<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|XX| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
-----------------------------------------------------
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 0-21390
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AFG Investment Trust B
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3157230
- ----------------------------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
88 Broad St., Sixth Floor, Boston, MA 02110
- ----------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (617) 854-5800
-----------------------------
Securities registered pursuant to Section 12(b) of the Act NONE
---------------------
Title of each class Name of each exchange on which registered
- ------------------------------- --------------------------------------------
- ------------------------------- --------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
665,494 Class A Trust Beneficiary Interests
- --------------------------------------------------------------------------------
(Title of class)
- --------------------------------------------------------------------------------
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes XX No
---- ----
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant. Not applicable. Securities are nonvoting for this purpose.
Refer to Item 12 for further information.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to security holders for
the year ended December 31, 1999 (Part I and II)
<PAGE>
AFG Investment Trust B
FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II
Item 5. Market for the Trust's Securities and Related Security Holder Matters 6
Item 6. Selected Financial Data 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
Item 8. Financial Statements and Supplementary Data 7
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 7
PART III
Item 10. Directors and Executive Officers of the Trust 8
Item 11. Executive Compensation 10
Item 12. Security Ownership of Certain Beneficial Owners and Management 10
Item 13. Certain Relationships and Related Transactions 11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14-15
</TABLE>
2
<PAGE>
PART I
Item 1. Business.
(a) General Development of Business
AFG Investment Trust B (the "Trust") was organized as a Delaware business
trust in accordance with the Delaware Business Trust Act on May 28, 1992 for the
purpose of acquiring and leasing to third parties a diversified portfolio of
capital equipment. Participants' capital initially consisted of contributions of
$1,000 from the Managing Trustee, AFG ASIT Corporation, $1,000 from the Special
Beneficiary, Equis Financial Group Limited Partnership (formerly known as
American Finance Group), a Massachusetts limited partnership, ("EFG" or the
"Advisor") and $100 from the Initial Beneficiary, AFG Assignor Corporation, a
wholly-owned affiliate of EFG. The Trust issued an aggregate of 665,494
Beneficiary Interests (hereinafter referred to as Class A Interests) at a
subscription price of $25.00 each ($16,637,350 in total) to 803 investors on
September 8, 1992. On July 18, 1997, the Trust issued 1,000,961 Class B
Interests at $5.00 each ($5,004,805 in total), of which (i) 997,373 interests
are held by Equis II Corporation, an affiliate of EFG, and (ii) 3,588 interests
are held by 5 other Class A investors. The Trust repurchased 82,837 Class A
Interests on October 10, 1997 at a cost of $785,295 using proceeds from the
issuance of Class B Interests. On December 1, 1997, the Trust repurchased 640
additional Class A Interests at a cost of $6,080. Accordingly, there are 582,017
Class A Interests currently outstanding. The Class A and Class B Interest
holders are collectively referred to as the "Beneficiaries".
The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts
corporation, and one Special Beneficiary, Semele Group Inc. ("Semele"). Semele
purchased the Special Beneficiary Interests from EFG during the fourth quarter
of 1999. EFG continues to act as Advisor to the Trust and provides services in
connection with the acquisition and remarketing of the Trust's assets. The
Managing Trustee is responsible for the general management and business affairs
of the Trust. AFG ASIT Corporation is a wholly owned subsidiary of Equis II
Corporation and an affiliate of EFG. Class A Interests and Class B Interests
basically have identical voting rights and, therefore, Equis II Corporation has
control over the Trust on all matters on which the Beneficiaries may vote. Gary
D. Engle, has voting control of Equis II Corporation. The Managing Trustee and
the Special Beneficiary are not required to make any other capital contributions
except as may be required under the Second Amended and Restated Declaration of
Trust, as amended (the "Trust Agreement").
(b) Financial Information About Industry Segments
Historically, the Trust has been 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 Purchase Price of the leased equipment. Operating leases are those in
which the aggregate undiscounted, noncancellable rental payments are less than
the Purchase Price of the leased equipment. In connection with a Solicitation
Statement and consent of Beneficiaries in 1998, the Trust Agreement was modified
to permit the Trust to invest in assets other than equipment. During 1999, the
Trust made certain non-equipment investments that the Managing Trustee believes
have the potential to enhance the Trust's overall economic performance for the
benefit of all of the Beneficiaries. Industry segment data is not applicable.
(c) Narrative Description of Business
The Trust 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. Significant
operations commenced coincident with the Trust's initial purchase of equipment
and associated lease commitments on September 8, 1992. The acquisition of the
equipment and its associated leases is described in detail in Note 3 to the
financial statements included in Item 14 herein. Pursuant to the Trust
Agreement, the Trust is scheduled to be dissolved by December 31, 2003. The
Trust was a Nominal Defendant in a Class Action Lawsuit, the resolution of which
is described in Note 8 to the accompanying financial statements.
3
<PAGE>
The Trust has no employees; however, it entered into an Advisory Agreement
with EFG. EFG'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 Advisor is compensated for such services as described
in the Trust Agreement, Item 13 herein, and in Note 5 to the financial
statements, included in Item 14, herein.
The Trust'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 Trust is subject to considerable
competition when equipment is re-leased or sold at the expiration of primary
lease terms. The Trust must compete with lease programs offered directly by
manufacturers and other equipment leasing companies, including business trusts
and limited partnerships organized and managed similarly to the Trust 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 Trust. Many competitors have greater financial resources and more experience
than the Trust, the Managing Trustee and the Advisor. In addition, default by a
lessee under a lease agreement may cause equipment to be returned to the Trust
at a time when the Managing Trustee or the Advisor is unable to arrange the sale
or re-lease of such equipment. This could result in the loss of a portion of
potential lease revenues and weaken the Trust's ability to repay related
indebtedness.
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1999, 1998 and 1997 is
incorporated herein by reference to Note 2 to the financial statements in the
1999 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the
Securities and Exchange Commission.
The Trust Agreement originally provided for the reinvestment of Cash From
Sales or Refinancings in additional equipment until September 8, 1996, a period
of four years following Closing. In connection with a Solicitation Statement and
consent of Beneficiaries in 1998, the Trust's reinvestment provisions were
reinstated until December 31, 2001 (see Note 5 to the financial statements
included in Item 14 herein) and the Trust was permitted to invest in assets
other than equipment. Upon the expiration of each primary lease term, the
Managing Trustee will determine whether to sell or re-lease the Trust's
equipment, depending on the economic advantages of each alternative. Over time,
the Trust will begin to liquidate its portfolio of equipment. Similarly, any
non-equipment investments will be liquidated as the Trust nears its scheduled
dissolution date.
EFG is a Massachusetts limited partnership formerly known as American
Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general
partnership and succeeded American Finance Group, Inc., a Massachusetts
corporation organized in 1980. EFG and its subsidiaries (collectively, the
"Company") are engaged in various aspects of the equipment leasing business,
including EFG's role as Equipment Manager or Advisor to the Trust 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
4
<PAGE>
acronym in connection with the Trust and the Other Investment Programs and to
continue managing all assets owned by the Trust and the Other Investment
Programs.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not applicable.
Item 2. Properties.
Incorporated herein by reference to Note 3 to the financial statements in
the 1999 Annual Report.
Item 3. Legal Proceedings.
Incorporated herein by reference to Note 8 to the financial statements in
the 1999 Annual Report.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
5
<PAGE>
PART II
Item 5. Market for the Trust's Securities and Related Security Holder Matters.
(a) Market Information
There is no public market for the resale of the Interests and it is not
anticipated that a public market for resale of the Interests will develop.
(b) Approximate Number of Security Holders
At December 31, 1999, there were 688 record holders (682 Class A Interest
and 6 Class B Interests) in the Trust.
(c) Dividend History and Restrictions
Historically, cash distributions have been declared and paid within 45 days
after the completion of each calendar month and described in a statement sent to
the Beneficiaries. Distributions prior to Class B Payout (defined below) were
allocated to the Class A and Class B Beneficiaries as follows: first, 100% to
the Class A Beneficiaries up to $0.41 per Class A Interest; second, 100% to the
Class B Beneficiaries up to $0.164 per Class B Interest, reduced by the Class B
Distribution Reduction Factor (defined below); third, 100% to the Class A
Beneficiaries up to an additional $0.215 per Class A Interest; and fourth, until
Class B Payout was attained, 80% to the Class B Beneficiaries and 20% to the
Class A Beneficiaries.
During the past year, the Managing Trustee evaluated and pursued a number
of potential new investments, several of which the Managing Trustee concluded
had market returns that it believed were less than adequate given the potential
risks. Most transactions have involved the equipment leasing, business finance
and real estate development industries. Although the Managing Trustee intends to
continue to evaluate additional new investments, it anticipates that the Trust
will be able to fund these new investments with cash on hand or from other
sources, such as the proceeds from future asset sales or refinancings and new
indebtedness. As a result, the Trust declared a special cash distribution to the
Trust Beneficiaries totaling $5,300,000 which was paid on January 19, 2000.
After the special distribution on January 19, 2000, the Trust adopted a new
distribution policy and suspended the payment of regular monthly cash
distributions. Looking forward, the Managing Trustee does not expect to
reinstate cash distributions until expiration of the Trust's reinvestment period
in December 2001; however, the Managing Trustee periodically will review and
consider other one-time distributions. In addition to maintaining sale proceeds
for reinvestment, the Managing Trustee expects that the Trust will retain cash
from operations to pay down debt and for the continued maintenance of the
Trust's assets. The Managing Trustee believes that this change in policy is in
the best interests of the Trust over the long term and will have the added
benefit of reducing the Trust's distribution expenses.
Class A Payout means the first time when the aggregate amount of all
distributions actually made to the Class A Beneficiaries equals $25 per Class A
Interest (minus all uninvested capital contributions returned to the Class A
Beneficiaries) plus a cumulative annual distribution of 10% compounded quarterly
and calculated beginning with the last day of the month of the Trust's initial
Class A Closing.
Class B Payout means the first time when the aggregate amount of all
distributions actually made to the Class B Beneficiaries equals $5 per Class B
Interest plus a cumulative annual return of 8% per annum compounded quarterly
with respect to capital contributions returned to them as a Class B Capital
Distribution and 10% per annum, compounded quarterly, with respect to the
balance of their capital contributions calculated beginning August 1, 1997, the
first day of the month following the Class B Closing. Class B Payout occurred on
January 19, 2000 in conjunction with the special cash distribution paid on that
date.
6
<PAGE>
As Class B Payout has been attained, all further distributions will be made
to the Class A Beneficiaries and the Class B Beneficiaries in amounts so that
each Class A Beneficiary receives, with respect to each Class A Interest, an
amount equal to 400%, divided by the difference between 100% and the Class B
Distribution Reduction Factor, of the amount so distributed with respect to each
Class B Interest. The Class B Distribution Reduction Factor means the percentage
determined as a fraction, the numerator of which is the aggregate amount of any
cash distributions paid to the Class B Beneficiaries as a return of their
original capital contributions (on a per Class B Subordinated Interest basis),
discounted at 8% per annum (commencing August 1, 1997, the first day of the
month following the Class B Closing) and the denominator of which is $5.00.
Distributions in 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Managing Special
Total Trustee Beneficiary Beneficiaries
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total 1999 distributions:
Class A Interests $ 2,983,360 $ 25,097 $ 207,039 $ 2,751,224
Class B Interests 4,145,410 41,452 341,998 3,761,960
--------------- --------------- --------------- ---------------
Total $ 7,128,770 $ 66,549 $ 549,037 $ 6,513,184
=============== =============== =============== ===============
Total 1998 distributions:
Class A Interests $ 1,050,516 $ 10,505 $ 86,668 $ 953,343
Class B Interests 2,123,890 6,234 51,426 2,066,230
--------------- --------------- --------------- ---------------
Total $ 3,174,406 $ 16,739 $ 138,094 $ 3,019,573
=============== =============== =============== ===============
</TABLE>
Distributions payable were $5,300,000 and $218,681 at December 31, 1999 and
1998, respectively.
Item 6. Selected Financial Data.
Incorporated herein by reference to the section entitled "Selected
Financial Data" in the 1999 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
1999 Annual Report.
Item 8. Financial Statements and Supplementary Data.
Incorporated herein by reference to the financial statements and
supplementary data included in the 1999 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
7
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Trust.
(a-b) Identification of Directors and Executive Officers
The Trust has no Directors or Officers. As indicated in Item 1 of this
report, AFG ASIT Corporation is the Managing Trustee of the Trust. Under the
Trust Agreement, the Managing Trustee is solely responsible for the operation of
the Trust's properties and the Beneficiaries have no right to participate in the
control of such operations. The names, titles and ages of the Directors and
Executive Officers of the Managing Trustee as of March 15, 2000 are as follows:
DIRECTORS AND EXECUTIVE OFFICERS
OF THE MANAGING TRUSTEE (See Item 13)
- -------------------------------------
<TABLE>
<CAPTION>
Name Title Age Term
- ---------------------------------- ------------------------------------------------ ------ -----------
<S> <C> <C> <C>
Geoffrey A. MacDonald Chairman and a member of the Until a
Executive Committee of EFG successor
and President and a Director is duly
of the Managing Trustee 51 elected
and
Gary D. Engle President and Chief Executive Officer qualified
and a member of the Executive
Committee of EFG and a Director
of the Managing Trustee 51
Gary M. Romano Executive Vice President and Chief
Operating Officer of EFG and
Clerk of the Managing Trustee 40
Michael J. Butterfield Senior Vice President, Finance and Treasurer
of EFG and Treasurer of the
Managing Trustee 40
James A. Coyne Executive Vice President, Capital Markets
of EFG and Senior Vice President of the
Managing Trustee 39
Sandra L. Simonsen Senior Vice President, Information Systems
of EFG 49
Gail D. Ofgant Senior Vice President, Lease Operations
of EFG 34
</TABLE>
(c) Identification of Certain Significant Persons
None.
(d) Family Relationship
No family relationship exists among any of the foregoing Directors or
Executive Officers.
8
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(e) Business Experience
Mr. MacDonald, age 51, is a co-founder, Chairman and a member of the
Executive Committee of EFG and President and a Director of the Managing Trustee.
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. Prior to co-founding EFG's predecessors,
Mr. MacDonald held various executive and management positions in the leasing and
pharmaceutical industries. Mr. MacDonald holds a M.B.A. from Boston College and
a B.A. degree from the University of Massachusetts (Amherst).
Mr. Engle, age 51, 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, and controls the general partner of Old North Capital Limited
Partnership ("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 B.S. degree from the University of Massachusetts
(Amherst).
Mr. Romano, age 40, 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. 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 39, 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. 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 B.S. 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 40, is Senior Vice President, Finance and Treasurer of
EFG and certain of its affiliates and is Treasurer of the Managing Trustee and
Semele. Mr. Butterfield joined EFG in June 1992, became Vice President, Finance
and Treasurer of EFG and certain of it's affiliates in April 1996 and in July
1998, was promoted to Senior Vice President, Finance and Treasurer of EFG and
certain of its affiliates. 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 49, joined EFG in February 1990 and was promoted to
Senior Vice President, Information Systems of EFG in April 1996. Prior to
joining EFG, Ms. Simonsen was Vice President, Information Systems with Investors
Mortgage Insurance Company, which she joined in 1973. Ms. Simonsen provided
systems consulting for a subsidiary of American International Group and authored
a software program published by IBM. Ms. Simonsen holds a B.A. degree from
Wilson College.
9
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Ms. Ofgant, age 34, 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 B.S. degree in
Finance from Providence College.
(f) Involvement in Certain Legal Proceedings
None.
(g) Promoters and Control Persons
See Item 10 (a-b) above.
Item 11. Executive Compensation.
(a) Cash Compensation
Currently, the Trust has no employees. However, under the terms of the
Trust Agreement, the Trust is obligated to pay all costs of personnel employed
full or part-time by the Trust, including officers or employees of the Managing
Trustee or its Affiliates. There is no plan at the present time to make any
officers or employees of the Managing Trustee or its Affiliates employees of the
Trust. The Trust has not paid and does not propose to pay any options, warrants
or rights to the officers or employees of the Managing Trustee or its
Affiliates.
(b) Compensation Pursuant to Plans
None.
(c) Other Compensation
Although the Trust has no employees, as discussed in Item 11(a), pursuant
to section 10.4(c) of the Trust Agreement, the Trust incurs a monthly charge for
personnel costs of EFG for persons engaged in providing administrative services
to the Trust. A description of the remuneration paid by the Trust to the
Managing Trustee and its Affiliates for such services is included in Item 13 of
this report 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 Managing Trustee
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 trust, the Trust has outstanding no
securities possessing traditional voting rights. However, as provided in Section
11.2(a) of the Trust Agreement (subject to Section 11.2(b)), a majority interest
of the Beneficiaries have voting rights with respect to:
1. Amendment of the Trust Agreement;
2. Termination of the Trust;
10
<PAGE>
3. Removal of the Managing Trustee; and
4. Approval or disapproval of the sale of all, or substantially all,
of the assets of the Trust (except in the orderly liquidation of
the Trust upon its termination and dissolution).
