-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, COxXKwJMio6UjqAML9bXOQFlm4YhW+GM03o6BzOmN0PLrk/AsOiQ6o4Y+LT9Yxaa nf3+AGihRndC1co/94Ue2Q== 0000950149-97-000681.txt : 19970401 0000950149-97-000681.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950149-97-000681 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRLEASE LTD CENTRAL INDEX KEY: 0000799033 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 943008908 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09259 FILM NUMBER: 97569262 BUSINESS ADDRESS: STREET 1: 733 FRONT ST STREET 2: P.O. BOX 193985 CITY: SAN FRANCISCO STATE: CA ZIP: 94119 BUSINESS PHONE: 4156279289 10-K 1 FORM 10-K FOR THE FISCAL YEAR ENDED 12/31/96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1996 Commission File No. 1-9259 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) California 94-3008908 (State of Organization) (I.R.S. Employer Identification No.) 555 California Street, Fourth Floor, San Francisco, CA 94104 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 765-1814 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS: NAME OF EACH EXCHANGE Depositary Units Representing ON WHICH REGISTERED: Limited Partner Interests New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ Aggregate market value of Depositary Units, held by nonaffiliates of the registrant as of the close of business at March 27, 1997 was $36,886,675.00. 2 TABLE OF CONTENTS Page PART I ITEM 1. BUSINESS ......................................................... 3 ITEM 2. PROPERTIES ....................................................... 16 ITEM 3. LEGAL PROCEEDINGS ................................................ 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS .............. 16 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS .............................................. 16 ITEM 6. SELECTED FINANCIAL DATA .......................................... 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .............................. 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ...................... 25 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .............................. 25 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .............. 25 ITEM 11. EXECUTIVE COMPENSATION .......................................... 27 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT .................................................. 27 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .................. 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K ......................................... 30 SIGNATURES ............................................................... 34 INDEX TO EXHIBITS ........................................................ A-15 2 3 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 PART I ITEM 1. BUSINESS GENERAL Airlease Ltd., A California Limited Partnership (the "Partnership" or "Airlease"), was formed in 1986. The general partner of the Partnership (the "General Partner") is Airlease Management Services, Inc., a Delaware corporation. Until October 31, 1996 the General Partner was a wholly owned subsidiary of USL Capital Corporation ("USL Capital"), which in turn is an indirect subsidiary of Ford Motor Company. On October 31, 1996, BA Leasing & Capital Corporation, a California corporation ("BALCAP") purchased the stock of the General Partner from USL Capital and now the General Partner is a wholly owned subsidiary of BALCAP. See "The BALCAP/USL Capital Transaction" below. BALCAP is a wholly owned indirect subsidiary of BankAmerica Corporation. A total of 4,625,000 Depositary Units representing limited partnership interests ("Units") in the Partnership are outstanding, of which 3,600,000 are held by the public and 1,025,000 are owned by BALCAP and its subsidiaries. The Partnership invests in commercial aircraft and leases the aircraft to others, primarily airlines, pursuant to full payout or operating leases. PLAN TO RESTRICT TRANSFERABILITY OF UNITS AND CEASE REINVESTMENT On March 13, 1997 the board of directors of the General Partner approved a plan to restrict the transferability of Units, which will result in delisting of the Units from trading on the New York Stock Exchange in December 1997, and to cease making new aircraft investments, leading to an earlier than planned liquidation of the Partnership (the "Plan to Restrict Transferability of Units and Cease Reinvestment"). The plan is subject to approval by the limited partners of the Partnership (the "Limited Partners"). The plan is designed to maximize value to holders of Units ("Unitholders") while protecting them from adverse effects of federal income tax law. As previously reported, the Partnership will be taxed as if it were a corporation effective January 1, 1998, if the Units are freely tradable on that date. This additional level of tax would substantially reduce distributions to Unitholders. The plan is being proposed because of these changes in the tax law and the Partnership's competitive position in the present market. See "Federal Income Taxation" below and "Competitive Position of the Partnership" below. Under the plan, transferability of the Units would be restricted in December 1997 and the Units would be delisted from trading at that time. Although the Units would not be 3 4 freely tradable on the New York Stock Exchange or a similar secondary market after December 1997, under provisions of the tax law, there are a number of services which may be available to facilitate purchases and sales of Units. At this time it is difficult to know if these services will operate with respect to the Units, and IRS rules impose various limitations as to the aggregate number of Units which may be sold in any year utilizing these services. The Partnership will explore the alternatives available to facilitate purchases and sales of the Units while protecting the Partnership from taxation as a corporation. If no such services develop, Unitholders may be unable to sell their Units, but they would receive distributions through the remaining term of the Partnership. The plan also provides that the Partnership would not make any new aircraft investments, would sell its aircraft as attractive opportunities become available and would distribute net sales proceeds to Unitholders after each sale. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION--Plan to Restrict Transferability of Units and Cease Reinvestment." THE BALCAP/USL CAPITAL TRANSACTION In August 1996, USL Capital and BALCAP entered into an agreement providing for the purchase by BALCAP and its affiliates of approximately $1.8 billion in assets from USL Capital, including substantially all of the aircraft portfolio assets of USL Capital (the "BALCAP/USL Capital Transaction"). The aircraft portfolio assets included all of the stock of the General Partner and United States Airlease Holding, Inc. (which then owned 22.2% of the outstanding Units), all Units owned by USL Capital and its subsidiaries, and the interests in aircraft jointly owned by USL Capital and the Partnership (a 50% interest in an aircraft (the "TWA Aircraft") on lease to TransWorld Airlines ("TWA") and a 50% interest in aircraft (the "Sun Jet Aircraft") on lease to Sun Jet International, Inc. ("Sun Jet")). The purchase price for the limited partnership interests was $15.70 per Unit and for the stock of the General Partner was $726,260 (as adjusted to account for fees payable to the General Partner under the Limited Partnership Agreement between September 1, 1996 and October 31, 1996), and the funds for such purchase were provided by Bank of America National Trust and Savings Association from its working capital. Pursuant to the agreements between USL Capital and the Partnership covering jointly owned aircraft, the Partnership had a right of first refusal to purchase USL Capital's interest in the TWA Aircraft and the Sun Jet Aircraft on the same terms as those offered by BALCAP. The General Partner reviewed these terms and determined that it would not be in the best interest of the Partnership to purchase the Sun Jet Aircraft. With respect to the TWA Aircraft, the General Partner determined that the purchase price was below the appraised value and that it would be in the Partnership's best interest to purchase the TWA Aircraft so long as the Partnership could obtain financing. As a result, USL Capital sold its interest in the Sun Jet Aircraft to BALCAP, and that aircraft is now jointly owned by BALCAP and the Partnership, and in January 1997, the Partnership purchased USL Capital's interest in the TWA Aircraft, and that aircraft is now wholly owned by the Partnership. The purchase of the TWA Aircraft was made on the same terms offered by BALCAP, and the purchase price was $5.7 million. 4 5 As a result of the BALCAP/USL Capital Transaction, the General Partner is a wholly owned subsidiary of BALCAP, BALCAP owns directly or through its subsidiaries 22.2% of the Units and BALCAP and the Partnership jointly own the Sun Jet Aircraft. USL Capital no longer has any affiliation with the Partnership, and the General Partner believes that as a result of the BALCAP/USL Capital Transaction, USL Capital is no longer in the aircraft leasing and finance business. PRINCIPAL INVESTMENT OBJECTIVES The business of the Partnership is to acquire and own, either directly or through joint ventures, aircraft and to lease such aircraft primarily to airlines. The Partnership's principal investment objectives are to generate income for quarterly cash distributions to Unitholders and to build and own a diversified portfolio of leased aircraft. The Partnership's investment objectives provide that until January 1, 2005, it intends to use a substantial portion of the cash derived from the sale, refinancing or other disposition of aircraft to purchase additional aircraft if attractive investment opportunities are available. However, because of the impact of changes in tax law and the Partnership's competitive position in the present market, the General Partner is proposing the Plan to Restrict Transferability of Units and Cease Reinvestment. See "Plan to Restrict Transferability of Units and Cease Reinvestment" above. AIRCRAFT PORTFOLIO The Partnership's aircraft portfolio consists of full and undivided partial ownership interests in narrow-body (single-aisle) twin and tri-jet commercial aircraft which were acquired as used aircraft. Although the Partnership is permitted to do so, the Partnership does not own interests in aircraft which were acquired as new aircraft; nor does the Partnership own any wide-body aircraft, such as the Boeing 747 and McDonnell Douglas MD-11, or any turboprop or prop-fan powered aircraft. 5 6 The following table describes the Partnership's aircraft portfolio at January 31, 1997:
Number & Current Purchase type; year of Ownership Acquired by lease price (in Type Noise Lessee delivery Interest Partnership expiration millions) of lease compliance(1) - ------ ---------- --------- ----------- ---------- --------- -------- ------------- USAir 5 MD-82 100% 1986 2001(3) $91.0 Direct Stage III 1981 (2) finance FedEx 1 727-200FH 100% 1987 2006 $18.5(4) Direct Stage III 1979 finance TWA 1 MD-82 100%(5) 1988(5) 2002 $15.8(5) Direct Stage III 1984 finance Sun Jet 1 DC-9-51 50% 1986 1997 $4.4(6) Operating Stage II 1975
(1) See "Government Regulations--Aircraft Noise" below, for a description of laws and regulations governing aircraft noise. (2) The investment tax credits and the accelerated depreciation originally available upon delivery of the aircraft on lease to USAirways, Inc. (formerly USAir, Inc.) ("USAir") were sold in 1981 pursuant to a tax benefit transfer lease, which terminated November, 1991. See Note 10 of Notes to Financial Statements. (3) USAir has the right to renew the lease as to all aircraft in 1998 (at the end of the initial twelve year term) for an additional three years at the current quarterly rental. If USAir does not elect to renew, it is required to make a termination payment and return the aircraft to the Partnership. See Note 2 of Notes to Financial Statements. (4) The purchase price includes $6.9 million of conversion costs for the upgrade of the aircraft from a Stage II passenger aircraft to a Stage III freighter. (5) The Partnership originally acquired a 50% interest in this aircraft in 1988 for a purchase price of $10.1 million. On January 31, 1997 the Partnership purchased the remaining 50% interest from USL Capital for a purchase price of $5.7 million. See "The BALCAP/USL Capital Transaction" above. (6) The purchase price includes $0.7 million related to the overhaul of the aircraft. At January 31, 1997, the book value of aircraft by lessee as a percent of total assets was as follows: USAir, 68.9%; FedEx, 12%; TWA, 13.3%; and Sun Jet, 1.1%. Revenues by lessee as a percentage of total revenue for 1996 and 1995, respectively, were as follows: USAir, 57.1% and 64%; TWA, 5.3% and 6.9%; FedEx, 4.1% and 4.6%; and Sun Jet, 2.6% and 2.7% See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Results of Operations" for a further discussion of the Partnership's lessees. The partnership's lessees have the following fair market value renewal options: USAir has the right to renew its lease as to any of the aircraft for up to three additional renewal terms of one year each at a fair market value rental, provided that the number of aircraft to be returned at the end of any renewal term may not be less than two; Fedex has the right to 6 7 renew its lease for one six-month term at the current rent payable under the lease, and thereafter for four successive one year terms at a fair market value rental; and TWA has the right to renew its lease for one term of one, two, three or four years at fair market value rentals. COMPETITIVE POSITION OF THE PARTNERSHIP As the Partnership has advised Unitholders over the course of the Partnership's existence, significant changes in the aircraft and aircraft leasing markets have occurred since the inception of the Partnership. In the past ten years, the supply of commercial jet aircraft has increased substantially, but the demand has not always kept pace with the supply primarily because of changes in the airline industry. In the late 1980's and early 1990's competition in the airline industry led to airline restructurings and consolidations. Airlease itself experienced the effect of this competition as four of its lessees (Eastern Airlines, Pan American Airlines, Continental Airlines, Inc. ("Continental") and TWA) filed for bankruptcy during this period. In the wake of these restructurings, airlines have been taking actions to increase utilization of their fleets to reduce the need for additional aircraft. These conditions have led to periods in which the supply of aircraft has exceeded the demand. Oversupply adversely impacts lessors like the Partnership, because it increases the competition among lessors to place and retain aircraft on lease and lease rates decline. Similarly, opportunities for gain on sale of aircraft are reduced. Although demand for aircraft has been increasing in the last two years as many airlines have returned to profitability, and more recently lease rates appear to be improving, the airline industry tends to be cyclical, indicating a potential return to less favorable conditions. The aircraft leasing industry has become increasingly competitive. In making aircraft investments, leasing aircraft to lessees, and seeking purchasers of aircraft, the Partnership competes with large leasing companies, aircraft manufacturers, airlines and other operators, equipment managers, financial institutions and other parties engaged in leasing, managing, marketing or remarketing aircraft. Affiliates of the General Partner are engaged in many of these businesses and may be deemed to be in competition with the Partnership. There are many large leasing companies which have the financial strength to borrow at very low rates and to obtain significant discounts when purchasing large quantities of aircraft. The lower capital and acquisition costs enjoyed by these large leasing companies permit them to offer airlines lower lease rates than smaller leasing companies can offer. The Partnership does not have the resources to purchase newer aircraft or to purchase aircraft at volume discounts and has only a limited ability to use tax deferrals in its pricing. 7 8 As previously reported to Unitholders, the Partnership's access to capital is limited. Since all Cash Available from Operations, as defined in the Limited Partnership Agreement, is distributed, there is no build up of equity capital, and acquisitions must be funded from proceeds available when aircraft are sold or from debt. Access to debt is limited because most of the Partnership's aircraft are being used to secure existing borrowings. In general, the Partnership's pricing is uncompetitive for new acquisitions because of its limited sources and high cost of capital. Because of these factors, finding new investment opportunities that offer an appropriate balance of risk and reward has been very difficult. During the past five years the Partnership has made only two aircraft investments, both of which were possible because of special circumstances which the General Partner believes are unlikely to occur in the future. In 1992, the Partnership acquired an interest in an aircraft on lease to Finnair OY ("Finnair"). This transaction was possible because it was funded from an existing bank line which had been in place since 1988 and had a very low borrowing rate. The General Partner believes that such favorable borrowing rates currently are not available to the Partnership. In January 1997, the Partnership acquired the remaining 50% interest in an aircraft on lease to TWA. This transaction was available only because the Partnership already owned a 50% interest in this aircraft and had originally negotiated the right to match a purchase offered by a third party. See "The BALCAP/USL Capital Transaction" above. In 1996, the Partnership sold interests in seven aircraft (a 50% interest in an aircraft on lease to Finnair and a one-third interest in six aircraft on lease to Continental) at a profit. See "Disposition of Aircraft" below. However because of the factors described above, the Partnership was unable to reinvest the proceeds in aircraft at an acceptable return, and the General Partner determined that the best use of the net proceeds was to distribute them to Unitholders. Because of the changes in tax law (see "Federal Income Taxation" below) and the competitive position of the Partnership described above, the General Partner is proposing the Plan to Restrict Transferability of Units and Cease Reinvestment. EXISTING PARTICIPANTS IN LEASES The Partnership owns a 100% interest in all aircraft in its portfolio except the Sun Jet Aircraft which is owned 50% by the Partnership and 50% by BALCAP. USL Capital originally participated equally with the Partnership in all transactions except the aircraft on lease to USAir (the "USAir Aircraft"). In April 1993 the Partnership leased two aircraft (held jointly with USL Capital), which were previously off lease, to FedEx. In September 1993 the Partnership exchanged its 50% interest in the two aircraft for a 100% interest in one aircraft and pledged the aircraft and the lease as collateral to obtain funds to upgrade the aircraft from a Stage II passenger aircraft to a Stage III freighter. In January 1997, the Partnership purchased a 50% interest in the TWA Aircraft formerly owned by USL Capital, and now owns a 100% interest in this aircraft. See "The BALCAP/USL Capital Transaction" above. 8 9 With respect to the Sun Jet Aircraft which is jointly owned by BALCAP and the Partnership, BALCAP and the Partnership have agreed (i) to act in good faith to reach agreement as to all actions which may be required with respect to the lease and that any dispute between them will be settled by arbitration; (ii) not to transfer any interest in the related aircraft or lease without the consent of the other, except for a transfer to an affiliate and except for a transfer described in clause (iii); and (iii) that each party has a right of first refusal to purchase any such interest prior to the transfer to any third party. DESCRIPTION OF LEASES All aircraft owned by the Partnership are leased to third parties pursuant to either full-payout leases (direct finance) or operating leases. Generally, operating leases are for a shorter term than full-payout leases and, therefore, it will be necessary for the Partnership to remarket the aircraft in order to recover its full investment. Full-payout leases are generally for a longer term and hence provide more predictable revenue than do operating leases. All of the Partnership's leases are net leases, which provide that the lessee will bear the direct operating costs and the risk of physical loss of the aircraft; pay sales, use or other similar taxes relating to the lease or use of the aircraft; maintain the aircraft; indemnify the Partnership-lessor against any liability suffered by the Partnership as the result of any act or omission of the lessee or its agents; maintain casualty insurance in an amount equal to the specific amount set forth in the lease (which may be less than the market value of the aircraft); and maintain liability insurance naming the Partnership as an additional insured with a minimum coverage which the General Partner deems appropriate. In general, substantially all obligations connected with the ownership and operation of the leased aircraft are assumed by the lessee and minimal obligations are imposed upon the Partnership. Default by a lessee may cause the Partnership to incur unanticipated expenses. See "Government Regulation" below. Certain provisions of the Partnership's leases may not be enforceable upon a default by a lessee or in the event of a lessee's bankruptcy. The enforceability of leases will be subject to limitations imposed by Federal, California, or other applicable state law and equitable principles. In order to encourage equipment financing to certain transportation industries, Federal bankruptcy laws traditionally have afforded special treatment to certain lenders or lessors who have provided such financing. Section 1110 ("Section 1110") of the United States Bankruptcy Code, as amended (the "Bankruptcy Code"), implements this policy by creating a category of aircraft lenders and lessors whose rights to repossession are substantially improved. If a transaction complies with Section 1110, the transaction is not affected by the automatic stay provisions of the Bankruptcy Code (and thus, the lender or lessor may repossess the equipment), unless within 60 days after commencement of a bankruptcy proceeding the trustee agrees to perform all obligations of the debtor under the agreement or lease and all defaults (except those relating to insolvency or insolvency proceedings) are cured within such 60-day period. 9 10 On October 22, 1994, President Clinton signed into law the Bankruptcy Reform Act of 1994 (the "Reform Act"). The Reform Act made several changes to Section 1110, such that it now protects all transactions involving qualifying equipment, whether the transaction is a lease, conditional sale, purchase money financing or customary refinancing. For equipment first placed in service on or prior to the date of enactment, the requirement that the lender provide purchase money financing continues to apply, but there is a "safe harbor" definition for leases, so that Section 1110 benefits will be available to the lessor without regard to whether or not the lease is ultimately determined to be a "true" lease. This safe harbor is not the exclusive test so that other leases which do not qualify under the safe harbor, but which are true leases, will continue to be covered as leases by Section 1110. The Partnership may not be entitled to the benefits of Section 1110 upon insolvency of a lessee airline under all of its leases. In the past, the Partnership has had interests in aircraft leased to operators based outside the United States. It is possible that the Partnership's aircraft could be leased or subleased to foreign airlines. Aircraft on lease to such foreign operators are not registered in the United States and it is not possible to file liens on such foreign aircraft with the Federal Aviation Administration (the "FAA"). Further, in the event of a lessee default or bankruptcy, repossession and claims would be subject to laws other than those of the United States. AIRCRAFT REMARKETING On termination of a lease and return of the aircraft to the Partnership, the Partnership must remarket the aircraft to realize its full investment. See "Disposition of Aircraft" below, for a description of the Partnership's remarketing at lease expiration of six aircraft on lease to Continental. Under the Amended and Restated Agreement of Limited Partnership, as amended, of the Partnership (the "Limited Partnership Agreement"), the remarketing of aircraft may be through a lease or sale. The terms and conditions of any such lease would be determined at the time of the re-lease, and it is possible (although not anticipated at this time) that the lease may not be a net lease. The General Partner will evaluate the risks associated with leases which are not net leases prior to entering into any such lease. The General Partner has not established any standards for lessees to which it will lease aircraft and, as a result, there is no investment restriction prohibiting the Partnership from doing business with any lessee, including "start-up" airlines. However, the General Partner will analyze the credit of a potential lessee and evaluate the aircraft's potential value prior to entering into any lease. DISPOSITION OF AIRCRAFT The Partnership's original intent was to dispose of all its aircraft by the year 2011, subject to prevailing market conditions and other factors. However, because of the impact of changes in tax law and the Partnership's competitive position in the present market, the General Partner is proposing the Plan to Restrict Transferability of Units and Cease Reinvestment. See "Plan to Restrict Transferability of Units and Cease Reinvestment" above. 10 11 Under the Limited Partnership Agreement, aircraft may be sold at any time whether or not the aircraft are subject to leases if, in the judgment of the General Partner, it is in the best interest of the Partnership to do so. In 1995, casualty proceeds were received on one 737-200 aircraft on lease to Continental which was damaged in a ground accident and declared a total loss. The proceeds received exceeded the net book value of the aircraft and resulted in a net gain of $21,000. The proceeds were distributed to Unitholders in the third quarter of 1995 in a special cash distribution of 10 cents per Unit. In March 1996, the Partnership sold its 50% interest in one MD-82 aircraft on lease to Finnair to a third party for approximately $6.9 million, resulting in a net gain of approximately $556,000. The Partnership had acquired its interest in this aircraft in April 1992, for approximately $8.5 million. A portion of the sale proceeds were used to pay off the outstanding balance under a non-recourse loan which was collateralized by this aircraft and the balance, after retaining a reserve for liquidity purposes, was distributed to Unitholders in the second quarter of 1996 in a special cash distribution of 80 cents per Unit. See "Competitive Position of the Partnership" above. The Partnership sold its one-third interest in six 737-200 aircraft on lease to Continental at lease expiration on December 31, 1996, at a sale price of approximately $3.1 million, resulting in a net gain of approximately $1.9 million. The proceeds were distributed to Unitholders in the first quarter of 1997 in a special cash distribution of 63 cents per Unit. See "Competitive Position of the Partnership" above. The lease for the Sun Jet Aircraft, which expires in December 1997, contains a fixed price purchase option, and Sun Jet has advised the Partnership that it wishes to exercise this option. However, Sun Jet has experienced financial difficulties and no assurance can be given as to whether, when or at what price this purchase will be consummated. