- 14 -
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number: 0-24126
FRONTIER AIRLINES, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1256945
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporated or organization)
12015 E. 46th Avenue, Denver, CO 80239
(Address of principal executive offices) (Zip Code)
Issuer's telephone number including area code: (303) 371-7400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares of the Company's Common Stock outstanding as of November
10, 1998 was 14,507,364.
<PAGE>
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Information
Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Item 3: Quantitative and Qualitative Disclosures
About Market Risk 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FRONTIER AIRLINES, INC.
Condensed Balance Sheets
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
--------------- --------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 23,823,598 $ 3,641,395
Restricted investments 4,000,000 4,000,000
Trade receivables, net of allowance for doubtful accounts of $172,295
and $139,096 at September 30, 1998 and March 31, 1998 9,586,154 11,661,323
Maintenance deposits 12,132,909 9,307,723
Prepaid expenses and other assets 5,483,419 3,843,694
Inventories 1,086,300 1,164,310
Deferred lease expenses 380,975 380,975
--------------- --------------
Total current assets 56,493,355 33,999,420
Security, maintenance and other deposits 9,320,149 7,633,143
Property and equipment, net 6,156,158 5,579,019
Deferred lease and other expenses 589,941 780,429
Restricted investments 3,425,813 2,606,459
=============== ==============
$ 75,985,416 $ 50,598,470
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 10,768,778 $ 13,664,750
Air traffic liability 18,302,114 18,910,441
Other accrued expenses 5,862,216 5,157,640
Accrued maintenance expense 14,575,022 12,537,228
Note payable 121,003 -
Current portion of obligations under capital leases 60,495 54,346
--------------- --------------
Total current liabilities 49,689,628 50,324,405
Senior secured notes payable 2,701,173 3,468,138
Accrued maintenance expense 3,839,292 2,381,354
Obligations under capital leases, excluding current portion 108,254 97,757
--------------- --------------
Total liabilities 56,338,347 56,271,654
--------------- --------------
Stockholders' equity
Preferred stock, no par value, authorized 1,000,000 shares;
none issued and outstanding - -
Common stock, no par value, stated value of $.001 per share,
authorized 40,000,000 shares; 14,280,564 and 9,253,563 shares
issued and outstanding at September 30, 1998 and March 31, 1998 14,280 9,253
Additional paid-in capital 53,289,418 37,954,584
Unearned ESOP shares (322,875) -
Accumulated deficit (33,333,754) (43,637,021)
--------------- --------------
Total stockholders' equity 19,647,069 (5,673,184)
--------------- --------------
$ 75,985,416 $ 50,598,470
=============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FRONTIER AIRLINES, INC.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Passenger $ 55,502,301 $ 36,021,428 $ 97,062,888 $ 69,642,878
Cargo 967,071 783,609 1,971,819 1,411,418
Other 383,541 808,085 705,759 1,115,496
--------------- -------------- --------------- --------------
Total revenues 56,852,913 37,613,122 99,740,466 72,169,792
--------------- -------------- --------------- --------------
Operating expenses:
Flight operations 18,778,648 15,887,077 36,632,354 30,131,179
Aircraft and traffic servicing 8,453,991 7,659,465 15,591,813 14,447,958
Maintenance 9,410,480 6,819,415 18,138,348 14,554,106
Promotion and sales 8,296,433 7,256,755 15,422,893 13,556,277
General and administrative 1,758,020 1,871,991 3,036,579 3,250,757
Depreciation and amortization 377,525 371,531 715,974 721,119
--------------- -------------- --------------- --------------
Total operating expenses 47,075,097 39,866,234 89,537,961 76,661,396
--------------- -------------- --------------- --------------
Operating income (loss) 9,777,816 (2,253,112) 10,202,505 (4,491,604)
--------------- -------------- --------------- --------------
Nonoperating income (expense):
Interest income 344,403 219,525 619,972 380,331
Interest expense (217,842) (5,679) (458,081) (10,216)
Other, net (34,819) (8,993) (61,129) (13,427)
--------------- -------------- --------------- --------------
Total nonoperating income, net 91,742 204,853 100,762 356,688
--------------- -------------- --------------- --------------
Net income (loss) $ 9,869,558 $ (2,048,259) $ 10,303,267 $ (4,134,916)
=============== ============== =============== ==============
Earnings (loss) per share:
Basic $ 0.71 $ (0.23) $ 0.78 $ (0.46)
=============== ============== =============== ==============
Diluted $ 0.64 $ (0.23) $ 0.71 $ (0.46)
=============== ============== =============== ==============
Weighted average shares of
common stock outstanding 13,955,031 9,071,866 13,238,367 8,958,742
=============== ============== =============== ==============
Weighted average shares of common stock and
common stock equivalents outstanding 15,354,381 9,071,866 14,483,683 8,958,742
=============== ============== =============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FRONTIER AIRLINES, INC.
Condensed Statements of Cash Flows
For the Six Months Ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 10,303,267 $ (4,134,916)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Employee stock option plan compensation expense 322,875 -
Depreciation and amortization 1,438,249 862,334
Loss on sale of equipment 6,793 -
Changes in operating assets and liabilities:
Restricted investments (819,354) (266)
Trade receivables 2,075,169 (8,126,346)
Security, maintenance and other deposits (4,228,192) (3,061,901)
Prepaid expenses and other assets (1,639,725) (4,205,127)
Inventories 78,010 (2,120)
Note receivable - 11,740
Accounts payable (2,895,972) (265,918)
Air traffic liability (608,327) 17,982,369
Other accrued expenses 704,576 4,280,185
Accrued maintenance expense 3,495,732 4,487,544
--------------- --------------
Net cash provided by operating activities 8,233,101 7,827,578
--------------- --------------
Cash flows used by investing activities:
Aircraft lease deposits (284,000) (117,500)
Increase in restricted investments - (750,000)
Capital expenditures (1,259,468) (1,077,977)
--------------- --------------
Net cash used by investing activities (1,543,468) (1,945,477)
--------------- --------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 13,395,477 396,106
Proceeds from short-term borrowings 179,664 170,318
Principal payments on short-term borrowings (58,778) (65,526)
Principal payments on obligations under capital leases (23,793) (17,342)
--------------- --------------
Net cash provided by financing activities 13,492,570 483,556
--------------- --------------
Net increase in cash and cash equivalents 20,182,203 6,365,657
Cash and cash equivalents, beginning of period 3,641,395 10,286,453
--------------- --------------
Cash and cash equivalents, end of period $ 23,823,598 $ 16,652,110
=============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
FRONTIER AIRLINES, INC.
Notes to Condensed Financial Statements
September 30, 1998
(1) Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the 1998 Annual
Report on Form 10-K. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary for
a fair presentation have been included. The results of operations for the
three and six months ended September 30, 1998 and 1997 are not necessarily
indicative of the results that will be realized for the full year.
(2) Senior Secured Notes Payable
In December 1997, the Company sold $5,000,000 of 10% senior secured notes
to Wexford Management LLC ("Wexford"). The notes are due and payable in
full on December 15, 2001 with interest payable quarterly in arrears. The
notes are secured by substantially all of the assets of the Company. The
Wexford agreement contains restrictions primarily related to liens on
assets and requires prior written consent for expenditures outside the
ordinary course of business. In connection with this transaction, the
Company issued Wexford warrants to purchase 1,750,000 shares of Common
Stock at $3.00 per share. The Company determined the value of the warrants
to be $1,645,434 and recorded the value as equity in additional paid-in
capital. The balance of the notes will be accreted to its face value over
the term of the notes and included as interest expense. The effective
interest rate on the notes is approximately 18.2% including the value of
the warrants.
During the six months ended September 30, 1998, Wexford exercised 459,000
warrants with proceeds to the Company totaling $1,377,000. Under the terms
of the agreement, Wexford elected to tender debt for the warrant exercise
price first by application of accrued unpaid interest and the remainder by
reducing the principal balance of the notes. As a result, $1,298,634 of the
principal balance of the notes was tendered during the six months ended
September 30, 1998.
(3) Common Stock
In April 1998, the Company sold 4,363,001 shares of its common stock, no
par value, through a private placement to an institutional investor. Gross
proceeds to the Company from the transaction were $14,179,753, of which the
Company received net proceeds of $13,654,694. The Company issued a warrant
to this investor to purchase 716,929 shares of common stock of the Company
at a purchase price of $3.75 per share, which warrant expires in April
2002.
(4) Income Tax Expense
The Company's income tax expense was zero for the three and six months
ended September 30, 1998. The current income tax expense for these periods
was offset by a reduction in the Company's valuation allowance for deferred
tax assets, a result of the Company's ability to utilize previously
reserved for net operating loss carryforwards.
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations
This report contains forward-looking statements within the meaning of Section
21E of the Securities Exchange Act of 1934 that describe the business and
prospects of Frontier Airlines, Inc. (the "Company") and the expectations of the
Company and management. When used in this document, the words "estimate,"
"anticipate," "intend," "project," "management believes" and similar words and
phrases are intended to identify forward-looking statements. These statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those set forth. These risks and uncertainties
include, but are not limited to: the timing of, and expense associated with,
expansion and modification of the Company's operations in accordance with its
business strategy or in response to competitive pressures or other factors such
as the Company's commencement of passenger service and ground handling
operations at several airports and assumption of maintenance and ground handling
operations at DIA with its own employees; general economic factors and behavior
of the fare-paying public and the federal government, such as the crash in May
1996 of another low-fare carrier's aircraft that resulted in a federal
investigation of the carrier, suspension of the carrier's operations and
increased federal scrutiny of low-fare carriers generally that may increase the
Company's operating costs or otherwise adversely affect the Company; actions of
competing airlines, such as increasing capacity and pricing actions of United
Airlines and other competitors; the availability of Boeing 737 aircraft, which
may inhibit the Company's ability to achieve operating economies and implement
its business strategy; recent changes to the former air transportation excise
tax of 10% to a combination of a percentage tax and flight segment fee; and
uncertainties regarding aviation fuel prices. Because the Company's business,
like that of the airline industry generally, is characterized by high fixed
costs relative to revenues, small fluctuations in the Company's yield per RPM or
expense per ASM can significantly affect operating results.
General
The Company is a low-fare, full-service commercial airline based in
Denver, Colorado. The Company currently operates routes linking its Denver hub
to 15 cities in 12 states spanning the nation from coast to coast. The Company's
current route system extends from Denver to Los Angeles, San Francisco and San
Diego, California; Chicago and Bloomington/Normal, Illinois; Boston,
Massachusetts; Baltimore, Maryland; Seattle/Tacoma, Washington; Phoenix,
Arizona; Minneapolis/St. Paul, Minnesota; Salt Lake City, Utah; Omaha, Nebraska;
Albuquerque, New Mexico, New York (LaGuardia), New York; and El Paso, Texas. At
present, the Company utilizes approximately five gates at Denver International
Airport ("DIA") for approximately 66 daily flight departures and arrivals.
Organized in February 1994, the Company commenced flight operations in
July 1994 with two leased Boeing 737-200 jet aircraft. It has since expanded its
fleet to 15 leased jets as of October 1998, including eight Boeing 737-200s and
seven larger Boeing 737-300s. The Company has executed letters of intent for two
new Boeing 737-300s with scheduled deliveries in November and December 1998. The
Company plans to add service to Atlanta, Georgia, Dallas/Fort Worth, Texas and
Las Vegas, Nevada in mid-December 1998 with the addition of these two aircraft.
The Company's senior management team includes executives with substantial
experience in the airline industry, including persons who occupied similar
positions at a former airline called Frontier Airlines that served regional
routes to and from Denver from 1950 to 1986. From time to time, the former
Frontier Airlines served most of the Company's current and intended markets with
jet equipment from its Denver hub.
Terminated Merger with Western Pacific Airlines
On June 30, 1997, the Company signed an Agreement and Plan of Merger
("the Merger Agreement") providing for the merger (the "Merger") of the Company
with Western Pacific Airlines ("Western Pacific"), a low-fare airline that had
previously used Colorado Springs, Colorado as its base of flight operations. The
Merger Agreement was signed following Western Pacific's shift of a portion of
its flight operations to DIA, and its announced intent to further expand its
operations at DIA. Pursuant to the Merger Agreement, a "code share" marketing
alliance between the Company and Western Pacific went into effect on August 1,
1997, in effect integrating the route networks of the two airlines.
On September 29, 1997, both companies mutually agreed to terminate the
Merger Agreement and the code-share arrangement. The separation of the two
carriers required the Company to implement a costly restructuring of its flight
schedule and route system to support a stand-alone operation competing against
both Western Pacific and United Airlines, the dominant air carrier at DIA. On
October 5, 1997, Western Pacific filed for protection under Chapter 11 of the
U.S. Bankruptcy Code. Western Pacific ceased operations on February 4, 1998 and
is in the process of liquidating its business.
Results of Operations
The Company had net income of $10,303,000 or $0.71 per diluted share for
the six months ended September 30, 1998 as compared to a net loss of $4,135,000
or $0.46 per share for the six months ended September 30, 1997. The Company had
net income of $9,869,000 or $0.64 per diluted share for the three months ended
September 30, 1998 as compared to a net loss of $2,048,000 or $0.23 per share
for the three months ended September 30, 1997. During the three and six months
ended September 30, 1998 as compared to the prior comparable period, the Company
experienced higher fares as a result of increases in business travelers,
decreased competition as a result of the demise of Western Pacific, and an
increase in the average length of haul and stage length. During the three months
ended September 30, 1998 the Company also experienced higher average fares in
certain of its markets as a result of accommodating Northwest Airlines
passengers while that carrier experienced a pilot strike during a portion of
August and September 1998. The Company's cost per ASM declined to 7.76(cents)
during the six months ended September 30, 1998 from 8.55(cents) for the prior
comparable period, principally as a result of a reduction in fuel prices and
improved operating efficiencies and economies of scale as the Company's fixed
costs were spread across a larger base of operations.
Small fluctuations in the Company's yield per RPM or expense per ASM can
significantly affect operating results because the Company, like other airlines,
has high fixed costs and low operating margins in relation to revenues. Airline
operations are highly sensitive to various factors, including the actions of
competing airlines and general economic factors, which can adversely affect the
Company's liquidity, cash flows and results of operations.
An airline's break-even load factor is the passenger load factor that
will result in operating revenues being equal to operating expenses, assuming
constant revenue per passenger mile and expenses. For the six months ended
September 30, 1998, the Company's break-even load factor was 56.2% compared to
the passenger load factor achieved of 62.9%. For the six months ended September
30, 1997, the Company's break-even load factor was 62.8% compared to the
achieved passenger load factor of 59.3%. The Company's break-even load factor
decreased from the prior comparable period largely as a result of an increase in
its average fare to $117 during the six months ended September 30, 1998 from $96
during the six months ended September 30, 1997 and a decrease in its expense per
ASM to 7.76(cents) for the six months ended September 30, 1998 from 8.55(cents)
for the six months ended September 30, 1997.
<PAGE>
The following table sets forth certain quarterly financial and operating
data regarding the Company for the fifteen months of operations ended September
30, 1998.
<TABLE>
<CAPTION>
Selected Financial and Operating Data
Quarter Ended
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
September 30, December 31, March 31, June 30, September 30,
1997 1997 1998 1998 1998
Passenger revenue $36,021,000 $31,922,000 $40,454,000 $41,561,000 $55,502,000
Revenue passengers carried 347,000 301,000 370,000 368,000 420,000
Revenue passenger
miles (RPMs)(1) 282,190,000 259,443,000 328,309,000 337,555,000 387,810,000
Available seat miles
(ASMs)(2) 490,810,000 524,686,000 575,294,000 544,557,000 609,111,000
Passenger load factor(3) 57.5% 49.4% 57.1% 62.0% 63.7%
Break-even load factor(4) 60.8% 67.3% 60.0% 61.3% 52.3%
Block hours(5) 10,507 11,059 12,114 11,255 12,543
Average daily block hour
utilization(6) 9.89 10.52 10.30 10.27 10.27
Yield per RPM (cents)(7) 12.76 12.30 12.32 12.31 14.31
Total yield per RPM
(cents)(8) 13.33 12.75 12.76 12.71 14.66
Total yield per ASM
(cents)(9) 7.66 6.31 7.28 7.88 9.33
Expense per ASM (cents) 8.12 8.52 7.70 7.80 7.73
Passenger revenue per
block hour $3,428.29 $2,886.52 $3,339.44 $3,692.67 $4,424.94
Average fare(10) $99 $101 $105 $108 $125
Average aircraft in fleet 11.8 13.0 13.6 14.0 14.0
Operating income (loss) ($2,253,000) ($11,626,000) ($2,437,000) $425,000 $9,778,000
Net income (loss) ($2,048,000) ($11,519,000) ($2,092,000) $434,000 $9,869,000
</TABLE>
(1) "Revenue passenger miles," or RPMs, are determined by multiplying the
number of fare-paying passengers carried by the distance flown.
(2) "Available seat miles," or ASMs, are determined by multiplying the number
of seats available for passengers by the number of miles flown.
(3) "Passenger load factor" is determined by dividing revenue passenger miles
by available seat miles.
(4) "Break-even load factor" is the passenger load factor that will result in
operating revenues being equal to operating expenses, assuming constant
revenue per passenger mile and expenses.
(5) "Block hours" represent the time between aircraft gate departure and
aircraft gate arrival.
(6) "Average daily block hour utilization" represents the total block hours
divided by the weighted average number of aircraft days in service.
(7) "Yield per RPM" is determined by dividing passenger revenues by revenue
passenger miles.
(8) "Total yield per RPM" is determined by dividing total revenues by revenue
passenger miles.
(9) "Total yield per ASM" is determined by dividing total revenues by available
seat miles.
(10) "Average fare" excludes revenue included in passenger revenue for non-
revenue passengers, administrative fees, and revenue recognized for unused
tickets that are greater than one year from issuance date.
<PAGE>
The following table provides operating revenues and expenses for the Company
expressed as cents per total available seat miles ("ASM") and as a percentage of
total operating revenues, as rounded, for the three and six months ended
September 30, 1998 and 1997.
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
------------------------------------------ -----------------------------------------
1998 1997 1998 1997
-------------------- -------------------- -------------------- -------------------
Per % Per % Per % Per %
total of total of total of total of
ASM Revenue ASM Revenue ASM Revenue ASM Revenue
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Passenger 9.11 97.6% 7.34 95.8% 8.41 97.3% 7.77 96.5%
Cargo 0.16 1.7% 0.16 2.1% 0.17 2.0% 0.16 2.0%
Other 0.06 0.7% 0.16 2.1% 0.06 0.7% 0.12 1.5%
--------- --------- ---------- --------- ---------- --------- --------- --------
Total revenues 9.33 100.0% 7.66 100.0% 8.64 100.0% 8.05 100.0%
Operating expenses:
Flight operations 3.08 33.0% 3.24 42.2% 3.18 36.7% 3.36 41.7%
Aircraft and traffic
servicing 1.39 14.9% 1.56 20.4% 1.35 15.6% 1.61 20.0%
Maintenance 1.55 16.5% 1.39 18.1% 1.57 18.2% 1.63 20.2%
Promotion and sales 1.36 14.6% 1.48 19.3% 1.34 15.5% 1.51 18.8%
General and
administrative 0.29 3.1% 0.38 5.0% 0.26 3.0% 0.36 4.5%
Depreciation and
amortization 0.06 0.7% 0.07 1.0% 0.06 0.7% 0.08 1.0%
========= ========= ========== ========= ========== ========= ========= ========
Total operating expenses 7.73 82.8% 8.12 106.0% 7.76 89.7% 8.55 106.2%
========= ========= ========== ========= ========== ========= ========= ========
Total ASMs (000s) 609,111 490,810 1,153,668 896,205
</TABLE>
Revenues
The Company's revenues are highly sensitive to changes in fare levels.
Fare pricing policies have a significant impact on the Company's revenues.
Because of the elasticity of passenger demand, the Company believes that
increases in fares will result in a decrease in passenger demand in many
markets. The Company cannot predict future fare levels, which depend to a
substantial degree on actions of competitors. When sale prices or other price
changes are initiated by competitors in the Company's markets, the Company
believes that it must, in most cases, match those competitive fares in order to
maintain its market share. Passenger revenues are seasonal in leisure travel
markets depending on the markets' locations and when they are most frequently
patronized.
The Company's average fare for the six months ended September 30, 1998
and 1997 was $117 and $96, respectively. Management believes that the increase
in the average fare during the six months ended September 30, 1998 over the
prior comparable period was largely a result of the Company's focus on
increasing the number of business travelers, decreased competition as a result
of the demise of Western Pacific, and an increase in the average length of haul
and stage length. The average length of haul increased from 775 miles for the
six months ended September 30, 1997 to 920 miles for the six months ended
September 30, 1998. The Company also experienced higher average fares in certain
of its markets as a result of accommodating Northwest Airlines passengers during
that carrier's pilot strike during a portion of August and September 1998.
Effective October 1, 1997, the U.S. Congress reduced the 10% excise tax to 9%,
but added a per-flight-segment fee of $1 on domestic flights. The tax decreased
to 8% October 1, 1998 and decreases to 7.5% on October 1, 1999. The
per-flight-segment fee increased to $2 effective October 1, 1998, increases to
$2.25 effective October 1, 1999 and thereafter increases in annual amounts of 25
cents until it reaches $3 effective October 1, 2002.
Passenger Revenues. Passenger revenues totaled $97,063,000 for the six
months ended September 30, 1998 compared to $69,643,000 for the six months ended
September 30, 1997, or an increase of 39.4%. The number of revenue passengers
carried was 788,000 for the six months ended September 30, 1998 compared to
686,000 for the six months ended September 30, 1997 or an increase of 14.9%. The
Company had an average of 14 aircraft in its fleet during the six months ended
June 30, 1998 compared to an average of 11.4 aircraft during the six months
ended September 30, 1997, an increase of 22.8%, and an increase in ASMs of
257,463,000 or 28.7%.
Cargo revenues, consisting of revenues from freight and mail service,
totaled $1,972,000 and $1,411,000 for the six months ended September 30, 1998
and 1997, respectively, representing 2% of total operating revenues and an
increase of 39.8%. This adjunct to the passenger business is highly competitive
and depends heavily on aircraft scheduling, alternate competitive means of same
day delivery service and schedule reliability.
Other revenues, comprised principally of interline handling fees, liquor
sales and excess baggage fees, totaled $706,000 and $1,116,000 or .7% and 1.5%
of total operating revenues for each of the six months ended September 30, 1998
and 1997, respectively. Other revenues were higher during the six months ended
September 30, 1997 as a result of ticket handling fees associated with the code
share agreement with Western Pacific. Ticket handling fees are earned by the
ticketing airline to offset ticketing costs incurred on segments ticketed on the
flight operated by the Company's code share partner. The Company recognized
approximately $539,000 in ticket handling fees associated with its code share
agreement with Western Pacific during the months of August and September 1997.
The costs which offset this revenue are included in sales and promotion
expenses.
Operating Expenses
Operating expenses include those related to flight operations, aircraft
and traffic servicing, maintenance, promotion and sales, general and
administrative and depreciation and amortization. Total operating expenses were
$89,538,000 and $76,661,000 for the six months ended September 30, 1998 and 1997
and represented 89.7% of and 106.2% of revenue, respectively. Operating expenses
decreased as a percentage of revenue during the six months ended September 30,
1998 as the Company experienced a significant reduction in fuel prices and
improved operating efficiencies and economies of scale as the Company's fixed
costs were spread across a larger base of operations.
Flight Operations. Flight operations expenses of $36,632,000 and
$30,131,000 were 36.7% and 41.7% of total revenue for the six months ended
September 30, 1998 and 1997, respectively. Flight operations expenses include
all expenses related directly to the operation of the aircraft including fuel,
lease and insurance expenses, pilot and flight attendant compensation, in flight
catering, crew overnight expenses, flight dispatch and flight operations
administrative expenses.
Aircraft fuel expenses include both the direct cost of fuel including
taxes as well as the cost of delivering fuel into the aircraft. Aircraft fuel
costs of $10,807,000 for 18,621,000 gallons used and $11,425,000 for 15,486,000
gallons used resulted in an average fuel cost of 58(cents) and 74(cents) per
gallon and represented 29.5% and 37.9% of total flight operations expenses for
the six months ended September 30, 1998 and 1997, respectively. The average fuel
cost per gallon decreased for the six months ended September 30, 1998 from the
comparable prior period due to an overall decrease in the cost of fuel. Fuel
prices are subject to change weekly as the Company does not purchase supplies in
advance for inventory. Fuel consumption for the six months ended September 30,
1998 and 1997 averaged 782 and 790 gallons per block hour, respectively. Fuel
consumption per block hour decreased as a result of more fuel efficient aircraft
and an increase in the average stage length.
Aircraft lease expenses totaled $15,181,000 (15.2% of total revenue) and
$10,329,000 (14.3% of total revenue) for the six months ended September 30, 1998
and 1997, respectively, or an increase of 47%. The increase is largely due to
higher lease expenses for larger and newer Boeing 737-300 aircraft added to the
fleet and partially attributable to the increase in the average number of
aircraft to 14 from 11.4, or 22.8%, for the six months ended September 30, 1998
and 1997, respectively.