As of March 1, 2000, the following person or group owns beneficially more
than 5% of the Trust's outstanding Beneficiary interests:
<TABLE>
<CAPTION>
Name and Amount Percent
Title Address of of Beneficial of
of Class Beneficial Owner Ownership Class
--------------------------- ------------------------- ----------------------- --------------
<S> <C> <C> <C>
Interests Representing Equis II Corporation
Class B Beneficiary 88 Broad Street 997,373 Interests 99.64%
Boston, MA 02110
</TABLE>
No person or group is known by the Managing Trustee to own beneficially
more than 5% of the Trust's 582,017 outstanding Class A Interests as of March 1,
2000.
Equis II Corporation is controlled by EFG's President and Chief Executive
Officer, Gary D. Engle (see Item 10 and Item 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 Managing Trustee of the Trust is AFG ASIT Corporation, an affiliate of
EFG.
(a) Transactions with Management and Others
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the years ended December 31, 1999, 1998 and
1997, which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Acquisition fees $ 14,450 $ -- $ --
Offering costs -- -- 50,048
Equipment management fees 72,020 128,627 235,030
Administrative charges 127,120 70,524 65,196
Reimbursable operating expenses
due to third parties 270,157 382,866 207,741
--------------- --------------- ---------------
Total $ 483,747 $ 582,017 $ 558,015
=============== =============== ===============
</TABLE>
EFG and its Affiliates were reimbursed for their out-of-pocket offering
costs incurred on behalf of the Trust in an amount equal to 1% of the gross
proceeds realized by the four trusts which sold Class B Interests pursuant to a
Registration Statement on Form S-1 in 1997. The amount of reimbursement made by
the Trust was prorated in proportion to the number of Beneficiary Interests sold
in the Trust.
As provided under the terms of the Trust Agreement, EFG is compensated for
its services to the Trust. Such services include all aspects of acquisition,
management and sale of equipment. For acquisition services, EFG was compensated
by an amount equal to .28% of Asset Base Price paid by the Trust for each asset
acquired for the Trust's initial asset portfolio. For acquisition services
during the initial reinvestment period, which expired on September 8, 1996, EFG
was compensated by an amount equal to 3% of Asset Base Price paid by the Trust.
In connection with a Solicitation Statement and consent of Beneficiaries in
1998, the Trust's reinvestment provisions were reinstated through December 31,
2001 and the Trust was permitted to invest in assets other than equipment.
11
<PAGE>
Acquisition fees paid to EFG in connection with such reinvestment assets are
equal to 1% of Asset Base Price paid by the Trust. For management services, EFG
is compensated by an amount equal to (i) 5% of gross operating lease rental
revenue and 2% of gross full payout lease rental revenue received by the Trust
with respect to assets acquired on or prior to March 31, 1998. For management
services earned in connection with assets acquired on or after April 1, 1998,
EFG is compensated by an amount equal to 2% of gross lease rental revenue
received by the Trust. Both of these fees are subject to certain limitations
defined in the Trust Agreement. For non-equipment investments other than cash,
the Managing Trustee receives an annualized management fee of 1%. Compensation
to EFG for services connected to the remarketing of equipment is calculated as
the lesser of (i) 3% of gross sale proceeds or (ii) one-half of reasonable
brokerage fees otherwise payable under arm's length circumstances. Payment of
the remarketing fee is subordinated to Payout and is subject to certain
limitations defined in the Trust Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in
providing administrative services to the Trust. Reimbursable operating expenses
due to third parties represent costs paid by EFG on behalf of the Trust which
are reimbursed to EFG at actual cost.
All equipment was purchased from EFG or directly from external vendors. The
Trust's Purchase Price is determined by the method described in Note 2 to the
Trust's financial statements included in Item 14, herein.
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 Trust. At
December 31, 1999, the Trust was owed $112,228 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 2000.
Old North Capital Limited Partnership ("ONC"), a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG, owns 839 Class A Interests
or less than 1% of the total outstanding Class A Interests of the Trust. The
general partner of ONC is controlled by Gary D. Engle. In addition, the limited
partnership interests of ONC are owned by a subsidiary of Semele Group, Inc.
("Semele"). Gary D. Engle is Chairman and CEO of Semele.
On July 18, 1997, the Trust issued 1,000,961 Class B Interests at $5.00 per
interest, thereby generating $5,004,805 in aggregate Class B capital
contributions. Class A Beneficiaries purchased 3,588 Class B Interests,
generating $17,940 of such aggregate capital contributions, and the Special
Beneficiary, EFG, purchased 997,373 of such Class B Interests, generating
$4,986,865 of such aggregate capital contributions. The Trust incurred offering
costs in the amount of $50,048 in connection with this offering.
Subsequently, EFG transferred its Class B Interests to a special-purpose
company, Equis II Corporation, a Delaware corporation. EFG also transferred its
ownership of AFG ASIT Corporation, the Managing Trustee of the Trust, to Equis
II Corporation. As a result, Equis II Corporation has voting control of the
Trust through its ownership of the majority of the Trust's outstanding voting
interests, as well as its ownership of AFG ASIT Corporation. Equis II
Corporation is controlled by EFG's President and Chief Executive Officer, Gary
D. Engle. Accordingly, control of the Managing Trustee did not change as a
result of the foregoing transactions. During the fourth quarter of 1999, Semele
Group Inc. purchased an 85% interest in Equis II Corporation; however, voting
control with respect to the Class B Interests owned by Equis II Corporation
remains vested in Mr. Engle.
(b) Certain Business Relationships
None.
(c) Indebtedness of Management to the Trust
None.
(d) Transactions with Promoters
12
<PAGE>
See Item 13(a) above.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report:
(1) Financial Statements:
Report of Independent Auditors.......................*
Statement of Financial Position
at December 31, 1999 and 1998........................*
Statement of Operations
for the years ended December 31, 1999, 1998 and
1997.................................................*
Statement of Changes in Participants' Capital
for the years ended December 31, 1999, 1998
` and 1997.............................................*
Statement of Cash Flows
for the years ended December 31, 1999, 1998
and 1997.............................................*
Notes to the Financial Statements....................*
(2) Financial Statement Schedules:
None required.
(3) Exhibits:
Except as set forth below, all Exhibits to Form 10-K,
as set forth in Item 601 of Regulation S-K, are not
applicable.
Exhibit
Number
----------
4 Second Amended and Restated Declaration of Trust.
10.1 Guarantee Agreement dated March 8, 2000 between AFG Investment
Trust A, AFG Investment Trust B, AFG Investment Trust C, and
AFG Investment Trust D (each a Guarantor) and Heller
Affordable Housing of Florida, Inc. (among others as
Beneficiaries) is filed in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999 as Exhibit 10.1
and is included herein.
10.2 Guarantee Fee Agreement dated March 8, 2000 between AFG
Investment Trust A, AFG Investment Trust B, AFG Investment
Trust C, and AFG Investment Trust D (each a Guarantor) and
Echelon Commercial LLC is filed in the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1999 as
Exhibit 10.2 and is included herein.
* Incorporated herein by reference to the appropriate portion of the 1999
Annual Report to security holders for the year ended December 31, 1999
(see Part II).
13
<PAGE>
Exhibit
Number
----------
10.3 Guarantors' Contribution Agreement dated March 8, 2000 by and
among AFG Investment Trust A, AFG Investment Trust B, AFG
Investment Trust C, and AFG Investment Trust D (each a
Guarantor) is filed in the Registrant's Annual Report on Form
10-K for the year ended December 31, 1999 as Exhibit 10.3 and
is included herein.
13 The 1999 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 Reno Air, Inc. is filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999 as Exhibit 99 (a) and is included herein.
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, 1998 as Exhibit 99 (a) and is incorporated herein
by reference.
99(c) Lease agreement with Alaska Airlines, Inc. was filed in the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993 as Exhibit 28 (e) and is incorporated herein
by reference.
99(d) Lease agreement with Tarmac Mid-Atlantic, Incorporated was
filed in the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993 as Exhibit 28 (g) and is
incorporated herein by reference.
99(e) Lease agreement with Montgomery Ward and Company, Inc. was
filed in the Registrant's Annual Report on Form 10-K for the
year ended December 31, 1997 as Exhibit 99 (d) and is
incorporated herein by reference.
(b) Reports on Form 8-K
None.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on behalf of the registrant and in the capacity and
on the date indicated.
AFG Investment Trust D
By: AFG ASIT Corporation,
a Massachusetts corporation and the
Managing Trustee of the Registrant.
By: /s/ Geoffrey A. MacDonald By: /s/ Gary D. Engle
------------------------------ -------------------------------
Geoffrey A. MacDonald Gary D. Engle
Chairman and a member of the President and Chief Executive
Executive Committee of EFG and Officer and a member of the
President and a Director of the Executive Committee of EFG and a
Managing Trustee Director of the Managing Trustee
(Principal Executive Officer)
Date: March 30, 2000 Date: March 30, 2000
---------------------------- -----------------------------
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 Treasurer of EFG and Treasurer
of the Managing Trustee of the Managing Trustee
(Principal Financial Officer) (Principal Accounting Officer)
Date: March 30, 2000 Date: March 30, 2000
---------------------------- -----------------------------
15
<PAGE>
Exhibit 10.1
GUARANTEE
THIS GUARANTEE, dated as of March 8, 2000 (this "Guarantee") is
made, jointly and severally, by AFG Investment Trust A, AFG Investment Trust B,
AFG Investment Trust C and AFG Investment Trust D, each a Delaware business
trust (each, a "Guarantor" and together, the "Guarantors") in favor of the
Beneficiaries (as defined below).
WITNESSETH:
WHEREAS, Echelon Commercial LLC a Delaware limited liability company
(the "Master Lessee"), is a party to and has undertaken payment and performance
obligations under the Amended and Restated Master Lease Agreement ("Master
Lease"), dated as of March 7, 2000 between Heller Affordable Housing Florida,
Inc., a Florida corporation, HAHF Trust I, a Delaware business trust; and HAHF
Trust I, a Delaware business trust (collectively, the "Master Lessor") and
Master Lease;
WHEREAS, in order to induce the Beneficiaries to enter into the
Master Lease, the Guarantors are executing and delivering this Guarantee to
Master Lessor (collectively, along with its successors and permitted assigns,
the "Beneficiaries"):
NOW, THEREFORE, for value received, each Guarantor hereby agrees
with and for the benefit of the Beneficiaries as follows:
ARTICLE I
DEFINED TERMS
Unless the context shall otherwise require, capitalized terms used
herein but not otherwise defined herein shall have the meanings assigned thereto
in the Master Lease.
ARTICLE II
GUARANTEE AND INDEMNITIES
SECTION 2.01 Guarantee of Obligations Under Master Lease.
(a) The Guarantors irrevocably and unconditionally, jointly and
severally guarantee to each of the beneficiaries the due, complete and punctual
performance and observance of all payment obligations of the Master Lessee under
the Master Lease, and the due. complete and punctual performance of, and
compliance with, each and all other obligations. covenants and agreements of the
Master Leasee under the Master Lease (in each case, including any and all
indemnities and Liabilities for breach of covenant or warranty now or hereafter
incurred by the Master Leasee to any Beneficiary arising pursuant or with
respect to the Master Lease), in each case strictly in accordance with the terms
thereof (all such obligations and other covenants, indemnities and agreements
being referred to herein as the "Obligations"). The Guarantors agree to pay upon
demand any and all expenses (including reasonable attorneys' fees and
disbursements) that may be paid or incurred by any Beneficiary in enforcing any
rights with
<PAGE>
respect to, or collecting, any or all payments due pursuant to the terms of the
Master Lease and/or enforcing any rights with respect to, or collecting against,
the Guarantor under this Guarantee (whether pursuant to this Section 2.01(a) or
any other provision hereof).
(b) In the event that Master Lessee fails to pay, perform or observe
duly, completely and punctually any Obligation when and as the same shall be due
and payable, or required to be observed or performed, as the case may be, in
accordance with the terms of the Master Lease, the Guarantors shall forthwith
pay, perform and observe such Obligation or cause the same forthwith to be paid,
performed or observed, regardless of whether or not any Beneficiary or anyone on
behalf of any of them shall have instituted any suit, action or proceeding or
exhausted its remedies or taken any steps to enforce any rights against Master
Lessee or any other Person or entity to compel any such performance or
observance or to collect all or any port of such amount pursuant to the
provisions of the Master Lease or am law or in equity, or otherwise, and
regardless of any other condition or contingency.
SECTION 2.02 Unconditional Obligations. This Guarantee is a primary
obligation of each Guarantor independent of the obligations of the Master Lessee
under the Master Lease. and is an unconditional, absolute, present and
continuing obligation and guarantee of payment and performance (and not merely
of collection) and the validity and enforceability of this Guarantee shall be
absolute and unconditional irrespective of, and, shall not be impaired. affected
or in any way conditioned or contingent upon (a) the making of a demand, the
institution of suit or the taking of any other action to enforce performance or
observance by Master Lessee of the Obligations, (b) the validity, regularity or
enforceability of the Master Lease or any of the Obligations or any collateral
security, other guarantee, if any, or credit support therefor or right of offset
with respect thereto at any time or from time to time held by any Beneficiary,
(c) any defense, setoff or counterclaim (other than the defense of prior payment
or performance) that may at any time be available to or be asserted by Master
Lessee or any Guarantor against any beneficiary, (d) any attempt to collect from
Master Lessee or any other entity or to perfect or enforce any security or (e)
upon any other action, occurrence or circumstance whatsoever. The Guarantors
waive any requirement that any Beneficiary shall have instituted any suit,
action or proceeding or exhausted its remedies or taken any steps to enforce any
rights against Master Lessee or any other Person or entity to compel any such
performance or to collect all or any part of such amount pursuant to the
provisions of the Master Lease or at law or in equity, or otherwise, and
regardless of any other condition or contingency.
SECTION 2.03 Amendments, etc., With Respect to the Obligations. The
Guarantors shall remain obligated hereunder and this Guarantee shall remain in
full force and effect without any reservation of rights against the Guarantors
and without notice to or further assent by the Guarantors, notwithstanding that
(a) any demand for payment or performance or observance of any of the
Obligations made by any Beneficiary may be rescinded by such Beneficiary and any
of the other Obligations continue to be in effect; (b) the Obligations, or the
liability of any other Person upon or for any part thereof, or any collateral
security or guarantee therefor or right of offset with respect thereto, may be
renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered or released by any Beneficiary; (c) the Master Lease, or any
collateral security document or other guarantee or document executed and
delivered in connection therewith or related thereto, may be amended, modified,
supplemented or terminated, in accordance with its terms, as the parties thereto
may deem advisable; (d) any
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<PAGE>
collateral security, guarantee or right to offset held by any Beneficiary for
the payment or performance or observance of the Obligations may be sold,
exchanged, waived, surrendered or released; or (e) any default with respect to
any ObIigation may be waived by any Beneficiary. No Beneficiary shall have any
obligation to protect, secure, perfect or insure any Lien at any time held by it
as security for the Obligations or for this Guarantee or any property subject
thereto. For purposes hereof, "demand" shall include the commencement and
continuance of any legal proceedings.
The Guarantors hereby ratify and confirm any such extension,
renewal, change, sale, release, waiver, surrender, exchange, modification,
amendment, impairment, substitution. settlement, adjustment or compromise and
agrees that the same shall be binding upon it, and hereby waive to the fullest
extent permitted by Applicable Law any and all defenses, counterclaims or
offsets which it might or could have by reason thereof, it being understood that
the Guarantors shall at all times be bound by this Guarantee and remain liable
hereunder.