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Results of Operations." If the purchase is not consummated, the Partnership intends to remarket the aircraft, which would include attempting to sell or to lease the aircraft. At December 31, 1996, the book value of the Partnership's interest in the Sun Jet Aircraft was $1.1 million. The Partnership is permitted to sell aircraft to affiliates of the General Partner at the fair market value of the aircraft at the time of sale as established by an independent appraisal. The General Partner will receive a Disposition or Remarketing Fee for any such sale. JOINT VENTURES/GENERAL ARRANGEMENTS Under the Limited Partnership Agreement, the Partnership may enter into joint ventures with third parties to acquire or own aircraft. Generally, each party to a joint venture is jointly responsible for all debts and obligations incurred by the joint venture, and 11 12 the joint venture will be treated as a single entity by third parties. The Partnership may become liable to third parties for obligations of the joint venture in excess of those contemplated by the terms of the joint venture agreement. There can be no assurance that the Partnership will be able to obtain control in any joint ventures, or that, even with such control the Partnership will not be adversely affected by the decisions and actions of the co-venturers. The General Partner attempts to ensure that all such agreements will be fair and reasonable to the Partnership, although joint ventures with affiliates of the General Partner may involve potential conflicts of interest. The Sun Jet Aircraft is the only aircraft now owned by the Partnership pursuant to a joint venture arrangement. See "Existing Participants in Leases," above. If the Plan to Restrict Transferability of Units and Cease Reinvestment is approved, the Partnership will not enter into any joint venture arrangements to acquire additional aircraft. BORROWING POLICIES Under the Limited Partnership Agreement, the Partnership may borrow funds or assume financing in an aggregate amount equal to less than 50% of the higher of the cost or fair market value at the time of the borrowing of all aircraft owned by the Partnership. The Partnership may exceed such 50% limit for short-term borrowing so long as the General Partner uses its best efforts to comply with such 50% limit within 120 days from the date such indebtedness is incurred or if the borrowed funds are necessary to prevent foreclosure on any Partnership asset. There is no limitation on the amount of such short-term indebtedness. The General Partner is authorized to borrow for working capital purposes and to make distributions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources" and Note 5 of Notes to Financial Statements. MANAGEMENT OF AIRCRAFT PORTFOLIO Aircraft management services are provided by the General Partner and its affiliates. The fees and expenses for these services are reviewed annually and are subject to approval by the Audit Committee of the Partnership. REGISTRATION OF AIRCRAFT; UNITED STATES PERSON Under the Federal Aviation Act, as amended (the "FAA Act"), the operation of an aircraft not registered with the Federal Aviation Administration (the "FAA") in the United States is generally unlawful. Subject to certain limited exceptions, an aircraft may not be registered under the FAA Act unless it is owned by a "citizen of the United States" or a "resident alien" of the United States. In order to attempt to ensure compliance with the citizenship requirements of the FAA Act, the Limited Partnership Agreement requires that all Unitholders (and all transferees of Units) be United States citizens or resident aliens within the meaning of the FAA Act. 12 13 GOVERNMENT REGULATION GENERAL The ownership and operation of aircraft in the United States are strictly regulated by the FAA, which imposes certain minimum restrictions and economic burdens upon the use, maintenance and ownership of aircraft. The FAA Act and FAA regulations contain strict provisions governing various aspects of aircraft ownership and operation, including aircraft inspection and certification, maintenance, equipment requirements, general operating and flight rules, noise levels, certification of personnel and record keeping in connection with aircraft maintenance. FAA policy has given high priority to aviation safety, and a primary objective of FAA regulations is that an aircraft be maintained properly during its service life. FAA regulations establish standards for repairs, periodic overhauls and alterations and require that the owner or operator of an aircraft establish an airworthiness inspection program to be carried out by certified mechanics qualified to perform aircraft repairs. Each aircraft in operation is required to have a Standard Airworthiness Certificate issued by the FAA. MAINTENANCE The Partnership, as the beneficial owner of aircraft, bears the ultimate responsibility for compliance with certain federal regulations. However, under all of the Partnership's aircraft leases, the lessee has the primary obligation to ensure that at all times the use, operation, maintenance and repair of the aircraft are in compliance with all applicable governmental rules and regulations and that the Partnership/lessor is indemnified from loss by the lessee for breach of any of these lessee responsibilities. Changes in government regulations after the Partnership's acquisition of aircraft may increase the cost to, and other burdens on, the Partnership of complying with such regulations. The General Partner monitors the physical condition of the Partnership's aircraft and periodically inspects them to attempt to ensure that the lessees comply with their maintenance and repair obligations under their respective leases. Maintenance is further regulated by the FAA which also monitors compliance. At lease termination, the lessees are required to return the aircraft in airworthy condition. The Partnership may incur unanticipated maintenance expenses if a lessee were to default under a lease and the Partnership were to take possession of the leased aircraft without such maintenance having been completed. If the lessee defaulting is in bankruptcy, the General Partner will file a proof of claim for the required maintenance expenses in the lessee's bankruptcy proceedings and attempt to negotiate payment and reimbursement of a portion of these expenses. The bankruptcy of a lessee could adversely impact the Partnership's ability to recover maintenance expense. From time to time, aircraft manufacturers issue service bulletins and the FAA issues airworthiness directives. These bulletins and directives provide instructions to aircraft operators in the maintenance of aircraft and are intended to prevent the occurrence of accidents arising from flaws discovered during maintenance or as the result of aircraft incidents. Compliance with airworthiness directives is mandatory. 13 14 A formal program to control corrosion in all aircraft is included in the FAA mandatory requirements for maintenance for each type of aircraft. These FAA rules and proposed rules evidence the current approach to aircraft maintenance developed by the manufacturers and supported by the FAA in conjunction with an aircraft industry group. The Partnership may be required to pay for these FAA requirements if a lessee defaults or if necessary to re-lease or sell the aircraft. Trade publications have reported that the FAA is considering issuing an airworthiness directive to remedy potential unsafe conditions in 727 aircraft which were converted from passenger to freight configuration. It has also been reported that the FAA may issue weight restrictions on such aircraft as an interim measure and may require extensive structural changes for the long term. As of March 1, 1997, no such airworthiness directives had been issued. Any such airworthiness directives would apply to the aircraft on lease to FedEx. Under the lease covering this aircraft, FedEx would be required to take the steps necessary to comply with airworthiness directives imposed during the lease term. However, airworthiness directives may affect the residual value of the aircraft or FedEx's decision to exercise fair market value renewal options under the lease. There are more than 11,500 jet aircraft in the fleets of the principal airlines of the world. On average these aircraft are about 13 years old. Several hundred have been in service for 20 years or more and that number is growing. See "Aircraft Portfolio" above, for a table showing the year of delivery (manufacture) of Partnership aircraft and the date of termination of the lease to which such aircraft is subject. AIRCRAFT NOISE The FAA, through regulations, has categorized certain aircraft types as Stage I, Stage II and Stage III according to the noise level as measured at three designated points. Stage I aircraft create the highest measured noise levels. Aircraft which exceed Stage I noise maximums are no longer allowed to operate from civil airports in the United States. In general, the Aviation Safety and Capacity Act of 1990 bans the operation of Stage II aircraft after December 31, 1999 for aircraft operated within the continental United States. The Act also allows United States airports to impose their own Stage II noise bans before the formal cut-off date, provided that an analysis of the costs and benefits of the restriction is presented and 180 days are allowed for public comment. The Act affects about 2,500 Stage II aircraft operated by United States airlines. Alternatives for operators of Stage II aircraft include hushkitting, re-engining and movement to jurisdictions without mandated noise compliance. Hushkit options are expected to become more plentiful. However, even when certified, there will still be considerable lag time before each program can be brought to maximum production efficiency. See "Aircraft Portfolio" above, for a description of the Partnership's aircraft portfolio. At December 31, 1996, the net book value of Stage II aircraft owned by the Partnership was $1.1 million or 1% of total assets and consisted of its interest in the Sun Jet 14 15 Aircraft. A noise kit that will bring this aircraft into compliance with Stage III noise requirements is generally expected but has not yet been developed. ACQUISITION OF ADDITIONAL AIRCRAFT During the past five years the Partnership has made only two aircraft investments. See "Competitive Position of the Partnership" above. If the Plan to Restrict Transferability of Units and Cease Reinvestment is approved, the Partnership will not acquire any more aircraft. See "Plan to Restrict Transferability of Units and Cease Reinvestment" above. If the Plan to Restrict Transferability of Units and Cease Reinvestment is not approved, the Partnership could invest in additional aircraft. If the Partnership were to acquire additional aircraft, it could do so in many different forms, such as in sale/leaseback transactions, by purchasing interests in existing leases from other lessors, by making loans secured by aircraft or by acquiring or financing leasehold interests in aircraft. The Partnership is permitted to acquire aircraft from affiliates of the General Partner subject to limitations set forth in the Limited Partnership Agreement. Prior to September 30, 1991, the General Partner and USL Capital were required to offer the Partnership a 50% participation interest in certain aircraft leasing investments made by Related Entities, as defined in the Limited Partnership Agreement. After September 30, 1991 and while the General Partner was an affiliate of USL Capital, the General Partner and USL Capital could, but were not obligated to, offer investment opportunities to the Partnership. The Partnership was required to accept suitable opportunities provided that the General Partner and Related Entities made at least 20% (including their investment through ownership of Units and the General Partner's interest) of the total investment made by Related Entities and the Partnership in such transactions. In the event that the Partnership elected not to make or to make only a portion of an investment offered to it by an affiliate, the remaining investment could be made by affiliates of the General Partner or third parties. The General Partner believes that since it is no longer affiliated with USL Capital, the limitation as to making investments with Related Entities should no longer apply and that the Partnership should be able to invest in any aircraft leasing transactions deemed suitable by the General Partner. In determining whether an investment is suitable for the Partnership, the General Partner will consider the following factors: the expected cash flow from the investment and whether existing Unitholders' investment will be diluted; the existing portfolio of the Partnership and the effect of the investment on the diversification of the Partnership's assets; the amount of funds available to finance the investment; the ability of the Partnership to obtain additional funds through debt financing, by issuing Units, or otherwise; the cost of such additional funds and the time needed to obtain such funds; the amount of time available to remove contingencies prior to making the investment; projected Federal income tax effect of the investment; projected residual value, if any; any legal or regulatory restrictions; and other factors deemed relevant by the General Partner. The General Partner and its affiliates are not obligated to make any investment opportunity available to the Partnership, and if any of them are presented with a potential 15 16 investment opportunity, it may be made by any of them without being offered to the Partnership. In addition, in determining which entity should invest in a particular transaction, it may be possible to structure the transaction in various ways to make the acquisition more or less suitable for the Partnership or for the General Partner or its affiliates. FEDERAL INCOME TAXATION As previously reported to Unitholders, changes in the federal income tax laws which occurred in 1987 will cause the Partnership to be taxed as a corporation beginning on January 1, 1998 if the Units continue to be traded on an established securities market or readily tradeable on a secondary market (or the substantial equivalent thereof). If the Partnership were taxed as a corporation, no deductions arising from partnership operations would be allowable to the Unitholders, income of the Partnership would be taxable at corporate rates, distributions to Unitholders would be taxable as dividends to the extent of the Partnership's current or accumulated earnings and profits and the amount of a Unitholder's after-tax cash flow from the Partnership would be substantially reduced. Certain corporate Unitholders, however, may be entitled to a dividends received deduction on such dividend distributions. While such a deduction would lessen the adverse impact of the Partnership's being subject to taxation as a corporation, the General Partner believes that few Unitholders other than BALCAP are corporations. See Note 9 of Notes to Financial Statements as to the Partnership's tax liability if it were taxed as a corporation. ITEM 2. PROPERTIES The Partnership does not own any real property, and shares office space in the offices of BALCAP and its affiliates. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS UNITS OUTSTANDING The Units are traded on the New York Stock Exchange under the symbol FLY. As of February 28, 1997, there were 1,493 holders of record of Units. If the Plan to Restrict 16 17 Transferability of Units and Cease Reinvestment is approved, transferability of the Units will be restricted in December 1997 which would result in delisting the Units from trading on the New York Stock Exchange at that time. See "BUSINESS--Plan to Restrict Transferability of Units and Cease Reinvestment." MARKET PRICE The following chart sets forth the high and low closing prices on the New York Stock Exchange and the trading volume for each of the quarters in the years ended December 31, 1995 and 1996.
Trading Volume Quarter Ended (in thousands) Unit Prices (high-low) - ------------- -------------- ---------------------- March 31, 1995 236 $15 - $13 3/8 June 30, 1995 338 $16 - $14 September 30, 1995 284 $18 - $15 1/8 December 31, 1995 213 $17 7/8 - $16 1/4 March 31, 1996 257 $18 7/8 - $17 June 30, 1996 557 $18 1/4 - $15 September 30, 1996 461 $16 3/4 - $13 1/4 December 31, 1996 298 $16 3/8 - $14 5/8
DISTRIBUTIONS TO UNITHOLDERS CASH DISTRIBUTIONS The Partnership makes quarterly cash distributions to Unitholders which are based on Cash Available from Operations (as defined in the Limited Partnership Agreement) and are partially tax sheltered. Information on the tax status of such payments, which is necessary in the preparation of individual tax returns, is prepared and mailed to Unitholders as quickly as practical after the close of each year. If the Plan to Restrict Transferability of Units and Cease Reinvestment is approved it may affect distributions to Unitholders. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Plan to Restrict Transferability of Units and Cease Reinvestment." Distributions declared during 1995, 1996 and the first quarter of 1997 were as follows: 17 18
Record Date Payment Date Per Unit - ----------- ------------ -------- March 31, 1995 May 14, 1995 47 cents June 30, 1995 August 13, 1995 50 cents September 29, 1995 November 15, 1995 60 cents(1) December 29, 1995 February 15, 1996 50 cents March 29, 1996 May 15, 1996 50 cents May 20, 1996 May 31, 1996 80 cents(2) June 28, 1996 August 15, 1996 45 cents September 30, 1996 November 15, 1996 45 cents December 31, 1996 February 14, 1997 45 cents January 15, 1997 January 31, 1997 63 cents(3) March 31, 1997 May 15, 1997 45 cents
(1) Includes a special cash distribution of 10 cents per Unit from casualty proceeds from an aircraft on lease to Continental. See "BUSINESS--Disposition of Aircraft" and "Distributions to Unitholders--Cash Available from Sale or Refinancing," below. (2) Special cash distribution from sale proceeds from the sale of an aircraft on lease to Finnair. See "BUSINESS--Disposition of Aircraft" and "Distributions to Unitholders--Cash Available from Sale or Refinancing," below. (3) Special cash distribution from sales proceeds from the sale of six aircraft on lease to Continental. See "BUSINESS--Disposition of Aircraft" and "Distributions to Unitholders--Cash Available from Sale or Refinancing," below. CASH AVAILABLE FROM OPERATIONS The Partnership distributes all Cash Available from Operations (as defined in the Limited Partnership Agreement). The Partnership is authorized to make distributions from any source, including reserves and borrowed funds. Distributions of Cash Available from Operations are allocated 99% to Unitholders and 1% to the General Partner. The Partnership makes distributions of Cash Available from Operations generally on the fifteenth day of each February, May, August and November to Unitholders of record on the last business day of the calendar quarter preceding payment. CASH AVAILABLE FROM SALE OR REFINANCING The Partnership's original intent was that Cash Available From Sale or Refinancing (as defined in the Limited Partnership Agreement) received prior to January 1, 2005 would be retained for use in the Partnership's business, provided that if the General Partner did not believe that attractive investment opportunities exist for the Partnership, the Partnership could distribute Cash Available from Sale or Refinancing. Any Cash Available from Sale or 18 19 Refinancing received after January 1, 2005 was not to be reinvested but was to be distributed. If the Plan to Restrict Transferability of Units and Cease Reinvestment is approved, Cash Available from Sale or Refinancing will not be reinvested and will be distributed. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS--Plan to Restrict Transferability of Units and Cease Reinvestment." For information as to the sales and casualty events giving rise to distributions from Cash Available from Sale or Refinancing, see "BUSINESS--Disposition of Aircraft." TAX ALLOCATIONS Allocations for tax purposes of income, gain, loss deduction, credit and tax preference are made on a monthly basis to Unitholders who owned Units on the first day of each month. Thus, for example, if an aircraft were sold at a gain, that gain would be allocated to Unitholders who owned Units on the first day of the month in which the sale occurred. If proceeds from this sale were distributed to Unitholders, such proceeds would be distributed to Unitholders who owned Units on the record date for such distribution, which, because of notice requirements, likely would not occur in the same month as the sale. In addition, a Unitholder who transfers his or her Units after the commencement of a quarter but prior to the record date for that quarter will be allocated a share of tax items for the first two months of that quarter without any corresponding distribution of Cash Available from Operations for, among other things, payment of any resulting tax. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data and other data concerning the Partnership for each of the last five years: 19 20
For years ended December 31, (In thousands except per-unit amounts) 1996 1995 1994 1993 1992 - -------------------------------------------------------------------------------------------------------- OPERATING RESULTS Lease and other income $ 10,747 $ 12,492 $ 12,538 $ 12,852 $ 12,375 Gain on disposition of aircraft 2,501 21 -- -- -- -------- -------- -------- -------- -------- Total Revenues 13,248 12,513 12,538 12,852 12,375 -------- -------- -------- -------- -------- Interest Expense 1,830 2,366 2,660 2,557 2,529 Depreciation expense 1,500 2,129 2,146 2,426 2,921 Other expenses 1,266 1,196 1,401 1,786 1,259 -------- -------- -------- -------- -------- Total Expenses 4,596 5,691 6,207 6,769 6,709 -------- -------- -------- -------- -------- Net income $ 8,652 $ 6,822 $ 6,331 $ 6,083 $ 5,666 -------- -------- -------- -------- -------- Net income per unit(1) 1.85 $ 1.46 $ 1.36 $ 1.30 $ 1.21 Cash distributions declared per unit(2) $ 3.28 $ 2.07 $ 1.85 $ 1.69 $ 1.66 FINANCIAL POSITION Total Assets $ 85,130 $103,021 $107,542 $113,967 $112,337 Long-term obligations $ 14,071 $ 27,483 $ 29,525 $ 27,940 $ 30,861 Total partners' equity $ 65,042 $ 71,712 $ 74,562 $ 76,874 $ 78,685 Limited Partners' equity per unit(1) 13.92 15.35 15.96 16.46 16.84 Cumulative return of capital per unit(1) 22.3% 18.6% 17.2% 16.0% 15.1%
(1) After allocation of the 1% General Partner's interest. (2) Includes special cash distributions of 10 cents per unit in 1995 and of $1.43 per unit in 1996, of which 63 cents was paid in January 1997. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At December 31, 1996, long-term borrowings of $14.1 million represented 11.3% of the cost of the aircraft presently owned by the Partnership and 16.6% of total assets. This debt is outstanding under three long-term, non-recourse debt facilities collateralized by certain aircraft, two of which are at fixed rates and one which is at a floating rate. The Partnership has entered into an interest rate swap agreement which limits its risk on the floating rate debt. At December 31, 1996 and 1995, $14.1 million and $27.5 million, respectively, were outstanding under these 20 21 three facilities. At December 31, 1996, approximately $5.6 million remained available. See Note 5 of Notes to Financial Statements. On January 31, 1997, the Partnership entered into a fourth long-term non-recourse note agreement in the amount of $9 million. Approximately $5.6 million of this loan was utilized to purchase an additional 50% interest in the TWA Aircraft. See "BUSINESS--The BALCAP/USL Capital Transaction." At the time of the acquisition, the Partnership already owned a 50% interest in this aircraft, and the loan is collateralized by this aircraft. The Partnership intends to use the balance of this loan for working capital. Total scheduled debt service in 1997 (including debt service under the loan agreement entered into in January 1997) is $7.5 million and will be paid from revenues, primarily from the rental payments received under its aircraft leases. Existing borrowings secured by aircraft on lease to USAir provide for full repayment of the debt by 1998 rather than through the end of the expected lease term in 2001. See Notes 2 and 5 of Notes to Financial Statements. As this debt is repaid and the related line of credit expires, by 1998 the Partnership will need to and believes that it would be able to obtain bank or other financing to replace all or a portion of these expiring facilities. Net cash provided by operating activities was $7.3 million for 1994, $9.3 million for 1995, and $7.3 million for 1996. Total debt service as a percentage of net cash provided by operating activities was 95.8%, 59.3%, and 107% for 1994, 1995 and 1996, respectively. In 1993 the Partnership incurred costs to convert an off-lease Boeing 727 to a cargo configuration and leased it to FedEx under a finance lease. This caused debt service to increase in 1994 due to the payment of these conversion costs, and net cash from operating activities to decrease because, as a finance lease, the FedEx lease generates cash from investing activities rather than operating activities. In 1996 debt service increased by $2.9 million from the prior year due to the timing of debt service payments. Under the loan documents, if December 31 is not a business day (as was the case in 1995), the loan payment is due in January, causing debt service to be lower in 1995 and higher in 1996. Net cash provided by operating activities decreased almost $2 million primarily because of reduced rentals resulting from the sale of one aircraft in March 1996. Note receivable of $236,000 represents advances made by the Partnership to Continental to finance certain aircraft modifications. The agreement for this financing was entered into as part of a 1991 stipulation in Continental's bankruptcy. Continental has advised the Partnership that because the lease has terminated these amounts are no longer due and the Partnership is reviewing Continental's claim. Cash distributions paid by the Partnership were $8.6 million ($1.84 per Unit) in 1994, $9.5 million ($2.04 per Unit) in 1995, and $12.6 million ($2.70 per Unit) in 1996. Distributions paid in 1995 include a special cash distribution of 10 cents per Unit made from the proceeds received from the casualty of one aircraft. Distributions paid in 1996 include a special cash distribution of 80 cents per Unit made from a portion of the sale proceeds received from the sale of a 50% interest in the aircraft on lease to Finnair. The increase in cash distributions per Unit in 1995 and 1996 are due primarily to the special cash distributions described above. On 21 22 January 31, 1997 the Partnership made an additional special cash distribution of 63 cents per Unit from the proceeds received from the December 31, 1996 sale of its interest in six 737-200 aircraft. See "Plan to Restrict Transferability of Units and Cease Reinvestment" below and "BUSINESS--Disposition of Aircraft". Partnership net income was $6.3 million in 1994, $6.8 million in 1995, and $8.7 million in 1996. Pursuant to the Limited Partnership Agreement, the Partnership distributed all Cash Available from Operations and also made special cash distributions, as described above. Since such distributions were in excess of earnings, Partnership equity declined from $71.7 million at December 31, 1995 to $65.0 million at December 31, 1996, and Limited Partner equity per Unit declined from $15.70 to $13.92. From a Limited Partner perspective, the portion of the distribution in excess of net income constitutes a return of capital. Total cash distributions declared since inception of the Partnership have exceeded total net income reflecting a return of capital of $4.92 per Unit, or 22% of the initial capital invested by Limited Partners. RESULTS OF OPERATIONS In 1994, revenues were earned from seven aircraft subject to finance leases (USAir, TWA, and FedEx) and nine aircraft subject to operating leases (Continental, Finnair, and Sun Jet). TWA contributed 5.2% of 1994 total revenues and there were two months (November and December) of non-accrual of TWA revenue. At year-end 1994, there were no off-lease aircraft and none of the Partnership's lessees was in bankruptcy. In 1995, revenues were earned from seven aircraft subject to finance leases (USAir, TWA, and FedEx). Finance lease income declined from 1994 as the balances due declined. TWA was on non-accrual status early in 1995, but remitted all past-due amounts by the third quarter. TWA was in bankruptcy for a portion of 1995, and the TWA lease contributed 7% of total 1995 revenues. Revenues were earned from nine aircraft subject to operating leases (Continental, Finnair, and Sun Jet) from January through May, and eight aircraft for the balance of the year, reflecting the casualty loss of one aircraft leased to Continental. At year-end 1995, there were no off-lease aircraft, all of the Partnership's lessees were current under their lease agreements, and none was in bankruptcy. In 1996, revenues were earned from seven aircraft subject to finance leases (USAir, TWA, and FedEx). Finance lease income declined from 1995 as the balances due declined. Revenues were earned from eight aircraft subject to operating leases (Continental, Finnair, and Sun Jet) from January through March, and seven aircraft for the remainder of the year, reflecting the March sale of the aircraft leased to Finnair. The decline in operating lease rentals is due primarily to the sale of this aircraft. On December 31, 1996, the operating lease with Continental covering six aircraft expired, and the aircraft were sold on that date. The sales of the Partnership's interests in aircraft on lease to Finnair and Continental produced gains of $556,000 and $1.9 million, respectively. See Note 3 of Notes to Financial Statements. At year-end 1996, there were no off-lease aircraft, all of the Partnership's lessees were current under their lease agreements and none was in bankruptcy. 