upon an Ordinary Disposal Occurrence (as defined below) (an
"Ordinary Disposal Occurrence"), unless within ninety (90) days after the Lessee
receives notice of the Casualty Occurrence or within ninety (90) days after the
Ordinary Disposal Occurrence, the Lessee shall, in accordance with Section 9(b)
below, replace that Container with one of like size, type, age, and condition
and shall notify the Lessor of the replacement. The replacement container shall
be deemed to be a "Container" for all purposes of this Agreement from and after
the date of the Casualty Occurrence or the Ordinary Disposal Occurrence, as
applicable. Unless Lessee replaces a Container subject to a Casualty Occurrence
or an Ordinary Disposal Occurrence in accordance with Section 9(b) below,
Lessee will sell, lease or otherwise dispose of such Container, and will
distribute the net proceeds from such sale, lease or other disposition, in
accordance with said section.
For purposes hereof, an "Ordinary Disposal Occurrence" means the
determination by Lessee to dispose of a Container in the ordinary course of
business for one or both of the following reasons: (i) the Container is no
longer marketable, for example, due to technological obsolescence; or (ii) the
Container has suffered such damage that it is not economic to repair and
re-lease the Container as described in the remainder of this section. When a
Container is returned to the Lessee in damaged condition, the Lessee compares
the net cash value of repairing that Container to the net proceeds that would be
received if that Container were instead sold. If the net cash value is less than
the net proceeds, the Lessee will dispose of the Container as an Ordinary
Disposal Occurrence. The net cash value is obtained by subtracting the cost of
restoring that Container to a leasable condition from the estimated present
value of the future cash streams from leasing that Container over its remaining
useful life.
(c) Termination by the Lessor. Notwithstanding Section 4(a), but subject
to Section 4(d), the Lessor may terminate this Agreement as to any Container by
written notice effective upon delivery of the notice to Lessee (except that this
Agreement shall
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<PAGE>
automatically terminate without notice in the event of the occurrence under
Section 4(c)(5) below), which notice may be given only in the event that:
(1) the Lessee shall fail to pay to the Lessor the Fixed Rent or the
Variable Rent required by Section 2(d) and such failure shall continue for a
period of ten (10) days after notice thereof by the Lessor to the Lessee;
(2) the Lessee shall assign or transfer any of its rights hereunder
without the prior written consent of the Lessor;
(3) the Lessee shall default in the performance or observance of any
other covenant, condition, agreement, or duty to be performed or observed by the
Lessee under this Agreement and such default shall continue unremedied for a
period of thirty (30) days after notice thereof by the Lessor to the Lessee;
(4) any representation or warranty made by the Lessee in Section
1(e) hereof, Section 5 of the Purchase and Sale Agreement, or in any Bill of
Sale (as defined in the Purchase and Sale Agreement) shall prove to have been
false in any material respect at the time made;
(5) the Lessee shall have (i) ceased doing business as a going
concern, (ii) made an assignment for the benefit of creditors, admitted in
writing its inability to pay its debts as they mature or generally failed to pay
its debts as they become due, (iii) initiated any voluntary bankruptcy or
insolvency proceeding, (iv) failed to obtain the discharge of any bankruptcy or
insolvency proceeding initiated against it by others within 60 days of the date
such proceedings were initiated, or (v) requested or consented to the
appointment of a trustee or receiver with respect to itself or for a substantial
part of its property; or
(6) the Lessee shall make two (2) or more Variable Rent payments in
amounts that, together with all other Variable Rent payments theretofore made,
fail to aggregate a cumulative annual return to the Lessor of fourteen percent
(14%) or more of the aggregate Container Cost of the Containers then under
lease hereunder.
The events described in Sections 4(c)(l), (2), (3), (4) and (5) above are
hereinafter collectively referred to as "Events of Default."
(d) Containers Subject to Sublease. Notwithstanding Sections 4(a) or 4(c),
if a Container is subject to sublease at a time when this Agreement would
otherwise terminate as to the Container, this Agreement shall remain in full
force and effect as to the Container until the last day of the calendar quarter
in which the Container comes off the sublease unless (x) such termination was as
a
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consequence of the Event of Default specified in Section 4(c) (5), or (y) such
termination was as a consequence of any other Event of Default and Lessor gives
the notice described in Section 5(c)(A); provided that, unless termination as to
the Container was pursuant to Section 4(c), the Lessee shall be entitled to
continue this Agreement as to a Container after the last day of the calendar
quarter in which the Container comes off the sublease if in its reasonable
judgment it is economically feasible to restore the Container to a leasable
condition and to re-lease the Container to an end-user, in which case this
Agreement shall continue as to that Container until the last day of the calendar
quarter in which the Container comes off a sublease or the last day of the
calendar quarter in which the Lessee determines that it is not economically
feasible to restore the Container to a leasable condition and to re-lease the
Container to an end-user. Notwithstanding the foregoing, unless Lessor exercises
its renewal option pursuant to Section 4(a), the Lessee shall not be entitled
pursuant to the foregoing proviso to continue this Agreement as to any Container
after the last day of the calendar quarter in which the Container comes off the
sublease without the prior written consent of the Lessor.
(e) Termination by the Lessee. Notwithstanding Section 4(d), the Lessee
may terminate this Agreement as to any Container of a particular size and type
at the end of the Stated Term thereof and at any time thereafter, upon the
election of the Lessee, at the Lessee's sole and absolute discretion, if
Variable Rent specifically allocable to the Set Containers of that size and
type, calculated in a manner analogous to Section 6(c), for the most recent
calendar quarter that can be reasonably calculated by the Lessee, is less than
fourteen percent (14%) of the aggregate Container Cost of Containers of that
size and type then under lease hereunder multiplied by a fraction the numerator
of which is the number of days in that quarter and the denominator of which is
365.
(f) Treatment of Non-Terminated Containers. Notwithstanding the
foregoing, the termination of this Agreement with respect to any individual
Container shall not relieve the Lessee from performing its obligations hereunder
as to any Containers not subject to such termination.
5. Termination.
(a) Settlement of the Variable Rent. Upon any termination of this
Agreement as to any Container, the Lessee shall make a complete and final
settlement of the Fixed Rent and the Variable Rent for the Container as
determined in Section 6 no later than the last day of the calendar quarter
following the calendar quarter in which termination of this Agreement occurs as
to the Container.