Aircraft insurance expenses totaled $1,235,000 (1.2% of total revenue) for the
six months ended September 30, 1998 offset by a profit commission of $153,000
for the policy period ended June 6, 1998. The profit commission was earned
because the Company had no aircraft hull insurance claims during the 1997-1998
policy year. Aircraft insurance expenses for the six months ended September 30,
1997 were $1,300,000 (1.8% of total revenue). Aircraft insurance expenses
decreased as a percentage of revenue as a result of competitive pricing in the
aircraft insurance industry, the Company's favorable experience rating since it
began flight operations in July 1994 and economies of scale due to the increase
in fleet size. For the policy period June 7, 1998 to June 6, 1999, the Company
has reduced its aircraft insurance rates by approximately 44.8% or an estimated
annual savings of $1,787,000 at its present fleet levels.
Pilot and flight attendant salaries before payroll taxes and benefits
totaled $4,787,000 and $4,132,000 or 4.9% and 5.9% of passenger revenue for each
of the six months ended September 30, 1998 and 1997, or an increase of 13.7%.
Pilot and flight attendant compensation increased principally as a result of a
22.8% increase in the average number of aircraft in service and an increase of
21.5% in block hours. Pilot and flight attendant salaries decreased as a
percentage of passenger revenue because the Company did not add additional
aircraft during the six months ended September 30, 1998. The Company pays pilot
and flight attendant salaries for training consisting of approximately six and
three weeks, respectively, prior to scheduled increases in service which can
cause the compensation expense during that period to appear high in relationship
to the average number of aircraft in service. When the Company is not in the
process of adding aircraft to its system, pilot and flight attendant expense per
aircraft normalizes. With a scheduled passenger operation, and with salaried
rather than hourly crew compensation, the Company's expenses for flight
operations are largely fixed, with flight catering and fuel expenses the
principal exception.
Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses
were $15,292,000 and $14,448,000 (an increase of 5.8%) for the six months ended
September 30, 1998 and 1997, respectively, and represented 15.6% and 20.0% of
total revenue. These include all expenses incurred at airports served by the
Company, as well as station operations administration and flight operations
ground equipment maintenance. Station expenses include landing fees, facilities
rental, station labor and ground handling expenses. Station expenses as a
percentage of revenue decreased during the six months ended September 30, 1998
over the six months ended September 30, 1997 as a result of the Company's rental
costs (in particular, the gate rentals at DIA and other cities where the Company
added additional frequencies), which are largely fixed costs, remaining
relatively constant as compared to the increase in revenue. Aircraft and traffic
servicing expenses will increase with the addition of new cities to the
Company's route system; however, the increased existing gate utilization at DIA
is expected to reduce per unit expenses.
Maintenance. Maintenance expenses of $18,138,000 and $14,554,000 were
18.2% and 20.2% of total revenue for the six months ended September 30, 1998 and
1997, respectively. These include all labor, parts and supplies expenses related
to the maintenance of the aircraft. Routine maintenance is charged to
maintenance expense as incurred while major engine overhauls and heavy
maintenance check expense is accrued monthly. Maintenance cost per block hour
was $762 and $743 per block hour for the six months ended September 30, 1998 and
1997, respectively. Maintenance costs per block hour increased as a result of
corrosion inspections on the Company's Boeing 737-200s and revisions in airframe
and engine overhaul estimates offset by lower maintenance costs on the four new
aircraft added to the Company's fleet during the past year and the fixed rental
cost of the hangar facility being spread over a larger aircraft fleet. The newer
aircraft require fewer routine repairs and are generally covered by a warranty
period of approximately up to three years on standard Boeing components.
Management believes that these costs will continue to normalize as additional
aircraft are added to the fleet.
Promotion and Sales. Promotion and sales expenses totaled $15,423,000 and
$13,556,000 and were 15.5% and 18.8% of total revenue for the six months ended
September 30, 1998 and 1997, respectively. These include advertising expenses,
telecommunications expenses, wages and benefits for reservationists and
reservations supervision as well as marketing management and sales personnel,
credit card fees, travel agency commissions and computer reservations costs. The
Company's promotion and sales expenses for the six months ended September 30,
1997 included expenses as a result of the code share agreement with Western
Pacific, under which the Company incurred additional communications, computer
reservation, and interline service charges and handling fees for the code share
agreement. These expenses were offset, in part, by interline handling fees
earned which are included in other revenues. The Company did not have any code
share agreements during the six months ended September 30, 1998 that had as
large of an impact on its expenses as the code share agreement with Western
Pacific. Promotion and sales expenses decreased as a percentage of revenue for
the six months ended September 30, 1998 over the prior comparable period largely
as a result of the increase in revenue.
Promotion and sales expenses per passenger decreased to $19.56 from
$19.76 for the six months ended September 30, 1997, as a result of the
elimination of expenses related to the code share agreement with Western Pacific
offset by increased reservation costs and an increase in credit card fees. The
costs of reservation expenses increased as a result of outsourcing part of the
Company's reservations requirements. These increased costs were offset by a
decrease in travel agency commissions. During the month of April 1998, the
Company reduced travel agency commissions to 8% from 10% matching an 8%
commission instituted by the Company's competitors in the fall of 1997.
Additionally, the Company's direct sales, which are not subject to commissions,
increased as a percentage of passenger revenue. Travel agency commissions and
interline service charges and handling fees, as a percentage of passenger
revenue, before non-revenue passengers, administrative fees and breakage
(revenue from expired tickets), decreased to 5.5% for the six months ended
September 30, 1998 from 7.4% for the six months ended September 30, 1997.
Advertising expenses of $1,836,000 were 1.9% of passenger revenue for the
six months ended September 30, 1998, compared to $1,237,000 or 1.8% of passenger
revenue for the six months ended September 30, 1997. During the six months ended
September 30, 1997, the Company's advertising expenses were less than the six
months ended September 30, 1998 because of the code share agreement with Western
Pacific that was in effect during the six months ended September 30, 1997. The
Company received benefits from the advertising that Western Pacific did, that it
was able to reduce its level of advertising and related expenses.
General and Administrative. General and administrative expenses for the
six months ended September 30, 1998 and 1997 totaling $3,037,000 and $3,251,000
were 3.0% and 4.5% of total revenue, respectively. These expenses include the
wages and benefits for the Company's executive officers and various other
administrative personnel. Legal and accounting expenses, supplies and other
miscellaneous expenses are also included in this category. During the six months
ended September 30, 1998, the Company relieved approximately $240,000 of its
employee health insurance liability which was determined to be overfunded with a
corresponding credit to general and administrative expenses. Without this
adjustment, general and administrative expenses would have been approximately
$3,277,000 or 3.3% of revenue. Included in general and administrative expenses
during the six months ended September 30, 1997 were unusual expenses of
approximately $500,000 associated with the terminated Merger Agreement with
Western Pacific.
Depreciation and Amortization. Depreciation and amortization expenses of
$716,000 and $721,000 were approximately .7% and 1% of total revenue for the six
months ended September 30, 1998 and 1997, respectively. These expenses include
depreciation of office equipment, ground station equipment, and other fixed
assets of the Company. Amortization of start-up and route development costs are
not included as these expenses have been expensed as incurred.
Nonoperating Income (Expense). Net nonoperating income totaled $101,000
for the six months ended September 30, 1998 compared to $357,000 for the six
months ended September 30, 1997. Interest income increased from $380,000 to
$620,000 during the six months ended September 30, 1998 from the prior
comparable period due to an increase in cash balances as a result of the sale of
common stock in April 1998 and an increase in cash from operating activities.
Interest income was offset by interest expense of $458,000 during the six months
ended September 30, 1998. In December 1997, the Company sold $5,000,000 of 10%
senior notes. In connection with this transaction, the Company issued the lender
warrants to purchase 1,750,000 shares of common stock. Interest expense paid in
cash and the accretion of the warrants and deferred loan expenses totaled
$380,000 during the six months ended September 30, 1998.
Income Tax Expense: The Company has substantial net operating loss
carryforwards (NOL's) available to offset future taxable income, however a
portion of these NOL's could be subject to Internal Revenue Code Section 382
annual limitations. Additionally, alternative minimum tax rules could limit the
Company's ability to utilize a portion of the NOL's each year and could result
in alternative minimum tax expense.
Expenses per ASM. The Company's expenses per ASM for the six months ended
September 30, 1998 and 1997 were 7.76(cents) and 8.55(cents), respectively, or a
decrease of 9.2%. Expenses per ASM decreased from the prior comparable period as
a result of economies of scale as fixed costs were spread across a larger base
of operations, a decrease in fuel prices, and the average ASMs per aircraft
having increased as the Company added aircraft with greater seating capacity as
compared to earlier fleet additions. Expenses per ASM are influenced to a degree
by the amount of aircraft utilization and by the seating configuration. For
example, with the 108 seat all coach seating configuration selected by the
Company on five of its Boeing 737-200 aircraft, the expenses per ASM of the
Company are higher by 11% when compared with the 120 seat alternative used by
many carriers. The Company's average seats per aircraft for the six months ended
September 30, 1998 were 124 as compared to 121 seats per aircraft for the six
months ended September 30, 1997.
Liquidity and Capital Resources
The Company's balance sheet reflected cash and cash equivalents of
$23,824,000 at September 30, 1998 and $3,641,000 at March 31, 1998. At September
30, 1998, total current assets were $56,493,000 as compared to $49,690,000 of
total current liabilities, resulting in working capital of $6,803,000. At March
31, 1998, total current assets were $33,999,000 as compared to $50,324,000 of
total current liabilities, resulting in a working capital deficit of
$16,325,000. The Company had a working capital deficit of $6,063,000 at
September 30, 1997. The Company's present working capital is largely a result of
the sale in April 1998 of 4,363,001 shares of the Company's common stock with
net proceeds to the Company totaling approximately $13,677,000 combined with
cash flows from operating activities during the six months ended September 30,
1998.
Cash provided by operating activities for the six months ended September
30, 1998 was $8,233,000. This is attributable to the Company's net income for
the period, a decrease in receivables and increases in other accrued expenses
and accrued maintenance expenses, offset by increases in security, maintenance
and other deposits and prepaid expenses and other assets, and decreases in
accounts payable and air traffic liability. Cash provided by operating
activities for the six months ended September 30, 1997 was $7,828,000. This was
largely attributable to an increase in air traffic liability, accrued expenses
and accrued maintenance expenses, offset by increases in trade receivables,
security, maintenance and other deposits, prepaid expenses, and the Company's
net loss for the period.
The large increase in cash and cash equivalents and corresponding large
increase in air traffic liability during the six months ended September 30, 1997
was a result of the code share agreement with Western Pacific. If a ticket for
travel on another airline is ticketed on the Company's ticket stock designated
by the other airline's code, the Company receives the cash for the sale and
records a corresponding liability until the passenger has traveled. Upon
providing the service, the airline that carries the passenger can invoice the
ticketing carrier. The payment on the invoice is made the following month.
During the month of October 1997, Western Pacific and the Company invoiced and
paid one another for travel services provided during the month of September 1997
totaling $6,949,000 and $1,970,000, respectively, or a net amount of $4,979,000.
The air traffic liability was decreased by the corresponding amount paid to
Western Pacific.
Cash used in investing activities for the six months ended September 30,
1998 was $1,543,000. The Company used $1,259,000 for capital expenditures for
ground handling equipment, rotable aircraft components and aircraft leasehold
costs and improvements. The Company used cash of $284,000 for initial lease
acquisition security deposits for the Boeing 737-200 aircraft to be delivered in
October 1998. Cash used in investing activities for the six months ended
September 30, 1997 was $1,945,000, largely a result of capital expenditures for
rotable aircraft components and aircraft leasehold costs and improvements for
aircraft delivered in May 1997, August and September 1997. Additionally, the
Company secured the aircraft delivered in August 1997 with a letter of credit
totaling $750,000. In turn the Company received $325,000 from the aircraft
lessor that was previously on deposit to secure this aircraft. The Company's
restricted investments increased $750,000 to collateralize the letter of credit.
Cash provided by financing activities for the six months ended September
30, 1998 and 1997 was $13,493,000 and $484,000, respectively. During the six
months ended September 30, 1998, the Company sold 4,363,001 shares of its common
stock through a private placement to an institutional investor. Gross proceeds
to the Company from the transaction were approximately $14,180,000, of which the
Company received net proceeds of approximately $13,677,000. The Company issued a
warrant to this investor to purchase 716,929 shares of common stock of the
Company at a purchase price of $3.75 per share. This warrant expires in April
2002. During the six months ended September 30, 1997, the Company received
$396,000 from the exercise of common stock options.
Five of the Company's Boeing 737-200 aircraft are leased under operating
leases that originally expired in 1997. The leases provide for up to two renewal
terms of two years each with no increase in basic rent. The Company renewed the
leases for the first two-year renewal period and these leases now expire in
1999. Under these leases, the Company was required to make security deposits and
makes deposits for maintenance of these leased aircraft. These deposits totaled
$625,000 and $3,521,000, respectively, at September 30, 1998. These aircraft are
not compliant with FAA Stage 3 noise regulations. As their leases expire in 1999
the Company plans to replace these aircraft with Stage 3 compliant aircraft.
There can be no assurances that the Company will be successful in replacing any
or all of these aircraft. Management believes that the replacement aircraft, if
any, will be newer, larger aircraft with higher monthly rental costs.
The Company in November 1995 leased two Boeing 737-300 aircraft under
operating leases that expire in the year 2000. The Company was required to make
security deposits and makes deposits for maintenance of these leased aircraft.
Security and maintenance deposits for these aircraft totaled $1,505,000 and
$3,235,000, respectively, at September 30, 1998. The Company has issued to each
of the two Boeing 737-300 aircraft lessors a warrant to purchase 100,000 shares
of the Company's common stock at an aggregate purchase price of $500,000. These
warrants, to the extent not earlier exercised, expire upon the expiration dates
of the aircraft leases.
In June 1996, the Company leased two additional Boeing 737-200 aircraft
under operating leases that expire in the year 2001. In November 1997, the
Company renegotiated one of these leases extending the lease term by one year to
2002 in return for a slight reduction in the monthly rental payment. The Company
was required to make security deposits for these aircraft totaling $858,000.
Commencing July 1996, the Company was required to make monthly deposits for
maintenance of these leased aircraft. At September 30, 1998, these deposits
totaled $2,156,000. These aircraft were "hush-kitted" by the lessor at its
expense during 1996 making them compliant with FAA Stage 3 noise regulations.
The Company has issued to the aircraft lessor two warrants, each of which
entitles the lessor to purchase 70,000 shares of the Company's common stock at
an aggregate purchase price of $503,300 per warrant.
In November 1996, the Company took delivery of a leased Boeing 737-300
aircraft which it placed in scheduled service in December 1996. The lease term
for this aircraft is eight years from date of delivery. The Company was required
to secure the aircraft lease with a letter of credit totaling $600,000. The
Company is also required to make monthly cash deposits for maintenance of this
aircraft. As of September 30, 1998, the Company had made maintenance deposits
associated with this leased aircraft totaling $1,878,000.
During the year ended March 31, 1997, the Company entered into four
operating lease agreements for four additional new Boeing 737-300 aircraft. The
Company took delivery of these aircraft in May, August and September 1997 and in
February 1998. In connection with the Boeing 737-300 aircraft delivered in
September 1997, the Company has issued to the lessor a warrant to purchase
55,000 shares of common stock at an aggregate purchase price of $385,000. As of
September 30, 1998, the Company had made cash security deposits totaling
$1,616,000 with respect to these aircraft. During the year ended March 31, 1998,
the Company secured lease obligations for two of these aircraft with letters of
credit totaling $1,500,000 and, in turn, $650,000 of cash security deposits was
returned to the Company. The Company's restricted cash increased by $1,500,000
to collateralize the letters of credit. Two of the four leases have seven year
terms, and two have eight year terms, in each case from date of delivery. Two of
the four leases have up to two one year renewal terms and a third may be renewed
for up to three one year terms. The Company is required to pay monthly cash
deposits to each aircraft lessor based on flight hours and cycles operated to
provide funding of future scheduled maintenance costs. As of September 30, 1998,
the Company had maintenance deposits associated with these aircraft totaling
$4,583,000.
In October 1998, the Company took delivery of a leased Boeing 737-200
advanced aircraft. The lease term for this aircraft is seven years from date of
delivery. The Company has made cash security deposits totaling $284,000 to
secure the aircraft lease. The Company is also required to make monthly cash
deposits for maintenance of this aircraft commencing in November 1998.
During October 1998, the Company executed two letters of intent with two
different lessors for two additional new Boeing 737-300 aircraft with scheduled
deliveries in November 1998 and December 1998. The first aircraft has a 40 month
lease term from date of delivery with an option to extend the lease term for an
additional 12 months. The second aircraft lease term expires on April 15, 2000,
and may be extended to October 31, 2000 at the lessor's option. The Company is
required to secure these aircraft with cash or letters of credit totaling
$1,120,000. The Company is also required to make monthly cash deposits for
maintenance of these aircraft commencing in January 1999. The addition of these
two aircraft in 1998 will permit the Company's then 17 aircraft fleet to be in
compliance with Stage 3 noise level requirements until January 1, 2000.
Management is continuing to take steps designed to improve the Company's
operating performance. Effective in January 1997, the Company introduced
electronic ticketing. Passengers who call the Company directly are provided the
option of receiving a paper ticket or a confirmation number in lieu of a paper
ticket. Electronic ticketing decreases certain costs including postage and
handling costs, ticket stock, and reduced revenue accounting fees. The Company
also has implemented and maintains a booking capability on its Internet site.
The Company is exploring various means to increase revenues and reduce
expenses. The Company has performed ad hoc charters and will consider them in
the future depending on the availability of its fleet. The Company is
considering revenue enhancement initiatives with new marketing alliances.
Expense reduction programs include the installation of an upgraded flight
operations, maintenance, and parts inventory management information system which
will be installed by the end of the fiscal year ending March 31, 1999. Other
potential cost savings programs include an in-house revenue accounting system
and conducting certain heavy maintenance checks in-house.
The Company began its own ground handling operations at DIA effective
September 1, 1998, a function which had been provided by an independent
contractor. Ground handling equipment required by the Company to perform these
operations internally necessitated capital expenditures of approximately
$850,000.
The Company's sublease with Continental Airlines for terminal gates and
other related space at DIA expires in March 2000. If DIA is unsuccessful in
reallocating the cost of the inoperative automated baggage system on Concourse
A, which is presently subsidized by Continental Airlines, the Company's
operating costs to cover the additional cost associated with this system would
increase materially. The Company's present fixed monthly rate under the terms of
the sublease with Continental would change to a per passenger fee.
The Company has a contract with a credit card processor that requires the
Company to provide a letter of credit to match the total amount of air traffic
liability associated with credit card customers if the Company does not meet
certain financial covenants and if the credit card processor requests that the
collateral be increased. As of September 30, 1998, the Company did not meet the
financial covenant requirements. In November 1997, the credit card processor
required an increase in the collateral amount from its present level of
$2,000,000 to $4,000,000, which increased the Company's current restricted
investment balance accordingly. As of November 9, 1998, the Company could be
required to increase the collateral amount to $6,183,000. Given the Company's
improved financial results, management is negotiating with the credit card
processor to reduce the collateral amount although there can be no assurance
that the Company will be able to reduce the collateral amount required.
The Company's goal is to continue to lease additional aircraft to serve
additional cities from Denver. The Company is adding routes to Atlanta, Georgia,
Dallas/Ft. Worth, Texas and Las Vegas, Nevada effective December 17, 1998. The
Company believes that expanding its route system would facilitate a greater
volume of connecting traffic as well as a stable base of local traffic and
offset the impact of higher DIA-related operating costs through more efficient
gate utilization. The expansion of the Company's operations will entail the
hiring of additional employees to staff flight and ground operations in new
markets, and significant initial costs such as deposits for airport and aircraft
leases. Because of the expansion of the Company's business, and competition
within the airline industry which often requires quick reaction by management to
changes in market conditions, the Company may require additional capital to
further expand its business.
In February 1997, United Airlines commenced service using its low fare
United "Shuttle" between Denver and Phoenix, Arizona, and in October 1997 such
service to Salt Lake City was added by United. These are both markets in which
the Company provides service, in addition to other markets where United Airlines
provides flights. The Company also plans to commence service between Denver and
Las Vegas in December 1998, another market in which United provides service with
United "Shuttle". This additional competition, as well as other competitive
activities by United and other carriers, have had and could continue to have a
material adverse effect on the Company's revenues and results of operations.
The Company has incurred substantial operating losses since its
inception. In addition, the Company has substantial contractual commitments for
leasing and maintaining aircraft. The Company believes that its existing cash
balances coupled with improved operating results will be adequate to fund the
Company's operations at least through March 31, 1999. There can be no assurances
however, that the Company will be successful in achieving profitable operating
results in fiscal 1999, and the Company could be required to obtain additional
capital or other financing to fund its operations.
Year 2000 Compliance
Background. Older computers were programmed to use a two-digit code for
the date entry rather than a four-digit code. For example, the date November 17,
1970 would be entered as "11/17/70" rather than "11/17/1970." The decision to
use two digits instead of four was based largely on cost-reduction
considerations and the belief that the code would no longer be used at the
millennium. Nevertheless, coding conventions have not changed, and on January 1,
2000, computers may read the digits "00" as denoting the year 1900 rather than
2000. At the least, this could result in massive quantities of incorrect data.
At worst, it could result in the total or partial failure of time sensitive
computer systems and software.
The Company's Year 2000 Issues. The Company began operations in July
1994, and its operations depend predominantly on third party computer systems.
Because of the Company's limited resources during its start-up, the most cost
effective way to establish its computer systems was to outsource or to use
manual systems. Internal systems developed and any software acquired are limited
and were designed or purchased with the Year 2000 taken into consideration.
The Company has designated an employee committee that is responsible for
(1) identifying and assessing Year 2000 issues, (2) modifying, upgrading or
replacing computer systems, (3) testing internal and third party systems and,
(4) developing contingency plans in the event that a system or systems fail.
This committee periodically reports to management regarding progress being made
in addressing the Year 2000 issue. Management, in turn, periodically reports to
the Board of Directors on the issue.
The Company relies on third parties which provide goods and services
which are imperative to the Company's operations including, but not limited to,
the U.S. Federal Aviation Administration, the U.S. Department of Transportation,
local airport authorities including DIA, utilities, communication providers, and
fuel suppliers. The Company is reviewing, and has initiated formal
communications with, these third party service providers to determine their Year
2000 readiness, the extent to which the Company is vulnerable to any failure by
such third parties to remediate their Year 2000 problems and to resolve such
issues to the extent practicable.
Although the Company is primarily in the identification and assessment
phase of its Year 2000 project, some systems are in the modification and testing
phases. These include the customer reservations and ticketing system and the
credit card processing system that is interfaced with the reservations and
ticketing system. These systems are outsourced and the costs of modifying and
testing these systems are being absorbed by the third party provider. The
Company's general accounting and payroll systems are being upgraded to new
versions that are Year 2000 compliant at an insignificant cost to the Company.
The Company's crew and dispatch training records, aircraft maintenance records
and inventory control are in the process of automating from manual systems to
computer systems that are Year 2000 compliant. The Boeing Company has verified
that the computer systems on the aircraft type operated by the Company are or
will be Year 2000 compliant before the year 2000. The Company plans to complete
its identification and assessment phase by December 31, 1998, its modification
and testing phases by June 30, 1999, and its contingency plans by October 31,
1999.
The Company has utilized existing resources and has not incurred any
significant costs to implement its Year 2000 project to date. The total
remaining cost of the Year 2000 project are expected to be immaterial and will
be funded through cash from operations. The costs and the dates on which the
Company anticipates it will complete the Year 2000 project are based on
management's best estimates. There can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Despite its efforts to address Year 2000 issues, the Company could
potentially experience disruptions to some of its operations, including those
resulting from non-compliant systems used by third party business and
governmental entities. The Company's business, financial condition or results of
operations could be materially adversely affected by the failure of its systems
or those operated by third parties upon which the Company's business relies.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
PART II. OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
Notes 2 and 3 to the Condensed Financial Statements are
incorporated by reference herein. The transactions referenced in
those notes were exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act") pursuant
to Section 4(2) thereof as sales to institutional investors not
involving a public offering. No underwriters were involved in such
offerings.
Item 4: Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on
September 10, 1998, at which a quorum for the transaction of
business was present. Three matters were voted upon, as described
below.
(a) Members of the Company's Board of Directors elected at the
meeting were Samuel D. Addoms, B LaRae Orullian, Paul S.
Dempsey, William B. McNamara, D. Dale Browning, Arthur H.
Amron and B. Ben Baldanza. The votes cast with respect to each
nominee were as follows:
12,679,084 "For" Mr. Addoms; 55,590 "Withheld"
12,668,683 "For" Ms. Orullian; 65,991 "Withheld"
12,680,006 "For" Mr. Dempsey; 54,668 "Withheld"
12,657,857 "For" Mr. McNamara; 76,817 "Withheld"
12,662,603 "For" Mr. Browning; 72,071 "Withheld"
12,665,986 "For" Mr. Amron 78,688 "Withheld"
12,635,442 "For" Mr. Baldanza 99,232 "Withheld"
(b) Shareholders voted to ratify an increase in the number of
shares available for grant under the Company's 1994 Stock
Option Plan from 2,250,000 to 4,250,000. There were 6,660,843
votes "for" this proposal, 564,073 "against", and 63,507
abstentions.
(c) Shareholders ratified the appointment of KPMG Peat Marwick LLP
as the Company's independent public accountants for the year
ending March 31, 1999. There were 12,631,988 votes "for" this
proposal, 35,717"against", and 66,969 abstentions.