22 23 USAir, the Partnership's major lessee (76% of total year-end assets), reported profits of $263 million on revenues of $8.1 billion for 1996, compared with profits of $119 million on revenues of $7.5 billion for 1995. FedEx (13.3% of total year-end assets) reported profits of $308 million on revenues of $10.3 billion for its fiscal year ending May 31, 1996, compared with profits of $298 million on revenues of $9.4 billion for its prior fiscal year. TWA (8.3% of total year-end assets) reported a net loss of $285 million on revenues of $3.6 billion for 1996, compared with a net loss of $228 million on revenues of $3.3 billion for 1995. Sun Jet (1.3% of total year-end assets) while current in its rental obligations throughout 1996, was delinquent in its February 1997 rental payment, but this delinquency has been cured. For information regarding the percentage of total Partnership assets and revenues represented by aircraft owned and leased by the Partnership, see "BUSINESS--Aircraft Portfolio". The Partnership believes that its revenues and income have not been materially affected by inflation and changing prices because its principal items of revenue (rental payments) and expenses (interest) are at fixed long-term rates. Interest expense in 1996 reflects an average interest rate of 8.7% based on average total outstanding debt of $21 million, compared to 1995's average interest rate of 8.3% based on average total outstanding debt of $28.5 million. Depreciation expense relates to aircraft subject to operating leases and those held for sale or lease. In 1996 depreciation expense decreased because of the March 1996 sale of the aircraft on lease to Finnair. In 1994, general and administrative expenses were $388,000, which included $197,000 in non-recurring expenses, primarily related to the early return and repair of the aircraft now on lease to Sun Jet. In 1994, the Partnership incurred total expenses of $798,000 (of which $668,000 were capitalized), to prepare its DC-9-51 aircraft for re-lease to Sun Jet. In 1996, general and administrative expenses increased by $117,000 to $272,000 primarily because of legal expenses relating to the January 1997 acquisition of an interest in an aircraft on lease to TWA and the 1998 change in tax status. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which is effective for fiscal years beginning after December 15, 1995. The Partnership adopted the standard January 1, 1996, and the impact on the financial statements was not material. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share". SFAS No. 128 establishes standards for computing and presenting earnings per share and applies to entities with publicly held common stock or potential common stock. It is effective for financial statements issued for periods ending after December 15, 1997, including interim periods and prior-periods presented. The Partnership does not expect that adoption of SFAS No. 128 will have a material effect on its financial position, results of operations or net income per Unit. 23 24 PLAN TO RESTRICT TRANSFERABILITY OF UNITS AND CEASE REINVESTMENT On March 13, 1997 the board of directors of the General Partner approved a plan to restrict the transferability of Units, which will result in delisting of the Units from trading on the New York Stock Exchange in December 1997, and to cease making new aircraft investments, leading to an earlier than planned liquidation of the Partnership. The plan is subject to Unitholder approval. As previously reported to Unitholders, Airlease will be taxed as if it were a corporation effective January 1, 1998, if its Units are freely tradable on that date. This additional level of tax would substantially reduce distributions to Unitholders. See Note 9 of Notes to Financial Statements. To address the adverse change in tax law, the plan provides that transferability of the Units would be restricted in December 1997 and the Units would be delisted from trading at that time. Although the Units would not be freely tradable on the New York Stock Exchange or a similar secondary market after December 1997, under provisions of the tax law, there are a number of services which may be available to facilitate purchases and sales of Units. At this time it is difficult to know if these services will operate with respect to the Units, and IRS rules impose various limitations as to the aggregate number of Units which may be sold in any year utilizing these services. If no such services develop Unitholders may be unable to sell their Units, but they would receive distributions through the remaining term of the Partnership. The plan also provides that Airlease would not make any new aircraft investments, would sell its aircraft as attractive opportunities become available and would distribute net sales proceeds to Unitholders after each sale. Airlease cannot predict when sales will be made, or provide any assurance as to the prices at which sales will be made. If the existing aircraft were sold at the end of their lease terms, 86% of the assets would be sold within five years and the remainder by 2006. This assumes that all lessees comply with their lease obligations and available lease renewal options are not exercised. Aircraft sales will result in a liquidation of the portfolio over time, and increasingly cash flow and distributions will depend more upon sales proceeds and less upon receipt of regular rental payments, and thus be less predictable. As previously disclosed, the Partnership's sources of capital are limited. Since all cash available from operations is distributed, there is no build up of equity capital and acquisitions must be funded from proceeds when aircraft are sold or from debt. Access to debt is limited because most of the aircraft are being used to secure existing borrowings. Because of these and other factors, Airlease cannot compete on the basis of price with many of its competitors which are much larger and have lower capital costs. As a result, finding investment opportunities that offer an appropriate balance of risk and reward has been very difficult. In the past five years, the Partnership has made only two aircraft investments, both of which were possible because of special circumstances which the General Partner believes are unlikely to occur in the future. As described above, during 1996 Airlease sold interests in seven aircraft at a profit, but the Partnership was unable to reinvest the proceeds in aircraft at an acceptable return, and the General Partner determined that the best use of the proceeds was to distribute them to Unitholders. Since these sales proceeds were not reinvested in aircraft, the size of the portfolio has been reduced. 24 25 These and other factors were considered by the Board of Directors of the General Partner as affecting the competitive position of Airlease, and these factors as well as the change in tax law were considered by the board in its decision to propose the plan. See "BUSINESS--Competitive Position of the Partnership" and "--Federal Income Taxation." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and Notes to Financial Statements described in Item 14(a) are set forth in Appendix A and are filed as part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT GENERAL The Partnership has no directors or executive officers. Under the Limited Partnership Agreement, the General Partner has full power and authority in the management and control of the business of the Partnership, subject to certain provisions requiring the consent of the Limited Partners. DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information about the directors and executive officers of the General Partner.
POSITION WITH PRINCIPAL OCCUPATION AND NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS ---- --------------- --- --------------------------- David B. Gebler Chairman of the 47 Mr. Gebler is Senior Vice President of Bank of America National Board, President, Trust and Savings Association ("Bank of America") and of Chief Executive BALCAP. He has been with BALCAP since September 1996. Officer and a Director From 1991 to September 1996 he was Senior Vice President of the Transportation and Industrial Financing business unit of USL Capital. Mr. Gebler has been President of the General Partner since 1989 and a Director since 1990. Mr. Gebler holds a bachelors degree in mathematics from Clarkson University and graduate degrees in Engineering and Management from the University of Michigan.
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POSITION WITH PRINCIPAL OCCUPATION AND NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS ---- --------------- --- --------------------------- Richard V. Harris Director 48 Mr. Harris is Executive Vice President of Bank of America and Chairman and President of BALCAP. He was elected President and CEO in 1982, adding the title of Chairman in 1988. He has been a Director of the General Partner since October 1996. Other assignments at Bank of America have included responsibilities for Project Finance and Asset-Backed Finance along with Leasing. Prior to assuming his present responsibilities, Mr. Harris held both transactional and marketing management positions at BankAmerica Leasing. Mr. Harris holds a B.S.E.E. degree in Electrical Engineering from Brigham Young University and a Master of Business Administration degree also from BYU. William A. Hasler Director 55 Mr. Hasler has been the dean of the Haas School of Business at the University of California at Berkeley since August 1991 and a Director of the General Partner since 1995. From 1984 to 1991, he was vice chairman and director of KPMG Peat Marwick and was responsible for its worldwide consulting business. He is a member of the board of governors of The Pacific Stock Exchange and of the board of directors of The Gap, TCSI, Tenera, Walker Industries, and Aphton Corporation. He serves on a presidential advisory board on critical technologies. He is a 1963 graduate of Pomona College and earned his MBA from Harvard in 1967. Leonard Marks, Jr. Director 75 Mr. Marks retired as Executive Vice President of Castle & Cooke, Inc. in 1985. Prior to that time, he was also president of the real estate and diversified activities group of that company. Mr. Marks has been a Director of the General Partner since 1986. For many years, Mr. Marks was an assistant professor of Finance at the Harvard Business School and a professor of Finance at the Stanford Business School. He was Assistant Secretary of the United States Air Force from 1964 to 1968. Mr. Marks is a director of Alexion Pharmaceutical Inc. and Northern Trust Bank of Arizona, N.A. Mr. Marks holds a Ph.D in Business Administration from Harvard University. Richard P. Powers Director 56 Mr. Powers has been Vice President, Finance and Administration and Chief Financial Officer of CardioGenesis Corporation, a medical device company, since 1996. From 1981 to 1994, he was with Syntex Corporation, a pharmaceutical company, serving as Senior Vice President and Chief Financial Officer of that company from 1986 to 1994. From 1994 to 1996 he served as consultant to various companies, including advising and assisting in the sale of Syntex Corporation to Roche Corporation in 1994. Mr. Powers holds a Bachelor of Science degree in Accounting from Canisius College and a Masters in Business Administration from the University of Rochester. K. Thomas Rose Director 52 Mr. Rose has been Executive Vice President and Chief Operating Officer of BALCAP since 1992, responsible for all non-marketing areas of BALCAP. He also is the chief credit officer for the subsidiaries of BankAmerica Corporation which comprise the leasing group. He has been a Director of the General Partner since October 1996. Prior to his present responsibilities, Mr. Rose was with Security Pacific Leasing Corporation as Executive Vice President - Lease Services since 1973. Mr. Rose holds a B.A. from California State University, Fullerton and a Juris Doctorate degree from Golden Gate University, School of Law.
26 27
POSITION WITH PRINCIPAL OCCUPATION AND NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS ---- --------------- --- --------------------------- Richard C. Walter Chief Financial Officer 51 Mr. Walter has been Senior Vice President and Controller of and a Director BALCAP since 1992. He has been a director of the General Partner since October 1996. Prior to assuming his present responsibilities at BALCAP, Mr. Walter was with Security Pacific Leasing as Accounting Manager since 1973. He holds a Bachelor of Science degree in Business Administration and Accounting from Montana State University.
ITEM 11. EXECUTIVE COMPENSATION The Partnership does not pay or employ directly any directors or officers. Each of the officers of the General Partner is also an officer or employee of BALCAP and is not separately compensated by the General Partner or the Partnership for services on behalf of the Partnership. Thus, there were no deliberations of the General Partner's Board of Directors with respect to compensation of any officer or employee. The Partnership reimburses the General Partner for fees paid to Directors of the General Partner who are not otherwise affiliated with the General Partner or its affiliates. In 1996, such unaffiliated directors were paid an annual fee of $14,500 and $500 for each meeting attended. The Partnership has not established any plans pursuant to which cash or non-cash compensation has been paid or distributed during the last fiscal year or its proposed to be paid or distributed in the future. The Partnership has not issued or established any options or rights relating to the acquisition of its securities or any plans therefor. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT UNIT OWNERSHIP BY CERTAIN BENEFICIAL OWNERS As of February 28, 1997, the following persons were known to the Partnership to be beneficial owners of more than five percent of the Partnership's equity securities:
Name and Address Amount and Nature of Title of Class of Beneficial Owner Beneficial Ownership Percent of Class - -------------- ------------------- -------------------- ---------------- Depositary United States Airlease 231,250(1) 5% Units Holding, Inc. 555 California Street San Francisco, CA 94104(2) Depositary BALCAP 793,750(3) 17.2% Units 555 California Street San Francisco, CA 94104(2)
27 28 - ---------- (1) United States Airlease Holding, Inc. ("Holding") reported that it had sole voting and dispositive power over these Units. (2) BALCAP owns all of the outstanding stock of Holding. Therefore, BALCAP may be deemed also to be the indirect beneficial owner of the Units owned by Holding. In addition, BALCAP owns all the outstanding stock of the General Partner. Therefore, BALCAP may be deemed to be the indirect beneficial owner of the General Partner's 1% general partner interest. BALCAP is a wholly owned indirect subsidiary of BankAmerica Corporation. Therefore, BankAmerica Corporation and each BankAmerica Corporation subsidiary which is the direct or indirect parent of BALCAP is also indirectly the beneficial owner of all Units and of the General Partner's 1% general partner interest owned or deemed owned by BALCAP. (3) BALCAP reported that it had sole voting and dispositive power over these Units. UNIT OWNERSHIP BY MANAGEMENT Set forth below is information regarding interests in the Partnership owned by each director of and all directors and executive officers, as a group, of the General Partner. Unless otherwise noted, each person has sole voting and investment power over all units owned.
Name of Amount and Nature of Title of Class Beneficial Owner Beneficial Ownership Percent of Class -------------- ---------------- -------------------- ---------------- Depositary David B. Gebler 700(1) (2) Units Leonard Marks, Jr. 500 (2) All directors and executive 1,200(3) (2) officers as a group
- ---------- (1) Includes 200 Units held by Mr. Gebler as custodian for a minor child as to which Mr. Gebler has shared voting and dispositive power and as to which beneficial ownership is disclaimed. (2) Represents less than 1%. (3) Includes the 200 Units described in note 1. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Until September 18, 1996, United States Airlease Holding, Inc. (which was then a wholly owned subsidiary of USL Capital), owned 22.2% of the outstanding Units. On that date, Holding sold 17% of the outstanding Units to BALCAP. The filing under Section 16 of the Securities Exchange Act reporting such sale was due on October 10, 1996 and inadvertently was not filed until October 21, 1996. 28 29 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For a discussion of certain fees, expenses and reimbursements payable and paid to the General Partner and its affiliates by the Partnership, see Note 8 of Notes to Financial Statements. From time to time, the Partnership borrowed funds from USL Capital, including advances for expense payments. All such borrowings were unsecured and bore interest at a floating rate not exceeding the prime rate. There were no such borrowings outstanding during 1996. For information regarding the purchase by the Partnership of an interest in the TWA Aircraft from USL Capital, see "BUSINESS--The BALCAP/USL Capital Transaction." For a discussion of certain terms of the Partnership Agreement regarding the Partnership's participation in aircraft leasing investments made by USL Capital and its Related Entities, see "BUSINESS--Acquisition of Additional Aircraft." For a discussion of aircraft held jointly between the Partnership and BALCAP or formerly held jointly between the Partnership and USL Capital, see "BUSINESS--Aircraft Portfolio" and "--Existing Participants in Leases." 29 30 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) 1. The following financial statements of the Partnership are included in this report as Appendix A:
Page ---- Management's Responsibility for Financial Statements................................... A-1 Independent Auditors' Report........................................................... A-2 Financial Statements: Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 ................................................................ A-3 Balance Sheets, as of December 31, 1996 and 1995.............................. A-4 Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994........................................................... A-5 Statements of Changes in Partners' Equity for the Years Ended December 31, 1996, 1995 and 1994.............................................. A-6 Notes to Financial Statements ......................................................... A-6
Financial statement schedules other than those listed above are omitted because the required information is included in the financial statements or the notes thereto or because of the absence of conditions under which they are required. (b) The Partnership did not file any reports on Form 8-K during the last quarter of the fiscal year ended December 31, 1996. 30 31 (c) Exhibits required by Item 601 of Regulation S-K: Exhibit No. Description ----------- ----------- 3.1(1) Amended and Restated Agreement of Limited Partnership of Partnership. 3.2(1) Form of Certificate for Limited Partnership Units of Partnership. 3.3(1) Form of Depositary Agreement among Partnership, Chase-Mellon Shareholder Services (formerly Manufacturers Hanover Trust Company), the General Partner and Limited Partners and Assignees holding Depositary Receipts. 3.4(1) Form of Depositary Receipt for Units of Limited Partners' Interest in the Partnership 3.5(2) Amendments to Amended and Restated Partnership Agreement. 4.1(1) Form of Application for Transfer of Depositary Unit. 4.2(2) Loan and Security Agreement dated as of March 20, 1987 between Meridian Trust Company, as Trustee, as Borrower and The World Wing Company Limited, as Lender. 4.3(2) 8.75% Secured Non-recourse Note of Meridian Trust Company dated March 31, 1987 in favor of The World Wing Company Limited. 4.4(2) Instructions and Consent Agreement dated as of March 31, 1987 between the Registrant and The World Wing Company Limited. 10.1(1) Trust Agreement, together with Trust Agreement Supplement No. 1-5, dated as of July 10, 1986, between the Registrant, Meridian Trust Company and the General Partner. 10.3(1) Lease Agreement, together with Lease Supplement Nos. 1-5, dated as of July 10, 1986, between Meridian Trust Company, not in its individual capacity but solely as Trustee, and Pacific Southwest Airlines. 10.40(2) Trust Agreement dated as of August 15, 1988, between Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.), as Trustee, United States Airlease, Inc., and the Registrant, with respect to aircraft N913TW. - ---------- (1) Incorporated by reference to the Partnership's Registration Statement on Form S-1 (File No. 33-7985), as amended. (2) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1995. 31 32 Exhibit No. Description ----------- ----------- 10.41 Stipulation and order dated July 1991 among Continental Airlines, Inc., Continental Airlines Holdings, Inc., New York Airlines, Inc., United States Leasing International, Inc., Airlease, Ltd., PS Group, Inc., and Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.) concerning seven Boeing 737-200 aircraft and certain engines and related equipment. 10.44(3) Aircraft Lease Agreement dated as of April 15, 1993 between Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.) as Owner Trustee, Lessor, and Federal Express Corporation, Lessee with respect to one (1) Boeing 727-2D4 Aircraft, U.S. Registration No. 362PA (manufacture serial no. 21850). 10.45(2) Trust Agreement dated as of July 27, 1993 among Airlease Ltd., A California Limited Partnership, as Owner Participant, and Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.) as Trustee, with respect to one (1) Boeing 727-204 Aircraft with FAA Registration No. N362PA leased to Federal Express Corporation. 10.48(4) Aircraft Lease Agreement dated as of December 1, 1994 and Lease Supplement dated December 13, 1994 between Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.) as Owner Trustee, Lessor and Sun Jet International, Inc., Lessee; Instruction Letter dated as of December 12, 1994 between Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.) as Owner Trustee, USL Capital Corporation and Airlease Ltd. as Owner Participants; and Appointment Letter of Leasing Agent dated as of December 12, 1994 between USL Capital Corporation and Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.), as Owner Trustee, with respect to one (1) McDonnell Douglas DC-9-51 Aircraft, Aircraft Registration No. N920PJ (manufacture serial #47677). 10.49 Assignment and Assumption Agreement dated as of January 31, 1997 between USL Capital Corporation and the Registrant. - ---------- (2) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1995. (3) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1993. (4) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1994. 32 33 Exhibit No. Description ----------- ----------- 10.50 Lease, together with Lease Supplement No. 1, dated as of March 15, 1984 between DC-9T-III, Inc., as Lessor, and Trans World Airlines, Inc., as Lessee, with respect to one (1) McDonnell Douglas DC-9-82 Aircraft, as amended by Amendment Agreement dated as of December 15, 1986. 33 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 28, 1997. AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP (Registrant) By: Airlease Management Services, Inc., General Partner By: /s/ David B. Gebler ------------------------------------- David B. Gebler Chairman, Chief Executive Officer and President 34 35 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. For Airlease Management Services, Inc. ("AMSI"), General Partner /s/ David B. Gebler March 28, 1997 - ----------------------------- David B. Gebler Chairman, Chief Executive Officer, President and Director of AMSI /s/ Richard C. Walter March 28, 1997 - ----------------------------- Richard C. Walter Chief Financial Officer and Director of AMSI (Principal Financial Officer and Accounting Officer) /s/ Richard V. Harris March 28, 1997 - ----------------------------- Richard V. Harris Director of AMSI /s/ K. Thomas Rose March 28, 1997 - ----------------------------- K. Thomas Rose Director of AMSI The foregoing constitute a majority of the members of the Board of Directors of Airlease Management Services, Inc. (the General Partner). 