(b) Remarketing of the Containers. Upon termination of this Agreement as
to any Container, other than as a consequence of one
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of the events specified in Section 4(b) or 4(c), the Lessor hereby authorizes
the Lessee to remarket the Containers on behalf of the Lessor, and the Lessee
shall, pursuant to such authorization:
(1) sell, lease or otherwise dispose of the Container, at the sole
and absolute discretion of the Lessee; provided that if the Lessee elects to
acquire the Container from the Lessor, the price to be paid for the Container
will be negotiated in an arm's length transaction and if the parties are unable
to agree on a price, Lessee will not be entitled to acquire the Container from
the Lessor. Lessee shall use its best efforts to maximize the net proceeds
received on account of any sale, lease or other disposition of a Container
pursuant to this Section 5(b) using a level or standard of care no less than the
Lessee would use with respect to containers it owns, leases or operates for
others. The net proceeds of the sale, lease or other disposition shall be
allocated between the Lessee and the Lessor as follows:
(A) the Lessor shall first receive an amount equal to the
lesser of (i) the amount of the net proceeds, or (ii) the value of the Container
pursuant to Exhibit A hereto; and
(B) any net proceeds remaining after the allocation to the
Lessor in subpart (A) shall be paid 50% to the Lessor and 5O% to the Lessee as
incentive compensation for handling the sale, lease or other disposition; and
(2) make payment of any share of the net proceeds to be paid the
Lessor pursuant to Section 5(b)(1) coincident with the final Variable Rent
payment for the Container, but in any event, not later than the last day of the
calendar quarter following the calendar quarter in which termination of this
Agreement occurs as to the Container.
For purposes of this Agreement, "net proceeds" means all proceeds
received by the Lessee as a result of the sale, lease or other disposition of a
Container (including without limitation damage recoveries and insurance
proceeds), less all costs of the sale, lease or other disposition (including
without limitation the cost of repairing and/or rehabilitating the Container to
prepare it for sale, sales commissions paid to vendors, and repositioning
costs).
If pursuant to this Section 5(b) the Lessee fails to sell, lease or
otherwise dispose of a Container on or prior to the last day of the calendar
quarter following the calendar quarter in which termination of this Agreement
occurs as to that Container, the Lessee shall, from and after such day, no
longer be entitled to sell, lease or otherwise dispose of that Container
pursuant to this Section 5(b) and the Lessee shall thereupon return that
Container to the Lessor's possession and control "AS IS, WHERE IS." The Lessor
shall thereupon retake possession and control of that
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Container and shall thereafter sell, lease or otherwise dispose of that
Container free from any right or interest of the Lessee but subject to the
matters set forth in the next succeeding paragraph.
On or before the last day of each calendar quarter, commencing with
the calendar quarter in which Lessee returns a Container to the Lessor's
possession and control pursuant to the preceding paragraph, provided no Event of
Default has occurred and is continuing since the commencement of the remarketing
period contained in this Section 5(b), the Lessor and the Lessee shall make a
complete and final settlement of the net proceeds received with respect to any
Container during such quarter. The net proceeds of the sale, lease or other
disposition shall be allocated between the Lessee and the Lessor as follows:
(A) the Lessor shall first receive an amount equal to the
lesser of (i) the amount of the net proceeds, or (ii) the value of the Container
pursuant to Exhibit A hereto; and
(B) any net proceeds remaining after the allocation to the
Lessor in subpart (A) shall be paid 50% to the Lessor and 50% to the Lessee.
(c) Return of the Containers (Event of Default).
(A) Upon termination of this Agreement as a consequence of an Event
of Default, the Lessor may, upon written notice to Lessee (except that no notice
is required with respect to the Event of Default specified in Section 4(c)(5)),
pursuant to the security interest granted under Section 10 below, direct any or
all sublessees of on-lease Containers to make payment directly to the Lessor and
to return the Containers to Lessor at the termination of the subleases and
otherwise exercise all rights and remedies of a secured creditor under the
Uniform Commercial Code in effect in the applicable jurisdiction.
(B) In the alternative, upon termination of this Agreement as a
consequence of an Event of Default (other than the Event of Default specified in
Section 4(c)(5)), if Lessor does not give the notice described in Section
5(c)(A), this Agreement will continue as to any Container subject to sublease at
the time when this Agreement would otherwise terminate as to that Container
until the last day of the calendar quarter in which the Container comes off the
sublease.
(C) In addition, upon termination of this Agreement as a consequence
of an Event of Default, the Lessee shall effect an orderly transition of any
Container that is off-lease at the time of termination, and of any Container
that is redelivered to Lessee by a sublessee (if this Agreement continues
pursuant to Section 5(c)(B)) to the Lessor for its own use or as lessor to a
container operator, all in accordance with the Lessor's directions. In the
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event that the Lessor chooses to continue operation of any such Container for
its own use or as lessor to a container operator, the Lessee shall redeliver
possession of such Container to the Lessor in sound operating condition, normal
wear and tear excepted, and arrange for the transport of such Container to any
of the depot location(s) described on Schedule I attached hereto (or such other
depot locations as may be mutually acceptable to Lessor and Lessee) (any
location described on said Schedule I or as so agreed by Lessor and Lessee being
hereinafter referred to as a "Schedule I Location"), it being understood that
the costs, if any, of transport of such Container to a Schedule I Location shall
be at the expense of the Lessee. Notwithstanding the foregoing, Lessee may
redeliver replacement containers of like size, type, age and condition if the
original Containers were re-delivered by Lessee's sublessees to non-Schedule I
Locations. The Lessee shall not arrange for the transport of more than 400 TEU's
of Containers (or replacement containers) to any of the following Schedule I
Locations: Bremen, Milan, Leghorn, Genoa, Marseille, Chicago or New Orleans,
except as agreed by the Lessor.
(d) Return of the Containers (Performance). Upon termination of this
Agreement as a consequence of the event specified in Section 4(c)(6), this
Agreement will continue as to any Container subject to sublease at the time when
this Agreement would otherwise terminate as to that Container until the last day
of the calendar quarter in which the Container comes off the sublease. The
Lessee shall thereupon effect an orderly transition of such Container, and of
any Container that is off-lease at the time of termination of this Agreement, to
the Lessor for its own use or as lessor to a container operator, all in
accordance with the Lessor's directions. In the event that the Lessor chooses to
continue operation of any such Container for its own use or as lessor to a
container operator, the Lessee shall redeliver possession of such Container to
the Lessor "AS IS, WHERE IS."