SECTION 2.04 The Guarantors' Obligations Not Affected. The
Guarantors expressly agree that the duties and obligations of the Guarantors
under this Guarantee shall remain in full force and effect, without the
necessity of any reservation of rights against the Guarantors or notice to or
further assent by the Guarantors at any time and from time to time, in whole or
in part, and without regard to, and shall not be impaired, released, discharged,
terminated or affected by any of the following actions or the occurrence of any
of the following:
(a) any extension, modification, amendment or renewal of,
termination, addition or supplement to, or deletion from, any of the terms of or
indulgence with respect to, or substitutions for, or the taking of any action or
the giving of any consent with respect to, the Obligations or any part thereof
or the Master Lease or other agreement relating thereto at any time;
(b) any failure, refusal or omission to enforce any right, power or
remedy with respect to the Obligations or any part thereof or the Master Lease
or other agreement relating thereto;
(c) any waiver of any right, power or remedy or of any default with
respect to the Obligations or any part thereof or the Master Lease or other
agreement relating thereto or to provide for any insurance on the Property, or
to establish or maintain the priority or perfection of any interest in the
Property;
(d) any release, surrender, compromise. settlement, waiver,
subordination or modification, with or without consideration, of any collateral
security or other guarantees with respect to the Obligations or any part
thereof, or any other obligation of any Person with respect to the Obligations
or any part thereof;
(e) the lack of genuineness, unenforceability, impossibility of
performance or invalidity of the Obligations or any part thereof or the lack of
genuineness, unenforceability, impossibility of performance or invalidity of the
Master Lease or other agreement relating thereto or the power or authority or
lack of power or authority of the Master Lessee to execute
- 3 -
<PAGE>
and deliver the Master Lease or to perform any of its obligations thereunder or
the existence or continuance of the Master Lessee or any other Person as a legal
entity;
(f) any change in the ownership of the Master Lessee or the
insolvency, bankruptcy or any other change in the legal status of the Master
Lessee or any rejection, modification or release of the obligations of the
Master Lessee or those of any Person under the Master Lease as a result of any
bankruptcy, reorganization, insolvency or similar proceeding;
(g) the change in or the imposition of any Applicable Law or other
governmental act that does or might impair, delay or in any way affect the
validity, enforceability, or the payment when due, of the Obligations to the
extent not prohibited by Applicable Law or otherwise.
(h) the existence of any claim, counterclaim, setoff or other rights
that the Guarantors may have at any time against the Master Lessee or any other
Person in connection herewith or with an unrelated transaction;
(i) any merger or consolidation of the Master Lessee or any
Guarantor into or with any other Person, or any sale, release or transfer of any
or all of the assets of the Master Lessee or any Guarantor to any other Person;
(j) the rights, powers or privileges any Beneficiary may now or
hereafter have against any Person or collateral;
(k) any assignment of the Master Lease or subletting of the Property
or any part thereof or any transfer, sale or other disposition or any
destruction of the Property or any failure of title with respect to any interest
in the Property,
(l) the failure of any Guarantor to receive any benefit from or as a
result of its execution, delivery and performance of this Guarantee; or
(m) any other action, omission, occurrence or circumstance
whatsoever which may in any manner or to any extent constitute a legal or
equitable defense of any Guarantor or vary the risk, prejudice any rights of
subrogation, limit the recourse or effect a discharge of any Guarantor hereunder
as a matter of law or otherwise;
provided that the specific enumeration of the above-mentioned acts, failures or
omissions shall not be deemed to exclude any other acts, failures or omissions,
that are not specifically mentioned above, it being the purpose and intent of
this paragraph that the obligations of the Guarantors hereunder shall be
absolute and unconditional and shall not be discharged, impaired or varied
except by the payment, observance or performance to the appropriate Beneficiary
of the Master Lessee's obligations under the Master Lease, and then only to the
extent of such payments, observance or performance.
Without limitation any of the other teams or provisions hereof, in
order to hold the Guarantors liable hereunder, there shall be no obligation on
the part of any Beneficiary at any time to enforce or attempt to enforce any
right or remedy against the Master Lessee or any other Person or to resort, in
any manner or form, to any collateral, property or estates or any other
- 4 -
<PAGE>
rights or remedies whatsoever. Without limiting the foregoing, it is understood
that repeated and successive demands may be made and recoveries may be had
hereunder but without duplication of payment as and when, from time to time, the
Master Lessee shall default under the terms of any of the Master Lease and that
notwithstanding the recovery hereunder for or in respect of any given default by
the Master Lessee wider the Master Lease, this Guarantee shall remain in full
force and effect and shall apply to each and every subsequent default. Each and
every default in any payment. observance or performance of any Obligation of the
Master Lessee under the Master Lease shall give rise to a separate claim and
cause of action hereunder, and separate claims or suits may be made and brought,
as the case may be, hereunder as each such default occurs.
SECTION 2.05 Waiver by the Guarantors. The Guarantors
unconditionally waive and release, to the fullest extent permitted by Applicable
Law, any and all (a) notice of the acceptance of this Guarantee by any
Beneficiary and of any change in the financial condition of the Master Lessee;
(b) notices of the creation. renewal, extension or accrual of any Obligation or
any of the matters referred to in Section 2.04 hereof or any notice of or proof
of reliance by any of the Beneficiaries upon this Guarantee or acceptance of
this Guarantee (the Obligations, and any of them, shall conclusively be deemed
to have been created, contracted, incurred, renewed, extended, amended or waived
in reliance upon this Guarantee and all dealings between the Master Lessee or
the Guarantors and each Beneficiary shall be conclusively presumed to have been
had or consummated in reliance upon this Guarantee); (c) notices which may be
required by statute, rule of law or otherwise, now or hereafter in effect, to
preserve intact any rights of any of the Beneficiaries against the Guarantors;
(d) the right to interpose all substantive and procedural defenses to the law of
guarantee, indemnification and suretyship, except the defenses of prior payment
or prior performance by the Master Lessee or the Guarantors of the Obligations;
(e) all rights, defenses and remedies accorded by Applicable Law to guarantors
or sureties, including any extension of time conferred by any law now or
hereafter in effect; (f) any right or claim of right to cause a marshaling of
the assets of the Master Lessee or to cause any Beneficiary to proceed against
the Master Lessee or any collateral held by any Beneficiary at any time or in
any particular order; (g) rights to the enforcement, assertion or exercise by
any of the Beneficiaries of any right, power, privilege or remedy conferred
herein or in the Master Lease or otherwise; (h) requirements of promptness or
diligence on the part of any of the Beneficiaries; (i) notices of the sale,
transfer or other disposition of any right, title to or interest in the Master
Lease; (j) demand of payment by any Beneficiary or any other Person from the
Master Lessee or any other Person indebted or in any manner liable on or for the
Obligations hereby guaranteed; (k) presentment for payment by any Beneficiary or
any other Person of the Obligations, protest thereof and notice of dishonor to
any party, or (l) other circumstances whatsoever (except the defenses of prior
payment or prior performance by the Master Lessee or the Guarantors of the
Obligations) which might otherwise constitute a legal or equitable discharge,
release or defense of a guarantor or surety, or which might otherwise limit
recourse against the Guarantors. No failure to exercise and no delay in
exercising, on the part of any Beneficiary, any right, power or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power or privilege preclude any other or further exercise
thereof, or the exercise of any other power, privilege or right. The rights and
remedies herein provided are cumulative and not exclusive of any rights or
remedies provided by law.
- 5 -
<PAGE>
SECTION 2.06 Payments. All payments hereunder shall be made in
compliance with Section 7.15.
SECTION 2.07 Reinstatement. This Guarantee shall continue to be
effective, or be reinstated, as the case may be. if at any time payment, in
whole or in part, of any of the Obligations is invalidated, voided, declared to
be fradulent or preferential, set aside, rescinded or must otherwise be repaid,
restored or returned to a trustee, receiver or any other Person by any
Beneficiary upon the bankruptcy, insolvency, reorganization, arrangement,
adjustment, composition, dissolution, liquidation, or the like, of the Master
Lessee or the Guarantors, or as a result of, the appointment of a custodian,
receiver, trustee or other officer with similar powers with respect to the
Master Lessee or the Guarantors or any substantial part of such Person's
respective property, or otherwise, all as though such payment had nor been made
notwithstanding any termination of this Guarantee or the Master Lease. The
liability of the Guarantors shall not he reduced or discharged, in whole or in
part, by any payment to any Beneficiary from any source that is thereafter
repaid, returned or refunded in whole or in part by reason of the assertion of a
claim of any kind relating thereto, including, but not limited to, any claim for
breach of contract, breach of warranty, preference, illegality, invalidity or
fraud asserted by any account debtor or by any other Person.
SECTION 2.08 Expenses. If the Guarantors fail to pay any amount
hereunder when due, the Guarantor shall pay interest, on demand, on such amount
at the Overdue Rate, to such Beneficiary entitled thereto. The Guarantors
further agree to pay to any Beneficiary any and all reasonable out-of-pocket
costs and expenses (including reasonable attorneys' fees and disbursements)
incurred by such Beneficiary in connection with enforcing its rights under the
Master Lease and/or this Guarantee.
SECTION 2.09 Limitation. The maximum liability under this Guarantee
will be the lesser of $34,500,000 or the Guaranteed Amount (as hereinafter
defined) (plus in either case, any interest on any amounts sought to be
recovered hereunder, and fees and expenses related to the enforcement of this
Guarantee as provided in Section 2.08 hereof).
ARTICLE III
COVENANTS
Each Guarantor hereby covenants, for the benefit of each
Beneficiary, as follows:
SECTlON 3.01 Information. Each Guarantor will deliver to the
Beneficiaries:
(a) promptly after the filing thereof, copies of all reports on
Forms 10-K, 10-Q and 8-K (or their equivalents), which such Guarantor shall have
filed with the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended;
(b) as soon as possible and in any event within ten (10) Business
Days after a Responsible Employee of such Guarantor obtains knowledge of the
occurrence of each Event of Default or each event that, with the giving of
notice or time elapse, or both, would constitute an Event of Default continuing
on the date of such statement, a statement of the authorized officer setting
forth details of such Event of Default or event and the action that the
Guarantor proposes
- 6 -
<PAGE>
to take with respect thereto; provided that the Guarantor shall not be obligated
to give notice of any Event of Default which is remedied within ten (10)
Business Days after such Responsible Employee first obtains knowledge;
(c) promptly upon becoming aware thereof, written notice of the
commencement or existence of any proceeding against the Guarantor or any
Affiliate of the Guarantor by or before any court or governmental agency that
might, in the reasonable judgment of the Guarantor, result in a Material Adverse
Effect on the business, operations or financial conditions of the Guarantor or
the ability of the Guarantor to perform its obligations hereunder or under the
Master Lease;
(d) as soon as possible and in any event within ten (10) Business
Days after the occurrence of any violation or alleged violation of an
Environmental Law by Guarantor or Master Lessee, a statement of an authorized
officer setting forth the details of such violation and the action which the
Guarantor proposes to take with respect thereto; and
(e) from time to time such additional information regarding the
business, properties, condition or operations, financial or otherwise, of such
Guarantor as the Beneficiaries may reasonably request.
SECTION 3.02 Compliance with Laws. The Guarantors will comply in all
material respects with all applicable laws, ordinances, rules, regulations, and
requirements of governmental authorities (including, without limitation,
Environmental Laws and ERISA and the rules and regulations thereunder).
SECTION 3.03 Further Assurances. Each Guarantor will promptly
execute and deliver to the Beneficiaries such further documents, instruments and
assurances and take such further action as the Beneficiaries from time to time
reasonably may request in order to carry out the intent and purpose of this
Guarantee and to establish and protect the rights and remedies created or
intended to be created in favor of the beneficiaries hereunder.
SECTION 3.04 Preservation of Existence, Etc. Each Guarantor will
preserve and maintain its existence and. all rights, privileges and franchises
necessary and desirable in the normal conduct of its business and the
performance of its obligations hereunder and under the Master Lease, provided
that a Guarantor may consolidate with or merge with or into any other
corporation or convey or transfer its properties and assets substantially as an
entirety to any Person, if either the Guarantor shall be the continuing Delaware
business trust (if other than the Guarantor) formed by such consolidation or
into which the Guarantor is merged or the Person which acquires by conveyance or
transfer the properties and assets of the Guarantor substantially as an entirety
shall expressly assume, by an assumption agreement executed and delivered to the
Beneficiaries, the performance of the Guarantor's obligations hereunder and
under the Master Lease.
SECTION 3.05 Payment of Taxes. Each Guarantor shall promptly pay
when due all Taxes owing by the Guarantors where such failure could reasonably
be expected to have a Material Adverse Effect, except for such Taxes that are
being contested in good faith by appropriate proceedings and adequate reserves
shall have been set aside therefor.
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<PAGE>
SECTION 3.06 Books and Records. Each Guarantor shall maintain its
books and financial statements in accordance with GAAP, and permit the
Beneficiaries to make or cause to be made inspections and audits of any books,
records and papers of such Guarantor and in make extracts therefrom at all such
reasonable times and as often as any such Person may reasonably require.
SECTION 3.07 Employee Benefit Plans. Each Guarantor shall maintain
each Plan as to which it may have liability, in compliance with all Applicable
Laws.
SECTION 3.08 Payment of Dividends, Each Guarantor agrees not to pay
any dividends or make any other distribution on its capital interests during the
term of this Guarantee except with the consent of the Beneficiary; provided,
however, the Guarantors agree not to request the Beneficiary's consent to such
distributions more than once a fiscal quarter; provided, that, for all tax years
ending on or after December 31, 2001. the Guarantors, if required, may
distribute to its owners amounts solely to compensate such owners for U.S.
federal income tax liability generated by their ownership interest in any
Guarantor. Such amount in no event will exceed 39.5% of the taxable income
allocated to such owner.
SECTION 3.09 Agreements with Affiliates. Each Guarantor agrees not
to amend, modify or terminate any of the agreements with its Affiliates set
forth on Schedule I attached hereto, or to enter into any agreement with any
Affiliate except as set forth on Exhibit A hereto, except to the extent such
amendment, modification, or termination or this Agreement does not (i) affect
the assets held by any Guarantor in an adverse manner, (ii) increase any fees
payable for any liability of any Guarantor, or (iii) create a new fee or
liability by any Guarantor to such Affiliate.
SECTION 3.10 Stipulated Value. The Guarantors may not acquire or
invest in additional assets unless (a) the Guarantors jointly hold not less than
$7,000,000 in cash and cash equivalents (as such terms are defined under GAAP),
and (b) the Stipulated Value (as defined below) as calculated immediately prior
to such asset acquisition or investment (after giving effect to such investment
or asset acquisition in the calculation) is equal to the lesser of $40 million
($40,000,000) or the Guaranteed Amount (as defined below).
(a) Stipulated Value means the sum of the net book values (defined
as determined by GAAP unless otherwise noted) of each individual Asset reduced
by its corresponding non-recourse debt ("NBV'), with no such NBV for an
individual asset being less than zero, included in each Category of Assets set
forth below multiplied by the Adjustment Percentage reduced by all Recourse
Indebtedness of the Guarantors.
Category of Assets Adjustment Percentage
------------------ ---------------------
(i) Unencumbered cash, cash
equivalents, and accounts receivable 100
front affiliates where cash is held by
such affiliate and remitted within 15
days
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<PAGE>
Category of Assets Adjustment Percentage
------------------ ---------------------
(ii) Present Value (at a discount rate
of 10%) of the difference between the
contractual rents payable on any
equipment lease and the contractual
non-recourse debt service
requirements in connection with
such equipment lease rents 90
(iii) The cost of any contract acquired to
manage equipment leasing assets, or
the cost of equity interests in
equipment leasing funds, less any
non-recourse debt incurred to
acquire such contract or equity
interest (without duplication) 82.5
(iv) The NBV (which NBV at the date
hereof is deemed to be $20,000,000)
of any residual interests on any
equipment currently under lease 75
(v) The NBV (which NBV at the date
hereof is deemed to be $2,700,000)
of any residual interests on any
equipment no longer under lease 50
(vi) The NBV of existing real estate
investments 40
(vii) The NBV of real estate investments
made after the date hereof 10
For purposes of the above:
(A) any investment or asset acquisitions alter the date hereof
will be valued at cost.
(B) any writedowns of asset value required by GAAP will also be
required for purposes of determining Stipulated Value.
(C) Upon the sale of any asset included in (iv) or (v) above, the
book value of a Category of Assets will be reduced by the
actual amount of sales
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<PAGE>
proceeds received for such asset multiplied by the Adjustment
Percentage for that Category of Assets.
Notwithstanding anything above to the contrary, the Guarantors may (i) invest up
to $2,500.000 into Equis Kirkwood LLC and (ii) invest up to $2,500,000 (net of
any non-recourse debt) pursuant to existing obligations under outstanding leases
or on improvements to existing equipment provided that such improvements are
incurred in connection with a sale or release of such equipment; provided that
upon consummation of such Investment, the Guarantors continue to hold not less
than $7,000,000 in cash and cash equivalents (as defined under GAAP).
(b) Guaranteed Amount means 125% of the total of Lease Balance plus
Recourse Debt less amounts held in the Cash Collateral Account
(c) Ten days prior to any asset acquisition or investment in excess
of $1,000,000 the Guarantors will deliver a certificate to Beneficiary, in a
form reasonably acceptable to it, evidencing compliance with this Section 3.10.