35 36 APPENDIX A MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Airlease Management Services, Inc. ("AMSI"), the general partner of the partnership was a wholly owned subsidiary of USL Capital until October 31, 1996, when BA Leasing & Capital Corporation ("BALCAP") purchased 100% of the stock of AMSI. AMSI is responsible for the preparation of the partnership's financial statements and the other financial information in this report. This responsibility includes maintaining the integrity and objectivity of the financial records and the presentation of the partnership's financial statements in accordance with generally accepted accounting principles. The general partner maintains an internal control structure designed to provide, among other things, reasonable assurance that partnership records include the transactions of its operations in all material respects and to provide protection against significant misuse or loss of partnership assets. The internal control structure is supported by careful selection and training of financial management personnel, by written procedures that communicate the details of the control structure to the partnership's activities, and by BALCAP's staff of operating control specialists who conduct reviews of adherence to the partnership's procedures and policies. The partnership's financial statements have been audited by Coopers & Lybrand L.L.P., independent auditors for the years ended December 31, 1996, and December 31, 1995. Their audits were conducted in accordance with generally accepted auditing standards which included consideration of the general partner's internal control structure. The Independent Auditors' Report appears on page A-2. The board of directors of the general partner, acting through its Audit Committee composed solely of directors who are not employees of the general partner, is responsible for overseeing the general partner's fulfillment of its responsibilities in the preparation of the partnership's financial statements and the financial control of its operations. The independent auditors have full and free access to the Audit Committee and meet with it to discuss their audit work, the partnership's internal controls, and financial reporting matters. /s/ David B. Gebler - ----------------------------- David B. Gebler Chairman, Chief Executive Officer and President Airlease Management Services, Inc. /s/ Richard C. Walter - ----------------------------- Richard C. Walter Chief Financial Officer Airlease Management Services, Inc. A-1 37 INDEPENDENT AUDITORS' REPORT To the Partners of Airlease Ltd., A California Limited Partnership: We have audited the accompanying balance sheet of Airlease Ltd., A California Limited Partnership as of December 31, 1996 and 1995, and the related statements of income, changes in partners' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the partnership as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. - ----------------------------- Coopers & Lybrand L.L.P. San Francisco, California January 27, 1997 except for Note 9 for which the date is March 13, 1997 A-2 38 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS EXCEPT PER-UNIT AMOUNTS) 1996 1995 1994 - -------------------------------------------------------------------------------- REVENUES Finance lease income $ 8,800 $ 9,455 $ 9,635 Operating lease rentals 1,798 2,883 2,743 Gain on disposition of equipment, net 2,501 21 -- Other income 149 154 160 ------- ------- ------- Total Revenues 13,248 12,513 12,538 ------- ------- ------- EXPENSES Interest 1,830 2,366 2,660 Depreciation-operating leases 1,500 2,129 2,146 Management fee-general partner 740 784 800 Investor reporting 254 258 213 General and administrative 272 154 388 ------- ------- ------- Total expenses 4,596 5,691 6,207 ------- ------- ------- NET INCOME $ 8,652 $ 6,822 $ 6,331 ------- ------- ------- NET INCOME ALLOCATED TO: ------- ------- ------- General Partner 87 68 63 ------- ------- ------- Limited Partners 8,565 6,754 6,268 ------- ------- ------- NET INCOME PER LIMITED PARTNERSHIP UNIT 1.85 1.46 1.36 ------- ------- -------
See notes to financial statements A-3 39 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP BALANCE SHEETS
AS OF DECEMBER 31, (IN THOUSANDS EXCEPT UNIT DATA) NOTES 1996 1995 - -------------------------------------------------------------------------------- ASSETS Cash $ 580 $ 0 Finance leases-net 1 & 2 83,056 91,564 Operating leases-net 1 & 3 1,090 10,259 Notes receivable 4 & 7 236 933 Prepaid expenses and other assets 168 265 -------- -------- Total Assets $ 85,130 $103,021 -------- -------- LIABILITIES AND PARTNERS' EQUITY LIABILITIES: Distribution payable to partners $ 5,045 $ 2,336 Accounts payable and accrued liabilities 972 1,490 Long-term notes payable 5 14,071 27,483 -------- -------- Total liabilities 20,088 31,309 -------- -------- COMMITMENTS AND CONTINGENCIES 6 PARTNERS' EQUITY: Limited partners (4,625,000 units outstanding) 64,391 70,995 General partner 651 717 -------- -------- Total partners' equity 65,042 71,712 -------- -------- TOTAL LIABILITIES AND PARTNERS' EQUITY $ 85,130 $103,021 -------- --------
See notes to financial statements A-4 40 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS) 1996 1995 1994 - -------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 8,652 $ 6,822 $ 6,331 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,500 2,129 2,146 Increase (decrease) in accounts payable and accrued (518) 231 (1,092) liabilities Decrease (increase) in prepaid expenses and other assets 97 54 (157) Decrease (increase) in accounts receivable 111 111 103 Gain on disposition of equipment, net (2,501) (21) 0 -------- -------- -------- Net cash provided by operating activities 7,341 9,326 7,331 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Aircraft equipment purchase and refurbishment (net of 0 (66) (4,401) accrued refurbishment costs of $66 in 1995, and $250 in 1994) Proceeds from disposition of equipment 10,060 440 0 Decrease (increase) in notes receivable 697 (260) (434) Rental receipts in excess of earned finance lease income 8,508 2,133 4,513 -------- -------- -------- Net cash provided (used) by investing activities 19,265 2,247 (322) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Revolving credit borrowing (repayment)-net (7,381) 545 5,946 Proceeds from issuance of long-term debt 0 575 0 Repayment of long-term debt (6,031) (3,162) (4,361) Distributions paid to partners (12,614) (9,531) (8,596) -------- -------- -------- Net cash used by financing activities (26,026) (11,573) (7,011) -------- -------- -------- Increase (decrease) in cash 580 0 (2) Cash at beginning of year 0 0 2 -------- -------- -------- Cash at end of year $ 580 $ 0 $ 0 -------- -------- -------- Additional information: Cash paid for interest $ 2,097 $ 2,052 $ 2,483 -------- -------- --------
NON-CASH INVESTING AND FINANCING ACTIVITIES During the second quarter of 1994, accrued conversion costs were adjusted by $920,000 See notes to financial statements A-5 41 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 GENERAL LIMITED TOTAL (IN THOUSANDS EXCEPT PER-UNIT AMOUNTS) PARTNER PARTNERS - -------------------------------------------------------------------------------- Balance, December 31, 1993 $ 769 $ 76,105 $ 76,874 Net Income - 1994 63 6,268 6,331 Distributions to partners declared ($1.85 (86) (8,557) (8,643) per limited partnership unit) - -------------------------------------------------------------------------------- Balance, December 31, 1994 746 73,816 74,562 Net Income - 1995 68 6,754 6,822 Distributions to partners declared ($2.07 (97) (9,575) (9,672) per limited partnership unit) - -------------------------------------------------------------------------------- Balance, December 31, 1995 717 70,995 71,712 Net Income - 1996 87 8,565 8,652 Distributions to partners declared ($3.28 (153) (15,169) (15,322) per limited partnership unit) - -------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 $ 651 $ 64,391 $ 65,042 - --------------------------------------------------------------------------------
See notes to financial statements NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Airlease Ltd., A California Limited Partnership (the "partnership") engages in the business of acquiring, either directly or through joint ventures, commercial jet aircraft, spare or separate engines and related rotable parts ("aircraft") and leasing such aircraft to domestic and foreign airlines and freight carriers. The general partner is Airlease Management Services, Inc. ("AMSI") which was a wholly-owned subsidiary of USL Capital Corporation ("USL Capital") until October 31, 1996 on which date BA Leasing and Capital Corporation ("BALCAP") purchased all of the stock of AMSI and of United States Airlease Holding ("Holding"), which holds 5% of the outstanding units from USL Capital. BALCAP owns A-6 42 directly or through its subsidiaries 22.2% of the units. An additional 3,600,000 units are publicly held. BASIS OF PRESENTATION - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FINANCE LEASES - Lease agreements, under which the partnership recovers substantially all its investment from the minimum lease payments are accounted for as finance leases. At lease commencement, the partnership records the lease receivable, estimated residual value of the leased aircraft, and unearned lease income. The original unearned income is equal to the receivable plus the residual value less the cost of the aircraft (including the acquisition fee paid to an affiliate of the general partner). The remaining unearned income is recognized as revenue over the lease terms so as to approximate a level rate of return on the investment. OPERATING LEASES - Leases that do not meet the criteria for finance leases are accounted for as operating leases. The partnership's undivided interests in aircraft subject to operating leases are recorded at cost which includes acquisition fees paid to an affiliate of the general partner. Aircraft are depreciated over the related lease terms, generally five to nine years on a straight-line basis to an estimated residual value, or over their useful lives for aircraft held for lease or sale, on a straight-line basis to an estimated salvage value. NET INCOME PER LIMITED PARTNERSHIP UNIT is computed by dividing the net income allocated to the Limited Partners by the weighted average units outstanding (4,625,000). CONCENTRATION OF CREDIT RISK - At December 31, 1996, all eight aircraft owned by the partnership (either directly or through joint ventures) were leased to commercial airlines and a major freight carrier. 2. FINANCE LEASES The partnership owns five aircraft which are leased to USAirways. The lessee is required to pay a substantial additional amount if it does not renew the lease for three years at the end of the initial 12-year term (1998); accordingly, the lease is accounted for as a 15-year lease. In 1996, 1995, and 1994, leases with USAirways resulted in finance lease revenues of $7,559,000, $8,007,000, and $8,409,000, respectively. A sixth aircraft subject to a finance lease expiring in 2002 was held jointly with USL Capital and leased to Trans World Airlines. On January 31, 1997, the partnership purchased USL Capital's 50% interest in this aircraft for $5.7 million and now holds a 100% interest in the aircraft. A seventh wholly-owned aircraft is leased to FedEx under a 13-year finance lease which expires in 2006. A-7 43 The finance leases at December 31, 1996 and 1995 are summarized as follows (in thousands):
1996 1995 -------- -------- Receivable in installments $ 74,875 $ 92,183 Residual valuation 41,950 41,950 Unearned lease income (33,769) (42,569) -------- -------- NET INVESTMENT $ 83,056 $ 91,564 ======== ========
Residual valuation, which is reviewed annually, represents the estimated amount to be received from the disposition of aircraft after lease termination. If necessary, residual adjustments are made which result in an immediate charge to earnings and/or a reduction in earnings over the remaining term of the lease. Finance lease receivables at December 31, 1996 are due in installments of $14,348,000 annually through 2000, and $11,389,000 in 2001, and $6,094,000 thereafter. 3. OPERATING LEASES The partnership, jointly with USL Capital and PS Group, Inc., owned an undivided 1/3 interest in six aircraft, subject to an operating lease with Continental Airlines, Inc. ("Continental") which were sold on December 31, 1996 and resulted in a net gain of $1.9 million. A seventh aircraft damaged and declared a casualty loss in July 1995 resulted in a net gain of $21,000. Operating lease revenues to the partnership from this lease were $1,260,000 in 1996, $1,347,500 in 1995, and $1,470,000 in 1994. In April 1992, the partnership, jointly with USL Capital, purchased an individual 50% interest in one aircraft for $8,526,000, and placed it on lease to Finnair OY for a seven-year term. In March 1996, the partnership sold its 50% interest in this aircraft, resulting in a net gain of $556,000. Finnair generated partnership operating lease revenues of $199,000 and $1,197,000 in 1996 and 1995, respectively. In December 1994, the partnership leased one aircraft which was previously off lease to Sun Jet International, Inc. under a three-year operating lease which expires in 1997. The aircraft was previously held with USL Capital. On October 31, 1996, USL Capital sold its 50% interest in the aircraft to BALCAP. Operating lease revenues to the partnership from this lease were $339,000 in 1996 and 1995 and $14,000 in 1994. The operating leases at December 31, 1996 and 1995 are summarized as follows (in thousands):
1996 1995 -------- -------- Leased aircraft (at cost) $ 4,501 $ 27,492 Accumulated depreciation (3,411) (17,344) Rentals receivable 0 111 -------- -------- NET INVESTMENT $ 1,090 $ 10,259 ======== ========
Future minimum rentals on operating leases at December 31, 1996, are due in installments of $290,000 in 1997. A-8 44 During 1995, the partnership incurred capital expenditures of $66,000 for repair work on the DC-9-51 aircraft. 4. NOTES RECEIVABLE At December 31, 1996 and 1995, the partnership had outstanding notes receivable of $236,000 and $933,000, respectively, from Continental for certain aircraft modifications pursuant to the restructuring of the lease agreement on the aircraft in 1991. The weighted average interest rate at December 31, 1996 and 1995 was 11.28% and 11.11%, respectively, and the principal is due in subsequent years as follows: 1997, $65,000; 1998, $73,000; 1999, $81,000, and $14,000 thereafter. 5. LONG-TERM NOTES PAYABLE At December 31, 1996 and 1995, the partnership had outstanding borrowings of $8,026,000 and $13,059,000, respectively, under an 8.75% note payable through September 30, 1998. The note is collateralized by three of the aircraft leased to USAirways under a finance lease with no other recourse to the partnership. The partnership has a non-recourse revolving variable interest loan facility which is collateralized by one of the aircraft leased to USAirways. The partnership may borrow up to $5,634,000 which amount declines through 1998. At December 31, 1996 and 1995, $0 and $7,381,000 were outstanding, respectively. The partnership has entered into an interest rate swap agreement which effectively fixes the interest rate at 7.36% on substantially all the borrowing through November 1998. See Note 6. In April 1993, the partnership entered into a non-recourse revolving declining loan agreement collateralized by the 50% interest in the aircraft leased to Finnair OY. The aircraft was sold in March 1996 and a portion of the sales proceeds were used to repay the outstanding debt under this agreement. In November 1993, the partnership entered into a non-recourse fixed interest rate loan facility collateralized by its 100% interest in the aircraft leased to FedEx. At December 31, 1996 and 1995, $6,045,000 and $6,467,000, respectively, were outstanding under a 7.4% note payable through 2006. Based upon amounts outstanding at December 31, 1996, the minimum future principal payments on all outstanding long-term notes payable are due as follows (in thousands): A-9 45 1997 $ 4,893 1998 4,080 1999 529 2000 568 2001 612 Thereafter 3,389 ------- TOTAL $14,071 =======
6. DERIVATIVE FINANCIAL INSTRUMENTS Interest rate swap agreements involve the exchange of interest obligations on fixed and floating interest rate debt without the exchange of the underlying principal amounts. The agreements generally mature at the time the related debt matures. The differential paid or received on interest rate swap agreements is recognized as an adjustment to interest expense over the life of the agreements. Notional amounts are used to express the volume of interest rate swap agreements. The notional amounts do not represent cash flows and are not subject to risk of loss. In the unlikely event that a counterparty fails to meet the terms of an interest rate swap agreement, the partnership's exposure is the termination value of the contracts. At December 31, 1996,the partnership had one interest rate swap agreement outstanding, which was in a payable position, with a notional principal amount of $5,462,000 and a termination value of $89,000. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents carrying amounts and fair values of the partnership's financial instruments at December 31, 1996. The fair value of a financial instrument is defined as the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
1996 (IN THOUSANDS) CARRYING AMOUNT FAIR VALUE --------------- ---------- Notes receivable (Note 4) $ 236 $ 244 Long-term debt (Note 5) $ 14,071 $ 14,115 Derivatives relating to debt (Note 6) Interest rate swaps-net pay position n/a $ (89)
The carrying amounts presented in the table are included in the balance sheet under the indicated captions. The following notes summarize the major methods and assumptions used in estimating the fair values of financial instruments: A-10 46 NOTES RECEIVABLE are estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. LONG-TERM DEBT is estimated by discounting the future cash flows using rates that are assumed would be charged to the partnership for debt with similar terms and remaining maturities. DERIVATIVES are estimated as the amount that the partnership would receive or pay to terminate the agreements at the reporting date, taking into account current market interest rates and corresponding borrowing spreads. 8. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES In accordance with the Agreement of Limited Partnership, the general partner and its affiliates receive expense reimbursement, fees and other compensation for services provided to the partnership. Amounts earned by the general partner and affiliates for the years ended December 31, 1996, 1995, and 1994, were as follows (in thousands):
1996 1995 1994 ------ ------ ------ Management fees $ 673 $ 718 $ 735 Disposition fees 501 23 0 Remarketing fees 67 66 65 Reimbursement of other costs 79 79 79 Reimbursement of interest costs 6 15 39 ------ ------ ------ TOTAL $1,326 $ 901 $ 918 ====== ====== ======
Disposition fees have been netted against the reported gain on sale amounts. See Note 3. The general partner was allocated its 1% share of the partnership net income and cash distributions. Holding and BALCAP, each a limited partner and an affiliate of the general partner, were also allocated their share of income and cash distributions. 9. FEDERAL INCOME TAX STATUS The partnership is considered a publicly traded partnership ("PTP") under the Revenue Act of 1987 and therefore will be subject to Federal income tax on any taxable income at regular corporate rates beginning in 1998. At that time the partners would no longer be entitled to take into account their distributive shares of deductions, income or credits, and would be subject to tax on their share of dividends to the extent distributed (1) out of current or accumulated earnings and profits or (2) as a return of capital in excess of their tax basis. The partnership has seven aircraft on finance leases which expire after 1997. The partnership's use of different accounting methods for income tax and financial statement purposes which may A-11 47 cause the partnership's taxable income to exceed financial statement income for years subsequent to 1997 up to $70 million, would result in partnership tax liabilities at the partnership level of up to a maximum of $28 million based upon current tax rates. On March 13, 1997, the general partner's board of directors approved a plan to restrict transferability of units which will result in the delisting of the partnership from the New York Stock Exchange in December 1997. The plan is subject to unitholder approval. On the basis of this tax planning strategy, no deferred taxes were recorded in the financial statements at December 31, 1996. It is possible that unitholders may not approve this plan in which case deferred taxes may need to be recorded in 1997 in an amount that could be material to the financial statements. 10. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING The aircraft on lease to USAirways were purchased by the partnership subject to a tax benefit transfer lease ("TBT") which provided for the transfer of Federal income tax ownership of the aircraft to a tax lessor until 1991. The transfer was accomplished by the sale, for tax purposes only, of the aircraft to the tax lessor for cash and a note and a leaseback of the aircraft for rental payments which equalled the payments on the note. The rental payments under the TBT lease resulted in tax deductions for the partnership and the interest was included by the partnership in taxable income. In 1991, the TBT lease agreement terminated and the tax attributes transferred under the TBT lease reverted to the partnership. The difference between the method of accounting for income tax reporting and the method of accounting used in the accompanying financial statements are as follows (in thousands except per unit amounts): A-12 48
1996 1995 1994 -------- -------- -------- Net income per financial statements: $ 8,652 $ 6,822 $ 6,331 Increases (decreases) resulting from Gain on disposition of equipment, net 777 109 0 Lease rents less earned finance lease income 5,627 5,207 4,530 Depreciation and amortization (6,242) (7,949) (6,577) -------- -------- -------- Income per income tax method 8,814 4,189 4,284 Allocable to general partner (88) (42) (43) -------- -------- -------- TAXABLE INCOME ALLOCABLE TO LIMITED PARTNERS $ 8,726 $ 4,147 $ 4,241 Taxable income per limited partnership unit after giving effect to taxable income allocable to general partner (amount based on a unit owned from October 10, 1986) $ 1.89 $ 0.90 $ 0.92 Partners' equity per financial statements $ 65,042 $ 71,712 $ 74,562 Increases (decreases) resulting from Gain on disposition of equipment, net 777 109 0 Lease rents less earned finance lease income 33,900 28,273 23,066 Deferred underwriting discounts and commissions and organization costs 5,351 5,351 5,351 Accumulated depreciation and amortization (51,222) (45,089) (37,140) TBT interest income less TBT rental expense (54,030) (54,030) (54,030) -------- -------- -------- PARTNERS' EQUITY PER INCOME TAX METHOD $ (182) $ 6,326 $ 11,809
A-13 49 11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1996 and 1995 (in thousands, except per unit amounts):
1996 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - ---- -------- ------- -------- ------- Total Revenues $3,431 $2,717 $2,598 $4,502 Net Income $2,171 $1,588 $1,532 $3,361 Net Income Per Limited Partnership $0.46 $0.34 $0.33 $0.72 Unit Unit Trading Data: Unit Prices (high-low) on NYSE $18 7/8-$17 $18 1/4-$15 $16 3/4-$13 1/4 $16 3/8-$14 5/8 Unit Trading Volumes on NYSE 257 557 461 298 1995 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - ---- -------- ------- -------- ------- Total Revenues $3,103 $3,221 $3,179 $3,010 Net Income $1,656 $1,793 $1,725 $1,648 Net Income Per Limited Partnership $0.35 $0.38 $0.37 $0.36 Unit Unit Trading Data: Unit Prices (high-low) on NYSE $15-$13 3/8 $16-$14 $18-$15 1/8 $17 7/8-$16 1/4 Unit Trading Volumes on NYSE 236 338 284 213
A-14 50 INDEX TO EXHIBITS Exhibit No. Description ----------- ----------- 10.41 Stipulation and order dated July 1991 among Continental Airlines, Inc., Continental Airlines Holdings, Inc., New York Airlines, Inc., United States Leasing International, Inc., Airlease, Ltd., PS Group, Inc., and Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.) concerning seven Boeing 737-200 aircraft and certain engines and related equipment. 10.49 Assignment and Assumption Agreement dated as of January 31, 1997 between USL Capital Corporation and the Registrant. 10.50 Lease, together with Lease Supplement No. 1, dated as of March 15, 1984 between DC-9T-III, Inc., as Lessor, and Trans World Airlines, Inc., as Lessee, with respect to one (1) McDonnell Douglas DC-9-82 Aircraft, as amended by Amendment Agreement dated as of December 15, 1986. 27. Financial Data Schedule. A-15 EX-10.41 2 STIPULATION AND ORDER DATED JULY 1991 1 EXHIBIT 10.41 UNITED STATES BANKRUPTCY COURT DISTRICT OF DELAWARE ___________________________________X IN RE: CASE NOS. 90-932 through 90-984 CONTINENTAL AIRLINES, INC., et al., JOINTLY ADMINISTERED DEBTORS. UNDER CASE NO. 90-932 ___________________________________X STIPULATION AND ORDER AMONG CONTINENTAL AIRLINES, INC., CONTINENTAL AIRLINES HOLDINGS, INC., NEW YORK AIRLINES, INC. UNITED STATES LEASING INTERNATIONAL, INC., AIRLEASE, LTD., PS GROUP, INC., AND TRUST COMPANY FOR USL, INC. CONCERNING SEVEN BOEING 737-200 AIRCRAFT AND CERTAIN ENGINES AND RELATED EQUIPMENT. IT IS HEREBY STIPULATED AND AGREED by and between Continental Airlines, Inc., debtor and debtor in possession ("Continental"), Continental Airlines Holdings, Inc., debtor and debtor in possession ("Holdings"), New York Airlines, Inc., debtor and debtor in possession ("NYA" and, together with Continental and Holdings, the "Debtors"), United States Leasing International, Inc., formerly United States Airlease, Inc. ("US Airlease"), Airlease, Ltd. ("Airlease"), PS Group, Inc. ("PS") (PS, together with US Airlease and Airlease, the "Beneficiaries"), and Trust Company for USL, Inc., as owner trustee for Beneficiaries ("Lessor" and together with the Beneficiaries, the "Lessor Parties"), subject to Bankruptcy Court approval, as follows: 1 2 I. 1. On December 3, 1990 (the "Petition Date"), the Debtors and certain of their affiliates filed petitions for relief under Chapter 11, Title 11 United States Code (the "Bankruptcy Code"). Pursuant to Section 1107 and 1108 of the Bankruptcy Code, the Debtors have retained possession of their property and are authorized as debtors in possession to continue the operation and management of their respective businesses. 2. NYA and Lessor Parties (as an assignee of GATX Leasing Corporation), have entered into seven Lease Agreements (each a "Lease" and collectively the "Leases") covering, among other property, seven Boeing 737-200 jet-powered aircraft and 14 engines (each such aircraft and the associated engines being referred to herein as an "Aircraft"), described as follows:
Engine Aircraft United States Manufacturer's Serial Nos. Registry Nos. Serial Nos. ----------- ------------- -------------- 20073 N737OF P674344B (to become N11244) P674380B 20074 N7371F P674487B (to become N14245) P674329B 20072 N7372F P674266B (to become N73243) P674262B 20361 N10251 P674361B (formerly N7373F) P674341B 20362 N17252 P674374B (formerly N7374F) P674335B 20070 N14241 P674250B (formerly N7378F) P674299B 20071 N10242 P674314B (formerly N7379F) P674384B
In connection with the Leases, Holdings executed and delivered seven Guarantees (each a "Guarantee" and, collectively, the 2 3 "Guarantees") pursuant to which Holdings guaranteed the obligations of NYA under the Leases. 3. On January 16, 1991, Debtors filed a Motion with Respect to Section 1110 of the Bankruptcy Code (the "1110 Motion") in which Debtors designated the Leases to be Section 1110 transactions and, therefore, entitled to the benefits of Section 1110. As authorized pursuant to the Order, dated January 30, 1991, of the Bankruptcy Court under Section 1110 of the Bankruptcy Code regarding the Motion of Continental Airlines, Inc., et al., and the Transactions listed on Exhibit 2 thereof (the "1110 Order"), NYA has cured all defaults under the Leases (or has agreed to do so, as provided in paragraph 28 below) and has continued to perform its obligations under the Leases in accordance with the terms thereof. 4. Notwithstanding NYA's continued performance under the Leases, Debtors have asserted that the Basic Rent (as defined in the Leases) is substantially above fair market rental values for the Aircraft. Debtors have asserted to the Lessor Parties that Debtors' continued use and operation of the Aircraft is subject to reaching an agreement to revise certain financial terms contained in the Leases. 5. Debtors and the Lessor Parties have subsequently negotiated concerning the status and treatment of the Leases and have reached the agreements set forth herein. These various agreements, including NYA's agreement to assign its rights and obligations under the Leases to Continental and Continental's agreement to assume and perform such obligations all as described 3 4 below, are part of a unified settlement among the Lessor Parties and Debtors concerning treatment of the Leases under Sections 1110, 361, 362, 363 and 365 of the Bankruptcy Code as set forth in greater detail below. 6. Debtors and the Lessor Parties agree that each of the Leases is hereby modified to the extent applicable as set forth below in this Stipulation. 7. Effective as of July 1, 1991 and continuing throughout the remainder of the term of each Lease (including any extension described herein but excluding any further renewal term as described in Section 21.02 of each Lease), the monthly Basic Rent owed pursuant to each of the Leases payable on the first business day of the month shall be $52,500 (the "Revised Rental Rates"), subject to rent deferral described below. In the event a Debtor pays in excess of the Revised Rental Rate with respect to any Basic Rent due on or after July 1, 1991 and prior to the date this Stipulation is approved by the Bankruptcy Court, such excess shall be refunded to such Debtor three business days following the date of such approval. Notwithstanding the foregoing provisions of this paragraph 7, any periodic rentals paid under any sublease of an Aircraft which are in excess of the Revised Rental Rates, but less than $115,000 per month, shall be paid to Lessor upon receipt. In addition, to the extent used in calculating liquidated damages for any purpose under or in connection with any of the Leases or this Stipulation, the stipulated loss values thereunder shall be deemed to be and each hereby is revised downward by an amount equal to the difference, 4 5 as of the time of determination, on a present value basis using a discount rate equal to the Stipulated Rate (as defined in paragraph 9 below), between the remaining Basic Rent which would have been payable based on the original basic rent rate and the remaining Basic Rent actually payable based on the Revised Rental Rates (the "Revised SLV"); provided that the foregoing shall not affect the stipulated loss values in connection with, but solely in connection with, an Event of Loss (as defined in the Leases) or required insurance under such Leases. The Revised SLV during the term of the Lease extensions provided for herein shall initially be equal to the Revised SLV in effect as of the date originally scheduled in each Lease for the last Basic Rent payment and shall decline by 1% of Lessor's Cost (as set forth in each Lease) per month until the stipulated loss value under such Lease is equal to 20% of such Lessor's Cost and thereupon shall remain at 20% of lessor's costs for the remainder of the term of the Lease extension. 8. With respect to the Basic Rent due under the Leases, Continental shall be entitled to defer such Basic Rent as follows: a. 100% of the August 1, 1991, payment; b. 50% of the September 1, 1991, payment; and c. 100% of each of the payments due October 1, 1991, through and including March 1, 1992. Any rentals deferred as provided in this paragraph 8 are referred to as the "Deferred Amount." Any Deferred Amount shall bear interest at the Stipulated Rate (defined below) and 5 6 shall be paid, together with such interest, as set forth below in paragraph 10. 9. Interest shall accrue on the outstanding principal amount of the Deferred Amount until paid in full at the rate of 12% per annum, calculated on the basis of 360-day year consisting of twelve 30-day months (the "Stipulated Rate"). In all other cases in which interest is provided for herein, such interest shall accrue on the relevant unpaid principal amount until paid in full at a per annum rate equal to the 5-year Treasury Rate (as published in the most recent Federal Reserve H. 15 report or, if such report shall be discontinued, as published in any equivalent official report of the United States government, in either case as of the date Lessor funds the relevant amount) plus 368 basis points, calculated on the basis of a 365-day year and actual days elapsed (the "Stated Interest Rate"). Notwithstanding the foregoing, if, between the period from the Petition Date through December 31, 1991, Debtors enter into settlement agreements with other lessors pertaining to more than 25% of Debtors' current aircraft of comparable model, series, engine type, age and other specifications to the Aircraft which provide (i) in connection with the rent deferrals, for rates of interest higher than the Stipulated Rate, then the Stipulated Rate shall be adjusted as of the date such other agreements are approved by the Bankruptcy Court to the arithmetic average of such higher rates or (ii) in connection with modification financing (as described in paragraphs 12 et seq. below), for interest rates determined by a spread over long term Treasury Rates with a spread greater than 6 7 the spread used in calculating the Stated Interest Rate, then the spread used to calculate the Stated Interest Rate shall be adjusted as of the date such other agreements are approved by the Bankruptcy Court to the arithmetic average of such higher spreads. 10. The unpaid Deferred Amounts and related accrued interest as of April 1, 1992 (the "Deferral Repayment Start Date") are for each Lease referred to herein collectively as the "Total Deferred Amount" for such Lease. The obligation of Continental to repay the Total Deferred Amount for each Lease shall be evidenced by separate promissory notes (each, a "Note") in the form of Exhibit A hereto. Notes relating to the Leases shall provide that Continental shall repay the applicable Total Deferred Amount and the interest accrued on the unamortized portion thereof at tho Stipulated Rate in twelve equal monthly installments of principal and interest commencing on April 1, 1992 and thereafter on the first Business Day (as defined in the applicable Lease) of each of the next eleven months. Each such Note shall be deemed evidence of the obligations referred to in this paragraph as further detailed in Exhibit A, but such obligations shall exist whether or not Continental shall execute and deliver a Note as required hereby, and such obligation shall be deemed to have an allowed administrative expense claim, with the priority provided by Sections 503(b)(1)(A) and 507(a)(1) of the Bankruptcy Code, for any amounts under such Note (or in respect of such obligations, as the case may be), not paid when due by Continental; provided, however, that if Continental grants 7 8 a higher priority to any other aircraft lessor in respect of basic rent (treating as rent for the purposes of this proviso any obligation originally so denominated without regard to the outcome of any issue as to whether the underlying agreement is a true lease or a secured loan (the "Characterization Issue") in respect of the particular transaction), the obligations of Continental hereunder with respect to Deferred Amounts shall be automatically accorded the benefit of such higher priority. Such claims shall be payable currently so long as Continental is then generally paying when due administrative expense claims which have the same or a lower priority (except that amounts payable only as a result of an acceleration shall be payable currently only if such claims other than wages, salaries or commissions for services rendered within the meaning of Section 503(b)(1)(A) of the Bankruptcy Code are generally being paid when due) and, notwithstanding any other provision hereof, Lessors shall have all rights to demand payment of such claims pursuant to Section 503(a) of the Bankruptcy Code or otherwise. A "Default" under any Note shall constitute an "Event of Default" under the related Lease and in respect of any FAA Modification Advance (as defined below) or New Image Modification Advance (as defined below) with respect to such Aircraft; and an "Event of Default" under any Lease shall constitute a "Default" under the related Note and in respect of any such FAA or New Image Modification Advances and the Lessor shall be entitled to exercise its rights and remedies under the Leases, the Note, and hereunder including, without limitation, the remedy set forth in paragraph 25 below. 8 9 11. Continental's (i) payment of the Total Deferred Amount and interest thereon as described above, (ii) payment of the basic and supplemental rent under a Lease with respect to any period and performance of its other obligations under such Lease and the related Operative Documents or Operative Agreements (as defined in such Lease) in accordance with the respective terms thereof (as modified hereby) with respect to such period and (iii) performance of any additional obligation hereunder with respect to such Lease with respect to such period (the obligations described in clauses (i), (ii) and (iii) referred to herein, collectively, as the "Modified Lease Obligations") shall constitute full satisfaction of any payment or performance obligation with respect to that period for such Lease under Sections 365, 362, 363 and 1110 of the Bankruptcy Code that Continental may have for such period for the applicable aircraft or equipment under such Lease and Continental shall not have, and accordingly, the Lessor Parties expressly waive any right to, any further payment or performance obligations under or in connection with such Lease and the related Operative Documents or Operative Agreements for such period. Nothing herein shall relieve or be deemed to relieve Continental of any obligations to comply with provisions of the Leases not expressly modified by this Stipulation (including without limitation provisions relating to maintenance, return, insurance, notice and inspection) or otherwise to comply with provisions of the Leases or related Operative Agreements or Operative Documents pertaining to payments other than basic rent (including without limitation, 9 10 payments in respect of indemnities, interest on overdue payments, events of default, events of loss and any termination, purchase or renewal options). 12. Upon notification from Continental to Lessor as described below, the Lessor shall finance the capital expenditures (up to the amounts set forth on Exhibit 8 hereto) constituting, if the applicable work is performed by Debtor, the cost of materials and Debtor's "fully burdened labor cost" or, if such work is done by a third party, the actual invoiced cost thereof, for any improvement or modification to any aircraft subject to the applicable Lease that is required to be made pursuant to any rule, regulation or directive of the Federal Aviation Administration relating to modifications for aging aircraft ("Aging Aircraft Modifications") and TCAS and Windshear Detection Modifications ("Avionics Modifications" and together, with Aging Aircraft Modifications, collectively the "FAA "Modifications"), up to $396,642 in the aggregate for each Aircraft. The parties stipulate for the purpose of this Stipulation and Order that Continental's current "fully burdened labor cost" on the date hereof is $27.53 per man-hour. Any future "fully burdened labor cost" for purposes of determining a Lessor's obligations hereunder with respect to FAA Modifications and New Image Modifications (as hereinafter defined) shall be calculated using the same methodology as used to calculate the current "fully burdened labor cost" and shall in any event be no more than the then prevailing average rate quoted by reputable third party providers used by Continental for the performance of 10 11 comparable work. Exhibit B annexed hereto describes the nature of the FAA Modifications. 13. Promptly upon completion of any FAA Modification of an aircraft subject to a Lease, Continental shall so notify the Lessor in writing, which notice shall describe the FAA Modification and set forth the calculation of the amount to be paid by Lessor. In addition, Continental shall provide such additional support information as the Lessor may reasonably request to verify the performance of the work at issue and the actual cost thereof. Within five business days following the later receipt of such notice or receipt of such reasonably requested support information, the Lessor shall pay by wire transfer to such account as Continental may designate the lesser of (i) the amount set forth in such notice and (ii) the maximum amount Lessor is obligated to finance for such FAA Modification as set forth on Exhibit B (an "FAA Modification Advance"). The Lessor shall have the right to inspect the Aircraft on which such FAA Modification was performed in accordance with the inspection provisions of the applicable Lease to verify the performance of the applicable FAA Modification, provided that any failure to conduct such inspection shall not affect the Lessor's obligation to fund such FAA Modification Advance. 14. Any FAA Modification Advance relating to an Aging Aircraft Modification shall bear interest at the Stated Interest Rate. Continental shall make equal monthly payments of principal and interest in respect of each such FAA Modification Advance commencing on the first business day of the month immediately 11 12 succeeding the date of funding, such FAA Modification in an amount calculated to amortize such FAA Modification Advance over five years, it being agreed that Continental shall have no obligation to make such payments beyond the expiration of the applicable Lease, regardless of whether such applicable FAA Modification Advance shall have been fully amortized. 15. If any Aging Aircraft Modification which would give rise to an FAA Modification Advance is to be performed or installed on or after December 31, 1993, Lessor shall have the option to decline payment of such FAA Modification Advance. If Lessor so declines to fund such Aging Aircraft Modification Advance, Continental shall have the option to terminate the applicable Lease upon ten days prior written notice to Lessor and return the applicable Aircraft pursuant to the return conditions of such Lease (except that a financial adjustment shall be made in lieu of any hour or cycle minimum requirements). In connection with such early termination by Continental, Continental shall pay, upon return of the applicable Aircraft to the Lessor, the outstanding principal amount of all FAA Modification Advances, Nev Image Modification Advances and Total Deferred Amount, to the extent Continental would otherwise have been required to pay such principal balance during the remaining term of the Lease of such Aircraft in accordance with the terms hereof. 16. Any FAA Modification Advance relating to an Avionics Modification paid by Lessor shall bear interest at the Stated Interest Rate and, at the option of Lessor, to be selected 12 13 at the time such FAA Modification Advance relating to Avionics Modifications is paid, such FAA Modification Advance a. shall be repaid by Continental in equal monthly installments of principal and interest calculated to amortize such Modification Advance from the date of payment thereof over the remaining term of the applicable Lease; or b. shall be amortized at the applicable Stated Interest Rate over 84 months and Continental shall make monthly payments of equal principal and interest calculated to provide that such FAA Modification Advance would be fully amortized over 84 months, it being agreed that Continental shall have no obligation to make such payments beyond the expiration of the applicable Lease, regardless of whether the FAA Modification Advance shall have been fully amortized. Payments with respect to such FAA Modification Advances, shall be payable on the first business day of each month, commencing with the month immediately succeeding the date of funding such FAA Modification Advance. In the event Lessor elects the repayment option set forth in clause (a) above, at the expiration or termination of the term of the applicable Lease, except in connection with a termination as a result of an Event of Default under such Lease, including as a result of Default under the 13 14 related Note or this Stipulation, Continental may remove and retain the relevant Avionics Modifications, provided that such removal shall not cause physical damage to the applicable Aircraft. If Lessor elects option (b) above, Continental agrees, to the extent not already provided pursuant to the applicable Lease, to execute such documentation as the Lessor may reasonably request in order to vest title to such modification in the Lessor. Continental shall repay Lessor for each FAA Modification Advance financed by Lessor in accordance with the foregoing paragraphs. Continental's obligation to make such repayments shall be independent of the related Lease and shall survive the termination thereof prior to the repayment in full of the applicable FAA Modification Advance and accrued interest thereon (including without limitation a termination in connection with a winding up of the business or a Fundamental Business Restructuring as each is defined below). If Continental shall fail to make any scheduled installment in respect of the repayment of an FAA Modification Advance within the cure periods provided in paragraph 25 below, such failure shall constitute an Event of Default under the applicable Lease, and the Applicable Note and the full amount of such FAA Modification Advance that would otherwise have been repaid by Continental shall be accelerated (unless acceleration is waived by Lessor and such waiver may be made and shall be effective without further order of the Bankruptcy Court) and shall accrue interest at a rate per 14 15 annum equal to the applicable Stated Interest Rate plus 2% from the original due date of such installment until paid in full. 17. Upon notification from Continental to the Lessor as provided below, the Lessor shall finance the capital expenditures constituting, if the applicable work is performed by Continental, the cost of materials and Continental's "fully burdened labor cost" or, if such work is done by a third party, the actual invoiced cost thereof, for any New Image Interior or Exterior Modification (a "New Image Modification") of the sort described in Exhibit B hereto up to $449,323 in the aggregate for each Aircraft. 18. (a) Promptly upon completion of any New Image Modification of an Aircraft subject to a Lease to be financed by the Lessor, Continental shall so notify the Lessor in writing, which notice shall describe the New Image Modification and set forth the amount to be financed by the Lessor. In addition, Continental shall provide such additional support information as the Lessor may reasonably request to verify that the work at issue has been performed and the actual cost thereof. The Lessor shall have the right to inspect the Aircraft on which such New Image Modification was performed in accordance with the inspection provisions of the applicable Lease to verify the performance of the applicable New Image Modification, provided that any failure to conduct such inspection shall not affect the Lessor's obligation to fund such New Image Modification Advance. Within five business days following tho later of receipt of such notice or receipt of such reasonably requested support 15 16 information, the Lessor shall pay by wire transfer to such account as Continental may designate the lesser of (i) the amount set forth in such notice and (ii) the maximum amount the Lessor is obligated to finance for such New Image Modification (a "New Image Modification Advance"). The outstanding New Image Modification Advances so financed shall accrue interest at the Stated Interest Rate calculated as of the date such New Image Modification Advance is financed by the Lessor. (b) Continental shall repay each New Image Modification Advance, together with interest thereon, monthly on the first Business Day (as defined in the Lease) of each month, commencing with the month immediately succeeding the month in which such amount is paid by the Lessor, in equal payments of principal and interest calculated to amortize such New Image Modification Advance over a period of time equal to the then remaining term (as defined in the applicable Lease) of the applicable Lease as extended hereby. Continental's obligation to make such repayments shall be independent of the related Lease and shall survive the termination thereof prior to the repayment in full of the applicable New Image Modification Advance and accrued interest thereon (including without limitation a termination in connection with a Fundamental Business Restructuring as defined below). If Continental shall fail to make any scheduled installment in respect of the repayment of a New Image Modification Advance within the cure periods provided in paragraph 25 below, such failure shall constitute an Event of Default under the applicable Lease and related Note, and the full 16 17 amount thereof shall be accelerated (unless acceleration is waived by Lessor and such waiver may be made and shall be effective without further order of the Bankruptcy Court) and shall accrue interest at the stated interest rate plus two percent per annum from the original due date of such installment until paid in full. 19. (a) The Lessor shall be deemed to have an allowed administrative expense claim, with the priority provided by Section 364(c)(1) of the Bankruptcy Code, for any amounts of principal and interest (including overdue interest) not paid when due, subject to any applicable cure period, by Continental in respect of an FAA Modification Advance or New Image Modification Advance. Such claims shall be payable currently so long as Continental is then generally paying when due administrative expense claims which have the same or a lower priority (except that amounts payable only as a result of an acceleration shall be payable currently only if such claims other than wages, salaries or commissions for services rendered within the meaning of Section 503(b)(1)(A) of the Bankruptcy Code are generally being paid when due) and, notwithstanding any other provision hereof, Lessor shall have all rights to demand payment of such claims pursuant to Section 503(a) of the Bankruptcy Code or otherwise, and the rights set forth in the last sentence of paragraph 25 below. Notwithstanding the first sentence of this paragraph 19(a), (i) the Lessor hereby acknowledges and agrees that such claims in respect of any FAA Modification Advance or New Image Modification Advance shall be, and are hereby deemed, 17 18 junior and subordinate in right of payment to any and all credit obtained debt or other obligations incurred, whether previously, concurrently or hereafter incurred by Continental, including, without limitation, debtor-in-possession financing heretofore extended by The Chase Manhattan Bank, N.A. and American Airlines, Inc. by authority granted by the Bankruptcy Court, with a priority senior to the priority established by Section 507(a)(1) and 503(b)(1)(A), including, without limitation, credit obtained or debt or other obligations incurred or guaranteed by Continental pursuant to, and having a priority established by, Sections 364(c) or (d) or Section 507(b) of the Bankruptcy Code, but excluding any such credit or debt provided by other lessors (treating as a lessor for purposes of this proviso any party originally so denominated without regard to the outcome of the Characterization Issue in respect of the particular transaction) of aircraft in Continental's fleet as of the date hereof in respect of modifications, improvements or additions to such aircraft ("Other Lessor Financing Amounts"), and (ii) Continental's obligations hereunder with respect to FAA Modification Advances and New Image Modification Advances under each Lease to Lessor shall rank (x) pari passu among each other; and (y) pari passu or senior to Continental's obligations now or hereafter incurred with respect to any Other Lessor Financing Amounts. The Lessor agrees that it shall not raise any objection in the Bankruptcy Court to the incurrence of any indebtedness or other obligation by Continental with a priority senior to the priority provided herein with respect to FAA Modification 18 19 Advances and New Image Modification Advances based on the effect of such incurrence of indebtedness or other obligations on continental's obligation to the Lessor with respect to FAA Modification Advances or New Image Modification Advances; provided, however that nothing herein shall preclude the Lessor from raising any such objection on grounds other than the priority of the Lessor's claim for repayment of FAA Modification Advances or New Image Modification Advances. (b) A failure of Continental to repay any FAA Modification Advances or New Image Modification Advances within the applicable cure periods shall constitute an Event of Default under the applicable underlying Lease. (c) The Lessor shall not be obligated to fund an FAA Modification Advance or New Image Modification Advance with respect to a Lease while an Event of Default exists thereunder. (d) The provisions in this Stipulation relating to Modification Advances shall supercede Section 9.05 of the applicable Lease. 