6. Fixed Rent; Variable Rent
(a) Payment. During the term of this Agreement, the Lessee shall pay to
the Lessor at a place designated by the Lessor in United States Dollars (1) the
Fixed Rent; and (2) the Variable Rent payment based on the Lessee's use of the
Containers. Because of the difficulty and complexity for the Lessee to account
for the use of each Container separately, the Lessor agrees that the Variable
Rent shall be based on the average use of a set of similar containers (the
"Container Set") and shall be calculated in accordance with the provisions of
this Section. All rentals and any other amounts to be remitted to the Lessor
under this Agreement shall be paid by wire transfer of funds in accordance with
payment instructions confirmed by the Lessor. All remittances due the Lessor
under this Agreement shall be paid without notice or demand, and without
abatement, set-off or deduction of any amounts whatsoever except as specifically
set forth in this Agreement. All
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remittances that become past due will bear interest at a floating rate per annum
equal to the lesser of (i) the "prime" rate of NatWest Bank N.A. as announced
from time to time at its head office in New York, New York, plus two percent
(2%) per annum (with each change in such prime rate to cause an equal and
corresponding change in the rate of interest payable hereunder) or (ii) the
highest rate allowed by California law, from the due date until paid.
(b) General.
(1) Container Set. The Container Set shall be denominated "Combined
Container Set IV" and shall consist of the Containers and such other containers
as are designated by the Lessee as included in the Container Set. The containers
in the Container Set (including the Containers) shall be referred to as "Set
Containers."
(2) Set Container Requirements. Each Set Container must satisfy the
following criteria:
(A) each Set Container must be a standard dry cargo or
special container (other than a refrigerated or tank container) or other
container-related equipment of similar classification and type;
(B) each Set Container must either be (i) owned by the Lessee
or an affiliate of the Lessee or a partnership of which the Lessee is a general
partner; (ii) leased by the Lessee from third parties, such as the Lessor; or
(iii) managed by the Lessee for the account of third parties; and
(C) each Set Container must either be acquired by the Lessee
or an affiliate of the Lessee or a partnership of which the Lessee is a general
partner or committed to the Container Set between January 1, 1992 and December
31, 1994.
(3) Notification to Lessor. The Lessee shall, after all the Set
Containers to be included in the Container Set have been identified, provide the
Lessor with a summary description, in writing, of the Set Containers included in
the Container Set.
(4) Inclusion in the Container Set. A Container shall be considered
to be included in the Container Set on the date that payment for such Container
is received in accordance with the Purchase and Sale Agreement (the "Purchase
Date").
(5) Container Cost. The Container Cost of each Container shall equal
US $2,350 per TEU or as otherwise mutually agreed to by the parties.
(6) Exchange Rate. If the Container Cost is not paid in
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United States dollars, the amount in such dollars shall be calculated based on
the exchange rate prevailing on the date of payment.
(7) TEUs. Each Set Container shall equal the following number of
twenty (20) foot equivalent units ("TEUs"):
(i) Each twenty (20)-foot dry cargo container shall
equal one (l) TEU;
(ii) Each forty (40)-foot dry cargo container shall equal
one and one-half (1.50) TEUs;
(iii) Each twenty (20)-foot open top container shall equal
one and fifty-four hundredths (1.54) TEUs;
(iv) Each forty (40)-foot open top container shall equal two
and forty-eight hundredths (2.48) TEUs;
(v) Each forty (40)-foot collapsible end flat rack container
shall equal two and seventy-six hundredths (2.76) TEUs; and
(vi) Each forty (40)-foot jumbo high cube container shall
equal one and sixty-eight hundredths (l.68) TEUs.
(c) Fixed Rent; Determination of Variable Rent.
(1) Adjusted Gross Revenues of the Container Set. Adjusted gross
revenues of the Container Set ("Adjusted Gross Revenues of the Container Set")
for any particular calendar quarter shall equal (x) the Gross Revenues of the
Container Set for that quarter less (y) the Operating Expenses of the Container
Set for that quarter.
(i) Gross revenues of the Container Set ("Gross Revenues")
for any particular quarter shall equal all revenues of the Lessee relating to
the Container Set accrued during that quarter from leasing or subleasing all Set
Containers, including but not limited to ancillary and all other related
charges, such as pickup and drop off charges, special handling fees, and late
payment fees, less uncollectible accounts receivable with respect to the Set
Containers for the same quarter, as recorded on the books of account of the
Lessee in accordance with generally accepted accounting principles.
(ii) Operating expenses of the Container Set ("Operating
Expenses") for any particular quarter shall equal all operating costs and
expenses incurred in connection with the operation and leasing of the Set
Containers during that quarter, including but not limited to, costs and expenses
related to the following: maintaining, repairing, or refurbishing the Set
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Containers; inspection, handling and storage; transporting the Set Containers
other than to the point of origin of the initial leases or subleases; legal fees
incurred in enforcing lease obligations; insurance; third-party claims arising
out of the possession or operation of the Set Containers (including, but not
limited to, injury to persons and loss of or damage to lading or other
property), including legal fees incurred in defending against such third-party
claims; charges, assessments or levies of any kind against the Set Containers;
and ad valorem, gross receipts and property taxes attributable to the Set
Containers. Notwithstanding the foregoing, the Operating Expenses shall not
include: (w) those costs and expenses that would be considered costs or expenses
associated with ownership of containers (as opposed to those associated with
operation and maintenance of containers), such as costs and expenses incurred by
the Lessee or Lessor in connection with the purchase and sale of the Set
Containers; (x) any taxes incurred by the Lessor in respect of the Lessor's
acquisition of the Containers or any income, capital or franchise taxes imposed
on the Lessor which are based on or measured by its net income, gross receipts
(other than gross receipts attributable to the Set Containers), or net worth
(all of which taxes shall be paid by the Lessor individually); (y) any income,
capital or franchise taxes imposed on the Lessee which are based on or measured
by its net income, gross receipts (other than gross receipts attributable to the
Set Containers), or net worth (all of which taxes shall be paid by the Lessee
individually); or (z) costs and expenses incurred by the Lessee in connection
with the leasing, management, and administration of the Set Containers as would
generally be considered to be a part of the Lessee's own marketing, general and
administrative expenses, including but not limited to, salaries, travel and
entertainment expenses of the Lessee's personnel; rent; and bookkeeping and
accounting charges.
(2) Container Set TEU-Days. For all Set Containers in the Container
Set for any particular calendar quarter, the number of Container Set TEU-days
("Container Set TEU-Days") shall equal the sum of the Monthly Container Set
TEU-Days for each of the months of that quarter. The Monthly Container Set
TEU-Days for any particular month shall equal (x) the number of TEU's of Set
Containers on the first day of the month and the number of TEU's of Set
Containers on the last day of the month, divided by two; multiplied by (y) the
number of days in that month.
(3) Container Set Daily Adjusted Gross Revenues. The "Container Set
Daily Adjusted Gross Revenues" for any particular calendar quarter shall equal
the Adjusted Gross Revenues of the Container Set for that quarter divided by the
number of Container Set TEU-Days for the same quarter.