Item 5: Other Information
On October 19, 1998, James B. Upchurch was appointed as a member
of the Company's board of directors.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
10.34 Aircraft Lease Agreement (MSN 21613) dated as of
August 10,1998 between the Company and Interlease
Aviation Investors, L.L.C.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
FRONTIER AIRLINES, INC.
Date: November 12, 1998 By: /s/ Samuel D. Addoms
---------------------------------------
Samuel D. Addoms, Principal Executive
Officer and Principal Financial Officer
Date: November 12, 1998 By: /s/ Elissa A. Potucek
---------------------------------------
Elissa A. Potucek, Vice President,
Controller, Treasurer and Principal
Accounting Officer
AIRCRAFT LEASE AGREEMENT
Dated as of
August 10, 1998
between
INTERLEASE AVIATION INVESTORS, L.L.C.
as
Lessor
and
FRONTIER AIRLINES, INC.
as
Lessee
in respect of Boeing 737-2P6 Aircraft
Serial Number 21613
U.S. Registration No. N1PC
<PAGE>
INDEX
CLAUSE PAGE
1. INTERPRETATION 1
2. REPRESENTATIONS AND WARRANTIES 13
3. CONDITIONS PRECEDENT 18
4. COMMENCEMENT 21
5. PAYMENTS 23
6. MANUFACTURER'S WARRANTIES 29
7. LESSOR'S COVENANTS 30
8. LESSEE'S COVENANTS 31
9. INSURANCE 45
10. INDEMNITY 48
11. EVENTS OF LOSS 49
12. RETURN OF AIRCRAFT 50
13. DEFAULT 53
14. ASSIGNMENT 58
15. ILLEGALITY 58
16. MISCELLANEOUS 58
17. DISCLAIMERS AND WAIVERS 62
18. SECTION 1110 63
<PAGE>
THIS AIRCRAFT LEASE AGREEMENT (this "Agreement") is made as of the ____
day of August, 1998 between INTERLEASE AVIATION INVESTORS, L.L.C., a limited
liability company incorporated under the laws of the State of Iowa whose
principal office is at One Northfield Plaza, Suite 525, Northfield, Illinois
60093, ("Lessor"), and FRONTIER AIRLINES, INC., a company incorporated under the
laws of the State of Colorado whose chief executive office is at 12015 East 46th
Avenue, Denver, Colorado 80239 ("Lessee").
WHEREAS, Lessor wishes to lease to Lessee, and Lessee is willing to
lease from Lessor, the Aircraft (as defined herein) on the terms of this
Agreement.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
agreements of the parties herein set forth, Lessor and Lessee agree as follows:
I. INTERPRETATION
A. DEFINITIONS
In this Agreement, the following terms have the meanings set forth
below:
Agreed Maintenance
Performer Lessee (up to and including C
Check but not including C-7
plus SI Check), or any FAA
approved maintenance facility
or any other person agreed to
from time to time in writing
by Lessor.
Agreed Maintenance
Program The Maintenance Program
agreed to from time to time
in writing by Lessor.
Agreed Value $12,500,000, or, if
higher, the appraised value
of the Aircraft most recently
determined by an appraiser
selected by Lessor from
appraisers experienced in
valuing Boeing 737 aircraft.
Air Authority The FAA.
Aircraft The aircraft described in
Part 1 of Schedule 1 (which
term includes, where the
context permits, a separate
reference to all Engines,
Parts and Aircraft
Documents).
Aircraft Deposit All amounts payable pursuant
to Section 5.1.
Aircraft Documents All historical records
delivered with the Aircraft
for work accomplished prior
to the Delivery Date and
current records for work
accomplished subsequent to
the Delivery Date, including,
but not limited to, the
documents, data and records
identified in Part 2 of
Schedule 1 and all additions,
renewals, revisions and
replacements from time to
time made in accordance with
this Agreement.
Airframe The Aircraft, excluding the
Engines and Aircraft
Documents.
APU The auxiliary power unit
installed on the Aircraft on
the Delivery Date and any
replacement auxiliary power
unit installed in accordance
with this Agreement.
Banks Such financial institution(s)
or other lenders which from
time to time finance(s) the
Aircraft for Lessor and/or
for whose benefit security
over, or rights relating to,
the Aircraft and/or this
Agreement is granted by
Lessor or at its request.
Boeing The Boeing Company, a
Delaware corporation with its
principal office in Seattle,
Washington.
Business Day A day (other than a
Saturday or Sunday) on which
business of the nature
required by this Agreement is
carried out in the State of
Illinois or, where used in
relation to payments, on
which banks are open for
business in the States of
Illinois and Colorado.
Certificated Air
Carrier Any Person (except the United
States Government) domiciled
in the United States of
America and holding a
Certificate of Convenience
and Necessity issued under 49
U.S.C.ss. 41102 of the Code
by the Department of
Transportation or any
predecessor or successor
agency thereto and an Air
Carrier Certificate issued by
the FAA under 49 U.S.C.ss.
44705, or, in the event such
Certificates shall no longer
be issued, any Person (except
the United States Government)
domiciled in the United
States of America and legally
engaged in the business of
transporting for hire
passengers or cargo by air
predominantly to, from or
between points within the
United States of America,
and, in either event,
operating commercial jet
aircraft, which also is
certificated so as to fall
within the purview of Section
1110 of Title 11 of the
United States Code or any
similar statute.
Cold Section
Refurbishment The completion of the
following tasks with respect
to an Engine: completely
unstack the high or low
compressors, or both if
needed, and complete the
following for the appropriate
section(s); de-blade disks as
necessary; accomplish visual
inspections of all disks;
measure to assure all snap
diameters on disks are within
limits; inspect blades for
proper chord dimensions and
cracking; repair or replace
blades below minimums;
inspect and repair stators as
necessary; blade up disks
using new lock plates;
assemble compressor rotors;
balance both rotors; and
install rotors in such Engine
Cycle One take-off and landing of
the Aircraft.
Damage Notification
Threshold $100,000.
Default Any Event of Default and any
event or condition which with
the giving of notice or lapse
of time would constitute an
Event of Default.
Delivery Date The date on which the
Aircraft is tendered for
delivery by Lessor in
accordance with this
Agreement.
Delivery Location Such airport within
the continental United States
as shall be agreed by Lessor
and Lessee.
Dollars and $ The lawful currency of the
United States of America.
Engine Whether or not installed on
the Aircraft:
(a) each engine of the
manufacture and model
specified in Part 1 of
Schedule 1 (each of
which has 750 or more
rated takeoff
horsepower or the
equivalent of such
horsepower) which
Lessor elects to tender
to Lessee with the
Aircraft on the
Delivery Date, such
engines being described
as to serial numbers on
the certificate of
acceptance to be
executed by Lessee upon
delivery of the
Aircraft; or
(b) any engine which has
replaced that engine,
title to which has, or
should have, passed to
Lessor in accordance
with this Agreement;
and in each case
includes all modules
and Parts from time to
time belonging to or
installed in that
engine but excludes any
properly replaced
engine title to which
has, or should have,
passed to Lessee
pursuant to this
Agreement.
Event of Default An event or condition
specified in Section 13.1.
Event of Loss With respect to the Aircraft
(including for the purposes
of this definition the
Airframe):
(a) the actual or
constructive total loss
of the Aircraft
(including any damage
to the Aircraft which
results in an insurance
settlement on the basis
of a total loss, or
requisition for use or
hire which results in
an insurance settlement
on the basis of a total
loss); or
(b) it being destroyed,
damaged beyond repair
or permanently rendered
unfit for normal use
for any reason
whatsoever; or
(c) the requisition of
title, or other
compulsory acquisition,
capture, seizure,
deprivation,
confiscation or
detention for any
reason of the Aircraft
by the government of
the State of
Registration or other
competent authority
(whether de jure or de
facto), but excluding
requisition for use or
hire not involving
requisition of title;
or
(d) the hijacking, theft,
condemnation,
confiscation, seizure
or requisition for use
or hire of the Aircraft
which deprives any
person permitted by
this Agreement to have
possession and/or use
of the Aircraft of its
possession and/or use
for more than 15 days.
Excusable Delay With respect to delivery of
the Aircraft, delay or
non-performance due to or
arising out of acts of God or
public enemy, civil war,
insurrection or riot, fire,
flood, explosion, earthquake,
accident, epidemic,
quarantine restriction, any
act of government,
governmental priority,
allocation, regulation or
order affecting, directly or
indirectly, the Aircraft, any
vendor, Lessor or any
materials or facilities,
strike or labor dispute
causing cessation,slowdown or
interruption of work,
inability after due and
timely diligence to procure
equipment, data or materials
from manufacturers,
suppliers, any existing
lessee in a timely manner,
damage, destruction or loss,
or any other cause to the
extent that such cause is
beyond the control of Lessor
whether above mentioned or
not and whether or not
similar to the foregoing.
Expiration Date Subject to Section 4.6, the
day preceding the numerically
corresponding day 84 months
after the Delivery Date or,
if earlier, the date on
which:
(a) the Aircraft has been
redelivered in
accordance with this
Agreement; or
(b) Lesso receives the
Agreed Value following
an Event of Loss.
FAA The Federal Aviation
Administration of the United
States of America and any
successor thereof.
Federal Aviation Act United States Federal
Aviation Act of 1958, as
amended, or any similar
legislation of the United
States of America enacted in
substitution or replacement
thereof.
Financial Indebtedness Any indebtedness in respect
of:
(a) moneys borrowed or
raised;
(b) any liability under any
debenture, bond, note,
loan stock, acceptance,
documentary credit or
other security;
(c) the acquisition cost of
any asset to the
extent payable before
or after the time of
acquisition or
possession; or
(d) any guarantee,
indemnity or similar
assurance against
financial loss of any
person in respect of
the above.
Financing Statements Uniform Commercial Code
Financing Statements in
respect of this Agreement and
the collateral described
therein prepared in a form
acceptable for filing with
the applicable Government
Entities in the Habitual
Base, the State in which the
chief executive office (as
that term is defined in
Article 9 of the Uniform
Commercial Code as in effect
in the State of Illinois) and
such other jurisdiction as
Lessor shall reasonably
require.
Flight Hour Each hour or part thereof
(rounded up to one decimal
place) elapsing from the
moment the wheel of the
Aircraft leave the ground on
take off until the wheels of
the Aircraft next touch the
ground.
Governing Law The laws of the State of
Illinois.
Government Entity Any of the following:
(a) any national
government, political
subdivision thereof, or
local jurisdiction
therein;
(b) any instrumentality,
board, commission,
court or agency of any
thereof, however
constituted; and
(c) any association,
organization, or
institution of which
any of the above is a
member or to whose
jurisdiction any
thereof is subject or
in whose activities any
of the above is a
participant.
Habitual Base The State of Colorado or,
subject to the prior
written consent of Lessor,
any other state in which the
Aircraft is for the time
being habitually based.
Hot Section
Refurbishment The complete visual
inspection and repair as
necessary of the combustion
section of an Engine. In
conducting such inspection
and repair, the engine shop
must completely unstack the
high pressure or low pressure
turbine or both if needed;
accomplish complete visual
inspection; de-blade disks as
necessary; accomplish visual
inspections of all disks;
measure to assure all snap
diameters on disks are within
limits; inspect blade for
proper chord dimensions and
cracking; repair or replace
blades below minimums;
inspect and repair stators as
necessary; blade up disks
using new lock plates;
assemble compressor rotors,
balance both rotors; and
install rotors in such Engine
Indemnitees Each of Lessor and Banks
including any of their
respective successors and
assigns, shareholders,
subsidiaries, affiliates,
partners, contractors,
directors, officers,
servants, agents and
employees.
Landing Gear The landing gear assemblies
of the Aircraft excluding any
rotable components.
Lessor Lien Any of the following:
(a) any security interest
whatsoever from time to
time created by or
through Lessor in
connection with the
financing of the
Aircraft;
(b) any other security
interest in respect of
the Aircraft which
results from acts of or
claims against Lessor
not related to the
transactions
contemplated by or
permitted under this
Agreement; and
(c) liens in respect of the
Aircraft for Lessor
Taxes.
Lessor Taxes Taxes:
(a) imposed as a direct
result of activities of
Lessor in the
jurisdiction imposing
the liability unrelated
to Lessor's dealings
with Lessee or to the
transactions
contemplated by this
Agreement or the
operation of the
Aircraft by Lessee; or
(b) imposed on the income,
profits or gains of
Lessor by any
Government Entity in
the United States of
America; or
(c) imposed with respect to
any period commencing
or event occurring
after the Expiration
Date and unrelated to
Lessor's dealings with
Lessee or to the
transactions
contemplated by this
Agreement.
Letter Agreement Letter Agreement of even date
herewith between Lessor and
Lessee in respect of the
Aircraft, the terms of which
constitute an integral part
of this Agreement.
Maintenance Program The FAA-approved maintenance
program for the Aircraft
encompassing scheduled
maintenance (including block
maintenance), condition
monitored maintenance, and/or
on-condition maintenance of
Airframe, Engines and Parts,
including but not limited to,
servicing, testing,
preventive maintenance,
repairs, structural
inspections, system checks,
overhauls, approved
modifications, service
bulletins, engineering
orders, airworthiness
directives, corrosion
control, inspections and
treatments.
Maintenance Reserves All amounts payable under
section 5.4(a).
Major Checks Any C-Check, multiple
C-Check, C-7 plus SI Check,
or annual heavy maintenance
visit or segment thereof
suggested for commercial
aircraft of the same model as
the Aircraft by its
manufacturer (however
denominated) as set out in
the Agreed Maintenance
Program.
Manufacturer Boeing.
Minimum Liability Coverage $600,000,000 on each
occurrence.
Other Agreements Any agreement (other than
this Agreement) made or to be
made between Lessor (or an
affiliate, associate or
subsidiary of Lessor) and
Lessee (or an affiliate,
associate or Subsidiary of
Lessee).
Part Whether or not installed on
the Aircraft:
(a) any component,
furnishing or equipment
(other than a complete
Engine) furnished with
the Aircraft on the
Delivery Date; and
(b) any other component,
furnishing or equipment
(other than a complete
Engine) title to which
has, or should have
passed to Lessor
pursuant to this
Agreement;
but excludes any such items
title to which has, or should
have, passed to Lessee
pursuant to this Agreement.
Permitted Lien The following, and only the
following:
(a) any lien for Taxes not
assessed or, if
assessed, not yet due
and payable, or being
contested in good faith
by appropriate
proceedings;
(b) any lien of a repairer,
mechanic, carrier,
hangarkeeper or other
similar lien arising i
the ordinary course of
business or by
operation of law in
respect of obligations
which are not overdue
or are being contested
in good faith by
appropriate
proceedings;
but only if (in the case of
both (a) and (b)) (i)
adequate reserves have been
provided by Lessee for the
payment of the Taxes or
obligations; and (ii) such
proceedings, or the continued
existence of the lien, do not
give rise to any likelihood
of the sale, forfeiture or
other loss of the Aircraft or
any interest therein or of
criminal liability on Lessor
or any Bank; and
(c) any Lessor Lien.
Person Any individual person,
corporation, partnership,
limited liability company,
firm, joint stock company,
joint venture, trust, estate,
unincorporated organization,
association, Government
Entity, or organization or
association of which any of
the above is a member or a
participant.
Prime Rate The rate of interest most
recently announced by
Lessor's Bank as its prime
rate, as in effect from time
to time.
Redelivery Location Chicago, Illinois or such
other location in the
continental United States of
America as Lessor shall
advise Lessee or such other
location as the parties may
agree.
Rent All amounts payable pursuant
to section 5.3.
Rental Period Each period ascertained in
accordance with section 5.2.
Rent Date The first day of each Rental
Period.
Security Interest Any mortgage, charge, pledge,
lien, assignment,
hypothecation, right of set
off or any encumbrance or
other restriction or any
agreement or arrangement
having the effect of creating
a security interest other
than a Permitted Lien, or any
agreement to create the
foregoing other than a
Permitted Lien.
State of Incorporation The State of Colorado.
State of Registration The United States of America.
Subsidiary (a) In relation to any
reference to financial
statements, any company
whose accounts are
consolidated with the
accounts of Lessee in
accordance with
accounting principles
generally accepted
under accounting
standards of the State
of Incorporation; and
(b) For any other purpose
an entity from time to
time:
(i)of which another has
direct or indirect
control or owns
directly or indirectly
more than fifty (50)
percent of the voting
share capital; or
(ii) which is a direct
or indirect subsidiary
of another under the
laws of the
jurisdiction of its
incorporation.
Taxes Taxes, duties and the like of
all kinds and any other
amount corresponding to any
taxation together with any
penalties, fines, surcharge
or interest thereon.
Term The period commencing on the
Delivery Date and ending on
the Expiration Date.
A. CONSTRUCTION
1. In this Agreement, unless a contrary intention is expressly stated,
a reference to:
a) each of "Lessor" or "Lessee" or any other person includes without
prejudice to the provisions of this Agreement any successor in title
to it and any permitted assignee;
a) words importing the plural shall include the singular and vice versa;
a) any document shall include that document as amended, modified, novated
or supplemented;
a) a law
[A] includes any statute, decree, constitution, regulation,
order, judgment or directive of any Government Entity;
[B] includes any treaty, pact, compact or other agreement to
which any Government Entity is a signatory or party;
[C] includes any judicial or administrative interpretation or
application thereof and (4) is a reference to that provision
as amended, substituted or re-enacted;
a) a Section or a Schedule is a reference to a section of or a schedule to
this Agreement; and
1. The headings in this Agreement are for convenience only and shall not be
considered part of any Section for purposes of construing this Agreement.
I. REPRESENTATIONS AND WARRANTIES
A. Lessee's Representations and Warranties: Lessee represents and warrants to
Lessor that:
1. Status. Lessee is a corporation duly incorporated and validly existing in
good standing under the laws of the State of Incorporation and has the corporate
power to own its assets and carry on its business as it is being conducted and
is the holder of all necessary air transportation licenses required in
connection therewith and with the use and operation of the Aircraft;
1. Power and Authority. Lessee has the corporate power to enter into and
perform, and has taken all necessary corporate action to authorize the entry
into, performance and delivery of, this Agreement and the transactions
contemplated by this Agreement;
1. Legal Validity. This Agreement constitutes Lessee's legal, valid and binding
obligation, enforceable against Lessee in accordance with its terms;
1. No Conflicts, Etc. The entry into and performance by Lessee of, and the
transactions contemplated by, this Agreement do not and will not:
a) conflict with any laws binding on Lessee; or
a) conflict with any provisions of the organizational documents of Lessee,
or
a) conflict with or result in default under any indenture, mortgage,
chattel mortgage, deed of trust, conditional sales contract, lease,
bank loan or credit agreement or other agreement which is binding upon
Lessee or any of it assets nor result in the creation of any
Security Interest over any of its assets;
1. Authorizations. All authorizations, consents, registrations and notifications
required in connection with the entry into, performance, validity and
enforceability of, this Agreement and the transactions contemplated by this
Agreement, have been (or will on or before the Delivery Date have been) obtained
or effected (as appropriate) and are (or will on their being obtained or
effected be) in full force and effect;
1. No Immunity.
a) Lessee is subject to civil commercial law with respect to its
obligations under this Agreement; and
a) neither Lessee nor any of its assets is entitled to any right of
immunity and the entry into and performance of this Agreement by Lessee
constitute private and commercial acts;
1. Financial Statements. The audited consolidated financial statements of Lessee
and its Subsidiaries most recently delivered to Lessor:
a) have been prepared in accordance with United States generally accepted
accounting principles applied consistently with the past practices of
Lessee and its Subsidiaries; and
a) fairly represent the consolidated financial condition of Lessee and its
Subsidiaries as at the date thereof;
1. Chief Executive Office. Lessee's chief executive office (as that term is
defined in Article 9 of the Uniform Commercial Code as in effect in the State of
Colorado) is located at 12015 East 46th Avenue, Denver, Colorado 80239;
1. Certificated Air Carrier. Lessee is a Certificated Air Carrier and Lessor, as
lessor of the Aircraft to Lessee, is entitled to the benefits of Section 1110 of
Title 11 of the United States Code with respect to the Aircraft; and
1. Citizen of the United States. Lessee is a "citizen of the United States" as
defined in Section 40102 of Title 49 of the United States Code.
A. Lessee's Further Representations and Warranties: Lessee further represents
and warrants to Lessor that:
1. No Default.
a) no Default has occurred and is continuing or might result from the
entry into or performance of this Agreement; and
a) no other event or condition has occurred and is continuing which
constitutes (or with the giving of notice, lapse of time, determination
of materiality or the fulfillment of any other applicable condition or
any combination of the foregoing, might constitute) a material default
under any indenture, mortgage, chattel mortgage, deed of trust,
conditional sales contract, lease, bank loan or credit agreement o
other agreement which is binding on Lessee or any assets of Lessee;
1. Registration.
a) except for the filing for recordation of this Agreement with the FAA
and the filing of any Financing Statements required (and continuation
statements at periodic intervals), it is not necessary under the laws
of the State of Incorporation or the Habitual Base in order to ensure
the validity, effectiveness and enforceability of this Agreement or
to, establish, perfect or protect the property rights of Lessor in
the Aircraft or any Engine or Part that this Agreement or any other
instrument relating thereto be filed, registered or recorded or tha
any other action be taken or if any such filings, registrations,
recordings or other actions are necessary or advisable, the same have
been effected or will have been effected on or before the Delivery
Date; and
a) under the laws of the State of Incorporation and the Habitual Base
the property rights of Lessor in the Aircraft, have been fully
established, perfected and protected and this Agreement will have
priority in all respects over the claims of all creditors of Lessee;
1. Litigation. No litigation, arbitration, administrative proceedings or
investigation are pending or to Lessee's knowledge threatened against Lessee
which, if adversely determined, would have a material adverse effect upon its
financial condition or business or its ability to perform its obligations under
this Agreement;
1. Pari Passu. The obligations of Lessee under this Agreement rank at least pari
passu with all other present and future unsecured and unsubordinated obligations
(including contingent obligations) of Lessee, with the exception of such
obligations as are mandatorily preferred by law and not by virtue of any
contract;
1. Material Adverse Change. There has been no material adverse change in the
consolidated financial condition of Lessee and its Subsidiaries or the financial
condition of Lessee since the date of the accounts most recently provided to
Lessor on or prior to the date of this Agreement;
1. Taxes. Lessee has delivered all necessary returns and payments due to the tax
authorities in the State of Incorporation and the Habitual Base and all other
jurisdictions in which Lessee is required to pay taxes and/or file tax returns
or reports and Lessee is not required by law to deduct any Taxes from any
payments under this Agreement;
1. Information. The financial and other information furnished by Lessee in
connection with this Agreement does not contain any untrue statement or omit to
state facts, the omission of which makes the statement therein, in the light of
the circumstances under which they were made, misleading, nor omits to disclose
any material matter to Lessor and all forecasts and opinions contained therein
were honestly made on reasonable grounds after due and careful inquiry by
Lessee;
1. Foreign Asset Control. As of the date of this Agreement, Lessee does not hold
any contract or other obligation to operate the Aircraft to any of the countries
designated under the United States Foreign Asset Control Regulations (31 C.F.R.
Parts 500-599), including, as of the date hereof, Cuba, Haiti, Iraq, Libya,
North Korea, Bosnia, Serbia and Montenegro and the Unita Rebels of Angola; 2.
ERISA. Lessee is not engaged in any transaction in connection with which it
could be subjected to either a civil penalty assessed pursuant to Section 502(c)
of ERISA or any tax imposed by Section 5975 of the Internal Revenue Code of
1986, as amended; no material liability of the Pension Benefit Guaranty
Corporation has been or is expected by Lessee to be incurred with respect to any
employee pension benefit plan (as defined in Section 3 of ERISA) maintained by
Lessee; there has been no reportable event (as defined in Section 4043(b) of
ERISA) with respect to any such employee pension benefit plan. There is no event
of termination of any such employee pension benefit plan by the Pension Benefit
Guaranty Corporation; and no accumulated funding deficiency (as defined in
Section 302 of ERISA or Section 412 of the Internal Revenue Code), whether or
not waived, exists with respect to any such employee pension benefit plan; and
1. Maintenance Program. The Maintenance Program for the Aircraft, a true,
correct and complete copy of which has been provided to Lessor, complies with
all FAA requirements and is based on the Boeing 737-200 Maintenance Planning
Document.
A. Survival.
The representations and warranties in Sections 2.1 and 2.2 will survive the
execution of this Agreement will be deemed to be remade by Lessee on the
Delivery Date with reference to the facts and circumstances then existing.
The representations and warranties contained in Clause 2.1 will be deemed to be
remade by Lessee on each Rent Date as if made with reference to the facts and
circumstances then existing.
A. Lessor's Representations and Warranties. Lessor represents and warrants to
Lessee that:
1. Status. Lessor is a limited liability company existing under the laws of the
State of Iowa and has the power to own its assets and carry on its business as
it is now being conducted;
1. Power and Authority. Lessor has the corporate power to enter into and
perform, and has taken all necessary corporate action to authorize the entry
into, performance and delivery of, this Agreement and the transactions
contemplated by this Agreement;
1. Legal Validity. This Agreement constitutes Lessor's legal, valid and binding
obligation, enforceable agreement Lessor in accordance with its terms;
1. No Conflicts. The entry into and performance by Lessor of, and the
transactions contemplated by, this Agreement do not and will not:
a) conflict with any laws binding on Lessor; or
a) conflict with the organizational documents of Lessor; or
a) conflict with any document which is binding upon Lessor or any of its
assets;
1. Authorizations. So far as concerns the obligations of Lessor, all
authorizations, consents, registrations and notifications required under the
laws of the State of Illinois in connection with the entry into, performance,
validity and enforceability of, and the transactions contemplated by, this
Agreement by Lessor have been (or will on or before the Delivery Date have been)
obtained or effected (as appropriate) and are (or will on their being obtained
or effected be) in full force and effect.