20. Approval of this Stipulation by the Bankruptcy Court shall constitute authorization for the applicable Debtor (i) to incur the indebtedness involved with the Deferred Amounts, the FAA Modification Advances and the New Image Modification Advances with respect to the equipment covered by each of the Leases; and (ii) to assume the Leases on the terms and conditions stated herein. Notwithstanding clause (i) above, the Debtors acknowledge that such authorization to incur the indebtedness involved with any New Image Modification Advance may be subject 19 20 to such additional terms and conditions as the Bankruptcy Court may require upon motion by Continental in connection with approval of the "New Image" modification program or otherwise; provided, however that the foregoing shall not affect the Lessor's obligation to fund or Lessor's rights with respect to, New Image Modification Advances and the Lessor may rely without further inquiry on a notice from Continental under paragraph 17 as conclusive evidence of Continental's authority to incur the indebtedness constituting the New Image Modification Advance thereby requested. The assumption referred to in clause (ii) of the first sentence of this paragraph shall occur automatically upon approval of this Stipulation by the Bankruptcy Court. The assumption of a Lease shall be deemed to constitute an assumption by NYA of the Operative Agreements or Operative Documents. Simultaneously with such assumption of a Lease all of NYA's rights, title, interest and obligations under such Lease and hereunder with respect to such Lease shall, without further actions, consent or approval, be assigned to and assumed by Continental. Effective immediately upon such assignment and assumption, (a) the term of such Lease shall be extended to expire on December 31, 1996 (subject to the further options described in Section 21 of the Leases), (b) NYA shall be released from all of its obligations under such Lease, and (c) the Guarantee relating to such Lease shall be terminated and Holdings shall be released from all its obligations thereunder. After such assignment and assumption, Continental shall not reject the Leases pursuant to Section 365(a) of the Bankruptcy Code or 20 21 otherwise except in connection with a winding up of the business of Continental or a Fundamental Business Restructuring (as each is defined in paragraph 22) as described in paragraph 21 and 23. The Lessor acknowledges and agrees that the terms and conditions stated herein constitute compliance with the provisions of Section 365(b)(1) in connection with the assumption of the Leases. Effective upon the assignment to and assumption by Continental described above with respect to a Lease, all references herein to NYA shall be deemed to mean Continental with respect to such Lease. Each Lessor Party hereby consents to the assumption of the Lease at the times and on the terms set forth in this Stipulation and agrees that no further payments need be made in connection with such assumption under the terms of Section 365 of the Bankruptcy Code other than those explicitly set forth in this Stipulation. 21. Subject to paragraph 22 hereof, effective upon assumption of a Lease pursuant to paragraph 20, the Lessor shall be deemed to have an allowed administrative expense claim, with the priority provided by Sections 503(b)(1)(A) and 507(a)(1) of the Bankruptcy Code, for any amounts not paid when due by Continental under such Lease, the related Note or hereunder with respect to such Lease including any amounts payable as a result of a breach thereunder or hereunder (collectively, "Lease Claims"). Any Lease Claim for amounts of basic rent and supplemental rent accrued and due and payable by Continental under a Lease or related Operative Agreements or Operative Documents during the period ending on the date on which all of 21 22 the equipment subject to such Lease is made available for repossession by the Lessor upon at least 3 business days' prior written notice from Continental of such availability, at a location in the continental United States to be specified in such notice (an "Availability Date"), shall be payable currently so long as Continental is then generally paying when due administrative expense claims which have the same or a lower priority dispute (except that amounts payable only as a result of an acceleration shall be payable currently only if such administrative expense claims other than wages, salaries or commissions for services rendered within the meaning of Section 503(b)(1)(A) of the Bankruptcy Code are generally being paid when due) and, notwithstanding any other provision hereof, Lessor shall have all rights under Section 503(a) of the Bankruptcy Code to demand payment of such claims and any other claims hereby granted a priority under Section 507(a)(1) or 364(c) of the Bankruptcy Code. 22. (a) Notwithstanding paragraph 21 and except as to claims expressly granted a higher priority herein, in the case of any breach attributable to the failure of Continental to perform an obligation under a Lease arising from or in connection with a winding up of the business of Continental (as hereinafter defined) or a Fundamental Business Restructuring (as hereinafter defined), any claim arising therefrom (a "Liquidation Claim", it being understood that Liquidation Claims shall not include any claims excluded pursuant to subparagraph (b) of this paragraph 22), shall be determined, and shall be allowed under 22 23 Section 502(a), (b) or (c) of the Bankruptcy Code or disallowed under Sections 502(d) or (e) of the Bankruptcy Code, as if such claim had arisen before the date of the filing of the petition by Continental, including, without limitation: (x) any claim for damages with respect to basic rent payments not yet accrued as of the Availability Date, including any liquidated damages in lieu thereof contemplated by the applicable Lease, and (y) any claim for damages attributable to the failure of the equipment to satisfy return conditions specified in the Lease (other than any such failure which does not constitute a Liquidation Claim or is excluded from the foregoing limitation on priority as provided elsewhere herein) or the failure of the applicable Debtor to provide notice of return as specified in the Lease; provided, however, that the limitation on administrative expense priority described above shall not apply with respect to: (i) any Lease Claim described in subparagraph (b) below as being expressly not included as a Liquidation Claim, (ii) any Liquidation Claim arising under a Lease in connection with a Fundamental Business Restructuring unless all Similar Aircraft (as defined below) other than Assumed Aircraft (as defined below), if any, have been permanently taken out of service by Continental and the applicable Fundamental Business Restructuring is or becomes a Permanent Downsizing (as hereinafter defined), 23 24 (iii) any Lease Claim for an amount payable as a result of the failure of any airframe or engine to have the specified minimum hours or cycles remaining until the next scheduled heavy maintenance visit or shop overhaul, or (iv) any direct, but not consequential claim for a breach of the undertakings contained in subparagraph (c) of this Paragraph 22, all of which claims enumerated in (i) through (iv) above having the priority provided by Sections 503(b)(1)(A) and 507(a)(1) of the Bankruptcy Code (or such higher priority specifically granted pursuant to this Stipulation) and shall be payable currently so long as Continental is then generally paying when due like administrative expense claims and, notwithstanding any other provision hereof, Lessor shall have all rights to demand payment of such claims pursuant to Section 503(a) of the Bankruptcy Code or otherwise. The parties hereto expressly waive any right to treatment of any Liquidation Claim with a priority superior to that provided herein and agree that in the event an allowed Liquidation Claim is granted such a superior priority, the assumption of the Lease related to such Liquidation Claim shall be deemed void ab initio; provided, however, that the foregoing shall not affect the priority of (i) the indebtedness involved with the Deferred Amounts, the FAA Modification Advances and the New Image Modification Advances; and (ii) claims excluded from the definition of Liquidation Claim set forth in subparagraph (b) below. 24 25 (b) It is expressly agreed that Liquidation Claims shall not include (i) any Lease Claim for amounts of basic rent and supplemental rent accrued and due and payable by Continental under a Lease or related Operative Agreements or Operative Documents arising during the period ending on the Availability Date for equipment subject to such Lease and (ii) any Lease Claims directly resulting from Continental's breach of its covenants contained in a Lease with respect to the operation, use, maintenance and possession of equipment subject to such Lease during the period ending on the Availability Date for such equipment including, without limitation, any breach by Continental of any covenant with respect to (x) compliance with Airworthiness Directives required to be performed during the period ending on the Availability Date or (y) maintenance of such equipment in accordance with an FAA-approved maintenance program during the period ending on the Availability Date (including performance of inspections, part replacement and overhauls required under such program) regardless of whether any such breach is discovered before or after the Availability Date. (c) With respect to the return of equipment subject to a Lease in connection with a winding up of the business of Continental or a Fundamental Business Restructuring, Continental agrees (i) to return at no charge to the Lessor within thirty days following the return of such equipment (or such longer period as may be provided in such Lease), all records, logs and manuals required under such Lease to be returned with such aircraft and (ii) except with respect to any 25 26 engine subject to a Lease which at the time of return is unserviceable or disassembled for maintenance purposes (which engine shall be made available in its then-current condition), to return such aircraft with the engines subject to such Lease (or substitute engines permitted under the terms of such Lease) installed on such aircraft. 23. For the purpose of this Stipulation and Order: (i) the "winding up of the business of Continental" shall mean any act by Continental or one of its affiliates, a trustee or examiner which constitutes (1) the publicly announced cessation of all or substantially all scheduled flight operations by Continental and its affiliates as debtors or as debtors in possession (a "Cessation") followed ultimately by an actual Cessation, or (2) a Cessation, and which in either case is without the intention to resume such operations; (ii) "Fundamental Business Restructuring" shall mean, with respect to the breach or rejection of a Lease giving rise to a Liquidation Claim, a reduction, prior to adoption of or in implementation of a downsizing set forth in a non-liquidating plan of reorganization, in the scheduled flight operations of Continental and its affiliates, as measured by weekly available seat miles ("ASM's") determined using a consistently applied and generally recognized methodology, of 35% from the week commencing on December 2, 1990, and ending on December 8, 1990, and at least 10% within ninety (90) days before or after the date of such breach or rejection; provided, however, that it Continental or one of its affiliates transfers flight operations to a third 26 27 party but retains effective control, through any agreement, contractual or otherwise, to select the equipment to be used by such third party in such operations, the ASM's of such flight operations shall be included in the operations of Continental and its affiliates for purposes of this definition; (iii) "Similar Aircraft" shall mean with respect to an aircraft as to which a Liquidation Claim is asserted; all aircraft, if any: (a) which were in Continental's or NYA's fleet on the Petition Date and at any time from the date hereof to the date of the Fundamental Business Restructuring; (b) which are of the same make, model, series and engine type as such aircraft as to which a Liquidation Claim is asserted; and (c) which were manufactured within five years of the date of manufacture of such aircraft as to which a Liquidation Claim is asserted; (iv) "Assumed Aircraft" shall mean any Similar Aircraft subject to a lease (treating as a lease any agreement originally denominated as such without regard to the outcome of the Characterization Issue in respect of the particular transaction) which, as of the date of a Fundamental Business Restructuring, shall have been assumed by the applicable Debtor under Section 365 of the Bankruptcy Code pursuant to this Stipulation or to any other agreement between a Debtor and the lessor thereunder which provide, among other things, for a deferral of periodic payments and financing of modifications to such Similar Aircraft; and (v) a Fundamental Business Restructuring resulting in tho breach or rejection of a Lease shall be deemed a "Permanent Downsizing" if (A) as of the end of any of the twelve full calendar months immediately following such 27 28 breach or rejection, the average monthly ASM's of Continental and its affiliates for the preceding 12 calendar months is at least 35% less than the average monthly ASM's of Continental and its affiliates in 1990 and (B) as of the end of any one of the three calendar months immediately following such breach or rejection, the monthly ASM's of Continental and its affiliates is at least 20% less than the average monthly ASM's of Continental and its affiliates for the 12 calendar months ended on the third full calendar month prior to such rejection. 24. Effective upon assumption of a Lease pursuant to paragraph 20 hereof, the applicable Debtor may reject a Lease pursuant to Section 365(a) of the Bankruptcy Code in connection with a Fundamental Business Restructuring only if all Similar Aircraft which are not Assumed Aircraft have been disposed of by Continental and the leases with respect to all leased Similar Aircraft which are not Assumed Aircraft shall have been rejected and the affected equipment shall have been taken out of service and made available to the applicable lessor for repossession. If the leases or Leases with respect to one or more Assumed Aircraft of any category of leased Similar Aircraft are to be rejected in connection with a Fundamental Business Restructuring, the determination and allowance of Liquidation Claims with respect to the affected Leases described in paragraph 21B shall apply only if all such leases or Leases are rejected or the particular leases or Leases to be rejected are selected at random from all such Assumed Aircraft in such category. In addition, in connection with any such rejection Continental shall pay to the 28 29 applicable Lessor on or before the Availability Date, any accrued and unpaid amounts due in current rent under the applicable Lease, excluding supplemental rent, Deferred Amounts, FAA Modification Advances and New Image Modification Advances and without giving effect to any acceleration thereof attributable to such rejection. 25. The applicable Debtor shall perform its obligations under the Leases (as amended pursuant hereto), other than obligations of the sort described Section 365(b)(2) of the Bankruptcy Code. No Lessor Party shall have a right to bring an action to seek return of any of the aircraft or related equipment covered by a Lease unless Continental shall (i) breach its obligation to pay any amount due under such Lease, as modified hereby, any related Note or hereunder with respect to such Lease and such breach shall remain uncured beyond any applicable cure period provided in the applicable document, it being agreed that the payment obligations of Continental hereunder shall be entitled to cure periods provided for basic rent payments under the applicable Leases, except that the payment obligations under paragraph 28 hereof shall be entitled to cure periods provided for supplemental rent payments under the applicable Leases (but interest on overdue amounts shall be payable to the extent provided in such Lease and Lessor Parties' or any Note holder's claim therefor shall be an allowed administrative expense claim) or (ii) breach any other material provision of the applicable Lease (other than provisions of the sort described in Section 365(b)(2) of the Bankruptcy Code) and such breach shall 29 30 remain uncured beyond any applicable cure period provided in the Lease. Upon approval of this stipulation by the Bankruptcy Court, the automatic stay of Section 362 of the Bankruptcy Code is modified to the extent necessary to permit the Lessor Parties to exercise their rights hereunder, under the Notes and under the Lease (as modified hereby) and, accordingly, any such right to repossess a aircraft subject to a Lease in compliance with the terms thereof following an Event of Default thereunder shall not be affected by such automatic stay. 26. Notwithstanding Section 1129(a)(9)(A) or any other provision of the Bankruptcy Code, in connection with the confirmation of a plan, the Debtors shall not be obligated to pay cash for claims hereunder granted a priority under Section 507(a)(1) or 364(c) to the extent such claims are not then due and payable in accordance with the terms hereof (including period of repayment and acceleration provisions), and the Lessor Parties consent to the treatment in any plan of reorganization of the Debtors proposed by any entity to payment of amounts in respect of Total Deferred Amounts, FAA Modification Advances and New Image Modification Advances in accordance with the terms hereof (including period of repayment and acceleration provisions). 27. To implement the foregoing, Continental and the Lessor Parties shall take, among others, the following actions upon approval of this Stipulation by the Bankruptcy Court and expiration of the period allowed to appeal such approval (and provided no such appeal or a stay of the order of such approval is pending): (i) the Lessor Parties shall promptly withdraw 30 31 their participation in all pending motions in respect of the Leases including all motions seeking relief under Sections 362, 363, 365 and/or 1110 of the Bankruptcy Code and shall refrain from filing any motion under the Bankruptcy Code for any relief whatsoever related to any Lease, the Operative Agreements or the Operative Documents for so long as Continental complies with such Lease (as amended hereby), the Operative Documents and Operative Agreements, this Stipulation and the Note relating to such Lease, provided that if an appeal has been filed, the Lessor Parties shall continue any such pending motion until such appeal is resolved so long as the Bankruptcy Court's approval hereof has been stayed; (ii) the Lessor Parties shall withdraw any appeal, or shall withdraw from participation in any appeal, of the Bankruptcy Court's January 30, 1991 ruling concerning the non-application of Section 1110 to Leases that do not cause the acquisition of new equipment (except that the Lessor Parties may participate in any response to any petition for certiorari or brief filed by Continental in the United States Supreme Court in connection with the reversal of such ruling); (iii) the Lessors shall not bring a motion seeking 1110 status for any Lease or shall dismiss any such motion already brought; (iv) Continental shall withdraw any pleadings seeking to recharacterize any Lease as other than a "true lease" provided that if an appeal has been filed Continental agrees to continue any such recharacterization motion until such appeal is resolved so long as the Bankruptcy Court's approval hereof have not been stayed; and (v) Continental shall promptly request and diligently pursue obtaining an order 31 32 of the Bankruptcy Court approving this Stipulation and, in that connection, shall give proper notice of and conduct a hearing under Section 364(b) and (c) of the Bankruptcy Code and Bankruptcy Rules 4001(c) and 9019 (with a request under clause (2) of Bankruptcy Rule 4001(c)(2) to hold such hearing or a preliminary hearing on July 19, 1991, and to seek authority to obtain credit necessary to avoid immediate and irreparable harm to the estate) with respect hereto, request that such hearing be expedited and held on July 19, 1991 and in good faith oppose any objections hereto raised by the Official Committee of Unsecured Creditors of Continental Airlines, Inc., et al. (the "Committee") or any other party. Continental agrees to treat the Leases as "true leases," including, without limitation, in any plan of reorganization or liquidation filed by it under its pending bankruptcy proceedings and to oppose in good faith any contrary characterization, in any such plan filed by another party to such bankruptcy proceedings or otherwise. 28. Within a reasonable period of time following the presentation to the appropriate Debtors and the Committee of an invoice adequately detailing the fees requested, and notwithstanding the provisions of paragraph 11 above, Continental shall pay reasonable out-of-pocket legal fees and expenses incurred by the Lessor Parties on or after the Petition Date in connection with the Chapter 11 proceedings with respect to the leases and the negotiation, execution and approval of this Stipulation. If the parties cannot agree as to the reasonable amount of such fees, costs and expenses requested within 60 days 32 33 of receipt of the complete invoice, or if the Committee objects to the reasonableness of such fees and files a timely written objection within 60 days of receipt of the complete invoice, then the matter shall be submitted promptly to the Bankruptcy Court for resolution, and Continental shall pay the amount ordered by final order of the Court. 29. During the pendency of the Debtors' proceedings under the United States Bankruptcy Code, no Aircraft shall be re-registered in a jurisdiction other than the United States of America, unless the prior written consent of Lessor shall have first been obtained, and thereafter, only as permitted by the applicable leases. 30. If on or before the earlier of December 31, 1992 or the date of confirmation of a plan of reorganization of Continental, Continental, with the approval of the Bankruptcy Court, enters into an agreement (other than an agreement embodied in a non-liquidating plan of reorganization) with any lessor (i) with respect to aircraft and engines of comparable model, series, engine type and age as the aircraft which are the subject of the Leases; (ii) with respect to one or more pre-petition leases covering such comparable equipment; and (iii) which provides overall benefits materially more favorable to the lessor(s) under such lease(s) than the overall benefits set forth herein, then the agreement contained herein with respect to such aircraft shall be modified in a mutually acceptable manner to provide the Lessors with treatment which, when viewed in its entirety (including all benefits and burdens), is not materially less 33 34 favorable to the Lessors than such agreement with such other lessor(s); provided, however, however, that in all events, regardless, inter alia, of the operation of this paragraph, force of law or otherwise, the Lessors' rights and priority in connection with a Liquidation Claim shall be as set forth in paragraph 16B, unless the Committee consents to the transaction forming the basis for Lessors' claim for better treatment pursuant to this paragraph; provided, further, however, that if an agreement or stipulation between Continental and any other pre-petition lessor of aircraft equipment includes a different definition of "Fundamental Business Restructuring" or "Permanent Downsizing" (including terms intended to describe comparable situations), each Lessor shall have the choice to adopt such different definitions in lieu of the applicable definitions set forth herein. 31. The parties hereto may execute documentation reasonably satisfactory to them and to the Committee to amend the applicable Leases to conform with the forms of this Stipulation but the execution of such documentation shall not be a precondition to the parties' respective obligations hereunder. 32. The Beneficiaries agree, jointly and severally, to provide funds to Lessor at such times and in such amounts as to enable Lessor to pay the Modification Advances as specified in this Stipulation and Order. In this regard, the Beneficiaries acknowledge that the Beneficiaries are the Lessor's only source of funds to pay such Modification Advances. In the event Lessor fails to pay any Modification Advance as required hereunder, NYA 34 35 shall be entitled to offset payments of Basic Rent to the extent of such Modification Advance. 33. This Stipulation shall not be of any force or effect until approved by order of the Bankruptcy Court. Until so approved by the Bankruptcy Court, (i) references in this Stipulation to "Lease", "Lessors", "rentals" or words or phrases of similar import are for convenience only and shall not constitute an admission by Continental that any alleged lease agreement in fact constitutes a true lease or is otherwise entitled to the protection of Sections 365 or 1110 of the Bankruptcy Code or any other Bankruptcy Code Section, (ii) the Revised Rental Rates shall not constitute an admission by any party that such rates constitute Fair Market Lease Rates under the Leases and (iii) this Stipulation and any document related hereto shall not be cited to any court for such purpose. Without limiting the generality of the foregoing, no statement, undertaking or characterization herein shall be deemed an admission by any party of any fact or legal conclusion for any purpose and shall not be cited to any court by any party against any other party as evidencing a waiver or an admission against interest or for any similar purpose. 34. Following approval of this Stipulation by the Bankruptcy Court, this Stipulation shall be binding upon and enforceable against the parties hereto, their successors and assigns and in the case of Continental, any and all of the affiliated debtors of Continental (including any substantively consolidated entity of which Continental may be a part), and any 35 36 trustee appointed in Continental's Chapter 11 proceedings and any trustee appointed in the event such proceedings are converted to Chapter 7 proceedings. 