(4) Lessor Container TEU-Days. For all Containers in the Container
Set for any particular calendar quarter, the number of Lessor Container TEU-days
("Lessor Container TEU-Days") shall equal
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the sum of the Individual Container TEU-Days for each Container for that
quarter. The Individual Container TEU-Days for any particular Container, for any
particular quarter shall equal (x) the applicable TEU factor for a Container of
that size and type (as set forth in Section 6(b)(7) above) multiplied by (y) the
actual number of days during the quarter that the Container was included in the
Container Set; provided that, if in any quarter a Container is subject to a
Casualty Occurrence or an Ordinary Disposal Occurrence (and the Lessee does not
replace that Container pursuant to Section 9(b)), that Container shall be deemed
to be removed from the Container Set at the midpoint of that quarter.
(5) Lessor Adjusted Gross Revenues. The "Lessor Adjusted Gross
Revenues" for any particular calendar quarter shall equal the Container Set
Daily Adjusted Gross Revenues for that quarter multiplied by the number of
Lessor Container TEU-Days for the same quarter.
(6) Fixed Rent and Variable Rent.
(i) Lessee shall pay Lessor "Fixed Rent" with respect to the
Containers included in the Container Set for the period commencing on the
Purchase Date therefor and ending on March 31, 1996 (the "Fixed Rent Period").
Fixed Rent for any particular calendar quarter shall equal the product obtained
by multiplying (x) the number of Lessor Container TEU-Days for that quarter,
divided by the number of days in that quarter, by (y) $98.81.
(ii) Lessee shall pay Lessor "Variable Rent" with respect to
the Containers included in the Container Set for the period commencing on April
1, 1996 and ending on the day this Agreement terminates in accordance with
Section 4 above (the "Variable Rent Period"). Subject to subparts (iii) and (iv)
below, the Variable Rent for any particular calendar quarter shall equal
seventy-five percent (75.0%) of the Lessor Adjusted Gross Revenues for that
quarter.
(iii) If the Variable Rent otherwise payable pursuant to
subpart (ii) for any calendar quarter during the first year of the Variable Rent
Period is less than the product obtained by multiplying (x) the number of Lessor
Container TEU-Days for that quarter, divided by the number of days in that
quarter, by (y) $98.81 (the "first Year Threshold Amount"), the Variable Rent
for that quarter shall be increased by an amount equal to the lesser of: (x)
fifteen percent (15%) times the Lessor Adjusted Gross Revenues for that quarter;
or (y) the amount by which the First Year Threshold Amount exceeds the Variable
Rent otherwise payable pursuant to subpart (ii) for that quarter without the
adjustment provided by this subpart (iii). If the Variable Rent otherwise
payable pursuant to subpart (ii) for any calendar quarter during the second year
of the Variable Rent Period is less than the product obtained by multiplying (x)
the number of Lessor Container
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TEU-Days for that, quarter, divided by the number of days in that quarter, by
(y) $91.69 (the "Second Year Threshold Amount"), the Variable Rent payable with
respect to such Container shall be increased by an amount equal to the lesser
of: (x) fifteen percent (15%) times the Lessor Adjusted Gross Revenues for that
quarter; or (y) the amount by which the Second Year Threshold Amount exceeds the
Variable Rent otherwise payable pursuant to subpart (ii) for that quarter
without the adjustment provided by this subpart (iii). The amount by which
Variable Rent is increased pursuant to this subpart (iii) shall hereinafter be
referred to as "Additional Variable Rent."
(iv) Commencing with the third year of the Variable Rent
Period, the Variable Rent otherwise payable pursuant to subpart (ii) for any
calendar quarter shall be decreased by an amount equal to the lesser of: (x)
one-twelfth of the aggregate Additional Variable Rent; or (y) the amount by
which the Variable Rent otherwise payable pursuant to subpart (ii) for that
quarter without the adjustment provided by this subpart (iv) exceeds the product
obtained by multiplying (A) the number of Lessor Container TEU-Days for that
quarter, divided by the number of days in that quarter, by (B) $80.
Notwithstanding the foregoing, the aggregate deductions from Variable Rent made
pursuant to this subpart (iv) shall in no event exceed the aggregate Additional
Variable Rent.
(7) Carry-Forward of Operating Deficit. If Variable Rent for any
particular calendar quarter is less than zero, the amount by which Variable Rent
is less than zero (the "Operating Deficit") shall be carried forward and offset
against and to the extent of Lessor's positive Variable Rent in subsequent
calendar quarters, without interest, until the Operating Deficit is fully
offset; provided that, no offset pursuant to this Section shall be made for any
quarter for which Additional Variable Rent is payable. In no event shall the
Lessor be obligated to make any direct payment to the Lessee to reimburse the
Lessee for any Operating Deficit.
7. Withholding Taxes; Arthur Andersen Review; Reports.
(a) Withholding Taxes.
(i) If at any time during the term of this Agreement, the Lessee is
required by law to make any deduction or withholding on account of any tax,
assessment or other governmental charge, which is currently in force or may in
the future come into force as a result of the action of any tax authority, with
respect to the Containers, the Fixed Rent, the Variable Rent, or any other
amount payable by the Lessee to the Lessor hereunder, other than any taxes
imposed on the Lessee which are based on or measured by its net income, gross
receipts (other than gross receipts attributable to the Set Containers), or net
worth, the Lessee shall, thereupon be
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<PAGE>
entitled to deduct or withhold, or to offset against the Fixed Rent, the
Variable Rent, or any other amount otherwise payable by the Lessee to the Lessor
hereunder, the amount of such tax, assessment or other governmental charge
(together with interest, additions to tax, penalties or other liabilities
related thereto), irrespective of whether such tax, assessment or other
governmental charge is imposed with respect to the then current or a previous
taxable period, and any amount so deducted, withheld, or offset by the Lessee
and paid by the Lessee to the applicable taxing authority pursuant to and in
accordance with the deduction or withholding requirement shall be deemed to have
been paid by the Lessee to Lessor in satisfaction of the requirements of this
Agreement
(ii) The Lessee agrees to execute and deliver all such documents and
instruments, and to take all such action, as the Lessor shall reasonably request
to minimize amounts to be deducted or withheld pursuant to the tax deduction or
withholding requirement or to obtain an exemption from the deduction or
withholding requirement and to effect any necessary compliance therewith.
(iii) If the Lessor is organized under the laws of a jurisdiction
outside the United States, then, on or prior to the date it becomes entitled to
the receipt of any payment hereunder and from time to time thereafter if
requested in writing by the Lessee, the Lessor shall, if and for so long as the
Lessor is lawfully able to do so, provide the Lessee with (i) an accurate,
complete and duly executed Internal Revenue Service Form 1001 or 4224, as
appropriate, or any successor form prescribed by the Internal Revenue Service,
certifying that the Lessor is entitled to benefits under an income tax treaty to
which the United States is a party that reduces the rate of withholding tax on
payments under this Agreement or certifying that the income receivable pursuant
to this Agreement is effectively connected with the conduct of a trade or
business in the United States; or (ii) in the event that, by virtue of a change
in law or regulations, such forms are no longer valid, such other evidence of
the Lessor's exemption from withholding (if and for so long as the Lessor is
legally able to provide such evidence) as is reasonably requested by the Lessee.