SECTION 3.11 Asset Acquisition Limitation. In no event will the
Guarantors acquire additional assets or make additional investments with an
aggregate purchase price in excess of $30,000,000 plus the amount by which
$34,500,000 exceeds the Guaranteed Amount For purposes of this section, if the
Guarantors make investments after the date hereof and later sell those
investments, the sale proceeds may be reinvested in addition to the limitation
set forth in the preceding sentence. The calculation of purchase price for
purposes of this Section shall include any indebtedness (whether with recourse
to any Guarantor or not) incurred to finance any portion of the purchase price
of any asset. No single asset may be acquired where the cash paid by the
Guarantor is greater than $5,000,000; however, an acquisition consisting of a
portfolio of individual assets, or an entity than owns individual assets, shall
be deemed to be an investment in each underlying asset rather than taken as a
whole. Notwithstanding any other restrictions in this agreement, any payments by
any Guarantor to Master Lessee shall not be deemed investments for purposes of
Sections 3.10 or 3.11 hereof
SECTION 3. Guarantees. In no event shall any Guarantor become liable
to any third party (including Affiliates) as guarantor, surety or any similar
arrangement (including any obligations to perform any obligations of such third
party under any contracts or agreements).
ARTICLE IV
RIGHTS OF THE PARTIES
SECTION 4.01 Concerning the Beneficiaries. The Guarantors
acknowledge that no Beneficiary shall have any obligation to perform any duty,
covenant or condition hereunder. The Guarantors further acknowledge and agree
that the rights of the beneficiaries in and to any payments hereunder in respect
of obligations assigned by the Master Lessee shall not be subject to any
defense, setoff, or recoupment or reduction of any kind for any reason (whether
asserted by counterclaim or otherwise) whatsoever. including, without
limitation, any other indebtedness or liability, howsoever and whenever
arising, of the Master Lessee to the
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<PAGE>
Guarantors or to any other Person or for any cause whatsoever, it being the
intent hereof that the Guarantors shall be unconditionally and absolutely
obligated to pay the Beneficiaries all amounts due hereunder for so long as the
Master Lease is in effect.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS
SECTION 5.01 Representations and Warranties of the Guarantors. Each
Guarantor hereby represents and warrants as of the date hereof as follows:
(a) Status. Each Guarantor (i) is a duly organized and validly
existing business trust in good standing under the laws of the State of Delaware
and (ii) has the power and authority to own its properties and to conduct the
business in which it is currently engaged.
(b) Power and Authority. The Guarantor has the power and authority
to execute, deliver and carry out the terms and provisions of this Guarantee and
has taken all necessary action to authorize the execution, delivery and
performance of this Guarantee and has duly executed and delivered this Guarantee
and, assuming the due authorization, execution and delivery thereof on the part
of each other party thereto, this Guarantee constitutes a legal, valid and
binding obligation enforceable against it in accordance with its terms, except
as the same may be limited by insolvency, bankruptcy, reorganization or other
laws relating to or affecting the enforcement of creditors' rights generally and
by equitable principles whether enforcement is sought by proceedings in equity
or at law and except as the same may be limited by certain circumstances under
law or court decisions in respect of provisions providing for indemnification
of a party with respect to liability where such indemnification is contrary to
public policy.
(c) No Legal Bar. Neither the execution, delivery and performance
by each Guarantor of this Guarantee nor compliance with the terms and provisions
hereof and thereof, nor the consummation by such Guarantor of the transactions
contemplated herein and therein (i) will result in a violation by such Guarantor
of any provision of any Applicable Law that would have a Material Adverse Effect
(x) the validity or enforceability of this Guarantee, or (y) the consolidated
financial position, business or consolidated results of operations of such
Guarantor or the ability of such Guarantor to perform its obligations under this
Guarantee, (ii) will conflict with or result in any breach which would
constitute a default under, or result in the creation or imposition of (or the
obligation to create or impose) any Lien upon any of the property or assets of
such Guarantor pursuant to the terms of any indenture, loan agreement or other
agreement for borrowed money to which the Guarantor is a party or by which it or
any of its property or assets is bound or to which it may be subject, or (iii)
will violate any provision of the declaration of trust or governing instrument
of such Guarantor.
(d) Litigation. There are no actions, suits or proceedings pending
or, to the knowledge of any Guarantor, threatened (i) that are reasonably likely
to have a Material Adverse Effect on the Property or on the ability of such
Guarantor to perform its obligations under the Guarantee or (ii) that question
the validity of the Guarantee or the rights or remedies of the Beneficiaries
with respect to rite Guarantor or the Property under the Master Lease.
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<PAGE>
(e) Governmental Approvals. No Governmental Action by any
Governmental Authority having jurisdiction over any Guarantor or the Property is
required to authorize or is required in connection with (i) the execution,
delivery and
performance by the Guarantor under the Guarantee, or (ii) the
legality, validity, binding effect or enforceability against the Guarantor under
the Guarantor.
(f) Investment Company Act, No Guarantor is an "investment company"
or a company "controlled" by an "investment company," within the meaning of the
Investment Company Act.
(g) Public Utility Holding Company Act. No Guarantor is a "holding
company" or a "subsidiary company", or an "affiliate" of a "holding company" or
of a "subsidiary company" of a "holding company", within the meaning of the
Public Utility Company Act of 1935, as amended.
(h) Financial Statements. The consolidated balance sheet of each
Guarantor as at December 31, 1998, and the related consolidated statements of
income and cash flows of each Guarantor for the fiscal year then ended,
accompanied by an opinion of Ernst & Young LLP, independent accountants, and the
consolidated balance sheet of such Guarantor as at September 30, 1999, and the
related consolidated statements of income and cash flows of the Guarantor for
the nine months then ended, duly certified by the chief financial officer of the
Guarantor, copies of which have been furnished to the Beneficiaries, fairly
present, subject, in the case of said balance sheet as at September 30, 1999,
and said statements of income and cash flows for the nine months then ended, to
year-end audit adjustments, the consolidated financial condition of the
Guarantor as at such dates and the consolidated results of the operations of the
Guarantor for the periods ended on such dates, all in accordance with GAAP
consistently applied. Since September 30, 1999, no event has occurred which
could have a Material Adverse Effect.
(i) Defaults. No Default or Event of Default or similar event has
occurred and is continuing hereunder or under any material bond, debenture, note
or other evidence of indebtedness or material mortgage, deed of trust, indenture
or loan agreement or other instrument to which any Guarantor is a party or is
subject to or bound.
(j) Tax Returns. Each Guarantor has filed or caused to be filed all
Federal, state, local and foreign tax returns required to have been filed by it
and has paid or caused to be paid all taxes shown to be due and payable on such
returns or on any assessments received by it, except taxes that are being
contested in good faith by appropriate proceedings and for which the Guarantor
shall have set aside on its books adequate reserves.
(k) No Material Misstatements. No information, report, financial
statement, exhibit or schedule furnished by or on behalf of any Guarantor to the
Beneficiaries in connection with the negotiation of this Guarantee or the Master
Lease or included therein or delivered pursuant thereto contained, contains or
will contain any misstatement of a material fact or omitted, omits or will omit
to state any material fact necessary to make the statements therein, in the
light of the circumstances under which they were, are or will be made, not
misleading.
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<PAGE>
Notwithstanding the foregoing, any financial projections provided by any
Guarantor based upon assumptions believed to be reasonable at the time by the
management of such Guarantor and are not intended to be guarantees of future
results
(l) Investment. No Guarantor has made a cash investment in the
Master Lessee, its parent, or any related transaction, it being understood,
however, that the Guarantors may advance all or a portion of the security
deposit with respect to a related transaction, provided the security deposit is
returned to the Guarantors within 5 business days of the Commencement Date.
ARTICLE VI
GUARANTEE EVENTS OF DEFAULT
SECTION 6.01 Guarantee Events of Default. If any of the following
events ("Guarantee Events of Default") shall occur and be continuing:
(a) The Guarantor shall fail to make any payment of any amount when
due hereunder to any Beneficiary; or
(b) Any representation or warranty made by the Guarantor under or in
connection with Article V of this Guarantee shall prove to have been incorrect
in any material respect when made or deemed made and such materiality is
continuing; or
(c) The Guarantor shall fail to perform or observe any term,
covenant or agreement contained in Article III and such failure shall remain
unremedied for thirty (30) days after written notice thereof shall have been
given to the Guarantor by the Beneficiaries; provided, however, that if such
failure is capable of cure but cannot be cured by payment of money or cannot be
cured by diligent efforts within such thirty (30) day period but such diligent
efforts shall be properly commenced within the cure period and the Guarantor is
diligently pursuing, and shall continue to pursue diligently, remedy of such
failure, the cure period shall be extended for an additional period of time as
may be necessary to cure, not to exceed an additional forty-five (45) days or to
extend beyond the Expiration Date; or
(d) The Guarantor shall (i) admit in writing its inability to pay
its debts generally as they become due, (ii) file a petition under the United
States bankruptcy laws or any other applicable insolvency law or statute of the
United States of America or any State or Commonwealth thereof (iii) make a
general assignment for the benefit of its creditors, (iv) consent to the
appointment of a receiver of itself or the whole or any substantial part of its
property, (v) fail to cause the discharge of any custodian, trustee or receiver
appointed for the Guarantor or the whole or a substantial part of its property
within sixty (60) days after such appointment, or (vi) file a petition or answer
seeking or consenting to reorganization under the United States bankruptcy laws
or any other applicable insolvency law or statute of the United States of
America or any State or Commonwealth thereof; or
(e) Insolvency proceedings or a petition under the United States
bankruptcy laws or any other applicable insolvency law or statute of the United
States of America or any
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<PAGE>
State or Commonwealth thereof shall be filed against the Guarantor and not
dismissed within sixty (60) days from the date of its filing, or a court of
competent jurisdiction shall enter an order or decree appointing, without the
consent of the Guarantor, a receiver of the Guarantor or the whole or a
substantial part of any of its property and such order or decree shall not be
vacated or set aside within ninety (90) days from the date of the entry thereof;
or
(f) An event of default, as defined in any agreement, mortgage,
indenture or instrument under which there may be issued, or by which there may
be secured or evidenced, any indebtedness for borrowed money of the Guarantor in
a principal amount in excess of $5,000,000, whether such indebtedness now exists
or shall hereafter be created, shall happen and be continuing, if the effect of
such default is to accelerate the maturity of such indebtedness, unless the
Guarantor is diligently and in good faith contesting such default in appropriate
proceedings; provided, however, any default on the non-recourse debt shall not
constitute a default hereunder; or
(g) At any time the Guarantors shall hold less than Two Million
($2,000,000) in unencumbered cash and cash equivalents (as defined by GAAP), or
(h) At any time that the Guarantors shall have a combined book value
(as defined by GAAP) less than the lesser of $30,000,000 and the Guaranteed
Amount.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01 No Waiver; Cumulative Remedies. The failure or delay of
any Beneficiary in exercising any right or remedy granted it hereunder shall not
operate as a waiver of such right or remedy or be construed to be a waiver of
any breach of any of the terms and conditions hereof or to be an acquiescence
therein. Each and every right, power and remedy herein specifically given to
each Beneficiary shall be cumulative and shall be in addition to every other
right, power and remedy herein specifically given or now or hereafter existing
at law, in equity or by statute and the exercise or the beginning of the
exercise of any right, power or remedy shall not be construed as a waiver of the
right to exercise at the same time or thereafter any other right, power or
remedy. A waiver by a Beneficiary of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy that such
Beneficiary or any other Beneficiary would otherwise have.
SECTION 7.02 Notices. All notices, demands, declarations, consents,
directions, approvals, instructions, requests and other communications required
or permitted by the terms hereof shall be in writing and delivered (i)
personally, (ii) by a nationally recognized overnight courier service, (iii) by
mail (by registered or certified mail, return receipt requested, postage
prepaid) or (iv) by facsimile (with confirmation of such transmission), in each
case directed to the address of such Person as indicated below:
If to the Guarantors:
AFG Investment Trust A,
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<PAGE>
AFG Investment Trust B,
AFG Investment Trust C, or
AFG Investment Trust D, as applicable
Equis Financial Group
88 Broad Street
Boston, MA 02110
Telephone No.: (617) 854-5800
Facsimile No.: (617) 695-0596
Attn: James A. Coyne
If to any Beneficiary:
Heller Affordable Housing of Florida, Inc.
c/o Heller EMX, Inc.
111 West 50th Street
New York, New York 10020
Attn: Senior Vice President
Telephone No.: (212) 408-0476
Facsimile No.: (212) 586-3017
Any such notice shall be effective upon receipt or refusal. From time to time
any party may designate a new address for purposes of notice hereunder by
written notice to each of the other parties hereto in accordance with this
Section 7.02.
SECTION 7.03 Amendments and Waivers; Successors and Assigns.
(a) Neither this Guarantee nor any of the terms hereof may be
terminated, amended, supplemented, waived or modified orally, but only by an
instrument in writing signed by the Guarantors and the Beneficiaries.
(b) This Guarantee shall be binding upon the Guarantors and their
successors and permitted assigns and shall inure to the benefit of the
Beneficiaries and their respective successors and assigns permitted under the
Master Lease.
(c) The Guarantors shall not assign any of their obligations
hereunder without the express prior written consent of the Beneficiary.
SECTION 7.04 Severability. Any provision of or obligation under this
Guarantee that is determined by competent authority to be prohibited and
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions or obligations hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render uneforceable
such provision or obligation in any other jurisdiction. To the extent permitted
by Applicable Law, the Guarantors hereby waive any provision of law that renders
any provision or obligation hereof prohibited or unenforceable in any respect.
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<PAGE>
SECTION 7.05 Termination. Subject to the provisions of Section 2.07
hereof, this Guarantee and the Guarantors' duties and obligations hereunder
shall remain in full force and effect and be binding in accordance with their
terms, until the earlier of (i) the date on which all Obligations and the
obligations of the Guarantors hereunder shall have been satisfied by payment and
performance in full, (ii) the date on which the Master Lease terminates, or
(iii) the date on which Full Collateralization occurs. If the Beneficiary
releases the Guarantor from any or all of the Guarantors' duties and obligations
hereunder owing to such Beneficiary. such release shall in no way effect the
remaining Guarantors duties and obligations to the Beneficiaries hereunder
SECTION 7.06 Entire Agreement. This Guarantee constitutes the entire
agreement and supersedes all prior agreements and understandings, both written
and oral between or among the Guarantors, and each Beneficiary with respect to
the subject matter hereof.
SECTION 7.07 Article Headings. The heading of the various Articles
and Sections of this Guarantee are for convenience of reference only and shall
not modify, define, expand or limit any of the terms or provisions hereof.
SECTION 7.08 Jurisdiction. Any suit, action or proceeding, whether
at law or in equity, including any declaratory judgment or similar suit or
action, instituted by or against the Guarantors arising out of or relating in
any way to this Guarantee may be brought and enforced in the Supreme Court of
the State of New York, New York County, or of the United States District Court
for the Southern District of New York and the Guarantors irrevocably consent and
submit to the jurisdiction of each such court in respect of any suit, action or
proceeding. The Guarantors further irrevocably consent to the service of process
in any such suit, action or proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, return receipt requested, to the
Guarantors or to agents at the address as set forth in Section 7.02 or as set
forth below, respectively. The foregoing shall not limit the right of the
Beneficiaries to serve process in any other manner permitted by law or to bring
any action or proceeding, or to obtain execution of any judgment, in any other
jurisdiction.
SECTION 7.09 Waiver of Venue. The Guarantors hereby irrevocably
waives any option or objection that they may now or hereafter have to the laying
of venue of any action or proceeding arising under or relating to this Guarantee
in any court located in the County of New York, State of New York, and hereby
further irrevocably waives any claim that a court located in the County of New
York is not a convenient forum for any such action or proceeding.
SECTION 7.10 Waiver of Jury Trial. THE GUARANTORS HEREBY WAIVE THEIR
RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF THIS GUARANTEE. THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL-ENCOMPASSING
OF ANY AND ALL DISPUTES THAT MAY BE FILED IN ANY COURT AND THAT RELATE TO THE
SUBJECT MATTER OF THE MASTER LEASE OR ANY TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING, WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS, AND ALL OTHER COMMON LAW AND STATUTORY CLAIMS. THE GUARANTORS
ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT FOR THE BENEFICIARIES TO
ENTER INTO A BUSINESS
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<PAGE>
RELATIONSHIP, THAT THE BENEFICIARIES HAVE ALREADY RELIED ON THE WAIVER IN
ENTERING INTO THE MASTER LEASE, AND THAT THE BENEFICIARIES WILL CONTINUE TO RELY
ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE GUARANTORS FURTHER WARRANT
AND REPRESENT THAT THEY HAVE REVIEWED THIS WAIVER WITH LEGAL COUNSEL, AND THAT
THEY KNOWINGLY AND VOLUNTARILY WAIVE JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS GUARANTEE
OR THE MASTER LEASE. IN THE EVENT OF LITIGATION, THIS WAIVER MAY BE FILED AS A
WRITTEN CONSENT TO A TRIAL BY THE COURT.
SECTION 7.11 Waiver of Immunity. The Guarantors hereby irrevocably
waive, to the fullest extent permitted by applicable United States federal and
state law, all immunity (whether on the basis of sovereignty or otherwise) from
jurisdiction, service of process, attachment (both before and after judgment)
and execution to which they might otherwise be entitled in any action or
proceeding relating in any way to this Guarantee in the courts specified in
Section 7.O8 and the Guarantors hereby waive any right they right otherwise have
to raise or claim or cause to be pleaded any such immunity at or in respect of
any such action or proceeding.