35. This Stipulation and Order may be executed in one or more counterparts, including facsimile transmittals, each of which shall be deemed an original and all of which, when taken together, shall constitute one and the same document and any of the parties hereto may execute this Stipulation and Order by signing any such counterpart. The Beneficiaries hereby authorize, by their execution of this Stipulation, the Lessor to execute this Stipulation and this Stipulation and Order maybe be filed with the Bankruptcy Court using facsimile transmitted executions. STIPULATED AND AGREED: Dated: July 3, 1991 /s/ Laura Davis Jones ------------------------------------- Attorney for Continental Airlines, Inc., Debtor and Debtor in Possession Dated: July 3, 1991 /s/ Laura Davis Jones ------------------------------------- Attorney for Continental Airlines Holdings, Inc., Debtor and Debtor in Possession Dated: July 3, 1991 /s/ Laura Davis Jones ------------------------------------- Attorney for New York Airlines, Inc., Debtor and Debtor in Possession Dated: July 3, 1991 /s/ [signature] ------------------------------------- Attorney for United States Airlease, Inc. 36 37 Dated: July 3, 1991 /s/ [signature] --------------------------------- Attorney for Airlease Ltd. Dated: July 3, 1991 /s/ [signature] --------------------------------- Attorney for PS Group, Inc. Dated: July 3, 1991 /s/ [signature] --------------------------------- Attorney for Trust Company for USL, Inc., as trustee 37 38 The Official Committee of Unsecured Creditors hereby confirms that it has no objection to the foregoing Stipulation or to the holding of a hearing with respect thereto as soon as the parties may be heard. Dated: July 3, 1991 /s/ [signature] -------------------------------------- Attorneys for the Official Committee of Unsecured Creditors SO ORDERED: Dated: July 3, 1991 -------------------------------------- United States Bankruptcy Judge 38 39 EXHIBIT A THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MUST BE HELD INDEFINITELY UNLESS SO REGISTERED OR TRANSFERRED IN A TRANSACTION EXEMPT FROM REGISTRATION [City, State] $*/ _____________________, Original Principal Amount PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned, CONTINENTAL AIRLINES, INC., a Delaware corporation [and debtor-in-possession] ("Borrower"), hereby promises to pay to [NAME OF APPLICABLE LESSOR], a [insert applicable jurisdiction] corporation ("Holder"), or its assigns, in lawful money of the United States of America, the principal sum of [INSERT APPLICABLE "TOTAL DEFERRED AMOUNT" DUE UNDER PARAGRAPH 10 OF THE STIPULATION ($_______________.__)] (the "Principal"), together with interest at the rate of twelve percent (12%) per annum calculated on the basis of a 360 day year consisting of twelve 30-day months (the "Interest Rate"), which interest shall accrue on the outstanding Principal from and including April 1, 1992 to but excluding the date on which the Principal and all accrued interest are paid in full. The Principal of, and accrued interest on, this Note shall be payable in accordance with the provisions of Section 2 hereof. The entire unpaid Principal of this Note, together with accrued and unpaid interest thereon, it any, shall be finally due and payable on the Maturity Date (as hereinafter defined). All amounts of Principal and, to the extent permitted by applicable law, interest which are not paid when due in accordance with the provisions of Section 2 hereof shall bear interest from the date such Principal and interest payment was due until paid at the Default Rate (hereinafter defined) (calculated on the basis of a 360 day year consisting of twelve 30-day months). Section 1. Certain Definitions. As used herein, the following terms have the following meanings: 1.1 "Default" means the occurrence of one or mare o the following events: __________________________________ */ Interest applicable "Total Deferred Amount" due under Paragraph 10 of the Stipulation. 1 40 (a) The failure of Borrower to pay any amounts of Principal or interest thereon due on this Note within ten (10) Business Days (as defined in the Lease) of when the same become due and payable in accordance with the terms hereof; or (b) The failure of Borrower to perform, observe, and comply with any covenant, agreement, or condition (other than the covenant to pay amounts of Principal or interest thereon due under this Note) contained in this Note including, without limitation, those covenants and agreements set forth in Section 4 hereof, and the continuation of such a failure for a period of forty-five (45) days following written notice to Borrower from the Holder of the continuation of such failure; or (c) The occurrence of an "Event of Default" as such term is defined in the Lease, subject to the provisions therein concerning notice and/or opportunity to cure such Event of Default, or a default under the Stipulation (after giving effect to the grace periods provided for in paragraph 22 thereof) insofar as it relates to the Lease or the equipment subject thereto. 1.2 "Default Rate" means the rate per annum equal to the lesser of (a) fourteen percent (14%), or (b) the highest rate then permitted by law for any period during which the Principal shall be overdue; provided, however, that if no such highest rate exists, then the rate specified in clause (a) preceding shall apply. 1.3 "Lease" means [insert applicable Lease definition.] 1.4 "Maturity Date" means February 1, 1993. 1.5 "Stipulation" mean [insert name of Stipulation]. Section 2. Payments of Principal and Interest. (a) Payment of Principal and the interest accrued at the Interest Rate on the unamortized portion of the Principal shall be made in twelve (12) equal monthly installments of Principal and interest commencing on March 1, 1992 and thereafter on the first Business Day (as defined in the Lease) of each of the next eleven (11) months. (b) Notwithstanding the foregoing, at the Maturity Date, the entire unpaid balance of Principal and all accrued and unpaid interest shall be finally due and payable. Section 3. Prepayments. Borrower shall be entitled to prepay the unpaid Principal, at any time and from time to time, in whole or in part, without premium or penalty, but only 2 41 if all accrued and unpaid interest on this Note is paid to the date of such prepayment. Section 4. Events of Default and Remedies. The entire unpaid Principal, and all accrued interest, if any, on this Note shall immediately become due and payable at the option of the Holder hereof upon the occurrence of a Default. In the event a Default shall have occurred, the holder of this Note may proceed to protect and enforce its rights either by suit in equity and/or by action at law, or by other appropriate proceedings, whether for the specific performance of any covenant or agreement contained in this Note, or in aid of the exercise of any power or right granted by this Note or to enforce any other legal or equitable right of the holder of this Note, including any rights accorded Holder under the Stipulation. Section 5. No Partnership or Agency Intended; Indemnity. (a) Nothing contained herein is intended, or shall in any way be construed, so as to create any form of partnership or agency relationship between Borrower and Holder. The parties hereby expressly disclaim any intention of any kind to create any such partnership or agency relationship between themselves hereby. Accordingly, in no event shall Holder be liable for any of the debts, obligations, or liabilities of Borrower as a result of the execution of this Note. (b) Holder shall have the benefit of the same indemnities as Lessor under the Lease but subject to the same conditions and exceptions. Section 6. Cumulative Rights. No delay on the part of the holder of this Note in the exercise of any power or right under this Note shall operate as a waiver thereof, nor shall a single or partial exercise of any such power or right. The remedies provided to Holder herein are cumulative of any other rights and remedies available at law or in equity and enforcement by the holder of this Note shall not constitute any election by it of remedies so as to preclude the exercise of any other remedy available to it. Section 7. Waiver. Borrower and each and other party, if any, ever liable for the payment of any sue of money payable or this Note, jointly and severally waive demand, presentment, protest, notice of nonpayment, dishonor and notice of dishonor, notice of intention to accelerate, notice of protest, notice of acceleration and any and all lack of diligence or any delay in collection or the filing of suit hereon which may occur, and agree that their liability on this Note shall not be affected by any renewal or extension in the time of payment hereof or by any indulgences, and hereby consent to any and all 3 42 renewals, extensions or indulgences, regardless of the number of such renewals, extensions or indulgences. Section 8. Attorneys' Fees and Costs. If a Default shall occur and thereafter this Note is placed in the hands of an attorney for collection, or if this Note is collected in whole or in part through legal proceedings of any nature, then and in any such case, Borrower promises to pay all reasonable costs of collection, including but not limited to reasonable attorneys' fees incurred by the holder hereof on account of such collection, whether or not suit is filed. Section 9. Notices. Any notice or other communication permitted or required to be given hereunder by one party to the other shall be given in accordance with the Lease. If the Holder is not a party to the Lease, the Holder agrees to provide Borrower all notice information reasonably requested by Borrower. SECTION 10. GOVERNING LAW. THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THE CONSTRUCTION, VALIDITY, ENFORCEMENT, AND INTERPRETATION OF THIS NOTE. Section 11. Headings; Construction. The headings of the sections of this Note are inserted for convenience only and shall not be deemed to constitute a part hereof, words used herein of any gender shall be construed to include any other gender where appropriate, and words used herein which are either singular or plural shall be construed to include the other where appropriate. Section 12. Successors and Assigns. All of the covenants, stipulations, promises, and agreements in this Note contained by or on behalf of Borrower shall bind its successors and assigns, whether so expressed or not; provided, however, that Borrower may not, without the prior consent of Holder, assign any rights, duties, or obligations under this Note except in connection with an assignment of Borrower's rights, obligations and duties under the Lease to the extent permitted thereunder and under the Stipulation. All rights, duties and privileges of Holder under this Note shall insure to the benefit of any successors and assigns, whether in whole or in part, of Holder. SECTION 13. Payments. Unless otherwise directed in writing by Holder, Borrower shall make all payments or prepayments on this Note in accordance with the provisions of Section _ of the Lease. All payments received in respect of this Note shall be applied first, to discharge any amounts owing under Section 8 hereof; second, to discharge any obligations owing under Section 5(b) hereof; third, to the payment of accrued and unpaid interest; fourth, to the payment of any Principal due and owing; and fifth, to the prepayment of Principal in the inverse order of maturity in accordance with Section 3 hereof. 4 43 IN WITNESS WHEREOF, the undersigned has executed this Note on the day and year first above written. CONTINENTAL AIRLINES, INC. [Debtor-in-Possession] By: ------------------------ Name: Title: [Promissory Note] 5 44 EXHIBIT B MODIFICATIONS Modifications applicable to each aircraft can summarized in the following categories: Aging Any act associated with Continental's FAA mandated Aging Aircraft Program which support continuing structural airworthiness of aircraft as they age beyond their original design goal by specifying a minimum acceptable level of structural maintenance. This program will include implementation of airworthiness directives, service bulletins, and corrosion control methods. Avionics Addition of systems and/or improvements to the aircraft not affiliated with the Aging Aircraft program, which would include TCAS (Traffic-alert Collision Avoidance System), Windshear detection systems, ACARS (Aircraft Communication, Addressing and Reporting System), Teleflex Cargo Landing System, Fire Containment Systems (specifically insulation of cargo holds). New Image/ Transformation of aircraft interiors and exteriors to Identity Continental's New Image/Identity Program. Exterior Modifications consist of painting the aircraft. Interior Modifications include 1) carpeting of floors, 2) repainting (or replacement of decorative material) of sidewalls, doors, bins, seat shrouds, toilet shrouds and surfaces (walls, bulkheads, dividers, ceilings) of cabin, galleys and lavatories, 3) leather or cloth exteriors and cushions for seats, 4) replacement of interior lights and aisle path lighting, 5) placards (signage), 6) interior upgrades (hot galleys, closets, required seat replacements and overhead bins), and 7) other miscellaneous improvements (seat track covers, window shades, and curtains). 6 EX-10.49 3 ASSIGNMENT AND ASSUMPTION AGREEMENT 1 EXHIBIT 10.49 ASSIGNMENT AND ASSUMPTION AGREEMENT This ASSIGNMENT AND ASSUMPTION AGREEMENT dated as of January 31, 1997 by and between USL CAPITAL CORPORATION, a Delaware corporation ("USL Capital"), and AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP ("Airlease"). W I T N E S E T H WHEREAS, USL Capital, Airlease and Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.) are party to that certain Trust Agreement dated as of August 15, 1988 (the "Trust Agreement") as more particularly described on Annex 1 attached hereto; WHEREAS, pursuant to that certain Asset Purchase Agreement dated as of January 31, 1997 by and between USL Capital and Airlease (the "Agreement"), USL Capital desires to transfer to Airlease, and Airlease desires to acquire from USL Capital, that certain trust certificate (the "Certificate") evidencing a 50% interest in the trust estate under the Trust Agreement and USL Capital's interest in the Trust Agreement and all agreements ancillary to the Trust Agreement (the "Related Agreements"); WHEREAS, Article XIV of the Trust Agreement provides that USL Capital may sell or otherwise transfer its interest in the Trust Agreement and the Related Agreements, provided that the requirements of said Article XIV have been complied with; and WHEREAS, in order to effect such transfer, Article XIV of the Trust Agreement requires an agreement to the following effects. NOW THEREFORE, in consideration of the transfer contemplated hereby and other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, USL Capital and Airlease do hereby agree as follows: 1. USL Capital assigns and transfers to Airlease, and Airlease accepts the assignment and transfer of (the "Assignment"), all of USL Capital's right, title and interest in, to and under the Certificate, the Trust Agreement the Related Agreements and the Books and Records (as such term is defined in the Agreement) relating to the Transaction (as such term is defined in the Agreement), and Airlease assumes and undertakes to perform any and all of USL Capital's liabilities or obligations of any kind or nature, whether absolute contingent, accrued, known or unknown, due or to become due, or recourse or nonrecourse (the "Liabilities") arising thereunder (except to the extent that any such Liability shall have accrued, or shall arise from facts or circumstances occurring, on or before the date hereof). USL Capital represents that its right, title and interest in, to and under the Certificate, Trust Agreement and 1 2 Related Agreements are free and clear of all liens, encumbrances or any interests of any third party (excepting any liens permitted under the Lease (as such term is defined in the Trust Agreement)). 2. Airlease shall henceforth be deemed to be a party to the Trust Agreement and the Related Agreements to which USL Capital is a party and agrees to be bound by their terms. 3. Airlease hereby represents and warrants that the Assignment will not cause an Owner Participant Event of Default (as defined in the Trust Agreement). 4. This Assignment and Assumption Agreement shall be governed by and construed in accordance with the laws of the State of California. [Remainder of page intentionally left blank] 2 3 IN WITNESS WHEREOF, USL Capital and Airlease have caused this Assignment and Assumption Agreement to be executed as of the date first above written. USL CAPITAL CORPORATION, a Delaware corporation By: /s/ F. Bruce Kulp Name: F. Bruce Kulp Title: Chairman and Chief Executive Officer AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP By: AIRLEASE MANAGEMENT SERVICES, INC., its General Partner By: /s/ David B. Gebler Name: David B. Gebler Title: Chairman S-1 4 Annex 1 to Assignment and Assumption Agreement Description of Trust Agreement Trust Agreement dated as of August 15, 1988 between Taurus Trust Company (formerly known as Trust Company for USL, Inc.), as trustee, and Airlease Ltd., a California Limited Partnership, and USL Capital Corporation, as beneficiaries. EX-10.50 4 LEASE WITH TRANS WORLD AIRLINES, INC. 1 EXHIBIT 10.50 LEASE Dated as of March 15, 1984 Between DC-9T-III, Inc., as Lessor and TRANS WORLD AIRLINES, INC., as Lessee _____________________________ One McDonnell Douglas DC-9-82 Aircraft 2 TABLE OF CONTENTS TO LEASE AGREEMENT Section 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 2. Acceptance Under Lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 3. Term and Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Term for Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Basic Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Supplemental Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Payment to Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Late Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Section 4. Lessor's Representations and Warranties; Certain Agreements of Lessee . . . . . . . . . . . . . . . . . . . 9 Lessor's Representations and Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Certain Agreements of Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Certain Covenants of Lessor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Section 5. Return of Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Condition Prior to Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Maintenance Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Inspections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Return Delivery Flight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Replacement Engine upon Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Failure to Return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Section 6. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Section 7. Registration, Maintenance and Operation; Possession; Insignia . . . . . . . . . . . . . . . . . . . . . . . 14 Registration, Maintenance and Operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Possession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Insignia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 8. Replacement and Pooling of Parts; Alterations, Modifications and Additions . . . . . . . . . . . . . . . . 19 Replacement of Parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Pooling of Parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Alterations, Modifications and Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 9. Voluntary Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Termination During Initial Lease Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Termination for Obsolescence or Surplusage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 10. Loss; Destruction; Requisition; etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Event of Loss with Respect to the Aircraft or the Airframe During Initial Lease Period . . . . . . . . . . . . 24 Event of Loss with Respect to the Aircraft or the Airframe During Base Lease Period or any Renewal Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
i 3 Event of Loss with Respect to an Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Conveyance of Replacement Airframe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Application of Payments from Governmental Authorities for Requisition of Title . . . . . . . . . . . . . . . . 29 Requisition for Use by the Government of the Airframe and the Engines Installed Thereon . . . . . . . . . . . 29 Requisition for Use by the Government of an Engine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Application of Payments During Existence of Event of Default . . . . . . . . . . . . . . . . . . . . . . . . . 30 Section 11. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Airlines Public Liability and Property Damage Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Insurance Against Loss or Damage to Aircraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Proceeds of Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Reports, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Insurance for Own Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 General Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 12. Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 13. Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 14. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Failure to Pay Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Failure to Carry Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Public Liability Insurance not in Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Failure to Perform Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Incorrect Representation or Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Entry of a Decree in Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Commencement of a Voluntary Case in Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Undischarged Final Judgment in Excess of $1,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Acceleration of Indebtedness Exceeding $5,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Failure to Remain Air Carrier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Voluntary Suspension of Airline Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 15. Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Return of Airframe and Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Sale of Airframe or Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Liquidated Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 16. Federal Bankruptcy Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 17. Further Assurances; Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 18. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 19. No Setoff; Counterclaim; etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 20. Purchase Option and Renewal Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Purchase Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Renewal Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Determination of Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ii 4 Section 21. Not Applicable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 22. Lessor's Right to Perform for Lessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 23. Maintenance of Certain Engines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 24. Investment of Security Funds; Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 EXHIBIT A - Form of Lease Supplement EXHIBIT B - Stipulated Loss Schedule EXHIBIT C - Termination Schedule EXHIBIT D - List of Permitted Air Carriers
iii 5 LEASE AGREEMENT THIS LEASE AGREEMENT dated as of March 15, 1984, between DC-9T-III, Inc , a Delaware corporation, with a place of business at United Technologies Building, Hartford, Connecticut and its successors and assigns ("Lessor"), and TRANS WORLD AIRLINES, INC., a Delaware corporation with its principal place of business at 605 Third Avenue, New York, New York 10158 ("Lessee" or "TWA"). WITNESSETH: Section 1. Definitions Unless the context otherwise requires, the following terms shall have the following meanings for all purposes of this Lease Agreement and shall be equally applicable to both the singular and the plural forms of the terms herein defined: "Act" means the Federal Aviation Act of 1958, as amended from time to time. "Agreement to Manufacture and Lease" means the Agreement to Manufacture and Lease dated October 29, 1982 between Lessee and Manufacturer. "Aircraft" means the Airframe delivered and leased hereunder (or any Replacement airframe substituted for such Airframe hereunder) together with the two Engines described under a Lease Supplement covering such Airframe (or any Engine substituted for any of such Engines hereunder), whether or not any of such initial or substituted Engines may from time to time be installed on such Airframe or may be installed on any other airframe. The term "Aircraft" shall also include any Replacement Aircraft. "Airframe" means (i) the McDonnell Douglas DC-9-82 aircraft (except Engines or engines from time to time installed thereon) leased hereunder by Lessor to Lessee under a Lease Supplement; and (ii) any and all Parts so long as the same shall be incorporated or installed in or attached to such aircraft, or so long as title thereto shell remain vested in Lessor in accordance with the terms of Section 8, after removal from such aircraft. The term "Airframe" shall also include any Replacement Airframe substituted as contemplated by Section 10(b). Except as otherwise set forth herein, at such time as a Replacement Airframe shall be so substituted, such replaced Airframe shall cease to be the Airframe hereunder. 