1. No Immunity.
a) Lessor is subject to civil commercia law with respect to its
obligations under this Agreement and
(ii) neither Lessor nor any of its assets is
entitled to any right of immunity and the entry
into and performance of this Agreement by Lessor
constitute private and commercial acts.
I. CONDITIONS PRECEDENT
A. Conditions Precedent. Lessor's obligation to deliver and lease the Aircraft
to Lessee under this Agreement is subject to s atisfaction of each of the
following conditions:
1. Receipt by Lessor from Lessee not later than one (1) Business Day prior to
the date set forth in, or determined in accordance with, Section 4.1 of the
following satisfactory in form and substance to Lessor:
a) Organizational Documents. A copy of the organizational documents of
Lessee, certified by the Secretary or an Assistant Secretary of Lessee;
a) Resolutions. A copy of resolutions of the board of directors of Lessee,
certified by the Secretary or an Assistant Secretary of Lessee,
approving the terms of, and the transactions contemplated by, this
Agreement, resolving that it enter into this Agreement, and authorizing
a specified person or persons to execute this Agreement and accept
delivery of the Aircraft on its behalf;
b) Opinion. An opinion substantially in the form of Schedule 5, dated the
Delivery Date, by the Vice President and General Counsel for Lessee,
acceptable to Lessor;
a) FAA Opinion. An opinion of counsel for Lessee, acceptable to Lessor,
who are recognized specialists with regard to FAA registration matters,
in a form acceptable to Lessor, as to the due filing for recordation
of this Agreement;
a) Approvals. Each approval, license and consent which may be require
in relation to the performance by Lessee of any of its obligations
hereunder (including, without limitation, any consent to the export
of the Aircraft from the Habitual Base upon the termination of the
leasing of the Aircraft under this Agreement);
a) Import. Any required import license, and all customs formalities,
relating to the import of the Aircraft into the Habitual Base have been
obtained or complied with, and that the import of the Aircraft into the
Habitual Base is exempt from Taxes;
a) Licenses. Certified copies of Lessee's air transport license, air
operator's certificates and all other licenses, certificates and
permits required by Lessee in relation to, or in connection with,
the operation of the Aircraft;
a) Process Agent. A letter from the process agent appointed by Lessee in
this Agreement accepting that appointment;
a) Certificate. A certificate of the Secretary or an Assistant Secretary
of Lessee:
a) Setting out a specimen of each signature referred to in Section 3.1(a)
(ii); and
b) Certifying that each copy document specified in this Section is
correct, complete and in full force and effect; and
a) General. Such other documents as Lessor may reasonably request;
1. The receipt by Lessor on or before the Delivery Date of:
a) Opinions. A signed original of each of the opinions referred to i
Sections 3.1(a)(iii) and (iv);
b) Payments. All sums due to Lessor under this Agreement on or before
the Delivery Date, including, without limitation, the first payment of
Rent;
a) Insurance. Certified copies of all policies of insurance, and other
evidence satisfactory to Lessor that Lessee has complied with the
provisions of this Agreement as to Insurance effective on and after
the Delivery Date;
a) Financial Statements. The latest available financial statements of
Lessee as described in Sections 8.2(b)(i) and (ii);
a) Documents. A confirmation of receipt of the Aircraft Documents
delivered with the Aircraft on the Delivery Date;
a) General. Such other documents as Lessor may reasonably request;
1. Receipt by Lessor of such information and documents relating to the proposed
Maintenance Program as Lessor may require and Lessor having agreed the proposed
Maintenance Program on or prior to the Delivery Date; and
1. Evidence that on the Delivery Date (i) the Financing Statements have been
duly filed, (ii) a Lease Supplement, substantially in the form of Schedule 1,
Part 3 hereof, has been filed, along with this Lease, with the FAA's aircraft
registry in Oklahoma City, Oklahoma and (iii) all filings, registrations,
recordings and other actions have been taken which are necessary or advisable to
ensure the validity, effectiveness and enforceability of this Agreement and to
protect the property rights of Lessor in the Aircraft or any Part.
A. Further Conditions Precedent. The obligations of Lessor to deliver and lease
the Aircraft under this Agreement are subject to the further conditions
precedent that:
1. The representations and warranties of Lessee under Sections 2.1 and 2.2 are
correct and remain correct on the Delivery Date if remade on delivery of the
Aircraft under this Agreement; and
1. No Default has occurred and is continuing or might result from the leasing of
the Aircraft to Lessee under this Agreement.
A. Waiver. The conditions specified in Sections 3.1 and 3.2 are for the sole
benefit of Lessor and may be waived in whole or in part and with or without
conditions by Lessor. If any of those conditions are not satisfied on the
Delivery Date and Lessor (in its absolute discretion) nonetheless agrees to
deliver the Aircraft to Lessee, Lessee will ensure that those conditions are
satisfied within fifteen (15) days after the Delivery Date and Lessor may treat
as an Event of Default the failure of Lessee to do so.
I. COMMENCEMENT
A. Leasing. Lessor will lease the Aircraft to Lessee, and Lessee will lease the
Aircraft from Lessor in accordance with this Agreement for the duration of the
Term. Lessor will deliver and Lessee will accept the Aircraft on or about
October 10, 1998 or such other day as may be agreed. After delivery, the
Aircraft and every Part will be in every respect at the sole risk of Lessee, who
will bear all risk of loss, theft, damage or destruction to the Aircraft from
any cause whatsoever.
A. Delivery. The Aircraft will be delivered to and accepted by Lessee at the
Delivery Location. Lessee will effect acceptance of the Aircraft by execution
and delivery to Lessor of the duly completed and executed Certificate of
Acceptance in the form of Schedule 2. Prior to the Delivery Date, Lessor shall
give Lessee written notice that the Aircraft is available for inspection at a
location designated by Lessor. Within three (3) Business Days thereafter, Lessee
will inspect the Aircraft at such location. Such inspection may include a
demonstration flight of up to two (2) hours in duration. Upon the conclusion of
such inspection, Lessee will (a) execute a Certificate of Acceptance in the form
of Schedule 2 or (b) in the event that the Aircraft is not in the condition
specified in Schedule 1 to this Agreement, will notify Lessor in writing of
those deficiencies which cause the Aircraft not to meet the delivery conditions
set forth in Schedule 1, in which event, prior to delivery to Lessee, Lessor
shall correct those deficiencies required to cause the Aircraft to meet the
delivery conditions set forth in Schedule 1 to this Lease Agreement.
A. Delayed Delivery. If, as a result of:
1. The current lessee of the Aircraft delaying the delivery of, or failing to
deliver, the Aircraft to Lessor for any reason (other than because of any
default of Lessor in the performance of its obligations under an agreement with
that lessee), unless the default results from any act or omission of Lessee,
whether or not in circumstances entitling that seller terminate that agreement;
or
1. any Excusable Delay;
Lessor delays in the delivery of, or fails to deliver, the Aircraft under this
Agreement:
a) Lessor will not be responsible for any losses, including loss of
profit, costs or expenses arising from or in connection with the delay
or failure suffered or incurred by Lessee;
a) Lessee will not be entitled to terminate this Agreement or to reject
the Aircraft when tendered for delivery by Lessor, on the grounds of
any such delay, unless mutually agreed by Lessor and Lessee; and
a) upon any such termination neither Lessor nor Lessee will have any
further obligation to the other under this Agreement other than as
expressly set out in this Agreement, except that Lessor will rebate to
Lessee the amount of the Aircraft Deposit paid under this Agreement.
A. Licenses. Lessee will at its expense obtain all licenses, permits and
approvals which may be necessary to export and/or transport the Aircraft from
the Delivery Location. Lessor will furnish such data and information as may be
reasonably requested by Lessee in connection with obtaining any such license,
permit or approval.
A. Not Used.
A. C Check Option. Provided that (x) no Default shall have occurred and is
continuing; and (y) there shall have been no material adverse change in Lessee's
financial condition since the Delivery Date, Lessee shall have the option (the
"C Check Option") to extend the Term for up to 2 months provided that such
extension of the Term is required by Lessee so as to enable Lessee to perform
the C Check required by paragraph 1 (e) of Schedule 3 at the time at which such
check would otherwise fall to be performed pursuant to the Agreed Maintenance
Program in the absence of the requirement contained in such section. The C Check
Option shall be exercised, if at all, by Lessee delivering an irrevocable
written notice (a "C Check Notice") to Lessor not later than one hundred eighty
(180) days prior to the New Expiration Date (as defined below) proposed by
Lessee which notice shall state whether Lessee desires to extend the Term and
the proposed date of performance and completion of the aforementioned C Check.
Upon the receipt by Lessor of the C Check Notice, (xx) Lessee shall be obliged
to lease the Aircraft from Lessor until the date (the "New Expiration Date") of
completion of the aforementioned C Check in accordance with the terms and
conditions of this Agreement; and (yy) the definition of "Expiration Date" shall
be deemed to have been amended so as to refer to the New Expiration Date and the
Aircraft shall be redelivered to Lessor on that date (or, as may be applicable,
any other date contemplated by such definition) in accordance with the terms and
conditions of this Agreement.
I. PAYMENTS
A. Aircraft Deposit. In order to faithfully secure its obligations hereunder,
Lessee shall pay to Lessor an Aircraft Deposit in the amount set forth in
paragraph 1 of the Letter Agreement and in accordance with the schedule set
forth in that paragraph. The Aircraft Deposit shall be nonrefundable during the
Term, and shall be held by Lessor as security for (i) the timely and faithful
performance by Lessee of all of Lessee's obligations under this Lease
(including, but not limited to, any prepetition or postpetition obligations of
Lessee in connection with any proceeding or other action involving Lessee under
any bankruptcy, insolvency or reorganization Law of any jurisdiction), (ii) all
payments of Rent and Maintenance Reserves due and owing from time to time, (iii)
any and all damages incurred by Lessor which may arise as a result of the breach
or rejection of the Lease, whether or not in connection with a motion to lift
stay or a motion to assume or reject the Lease, including, without limitation,
overdue interest, costs of preservation or protection of the Aircraft and costs
of repossession and (iv) all attorney's fees incurred by Lessor in connection
with any relating to any of the above, whether or not litigation is instituted
and whether incurred before or after the filing by Lessee of a petition under
Chapter 7 or Chapter 11 of the Bankruptcy Code. Unless this Lease Agreement
shall have been earlier terminated pursuant to Section 13.2, and provided that
no Default shall have occurred and be continuing, the Aircraft Deposit shall be
returned by Lessor to Lessee on the Expiration Date.
A. Rental Periods. The Term will be divided into Rental Periods. The first
Rental Period will commence on the Delivery Date and end on the last day of the
calendar month during which the Delivery Date occurs, with the Rent for such
first Rental Period and the last Rental Period to be prorated on a daily basis
to reflect the actual number of days in such first and last Rental Periods. The
second and each subsequent Rental Period will commence on the first day of each
month next following the last day of the previous Rental Period. Each Rental
Period will end on the last day of each month except that if a Rental Period
would otherwise overrun the Expiration Date, it will end on the Expiration Date.
A. Rent. Lessee will pay to Lessor or its order on each Rent Date, Rent, in
advance, in immediately available funds in the amount set forth in paragraph 2
of Letter Agreement. Payment must be initiated adequately in advance of the Rent
Date to ensure that Lessor receives funds on the Rent Date. If a Rental Period
begins on a non-Business Day, the Rent payable in respect of that Rental Period
shall be paid on the Business Day immediately preceding the date on which such
Rental Period commences. B. Maintenance Reserves.
1. Amount. Lessee will also pay to Lessor Maintenance Reserves in relation to
each Rental Period (including without limitation the last Rental Period of the
Term) on the 10th day following the end of the preceding Rental Period as
follows:
a) in respect of the Airframe, the amount set forth in paragraph 3 (i) of
Letter Agreement in respect of each Flight Hour operated by the
Aircraft during that Rental Period ("Airframe Maintenance Reserves");
and
a) in respect of each Engine, the amount set forth in paragraph 3 (ii) of
Letter Agreement in respect of each Flight Hour operated by that Engine
during that Rental Period ("Engine Refurbishment Maintenance
Reserves");
a) in respect of the APU, the amount set forth in paragraph 3 (iii) of
Letter Agreement in respect of each Flight Hour operated by the APU
during that Rental Period ("APU Refurbishment Maintenance Reserves");
and
a) in respect of the Landing Gear, the amount set forth in paragraph 3
(iv) of Letter Agreement in respect of each Flight Hour operated by the
Landing Gear during that Rental Period ("Landing Gear Maintenance
Reserves").
1. Adjustment. The rate of Maintenance Reserves may be adjusted upwards annually
by Lessor at the rate of up to 3 percent per annum commencing on the first
anniversary of the Delivery Date. In addition, but not limiting the foregoing,
Lessee acknowledges that the rates of Maintenance Reserves currently provided
for in this Agreement are based upon the assumptions that (i) the Agreed
Maintenance Program for the Aircraft during the Term will be the same as that in
effect on the Delivery Date and (ii) the ratio of Flight Hours to Cycles is
1.2:1. In the event that either such assumption proves to be incorrect at any
time during the Term, Lessor and Lessee agree that Lessor shall have the right,
upon written notice to Lessee, to adjust the rate of Maintenance Reserves so as
to reasonably account for the incorrectness of such assumptions. In the event
that the Agreed Maintenance Program changes during the Term (any such change to
be in accordance with the relevant terms and conditions of this Agreement),
Lessor shall make the aforementioned adjustment in the manner which Lessor
determines, in its reasonable discretion, is necessary to maintain the rates of
Maintenance Reserves at levels which accurately reflect the costs associated
with obtaining the affected maintenance services referred to in Section 7.2 at
prevailing industry rates. Each such notice shall specify the revised rate of
Maintenance Reserves and the effective date of such revision. Lessee agrees to
advise Lessor, in writing, of any circumstances or events which would result in
the foregoing assumptions becoming incorrect at any time during the Term.
1. General. Maintenance Reserves will not be held in a blocked or other escrow
account, nor shall the amount of any Maintenance Reserves in excess of the
amounts payable toward accomplishment of the various maintenance tasks in
accordance with Section 7.2 hereof be refunded to Lessee.
A. Payments. All payments by Lessee to Lessor under this Agreement will be made
on the due date in Dollars and in immediately available funds settled through
the New York Clearing House System by wire transfer to Mercantile Bank of
Dubuque, (Acct. No. 28100164518), ABA No. 073900111. Such account shall be
established in such a fashion as to ensure that Lessor's bank will be paid
automatically from such account any amounts owing to the Bank in respect of the
Aircraft.
A. Gross-up.
1. All payments by Lessee under or in connection with this Agreement will be
made without set-off or counterclaim, free and clear of and without deduction
for or on account of all Taxes (other than Lessor Taxes);
1. All Taxes (other than Lessor Taxes) in respect of payments under this
Agreement shall be for the account of and will be paid by Lessee for its own
account prior to the date on which penalties apply; and
1. If Lessee is compelled by law to make payment subject to any Tax (other than
Lessor Taxes) and Lessor does not actually receive for its own benefit on the
due date a net amount equal to the full amount provided for under this
Agreement, Lessee will pay all necessary additional amounts to ensure receipt by
Lessor of the full amount so provided for.
A. Taxation. Lessee will on demand pay and indemnify Lessor against all Taxes
(other than Lessor Taxes) levied or imposed against or upon Lessor or Lessee and
relating to or attributable to Lessee, this Agreement or the Aircraft directly
or indirectly in connection with the importation, exportation, registration,
ownership, leasing, sub leasing, delivery, possession, use, operation, repair,
maintenance, overhaul, transportation, landing, storage, presence or redelivery
of the Aircraft or any part thereof or any rent, receipts, insurance proceeds,
income or other amounts arising therefrom.
A. Value Added Tax.
1. For the purposes of this subsection:
a) "VAT" means value added tax and any sales or turnover tax or imposition
of a like nature;
a) "supply" includes anything on which VAT is chargeable;
1. Lessee will pay to Lessor the amount of any VAT chargeable in respect of any
supply of goods or services for VAT purposes under this Agreement; and
1. Each amount stated as payable by Lessee under this Agreement is exclusive of
VAT (if any) and is accordingly to be construed as a reference to that amount
plus any VAT in respect of it.
A. Information. If Lessee is required by any applicable law, or by any third
party, to deliver any report or return in connection with any Taxes, Lessee will
complete the same in a manner satisfactory to Lessor and in particular will
state therein that Lessee is exclusively responsible for the use and operation
of the Aircraft and for any Taxes arising therefrom, and Lessee will, on request
supply a copy of the report or return to Lessor.
A. Taxation of Indemnity Payments.
1. If and to the extent that any sums payable to Lessor by Lessee under this
Agreement by way of indemnity are insufficient, by reason of any Taxes payable
in respect of those sums, for Lessor to discharge the corresponding liability to
the relevant party (including any taxation authority), or to reimburse Lessor
for the cost incurred by it to a third party (including any taxation authority)
Lessee will pay to Lessor such sum as will after the tax liability has been
fully satisfied leave Lessor with the same amount as it would have been entitled
to receive in the absence of that liability together with interest on the amount
of the deficit at the rate of interest stated in Section 5.11 in respect of the
period commencing on the date on which the payment of taxation is finally due
until payment by Lessee (both before and after judgment); and
1. If and to the extent that any sums constituting (directly or indirectly) an
indemnity to Lessor but paid by Lessee to any person other than Lessor are
treated as taxable in the hands of Lessor, Lessee will pay to Lessor such sum as
will after the tax liability has been fully satisfied indemnify Lessor to the
same extent as it would have been indemnified in the absence of such liability
together with interest on the amount payable by Lessee under this subsection at
the rate of interest stated in Section 5.11 in respect of the period commencing
on the date on which the payment of taxation is finally due until payment by
Lessee (both before and after judgment) provided however that Lessee will not be
liable for any Lessor Taxes incurred as a result of the payment of the Agreed
Value pursuant to Section 11.
A. Default Interest. If Lessee fails to pay any amount payable under this
Agreement on the due date, Lessee will pay on demand from time to time to Lessor
interest (both before and after judgment) on that amount, from the due date to
the date of payment in full by Lessee to Lessor, at the rate calculated by
Lessor to be the Prime Rate plus five percent (5%) per annum. All such interest
will be compounded monthly and calculated on the basis of the actual number of
days elapsed and a 360 day year.
A. Contest. If Lessee disputes the payment of any Taxes payable by Lessor for
which Lessee is responsible under this Agreement, Lessor will consider with
Lessee the taking of such action as Lessee may reasonably request at Lessee's
expense to contest that payment but will not be obliged to take any such action:
1. Which Lessor considers in its sole discretion may prejudice it; or
1. Which Lessor considers does not have a reasonable prospect of success; or
1. For which Lessee has not made adequate provision to the satisfaction of
Lessor in respect of the expense concerned.
A. Absolute and Conditional Obligations of Lessee. Lessee's obligations under
this Agreement are absolute and unconditional irrespective of any contingency
whatsoever including (but not limited to):
1. Any right of set-off, counterclaim, recoupment, defence or other right which
either party to this Agreement may have against the other;
1. Any unavailability of the Aircraft for any reason, including, but not limited
to, a requisition of the Aircraft or any prohibition or interruption of or
interference with or other restriction against Lessee's use, operation or
possession of the Aircraft;
1. Any lack or invalidity of title or any other defect in title, airworthiness,
merchantability, fitness for any purpose, condition, design, or operation of any
kind or nature of the Aircraft for any particular use or trade, or for
registration or documentation under the laws of any relevant jurisdiction, or
any Event of Loss in respect of or any damage to the Aircraft;
1. Any insolvency, bankruptcy, reorganization, arrangement, readjustment of
debt, dissolution, liquidation or similar proceedings by or against Lessor or
Lessee;
1. Any invalidity or unenforceability or lack of due authorization of, or other
defect in, this Agreement; and
1. Any other cause which but for this provision would or might otherwise have
the effect of terminating or in any way affecting any obligation of Lessee under
this Agreement.
A. Security.
1. It is intended by Lessor and Lessee that the Maintenance Reserves payable by
Lessee to Lessor pursuant to Section 5.4 are amounts paid by Lessee to Lessor in
consideration for the use of the Aircraft by Lessee and the satisfaction of
Lessee's obligations under this Agreement and that, except as otherwise provided
in Section 7.2, once paid, those monies irrevocably and unconditionally shall be
the property of Lessor. Notwithstanding that stated intent, if and to the extent
that those monies or any thereof, under any applicable law or otherwise, are
determined to be security deposits or otherwise the property of Lessee or if it
is so determined those monies are a debt owed to Lessee or that Lessee, other
than as set forth in Section 7.2, shall have any interest in those monies (the
"Maintenance Reserve Account"), the parties agree that subsections (c), (d) and
(e) below shall apply;
1. It is further intended by Lessor and Lessee that Aircraft Deposit payable by
Lessee to Lessor pursuant to Section 5.1 and, if applicable, the Insurance
Security Deposit contemplated by the first paragraph of Schedule 4
(collectively, the "Deposits") are security deposits to faithfully secure the
satisfaction by Lessee of its obligations under the Agreement.
1. To the fullest extent permitted by law and by way of continuing security,
Lessee grants to Lessor a security interest in the Maintenance Reserve Account
and the Deposits and all rights of Lessee to payment thereof, the debt
represented thereby and/or any and all interest of Lessee therein to Lessor by
way of first priority security interest as security for Lessee's obligations and
liabilities under this Agreement and the Other Agreements (the "Secured
Liabilities"). Except as expressly permitted under Sections 7.2 or otherwise
under this Agreement, Lessee will not be entitled to payment of the Maintenance
Reserve Account. Except as expressly permitted under Section 5.1 and Schedule 4
of this Agreement, Lessee will not be entitled to payment of the Deposits.
Lessee will not assign, transfer or otherwise dispose of all or part of its
rights in the Maintenance Reserve Account or the Deposits and Lessee agrees that
it will enter into any additional documents and instruments necessary or
reasonably requested by Lessor to evidence, create or perfect Lessor's rights in
the Reserve Account and the Deposits.
1. If Lessee fails to comply with any provision of this Agreement or any Event
of Default has occurred and is continuing Lessor may immediately or at any time
thereafter, without prior notice to Lessee:
a) Set-off all or any part of the Secure Liabilities against the
contribution and/or refund liabilities of Lessor in respect of the
Maintenance Reserve Account and/or the Deposits; or
a) Apply or appropriate the Maintenance Reserve Account and/or the
Deposits in or towards the payment or discharge of the Secured
Liabilities in such order as Lessor sees fit; and
1. If Lessor has exercised the set-off described in sub-clause (d) above, Lessee
shall, following a demand in writing from Lessor, promptly restore the
Maintenance Reserve Account and/or the Deposits, as applicable, to the level at
which they stood immediately prior to such set-off.
I. MANUFACTURER'S WARRANTIES
A. Assignment. Notwithstanding this Agreement, Lessor will remain entitled to
the benefit of each warranty, express or implied, with respect to the Aircraft,
any Engine or Part so far as concerns any manufacturer, vendor, subcontractor or
supplier or any seller from whom Lessor acquired the Aircraft. Except to the
extent Lessor otherwise directs, Lessor hereby authorizes Lessee to pursue any
claim against any manufacturer, vendor or supplier (but not any seller of the
Aircraft) in relation to defects affecting the Aircraft, any Engine or Part and
Lessee agrees diligently to pursue any such claim which arises at its own cost.
Lessee will notify Lessor promptly upon becoming aware of any such claim.
A. Proceeds. Except to the extent Lessor otherwise agrees in a particular case,
all proceeds of any such claim will be paid directly to Lessor, except, but if
and to the extent that such claim relates:
1. To defects affecting the Aircraft which Lessee has rectified; or
2. To compensation for loss of use of the Aircraft, an Engine or any Part during
the Term; and provided no Default has occurred and is continuing, the proceeds
will be paid to Lessee by Lessor but only on receipt of evidence satisfactory
to Lessor that Lessee has rectified the relevant defect.
A. Parts. Except to the extent Lessor otherwise agrees in a particular case,
Lessee will procure all engines, components, furnishings or equipment provided
by the manufacturer, vendor, subcontractor or supplier in replacement of a
defective Engine or Part pursuant to the terms of any warranty, all of which
will be installed promptly by Lessee such that title thereto vests in Lessor
free of Security Interests. On installation those items will be deemed to be an
Engine or Part as applicable.
A. Agreement. To the extent any warranties relating to the Aircraft are made
available under an agreement between any manufacturer, vendor, subcontractor or
supplier and Lessee, this Section 6 is subject to that agreement. However Lessee
will:
1. Pay the proceeds of any claim thereunder to Lessor to be applied pursuant to
Section 6.2 and pending such payment will hold the claim and the proceeds on
trust for Lessor; and
1. Lessee will take all such steps as are necessary at the end of the Term to
ensure the benefit of any of those warranties which have not expired are vested
in Lessor.