(iv) If the Lessee makes any deduction or pays any withholding tax
pursuant to this Section, the Lessee shall promptly give the Lessor written
evidence of payment of such tax.
(b) Arthur Andersen Review. Arthur Andersen & Company or such other
independent public accounting firm as may be satisfactory to the Lessor will
review the calculations of the Adjusted Gross Revenues of the Container Set for
each calendar quarter during the Variable Rent Period in the course of
performing the annual audit of the Lessee's financial statements and will
confirm by a written report to the Lessor to accompany the Variable Rent payment
to be paid on or about June 30th of each year during the Variable Rent
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Period that the calculations made by the Lessee during the preceding year were
made in accordance with this Agreement. The Lessee will bear the cost of the
review. Any adjustments in the Variable Rent resulting from the review shall be
reflected in the payment that accompanies the written report.
(c) Reports, Inspection.
(i) Concurrently with payment of the Variable Rent for each calendar
quarter, Lessee shall provide to Lessor a report substantially in the form of
Schedule II hereto showing the calculation of the Lessor Adjusted Gross Revenues
for that quarter.
(ii) During the term of this Agreement and for a period of one year
following termination of this Agreement for any reason whatsoever, for the
purpose of verifying the amount of Variable Rent due under this Agreement for
any one or more calendar quarters, Lessor shall have the right on five business
days notice, at Lessor's expense, to examine during the Lessee's. normal
business hours the business records relating to the Containers.
8. Utilization and Other Matters.
(a) The Lessee agrees to use the Containers in accordance with the
standards accepted in the container leasing industry. The Lessor retains the
right to have the Containers inspected at any time, so long as any inspection
does not interfere with normal utilization of the Containers.
(b) The Lessee agrees not to grant or suffer to exist a lien of any kind
on the Containers, or to permit any sublessee to grant or suffer to exist a lien
of any kind on the Containers, except for the following liens or encumbrances
("Permitted Liens"):
(i) liens or encumbrances that result from acts or omissions of the
Lessor;
(ii) liens or charges for current taxes, assessments or other
governmental charges which are either not yet due or are being contested in good
faith and by appropriate proceedings so long, as such proceedings do not involve
any danger of the sale, forfeiture or loss of any Container or any interest
therein;
(iii) materialmen's, mechanics', workmen's, repairmen's, employees'
and other like liens arising in the ordinary course of business which are either
inchoate and relate to an obligation which is not yet due or which are being
contested in good faith and by appropriate proceedings so long as such
proceedings do not involve any danger of the sale, forfeiture or loss of any
Container or any interest therein; and
(iv) the rights of the sublessees of the Containers under
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their respective subleases with the Lessee.
Lessor may enter into a financing arrangement with one or more Lenders;
provided that such Lenders acknowledge in writing that they take subject to this
Agreement.
(c) The Lessee will not permit any sublessee to sell or otherwise transfer
title to any Container to any third party.
(d) The Lessee agrees to give the Lessor, within one hundred and eighty
(180) days of the end of each calendar year, an inventory of the Containers as
of year end. This inventory will specify the name of the lessee of each
Container then on lease.
9. Insurance; Total Loss or Destruction.
(a) The Lessee agrees during the term of this Agreement to insure the
Containers against all risks of physical loss and to maintain comprehensive
general liability insurance covering the Containers against bodily injury or
property damage, in each case subject to normal terms and conditions of a
comprehensive insurance policy, the cost of which insurance shall be an
Operating Expense of the Container Set for purposes of Section 6. The Lessee
will provide the Lessor with a Certificate of Insurance evidencing the insurance
for all Containers covered by this Agreement and naming Lessor and Lenders as an
additional insured and loss payee as their interests may appear. If the Lessee,
through its own negligence, does not maintain the insurance in effect, any loss
or expense due to the failure to maintain the insurance in effect shall be the
responsibility of the Lessee and, notwithstanding the provisions of Section 6,
shall not be an Operating Expense of the Container Set for purposes of Section
6.
(b) (i) In the case of a Casualty Occurrence or an Ordinary Disposal
Occurrence as to a Container, the Lessee agrees to replace the Container within
ninety (90) days after Lessee receives notice of the Casualty Occurrence or
within ninety (90) days after the Ordinary Disposal Occurrence with one of like
size, type, age, and condition and to deliver to the Lessor with respect thereto
concurrently with the replacement of such Container a Certificate of Replacement
in the form of Exhibit B attached hereto, a Bill of Sale in substantially the
form attached to the Purchase and Sale Agreement, and an amendment to the
Uniform Commercial Code financing statements originally filed with respect to
this transaction.
(ii) In the alternative, until the last day of the calendar quarter
following the calendar quarter in which there occurs a Casualty Occurrence or an
Ordinary Disposal Occurrence, Lessee may, on behalf of the Lessor, and Lessor
hereby authorizes Lessee to, sell, lease or otherwise dispose of a Container
subject to a Casualty Occurrence or an Ordinary Disposal Occurrence, at the
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sole and absolute discretion of the Lessee; provided that, if (x) a Container is
subject to a Casualty Occurrence or an Ordinary Disposal Occurrence during the
period commencing on the Purchase Date and ending on June 30, 1999; and (y) the
total number of Containers included in the Container Set on the Purchase Date
and theretofore sold, leased or otherwise disposed of pursuant to this Section
(calculated on a TEU basis as of the last day of the most recent calendar
quarter during such period) exceeds five percent (5%) of the total number of
Containers (calculated on a TEU basis as of the Purchase Date), Lessee shall
replace such Container in accordance. with the preceding Section and shall not
be entitled to sell, lease or otherwise dispose of such Container pursuant to
this Section. The net proceeds of the sale, lease or other disposition shall be
allocated between the Lessor and the Lessee as follows:
(1) the Lessor shall first receive an amount equal to the
lesser of:
(A) the amount of the net proceeds; or
(B) the value of the Container according to Exhibit A
attached hereto; and
(2) any net proceeds remaining after the allocation to the
Lessor in subpart (1) shall be paid 50% to the Lessor and 50% to the Lessee as
incentive compensation for handling the sale, lease or other disposition.
(iii) The cost of the replacement or the payment shall not be an
Operating Expense of the Container Set for purposes of Section 6.