SECTION 7.12 GOVERNING LAW. THIS GUARANTEE SHALL IN ALL RESPECTS BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
(EXCLUDING ANY CONFLICT-OF-LAW RULES WHICH MIGHT LEAD TO THE APPLICATION OF THE
INTERNAL LAWS OF ANY OTHER JURISDICTION).
SECTION 7.13 Subordination. The Guarantors hereby acknowledge and
agree that any rights of the Guarantors hereunder, whether by way of
subrogation or otherwise, may not be enforced until all amounts due from the
Master Lessee under the Master Lease shall have been paid in full to the parties
entitled thereto. The Guarantors agree (a) not to take any action to hinder or
delay the exercise of any right or remedy granted to any Beneficiary under the
Master Lease or any law applicable thereto and (b) not to exercise or pursue any
other rights, remedies, powers, privileges or benefits of any kind hereunder
(whether available to Guarantors hereunder or at law or in equity) until such
time as all amounts due from the Master Lessee under the Master Lease have been
paid in full to the parties entitled thereto.
SECTION 7.14 Survival. All warranties, representations and covenants
made by the Guarantors herein or in any certificate or other instrument
delivered by it or on its behalf under this Guarantee shall be considered to
have been relied upon by the Beneficiaries and shall survive the execution and
delivery of this Guarantee, regardless of any investigation made by the
Beneficiaries on behalf of any of them. All statements in any such certificate
or other instrument shall constitute warranties and representations by the
Guarantors hereunder.
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<PAGE>
SECTION 7.15 Currency. All amounts payable hereunder shall be paid
in lawful currency of the United States of America.
SECTION 7.16 Counterparts. This Guarantee may be executed
simultaneously in two or more counterparts each of which shall be deemed an
original, and it shall not be necessary in making proof of this Guarantee to
produce or account for more than one such counterpart.
[Signature Page Follows]
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<PAGE>
IN WITNESS WHEREOF, each Guarantor has caused this Guarantee to be
executed as of the day and year first set forth above.
AFG INVESTMENT TRUST A
AFG INVESTMENT TRUST B
AFG INVESTMENT TRUST C
AFG INVESTMENT TRUST D
By: AFG ASIT CORPORATION
its Managing Trustee
By: /s/ [ILLEGIBLE]
-----------------------------
Its V.P.
<PAGE>
Exhibit 10.2
GUARANTY FEE AGREEMENT
This Agreement made and entered into as of the 8th day of March, 2000, by
and between Echelon Commercial LLC, a Delaware limited liability company (the
"Lessee") and each of AFG Investment Trust A, AFG Investment Trust B, AFG
Investment Trust C and AFG Investment Trust D, each a Delaware business trust
(each, a "Guarantor" and together, the "Guarantors").
WITNESSETH:
WHEREAS, the Lessee has entered into a Lease Agreement dated as of March
8, 2000 (the "Lease") between Heller Affordable Housing of Florida, Inc., a
Florida corporation, as lessor (the "Lessor"), and Lessee, as lessee;
WHEREAS, the Lessor has requested that the Guarantors enter into that
certain Guarantee (the "Guarantee") dated of even date with the Lease, whereby
the Guarantors have agreed to jointly and severally guaranty the obligations of
the Lessee under the Lease;
WHEREAS, the Guarantors are willing to enter into the Guarantee on the
terms and conditions set forth therein subject to the Lessee's execution and
delivery of this Agreement.
NOW THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used but not defined herein shall have
the meanings ascribed to them in the Guarantee.
2. Guaranty Fee. In consideration of the execution and delivery of the
Guarantee, the Lessee hereby agrees to pay the Guarantors the following amounts
(the "Guarantee Fee"):
(i) the Lessee shall pay to the Guarantors on the date hereof a
nonrefundable upfront fee equal to $500,000, which fee shall constitute an
offset in such amount against the Quarterly Fee payable to the Guarantors as set
forth below;
(ii) the Lessee shall pay to the Guarantors on the Guaranty Payment
Date a fee (the "Quarterly Fee") in an amount equal to four percent (4%) per
annum multiplied by the average of the amounts deemed outstanding under Section
2.10 of the Guaranty during each calendar quarter, which amount shall accrue and
compound quarterly at a per annum rate equal to 7.5% until paid by the Lessee.
As used herein, the "Guaranty Payment Date" shall mean the Expiration Date (as
defined in the Lease), provided, however, that no payment shall be made
hereunder until such time as Echelon Development LLC, the parent of the Lessee
(the "Parent"), shall have satisfied its obligations under is operating
agreement to make all tax distributions to its members or the manager of the
Parent shall determine that it shall have properly set aside any such amount.
<PAGE>
3. Minimum Fee. The Lessee further agrees that, notwithstanding the
foregoing, the Guarantors shall be paid a minimum Guarantee Fee in an amount
equal to $1,000,000.
4. Allocation. The Lessee hereby agrees to allocate the Guaranty Fee
between and among the Guarantors in the following manner (unless and until all
of the Guarantors shall notify the Lessee to the contrary):
AFG Investment Trust A: 7.00%
AFG Investment Trust B: 11.58%
AFG Investment Trust C: 35.08%
AFG Investment Trust D: 46.34%
5. Amendments. This Agreement may be amended only by the written agreement
of an authorized representative of each of the parties hereto.
6. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of The Commonwealth of Massachusetts, without
regard to its conflict of laws provisions, and shall inure to the benefit of and
be binding upon the successors and assigns of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement under
seal as of the date first written above.
ECHELON COMMERCIAL LLC
By: Echelon Development LLC, Manager
By: Equis/Echelon Development
Management Corp.,
Manager
/s/ Michael J. Butterfield
-----------------------------------
Print: Michael J. Butterfield
Title: Vice President, Finance
AFG INVESTMENT TRUST A
AFG INVESTMENT TRUST B
AFG INVESTMENT TRUST C
AFG INVESTMENT TRUST D
By: AFG ASIT Corporation, their
Managing Trustee
/s/ Gail D. Ofgant
-----------------------------------
Print: Gail D. Ofgant
Title: Vice President
2
<PAGE>
Exhibit 10.3
GUARANTORS' CONTRIBUTION AGREEMENT
This Agreement is made as of March 8, 2000, by and among AFG Investment
Trust A, AFG Investment Trust B, AFG Investment Trust C and AFG Investment Trust
D, each a Delaware business trust (each, a "Guarantor" and together, the
"Guarantors").
RECITALS
WHEREAS, each of the Guarantors is a party to that certain Guarantee dated
as of March 8, 2000 (the "Guarantee") in favor of Heller Affordable Housing of
Florida, Inc., as lessor under that certain Lease Agreement dated as of March 8,
2000 with Echelon Commercial LLC, a Delaware limited liability company;
WHEREAS, each Guarantor is jointly and severally liable under the
Guarantee; and
WHEREAS, each Guarantor desires to limit its liability under the Guarantee
to an amount reflecting its relative net worth vis a vis the other Guarantors.
NOW THEREFORE, the parties hereto hereby agree as follows:
1. Contribution. The Guarantors agree that, as among themselves in their
capacity as guarantors, the ultimate responsibility for repayment of the
Obligations (as defined in the Guarantee) shall be apportioned among the
respective Guarantors pro rata in accordance with their respective net worth as
of December 31, 1999, which percentage allocation is set forth on Schedule A
hereto. In the event that any Guarantor, in its capacity as a guarantor, pays an
amount with respect to the Obligations in excess of its proportionate share as
set forth on such schedule, each other Guarantor shall make a contribution
payment to such Guarantor in an amount such that the aggregate amount paid by
each Guarantor reflects its proportionate share of the Obligations. In the event
of any default by any Guarantor under this Section 1, each other Guarantor will
bear its proportionate share of the defaulting Guarantors obligation under this
Section 1.
2. Miscellaneous. This Agreement may be amended only by the written
agreement of an authorized representative of each of the parties hereto. This
Agreement shall be governed by and construed in accordance with the internal
laws of The Commonwealth of Massachusetts, without regard to its conflict of
laws provisions, and shall inure to the benefit of and be binding upon the
successors and assigns of the parties hereto.
<PAGE>
IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to
be executed and delivered by its duly authorized officer as of the date first
above written.
AFG INVESTMENT TRUST A
AFG INVESTMENT TRUST B
AFG INVESTMENT TRUST C
AFG INVESTMENT TRUST D
By: AFG ASIT Corporation, their
Managing Trustee
/s/ Gail D. Ofgant
-----------------------------------
Print: Gail D. Ofgant
Title: Senior Vice President
2
<PAGE>
SCHEDULE A
Allocation
----------
AFG Investment Trust A 7.00%
AFG Investment Trust B 11.58%
AFG Investment Trust C 35.08%
AFG Investment Trust D 46.34%
3
<PAGE>
AFG INVESTMENT TRUST
AFG Investment Trust B
Annual Report to the Participants, December 31, 1999
<PAGE>
AFG Investment Trust B
INDEX TO ANNUAL REPORT TO THE PARTICIPANTS
Page
----
SELECTED FINANCIAL DATA 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 3-7
FINANCIAL STATEMENTS:
Report of Independent Auditors 8
Statement of Financial Position
at December 31, 1999 and 1998 9
Statement of Operations
for the years ended December 31, 1999, 1998 and 1997 10
Statement of Changes in Participants' Capital
for the years ended December 31, 1999, 1998 and 1997 11
Statement of Cash Flows
for the years ended December 31, 1999, 1998 and 1997 12
Notes to the Financial Statements 13-22
ADDITIONAL FINANCIAL INFORMATION:
Schedule of Excess (Deficiency) of Total Cash
Generated to Cost of Equipment Disposed 23
Statement of Cash and Distributable Cash From
Operations, Sales and Refinancings 24
Schedule of Costs Reimbursed to the
Managing Trustee and its Affiliates as
Required by Section 10.4 of the Second
Amended and Restated Declaration of Trust 25
Schedule of Reimbursable Operating Expenses Due
to Third Parties 26
Schedule of Equipment 27-28
<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, 1999:
<TABLE>
<CAPTION>
Summary of
Operations 1999 1998 1997 1996 1995
- --------------------------- -------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Lease revenue $ 1,325,194 $ 2,646,205 $ 5,400,331 $ 5,809,086 $ 6,173,972
Net income $ 1,470,149 $ 993,932 $ 1,174,206 $ 807,840 $ 527,564
Per Beneficiary Interest:
Net income
Class A Interests $ 0.98 $ 1.04 $ 1.05 $ 1.10 $ 0.72
Class B Interests $ 0.57 $ 0.23 $ 0.05 $ -- $ --
Cash distributions
Class A Interests $ 4.73 $ 1.64 $ 3.11 $ 1.42 $ 2.00
Class B Interests $ 3.76 $ 2.06 $ 0.30 $ -- $ --
Financial Position
- ---------------------------
Total assets $ 13,052,016 $ 14,037,315 $ 17,214,157 $ 16,631,159 $ 19,573,350
Total long-term obligations $ 656,454 $ 818,841 $ 2,038,628 $ 4,352,811 $ 7,097,113
Participants' capital $ 6,982,082 $ 12,635,661 $ 14,816,135 $ 11,925,600 $ 12,157,251
</TABLE>
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year ended December 31, 1999 compared to the year ended
December 31, 1998 and the year ended December 31, 1998
compared to the year ended December 31, 1997
AFG Investment Trust B (the "Trust") commenced operations in 1992 and is
scheduled to be dissolved by December 31, 2003. The Trust was a Nominal
Defendant in a Class Action Lawsuit that was settled, with respect to the Trust
and certain affiliates, in 1999. See Note 8 to the accompanying financial
statements.
Certain statements in this annual report 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
collection of the Trust's contracted rents, the realization of residual proceeds
for the Trust's equipment, the performance of the Trust's non-equipment
investments, and future economic conditions.
Year 2000 Issue
The Trust uses information systems provided by EFG and has no information
systems of its own. EFG completed all Year 2000 readiness work prior to December
31, 1999 and did not experience any significant problems. Additionally, EFG is
not aware of any outside customer or vendor that experienced a Year 2000 issue
that would have a material effect on the Trust's results of operations,
liquidity, or financial position. However, EFG has no means of ensuring that all
customers, vendors and third-party servicers have conformed to Year 2000
standards. The effect of this risk to the Trust is not determinable.
Results of Operations
For the year ended December 31, 1999, the Trust recognized lease revenue of
$1,325,194 compared to $2,646,205 and $5,400,331 for the years ended December
31, 1998 and 1997, respectively. The decrease in lease revenue from 1997 to 1999
resulted principally from lease term expirations and the sale of equipment. The
level of lease revenue to be recognized by the Trust in the future may be
impacted by future reinvestment; however, the extent of such impact cannot be
determined at this time.
The Trust's equipment portfolio includes certain assets in which the Trust
holds a proportionate ownership interest. In such cases, the remaining interests
are owned by EFG or an affiliated equipment leasing program sponsored by EFG.
Proportionate equipment ownership enables the Trust to further diversify its
equipment portfolio by participating in the ownership of selected assets,
thereby reducing the general levels of risk which could result from a
concentration in any single equipment type, industry or lessee. The Trust 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, 1999 was $540,106 compared
to $387,410 and $264,503 for the years ended December 31, 1998 and 1997,
respectively. Generally, interest income is generated from the temporary
investment of rental receipts and equipment sale proceeds in short-term
instruments. Interest income also includes interest earned on proceeds from the
issuance of the Trust's Class B Interests in 1997. Future interest income will
fluctuate as a result of changing interest rates, the collection of lease
revenue and the proceeds from equipment sales, among other factors. In addition,
the Trust distributed $5,300,000 in January 2000, that will result in a
reduction of cash available for investment in the future.
The Trust received $261,116 in 1999 as a breakage fee from a third-party
seller in connection with a transaction for new investments that was canceled by
the seller in the first quarter of 1999. This amount is reflected as Other
Income on the accompanying Statement of Operations for the year ended December
31, 1999.
During the year ended December 31, 1999, the Trust sold equipment having a
net book value of $4,237,791 to existing lessees and third parties. These sales
resulted in a net gain, for financial statement purposes, of $508,542
3
<PAGE>
compared to a net gain of $686,338 in 1998 on equipment having a net book value
of $942,188 and a net gain in 1997 of $76,559 on equipment having a net book
value of $272,233.
It cannot be determined whether future sales of equipment will result in a
net gain or a net loss to the Trust, 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 Trust 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 Trust 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 Trust achieved from leasing the equipment.
Depreciation and amortization expense was $645,123, $2,068,161 and
$3,862,631 for the years ended December 31, 1999, 1998 and 1997, respectively.
For financial reporting purposes, to the extent that an asset is held on primary
lease term, the Trust 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 Trust
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 $50,389 or 3.8% of lease revenue in 1999, $75,843 or
2.9% of lease revenue in 1998 and $196,589 or 3.6% of lease revenue in 1997.
Management fees were $72,020, $128,627 and $235,030 during the years ended
December 31, 1999, 1998 and 1997, 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. Management fees also include a 1%
management fee on non-equipment investments, excluding cash.
Operating expenses consist principally of administrative charges,
professional service costs, such as audit and legal fees, as well as printing,
distribution and remarketing expenses. Operating expenses were $397,277,
$453,390 and $272,937 during the years ended December 31, 1999, 1998 and 1997,
respectively. During 1998, the Trust incurred or accrued approximately $103,000
for certain legal expenses related to the Class Action Lawsuit described in Note
8 to the financial statements. Additionally, operating expenses increased from
1997 to 1998 due to remarketing expenses incurred in 1998 in connection with the
sale of equipment. The amount of future operating expenses cannot be predicted
with certainty; however, such expenses are usually higher during the acquisition
and liquidation phases of a trust. Other fluctuations typically occur in
relation to the volume and timing of remarketing activities.
Liquidity and Capital Resources and Discussion of Cash Flows
The Trust by its nature is a limited life entity. As an equipment leasing
program, the Trust's principal operating activities have been derived from asset
rental transactions. Accordingly, the Trust's 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 $1,576,475, $3,304,397 and $4,399,596 in 1999, 1998 and
1997, respectively. Future renewal, re-lease and equipment sale activities will
cause a decline in the Trust's primary-term lease revenue and corresponding
sources of operating cash. Expenses associated with rental activities, such as
management fees, also will decline as the Trust experiences a higher frequency
of remarketing events.