I. LESSOR'S COVENANTS
A. Quiet Enjoyment. Lessor will not interfere with the quiet use, possession and
enjoyment of the Aircraft by Lessee, but the exercise by Lessor of its rights
under or in connection with this Agreement will not constitute such an
interference.
A. Maintenance Contribution. Provided no Default has occurred and is continuing,
Lessor will promptly pay to third party vendors, suppliers, maintenance shops or
service facilities, by way of contribution to the cost of maintenance of the
Aircraft, upon submission by Lessee to Lessor within six (6) months of the
commencement of that maintenance and before the Expiration Date of an invoice
(which for this purpose may include such vendor's final estimated invoice issued
immediately prior to redelivery to Lessee of the Aircraft so long as Lessee
provides Lessor with the final invoice and the relevant maintenance contribution
is adjusted to reflect such final invoice as soon as it becomes available) and
supporting documentation reasonably satisfactory to Lessor, evidencing with
respect to (x) the Airframe, any "C-7" plus SI (formerly "D") check or (y) any
Engine or APU, the performance in accordance with this Agreement of a Hot
Section Refurbishment, a Cold Section Refurbishment and/or the replacement of
Life Limited Parts or (z) any landing gear, work in the nature of overhaul
requiring removal and disassembly (in each case, other than (i) repairs arising
as a result of foreign object damage or operational or maintenance mishandling
and/or (ii) removal, installation, maintenance and repair of QEC (Quick Engine
Change) kits; and/or (iii) accomplishment of any airworthiness directives) the
lesser of (a) the amount of that invoice and (b) an amount equal to the
aggregate amount of Maintenance Reserves paid in respect of the Airframe, that
Engine or APU or the Landing Gear under this Agreement, respectively, at the
time of commencement of such maintenance less the aggregate amount previously
paid in respect of the Airframe, that Engine or APU or the Landing Gear by
Lessor under this subsection. Notwithstanding the foregoing to the contrary, if
the amount of the Airframe Maintenance Reserves paid by Lessee are insufficient
to perform the first "C-7" plus SI (formerly "D") check, Lessor shall contribute
to the cost thereof an amount of money up to the sum equal to $80 multiplied by
the number of Flight Hours flown by the Aircraft by the previous lessee.
A. Lessor Obligations Following Expiration Date. Upon:
1. Redelivery of the Aircraft to Lessor in accordance with and in the condition
required by this Agreement; or
1. Payment to Lessor of the Agreed Value following an Event of Loss after the
Delivery Date;
or in each case such later time as Lessor is satisfied Lessee has irrevocably
paid to Lessor all amounts which may then be outstanding or become payable under
this Agreement or the Other Agreements and provided that no Default shall have
occurred and is continuing, Lessor will pay to Lessee:
a) the amount of any Rent received in respect of any period falling after
the date of redelivery of the Aircraft or payment of the Agreed Value,
as the case may be; and
a) the Aircraft Deposit.
I. LESSEE'S COVENANTS
A. Duration. The obligations in this Section and in Section 12 will:
1. Except as otherwise stated, be performed at the expense of Lessee; and
1. Remain in force until the Expiration Date in accordance with this Agreement
and thereafter to the extent of any accrued rights of Lessor in relation to
those obligations.
A. Information. Lessee will:
1. Notify Lessor forthwith of the occurrence of any Default or any other event
which might adversely affect Lessee's ability to perform any of its obligations
under this Agreement;
1. Furnish to Lessor:
a) on a monthly and quarterly basis, the consolidated unaudited financial
statements of Lessee (comprising a balance sheet and profit and loss
statement) prepared for the most recent previous month or fiscal
quarter, certified by Lessee's chief financial officer as being true
and correct;
a) as soon as available but not in any event later than one hundred twenty
(120) days after the last day of each fiscal year of Lessee, its
audited consolidated financial statements for the year ending on such
day;
a) at the same time as it is issued to the shareholders or creditors of
Lessee generally, a copy of each notice or circular issued to Lessee's
shareholders or creditors as a group; and
a) on request from time to time, such other information relevant to the
transactions contemplated by this Agreement regarding Lessee and its
business and affairs as Lessor may reasonably request;
1. Keep Lessor informed as to current serial numbers of the Engines and any
engine installed on the Aircraft;
1. Promptly furnish to Lessor all information Lessor from time to time
reasonably requests regarding the Aircraft, any Engine or any Part, its use,
location and condition including, without limitation, the hours available on the
Aircraft and any Engine until the next scheduled check, inspection, overhaul or
shop visit, as the case may be;
1. On request, within ten (10) days after the end of any Rental Period, furnish
to Lessor evidence satisfactory to Lessor of payment of all Taxes due during
that or any previous Rental Period;
1. On request, furnish to Lessor evidence satisfactory to Lessor that all Taxes
and charges incurred by Lessee with respect to the Aircraft, including without
limitation all payments due to the relevant air traffic control authorities,
have been paid and discharged in full;
1. Provide Lessor with a monthly report (i) on the Flight Hours and Cycles
accumulated in respect of the Airframe, each Engine and APU and each Landing
Gear during the preceding month in the form required from time to time by Lessor
and (ii) removal and/or replacement (whether temporary or otherwise) of any
Engine, APU, Landing Gear or other rotable Part during the preceding month in
the form required from time to time by Lessor.
1. Give Lessor not less than sixty (60) days' written notice as to the time and
location of all Major Checks and provide Lessor prompt notice of any changes in
such time and location; and
1. Promptly notify Lessor of:
a) Any loss, theft, damage or destruction to the Aircraft, any Engine or
any Part, or any modification to the Aircraft if the potential cost may
exceed the Damage Notification Threshold; and
a) Any claim or other occurrence reasonably likely to give rise to a claim
under the Insurance (but in the case of hull claims only in excess of
the Damage Notification Threshold) and details of any negotiations with
the insurance brokers over any such claim.
A. Lawful and Safe Operation. Lessee will:
1. Comply with all laws in force in any country or jurisdiction which may be
applicable to the Aircraft or, so far as concerns the use and operation of the
Aircraft or an owner or operator thereof and take all reasonable steps to ensure
that the Aircraft is not used for any illegal purpose;
1. Not use the Aircraft in any manner contrary to any recommendation of the
manufacturer of the Aircraft, any Engine or any Part or any recommendation or
regulation of the Air Authority or for any purpose for which the Aircraft is not
designed or reasonably suitable;
1. Ensure that the crew and engineers employed by it in connection with the
operation and maintenance of the Aircraft have the qualifications and hold the
licenses required by the Air Authority and applicable law;
1. Use the Aircraft solely in commercial or other operations for which Lessee is
duly authorized by the Air Authority and applicable law; 2. Not use the Aircraft
for the carriage of:
a) whole animals living or dead except in the cargo compartments according
to I.A.T.A. regulations, and except domestic pet animals carried in a
suitable container to prevent the escap of any liquid and to ensure
the welfare of the animal;
a) acids, toxic chemicals, other corrosive materials, explosives, nuclear
fuels, nuclear wastes, or any nuclear assemblies or components, except
as permitted for passenger aircraft under the "Restriction of Goods"
schedule issued by I.A.T.A. from time to time and provided that all the
requirements for packaging or otherwise contained therein are
fulfilled;
a) any other goods, materials or items of cargo which could reasonably be
expected to cause damage to the Aircraft and which would not be
adequately covered by the Insurances; or
a) any illegal item or substance;
1. Not utilize the Aircraft for purposes of training, qualifying or reconfirming
the status of cockpit personnel except for the benefit of Lessee's cockpit
personnel, and then only if the use of the Aircraft for such purpose is not
disproportionate to the use for such purpose of other aircraft of the same type
operated by Lessee;
1. Not cause or permit the Aircraft to proceed to, or remain at, any location
which is then the subject of a prohibition order (or any similar order or
directive), sanctions or restrictions by:
a) the United Nations Security Council, the U.S. International Economic
Emergency Powers Act or U.N. Security Council directives or the U.S.
Export Administration Act Regulations (15 C.F.R. Parts 730-799), except
as may be permitted by operating in accordance with the conditions
specified by the U.S. Export Administration Regulations, General
License GATS (15 C.F.R. Part 771.19);
a) any Government Entity of the State of Registration or the Habitual
Base;
a) any Government Entity of the country in which such location is
situated; or
a) any Government Entity having jurisdiction over Lessor, the Banks or the
Aircraft;
1. Obtain and maintain in full force all certificates, licenses, permits and
authorizations required for the use and operation of the Aircraft for the time
being, and for the making of payments required by, and the compliance by Lessee
with its other obligations under, this Agreement;
1. Not operate or locate the Aircraft or locate the Aircraft or suffer or permit
the Aircraft to be operated or located during the Term in any area excluded from
coverage by any insurance policy issued pursuant to the requirements of this
Agreement; and
1. Not operate or locate the Aircraft in, to or over any country which is (x)
the subject of sanctions under the U.S. International Economic Emergency Powers
Act or United Nations Security Council Directives and/or (y) restricted under
the United States Trading with the Enemy Act or the United States Export
Administration Act except as may be permitted by operating in accordance with
the conditions specified by the United States Export Administration Regulations,
General License GATS (15 CFR Part 771.19).
A. Taxes and Other Payments. Lessee will promptly pay:
1. All license and registration fees, Taxes (other than Lessor Taxes) and other
amounts of any nature imposed by any Government Entity with respect to the
Aircraft, including without limitation the purchase, ownership, delivery,
leasing, possession, use, operation, return, sale or other disposition of the
Aircraft; and
1. All rent, fees, charges, Taxes (other than Lessor Taxes) and other amounts in
respect of any premises where the Aircraft or any Part thereof is located from
time to time; except to the extent that in the reasonable opinion of Lessor such
payment is being contested in good faith by appropriate proceedings, in respect
of which adequate reserves have been provided by Lessee and non-payment of which
does not give rise to any material likelihood of the Aircraft or any interest
therein being sold, forfeited or otherwise lost or of criminal liability on the
part of Lessor or any Bank.
A. Sub-Leasing. LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR,
SUB-LEASE OR OTHERWISE PART WITH POSSESSION OF THE AIRCRAFT, THE ENGINES OR ANY
PART EXCEPT THAT LESSEE MAY PART WITH POSSESSION (A) WITH RESPECT TO THE
AIRCRAFT, THE ENGINES OR ANY PART TO THE RELEVANT MANUFACTURERS FOR TESTING OR
SIMILAR PURPOSES OR TO THE AGREED MAINTENANCE PERFORMER FOR SERVICE, REPAIR,
MAINTENANCE OR OVERHAUL WORK, OR ALTERATIONS, MODIFICATIONS OR ADDITIONS TO THE
EXTENT REQUIRED OR PERMITTED BY THIS AGREEMENT, AND (B) WITH RESPECT TO AN
ENGINE OR PART, AS EXPRESSLY PERMITTED BY THIS AGREEMENT; PROVIDED, HOWEVER, WET
LEASES SHALL BE PERMITTED.
A. Inspection.
1. Lessor and any person designated by Lessor may at any time visit, inspect and
survey the Aircraft, any Engine or any Part and may maintain its own technical
representative on site throughout any Major Check and for such purpose may,
subject to any applicable Air Authority regulation, travel on the flight deck as
observer;
1. Lessor will have no duty or liability to make, or arising out of any such
visit, inspection or survey; and
1. So long as no Default has occurred and is continuing, Lessor will not
exercise such right other than on reasonable notice and so as not to disrupt
unreasonably the commercial operations of Lessee.
A. Ownership; Property Interests; Related Matters. Lessee will:
1. Not do or knowingly permit to be done or omit or knowingly permit to be
omitted to be done any act or thing which might reasonably be expected to
jeopardize the rights of Lessor as owner and lessor of the Aircraft;
1. On all occasions when the ownership of the Aircraft, any Engine or any Part
is relevant, make clear to third parties that title is held by Lessor;
1. Not at any time (i) represent or hold out Lessor or the Banks as carrying
goods or passengers on the Aircraft or as being in any way connected or
associated with any operation or carriage (whether for hire or reward or
gratuitously) which may be undertaken by Lessee or (ii) pledge the credit of
Lessor or the Banks;
1. Ensure that there is always affixed, and not removed or in any way obscured,
a fireproof plate (having dimensions of not less than 10 cm. x 7 cm.) in a
reasonably prominent position in the cockpit of the Aircraft adjacent to the
certificate of airworthiness and on each Engine stating:
"This Aircraft/Engine is owned by Interlease Aviation Investors, L.L.C. and is
leased to Frontier Airlines, Inc. and may not be operated by any other person
without the prior written, consent of Interlease Aviation Investors, L.L.C.;"
1. Not create or permit to exist any Security Interest upon the Aircraft, any
Engine or any Part;
1. Not do or permit to be done anything which may reasonably be expected to
expose the Aircraft, any Engine or any Part to penalty, forfeiture, impounding,
detention, appropriation, damage or destruction and without prejudice to the
foregoing, if any such penalty, forfeiture, impounding, detention or
appropriation, damage or destruction occurs, give Lessor notice and use best
endeavors to procure the immediate release of the Aircraft, any Engine or the
Part, as the case may be;
1. Not abandon the Aircraft, the Engine or any Part;
1. Pay and discharge or cause to be paid and discharged when due and payable or
make adequate provision by way of security or otherwise for all debts, damages,
claims and liabilities which have given or might give rise to a Security
Interest over or affecting the Aircraft, any Engine or any Part; and
1. Not attempt, or hold itself out as having any power, to sell, lease or
otherwise dispose of the Aircraft, any Engine or any Part.
A. General. Lessee will:
1. Not liquidate or dissolve; and Lessee shall not, without Lessor's prior
written consent, which will not be unreasonably withheld or delayed, consolidate
with or merge into, any other corporation, and Lessee shall not convey,
transfer, lease or otherwise dispose of all or substantially all of its property
and other assets, whether in one or series of related transactions;
1. Ensure that no change will occur in the Habitual Base of the Aircraft without
the prior written consent of Lessor. Lessor agrees that it shall not withhold
its consent to a change in the Habitual Base to another state of the United
States of America if Lessee shall have provided Lessor with an opinion of
counsel practicing in the state of the United States of America proposed by
Lessee to be the Habitual Base in form and in substance reasonably satisfactory
to Lessor to the effect that the rights and interests of Lessor are duly
protected; and
1. Not, without giving Lessor thirty (30) days prior notice (in accordance with
this Agreement), change its chief executive office (as such term is defined in
Article 9 of the Uniform Commercial Code as in effect in the State of Colorado)
from 12015 East 46th Avenue, Denver, Colorado 80239;
1. remain a Certificated Air Carrier and maintain, without limitation, its
status so as to fall within the purview of Section 1110 of Title 11 of the
United States Code or any analogous Statute; and
1. remain a "citizen of the United States" as defined in Section 40102 of Title
49 of the United States Code.
A. Records. Lessee will:
1. Cause accurate, complete and current records of all flights made by, and all
maintenance carried out on, the Aircraft (including in relation to each Engine
and Part subsequently installed, before the installation) to be prepared in
English and kept in such manner as the Air Authority may from time to time
require, and ensure that they comply with the recommendations of any
manufacturers of the Aircraft, any Engine or any Part. The records will form
part of the Aircraft Documents; and
1. Maintain with appropriate revisions, all Aircraft Documents, records, logs,
and other materials required by applicable laws and best practice of major
international air transport operators in respect of the Aircraft.
A. Protection: Lessee will:
1. Maintain the registration of the Aircraft with the Air Authority in the name
of Lessor and, to the extent permitted under the laws of the State of
Registration, reflecting the interests of Lessor and not do or suffer to be done
anything which might adversely affect that registration; and
1. Do all acts and things (including, without limitation, making any filing or
registration with the Air Authority or any other Government Entity) and execute
and deliver, notarize, file, register and record all documents (including,
without limitation, any amendment of this Agreement) as may be required by
Lessor:
a) at Lessor's expense, following any change or proposed change in the
ownership or financing of the Aircraft or in the manner of securing
Lessor's obligations to the Banks; or
a) following any modification of the Aircraft, any Engine or any Part or
the permanent replacement of any Engine or Part in accordance with this
Agreement, so as to ensure that the rights of Lessor as owner and
lessor of the Aircraft and under this Agreement apply with the same
effect as before; or
a) to establish, maintain, preserve, perfect and protect the rights of
Lessor under this Agreement or the interest of Lessor as owner of the
Aircraft.
A. Maintenance and Repair. Lessee, at its own cost and expense, will:
1. Service, repair, maintain, overhaul, test, or cause the same to be done to
the Aircraft, to industry standard, and in accordance with the Agreed
Maintenance Program, so as to keep the Aircraft in as good operating condition
as when delivered to Lessee on the Delivery Date, as determined periodically by
Lessor or its agent, and such operating condition as may be necessary to enable
the Airworthiness Certificate of the Aircraft to be maintained in good standing
at all times under applicable law;
1. Not change the Agreed Maintenance Program or the schedule of the Agreed
Maintenance Program without the written consent of Lessor;
1. Maintain the Aircraft in accordance with the Agreed Maintenance Program
through the Agreed Maintenance Performer and perform (at the respective
intervals provided in the Agreed Maintenance Program) all Major Checks;
1. Maintain the Aircraft in accordance with FAA Federal Air Regulations Part 121
and any other rules and regulations of the FAA as may be applicable to passenger
category aircraft and in at least the same manner and with at least the same
care, including, without limitation, maintenance scheduling, modification status
and technical condition, as is the case with respect to similar aircraft owned
or otherwise operated by Lessee and as if Lessee were to retain the Aircraft in
its fleet and continue to operate the Aircraft after the Expiration Date and
including, without limitation, all maintenance to the Airframe, any Engine or
any Part required to maintain all warranties, performance guarantees or service
life policies in full force and effect;
1. Without limiting Lessor's obligations under clause (d) of Schedule 1, Part 1,
to this Agreement, comply with all outstanding mandatory inspection and
modification requirements, airworthiness directives and similar requirements
applicable to the Aircraft, any Engine or Part which are issued prior to the
Expiration Date and have a mandatory compliance date during the Term or within
one hundred eighty (180) days after the Expiration Date and which are required
by the Air Authority, and/or the laws of the state of manufacture of the
Aircraft, any Engine or Part and/or mandated by any manufacturer of the
Aircraft, any Engine or Part (each of the foregoing being hereinafter referred
to as "AD").
The cost of each AD accomplishment or repetitive AD
accomplishment for any AD issued during the Term shall be allocated among Lessor
and Lessee as follows:
(i) Lessee shall be responsible for the first
$150,000 of Lessee's actual cost of such AD accomplishment or
repetitive AD accomplishment;
(ii) Lessor and Lessee shall share the portion of
Lessee's actual cost of such AD accomplishment or repetitive AD
accomplishment (if any) which exceeds $150,000, on an equal basis, up
to and including $350,000; and
(iii) Lessor shall be wholly responsible for the
portion of Lessee's actual cost of such AD accomplishment or repetitive
AD accomplishment (if any) which exceeds $350,000 (subject always to
the provisions of the following paragraph).
Notwithstanding the foregoing, in the event that the total
cost of any AD accomplishment or repetitive AD accomplishment (such total cost
to be mutually agreed, in good faith, between Lessor and Lessee) exceeds
$350,000 (the "Threshold Amount"), Lessor may elect not to make its contribution
to the cost of compliance with such AD accomplishment or repetitive AD
accomplishment as described above. If Lessor shall so elect, Lessee shall be
entitled, by giving prior written notice to Lessor, to terminate this Agreement
and redeliver the Aircraft to Lessor in accordance with the terms of Sections
12.1 through 12.8 and Schedule 3 (except for compliance with the relevant AD
which gave rise to such termination) on the earlier of (x) the date which is 30
days after the date of such notice from Lessee to Lessor or (y) the date on
which the Aircraft is required to be removed from service by reason of
non-compliance with the applicable AD. Such notice shall specify the proposed
redelivery date of the Aircraft by Lessee and, upon the receipt of such notice
by Lessor, the then current definition of Expiration Date shall be deemed to
have been amended accordingly. Upon any termination of this Agreement pursuant
to this Section 8.11(e), neither party shall be under any further obligation in
the other hereunder except for (x) accrued obligations of Lessee hereunder; and
(y) obligations hereunder which are expressed to continue notwithstanding the
expiration of the Term; provided, however, that Lessor shall, if applicable
having regard to the provisions of Section 7.2, make the payments described in
Section 7.2 but shall be under no obligation to repay, rebate or otherwise
refund any Maintenance Reserves previously paid by Lessee under this Agreement
and provided further that if no Default shall have occurred and be continuing,
the Aircraft Deposit shall be returned by Lessor to Lessee.
1. Comply with all applicable laws and the regulations of the Air Authority and
other aviation authorities with jurisdiction over Lessee or the Aircraft, any
Engine or Part regardless of upon whom such requirements are imposed and which
relate to the maintenance, condition, use or operation of the Aircraft or
require any modification or alteration to the Aircraft, any Engine or Part;
1. Maintain in good standing a current certificate of airworthiness (in the
appropriate category for the nature of the operations of the Aircraft) for the
Aircraft issued by the Air Authority except where the Aircraft is undergoing
maintenance, modification or repair required or permitted by this Agreement and
will from time to time provide to Lessor a copy on request;
1. If required by the Air Authority, maintain a current certification as to
maintenance issued by or on behalf of the Air Authority in respect of the
Aircraft and will from time to time provide to Lessor a copy on request; and
1. Procure promptly the replacement of any Engine or Part which has become time,
cycle or calendar expired, lost, stolen, seized, confiscated, destroyed, damaged
beyond repair, unserviceable or permanently rendered unfit for use, with an
engine or part complying with the conditions set out in Section 8.13(a).
A. Remova of Engines and Parts. Lessee will ensure that no Engine or Part
installed on the Aircraft is at any time removed from the Aircraft other than:
1. If replaced as expressly permitted by this Agreement; or
1. If the removal is of an obsolete item and is in accordance with the Agreed
Maintenance Program; or
a) During the course of maintaining, servicing, repairing, overhauling or
testing that Engine or the Aircraft, as the case may be; or
a) For the purpose of making such modifications to the Engine or the
Aircraft, as the case may be, as are permitted under this Agreement;
and then in each case only if it is reinstalled or replaced by an
engine or part complying with Section 8.13(a) as soon as possible and
in any event no later than the Expiration Date.
A. Installation of Engines and Parts. Lessee will:
1. Ensure that, except as permitted by this Agreement, no engine or part is
installed on the Aircraft unless:
a) in the case of an engine, it is an engine of the same model as, or an
improved or advanced version of the Engine it replaces, which is in the
same or better operating condition, has substantially similar hours and
cycles available until the next scheduled checks, inspections,
overhauls, shop visits and replacement of life limited components and
has the same or greater value and utility as the replaced Engine;
a) in the case of a part, it is in as good operating condition, has
substantially similar hours available until the next scheduled checks,
inspections, overhauls and shop visits, is of the same or a more
advanced make and model and is of the same interchangeable modification
status as the replaced Part;
a) in each case, it has become and remains the property of Lessor free
from Security Interests and on installation on the Aircraft will
without further act be subject to this Agreement; and
a) in each case, Lessee has full details as to its source and maintenance
records;
1. If no Default has occurred which is continuing, be entitled to install any
engine or part on the Aircraft by way of replacement notwithstanding Section
8.13(a) if:
a) there is not available to Lessee at the time and in the place that that
engine or part is required to be installed on the Aircraft, a
replacement engine or, as the case may be, part complying with the
requirements of Section 8.13(a);
a) it would result in an unreasonable disruption of the operation of the
Aircraft and/or the business of Lessee to ground the Aircraft until an
engine or part, as the case may be, complying with Section 8.13(a)
becomes available for installation on the Aircraft;
a) Lessee gives Lessor written notice of such replacement
contemporaneously with such installation; and
a) as soon as possible after installation of the same on the Aircraft but,
in any event, no later than sixty (60) days thereafter (but in no event
later than the Expiration Date), Lessee removes any such engine or part
and replaces it with the Engine or Part replaced by it or by an engine
or part, as the case may be, complying with Section 8.13(a).
A. Non-Installed Engines and Parts. Lessee will:
1. Ensure that any Engine or Part which is not installed on the Aircraft (or any
other aircraft as permitted by this Agreement) is, except as expressly permitted
by this Agreement, properly and safely stored, and kept free from Security
Interests;
1. Notify Lessor whenever any Engine is removed from the Aircraft and, from time
to time on request, ensure that any person to whom possession of an Engine is
given acknowledges in writing to Lessor, in form and substance satisfactory to
Lessor, that it will respect the interests of Lessor and as owner of the Engine
and will not seek to exercise any rights whatsoever in relation to it;
1. Notwithstanding the foregoing provisions of this subsection, be permitted, if
no Default has occurred and is continuing, to install any Engine or Part on an
aircraft, or in the case of a Part, an engine for a temporary period of up to
thirty (30) days:
a) owned and operated by Lessee free from Security Interests; or
a) leased or hired to Lessee pursuant to a lease or conditional sale
agreement on a long-term basis and on terms whereby Lessee has full
operational control of that aircraft or engine; or
a) acquired by Lessee and/or financed or refinanced, and operated by
Lessee, on terms that ownership of that aircraft or engine, as the case
may be, pursuant to a lease or conditional sale agreement, or a
Security Interest therein, is vested in or held by any other person;
provided that in the case of (ii) and (iii):
(i) the terms of any such lease, conditional sale agreement or
Security Interest will not have the effect of prejudicing the
interests of Lessor as owner and lessor of that Engine or
Part; and
(i) the lessor under such lease, the seller under such conditional
sale agreement or the holder of such Security Interest, as the
case may be, has confirmed and acknowledged in writing to
Lessor, in form and substance satisfactory to Lessor, that it
will respect the interest of Lessor as owner and lessor of
that Engine or Part and that it will not seek to exercise any
rights whatsoever in relation thereto.