(iv) If the Lessee elects to replace the Container, it shall be
entitled to retain the net proceeds of the Casualty Occurrence or Ordinary
Disposal Occurrence for its own account, and the Lessor shall transfer all of
its right, title and interest in and to the original Container to the Lessee.
Lessor agrees to execute or to cause to be executed all necessary documents,
including a bill of sale and a Uniform Commercial Code release, to evidence such
transfer to Lessee.
(v) If the Lessee elects to pay the Lessor the amount described in
Section 9(b) (ii) above, the Lessor shall be entitled to Fixed Rent or Variable
Rent on account of the Container subject to the Casualty Occurrence or Ordinary
Disposal Occurrence in accordance with Section 6 and shall be entitled to
receive such amount on or prior to the last day of the calendar quarter
following the calendar quarter in which termination of this Agreement occurs as
to such Container.
10. Security Interest. To secure the prompt and full payment and
performance of any and all of Lessee's obligations hereunder,
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Lessee hereby assigns, transfers, sets over, and grants to Lessor a security
interest in all of Lessee's right, title and interest in and to any and all
present or future subleases, leases, chattel paper, agreements for use, or other
similar agreements relating to the Containers, all accounts, rents, payments and
other rights to receive moneys relating thereto, all other general intangibles
thereunder, all books and records and other documents relating thereto, and all
proceeds of the foregoing (in each case to the extent the same relates to the
Containers) (collectively, the "Collateral"). Upon the occurrence and during the
continuance of an Event of Default (provided that the Lessor shall have
delivered to the Lessee written notice of termination of this Agreement
pursuant to Section 4(c) and the written notice described in Section 5 (c) (A),
except that no notices are required with respect to the Event of Default
specified in Section 4(c) (5)), Lessee agrees that Lessor shall have the right
from and after the effective date of termination to receive and collect all
rent and other sums payable to or receivable by Lessee under any such subleases,
and the right to make all waivers and agreements, to give all notices, consents
and releases and to do any and all other things whatsoever which the Lessee is
or may become entitled to do under any sublease (in each case to the extent such
sublease relates to the Containers).
Anything herein to the contrary notwithstanding, nothing contained
in this Section 10 may be interpreted as permitting the Lessor or any Lender,
and no right or remedy may be exercised by the Lessor or any Lender, which would
result in the derogation of any covenant of quiet enjoyment made to any
sublessee under any sublease of a Container.
11. Sale or Transfer by Lessor. The Lessor may at any time sell or
transfer any Container or any interest therein subject to this Agreement,
provided that:
(a) the party to whom the Container is sold or transferred
acknowledges in writing that the sale or transfer is subject to this Agreement;
(b) the Lessor shall not be entitled to offer or sell any Container
or any interest therein or assign or transfer this Agreement or any interest
therein to any resident, domiciliary or citizen of the United States unless the
offer, sale, assignment or transfer is made in compliance with all applicable
United States and state securities laws; and
(c) the Lessor shall not be entitled to sell or transfer any
Container or any interest therein during the term of this Agreement to any
person engaged in the business of operating and leasing ocean-going marine
shipping containers to end-users, or any affiliates thereof (other than PLM
International, Inc. and its affiliates).
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With respect to paragraph (b) above, the Lessor agrees that it will not
authorize discussions concerning the sale or transfer of any Container or any
interest therein, or the assignment or transfer of this Agreement or any
interest therein, within the United States. If an agency or court of the United
States or any State thereof makes a legitimate request for information to
evidence compliance with the matters stated in this Section 11, the Lessor
shall, upon notice from the Lessee that such request has been made, disclose
such information or the evidence verifying such information so as to comply with
such request.
12. Assignment or Transfer by Lessee. No assignment hereof by Lessee or
transfer of any of the rights of Lessee hereunder shall be valid or effective as
against the Lessor unless in conformity with the prior written consent of the
Lessor (which consent shall not be unreasonably withheld).
13. Governing Law. This Agreement is to be interpreted and enforced in
accordance with the laws of the State of California.
14. Securities Laws Representation. For the purpose of the United States
and state securities laws, Lessor represents and warrants to the Lessee that the
following are true and correct on the date the Lessor executes this Agreement:
(a) The Lessor has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of an
investment in containers and of protecting its own interests in connection with
such investment.
(b) The Lessor is entering into this Agreement and acquiring the
Containers or an interest therein for its own account and not with a view to or
for sale in connection with any distribution of a security.
Lessor acknowledges that this transaction has not been registered
under the Securities Act of 1933, as amended (the "Act"), or any state
securities law. Therefore, if this transaction is deemed a security under
federal or state securities laws, an interest in this Agreement or in the
Containers may not be resold unless it is registered under the Act and all
applicable state securities laws or an exemption from such registration is
available.
15. Amendment.
No modification or amendment of this Agreement shall be valid unless in
writing and executed by the parties hereto.
16. Integration.
This Agreement represents the entire agreement and understand-
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ing between the parties hereto and supersedes all prior or contemporaneous
agreements, whether written or oral, with respect to the subject matter hereof.
17. Counterparts.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
18. Title and Headings; Sections.
Title and headings of the sections and subsections of this Agreement are
for convenience of reference only and do not form a part of this Agreement and
shall not in any way affect the interpretation thereof. References to sections
and subsections without further attribution mean sections and subsections of
this Agreement.
19. Successors and Assigns.
The terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective permitted successors and assigns of each
party hereto.
20. Further Assurances.
The parties hereto agree to execute and deliver, or cause to be executed
and delivered, such further instruments or documents and take such further
action as may be reasonably required effectively to carry out the transactions
contemplated herein.
21. Waiver of Jury Trial.
LESSEE AND LESSOR EACH IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER LITIGATION OR PROCEEDING UPON,
ARISING OUT OF, OR RELATED TO THIS AGREEMENT.
22. Chattel Paper.
Only one counterpart of this Agreement shall be marked "Counterpart No.
One" ("Counterpart No. One"), and all other counterparts hereof shall be marked
as, and shall be duplicates. To the extent this Agreement constitutes chattel
paper (as such term is defined in the Uniform Commercial Code in effect in any
applicable jurisdiction), no security interest herein may be created through the
transfer or possession of any counterpart other than Counterpart No. One.
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23. Effectiveness.
This Agreement shall be effective, only when it has been executed and
delivered by each of the parties hereto.
EXECUTED as of the 17th day of April, 1995.
TRANS OCEAN CONTAINER CORPORATION,
the Lessee
851 Traeger Avenue
San Bruno, CA. 94066
Telecopy No. (415) 873-6764
By: /s/ [ILLEGIBLE]
------------------------------------
Its: TREASURER
-----------------------------------
INVESTORS ASSET HOLDING CORP., not in its
individual capacity but solely as Trustee
of the "AFG/ICCU Trust," the Lessor
Exchange Place
Boston, MA 02109
Telecopy No. (617) 523-1410
By:
------------------------------------
Its:
-----------------------------------
24
<PAGE>
23. Effectiveness.
This Agreement shall be effective, only when it has been executed and
delivered by each of the parties hereto.