4
<PAGE>
The Trust's equipment is leased by a number of creditworthy,
investment-grade companies and, to date, the Trust has not experienced any
material collection problems and has not considered it necessary to provide an
allowance for doubtful accounts. Notwithstanding a positive collection history,
there is no assurance that all future contracted rents will be collected or that
the credit quality of the Trust's lessees will be maintained. Collection risk
could increase in the future, particularly as the Trust remarkets its equipment
and enters re-lease agreements with different lessees. The Managing Trustee will
continue to evaluate and monitor the Trust's experience in collecting accounts
receivable to determine whether a future allowance for doubtful accounts may
become appropriate.
Cash expended for asset acquisitions and cash realized from asset disposal
transactions are reported under investing activities on the accompanying
Statement of Cash Flows. During 1999, the Trust expended $1,353,400 to acquire
its investment in EFG/Kirkwood (see Note 4) and $103,132 to purchase marketable
securities. During 1999, 1998 and 1997, the Trust realized net cash proceeds
from asset disposals of $4,746,333, $1,628,526 and $348,792, respectively. Sale
proceeds in 1999 include $4,619,262 related to the Trust's 39.59% interest in a
McDonnell Douglas MD-82 aircraft formerly leased to Alaska Airlines, Inc. which
was sold in January 1999. Future inflows of cash from asset disposal
transactions 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.
The Trust 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 future
years, the amount of cash used to repay debt obligations will decline as the
principal balance of notes payable is reduced through the collection and
application of rents. Notwithstanding the foregoing, the Trust has a balloon
payment obligation of $282,421 in 2003, at the expiration of the primary lease
term related to its interest in an aircraft leased to Reno Air, Inc.
In accordance with Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, marketable
debt and equity securities classified as available-for-sale are required to be
carried at fair value. During the year ended December 31, 1999, the Trust
recorded an unrealized gain on available-for-sale securities of $5,042.
At December 31, 1999, the Trust was due aggregate future minimum lease
payments of $972,675 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 $656,454 (see Note 6 to the financial statements).
Additional cash inflows will be realized from future remarketing activities,
such as lease renewals and equipment sales, the timing and extent of which
cannot be predicted with certainty. This is because the timing and extent of
equipment sales is often 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
Trust matures and a greater level of its equipment assets becomes available for
remarketing, the cash flows of the Trust will become less predictable.
On July 18, 1997, the Trust issued 1,000,961 Class B Interests at $5.00 per
interest, thereby generating $5,004,805 in aggregate Class B capital
contributions. Class A Beneficiaries purchased 3,588 Class B Interests,
generating $17,940 of such aggregate capital contributions, and the then Special
Beneficiary, EFG, purchased 997,373 Class B Interests, generating $4,986,865 of
such aggregate capital contributions. The Trust incurred offering costs in the
amount of $50,048 and professional service costs of $62,170 in connection with
this offering. Subsequently, EFG transferred its Class B Interests to a
special-purpose company, Equis II Corporation, a Delaware corporation. EFG also
transferred its ownership of AFG ASIT Corporation, the Managing Trustee of the
Trust, to Equis II Corporation. As a result, Equis II Corporation has voting
control of the Trust through its ownership of the majority of the Trust's
outstanding voting interests, as well as its ownership of AFG ASIT Corporation.
Control of the Managing Trustee did not change as a result of the foregoing
transactions, as Equis II Corporation was controlled by EFG's President and
Chief Executive Officer, Gary D. Engle. During the fourth quarter of 1999, an
affiliate of EFG, Semele Group Inc. acquired the Special Beneficiary Interests
from EFG and an economic interest in Equis II Corporation. Gary D. Engle is
President and CEO of Semele Group Inc. Mr. Engle continues to have voting
control with respect to the Class B Interests owned by Equis II Corporation.
5
<PAGE>
As described in the Prospectus for the offering of the Class B Interests,
the Managing Trustee used a portion of the net cash proceeds realized from the
offering of the Class B Interests to pay a one-time special cash distribution of
approximately $1.47 per Class A Interest to the Class A Beneficiaries of the
Trust. The Managing Trustee declared and paid this special cash distribution,
aggregating $979,449, to Class A Beneficiaries on August 15, 1997.
On August 7, 1997, the Trust commenced an offer to purchase up to 45% of
the outstanding Class A Beneficiary Interests of the Trust. On October 10, 1997,
the Trust used $785,295 of the net proceeds realized from the issuance of the
Class B Interests to purchase 82,837 of the Class A Interests tendered as a
result of the offer. On December 1, 1997, the Trust purchased 640 additional
Class A Interests at a cost of $6,080. On July 6, 1998, the Trust used
$1,500,539 of the Class B offering proceeds to pay a capital distribution to the
Class B Beneficiaries. In July 1999, the Trust distributed $500,709, including
legal fees of $26,913 paid to Plaintiffs' counsel, as a special cash
distribution in connection with the settlement of the Class Action Lawsuit
described in Note 8 to the financial statements ($0.81 per unit, net of legal
fees). In addition, the parent company of the Managing Trustee, Equis II
Corporation, agreed to commit $1,126,595 of its Class B Capital Contributions
(paid in connection with its purchase of Class B Interests in July 1997) to the
Trust for the Trust's investment purposes.
During the past year, the Managing Trustee has evaluated and pursued a
number of potential new investments, several of which the Managing Trustee
concluded had market returns that it believed were less than adequate given the
potential risks. Most transactions have involved the equipment leasing, business
finance and real estate development industries. Although the Managing Trustee
intends to continue to evaluate additional new investments, it anticipates that
the Trust will be able to fund these new investments with cash on hand or other
sources, such as the proceeds from future asset sales or refinancings and new
indebtedness. As a result, the Trust declared a special cash distribution
totaling $5,300,000 which was paid on January 19, 2000.
After the special distribution on January 19, 2000, the Trust will adopt a
new distribution policy and suspend the payment of regular monthly cash
distributions. Looking forward, the Managing Trustee presently does not expect
to reinstate cash distributions until expiration of the Trust's reinvestment
period in December 2001; however, the Managing Trustee periodically will review
and consider other one-time distributions. In addition to maintaining sale
proceeds for reinvestment, the Managing Trustee expects that the Trust will
retain cash from operations to pay down debt and for the continued maintenance
of the Trust's assets. The Managing Trustee believes that this change in policy
is in the best interests of the Trust over the long term and will have the added
benefit of reducing the Trust's distribution expenses.
Historically, cash distributions to the Managing Trustee, the Special
Beneficiary and the Beneficiaries have been declared and generally paid within
45 days following the end of each calendar month. The payment of such
distributions is presented as a component of financing activities. For the year
ended December 31, 1999, the Trust declared total cash distributions of
$7,128,770, including the special distributions described above. Of the total
distributions, the Beneficiaries were allocated $6,513,184 ($2,751,224 to Class
A Beneficiaries and $3,761,960 to Class B Beneficiaries); the Special
Beneficiary was allocated $549,037, and the Managing Trustee was allocated
$66,549.
Cash distributions paid to the Participants 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 Trust and will be dependent upon the
collection of all future contracted rents, the generation of renewal and/or
re-lease rents, the residual value realized for each asset at its disposal date,
and the performance of the Trust's non-equipment investments. Future market
conditions, technological changes, the ability of EFG to manage and remarket the
assets, and many other events and circumstances, could enhance or detract from
individual asset yields and the collective performance of the Trust's asset
portfolio.
In the future, the nature of the Trust's operations and principal cash
flows gradually will shift from rental receipts to equipment sale proceeds as
the Trust matures and change as a result of potential new investments not
consisting of equipment acquisitions. As this occurs, the Trust's cash flows
resulting from equipment investments may become more volatile in that certain of
the Trust's equipment leases will be renewed and certain of its assets will be
sold. In some cases, the Trust may be required to expend funds to refurbish or
otherwise improve the
6
<PAGE>
equipment being remarketed in order to make it more desirable to a potential
lessee or purchaser. The Trust's Advisor, EFG, and the Managing Trustee will
attempt to monitor and manage these events in order to maximize the residual
value of the Trust's equipment and will consider these factors, in addition to
new investment activities, the collection of contractual rents, the retirement
of scheduled indebtedness, and the Trust's future working capital requirements,
in establishing the amount and timing of future cash distributions.
In accordance with the Trust Agreement, upon the dissolution of the Trust,
the Managing Trustee will be required to contribute to the Trust an amount equal
to any negative balance which may exist in the Managing Trustee's tax capital
account. At December 31, 1999, the Managing Trustee had a positive tax capital
account balance. No such requirement exists with respect to the Special
Beneficiary.
7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Participants of AFG Investment Trust B:
We have audited the accompanying statements of financial position of AFG
Investment Trust B as of December 31, 1999 and 1998, and the related statements
of operations, changes in participants' capital, and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 AFG Investment Trust B at
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
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 Participants 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 30, 2000
8
<PAGE>
AFG Investment Trust B
STATEMENT OF FINANCIAL POSITION
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 10,193,277 $ 5,909,535
Restricted cash -- 1,627,304
Marketable securities 108,544 --
Rents receivable 635 234,774
Accounts receivable - affiliate 112,228 102,537
Interest receivable 3,681 --
Investment in EFG/Kirkwood 1,353,400 --
Equipment at cost, net of accumulated depreciation
of $6,686,836 and $10,713,524 at December 31, 1999
and 1998, respectively 1,280,251 6,163,165
----------------- -------------------
Total assets $ 13,052,016 $ 14,037,315
================= ===================
LIABILITIES AND PARTICIPANTS' CAPITAL
Notes payable $ 656,454 $ 818,841
Accrued interest 2,386 2,596
Accrued liabilities 53,608 133,500
Accrued liabilities - affiliate 15,436 16,028
Deferred rental income 42,050 14,058
Other liabilities -- 197,950
Cash distributions payable to participants 5,300,000 218,681
----------------- -------------------
Total liabilities 6,069,934 1,401,654
----------------- -------------------
Participants' capital (deficit):
Managing Trustee (26,988) 3,652
Special Beneficiary (222,647) 30,133
Class A Beneficiary Interests (582,017 Interests;
initial purchase price of $25 each) 8,336,812 10,514,496
Class B Beneficiary Interests (1,000,961 Interests;
Initial purchase price of $5 each) (313,720) 2,878,755
Treasury Interests (83,477 Class A Interests at Cost) (791,375) (791,375)
----------------- -------------------
Total participants' capital 6,982,082 12,635,661
----------------- -------------------
Total liabilities and participants' capital $ 13,052,016 $ 14,037,315
================= ===================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
9
<PAGE>
AFG Investment Trust B
STATEMENT OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
Income:
<S> <C> <C> <C>
Lease revenue $ 1,325,194 $ 2,646,205 $ 5,400,331
Interest income 540,106 387,410 264,503
Other income 261,116 -- --
Gain on sale of equipment 508,542 686,338 76,559
------------------ ------------------ ------------------
Total income 2,634,958 3,719,953 5,741,393
------------------ ------------------ ------------------
Expenses:
Depreciation and amortization 645,123 2,068,161 3,862,631
Interest expense 50,389 75,843 196,589
Equipment management fees - affiliates 72,020 128,627 235,030
Operating expenses - affiliate 397,277 453,390 272,937
------------------ ------------------ ------------------
Total expenses 1,164,809 2,726,021 4,567,187
------------------ ------------------ ------------------
Net income $ 1,470,149 $ 993,932 $ 1,174,206
================== ================== ==================
Net income
per Class A Beneficiary Interest $ 0.98 $ 1.04 $ 1.05
================== ================== ==================
per Class B Beneficiary Interest $ 0.57 $ 0.23 $ 0.05
================== ================== ==================
Cash distributions declared
per Class A Beneficiary Interest $ 4.73 $ 1.64 $ 3.11
================== ================== ==================
per Class B Beneficiary Interest $ 3.76 $ 2.06 $ 0.30
================== ================== ==================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
10
<PAGE>
AFG Investment Trust B
STATEMENT OF CHANGES IN PARTICIPANTS' CAPITAL
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Managing Special Class A Beneficiaries
Trustee Beneficiary ---------------------------------
Amount Amount Interests Amount
------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ (30,382) $ (257,894) 665,494 $ 12,213,876
Class B capital contribution -- -- -- --
Less: Offering costs -- -- -- --
Net income - 1997 48,593 408,133 -- 663,266
Cash distributions declared (14,676) (121,077) -- (2,012,992)
Acquisition of treasury interests, at cost -- -- (83,477) --
------------- -------------- -------------- ---------------
Balance at December 31, 1997 3,535 29,162 582,017 10,864,150
Net income - 1998 16,856 139,065 -- 603,689
Cash distributions declared (16,739) (138,094) -- (953,343)
------------- -------------- -------------- ---------------
Balance at December 31, 1998 3,652 30,133 582,017 10,514,496
Net income - 1999 35,859 295,841 -- 569,851
Unrealized gain on marketable
Securities 50 416 -- 3,689
------------- -------------- -------------- ---------------
Comprehensive income 35,909 296,257 -- 573,540
------------- -------------- -------------- ---------------
Cash distributions declared (66,549) (549,037) -- (2,751,224)
------------- -------------- -------------- ---------------
Balance at December 31, 1999 $ (26,988) $ (222,647) 582,017 $ 8,336,812
============= ============== ============== ===============
<CAPTION>
Class B Beneficiaries
---------------------------------- Treasury
Interests Amount Interests Total
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 -- $ -- -- $ 11,925,600
Class B capital contribution 1,000,961 5,004,805 -- 5,004,805
Less: Offering costs -- (50,048) -- (50,048)
Net income - 1997 -- 54,214 -- 1,174,206
Cash distributions declared -- (298,308) -- (2,447,053)
Acquisition of treasury interests, at cost -- -- (791,375) (791,375)
-------------- --------------- -------------- ---------------
Balance at December 31, 1997 1,000,961 4,710,663 (791,375) 14,816,135
Net income - 1998 -- 234,322 -- 993,932
Cash distributions declared -- (2,066,230) -- (3,174,406)
-------------- --------------- -------------- ---------------
Balance at December 31, 1998 1,000,961 2,878,755 $ (791,375) $ 12,635,661
Net income - 1999 -- 568,598 -- 1,470,149
Unrealized gain on marketable
Securities -- 887 -- 5,042
-------------- --------------- -------------- ---------------
Comprehensive income -- 569,485 -- 1,475,191
-------------- --------------- -------------- ---------------
Cash distributions declared -- (3,761,960) -- (7,128,770)
-------------- --------------- -------------- ---------------
Balance at December 31, 1999 1,000,961 $ (313,720) $ (791,375) $ 6,982,082
============== =============== ============== ===============
</TABLE>
The accompanying notes are an integral part of
these financial statements.
11
<PAGE>
AFG Investment Trust B
STATEMENT OF CASH FLOWS
for the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 1,470,149 $ 993,932 $ 1,174,206
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 645,123 2,068,161 3,862,631
Accretion of bond discount (370) -- --
Gain on sale of equipment (508,542) (686,338) (76,559)
Changes in assets and liabilities:
Decrease (increase) in:
Rents receivable 234,139 440,855 (336,336)
Accounts receivable - affiliate (9,691) 247,472 (195,614)
Interest receivable (3,681) -- --
Increase (decrease) in:
Accrued interest (210) (24,799) (9,176)
Accrued liabilities (79,892) 121,950 (11,700)
Accrued liabilities - affiliate (592) (33,569) 2,419
Deferred rental income 27,992 (21,217) (10,275)
Other liabilities (197,950) 197,950 --
---------------- ---------------- ----------------
Net cash from operating activities 1,576,475 3,304,397 4,399,596
---------------- ---------------- ----------------
Cash flows from (used in) investing activities:
Purchase of marketable securities (103,132) -- --
Investment in EFG/Kirkwood (1,353,400) -- --
Proceeds from equipment sales 4,746,333 1,628,526 348,792
---------------- ---------------- ----------------
Net cash from investing activities 3,289,801 1,628,526 348,792
---------------- ---------------- ----------------
Cash flows from (used in) financing activities:
Proceeds from capital contributions -- -- 5,004,805
Payment of offering costs -- -- (50,048)
Purchase of treasury interests -- -- (791,375)
Restricted cash 1,627,304 1,494,459 (3,121,763)
Principal payments - notes payable (162,387) (1,219,787) (2,314,183)
Distributions paid (2,047,451) (3,191,302) (2,411,675)
---------------- ---------------- ----------------
Net cash used in financing activities (582,534) (2,916,630) (3,684,239)
---------------- ---------------- ----------------
Net increase in cash and cash equivalents 4,283,742 2,016,293 1,064,149
Cash and cash equivalents at beginning of year 5,909,535 3,893,242 2,829,093
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 10,193,277 $ 5,909,535 $ 3,893,242
================ ================ ================
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 50,599 $ 100,642 $ 205,765
================ ================ ================
</TABLE>
The accompanying notes are an integral part of
these financial statements.