A. Pooling of Engines and Parts. Lessee will not enter into nor permit any
pooling agreement or arrangement in respect of an Engine or Part without the
prior written consent of Lessor.
A. Equipment Changes.
1. Lessee will not make any modification or addition to the Aircraft (each an
"Equipment Change"), except for an Equipment Change which:
a) is expressly permitted by this Agreement, or
a) has the prior written approval of Lessor and which does not diminish
the value, utility, condition, or airworthiness of the Aircraft; and
1. So long as a Default has not occurred and is continuing, Lessee may remove
any Equipment Change if it can be removed from the Aircraft without diminishing
or impairing the value, utility, condition or airworthiness of the Aircraft.
A. Title on an Equipment Change.
1. Title to all Engines and Parts installed on the Aircraft whether by way of
replacement, as the result of an Equipment Change or otherwise (except those
installed pursuant to Section 8.13(b)) will on installation, without further
act, vest in Lessor subject to this Agreement free and clear of all Security
Interests. Lessee will at its own expense take all such steps and execute, and
procure the execution of, all such instruments as Lessor may require and which
are necessary to ensure that title so passes to Lessor according to all
applicable laws. At any time when requested by Lessor, Lessee will provide
evidence to Lessor's satisfaction (including the provision, if required, to
Lessor of one or more legal opinions) that title has so passed to Lessor;
1. Lessor may require Lessee to remove any Equipment Change and to restore the
Aircraft to its condition prior to that Equipment Change; and
1. Except as referred to in Section 8.17(b) any Engine or Part at any time
removed from the Aircraft will remain the property of Lessor until a replacement
has been made in accordance with this Agreement and until title in that
replacement has passed, according to applicable laws, to Lessor subject to this
Agreement free of all Security Interests whereupon title to the replaced Engine
or Part will pass to Lessee. B. Third Party. Lessee will ensure that no person
(other than Lessor or any Bank) will act in any manner inconsistent with its
obligations under this Agreement and that all persons will comply with those
obligations as if references to "Lessee" included a separate reference to those
persons.
I. INSURANCE
A. Insurance. Lessee will maintain in full force during the Term insurance in
respect of the Aircraft in form and substance satisfactory to Lessor (the
"Insurance", which expression includes, where the context so admits, any
relevant re-insurance(s)) through such brokers and with such insurers and having
such deductibles and being subject to such exclusions as may be approved by
Lessor. The Insurance will be effected either: (a) on a direct basis with
insurers of recognized standing who normally participate in aviation insurance
in the leading international insurance markets and led by reputable
underwriter(s) approved by Lessor; or (b) with a single insurer or group of
insurers approved by Lessor who does not retain the risk but effects substantial
reinsurance with reinsurers in the leading international insurance markets and
through brokers each of recognized standing and acceptable to Lessor for a
percentage acceptable to Lessor of all risks insured (the "Reinsurance").
A. Requirements. Lessor's current requirements as to required Insurance are as
specified in this Section and in Schedule 4. Lessor may from time to time
stipulate other requirements for the Insurance so that the scope and level of
cover is maintained in line with best industry practice and the interests of
Lessor protected.
A. Change. If at any time Lessor wishes to revoke its approval of any insurer,
reinsurer, insurance or reinsurance, Lessor and/or its brokers will consult with
Lessee and Lessee's brokers (as for the time being approved by Lessor) regarding
whether that approval should be revoked to protect the interests of the parties
insured. If, following the consultation, Lessor considers that any change should
be made, Lessee will then arrange or procure the arrangement of alternative
cover satisfactory to Lessor.
A. Insurance Covenants. Lessee will:
1. Ensure that all legal requirements as to insurance of the Aircraft, any
Engine or any Part which may from time to time be imposed by the laws of the
State of Registration or any state to, from or over which the Aircraft may be
flown, in so far as they affect or concern the operation of the Aircraft, are
complied with and in particular those requirements compliance with which is
necessary to ensure that (i) the Aircraft is not in danger of detention or
forfeiture, (ii) the Insurance remain valid and in full force and effect, and
(iii) the interests of the Indemnitees in the Insurance and the Aircraft or any
Part are not thereby prejudiced;
1. Not use, cause or permit the Aircraft, any Engine or any Part to be used for
any purpose or in any manner not covered by the Insurance or outside any
geographical limit imposed by the Insurance;
1. Comply with the terms and conditions of each policy of the Insurance and not
do, consent or agree to any act or omission which:
a) invalidates or may invalidate the Insurance; or
a) renders or may render void or voidable the whole or any part of any of
the Insurance; or
a) brings any particular liability within the scope of an exclusion or
exception to the Insurance;
1. Not take out without the prior written approval of Lessor any insurance or
reinsurance in respect of the Aircraft other than those required under this
Agreement unless relating solely to hull total loss, business interruption,
profit commission and deductible risk;
1. Commence renewal procedures at least thirty (30) days prior to expiration of
any of the Insurance and provide to Lessor:
a) if requested by Lessor, a written status report of renewal negotiation
14 days prior to each expiration date;
a) facsimile confirmation of completion of renewal prior to each
expiration date;
a) certificates of insurance (and where appropriate certificates of
reinsurance), and broker's (and any reinsurance brokers') letter of
undertaking in a form acceptable to Lessor, detailing the coverage and
confirming the insurers' (and any reinsurers') agreement to the
specified insurance requirements of this Agreement within seven (7)
days after each renewal date;
1. Provide to Lessor copies of documents evidencing the Insurance;
1. Provide to Lessor evidence that the Insurance premiums have been paid; 2. Not
make any modification or alteration to the Insurance material and adverse to the
interests of any of the Indemnitees;
1. Be responsible for any deductible under the Insurance; and
1. Provide any other insurance and reinsurance related information, or
assistance, in respect of the Insurance as Lessor may reasonably require.
A. Failure to Insure. If Lessee fails to maintain the Insurance in compliance
with this Agreement, each of the Indemnitees will be entitled but not bound
(without prejudice to any other rights of Lessor under this Agreement):
1. To pay the premiums due or to effect and maintain insurance satisfactory to
it or otherwise remedy Lessee's failure in such manner (including, without
limitation to effect and maintain an "owner's interest" policy) as it considers
appropriate. Any sums so expended by it will become immediately due and payable
by Lessee to Lessor together with interest thereon at the rate specified in
Section 5.11, from the date of expenditure by it up to the date of reimbursement
by Lessee; and
1. At any time while such failure is continuing to require the Aircraft to
remain at any airport or to proceed to and remain at any airport designated by
it until the failure is remedied to its satisfaction.
A. Continuing Indemnity. Lessor may require Lessee to effect and to maintain
insurance after the Expiration Date with respect to its liability under the
indemnities in Section 10 for such period as Lessor may reasonably require (but
in any event not more than two (2) years) which provides for each Indemnitee to
be named as additional insured. Lessee's obligation in this Section shall not be
affected by Lessee ceasing to be lessee of the Aircraft and/or any of the
Indemnitees ceasing to have any interest in respect of the Aircraft.
A. Application of Insurance Proceeds. As between Lessor and Lessee:
1. All insurance payments received as the result of an Event of Loss occurring
during the Term will be paid to Lessor, and Lessor will pay the balance of those
amounts to Lessee after deduction of all amounts which may be or become payable
by Lessee to Lessor under this Agreement (including under Section 11.1(b));
1. All insurance proceeds of any property damage or loss to the Aircraft, any
Engine or any Part occurring during the Term not constituting an Event of Loss
and in excess of the Damage Notification Threshold will be paid to Lessor and
applied in payment (or to reimburse Lessee) for repairs or replacement property
upon Lessor being satisfied that the repairs or replacement have been effected
in accordance with this Agreement. Insurance proceeds in amounts below the
Damage Notification Threshold may be paid by the insurer directly to Lessee. Any
balance remaining may be retained by Lessor;
1. All insurance proceeds in respect of third party liability will, except to
the extent paid by the insurers to the relevant third party, be paid to Lessor
to be paid directly in satisfaction of the relevant liability or to Lessee in
reimbursement of any payment so made; and
1. Notwithstanding Sections 9.7(a), (b) or (c), if at the time of the payment of
any such insurance proceeds a Default has occurred and is continuing, all such
proceeds will be paid to or retained by Lessor to be applied toward payment of
any amounts which may be or become payable by Lessee in such order as Lessor
sees fit or as Lessor may elect.
I. INDEMNITY
A. General. Lessee agrees to assume liability for, defend, indemnify and hold
harmless the Indemnitees on an after tax basis from and against any and all
claims, proceedings, losses, liabilities, damages (whether direct, indirect,
special, incidental or consequential) suits, judgments, costs, expenses
(including, without limitation, legal fees and expenses), penalties (whether
civil or criminal) or fines (each a "Claim") (regardless of when the same is
made or incurred, whether during or after the Term (but not before)):
1. Which may at any time be suffered or incurred directly or indirectly as a
result of or in any manner connected with the possession, delivery, performance,
management, ownership, registration, control, maintenance, condition, service,
repair, overhaul, leasing, use, operation or return of the Aircraft, any Engine
or Part (either in the air or on the ground) whether or not the Claim may be
attributable to any defect in the Aircraft, any Engine or any Part or to its
design, testing or use or otherwise, and regardless of when the same arises or
whether it arises out of or is attributable to any act or omission, negligent or
otherwise, of any Indemnitee; or
1. Which arise out of any act or omission which invalidates or which renders
voidable any of the Insurance; or
1. Which may at any time be suffered or incurred as a consequence of any design,
article or material in the Aircraft, any Engine or any Part or its operation or
use constituting an infringement of patent, copyright, trademark, design or
other proprietary right or a breach of any obligation of confidentiality owed to
any person; or
1. Which results from Lessee's breach of any of its representations or
warranties or any other Event of Default under this Agreement.
but excluding any Claim in relation to a particular Indemnitee to the extent
that that Claim is covered pursuant to another indemnity provision of this
Agreement or to the extent it arises solely as a result of the negligence or
wilful misconduct of that Indemnitee, Lessor, Lessor Taxes or a Lessor Lien.
A. Duration. The indemnities contained in this Agreement will continue in full
force after the Expiration Date.
I. EVENTS OF LOSS
A. Events of Loss.
1. If an Event of Loss occurs prior to delivery of the Aircraft to Lessee,
Lessor will have the option, exercisable by giving Lessee notice in writing, to
substitute an alternative aircraft of the same manufacture, model, value and
utility as the Aircraft. If Lessor exercises such option, Lessee shall be
obliged to lease such substitute aircraft pursuant to the terms and conditions
of this Agreement and such substitute aircraft shall constitute the Aircraft for
all purposes of this Agreement. Lessor shall provide Lessee with details of the
substitute aircraft as soon as may be practicable after the occurrence of the
Event of Loss. If Lessor advises Lessee that Lessor does not wish to exercise
such option, this Agreement will immediately terminate and except as expressly
stated in this Agreement neither party will have any further obligation or
liability under this Agreement other than pursuant to Section 16.90 except that
Lessor will rebate to Lessee the amount of any Aircraft Deposit paid under this
Agreement; and
1. If an Event of Loss occurs after delivery of the Aircraft to Lessee, Lessee
will pay the Agreed Value to Lessor on or prior to the earlier of (i) five (5)
Business Days after the Event of Loss and (ii) the date of receipt of insurance
proceeds in respect of that Event of Loss. Subject to the rights of any insurers
and reinsurers or other third party, upon irrevocable payment in full to Lessor
of that amount and all other amounts which may be or become payable to Lessor
under this Agreement, Lessor will without recourse or warranty (except as to
Lessor's Liens) and without further act, be deemed to have transferred to Lessee
all of Lessor's rights to any Engines and Parts not installed when the Event of
Loss occurred, all on an as-is where-is basis, and will at Lessee's expense,
execute and deliver such bills of sale and other documents and instruments as
Lessee may reasonably request to evidence (on the public record or otherwise)
the transfer and the vesting of Lessor's rights in such Engines and Parts in
Lessee, free and clear of all rights of Lessor and Lessor Liens.
A. Requisition. During any requisition for use or hire of the Aircraft, any
Engine or Part which does not constitute an Event of Loss:
1. The Rent, Supplemental Rent and other charges payable under this Agreement
will not be suspended or abated either in whole or in part, and Lessee will not
be released from any of its other obligations under the Agreement (other than
operational obligations with which Lessee is unable to comply solely by virtue
of the requisition); and
1. So long as no Default has occurred and is continuing, Lessee will be entitled
to any hire paid by the requisitioning authority in respect of the Term. Lessee
will, as soon as practicable after the end of any such requisition, cause the
Aircraft to be put into the condition required by this Agreement. Lessor will be
entitled to all compensation payable by the requisitioning authority in respect
of any change in the structure, state or condition of the Aircraft arising
during the period of requisition, and Lessor will apply such compensation in
reimbursing Lessee for the cost of complying with its obligations under this
Agreement in respect of any such change, but so that, if any Default has
occurred and is continuing, Lessor may apply the compensation or hire in or
towards settlement of any amounts owing by Lessee under this Agreement.
I. RETURN OF AIRCRAFT
A. Return. On the Expiration Date or earlier termination of the lease of the
Aircraft under this Agreement, unless an Event of Loss has occurred, and after
the Final Inspection required by Section 12.2 has occurred, Lessee will, at its
expense, redeliver the Aircraft and Aircraft Documents to Lessor at the
Redelivery Location or such other airport as is mutually acceptable to the
parties hereto, in a condition complying with Schedule 3, free and clear of all
Security Interests and Permitted Liens (other than Lessor Liens) and in a
condition qualifying for immediate certification of airworthiness by the FAA or
as otherwise agreed by Lessor and Lessee.
A. Final Inspection. Immediately prior to redelivery of the Aircraft, Lessee
will make the Aircraft available to Lessor for detailed inspection ("Final
Inspection") in order to verify that the condition of the Aircraft complies with
the requirements of Schedule 3 to this Agreement. The Final Inspection will be
long enough to permit Lessor to:
1. Inspect the Aircraft Documents;
1. Inspect the Aircraft and uninstalled Parts;
1. Inspect the Engines, including without limitation (i) at Lessor's expense, a
video boroscope inspection of (A) the low pressure and high pressure compressors
and (B) turbine area and (ii) at Lessee's expense, engine condition runs; and
1. Observe a two (2) hour test flight (with Lessor's representatives as on-board
observers).
Such test flight shall be conducted by Lessee using the aircraft manufacturer's
recommended test flight procedures. The Lessee shall provide, at Lessee's cost,
insurance on the aircraft hull and liability and for the representatives of the
Lessor during the test flight. Lessor shall be permitted to have a minimum of
two (2) representatives attend the Inspection and/or test flight. The Lessee
shall be required to open any areas of the Aircraft requested to be opened by
the Lessor or its representative in order to verify any aspect of its condition,
including but not limited to the opening of the galley area, the lavatories and
the lower cargo compartment bilges. The Final Inspection shall commence on or
before the Expiration Date with respect to the Aircraft and shall continue until
concluded.
A. Non-Compliance. To the extent that, at the time of Final Inspection, the
condition of the Aircraft does not comply with this Agreement, Lessee will at
Lessor's option:
1. Immediately rectify the non-compliance and to the extent the non-compliance
extends beyond the Expiration Date, the Term (and Lessee's obligation to pay
Rent) will be automatically extended and this Agreement will remain in force
until the non-compliance has been rectified; or
1. Redeliver the Aircraft to Lessor and indemnify Lessor, and provide to
Lessor's satisfaction cash as security for that indemnity, against the cost of
putting the Aircraft into the condition required by this Agreement.
A. Intentionally Omitted.
A. Acknowledgement. Provided Lessee has complied with its obligations under this
Agreement, following redelivery of the Aircraft by Lessee to Lessor at the
Redelivery Location, Lessor will deliver to Lessee an acknowledgement confirmin
that Lessee has redelivered the Aircraft to Lessor in accordance with this
Agreement.
B. Maintenance Program.
1. Prior to the Expiration Date and upon Lessor's request, Lessee will provide
Lessor or its agent reasonable access to the Agreed Maintenance Program and the
Aircraft Documents in order to facilitate the Aircraft's integration into any
subsequent operator's fleet;
1. Lessee will, if requested by Lessor to do so, upon return of the Aircraft
deliver to Lessor a certified true current and complete copy of the Agreed
Maintenance Program, together with a letter authorizing Lessor to use such copy
for "bridging" purposes for the next lessee of the Aircraft. Lessor agrees that
it will not disclose the contents of the Agreed Maintenance Program to any
person or entity except to the extent necessary to monitor Lessee's compliance
with this Agreement and/or to bridge the maintenance program for the Aircraft
from the Agreed Maintenance Program to another program after the Expiration
Date.
A. Fuel. Upon redelivery of the Aircraft to Lessor, an adjustment will be made
in respect of fuel on board on the Delivery Date and the Expiration Date at the
price then prevailing at the Redelivery Location.
A. Aircraft Storage. During the period of thirty (30) days after the Expiration
Date, Lessor shall have the right to require Lessee to maintain, store and
insure the Aircraft at a location having a facility capable of performing
required maintenance of the Aircraft (to be mutually agreed by Lessor and
Lessee). All costs actually paid by Lessee to any third party vendor in
connection with the foregoing shall be payable by Lessor at Lessee's direct cost
without "mark-up". At least thirty (30) days prior to the Expiration Date,
Lessor shall advise Lessee as to whether Lessor requires Lessee to provide the
services contemplated by this Section 12.8.
I. DEFAULT
A. Events of Default. Each of the following events or conditions will constitute
an Event of Default (whether any such event or condition is voluntary or
involuntary or occurs by operation of law or pursuant to or in compliance with
any judgment, decree or order of any court or any order, rule or regulation of
any Government Entity):
1. Non-Payment. Lessee fails to make any payment under this Agreement on the due
date and such failure continues for two (2) Business Days; or
1. Insurance. Lessee fails to comply with any provision of Section 9 or any
insurance required to be maintained under this Agreement is cancelled or
terminated or notice of cancellation is given in respect of any such insurance;
or
1. Breach. Lessee fails to comply with any other provision of this Agreement
and, if such failure is in the reasonable opinion of Lessor capable of remedy,
the failure continues for five (5) Business Days after notice from Lessor to
Lessee; or
1. Representation. Any representation or warranty made (or deemed to be
repeated) by Lessee in or pursuant to this Agreement or in any document or
certificate or statement is or proves to have been incorrect in any material
respect when made or deemed to be repeated; or
1. Cross Default.
a) A final judgment for the payment of money not covered by insurance in
excess of Two Hundred Fifty Thousand Dollars ($250,000), or final
judgments for the payment of money not covered by insurance in excess
of Two Hundred Fifty Thousand Dollars ($250,000) in aggregate, shall be
rendered against Lessee and the same shall remain undischarged for a
period of ninety (90) days during which execution thereof shall not be
effectively stayed by agreement of the parties involved, stayed by
court order or adequately bonded; or
a) Attachments or other Security Interests shall be issued or entered
against substantially all of the property of Lessee and shall remain
undischarged or unbonded for ninety (90) days except for Security
Interests created in connection with monies borrowed or obligations
agreed to by Lessee in the ordinary course of its business; or
a) Lessee shall default in the payment of any sum which is in excess of
$250,000 of any one or more obligations for the payment of borrowed
money, for the deferred purchase price of property or for the payment
of rent or hire under any lease of aircraft when the same becomes due
if such nonpayment results in or would permit an acceleration of such
indebtedness, or Lessee shall default in the performance of any other
term, agreement, or condition contained in any agreement or instrument
under or by which any such obligation is created, evidenced or secured,
if the effect of such default is to cause or permit such obligation to
become due prior to its stated maturity; or
a) Any event of default or termination event, howsoever described, occurs
under any Other Agreement.
1. Approvals: Any consent, authorization, license, certificate or approval of or
registration with or declaration to any Government Entity in connection with
this Agreement (including, without limitation):
a) required by Lessee to authorize, or in connection with, the execution,
delivery, validity, enforceability or admissibility in evidence of this
Agreement or the performance by Lessee of its obligations under this
Agreement; or
a) the registration of the Aircraft (to the extent that the same is within
the control of Lessee); or
a) any airline license or air transport license including, without
limitation, authority to operate the Aircraft under Part 121 of the
Federal Aviation Regulations and a Certificate of Convenience and
Necessity issued under Section 401 of the Federal Aviation Act;
is modified in a manner unacceptable to Lessor or is withheld, or is revoked,
suspended, cancelled, withdrawn, terminated or not renewed, or otherwise ceases
to be in full force; or
1. Bankruptcy, Etc.
a) Lessee or any Subsidiary consents to the appointment of a custodian,
receiver, trustee or liquidator of itself or all or any material part
of Lessee's property or Lessee's consolidated property, or Lessee or
any Subsidiary admits in writing its inability to, or is unable to, or
does not, pay its debts generally as they come due, or makes a general
assignment for the benefit of creditors, or Lessee or any Subsidiary
files a voluntary petition in bankruptcy or a voluntary petition
seeking reorganization in a proceeding under any bankruptcy or
insolvency laws (as now or hereafter in effect), or an answer admitting
the material allegations of a petition filed against Lessee or any
Subsidiary in any such proceeding, or Lessee or any Subsidiary by
voluntary petition, answer or consent seeks relief under the provisions
of any other bankruptcy, insolvency or other similar law providing for
the reorganization or winding-up of corporations, or provides for an
agreement, composition, extension or adjustment with its creditors, or
any corporate action (including, without limitation, any board of
directors or shareholder action) is taken by Lessee or any Subsidiary
in furtherance of any of the foregoing, whether or not the same is
fully effected or accomplished; or
a) an order, judgment or decree is entered by any court appointing,
without the consent of Lessee or any Subsidiary, a custodian, receiver,
trustee or liquidator of Lessee or any Subsidiary, or of all or any
material part of Lessee's property or Lessee's consolidated property is
sequestered, and any such order, judgment or decree of appointment or
sequestration remains in effect, undismissed, unstayed or unvacated for
a period of thirty (30) days after the date of entry thereof or at any
time an order for relief is granted; or
a) an involuntary petition against Lessee or any Subsidiary in a
proceeding under the United States Federal Bankruptcy laws or other
insolvency laws (as now or hereafter in effect) is filed and is not
withdrawn or dismissed within thirty (30) days thereafter or at any
time an order for relief is granted in such proceeding, or if, under
the provisions of any law providing for reorganization or winding-up of
corporations which may apply to Lessee or any Subsidiary, any court of
competent jurisdiction assumes jurisdiction over, or custody or control
of, Lessee or any Subsidiary or of all or any material part of Lessee's
property, or Lessee's consolidated property and such jurisdiction,
custody or control remains in effect, unrelinquished, unstayed or
unterminated for a period of 30 days or at any time an order for relief
is granted in such proceeding; or
1. Unlawful. It becomes unlawful for Lessee to perform any of its obligations
under this Agreement or this Agreement becomes wholly or partly invalid or
unenforceable; or
1. Suspension of Business. Lessee or any of its Subsidiaries suspends or ceases
or threatens to suspend or cease to carry on all or a substantial part of its
business as a Certificated Air Carrier for a period of more than seven (7) days;
or
1. Disposal. Lessee or any of its Subsidiaries disposes, conveys or transfers or
threatens to dispose, convey or transfer of all or a material part of its
assets, liquidates or dissolves or, without the prior written consent of Lessor
which will not be unreasonably withheld or delayed, consolidates or merges with
any other Person whether by one or a series of transactions, related or not; or
1. Rights. The existence, validity, enforceability or priority of the rights of
Lessor as owner and lessor in respect of the Aircraft are challenged by Lessee
or any other person claiming by or through Lessee; or
1. Not Used.
2. Delivery. Lessee fails to accept delivery of the Aircraft when validly
tendered by Lessor pursuant to this Agreement; or
1. Adverse Change. Any event or series of events occurs which Lessor reasonably
believes is likely to have a material adverse effect on the ability of Lessee to
comply with its obligations under this Agreement and of which Lessor has
notified Lessee.
A. Rights. If an Event of Default occurs, Lessor may at its option (and without
prejudice to any of its other rights under this Agreement), at any time
thereafter (without notice to Lessee except as required under applicable law):
1. By notice to Lessee and with immediate effect, terminate this lease of the
Aircraft (but without prejudice to the continuing obligations of Lessee under
this Agreement), whereupon all rights of Lessee under this Agreement shall
cease; and/or
1. Proceed by appropriate court action or actions to enforce performance of this
Agreement or to recover damages for the breach of this Agreement; and/or
1. Either:
a) Take possession of the Aircraft, for which purpose Lessor may enter any
premises belonging to or in the occupation of or under the control of
Lessee where the Aircraft may be located, or cause the Aircraft to be
redelivered to Lessor at Chicago, Illinois (or such other location as
Lessor may require), and Lessor is hereby irrevocably by way of
security for Lessee's obligations under this Agreement appointed
attorney for Lessee in causing the redelivery or in directing the
pilots of Lessee or other pilots to fly the Aircraft to that airport
and will have all the powers and authorizations necessary for taking
that action; or
a) By serving notice require Lessee to redeliver the Aircraft to Lessor at
Chicago, Illinois (or such other location as Lessor may require).