EXECUTED as of the 17th day of April, 1995.
TRANS OCEAN CONTAINER CORPORATION,
the Lessee
851 Traeger Avenue
San Bruno, CA. 94066
Telecopy No. (415) 873-6764
By:
------------------------------------
Its:
-----------------------------------
INVESTORS ASSET HOLDING CORP., not in its
individual capacity but solely as Trustee
of the "AFG/ICCU Trust," the Lessor
Exchange Place
Boston, MA 02109
Telecopy No. (617) 523-1410
By: /s/ [ILLEGIBLE]
------------------------------------
Its: Vice-President
-----------------------------------
24
<PAGE>
EXHIBIT A
VALUE IN THE EVENT OF A CASUALTY OCCURRENCE
OR AN ORDINARY DISPOSAL OCCURRENCE
(As % of Container Cost)
After After
Quarter* Value Quarter* Value
-------- ----- -------- -----
0 103.75% 31 64.77%
1 103.00% 32 62.76%
2 102.23% 33 60.68%
3 101.43% 34 58.53%
4 100.61% 35 56.31%
5 99.76% 36 54.02%
6 98.89% 37 51.66%
7 97.98% 38 49.22%
8 97.05% 39 46.70%
9 96.08% 40 44.10%
10 95.08% 41 41.41%
11 94.05% 42 38.64%
12 92.99% 43 35.77%
13 91.90% 44 32.82%
14 90.76% 45 29.77%
15 89.59% 46 26.61%
16 88.39% 47 23.36%
17 87.14% 48 20.00%
18 85.85% 49 18.61%
19 84.52% 50 17.18%
20 83.15% 51 15.70%
21 81.73% 52 14.17%
22 80.27% 53 12.59%
23 78.76% 54 10.96%
24 77.20% 55 9.28%
25 75.59% 56 7.54%
26 73.93% 57 5.74%
27 72.21% 58 3.89%
28 70.44% 59 1.98%
29 68.61% 60 0.00%
30 66.72%
- ----------
* Quarters begin to be counted as of the beginning of the first calendar quarter
after the calendar quarter in which the Container is included in the Container
Set.
26
<PAGE>
EXHIBIT B
SAMPLE
Certificate of Replacement Number ______
A. Description of the Container(s)
Trans Ocean Container Corporation (the "Lessee") certifies that the
Container(s) listed below in Column 1 (the "Affected Container(s)") that
heretofore were subject to the Marine Shipping Container Variable Lease dated as
of April _____, 1995 (the "Agreement") with Investors Asset Holding Corp., a
Massachusetts corporation, not in its individual capacity but solely as Trustee
of the "AFG/ICCU Trust" (the "Lessor") have been subject to a Casualty
Occurrence or an Ordinary Disposal Occurrence (as such terms are defined in the
Agreement). Therefore, in accordance with Section 9(b) of the Agreement, the
Lessee elects to provide replacement container(s) therefor and certifies that:
(i) the container(s) listed below in Column 2 (the "Replacement Container (s)")
are of like size, type, age and condition as the Affected Container(s), and (ii)
effective on the date indicated below, the Replacement Container(s) shall, for
purposes of the Agreement, replace the Affected Container(s), and (iii) the
Replacement Container(s) are, as of such date, "Containers" for purposes of the
Agreement.
COLUMN 1 COLUMN 2
-------- --------
1. Designation of Containers 1. Designation of Containers
2. Type: 2. Type:
3. Quantity: 3. Quantity:
4. Container 4. Container
Numbers: Numbers:
B. Date Replacement Container(s)
Are Effective Under The Agreement:
C. Lease of the Replacement Containers(s)
The Lessee shall lease the above-designated Replacement Container(s) in
accordance with the terms and conditions of the Agreement.
D. Restriction on Transfer of the Replacement Container(s)
The Lessor may not sell or transfer the above designated Replacement
Container(s) or any interest therein except in accordance with the Agreement.
TRANS OCEAN CONTAINER CORPORATION
By:
-------------------------------
Title:
----------------------------
27
<PAGE>
SCHEDULE I
Specified Depot Locations
for Redelivery of the Containers
Pusan New York
Hong Kong London
Kaohsiung Le Havre
Kobe Antwerp
Nagoya Rotterdam
Yokohama Bremen
Seattle Hamburg
San Francisco/Oakland Marseille
Los Angeles/Long Beach Genoa
Houston Leghorn
New Orleans Milan
Chicago
28
<PAGE>
SCHEDULE II
TRANS OCEAN LTD
CALCULATION OF DAILY ADJUSTED GROSS REVENUE
COMBINED CONTAINER SET IV
? QUARTER 199?
I. CONTAINER SET RESULTS
<TABLE>
<CAPTION>
DRY CARGO DRY CARGO HIGH CUBE OPEN TOP OPEN TOP COLLAPSIBLE
20' 40' DRY 40' 20' 40' FLAT 40' TOTAL
--------- --------- --------- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
GROSS REVENUE $5 $5 $5 $5 $5 $5 $30
BAD DEBT WRITE-OFFS ($1) ($1) ($1) ($1) ($1) ($1) ($6)
--------- --------- --------- -------- -------- ----------- -----
TOTAL GROSS REVENUE $4 $4 $4 $4 $4 $4 $24
REPAIR AND MAINTENANCE EXPENSE $1 $1 $1 $1 $1 $1 $6
OTHER OPERATING EXPENSES $1 $1 $1 $1 $1 $1 $6
--------- --------- --------- -------- -------- ----------- -----
TOTAL EXPENSES $2 $2 $2 $2 $2 $2 $12
--------- --------- --------- -------- -------- ----------- -----
ADJUSTED GROSS REVENUE $2 $2 $2 $2 $2 $2 $12
========= ========= ========= ======== ======== =========== =====
</TABLE>
II. CONTAINER SET TEU DAYS
BEGINNING ENDING AVERAGE DAYS IN CONTAINER SET
MONTH TEUS TEUS TEUS MONTH TEU DAYS
- ---------- --------- ------ ------- ------- -------------
Month 1 6.00 6.00 6.00 31 186.00
Month 2 6.00 6.00 6.00 30 180.00
Month 3 6.00 6.00 6.00 31 186.00
-------------
TOTAL CONTAINER SET TEU DAYS 552.00
=============
III. DAILY ADJUSTED GROSS REVENUE PER TEU
<TABLE>
<CAPTION>
DRY CARGO DRY CARGO HIGH CUBE OPEN TOP OPEN TOP COLLAPSIBLE
20' 40' DRY 40' 20' 40' FLAT 40' TOTAL
--------- --------- --------- -------- -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
AVERAGE # OF CONTAINER TEU DAYS 92.00 138.00 154.56 92.00 33.44 42.00 552.00
GROSS REVENUE $0.05 $0.04 $0.03 $0.05 $0.15 $0.12 $0.05
BAD DEBT WRITE-OFFS ($0.01) ($0.01) ($0.01) ($0.01) ($0.03) ($0.02) ($0.01)
--------- --------- --------- -------- -------- ----------- ------
TOTAL GROSS REVENUE $0.04 $0.03 $0.03 $0.04 $0.12 $0.10 $0.04
REPAIR AND MAINTENANCE EXPENSE $0.01 $0.01 $0.01 $0.01 $0.03 $0.02 $0.01
OTHER OPERATING EXPENSES $0.01 $0.01 $0.01 $0.01 $0.03 $0.02 $0.01
--------- --------- --------- -------- -------- ----------- ------
TOTAL EXPENSES $0.02 $0.01 $0.01 $0.02 $0.06 $0.05 $0.02
--------- --------- --------- -------- -------- ----------- ------
ADJUSTED GROSS REVENUE $0.02 $0.01 $0.01 $0.02 $0.06 $0.05 $0.02
========= ========= ========= ======== ======== =========== ======
</TABLE>
<PAGE>
TRANS OCEAN LTD
CALCULATION OF LESSOR'S VARIABLE RENT
COMBINED CONTAINER SET IV
? QUARTER 199?