12
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
December 31, 1999
NOTE 1 - ORGANIZATION AND TRUST MATTERS
AFG Investment Trust B (the "Trust") was organized as a Delaware business
trust in accordance with the Delaware Business Trust Act on May 28, 1992 for the
purpose of acquiring and leasing to third parties a diversified portfolio of
capital equipment. Participants' capital initially consisted of contributions of
$1,000 from the Managing Trustee, AFG ASIT Corporation, $1,000 from the Special
Beneficiary, Equis Financial Group Limited Partnership (formerly known as
American Finance Group), a Massachusetts limited partnership, ("EFG" or the
"Advisor") and $100 from the Initial Beneficiary, AFG Assignor Corporation, a
wholly-owned affiliate of EFG. The Trust issued an aggregate of 665,494
Beneficiary Interests (hereinafter referred to as Class A Interests) at a
subscription price of $25.00 each ($16,637,350 in total) to 803 investors on
September 8, 1992. On July 18, 1997, the Trust issued 1,000,961 Class B
Interests at $5.00 each ($5,004,805 in total), of which (i) 997,373 interests
are held by Equis II Corporation, an affiliate of EFG, and (ii) 3,588 interests
are held by 5 other Class A investors. The Trust repurchased 82,837 Class A
Interests on October 10, 1997 using proceeds from the issuance of Class B
Interests. On December 1, 1997, the Trust repurchased 640 additional Class A
Interests. Accordingly, there are 582,017 Class A Interests currently
outstanding. The Class A and Class B Interest holders are collectively referred
to as the "Beneficiaries".
The Trust has one Managing Trustee, AFG ASIT Corporation, a Massachusetts
corporation, and one Special Beneficiary, Semele Group Inc. ("Semele"). Semele
purchased the Special Beneficiary Interests from EFG during the fourth quarter
of 1999. EFG continues to act as Advisor to the Trust and provides services in
connection with the acquisition and remarketing of the Trust's assets. The
Managing Trustee is responsible for the general management and business affairs
of the Trust. AFG ASIT Corporation is a wholly owned subsidiary of Equis II
Corporation and an affiliate of EFG. Class A Interests and Class B Interests
basically have identical voting rights. Gary D. Engle, has voting control of the
Class B Interests owned by Equis II Corporation. The Managing Trustee and the
Special Beneficiary are not required to make any other capital contributions
except as may be required under the Second Amended and Restated Declaration of
Trust, as amended (the "Trust Agreement").
Significant operations commenced September 8, 1992 when the Trust made its
initial equipment purchase. Pursuant to the Trust Agreement, each distribution
of Distributable Cash From Operations and Distributable Cash From Sales or
Refinancings of the Trust is made 90.75% to the Beneficiaries, 8.25% to the
Special Beneficiary and 1% to the Managing Trustee.
Under the terms of the Advisory Agreement between the Trust and EFG,
management services are provided by EFG to the Trust at fees which the Managing
Trustee believes to be competitive for similar services. (Also 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 Equipment Manager or Advisor to the Trust 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.
13
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
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
Trust and the Other Investment Programs and to continue managing all assets
owned by the Trust and the Other Investment Programs.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash Equivalents and Marketable Securities
The Trust considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents. Marketable securities consist of
equity securities and debt securities that are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with unrealized gains
and losses reported as a separate component of participants' capital. The
amortized cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and accretion are included
in interest income on the accompanying Statement of Operations.
The Trust recorded an unrealized gain on available-for-sale securities of
$5,042 during the year ended December 31, 1999 that is included as a separate
component of participants' capital. At December 31, 1999, total debt securities
had an amortized cost of $71,370 and a fair value of $72,250. During the year
ended December 31, 1999, total comprehensive income amounted to $1,475,191.
Revenue Recognition
Rents are payable to the Trust 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. In certain instances, the Trust
may enter primary-term, renewal or re-lease agreements which expire beyond the
Trust's anticipated dissolution date. This circumstance is not expected to
prevent the orderly wind-up of the Trust's business activities as the Managing
Trustee and the Advisor would seek to sell the then-remaining equipment assets
either to the lessee or to a third party, taking into consideration the amount
of future non-cancelable rental payments associated with the attendant lease
agreements. Future minimum rents of $972,675 are due as follows:
For the year ending December 31, 2000 $ 650,095
2001 163,100
2002 159,480
-------------
Total $ 972,675
=============
Revenue from major individual lessees which accounted for 10% or more of
lease revenue during the years ended December 31, 1999, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Reno Air, Inc. $ 153,980 $ -- $ --
Montgomery Ward and Company, Inc. $ 378,684 $ 576,457 $ 576,457
General Motors Corporation $ 276,429 $ 281,204 $ --
Alaska Airlines, Inc. $ -- $ -- $ 1,001,979
Tarmac Mid-Atlantic, Incorporated $ -- $ -- $ 640,293
</TABLE>
14
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Equipment on Lease
All equipment was acquired from EFG, one of its Affiliates or from
third-party sellers. Equipment Cost means the actual cost paid by the Trust 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 and Amortization
The Trust'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 Trust 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 Trust 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 Managing Trustee evaluates the net carrying value of equipment
to determine whether it exceeds estimated net realizable value. For purposes of
this comparison, "net carrying value" represents, at a given date, the net book
value (equipment cost less accumulated depreciation for financial reporting
purposes) of the Trust's equipment and "net realizable value" represents, at the
same date, the aggregate undiscounted cash flows resulting from future
contracted lease payments plus the estimated residual value of the Trust's
equipment. The Managing Trustee evaluates significant equipment assets, such as
aircraft, individually. All other assets are evaluated collectively by equipment
type unless the Managing Trustee learns of specific circumstances, such as a
lessee default, technological obsolescence, or other market developments, which
could affect the net realizable value of particular assets. 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 are 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, technological advances,
and many other events can converge to enhance or detract from asset values at
any given time.
Organization costs were amortized using the straight-line method over a
period of five years.
Accrued Liabilities - Affiliate
Unpaid fees and operating expenses paid by EFG on behalf of the Trust and
accrued but unpaid administrative charges and management fees are reported as
Accrued Liabilities - Affiliate (See Note 5).
15
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
Allocation of Net Income or Loss
Net income is allocated quarterly first, to eliminate any Participant's
negative capital account balance and second, 1% to the Managing Trustee, 8.25%
to the Special Beneficiary and 90.75% collectively to the Class A and Class B
Beneficiaries. The latter is allocated proportionately between the Class A and
Class B Beneficiaries based upon the ratio of cash distributions declared and
allocated to the Class A and Class B Beneficiaries during the period (excluding
$473,796 Class A special cash distributions paid in 1999 and $1,500,539 Class B
capital distributions paid in 1998). Net losses are allocated quarterly first,
to eliminate any positive capital account balance of the Managing Trustee, the
Special Beneficiary and the Class B Beneficiaries; second, to eliminate any
positive capital account balances of the Class A Beneficiaries; and third, any
remainder to the Managing Trustee. Prior to adoption of the current Trust
Agreement on July 15, 1997, the Trust allocated net income or loss to the
Participants for financial reporting purposes according to their respective
beneficial interests in the Trust (1% to the Managing Trustee, 8.25% to the
Special Beneficiary, and 90.75% to the Class A Beneficiaries).
The allocation of net income or loss pursuant to the Trust Agreement
differs from the foregoing and is based upon government rules and regulations
for federal income tax reporting purposes and assumes, for each income tax
reporting period, the liquidation of all of the Trust's assets and the
subsequent distribution of all available cash to the Participants. For income
tax purposes, the Trust adjusts its allocations of income and loss to the
Participants so as to cause their tax capital account balances at the end of the
reporting period to be equal to the amount that would be distributed to them at
such date in the event of a liquidation and dissolution of the Trust. This
methodology does not consider the costs attendant to liquidation or whether the
Trust intends to have future business operations. If the Trust made similar
assumptions and allocations for financial reporting purposes and the Trust was
liquidated at December 31, 1999 for an amount equal to its net carrying value
for financial reporting purposes, the capital accounts of the Managing Trustee,
Special Beneficiary, Class A Beneficiaries, and Class B Beneficiaries would have
reflected ending balances of $69,821, $576,022, $4,833,632, and $1,502,607,
respectively. See Note 7 for additional information concerning the allocation of
net income or loss for income tax reporting purposes.
Net Income and Cash Distributions Per Beneficiary Interest
Net income and cash distributions per Class A Beneficiary Interest are
based on 582,017 Class A Interests outstanding during the years ended December
31, 1999 and 1998, respectively. Net income and cash distributions per Class A
Interest in 1997 are based on 665,494 Class A Interests outstanding during the
period January 1, 1997 through October 9, 1997, 582,657 Class A Interests
outstanding during the period October 10, 1997 through November 30, 1997 and
582,017 Class A Interests outstanding during the period December 1, 1997 through
December 31, 1997. Net income and cash distributions per Class B Interest are
based on 1,000,961 Class B Interests outstanding during the years ended December
31, 1999 and 1998 and the period July 18, 1997 through December 31, 1997. For
each of the aforementioned periods, net income and cash distributions per
Beneficiary Interest are computed after allocation of the Managing Trustee's and
Special Beneficiary's shares of net income and cash distributions.
Provision for Income Taxes
No provision or benefit from income taxes is included in the accompanying
financial statements. The Participants are responsible for reporting their
proportionate shares of the Trust's taxable income or loss and other tax
attributes on their tax returns.
16
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
NOTE 3 - EQUIPMENT
The following is a summary of equipment owned by the Trust at December 31,
1999. Remaining Lease Term (Months), as used below, represents the number of
months remaining from December 31, 1999 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 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>
Communications 12 $ 2,703,591 AL/AR/AZ/CA/CO/FL/GA/IA/ID/IL/IN/
KS/KY/LA/MD/MI/MN/MO/MT/NC/
ND/NE/NH/NM/NV/NY/OH/OK/OR/
PA/SC/TN/TX/VA/VT/WA/WI/WV/WY
Materials handling 0-9 2,349,227 AR/CA/GA/IA/IL/IN/MI/NC/NY/PA/
TX/WV
Aircraft 36 1,239,741 NV
Computers and peripherals 0-7 1,051,435 NY/OH/WI
Tractors and heavy duty trucks 0 233,794 CO/FL/MI
Construction and mining 12 219,162 NV
Trailers/intermodal containers 0-14 128,443 OH/VA
Manufacturing 0 41,694 IL
-----------------
Total equipment cost 7,967,087
Accumulated depreciation (6,686,836)
-----------------
Equipment, net of accumulated depreciation $ 1,280,251
=================
</TABLE>
In certain cases, the cost of the Trust's equipment represents a
proportionate ownership interest. The remaining interests are owned by EFG or an
affiliated equipment leasing program sponsored by EFG. The Trust and each
affiliate individually report, in proportion to their respective ownership
interests, their respective shares of assets, liabilities, revenues, and
expenses associated with the equipment. Proportionate equipment ownership
enables the Trust to further diversify its equipment portfolio by participating
in the ownership of selected assets, thereby reducing the general levels of risk
which could result from a concentration in any single equipment type, industry
or lessee. At December 31, 1999, the Trust's equipment portfolio included
equipment having a proportionate original cost of $5,368,518, representing
approximately 67% of total equipment cost.
Certain of the equipment and related lease payment streams were used to
secure term loans with third-party lenders. The preceding summary of equipment
includes leveraged equipment having an original cost of approximately $1,240,000
and a net book value of approximately $1,017,000 at December 31, 1999. (See Note
6.)
Generally, the costs associated with maintaining, insuring and operating
the Trust's equipment are incurred by the respective lessees pursuant to terms
specified in their individual lease agreements with the Trust.
As equipment is sold to third parties, or otherwise disposed of, the Trust
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
17
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
realized upon sale or disposition. The ultimate realization of estimated
residual value in the equipment will be 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 fully
depreciated equipment held for sale or re-lease with an original cost of
approximately $859,000 at December 31, 1999. The Managing Trustee is actively
seeking the sale or re-lease of all equipment not on lease. In addition, the
summary above includes equipment being leased on a month-to-month basis.
NOTE 4 - INVESTMENT IN EFG/KIRKWOOD
On May 1, 1999, the Trust and three affiliated trusts (collectively the
"Trusts") and another affiliate formed EFG/Kirkwood Capital LLC ("EFG/Kirkwood")
for the purpose of making an investment in Kirkwood Associates Inc. ("KAI").
EFG/Kirkwood's investment consists of a common stock interest in KAI of
approximately 16% as well as preferred stock and convertible debt. The Trusts
purchased Class A Interests in EFG/Kirkwood and the other affiliate purchased
Class B Interests in EFG/Kirkwood. Generally, the Class A Interest holders are
entitled to certain preferred returns prior to distribution payments to the
Class B Interest holder. KAI owns a ski resort, a local public utility, and land
which is held for development. The resort is located in Kirkwood, California and
is approximately 30 miles from South Lake Tahoe, Nevada. Subsequent to making
its investment in KAI, EFG/Kirkwood made a 50% investment in Mountain Springs
Resorts LLC, an entity formed for the purpose of acquiring an ownership interest
in a Colorado ski resort that remains pending. The Trust's ownership interest in
EFG/Kirkwood had a cost of $1,353,400, including a 1% acquisition fee ($13,400)
paid to EFG. The Trust's investment in EFG/Kirkwood is accounted for on the
equity method.
NOTE 5 - RELATED PARTY TRANSACTIONS
All operating expenses incurred by the Trust are paid by EFG on behalf of
the Trust and EFG is reimbursed at its actual cost for such expenditures. Fees
and other costs incurred during the years ended December 31, 1999, 1998 and
1997, which were paid or accrued by the Trust to EFG or its Affiliates, are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Acquisition fees $ 14,450 $ -- $ --
Offering costs -- -- 50,048
Equipment management fees 72,020 128,627 235,030
Administrative charges 127,120 70,524 65,196
Reimbursable operating expenses
Due to third parties 270,157 382,866 207,741
------------------ ------------------ ------------------
Total $ 483,747 $ 582,017 $ 558,015
================== ================== ==================
</TABLE>
EFG and its Affiliates were reimbursed for their out-of-pocket offering
costs incurred on behalf of the Trust in an amount equal to 1% of the gross
proceeds realized by the four trusts which sold Class B Interests pursuant to a
Registration Statement on Form S-1 in 1997. The amount of reimbursement made by
the Trust was prorated in proportion to the number of Beneficiary Interests sold
in the Trust.
As provided under the terms of the Trust Agreement, EFG is compensated for
its services to the Trust. Such services include all aspects of acquisition,
management and sale of equipment. For acquisition services, EFG was compensated
by an amount equal to .28% of Asset Base Price paid by the Trust for each asset
acquired for the Trust's initial asset portfolio. For acquisition services
during the initial reinvestment period, which expired on September 8, 1996, EFG
was compensated by an amount equal to 3% of Asset Base Price paid by the Trust.
In connection with a Solicitation Statement and consent of Beneficiaries in
1998, the Trust's reinvestment provisions
18
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
were reinstated through December 31, 2001 and the Trust was permitted to invest
in assets other than equipment. Acquisition fees paid to EFG in connection with
such reinvestment assets are equal to 1% of Asset Base Price paid by the Trust.
For management services, EFG is compensated by an amount equal to (i) 5% of
gross operating lease rental revenue and 2% of gross full payout lease rental
revenue received by the Trust with respect to assets acquired on or prior to
March 31, 1998. For management services earned in connection with assets
acquired on or after April 1, 1998, EFG is compensated by an amount equal to 2%
of gross lease rental revenue received by the Trust. Both of these fees are
subject to certain limitations defined in the Trust Agreement. For non-equipment
investments other than cash, the Managing Trustee receives an annualized
management fee of 1%. Compensation to EFG for services connected to the
remarketing of equipment is calculated as the lesser of (i) 3% of gross sale
proceeds or (ii) one-half of reasonable brokerage fees otherwise payable under
arm's length circumstances. Payment of the remarketing fee is subordinated to
Payout and is subject to certain limitations defined in the Trust Agreement.
Administrative charges represent amounts owed to EFG, pursuant to Section
10.4(c) of the Trust Agreement, for persons employed by EFG who are engaged in
providing administrative services to the Trust. Reimbursable operating expenses
due to third parties represent costs paid by EFG on behalf of the Trust which
are reimbursed to EFG at actual cost.
All equipment was purchased from EFG, one of its Affiliates or from
third-party sellers. The Trust's Purchase Price is determined by the method
described in Note 2, Equipment on Lease.
All rents and proceeds from the sale of equipment are paid directly to
either EFG or to a lender. EFG temporarily deposits collected funds in a
separate interest-bearing escrow account prior to remittance to the Trust. At
December 31, 1999, the Trust was owed $112,228 by EFG for such funds and the
interest thereon. These funds were remitted to the Trust in January 2000.
Old North Capital Limited Partnership ("ONC"), a Massachusetts limited
partnership formed in 1995 and an affiliate of EFG, owns 839 Class A Interests
or less than 1% of the total outstanding Class A Interests of the Trust. The
general partner of ONC is controlled by Gary D. Engle. In addition, the limited
partnership interests of ONC are owned by a subsidiary of Semele Group, Inc.