Further, in the event that Lessee fails to redeliver the Aircraft to Lessor
pursuant to Lessor's written notice and Lessor seeks a judicial order of
replevin, attachment or similar remedy, to the extent permitted by applicable
law, Lessee hereby waives the posting of any bond by Lessor in connection
therewith.
A. Deregistration. If an Event of Default occurs, Lessor may sell or otherwise
deal with the Aircraft free and clear of any leasehold or other interest of
Lessee as if this Agreement had never been made and Lessee will, at the request
of Lessor, take all steps necessary to effect (if applicable) deregistration of
the Aircraft and its export from the country where the Aircraft is situated and
any other steps necessary to enable the Aircraft to be delivered, at Lessor's
option, outside the United States; Lessee hereby irrevocably and by way of
security for its obligations under this Agreement appoints (which appointment is
coupled with an interest) Lessor as its attorney to execute and deliver any
documentation and to do any act or thing required in connection with the
foregoing.
A. Default Payments. If:
1. A Default occurs; or
1. The Aircraft is not delivered on the proposed Delivery Date by reason of
failure of Lessee to satisfy any conditions to that delivery;
Lessee will indemnify Lessor on demand against any loss (including loss of
profit), damage, expense, cost or liability which Lessor may sustain or incur
directly or indirectly as a result including but not limited to:
(a) Any loss of profit suffered by Lessor because of Lessor's
inability to place the Aircraft on lease with another lessee on terms as
favorable to Lessor as this Agreement or because whatever use, if any, to which
Lessor is able to put the Aircraft upon its return to Lessor, or the funds
arising upon a sale or other disposal of the Aircraft, is not as profitable to
Lessor as this Agreement;
(b) Any amount of principal, interest, fees or other sums
whatsoever paid or payable on account of funds borrowed in order to carry any
unpaid amount;
(c) Any loss, premium, penalty or expense which may be
incurred in repaying funds raised to finance the Aircraft or in unwinding any
swap, forward interest rate agreement or other financial instrument relating in
whole or in part to Lessor's financing of the Aircraft; and
(d) Any loss, cost, expense or liability sustained or incurred
by Lessor owing to Lessee's failure to redeliver the Aircraft on the date, at
the place and in the condition required by this Agreement.
I. ASSIGNMENT
A. LESSEE WILL NOT ASSIGN, TRANSFER (VOLUNTARILY OR INVOLUNTARILY BY OPERATION
OF LAW OR OTHERWISE) OR CREATE OR PERMIT TO EXIST ANY SECURITY INTEREST IN, TO
OR UNDER, ANY OF ITS RIGHTS UNDER THIS AGREEMENT.
A. Lessor at its expense may assign or transfer all or any of its rights under
this Agreement and in the Aircraft, provided that Lessor will in the case of an
assignment other than by way of security have no further obligation under this
Agreement following the assignment of all its rights under this Agreement and
the assumption by the assignee or transferee of all of Lessor's obligations
under this Agreement, but notwithstanding that assignment will remain entitled
to the benefit of each indemnity and the liability insurances effected under
this Agreement. Lessee will comply with all reasonable requests of Lessor, its
successors and assigns in respect of any such assignment, and Lessor will
promptly notify Lessee of any such assignment.
A. If Lessor desires to effect any assignment or transfer of its rights and
obligations under this Agreement, Lessee at Lessor's expense agrees to cooperate
and take all such steps as Lessor may reasonably request to give the transferee
the benefit of this Agreement.
I. ILLEGALITY
If it is or becomes unlawful in any jurisdiction for Lessor to give
effect to any of its material obligations as contemplated by this Agreement or
to continue this Agreement Lessor may by notice in writing to Lessee terminate
the leasing of the Aircraft under this Agreement and Lessee will forthwith
redeliver the Aircraft to Lessor in accordance with Section 12. Without
prejudice to the foregoing Lessor will consult in good faith with Lessee as to
any steps which may be taken to restructure the transaction to avoid that
unlawfulness but will be under no obligation to take any such steps.
I. MISCELLANEOUS
A. Waivers, Remedies Cumulative. The rights of Lessor under this Agreement:
1. May be exercised as often as necessary;
1. Are cumulative and not exclusive of its rights under any law; and
1. May be waived only in writing and specifically.
Delay in exercising or non-exercise of any such right will not constitute a
waiver of that right.
A. Delegation. Lessor may delegate to any person or persons all or any of the
trusts, powers or discretions vested in it by these presents and any such
delegation may be made upon such terms and conditions and subject to such
regulations (including power to sub-delegate) as Lessor in its absolute
discretion thinks fit.
A. Certificates. Except where expressly provided in this Agreement, any
certificate or determination by Lessor as to any rate of interest or as to any
other amount payable under this Agreement will, in the absence of manifest
error, be conclusive and binding on Lessee.
A. Appropriation. If any sum paid or recovered in respect of the liabilities of
Lessee under this Agreement is less than the amount then due, Lessor may apply
that sum to amounts due under this Agreement in such proportions and order and
generally in such manner as Lessor may determine at its sole discretion.
A. Not Used.
A. Set-off. Lessor may set off any matured obligation owed by Lessee under this
Agreement or the Other Agreements (to the extent beneficially owned by Lessor)
against any obligation (whether or not matured) owed by Lessor to Lessee,
regardless of the place of payment or currency. If an obligation is
unascertained or unliquidated, Lessor may in good faith estimate that obligation
and set off in respect of the estimate, subject to the relevant party accounting
to the other when the obligation is ascertained or liquidated. Lessor will not
be obliged to pay any amounts to Lessee under this Agreement so long as any sums
which are then due from Lessee under this Agreement or the Other Agreements
remain unpaid and any such amounts which would otherwise be due will fall due
only if and when Lessee has paid all such sums except to the extent Lessor
otherwise agrees or sets off such amounts against such payment pursuant to the
foregoing.
A. Severability. If a provision of this Agreement is or becomes illegal, invalid
or unenforceable in any jurisdiction, that will not affect:
1. The legality, validity or enforceability in that jurisdiction of any other
provision of this Agreement; or
1. The legality, validity or enforceability in any other jurisdiction of that or
any other provision of this Agreement.
A. Remedy. If Lessee fails to comply with any provision of this Agreement,
Lessor may, without being in any way obliged to do so or responsible for so
doing and without prejudice to the ability of Lessor to treat the non-compliance
as a Default or an Event of Default, effect compliance on behalf of Lessee,
whereupon Lessee shall become liable to pay immediately any sums expended by
Lessor together with all costs and expenses (including legal costs) in
connection therewith.
A. Expenses. Whether or not the Aircraft is delivered to Lessee (except where
such delivery is prevented by the act of Lessor) pursuant to this Agreement,
Lessee will pay to Lessor on demand all expenses (including legal, survey and
other costs) payable or incurred by Lessor in contemplation of, or otherwise in
connection with, the enforcement of or preservation of any of Lessor's rights
under this Agreement, or in respect of the repossession of the Aircraft.
All expenses payable pursuant to this Section 16.9 will be paid as they are
incurred by Lessor.
A. Time of Essence. The time stipulated in this Agreement for all payments
payable by Lessee to Lessor and for the performance of Lessee's other
obligations under this Agreement will be of the essence of this Agreement.
A. Notices. All notices under, or in connection with, this Agreement will,
unless otherwise stated, be given in writing by letter or facsimile. Any such
notice is deemed effectively to be given as follows:
1. If by letter, when delivered;
1. If by facsimile, when transmitted and full transmission has been separately
notified by telephone by the transmitting party.
The address, facsimile and telephone numbers of Lessee and Lessor are as
follows:
Lessee: Frontier Airlines, Inc.
12015 East 46th Avenue
Denver, Colorado 80239
Attn: General Counsel
Facsimile: (303) 371-7007
Telephone: (303) 371-7400
Lessor: Interlease Aviation Investors, L.L.C.
One Northfield Plaza
Suite 525
Northfield, Illinois 60093
Attn: Philip Coleman
Facsimile: (708) 446-2749
Telephone: (708) 446-2644
A. Law and Jurisdiction:
1. THIS AGREEMENT IN ALL RESPECTS IS GOVERNED BY AND TO BE INTERPRETED IN
ACCORDANCE WITH LAWS OF THE STATE OF THE GOVERNING LAW, WITHOUT REGARD TO ITS
CONFLICTS OF LAW PRINCIPLES. 2. For the benefit of Lessor, Lessee agrees that
the federal courts of the Northern District of Illinois, or the courts of the
State of Illinois, County of Cook, are to have nonexclusive jurisdiction to
settle any disputes in connection with this Agreement and submits itself and its
property to the jurisdiction of the courts of the State of Iowa in connection
with this Agreement;
1. Without prejudice to any other mode of service, Lessee:
a) appoints Prentice Hall Corporation System, Inc. as its agent for
service of process relating to any proceedings before the Illinois
courts in connection with this Agreement and agrees to maintain the
process agent in Illinois notified to Lessor;
a) agrees that failure by a process agent to notify Lessee of the process
shall not invalidate the proceedings concerned;
a) consents to the service of process relating to any such proceedings by
prepaid mailing of a copy of the process to Lessee's agent at the
address identified in paragraph (i);
1. Lessee:
a) waives objection to the federal and state courts in the State of
Illinois on grounds of inconvenient forum or otherwise as regards
proceedings in connection with this Agreement; and
a) agrees that a judgment or order of a federal or court in the State of
Illinois in connection with this Agreement is conclusive and binding on
it and may be enforced against it in the courts of any other
jurisdiction;
1. Nothing in this Section limits the right of Lessor or Lessee to bring
proceedings against Lessee or Lessor, as the case may be, in connection with
this Agreement:
a) in any other court of competent jurisdiction; or
a) concurrently in more than one jurisdiction; and
2. Lessee irrevocably and unconditionally:
a) agrees that if Lessor brings legal proceedings against it or its assets
in relation to this Agreement no immunity from such legal proceedings
(which will be deemed to include without limitation, suit, attachment
prior to judgment, other attachment, the obtaining of judgment,
execution or other enforcement) will be claimed by or on behalf of
itself or with respect to its assets;
a) waives any such right of immunity which it or its assets now has or may
in the future acquire;
a) consents generally in respect of any such proceedings to the giving of
any relief or the issue of any process in connection with such
proceedings including, without limitation, the making, enforcement or
execution against any property whatsoever (irrespective of its use or
intended use) of any order or judgment which may be made or given in
such proceedings.
A. Entire Agreement. This Agreement, the Letter Agreement and any related
side-letters are the sole and entire agreement between Lessor and Lessee in
relation to the leasing of the Aircraft, and supersede all previous agreements
in relation to that leasing.
A. Indemnities. All rights expressed to be granted to each Indemnitee under this
Agreement (other than Lessor) are given to Lessor on behalf of that Indemnitee.
A. Counterparts. This Agreement may be executed in counterparts each of which
will constitute one and the same document.
I. DISCLAIMERS AND WAIVERS
A. Exclusion. EXCEPT AS SET FORTH IN THIS AGREEMENT, THE SCHEDULES HERETO AND
THE LETTER AGREEMENT, THE AIRCRAFT IS DELIVERED "AS IS, WHERE IS" AND LESSEE
AGREES AND ACKNOWLEDGES THAT, SAVE AS EXPRESSLY STATED IN THIS AGREEMENT, LESSOR
WILL HAVE NO LIABILITY IN RELATION TO, AND LESSOR HAS NOT AND WILL NOT BE DEEMED
TO HAVE MADE OR GIVEN, ANY WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED,
WITH RESPECT TO, THE AIRCRAFT, INCLUDING BUT NOT LIMITED TO:
1. THE DESCRIPTION, AIRWORTHINESS, MERCHANTABILITY, FITNESS FOR ANY PARTICULAR
USE OR PURPOSE, VALUE, CONDITION, OR DESIGN, OF THE AIRCRAFT OR ANY PART; OR
1. ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT
ARISING FROM LESSOR'S NEGLIGENCE, ACTUAL OR IMPUTED; OR
1. ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO
THE AIRCRAFT, FOR ANY LIABILITY OF LESSEE TO ANY THIRD PARTY, OR FOR ANY OTHER
DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.
A. Waiver. LESSEE HEREBY WAIVES, AS BETWEEN ITSELF AND THE LESSOR, ALL ITS
RIGHTS IN RESPECT OF ANY WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, ON THE
PART OF LESSOR AND ALL CLAIMS AGAINST LESSOR HOWSOEVER AND WHENEVER ARISING AT
ANY TIME IN RESPECT OF OR OUT OF THE OPERATION OR PERFORMANCE OF THE AIRCRAFT OR
THIS AGREEMENT EXCEPT TO THE EXTENT EXPRESSLY ARISING UNDER THIS AGREEMENT.
A. Confirmation. LESSEE CONFIRMS THAT IT IS FULLY AWARE OF THE PROVISIONS OF
THIS SECTION 17 AND ACKNOWLEDGES THAT RENT AND OTHER AMOUNTS HAVE BEEN
CALCULATED BASED ON ITS PROVISIONS.
I. SECTION 1110
Lessee acknowledges that Lessor would not have entered into this
Agreement unless it had available to it the benefits of a lessor under Section
1110 of Title 11 of the United States Code. Lessee covenants and agrees with
Lessor that to better ensure the availability of such benefits, Lessee shall
support any motion, petition or application filed by Lessor with any bankruptcy
court having jurisdiction over Lessee, whereby Lessor seeks recovery of
possession of the Aircraft under said Section 1110 and shall not in any way
oppose such action by Lessor unless Lessee shall have complied with the
requirements of said Section 1110 to be fulfilled in order to entitle Lessee to
continued use and possession of the Aircraft hereunder. In the event said
Section 1110 is amended, or if it is repealed and another statute is enacted in
lieu thereof, Lessor and Lessee agree to amend this Agreement and take such
other action not inconsistent with this Agreement as Lessor reasonably deems
necessary so as to afford to Lessor the rights and benefits as such amended or
substituted statute confers upon owners and lessors of aircraft similarly
situated to Lessor.
<PAGE>
IN WITNESS whereof the parties hereto have executed this Agreement on
the date shown at the beginning of this Agreement.
WITNESS: Lessor:
INTERLEASE AVIATION INVESTORS, L.L.C.
__________________________
By: _____________________________
Name: _____________________________
Title: _____________________________
WITNESS: Lessee:
FRONTIER AIRLINES, INC.
___________________________ By: _____________________________
Name: _____________________________
Title: _____________________________
<PAGE>
SCHEDULE 1
PART 1
DESCRIPTION OF AIRCRAFT
AIRCRAFT MANUFACTURER: Boeing
MODEL: 737-2P6
SERIAL NUMBER: 21613
ENGINES
ENGINE TYPE AND NO.: Pratt & Whitney JT8D-15 x 2 with
Stage 3 Nordam "LGW-N" Hushkits
SERIAL NOS: P688665 and P688655
On the Delivery Date, the Aircraft shall:
1. Possess a Certificate of Airworthiness issued by the Air Authority;
1. Meet the requirements for U.S domestic operation under an FAA Part 121
Operating Certificate;
1. Have undergone a fresh "C-3" check in accordance with the existing lessee's
maintenance program;
1. Be in compliance with all outstanding airworthiness directives issued by the
FAA (AD's), and mandatory manufacturing orders which have a mandatory compliance
date within 180 days of the Delivery Date, including compliance with initial
tasks of the Corrosion Prevention and Control Program (CPCP) due under Boeing
D6-38528 document;
1. Be equipped with Engines which are fresh from a Hot Section Refurbishment,
with not less than 6,000 Cycles and 9,000 Flight Hours until the next scheduled
Life Limited Parts replacement.
1. Have hard time components with the lesser of either (i) not less than 4,000
Flight Hours or Cycles, whichever is most limiting, or (ii) twelve (12) months
and shall be delivered with a copy of the hard time components listing with
corresponding time remaining until removal, all of which will be in accordance
with the Boeing maintenance program; 2. Be delivered with applicable records and
manuals in either microfilm or paper medium;
1. Be delivered with a listing of each life limited part within each Landing
Gear and corresponding time remaining until replacement;
1. Have had a boroscope inspection of each Engine, at Lessee's expense, and a
power assurance run, to be witnessed by both parties. Any discrepancies,
mutually agreed, beyond the Engine manufacturer's limits will be repaired at
Lessor's expense. No Engine will be "on watch" for any reason requiring any
special or out of sequence inspection;
1. Be in an all economy seating configuration of 119 seats providing at least
31" pitch or other seating configuration to be mutually agreed between Lessor
and Lessee;
1. Shall be stripped and repainted white, with Boeing gray wings;
1. Have installed Windshear (W/S) and Traffic Alert and Collision Avoidance
Systems (TCAS) in accordance with FAR part 121 standards;
1. Emergency equipment having a calendar life will have a minimum of one (1)
year or 100% of its total approved life, whichever is less, remaining;
1. Time remaining to overhaul on the Landing Gear will not be less than 4,000
Flight Hours or Cycles, whichever is most limiting. The Landing Gear and wheel
wells will be clean, free of leaks and repaired as necessary.
1. Wheel wells shall be coated with corrosion inhibitor;
1. All decals and placards shall be clean, secure and legible.
1. Intalled tires and brakes shall have at least 50% landings remaining.
1. The Aircraft will have been inspected and treated with respect to corrosion
as defined in the Agreed Maintenance Program and/or Boeing Document No.D6-38528
relative to compliance with the Corrosion Prevention and Control Program (CPCP).
The entire fuselage will be substantially free from corrosion and will be
adequately treated and an approved corrosion prevention program will be in
operation; and
1. Fuel tanks will be free from contamination and corrosion and a tank treatment
program will be in operation.
<PAGE>
SCHEDULE 1
PART 2
AIRCRAFT DOCUMENTS
A. CERTIFICATES
o FAA Certificate of Airworthiness
B. AIRCRAFT STATUS RECORDS
o Log Books
o Airframe Maintenance Status Report
o Supplemental Structural Inspection Document Status (if applicable)
o Manufacturer's Service Bulletin Status Report
o Airworthiness Directive Compliance Report (terminated and repetitive)
o Modification Status Report List documents will be provided upon request
o Last Weighing Report
o List of Life Limited Components with remaining hours/cycles
C. AIRCRAFT MAINTENANCE RECORDS (last heavy maintenance visit)
o Test Flight Report
o X-ray pictures
o Last annual check and heaviest maintenance check Work Cards
D. AIRCRAFT HISTORY RECORDS
o Aircraft Maintenance History Cards
o Service Difficulty Report
o Accident or Incident Report (Major Structural Repair)
E. ENGINE RECORDS (for each engine)
o Engine time and cycle records
o Last overhaul and repair documents (including FAA Forms 337)
o Airworthiness Directive Compliance Report (terminated and repetitive)
o Manufacturer's Service Bulletin Status Report
o List of Time Controlled Components with remaining hours and cycles
o Modification Status Report
o Engine Disc Sheets
o Engine Build Specifications
F. APU RECORDS
o Last Overhaul and Repair Documents (including modification status)
o Airworthiness Directive Compliance Report (terminated and repetitive)
o Manufacturer's Service Bulletin Status Report
o List of Time Controlled Components with remaining hours/cycles
o Modification Status Report
G. COMPONENT RECORDS
o Time Controlled Component Historical Records with Installation and
Serviceability Tags
H. MANUALS
o Airplane Flight Manual (Manufacturer Approved, FAA Approved)
o Flight Crew Operating Manual
o Weight and Balance Manual
o Wiring Diagram Manual (microfilm and hard copy if available)
o Illustrated Parts Catalog (microfilm)
o Aircraft Maintenance Manual (microfilm)
o Manufacturer's Engine Maintenance Manual and any approved engineering
changes, as applicable
I. MISCELLANEOUS TECHNICAL DOCUMENTS
o Maintenance Program Specifications
o Interior Configuration Drawings
o Original Delivery Documents
o Loose Equipment Inventory
<PAGE>
SCHEDULE 1
PART 3
LEASE SUPPLEMENT
THIS LEASE SUPPLEMENT is dated as of ______ __, 1998, and is
executed by Frontier Airlines, Inc. ("Lessee") and Interlease Aviation
Investors, L.L.C. ("Lessor"), pursuant to Section 3.1(d) of the Aircraft Lease
Agreement between Lessor and Lessee dated as of August __, 1998 (the "Lease").
All capitalized terms used herein which are not otherwise defined herein shall
have the meaning given to such terms in the Lease.
Lessor hereby leases to Lessee, and Lessee hereby leases from
Lessor, the Aircraft described below (the "Aircraft") upon and subject to all of
the terms, conditions and provisions of the Lease, and Lessor and Lessee further
agree and state as follows:
1. Description of the Aircraft:
(a) Airframe: Boeing 737-2P6
Manufacturer's Serial No.: 21613
U.S. FAA Registration No.: N1PC
(b) Engines: Two (2) Pratt & Whitney JT8D-15 engines, Serial Numbers
P688665, and P688655, each of said engines having 750 or more rated
take-off horsepower or the equivalent thereof;
(c) All Parts (other than Engines) installed on or associated with the
Airframe and Engines; and
(d) The Aircraft Documents relating to the Airframe and Engines.
2. The Habitual Base of the Aircraft is __________, ______________.
3. The Term for the Lease commences on __________, 1998 (the "Delivery Date")
and ends on the day preceding the numerically corresponding day 84 months after
the Delivery Date, both dates inclusive, unless sooner terminated in accordance
with the provisions of the Lease.
4. The Rent for the Aircraft shall be the amount set forth in the Letter
Agreement.
IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease
Supplement to be executed by their respective corporate officers as of the date
first above written.
<PAGE>
FRONTIER AIRLINES, INC. (LESSEE)
By: _______________________________
Title: ____________________________
<PAGE>
INTERLEASE AVIATION INVESTORS, L.L.C.
(LESSOR)
By: ______________________________
Title: ___________________________
<PAGE>
SCHEDULE 2
CERTIFICATE OF ACCEPTANCE
This Certificate of Acceptance is delivered, on the date set forth
below by Frontier Airlines, Inc. ("Lessee"), to Interlease Aviation Investors,
L.L.C. ("Lessor"), pursuant to the Aircraft Lease Agreement dated as of August
10, 1998 between Lessor and Lessee (the "Agreement"). Capitalized terms used in
this Certificate shall have the meaning given to such terms in the Agreement.
1. DETAILS OF ACCEPTANCE
Lessee hereby confirms to Lessor that Lessee has at _________ o'clock
on this ____ day of _______________, 199_, at ________, accepted the following,
in accordance with the provisions of the Agreement
(a) Boeing 737-286 airframe, Manufacturer's Serial No. 21613;
(b) 2 Pratt & Whitney JT8D-15 Engines:
Engine Number Manufacturer's Serial No.
1 P688665; and
2 P688655
(Each of which shall have more than 750 rated takeoff horsepower or the
equivalent of such horsepower).
(c) Fuel Status: _____________; and
(d) Loose Equipment Check List: as per list signed by Lessor and Lessee and
attached hereto.
2. CONFIRMATION
Lessee confirms to Lessor that as at the time indicated above, being
the Delivery Date:
(a) The representations and warranties contained in Clause 2 are hereby
repeated;
(b) The Aircraft is insured as required by the Agreement;
(c) Lessee confirms that there have been affixed to the Aircraft and the
Engines the fireproof notices required by the Agreement; and
(d) Lessee's authorized technical experts have inspected the Aircraft to
ensure the Aircraft conforms to Lessee's requirements. The Aircraft
is in accordance with the specifications of the Agreement and
satisfactory in all respects.
3. HOURS AND CYCLES DATA (as of Delivery Date)
(a) Airframe:
Number of Hours since last "C-7" plus SI (formerly "D") Check (Heaviest
Check): ____hours
"C" Check (or Equivalent):
Type of Check: _______________________
Interval: ____________________________
Time Since: __________________________
(b) Landing Gear Overhaul:
Number of Hours Since Last Overhaul:
Left Gear ___________________________ Hours
Right Gear __________________________ Hours
Nose Gear ___________________________ Hours
Interval:
Left Gear ________________________
Right Gear _______________________
Nose Gear ________________________
(c) Engines:
Total Number of Hours and Cycles:
S/N ______:_________ hours; _____________ cycles
S/N ______:_________ hours; _____________ cycles
Number of Hours Since Last Hot Section Refurbishment:
S/N ______:_________ hours
S/N ______:_________ hours
Number of Hours Since Last Cold Section Refurbishment:
S/N ______:_________ hours
S/N ______:_________ hours
Hot Section Refurbishment:
Interval _________________________________
Time Since (S/N _________): ______________________
Time Since (S/N _________): ______________________
Time Remaining to First Restriction ("Limiter"):
Engine S/N: P688665
Hours: ____________ Restriction: ____________
Cycles: ___________ Restriction: ____________
Engine S/N: P688655
Hours: ____________ Restriction: ____________
Cycles: ___________ Restriction: ____________
Hours and Cycles used and remaining in Life Limited Parts (see attached
Schedule):
--------------
(d) Auxiliary Power Unit:
Number of APU Hours Since Last Heavy Shop Visit:
_________ hours __________ Date accomplished
Hot Section Refurbishment:
Interval: _______________________
Time Since: _____________________
(e) Time Controlled Components: [see attached report]
(f) Fuel on Board on Delivery Date: ____________________
(g) Interior Equipment:
Number of Passenger Seats
and Configuration: _____ _____
Number of Galleys and Location: _____ _____
Number of Lavatories and Location: _____ _____
LOPA - Attached: _____ _____
List of Loose Equipment on Board:
---------------------------------- ----- -----
---------------------------------- ----- -----
---------------------------------- ----- -----
---------------------------------- ----- -----
---------------------------------- ----- -----
---------------------------------- ----- -----
(h) Avionics:
Description (use continuation Model No.
sheet(s) as required)
---------------------------------- ----- -----
---------------------------------- ----- -----
---------------------------------- ----- -----
---------------------------------- ----- -----
---------------------------------- ----- -----
---------------------------------- ----- -----
IN WITNESS WHEREOF, Lessee has, by its duly authorized representative,
executed this Certificate on the date in paragraph 1 above.