LESSOR: ?
I. LESSOR'S CONTAINER TEU DAYS
40' HIGH
40' DRY CUBE
CARGO DRY CARGO TOTAL
------- --------- ------
NUMBER OF CONTAINER DAYS
IN THE CONTAINER SET: 92 92
TEU FACTOR: 1.50 1.68
------- ---------
LESSOR'S CONTAINER TEU DAYS: 138.00 154.56 292.56
------- --------- ======
II LESSOR'S ADJUSTED GROSS REVENUE
DAILY ADJUSTED GROSS REVENUE PER TEU: $0.02
LESSOR'S CONTAINER TEU DAYS: 292.56
--------
LESSOR'S ADJUSTED GROSS REVENUE $5.85
--------
VARIABLE RENT PERCENTAGE: 75.00%
--------
VARIABLE RENT DUE TO LESSOR: $4.39
========
<PAGE>
CONTAINER TEU DAYS CALCULATION
? QUARTER 199?
LESSOR
TOTAL
UNIT TOTAL
CONTAINER ACTIVITY NUMBER DAYS IN TEU TEU
TYPE DATE OF UNITS QUARTER FACTOR DAYS
- ------------ -------- -------- ------- ------ -------
C40 Month 1 1 92 1.50 138.00
-------- ------- -------
1 92 138.00
J40 Month 1 1 92 1.68 154.56
-------- ------- -------
1 92 154.56
<PAGE>
LLR00D LOAN AMORTIZATION SCHEDULE 9/29/97 10:34:50 PAGE 1
EQUITY OWNER: 8801 AFG TRUST 88-1
PERCENT OWNED: 100.000000%
LESSEE: AMOCO RENTAL SCHEDULE: B-O-9
LENDER NAME: KANSALLIS FINANCE LTD LOAN CODE: KFNL052
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
PAYMENT PMT BALANCE TOTAL INTEREST PRINCIPAL BALANCE
DATE # BEFORE PMT PAYMENT PAYMENT PAYMENT AFTER PMT
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
2/01/1989 1 119,033.61 9,808.71 3,228.79 6,579.92 112,453.69
8/01/1989 2 112,453.69 9,808.71 5,903.82 3,904.89 108,548.80
2/01/1990 3 108,548.80 9,808.71 5,698.81 4,109.90 104,438.90
8/01/1990 4 104,438.90 9,808.71 5,483.04 4,325.67 100,113.23
2/01/1991 5 100,113.23 9,808.71 5,255.94 4,552.77 95,560.46
8/01/1991 6 95,560.46 9,808.71 5,016.92 4,791.79 90,768.67
2/01/1992 7 90,768.67 9,808.71 4,765.36 5,043.35 85,725.32
8/01/1992 8 85,725.32 9,808.71 4,500.58 5,308.13 80,417.19
2/01/1993 9 80,417.19 9,808.71 4,221.90 5,586.81 74,830.38
8/01/1993 10 74,830.38 9,808.71 3,928.60 5,880.11 68,950.27
2/01/1994 11 68,950.27 9,808.71 3,619.89 6,188.82 62,761.45
8/01/1994 12 62,761.45 9,808.71 3,294.98 6,513.73 56,247.72
8/01/1994 56,247.72 17,975.55 .00 17,975.55 38,272.17
2/01/1995 13 38,272.17 6,674.24 2,009.29 4,664.95 33,607.22
8/01/1995 14 33,607.22 6,674.24 1,764.38 4,909.86 28,697.36
2/01/1996 15 28,697.36 6,674.24 1,506.61 5,167.63 23,529.73
8/01/1996 16 23,529.73 6,674.24 1,235.31 5,438.93 18,090.80
2/01/1997 17 18,090.80 6,674.24 949.77 5,724.47 12,366.33
8/01/1997 18 12,366.33 6,674.24 649.23 6,025.01 6,341.32
8/02/1997 6,341.32 6,341.32 .00 6,341.32 .00
2/01/1998 19 .00 .00 .00 .00 .00
182,066.83 63,033.22 119,033.61
</TABLE>
YEARLY RATE OF RETURN: 10.50000%
** END OF REPORT **
<PAGE>
Exhibit A - Value in the Event of a Casualty Occurrence or an Ordinary Disposal
Occurrence
Exhibit B - Certificate of Replacement
Schedule I - Specified Depot Locations
Schedule II - Form of Report re: Lessor Adjusted Gross Revenues
<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> 3,243,631
<SECURITIES> 86,113
<RECEIVABLES> 871,779
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,201,523
<PP&E> 15,974,300
<DEPRECIATION> 8,610,088
<TOTAL-ASSETS> 11,565,735
<CURRENT-LIABILITIES> 514,360
<BONDS> 3,459,289
0
0
<COMMON> 0
<OTHER-SE> 7,592,086
<TOTAL-LIABILITY-AND-EQUITY> 11,565,735
<SALES> 0
<TOTAL-REVENUES> 2,778,361
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,836,821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 318,530
<INCOME-PRETAX> 623,010
<INCOME-TAX> 0
<INCOME-CONTINUING> 623,010
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 623,010
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