("Semele"). Gary D. Engle is Chairman and CEO of Semele.
NOTE 6 - NOTES PAYABLE
Notes payable at December 31, 1999 consisted of an installment note of
$656,454 payable to an institutional lender. The note bears a fluctuating
interest rate based on LIBOR (6.4625% at December 31, 1999) plus a margin. The
installment note is non-recourse and is collateralized by the Trust's interest
in an aircraft leased to Reno Air, Inc. and the assignment of the related lease
payments. The Trust has a balloon payment obligation of $282,421 at the
expiration of the related lease term. The carrying amount of notes payable
approximates fair value at December 31, 1999.
The annual maturities of the notes payable are as follows:
For the year ending December 31, 2000 $ 119,908
2001 128,484
2002 125,641
2003 282,421
-------------
Total $ 656,454
=============
19
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
NOTE 7 - INCOME TAXES
The Trust is not a taxable entity for federal income tax purposes.
Accordingly, no provision for income taxes has been recorded in the accounts of
the Trust.
For financial statement purposes, the Trust allocates net income quarterly
first, to eliminate any Participant's negative capital account balance and
second, 1% to the Managing Trustee, 8.25% to the Special Beneficiary and 90.75%
collectively to the Class A and Class B Beneficiaries. The latter is allocated
proportionately between the Class A and Class B Beneficiaries based upon the
ratio of cash distributions declared and allocated to the Class A and Class B
Beneficiaries during the period (excluding $473,796 Class A special cash
distributions paid in 1999 and $1,500,539 Class B capital distributions paid in
1998). Net losses are allocated quarterly first, to eliminate any positive
capital account balance of the Managing Trustee, the Special Beneficiary and the
Class B Beneficiaries; second, to eliminate any positive capital account
balances of the Class A Beneficiaries; and third, any remainder to the Managing
Trustee. This convention differs from the income or loss allocation requirements
for income tax and Dissolution Event purposes as delineated in the Trust
Agreement. For income tax purposes, the Trust allocates net income or net loss
in accordance with the provisions of such agreement. Pursuant to the Trust
Agreement, upon dissolution of the Trust, the Managing Trustee will be required
to contribute to the Trust an amount equal to any negative balance which may
exist in the Managing Trustee's tax capital account. At December 31, 1999, the
Managing Trustee 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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net income $ 1,470,149 $ 993,932 $ 1,174,206
Financial statement depreciation in
excess of tax depreciation 132,483 395,240 766,944
Tax gain (loss) in excess of book gain 2,979,533 196,147 185,325
Deferred rental income 27,992 (21,217) (10,275)
Other 13,000 (13,000) (115,487)
------------------ ------------------ ------------------
Net income for federal income tax
reporting purposes $ 4,623,157 $ 1,551,102 $ 2,000,713
================== ================== ==================
</TABLE>
The following is a reconciliation between participants' capital reported
for financial statement and federal income tax reporting purposes for the years
ended December 31, 1999 and 1998:
20
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
<S> <C> <C>
Participants' capital $ 6,982,082 $ 12,635,661
Unrealized gain on marketable securities (5,042) --
Add back selling commissions and organization
and offering costs 1,625,692 1,625,692
Financial statement distributions in excess of
tax distributions 5,422,878 28,980
Deduct deferred step-down of capital basis (68,201) (68,201)
Cumulative difference between federal income tax
and financial statement income (loss) (1,344,717) (4,497,725)
------------------ ------------------
Participants' capital for federal income tax
reporting purposes $ 12,612,692 $ 9,724,407
================== ==================
</TABLE>
Financial statement distributions in excess of tax distributions and
cumulative difference between federal income tax and financial statement income
(loss) represent timing differences.
NOTE 8 - LEGAL PROCEEDINGS
On or about January 15, 1998, certain plaintiffs (the "Plaintiffs") filed a
class and derivative action, captioned Leonard Rosenblum, et al. v. Equis
Financial Group Limited Partnership, et al., in the United States District Court
for the Southern District of Florida (the "Court") on behalf of a proposed class
of investors in 28 equipment leasing programs sponsored by EFG, including the
Trust (collectively, the "Nominal Defendants"), against EFG and a number of its
affiliates, including the Managing Trustee, 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 Class Action Lawsuit was divided into two sub-classes on
March 22, 1999.
On May 26, 1999, the Court issued its Order and Final Judgment approving
settlement of the Class Action Lawsuit with respect to claims asserted by the
Plaintiffs on behalf of the sub-class that includes the Trust. Claims involving
the second sub-class, not including the Trust, remain pending. As a result of
the settlement, the Trust declared a special cash distribution of $500,709,
including legal fees for Plaintiffs' counsel of $26,913, that was paid in July
1999 ($0.81 per unit, net of legal fees). In addition, the parent company of the
Managing Trustee, Equis II Corporation, agreed to commit $1,126,595 of its Class
B Capital Contributions (paid in connection with its purchase of Class B
Interests in July 1997) to the Trust for the Trust's investment purposes. In the
absence of this commitment, Equis II Corporation would have been entitled to
receive a Class B Capital Distribution for this amount pursuant to the Trust
Agreement, as amended. The Trust's share of legal fees and expenses related to
the Class Action Lawsuit, including the fees for Plaintiff's counsel referenced
above, was estimated to be approximately $88,000, all of which was accrued and
expensed by the Trust in 1998.
21
<PAGE>
AFG Investment Trust B
Notes to the Financial Statements
(Continued)
In addition to the foregoing, the Trust 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 was resolved during the year ended December 31, 1999:
Action involving National Steel Corporation
EFG, on behalf of the Trust 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 Trust, National Steel Corporation ("National Steel"). The
Complaint sought 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. On May 11, 1999, the
parties executed a comprehensive settlement agreement to resolve all outstanding
issues, including reimbursement to the Trust for the disputed sales tax items
referenced above. This matter did not have a material effect on the Trust's
financial position or results of operations.
NOTE 9 - SUBSEQUENT EVENTS
On January 19, 2000, the Trust distributed $5,300,000 as a special cash
distribution to the Trust Beneficiaries. Of the total distributions, the
Beneficiaries were allocated $4,809,750 ($1,482,978 to Class A Beneficiaries and
$3,326,772 to Class B Beneficiaries); the Special Beneficiary was allocated
$437,250, and the Managing Trustee was allocated $53,000.
On March 8, 2000, the Trust and three affiliated trusts entered into a
guarantee agreement whereby the trusts, jointly and severally, have
guaranteed the payment obligations under a master lease agreement between
Echelon Commercial LLC, a newly-formed Delaware company that is controlled by
Gary D. Engle, President and Chief Executive Officer of EFG, as lessee, and
Heller Affordable Housing of Florida, Inc., and two other entities, as lessor
("Heller"). The lease payments of Echelon Commercial LLC to Heller are
supported by lease payments to Echelon Commercial LLC from various
sub-lessees who are parties to commercial and residential lease agreements
under the master lease agreement. The guarantee of lease payments by the
Trust and the three affiliated trusts is capped at a maximum of $34,500,000,
excluding expenses that could result in the event that Echelon Commercial LLC
experiences a default under the terms of the master lease agreement. An
agreement among the four trusts provides that the Trust is responsible for
11.58% of the guaranteed amount, or $3,995,100. In consideration for its
guarantee, the Trust received an upfront cash fee equal to $57,900 and will
receive an annualized fee equal to 4% per annum of the average guarantee
amount outstanding during each quarterly period. Accrued but unpaid fees will
accrue and compound interest quarterly at an annualized interest rate of 7.5%
until paid. The Trust will receive minimum aggregate fees for its guarantee
of not less than $115,800, excluding interest.
22
<PAGE>
AFG Investment Trust B
SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST
OF EQUIPMENT DISPOSED
for the years ended December 31, 1999, 1998 and 1997
The Trust classifies all rents from leasing equipment as lease revenue.
Upon expiration of the primary lease terms, equipment may be sold, rented on a
month-to-month basis or re-leased for a defined period under a new or extended
lease agreement. The proceeds generated from selling or re-leasing the
equipment, in addition to any month-to-month revenues, represent the total
residual value realized for each item of equipment. Therefore, the financial
statement gain or loss, which reflects the difference between the net book value
of the equipment at the time of sale or disposition and the proceeds realized
upon sale or disposition, may not reflect the aggregate residual proceeds
realized by the Trust for such equipment.
The following is a summary of cash excess associated with equipment
dispositions occurring in the years ended December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ------------------ ------------------
<S> <C> <C> <C>
Rents earned prior to disposal of
equipment, net of interest charges $ 6,729,842 $ 7,495,292 $ 1,777,768
Sale proceeds realized upon
disposition of equipment 4,746,333 1,628,526 348,792
------------------ ------------------ ------------------
Total cash generated from rents
and equipment sale proceeds 11,476,175 9,123,818 2,126,560
Original acquisition cost of equipment
disposed 8,909,602 7,092,845 1,500,126
------------------ ------------------ ------------------
Excess of total cash generated to cost
of equipment disposed $ 2,566,573 $ 2,030,973 $ 626,434
================== ================== ==================
</TABLE>
23
<PAGE>
AFG Investment Trust B
STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS,
SALES AND REFINANCINGS
for the year ended December 31, 1999
<TABLE>
<CAPTION>
Sales and
Operations Refinancings Total
------------------ ------------------ ------------------
<S> <C> <C> <C>
Net income $ 961,607 $ 508,542 $ 1,470,149
Add:
Depreciation 645,123 -- 645,123
Accretion of bond discount (370) -- (370)
Management fees 72,020 -- 72,020
Book value of disposed equipment -- 4,237,791 4,237,791
Less:
Principal reduction of notes payable (162,387) -- (162,387)
------------------ ------------------ ------------------
Cash from operations, sales and
refinancings 1,515,993 4,746,333 6,262,326
Less:
Management fees (72,020) -- (72,020)
------------------ ------------------ ------------------
Distributable cash from operations,
sales and refinancings 1,443,973 4,746,333 6,190,306
Other sources and uses of cash:
Cash at beginning of year 2,350,342 3,559,193 5,909,535
Restricted cash 1,627,304 -- 1,627,304
Purchase of marketable securities (103,132) -- (103,132)
Investment in EFG/Kirkwood (1,353,400) -- (1,353,400)
Net change in receivables and accruals (29,885) -- (29,885)
Less:
Cash distributions paid (2,047,451) -- (2,047,451)
------------------ ------------------ ------------------
Cash at end of year $ 1,887,751 $ 8,305,526 $ 10,193,277
================== ================== ==================
</TABLE>
24
<PAGE>
AFG Investment Trust B
SCHEDULE OF COSTS REIMBURSED TO THE
MANAGING TRUSTEE AND ITS AFFILIATES AS
REQUIRED BY SECTION 10.4 OF THE SECOND AMENDED
AND RESTATED DECLARATION OF TRUST
December 31, 1999
For the year ended December 31, 1999, the Trust reimbursed the Managing
Trustee and its Affiliates for the following costs:
Operating expenses $ 475,734
25
<PAGE>
AFG Investment Trust B
SCHEDULE OF REIMBURSABLE OPERATING EXPENSES DUE TO THIRD PARTIES
December 31, 1999
Operating expenses for the year ended December 31, 1999 consisted of the
following:
Aircraft Maintenance $ 138,491
Legal 96,924
Selling & Remarketing 61,056
Accounting and Tax 54,119
Printing & Document Services 26,140
Office 19,960
Investor Services 16,711
Third Party Service Contracts 12,865
Bank Charges 12,514
Travel & Entertainment 6,029
Insurance 3,503
-----------------
448,312
Recovery of aircraft maintenance costs
incurred in prior years (178,155)
-----------------
Total $ 270,157
=================
26
<PAGE>
AFG Investment Trust B
SCHEDULE OF EQUIPMENT
December 31, 1999
<TABLE>
<CAPTION>
LEASE
EXPIRATION NET BOOK
LESSEE RENTAL SCHEDULE DATE COST VALUE DEBT
- ---------------------------------- ---------------------- ------------------ -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Amoco Corporation A-O-20 $ 20,748
Amoco Corporation A-O-22 75,336 $ 15,539
Amoco Corporation A-O-23 75,000 13,317
Collection Services, Inc. A-1 83,458
Cray Research, Inc. 1 859,132
International Paper A-24-122 19,891
International Paper B-24-64 12,879 1,314
International Paper B-71-84 09/30/00 202,056 86,595
Ford Motor Company A861530-RN3 33,194
Ford Motor Company 300581-2 15,319
GATX Logistics, Inc. E-2 41,694
GATX Logistics, Inc. E-3 68,861
General Motors Corporation A-22 13,451
General Motors Corporation A-26 27,463
General Motors Corporation A-26RN1 825,570
General Motors Corporation A-28 205,130
General Motors Corporation A-28RN1 410,497
General Motors Corporation A-34 27,274
Maytag Corporation A-13 03/31/00 29,382 5,137
Montgomery Ward & Co., Inc. 1ARN1 12/31/00 863,922
Montgomery Ward & Co., Inc. 1BRN1 12/31/00 1,753,271
Montgomery Ward & Co., Inc. 1CRN1 12/31/00 28,837
Montgomery Ward & Co., Inc. 1DRN1 12/31/00 57,557
Owens-Corning Fiberglass Corp. A-42 572
Tenneco Packaging B-72RN1 107,464
Reno Air, Inc. N753RA 01/14/03 1,239,741 1,017,113 $ 656,454
Temple-Inland Forest Product Group A-1RN1 12/31/00 144,841 51,711
USS/Kobe Steel Company A-1 122,886
USS/Kobe Steel Company A-2 44,254
USS/Kobe Steel Company A-6 71,467 24,467
Walker Manufacturing Company A-9RN1 02/28/01 56,975
</TABLE>
27
<PAGE>
AFG Investment Trust B
SCHEDULE OF EQUIPMENT
December 31, 1999
<TABLE>
<CAPTION>
LEASE
EXPIRATION NET BOOK
LESSEE RENTAL SCHEDULE DATE COST VALUE DEBT
- ---------------------------------- ---------------------- ------------------ -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Xerox Corporation BB-57RN2 01/31/00 $ 110,738
Xerox Corporation BB-60RN3 07/31/00 24,592
Xerox Corporation BB-61RN1 10/31/00 50,975
Xerox Corporation BB-68RN1 10/31/01 23,499
Getchell Gold Corporation A-10 12/31/00 219,161 65,058
-------------- ---------------- -------------
Total $7,967,087 $ 1,280,251 $ 656,454
============== ================ =============
</TABLE>
28
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form
10-K) of AFG Investment Trust B of our report dated March 30, 2000, included in
the 1999 Annual Report to the Participants of AFG Investment Trust B.
ERNST & YOUNG LLP
Boston, Massachusetts
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,193,277
<SECURITIES> 108,544
<RECEIVABLES> 116,544
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,418,365
<PP&E> 7,967,087
<DEPRECIATION> (6,686,836)
<TOTAL-ASSETS> 13,052,016
<CURRENT-LIABILITIES> 5,413,480
<BONDS> 656,454
0
0
<COMMON> 0
<OTHER-SE> 6,982,082
<TOTAL-LIABILITY-AND-EQUITY> 13,052,016
<SALES> 0
<TOTAL-REVENUES> 2,634,958
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,114,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,389
<INCOME-PRETAX> 1,470,149
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,470,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,470,149
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE>
Exhibit 99(a)
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
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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.
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"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
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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.
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"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;
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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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<PAGE>
(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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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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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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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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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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(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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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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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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<PAGE>
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 "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.
-80-
<PAGE>
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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<PAGE>
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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<PAGE>
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.
-83-
<PAGE>
EXHIBIT "H"
LEASE IDENTIFICATION
OWNER: Olivia Corp.
LESSEE: Reno Air, Inc.
MORTGAGEE: Credit Lyonnais/PK AIRFINANCE, New York Branch
-84-
<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:
3
<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: /s/ Robert M. Rowen
--------------------------- ---------------------------
Name: Name: Robert M. Rowen
Title: Title: Vice President and General Counsel
3
<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:
4
<PAGE>
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.
5
<PAGE>
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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<PAGE>
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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<PAGE>
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.
-87-
<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.
-88-
<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.
-89-
<PAGE>
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.
-90-
<PAGE>
EXHIBIT "K"
ASSIGNMENT OF LEASE AND CONSENT
-91-
<PAGE>
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
1
<PAGE>
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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<PAGE>
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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<PAGE>
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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<PAGE>
(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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<PAGE>
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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<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.
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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: /s/ Aaron Mendelsohn By:
--------------------------- ---------------------------
Name: Aaron Mendelsohn Name:
Title: President Title:
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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: /s/ Robert M. Rowen
--------------------------- ---------------------------
Name: Name: Robert M. Rowen
Title: Title: Vice President and General Counsel
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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.
5