LESSEE:
FRONTIER AIRLINES, INC.
By: __________________________
Title: _______________________
<PAGE>
SCHEDULE 3
OPERATING CONDITION AT REDELIVERY
1. GENERAL CONDITION
In addition to the specific requirements set forth below, on or before
the Expiration Date, Lessee, at its own expense, shall return the Aircraft in
compliance with all applicable Federal Aviation Regulations ("FAR"), including
Part 121 thereof, and all of the following provisions:
(a) The Aircraft shall be airworthy and shall have been maintained and
operated in accordance with Article 8 of the Lease in accordance with FAR Part
121 and all other applicable FAA regulations with the same care and
consideration for the technical condition of the Aircraft as if the Aircraft
were to have been kept in continued regular service by Lessee and all
modifications and maintenance to the Aircraft shall have been performed in such
a manner as to demonstrate compliance with such Article 8, the applicable FAA
regulations and the Maintenance Program, or as recommended by the manufacturer.
(b) The Aircraft exterior shall be washed and the interior shall have
received a deep cleaning by international commercial airline standards. The
cockpit placards shall be replaced as required and the cockpit shall be
repainted as required.
(c) The Aircraft shall have installed the full complement of Engines
and other equipment, parts, components, accessories, and loose equipment as when
delivered, each such item functioning in accordance with its intended use.
(d) The Aircraft shall comply with the manufacturer's original type
certificate specifications, as revised up to the Expiration Date, in so far as
such revisions are mandatory and as amended by supplemental type certificates
applicable to the Aircraft.
(e) The Aircraft and each Engine shall comply with all outstanding U.S.
Federal Aviation Regulations and Airworthiness Directives issued by the FAA
affecting such model aircraft, engines, and components which by their terms have
a mandatory compliance date on or before the return date or within 180 days
thereafter, notwithstanding any waiver, deviation or time extension obtained by
Lessee from the FAA or otherwise other than any waiver, deviation or time
extension which is issued for all aircraft or engines, as the case may be, of
the same model and type as such Aircraft or such Engine, as the case may be,
without a requirement for application to the FAA for such waiver, deviation, or
time extension.
(f) The Aircraft shall meet the requirements for airworthiness
certification for a transport category commercial aircraft in accordance with
all applicable FARs and shall have a current and effective airworthiness
certificate issued by the FAA.
(g) The Aircraft shall be in as good operating condition as when
delivered to Lessee hereunder, ordinary wear and tear excepted. Those items in
the interior of the Aircraft which, in the reasonable opinion of Lessor, are
defective, damaged or excessively worn shall be repaired or replaced by Lessee.
(h) The entire fuselage and vertical stabilizer, including fairings,
wheel well doors, and engine cowlings, and horizontal stabilizer shall be newly
stripped of paint and repainted white. Lessee shall prepare the Aircraft for
such repainting by restoring aerodynamic sealer to any area stripped of paint.
Wing surfaces shall be stripped and painted Boeing gray and the floor line which
shall have fresh paint in white. All required placards and markings shall be
replaced as required.
(i) The Aircraft and Engines shall be in compliance with all
manufacturer's service bulletins as accomplished on similar aircraft engines in
Lessee's fleet.
(j) The Aircraft, except as otherwise provided in the Lease or as
consented to by Lessor, shall be in the same configuration (including, but not
limited to, interior seating configuration, galleys and lavatories) as when the
Aircraft was originally delivered to Lessee hereunder, unless otherwise agreed
to by Lessor in writing.
(k) Neither the Aircraft nor any Engine shall have any open, deferred
or placarded maintenance items or watch items, nor shall they have any hour,
cycle or calendar time extensions, waivers or non-transferable alternate methods
of compliance. The Aircraft and each Engine shall comply with the operation
specifications of the Lessee without waiver or exceptions.
(l) The Aircraft shall have undergone, immediately prior to redelivery,
the complete C check which is next due per the Boeing MPD. If the C-check next
due is a "C-7" plus SI (formerly "D") check, Lessor may require Lessee to
perform a "C-7" plus SI check utilizing the Airframe Maintenance Reserves
accumulated for that purpose or, alternatively, may require Lessee to pay Lessor
an additional payment equivalent to the Maintenance Reserve per Flight Hour for
each Flight Hour remaining to the time when the Next "C-7" plus SI check would
become mandatory in accordance with the Agreed Maintenance Program.
(m) The Aircraft shall have installed all applicable vendor's and
manufacturer's service bulletin kits received free of charge by Lessee that are
appropriate for the Aircraft and to the extent not installed, those kits will be
furnished free of charge to Lessor.
2. COMPONENTS
The Aircraft shall:
(a) Have hard time components with the lesser of either (i) 4,000
Flight Hours or Cycles, whichever is most limiting, or (ii) twelve (12) months,
and shall be delivered with a copy of the hard time components listing with
corresponding time remaining until removal, all of which will be in accordance
with the Boeing maintenance program;
(b) Each "on-condition" and "condition monitored" component will be
serviceable; and
(c) The APU will be in the same operational condition as at the
Delivery Date with temperatures and air outputs within the APU manufacturer's
limits at all operational settings; and
3. ENGINES
Each Engine will be installed on the Aircraft (and if not the engines
installed on the Delivery Date will be accompanied by all documentation Lessor
may require to evidence that title thereto is properly vested in Lessor) and, at
Lessor's option and expense, each Engine will have had a complete hot (including
combustion chamber) and cold section video boroscope inspection, and a power
assurance run in accordance with the Engine manufacturer's maintenance manual
and all items beyond such manufacturer's limits will be repaired at Lessee's
expense. No Engine will be "on watch" for any reason requiring any special or
out of sequence inspection.
Lessee shall redeliver each Engine to Lessor with at least 9,000 Flight
Hours and 6,000 Cycles remaining until the next scheduled life limited Parts
replacement (determined in accordance with the Agreed Maintenance Program). If
Lessee desires to return the Engines with less than the minimum Flight Hours or
Cycles specified above, at Lessor's sole option, Lessor may require Lessee to
perform a premature shop visit and Hot Section Refurbishment utilizing the
Engine Maintenance Reserves accumulated for that purpose or, alternatively,
Lessor may require Lessee to pay Lessor an additional payment equivalent to the
Maintenance Reserve for each Flight Hour remaining to the time of the next
scheduled life limited parts replacement.
4. FUSELAGE, WINDOWS AND DOORS
(a) The fuselage will be free of major dents and abrasions and loose or
pulled or missing rivets;
(b) Doors will be free moving, correctly rigged and be fitted with
serviceable seals;
(c) Windows shall be free of delamination, blemishes and/or crazing and
shall be properly sealed; and
(d) Prior to the Expiration Date, all repairs accomplished during the
Term of a temporary or interim nature, including repairs using blind fasteners
and those requiring repetitive inspections or future upgrading, shall be
upgraded to a permanent repair, and all external doublers (scab patches) shall
be replaced with flush repairs (unless such external doublers are approved by
the manufacturer as permanent repair), all in accordance with the applicable
manufacturer's maintenance manual, structural repair manual or other FAA
approved data. In addition, all AD's shall be terminated with no carry over
items.
5. WINGS AND EMPENNAGE
(a) Leading edges will be free from damage and patches;
(b) Wings will be free of fuel leaks and no previous fuel leaks shall
have temporary repairs.
6. INTERIOR
(a) Ceilings, sidewalls and bulkhead panels will be clean and free of
cracks and stains.
(b) Carpets and seat covers will be in good condition, reasonably clean
and free of stains and meet FAR burn certification regulations;
(c) Seats will be serviceable, in good condition and the seat frames
shall be repainted as necessary;
(d) Emergency equipment having a calendar life will have a minimum of
one (1) year or 100% of its total approved life, whichever is less, remaining;
(e) Galleys will contain all equipment on board at Delivery installed
and functional including service carts (trolleys), containers and coffee pots,
which will be clean by airline standards, free of corrosion, and shall have all
FAA required markings installed;
(f) Overhead stowage compartments will be clean by airline standards
and serviceable with proper markings installed; and
(g) Lavatories will be clean, and free of corrosion by airline
standards and serviceable with correct FAA markings installed.
7. COCKPIT
(a) Trim panels shall be free of stains and cracks, will be clean
secure and repainted as necessary;
(b) Seat covers will be in good condition, clean and free of stains and
will conform to FAR burn certification regulations; and
(c) Floor coverings shall be effectively sealed.
8. CARGO COMPARTMENTS
(a) Panels will be in good condition; and
(b) Nets will be in good condition.
(c) All electrical equipment shall be installed and functioning
normally.
9. LANDING GEAR AND WHEEL WELLS
(a) Time remaining to overhaul on the Landing Gear will not be less
than 4,000 Flight Hours or Flight Cycles, whichever is most limiting. The
Landing Gear and wheel wells will be clean, free of leaks and repaired as
necessary.
(b) Wheel wells shall be coated with corrosion inhibitor;
(c) All decals and placards shall be clean, secure and legible.
(d) Installed tires and brakes shall have at least 50% landings
remaining.
10.CORROSION
(a) The Aircraft will have been inspected and treated with respect to
corrosion as defined in the Agreed Maintenance Program and/or Boeing Document
No.D6-38528 relative to compliance with the Corrosion Prevention and Control
Program (CPCP). The entire fuselage will be substantially free from corrosion
and will be adequately treated and an approved corrosion prevention program will
be in operation; and
(b) Fuel tanks will be free from contamination and corrosion and a tank
treatment program will be in operation.
11.DOCUMENTATION
(a) All Aircraft Documents and other current and historical records
delivered with the Aircraft on the Delivery Date, and acquired or prepared by
Lessee during the Term of the Lease, shall be returned with the Aircraft
including, but not limited to, time logs showing Flight Hours and Cycles on any
given date, documents, manuals (as revised up to and including the most current
revisions issued by the manufacturer), data, overhaul records, Time Controlled
Part traceability to overhaul and "zero time since new" for life-limited parts,
log books, original Aircraft and Engine delivery documents, serviceable parts
tags, FAA forms, modification records, inspection records, all other
documentation pertaining to the Aircraft, Engine and Part, and all documents and
records described in Part 2 to Schedule I. All records discrepancies shall be
corrected, and any missing or incomplete records shall be reconstructed by
Lessee at Lessee's sole cost and expense prior to the return of the Aircraft.
(b) Lessee shall cooperate with the Lessor and any successor lessee
identified by Lessor at any time, in order to assist the Lessor and such
successor lessee with the integration of the Aircraft into the successor
lessee's maintenance program, and the approval of the addition of the Aircraft
as an aircraft on such successor lessee's operating certificate, and other
licenses, permits and approvals, solely by providing all data, access to logs,
job cards, yellow tags, service records, overhaul data and test data for any
Engine, Part or the Airframe, which data, logs, job cards, yellow tags, service
records, overhaul data and test data (i) were delivered to or received by Lessee
at any time; (ii) were required by law to be created or maintained by Lessee; or
(iii) are customarily created or maintained by aircraft operators and can easily
and readily be produced for Lessor at Lessor's expense. This sub-section shall
survive the termination of this Lease for any reason whatsoever.
Notwithstanding anything contained in this Schedule 3, Lessor shall not
be required to make any payments to Lessee in the event that the Airframe, the
Engines, the Landing Gear, any time, cycle or calendar controlled component is
returned to Lessor in a condition better than that specified in Section 12 and
this Schedule 3.
<PAGE>
SCHEDULE 4
INSURANCE REQUIREMENTS
The Insurance required to be maintained are as follows:
(a) HULL ALL RISKS of Loss or Damage (while flying and on the ground)
with respect to the Aircraft on an "agreed value basis" for the Agreed Value and
with a deductible not exceeding $250,000 (including, without limitation, foreign
object damage coverage with a deductible not exceeding $250,000 per engine per
occurrence), or such other amount agreed by Lessor from time to time. Without
prejudice to the foregoing, with the prior written consent of Lessor, Lessee may
increase the aforesaid deductible amount to $500,000 if, prior to doing so,
Lessee shall have paid to Lessor the sum of $250,000 by way of an insurance
security deposit (the "Insurance Security Deposit") (which Insurance Deposit
shall also be available to be applied to deductible losses between $100,000 and
$500,000). Insurance Security Deposit (which shall be held by Lessor as security
for the performance by Lessee of its obligations under this Agreement and the
Other Agreements), shall be returned to Lessee on the Expiration Date if all
amounts payable by Lessee under this Agreement and any Other Agreement shall
have been paid in full and no Default shall have occurred and be continuing.
With Lessor's prior consent, the Insurance Deposit may be provided by Lessee by
way of letter of credit issued by a bank acceptable to Lessor and in form and in
substance satisfactory to Lessor.
In the event that the Insurance Security Deposit is applied to a loss
claim thereby reducing the balance thereof, Lessee will either (a) replace any
deficiency in such balance; or (b) lower the all risk hull insurance deductible
to $250,000 within 15 days after the aforementioned application.
(b) HULL WAR AND ALLIED PERILS, being such risks excluded from the Hull
All Risks Policy to the fullest extent available from the leading international
insurance markets including confiscation and requisition by the State of
Registration for the Agreed Value;
(c) ALL RISKS (INCLUDING WAR AND ALLIED RISK except when on the ground
or in transit other than by air) property insurance on all Engines and Parts
when not installed on the Aircraft on an "agreed value" basis for their full
replacement value and including engine test and running risks;
(d) AIRCRAFT THIRD PARTY, PROPERTY DAMAGE, PASSENGER, BAGGAGE, CARGO
AND MAIL AND AIRLINE GENERAL THIRD PARTY (INCLUDING PRODUCTS) LEGAL LIABILITY
for a Combined Single Limit (Bodily Injury/Property Damage) of an amount not
less than the Minimum Liability Coverage for any one occurrence (but in respect
of products and personal injury liability this limit may be an aggregate limit
for any and all losses occurring during the currency of the policy). War and
Allied Risks are also to be covered under the Policy to the fullest extent
available from the leading international insurance markets;
(e) All required hull and spares insurance (as specified above), so far
as it relates to the Aircraft will:
(i) name Lessor and their respective successors and
assigns as additional assureds for their respective rights and
interests, warranted, each as to itself only, no operational interest;
(ii) provide that any loss will be settled jointly
with Lessor and Lessee, subject to final prior approval of Lessor and
will be payable in Dollars to Lessor, for the account of all interests
except where the loss does not exceed the Damage Notification
Threshold, and Lessor has not notified the insurers to the contrary, in
which case the loss will be settled with and paid to Lessee;
(iii) include a notice and/or acknowledgement of
assignment in a form acceptable to Lessor;
(iv) if separate Hull "all risks" and "war risks"
insurances are arranged, include a 50/50 provision in accordance with
market practice (AVS. 103 is the current market language);
(v) confirm that the insurers are not entitled to
replace the Aircraft in the event of an insured Event of Loss;
(vi) confirm that the insurers will not obtain a
valid discharge of the obligations under the Insurance by payment to
the broker, notwithstanding market practice to the contrary;
(f) All required liability insurances (specified above) will:
(i) include Lessor and its successors and assigns and
their respective shareholders, subsidiaries, directors, officers,
agents, employees and indemnitees as additional insureds for their
respective rights and interests, warranted, each as to itself only, no
operational interest;
(ii) include a Severability of Interest Clause which
provides that the insurance, except for the limit of liability, will
operate to give each assured the same protection as if there was a
separate policy issued to each assured;
(iii) contain a provision confirming that the policy
is primary without right of contribution and the liability of the
insurers will not be affected by any other insurance of which Lessor or
Lessee have the benefit so as to reduce the amount payable to the
additional insureds under such policies;
(g) All Insurance will:
(i) be in accordance with normal industry practice o
persons operating similar aircraft in similar circumstances;
(ii) provide cover denominated in Dollars and any
other currencies which Lessor may reasonably require in relation to
liability insurance;
(iii) operate on a worldwide basis subject to such
limitations and exclusions as Lessor may agree;
(iv) acknowledge the insurer is aware (and has seen a
copy) of this Agreement and that the Aircraft is owned by Lessor;
(v) provide that, in relation to the interests of
each of the additional assureds the Insurance will not be invalidated
by any act or omission by Lessee, or any other person other than the
respective additional assured seeking protection and shall insure the
interests of each of the additional assureds regardless of any breach
or violation by Lessee, or any other person other than the respective
additional assured seeking protection of any warranty, declaration or
condition, contained in such Insurances;
(vi) provide that the insurers will hold harmless and
waive any rights of recourse and/or subrogation against the additional
assureds or to be subrogated to any rights of the Banks against Lessor
or Lessee;
(vii) provide that the additional assureds will have
no obligation or responsibility for the payment of any premiums due
(but reserve the right to pay the same should any of them elect so to
do) and that the insurers will not exercise any right of set-off or
counter-claim in respect of any premium due against the respective
interests of the additional assureds other than outstanding premiums
relating to the Aircraft, any Engine or Part the subject of the
relevant claim;
(viii) provide that the Insurance will continue
unaltered for the benefit of the additional assureds for at least
thirty (30) days after written notice by registered mail or telex of
any cancellation, change, event of non-payment of premium or instalment
thereof has been sent to Lessor, except in the case of war risks for
which seven (7) days (or such lesser period as is or may be customarily
available in respect of war risks or allied perils) will be given, or
in the case of war between the five (5) great powers or nuclear peril
for which termination is automatic;
(ix) if reinsurance is a requirement of this
Agreement such reinsurance will (i) be on the same terms as the
original insurances and will include the provisions of this Schedule,
(ii) provide that notwithstanding any bankruptcy, insolvency,
liquidation, dissolution or similar proceedings of or affecting the
reinsured that the reinsurers' liability will be to make such payments
as would have fallen due under the relevant policy of reinsurance if
the reinsured had (immediately before such bankruptcy, insolvency,
liquidation, dissolution or similar proceedings) discharged its
obligations in full under the original insurance policies in respect of
which the then relevant policy of reinsurance has been effected; and
(iii) contain a "cutthrough" clause in the following form (or
otherwise, satisfactory to Lessor): "The Reinsurers and the Reinsured
hereby mutually agree that in the event of any claim arising under the
reinsurances in respect of a total loss or other claim where as
provided by the Aircraft Lease Agreement dated as of August 10, 1998
and made between Interlease Aviation Investors, L.L.C. and Frontier
Airlines, Inc. such claim is to be paid to the person named as sole
loss payee under the primary insurances, the Reinsurers will in lieu of
payment to the Reinsured, its successors in interest and assigns pay to
the person named as sole loss payee under the primary insurances
effected by the Reinsured that portion of any loss due for which the
Reinsurers would otherwise be liable to pay the Reinsured (subject to
proof of loss), it being understood and agreed that any such payment by
the Reinsurers will (to the extent of such payment) fully discharge and
release the Reinsurers from any and all further liability in connection
therewith"; subject to such provisions not contravening any law of the
State of Incorporation;
(x) contain a provision entitling Lessor or any
insured party to initiate a claim under any policy in the event of the
refusal or failure of Lessee to do so; and
(xi) accept and insure the indemnity provisions of
this Agreement to the extent of the risks covered by the policies.
<PAGE>
SCHEDULE 5
FORM OF LEGAL OPINION
To: [Lessor]
[Date]
Dear Sir or Madam:
You have asked us to render an opinion in connection with the
transaction governed, inter alia, by the Lease (as hereinafter defined). Words
and expressions used herein will have the same meanings as defined in an
Aircraft Lease Agreement (the "Lease") dated as of ____________, 199__ between
Interlease Aviation Investors, L.L.C. ("Lessor") and Frontier Airlines, Inc.
("Lessee") in respect of one Boeing 737 aircraft, with manufacturer's serial
number ________, together with the 2 installed Pratt & Whitney __________
engines (the "Aircraft").
In connection with our opinion, we have reviewed, inter alia, the
following:
(a) The Lease;
(b) The Articles of Incorporation and Bylaws of Lessee;
(c) All other documents, approvals and consents of whatever
nature and wherever kept which it was, in our judgment and to our knowledge,
necessary or appropriate to examine to enable us to give the opinion expressed
below.
After reviewing the documents listed in the preceding paragraph above,
and having regard to the relevant laws of the State of Illinois, we are of the
opinion that:
(a) Lessee is a corporation duly organized and validly
existing under the laws of [Colorado], is qualified to do business as a foreign
corporation in each jurisdiction where failure to so qualify would have a
materially adverse effect on Lessee's business or its ability to perform its
obligations under the Lease;
(b) Lessee has the corporate power to enter into and perform,
and has taken all necessary corporate action to authorize the entry into,
performance and delivery of, the Lease and the transactions contemplated by the
Lease; and
(c) The entry into and performance by Lessee of, and the
transactions contemplated by, the Lease do not and will not:
(i) conflict with any laws binding on Lessee; or
(ii) conflict with the Articles of Incorporation or
Bylaws of Lessee; or
(iii) to the best of our knowledge, after inquiry,
conflict with or result in default under any indenture, mortgage,
chattel mortgage, deed of trust, conditional sales contract, lease,
bank loan or credit agreement or other agreement which is binding upon
Lessee or any of its assets or result in the creation of any Security
Interest over any of its assets.
(d) No authorizations, consents, licenses, approvals and
registrations (other than those which have been obtained and of which copies are
attached hereto) are necessary or desirable to be obtained from any governmental
or other regulatory authorities in having jurisdiction over Lessee or its
properties to enable Lessee:
(1) To enter into and perform the transactions
contemplated by the Lease;
(2) To import the Aircraft into the United
States and Colorado for the duration of the Term;
(3) To operate the Aircraft in the United States
for the transport of fare-paying passengers; or
(4) To make the payments provided for in the
Lease;
(e) Except for the filing and recordation of the Lease with
the FAA and the filing of the Financial Statements with the Secretary of State
of Colorado (which filing has been duly made on or before this date), it is not
necessary to ensure the priority, validity and enforceability of all the
obligations of Lessee under the Lease that the Lease be filed, registered,
recorded or notarized in any public office or elsewhere or that any other
instrument relating thereto be signed, delivered, filed, registered or recorded,
that any tax or duty be paid or that any other action whatsoever be taken;
(f) No other steps are necessary to record or perfect
Lessor's interest in the Aircraft in the United States or Colorado;
(g) On termination of the Lease (whether on expiration or
otherwise) as contemplated in the Lease, Lessor will be entitled;
(1) To repossess the Aircraft;
(2) To de-register the Aircraft from the
aircraft registry of the Air Authority; and
(3) To export the Aircraft from the United
States; without requiring any further consents,
approvals or licenses from any governmental or
regulatory authority in the United States;
(h) The Lease has been properly signed and delivered on
behalf of Lessee and the obligations on the part of Lessee contained therein,
assuming them to be valid and binding according to the Governing Law, are valid
and legally binding on and enforceable against Lessee respectively under the
laws of Iowa;
(i) Lessee is a Certificated Air Carrier;
(j) Lessee is a "citizen of the United States" as defined
in Section 101(16) of the Federal Aviation Act;
(k) Lessor is entitled to the benefits of Section 1110
of Title 11 of the United States Code with respect to the Aircraft;
(l) There is no withholding tax or other Tax to be
deducted from any payment whatsoever which may be made by Lessee pursuant to the
Lease;
(m) There is no applicable usury or interest limitation
law in Illinois which may restrict the recovery of payments in accordance with
the Lease;
(n) There are no registration, stamp or other taxes or
duties of any kind payable in Colorado in connection with the signature,
performance or enforcement by legal proceedings of the Lease;
(o) It is not necessary for Lessor to qualify to do
business in Colorado in order to enforce any provisions of the Lease against
Lessee;
(p) The choice of the Governing Law to govern the Lease
will be upheld as a valid choice of law in any action in the Courts of Illinois;
and
(q) The consent to the jurisdiction by Lessee contained
in the Lease is valid and binding on Lessee and not subject to revocation.
Very truly yours,
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 23,823,598
<SECURITIES> 0
<RECEIVABLES> 9,758,449
<ALLOWANCES> 172,295
<INVENTORY> 1,086,300
<CURRENT-ASSETS> 56,493,355
<PP&E> 9,870,293
<DEPRECIATION> 3,714,135
<TOTAL-ASSETS> 75,985,416
<CURRENT-LIABILITIES> 49,689,628
<BONDS> 0
0
0
<COMMON> 14,280
<OTHER-SE> 19,632,789
<TOTAL-LIABILITY-AND-EQUITY> 75,985,416
<SALES> 99,034,707
<TOTAL-REVENUES> 99,740,466
<CGS> 0
<TOTAL-COSTS> 89,537,961
<OTHER-EXPENSES> (558,843)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 458,081
<INCOME-PRETAX> 10,303,267
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,303,267
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,303,267
<EPS-PRIMARY> .78
<EPS-DILUTED> .71
</TABLE>