6 "Base Lease Period" means a period from the day after the end of the Initial Lease Period for the Aircraft to but not including the eighteenth anniversary of the Delivery Date of the Aircraft. "Base Loss Cost" for the Aircraft means $23,840,000 and for any Engine means 2,000,000. "Basic Rent" for the Aircraft means the rent payable for the Aircraft to pursuant to Section 3(b) and, during any Renewal Period, Renewal Rent. "Business Day" means any day other than a Saturday, Sunday or holiday scheduled by law for any commercial banking institution in New York, New York. "Delivery Date" for the Aircraft means the date, which shall be a Business Day other than a day on which the FAA is authorized or required by law to remain closed, on which the Aircraft is delivered to and accepted by, Lessor, and the Aircraft is leased by Lessor to Lessee hereunder, which shall be the date of the Lease Supplement covering the Aircraft. "Engine" means (i) each of the two Pratt & Whitney Aircraft Model JT8D-217A engines listed by manufacturer's serial numbers in a Lease Supplement and originally installed on the Airframe covered by such Lease Supplement whether or not from time to time thereafter installed on such Airframe or installed on any other airframe or on any other aircraft; and (ii) any Replacement Engine which may from time to time be substituted as contemplated by Sections 5, 7(b), 10(b) or 10(c) for an Engine leased hereunder; together in each case with any and all Parts incorporated or installed in or attached thereto or any and all Parts removed therefrom so long as title thereto shall remain vested in Lessor in accordance with the terms of Section 8 after removal from such Engine. Except as otherwise set forth herein, at such time as a Replacement Engine shall be so substituted, such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means, as of any date of determination, all Engines then leased hereunder. Each Engine has or at the time it becomes a Replacement Engine hereunder will have at least 750 rated take-off horsepower or the equivalent of such horsepower. "Event of Default" has the meaning specified in Section 14. "Event of Loss" with respect to any property means any of the following events with respect to such property: (i) loss of such property or the use thereof -2- 7 due to theft, disappearance, destruction, damage beyond repair or rendition of such property permanently unfit for normal use for any reason whatsoever; (ii) any damage to such property which results in the receipt of insurance proceeds with respect to such property on the basis of a total loss; (iii) the condemnation, confiscation or seizure of, or requisition of title to or use of, such property, other than a requisition for use by the United States Government or any instrumentality or agency thereof (unless and until such property shall have been modified or adapted in such manner as would render reconversion of such property for use in normal commercial passenger service impractical or uneconomical); (iv) as a result of any rule, regulation, order or other action by the FAA, the Civil Aeronautics Board or other governmental body having jurisdiction, the use of such property in the normal course of interstate air transportation of persons shall have been prohibited for a period of six consecutive months, unless Lessee, prior to the expiration of such six (6) month period, shall have undertaken and shall be diligently carrying forward all steps which are necessary or desirable to permit the normal use of such property by Lessee or, in any event, if such use shall have been prohibited for a period of 12 consecutive months; (v) with respect to an Aircraft or Engine, the operation or location of such Aircraftor Engine, while under requisition for use by the United States Government or any instrumentality or agency thereof, in any area excluded from coverage by any insurance policy in effect with respect to such Aircraft or Engine required by the terms of Section 11 hereof, if Lessee shall be unable to obtain indemnity in lieu thereof from the United States of America; or(vi) with respect to the Aircraft or any Engine, the opinion required pursuant to Section 4(q) of the Participation Agreement shall not be to the effect contemplated by such Section and Lessee shall fail to take such action as shall enable a new opinion to the effect so contemplated to be delivered within thirty (30) days after the date of such first opinion. An Event of Loss with respect to the Aircraft shall be deemed to have occurred if an Event of Loss occurs with respect to the Airframe. "FAA" means the Federal Aviation Administration or a successor agency. "Incentive Rate" means a fluctuating rate equal to the prime rate quoted from time to time by The Chase Manhattan Bank, National Association, plus 1-1/2%. "Independent Appraisal" means an appraisal mutually agreed to by two nationally recognized -3- 8 independent aircraft appraisers, one of which shall be chosen by Lessor and one by Lessee, or, if such appraisers cannot agree on the amount of such appraisal, an appraisal arrived at by a third nationally recognized independent aircraft appraiser chosen by the mutual consent of such two appraisers, and paid for by Lessee, provided that, if either party shall fail to appoint an appraiser within 15 days after a written request to do so by the other party, or if such two appraisers cannot agree on the amount of such appraisal and fail to appoint a third appraiser within thirty (30) days after the date of the appointment of the second of such appraisers, then either party may apply to any court having jurisdiction to make such appointment. An "Independent Appraisal" of the fair market value or fair market rental value of the Aircraft shall mean an appraisal which assumes that the Aircraft is unencumbered by this Lease or any renewal or purchase option hereunder and which assumes that the Aircraft has been maintained in all respects in accordance with the terms of this Lease (whether or not it is in fact in such condition) and which is net of selling and transportation charges, and which would be obtained in an arms-length transaction between an informed and willing lessor or seller, as the case may be, and an informed and willing lessee or purchaser, as the case may be, both under no compulsion to lease or sell and purchase, as the case may be. "Initial Lease Period" means a period of five years from the Delivery Date for the Aircraft to but excluding the fifth anniversary of such Delivery Date. "Lease Agreement", "this Lease Agreement", "this Lease", "this Agreement", "herein", "hereunder", "hereby" or other like words mean this Lease Agreement as originally executed or as modified, amended or supplemented pursuant to the applicable provisions hereof, including, without limitation, supplementation hereof by one or more Lease Supplements entered into pursuant to the applicable provisions hereof. "Lease Supplement" means a Lease Supplement, substantially in the form of Exhibit A hereto, entered into between Lessor and Lessee for the purpose of leasing an Aircraft, Airframe or an Engine under and pursuant to the terms of this Lease Agreement, including, without limitation, any amendment thereto entered into subsequent to the Delivery Date of such Aircraft. "Lessor's Warranty" means, as to any property, a warranty by Lessor that: (i) Lessor has received, or will receive, whatever title to such property was -4- 9 conveyed, or will be conveyed, to Lessor by the Manufacturer or by any other predecessor in interest to such property, as the case may be; and (ii) such property is free of Liens of any Person claiming by, through, or under Lessor which either (a) result from action taken by Lessor, other than with respect to its ownership of the Aircraft, or (b) result from action taken by Lessor other than action (1) permitted by this Lease or the Participation Agreement, (2) participated in or consented to by Lessee, or (3) taken by reason of the occurrence of an Event of Default hereunder. "Lien" means any mortgage, pledge, lien, charge, encumbrance, lease, exercise of rights, security interest or claim of any nature whatsoever. "Manufacturer" means McDonnell Douglas Corporation, a Maryland corporation, and its successors and assigns. "Material Adverse Change in Financial Condition" means the existence of an event of default, as such term may be defined in any then effective agreement, with respect to any material financial covenant in such agreement binding on Lessee, which has not been cured within the applicable cure period. "Participation Agreement" means that certain Participation Agreement dated as of the date hereof between Lessee and Lessor whereby, among other things, the Lessor agrees, subject to conditions specified therein, to purchase the Aircraft to be leased hereunder as therein provided. "Parts" means any and all appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature (other than complete Engines or engines), which may from time to time be incorporated or installed in or attached to the Airframe or any Engine. "Permitted Air Carrier" has the meaning set forth in Section 7(b). "Person" means any individual, corporation, partnership, trust, unincorporated organization or government, or any agency or political subdivision thereof. "Pratt & Whitney Aircraft" means Pratt & Whitney Aircraft Group of United Technologies Corporation, a Delaware Corporation, and its successors and assigns. -5- 10 "Renewal Period" means for the Aircraft, a period of one, two, three or four years commencing the day after the end of the Base Lease Period aa determined pursuant to Section 20(b) hereof. "Renewal Rent" means, the rent payable for the Aircraft pursuant to Section 20(b) hereof. "Rent" means Basic Rent, Renewal Rent and Supplemental Rent. "Replacement Aircraft" means the Aircraft of which a Replacement Airframe is part. "Replacement Airframe" means each McDonnell Douglas DC-9-82 aircraft (except Engines or engines from time to time installed thereon), the cockpit configuration of which is substantially the same as the Airframe which is being replaced, and which shall have been substituted as contemplated by Section 10(d) hereof, together with all Parts relating to such aircraft. "Replacement Engine" means each Pratt & Whitney Aircraft Model JT8D-217A engine (or engine of the same or, if Pratt & Whitney Aircraft no longer manufacturers such engines, another manufacturer of the same or an improved model), that has a value and utility at least equal to such Pratt & Whitney Aircraft engine and which may be installed on the Airframe without materially impairing the value or utility of the Aircraft, and is certified for use on a McDonnell Douglas DC-9-80 aircraft, which shall have been leased hereunder as contemplated by Sections 5(e), 7(b), 10(b) or 10(c) hereof, together with all Parts relating to such engine. "Stipulated Loss Schedule" shall mean, in the case of the Aircraft and each Engine, the Stipulated Loss Schedule included as Exhibit B to this Lease, to which reference is made in determining the Stipulated Loss Value for the Aircraft or such Engine. "Stipulated Loss Value" for the Aircraft or any Engine, as of any date of computation, shall mean an amount equal to Base Loss Cost for the Aircraft or such Engine multiplied by either (a) if the date of computation falls on a date on which a Basic Rent payment for the Aircraft becomes due, or, in the case of an Engine, on the date on which a Basic Rent payment becomes due for the Aircraft of which such Engine was a part, the percentage specified in the Stipulated Loss Schedule opposite the month corresponding to the Basic Rent payment date for the Aircraft or such Engine, or -6- 11 (b) if the date of computation falls on a day other than one on which a Basic Rent payment for the Aircraft becomes due, or, in the case of an Engine, on a date other than one on which a Basic Rent payment becomes due for the Aircraft of which such Engine was a part, the percentage derived by linear interpolation (by reference to the actual number of days) between the percentages specified in the Stipulated Loss Schedule for the Aircraft or such Engine opposite the month of the Basic Rent payment immediately preceding and the month of the Basic Rent payment immediately following the date of computation, less the amount of Basic Rent multiplied by a fraction, the denominator of which shall be 30 and the numerator of which shall be 30 minus the number of days from and including the date of computation to but excluding the Basic Rent payment date next succeeding the termination. "Supplemental Rent" means all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees to pay hereunder or under the Participation Agreement to Lessor or others, including, without limitation, payments of Stipulated Loss Value, any interest payable with respect to payments pursuant to Section 3(e) hereunder and the amount of any loss of principal realized as the result of any investments made pursuant to Section 24 hereunder. "Term" means the period for which Lessee leases the Aircraft pursuant to this Lease Agreement. "Termination Value" means for the Aircraft, as of any date of computation, an amount equal to Base Loss Cost for the Aircraft multiplied by either (a) if the date of computation falls on a date on which a Basic Rent payment for the Aircraft becomes due, the percentage specified in Exhibit C hereto opposite the month corresponding to the Basic Rent payment date for the Aircraft, or (b) if the date of computation falls on a day other than one or which a Basic Rent payment for the Aircraft becomes due, the percentage derived by linear interpolation (by reference to the actual number of days) between the percentages specified in Exhibit C opposite the month of the Basic Rent payment immediately preceding and the month of the Basic Rent payment immediately following the date of computation less the amount of Basic Rent multiplied by a fraction, the denominator of which shall be 30 and the numerator of which shall be 30 minus the number of days from and including the date of computation to but excluding the Basic Rent payment date next succeeding the termination date. -7- 12 Section 2. Acceptance Under Lease Lessor hereby agrees (subject to satisfaction or waiver of the conditions set forth in Section 4 of the Participation Agreement) to purchase and accept delivery of the Aircraft from Manufacturer and simultaneously to lease to Lessee hereunder, and Lessee hereby agrees to lease from Lessor hereunder, the Aircraft as evidenced by the execution by Lessor and Lessee of a Lease Supplement leasing the Aircraft hereunder. Lessor shall authorize one or more employees of Lessee, designated by Lessee, as the authorized representative or representatives of Lessor to accept delivery of the Aircraft. Lessee hereby agrees that such acceptance of delivery by such authorized representative or representatives on behalf of Lessor shall, without further act, irrevocably constitute acceptance by Lessee of the Aircraft for all purposes of this Agreement. Section 3. Term and Rent (a) Term for Aircraft. The Term for the Aircraft shall consist of the following period: (i) the Initial Lease Period; (ii) upon written notice given by Lessee to Lessor on or before October 17, 1987 Lessee may elect to renew the lease for the Base Lease Period; and (iii) upon written notice given at least eight (8) months prior to the end of the Base Lease Period for the Aircraft, Lessee may elect to renew the Lease for a Renewal Period as specified herein. (b) Basic Rent. For the Aircraft, Lessee agrees to pay Basic Rent in installments monthly in advance at the rate specified in Section 4 of the Lease Supplement relating to the Aircraft commencing on the Delivery Date thereof, and on the date in each succeeding calendar month corresponding to such Delivery Date or, if any month has no such corresponding date, on the last day of such month. (c) Supplemental Rent. Lessee also agrees to pay to Lessor or to whomsoever shall be entitled thereto, any and all Supplemental Rent promptly as the same shall become due and owing, and in the event of any failure on the part of Lessee to pay any Supplemental Rent, Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. Supplemental Rent shall include, without limitation, all amounts payable by Lessee under Section 3(e) hereof and under Sections 8 and 11 of the Participation Agreement when and as the same shall become due. (d) Payment to Lessor. All Rent shall be paid by Lessee to Lessor to its General Account No. 38137504 at Citibank, N.A., 399 Park Avenue, New York, New York, or as Lessor may otherwise direct, in immediately available funds in U.S. Dollars by 11 A.M. New York time on the date that such payment is due if -8- 13 such day is a Business Day or, if such day is not a Business Day, the next preceding Business Day. (e) Late Payments. As to any (i) amount due under this Lease or the Participation Agreement which is not paid when due as herein provided; or (ii) advance made by Lessor of any amount required to be paid by Lessee as herein provided and not so paid by Lessor, Lessee shall pay on demand to Lessor aa Supplemental Rent, interest thereon from either the due date thereof or the date demanded by Lessor, as the case may be (as to amounts referred to in clause (i)) or the date advanced by Lessor (as to amounts referred to in clause (ii)), as the case may be, to the date paid at the Incentive Rate. Section 4. Lessor's Representations and Warranties; Certain Agreements of Lessee (a) Lessor's Representations and Warranty. Lessor hereby makes Lessor's Warranty and represents and warrants that it is a "citizen of the United States" as defined in Section 101(16) of the Act. EXCEPT FOR THE FOREGOING WARRANTIES AND THE REPRESENTATIONS AND WARRANTIES OF LESSOR SET FORTH IN SECTION 12 OF THE PARTICIPATION AGREEMENT, LESSOR NEITHER MAKES NOR SHALL BE DEEMED TO HAVE MADE OR TO MAKE ANY WARRANTIES, REPRESENTATIONS OR GUARANTEES OF ANY KIND, AND LESSEE HEREBY WAIVES, RELEASES AND RENOUNCES ANY WARRANTIES, REPRESENTATIONS OR GUARANTEES, LIABILITIES AND OBLIGATIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE AIRCRAFT, THE AIRFRAME, OR ANY ENGINE, PART OR OTHER THING DELIVERED, LEASED, SOLD OR TRANSFERRED HEREUNDER (AND WHETHER OR NOT ARISING OUT OF THE DELIVERY, USE, OPERATION, LEASE, SUBLEASE, TRANSFER, POSSESSION, STORAGE, MODIFICATION, ALTERATION, MAINTENANCE, REPAIR OR OTHER DISPOSITION THEREOF), INCLUDING, BUT NOT LIMITED TO (i) THE AIRWORTHINESS, VALUE, CONDITION, DESIGN, OPERATION OF OR THE QUALITY OF THE MATERIAL OR WORKMANSHIP IN, OR TITLE TO, OR ANY DEFECT IN THE AIRCRAFT, THE AIRFRAME, OR ANY ENGINE, PART OR OTHER THING DELIVERED, LEASED, SOLD OR TRANSFERRED HEREUNDER; (ii) ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR FOR A PARTICULAR PURPOSE, AGAINST INFRINGEMENT OR THE LIKE, OR ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE; (iii) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT WITH RESPECT TO THE AIRCRAFT, THE AIRFRAME, OR ANY ENGINE, PART OR OTHER THING DELIVERED, LEASED, SOLD OR TRANSFERRED HEREUNDER, WHETHER OR NOT IN STRICT OR ABSOLUTE LIABILITY OR ARISING FROM THE NEGLIGENCE OF LESSOR, ACTUAL OR IMPUTED; OR (iv) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF, OR DAMAGE TO, THE AIRCRAFT, THE AIRFRAME, OR ANY ENGINE, PART OR OTHER THING, FOR ANY LOSS OF USE, REVENUE OR PROFIT, OR OTHER DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES. Nothing in this Section 4(a) shall be deemed to modify or otherwise affect the respective rights and obligations of the Lessee and of the Manufacturer (as manufacturer) under the Agreement to Manufacture and Lease. -9- 14 (b) Certain Agreements of Lessee. Lessee agrees with Lessor that it shall perform the agreements, covenants and indemnities of Lessee set forth in Sections 7, 8, 10, 11 and 14 of the Participation Agreement as fully and to the same extent and with the same force and effect as if set forth in full in this Section 4(b). (c) Certain Covenants of Lessor. (i) Lessor covenants with Lessee that, so long as no Event of Default or event, which with the passage of time or the giving of notice, or both, would become an Event of Default, shall have occurred, Lessee's right to use and possession of the Aircraft shall not be interrupted by voluntary acts or omissions of Lessor, or by persons claiming through Lessor resulting from actions taken by Lessor, in each case other than as permitted by this Lease or the Participation Agreement or participated in or consented to by Lessee and not arising from Lessor's ownership of the Aircraft, it being understood and agreed that, Lessee shall not thereby be relieved of any obligation, covenant or agreement of Lessee set forth herein or in the Participation Agreement (including, without limitation, those of Section 6 hereof and of Section 10 of the Participation Agreement. (ii) throughout the Term, Lessor shall (A) not knowingly create any Lien on the Aircraft (x) which results from or constitutes a claim against Lessor not relating to or arising directly or indirectly as a result of its interest in the Aircraft, the Airframe or any Engine or of the transactions contemplated by this Lease, or the Participation Agreement or (y) covered by Lessor's Warranty, (B) as soon as reasonably practical after it becomes aware of any such Lien (whether such Lien arose with or without the knowledge of Lessor) on the Aircraft, discharge or remove the same unless, where such Lien does not affect Lessee's quiet possession and enjoyment of the Aircraft, Lessor is contesting such Lien in good faith by appropriate proceedings as long as such proceedings will not adversely affect the continued quiet possession and enjoyment of the Aircraft by Lessee and will not result in the sale, forfeiture or loss of the Airframe or any Engine or interest therein during its continuance, and (C) pay when due all taxes of Lessor the non-payment of which will result in a Lien against the Aircraft (unless, where such Lien does not affect Lessee's quiet possession and enjoyment of the Aircraft, the liability to pay and/or the amount of such taxes are being disputed or contested by Lessor in good faith by appropriate proceedings so long aa such proceedings will not adversely affect the continued quiet possession and enjoyment of the Aircraft by Lessee and.will not result in the sale, forfeiture or loss of the Airframe or any Engine or interest therein during its continuance), other than taxes for which Lessor is entitled to indemnification under this Lease or the Participation Agreement. -10- 15 Section 5. Return of Aircraft Following the termination of this Lease in any circumstances other than as a result of an Event of Loss, within four days after such termination, or as otherwise agreed, Lessee shall, at its own expense, redeliver the Aircraft to Lessor at Manufacturer's facility in Long Beach, California. All costs associated with the return flight shall be for the account of Lessee. (a) Condition Prior to Return. Immediately prior to return of the Aircraft to Lessor, the Aircraft shall have a currently valid Standard FAA Certificate of Airworthiness. The Aircraft condition shall allow for normal wear and tear. The Aircraft shall be clean by normal airline operating standards and shall have installed thereon all Engines, equipment, accessories or Parts as when delivered to Lessee or replacements therefor and additions and improvements thereto, as provided in Sections 7 and 8 herein, and shall be in the same interior configuration as when delivered to Lessee or as otherwise mutually agreed. All Lessee exterior markings shall have been painted over in matching exterior colors. (b) Maintenance Status. The maintenance status of the Aircraft so returned shall be as follows: (i) all FAA Airworthiness Directives applicable to the Aircraft requiring compliance on or before the return date shall have been complied with; (ii) at time of return, the Aircraft shall be in its "as is" maintenance cycle condition within Lessee's then current FAA approved maintenance program; and (iii) if requested by Lessor, Lessee shall perform or cause to be performed a single visit "C" check within thirty (30) days prior to the return of the Aircraft and such additional overhaul, repair or maintenance work which Lessor in its Judgment deems necessary to bring the Aircraft up to a condition not greater than half-time. Lessor will pay Lessee an amount equal to the cost of such single visit "C" check and such additional overhaul, repair or maintenance work. Lessee shall not exchange Engines or time/cycle controlled components on the Aircraft about to be returned to Lessor for engines or time/cycle controlled components on other aircraft or in Lessee's possession which will remain in Lessee's possession after such return in order to reduce or avoid future maintenance requirements. (c) Inspections. Upon termination of the Lease, Lessee shall provide up to three (3) days for a ground functional -11- 16 inspection including engine runs at Lessee's main base of operations. Such inspections shall be conducted during normal working hours, unless otherwise agreed by both parties. Any equipment noted during such inspections not complying with normal airline standards for continued usage in passenger service shall be corrected by Lessee. All costs associated therewith shall be to the account of Lessee. (d) Return Delivery Flight. During the return delivery flights, a pilot of Manufacturer, in conjunction with Lessee's flight crew, will accomplish a flight functional to demonstrate the airworthiness of the Aircraft and proper functioning of all systems and components. Any discrepancy or malfunction detected of an airworthiness or operational nature by normal airline standards shall be corrected. All costs associated therewith shall be to the account of Lessee. (e) Replacement Engine upon Return. In the event that any engine not owned by Lessor shall be installed on the Airframe returned in accordance with this Section 5(a) hereof, such engine shall comply with the definition of a Replacement Engine, suitable for installation and use on the Airframe and fully compatible with other Engines. At the time of such replacement such engine shall have performance and durability characteristics and a value, condition and utility at least equal to the Engine it replaced hereunder, assuming such Engine was maintained in accordance with the requirements of this Lease, including this Section 5, which are applicable to Engines. Upon return of the Aircraft of which the Airframe is a part, Lessee shall duly convey to Lessor good and marketable title to any such replacement engines, free and clear of all Liens whatsoever; and, upon such conveyance, Lessee, at its own expense, will (i) furnish Lessor with a full warranty bill of sale, in form and substance satisfactory to Lessor, with respect to such replacement engines; (ii) furnish Lessor with such evidence of Lessee's title to such replacement engines, including an opinion of Lessee's counsel, and of the condition of such replacement engines may be duly and properly vested in Lessor to the same extent as the Engine replaced thereby. Upon full compliance by Lessee with its obligations hereunder, at Lessee's expense, Lessor will transfer to Lessor, without recourse or warrant, (except for Lessor's Warranty and subject to the disclaimer set forth in Section 4(a) hereof), all Lessor's right, title and interest in and to an Engine constituting part of the Aircraft but not installed on the Airframe at the time of the return of the Airframe. (f) Failure to Return. If Lessee shall, for any reason whatsoever, fail to return the Aircraft or any Engine at the time specified herein, the obligations of Lessee as provided in this Lease shall continue in effect with respect to the Aircraft or such Engine until the Aircraft or such Engine is returned to Lessor, provided that this Section 5(f) shall not be construed as (A) permitting Lessee to fail to meet its obligation -12- 17 to return the Aircraft and Engines in accordance with the requirements of this Lease or (B) relieving Lessee of any legal responsibility for direct or consequential damages suffered by Lessor by reason of such failure. (g) Documentation. Documentation for the Aircraft upon return shall be as follows: (i) all documentation shall be made available by Lessee for review by Lessor seven (7) days prior to the return of the Aircraft. Applicable Maintenance, Repair, Wiring Diagram, Weight and Balance, Flight Crew Operating, FAA approved Flight Manuals, and other documentation as listed in the Agreement to Manufacture and Lease, will be provided with the Aircraft at time of return; and (ii) upon acceptance of the Aircraft by Lessor, Lessor agrees to execute a receipt for such Aircraft in a mutually acceptable form. (iii) upon the return of the Airframe either at the end of the Term or pursuant to Section 9 hereof, each fuel tank and oil tank shall contain the same quantity of fuel and oil as was contained in the fuel and oil tanks when the original Airframe was delivered to Lessee on the Delivery Date of the Aircraft, or, in the case of differences in any such quantities, an appropriate adjustment will be made by payment at the then current market price of fuel or oil, as the case may be. If Lessor requests the single visit "C" check and additional work as may be required as noted in paragraph (b)(iii) above, Lessor and Lessee agree that the Term will be extended by the amount of time required by Lessee to accomplish such "C" check and additional work and Lessor agrees to waive the payment of Basic Rent for such extension period. All other terms and conditions of the Lease Agreement shall remain in full force and effect during such extension. (h) Insurance. In connection with inspections of the Aircraft and the return delivery flights, Lessor shall be named as additional insured under Lessee's Third Party and Passenger Liability insurance and Lessee shall maintain the following insurance in the minimum amounts noted (and otherwise as provided in Section 11 hereof): (i) Hull Insurance (in the amount of Stipulated Loss Value at the last day of the Term before such return). -13- 18 (ii) Third Party and Passenger Liability coverage (in the amount of Lessee's current coverage but not less than U.S. $100,000,000). The hull insurance coverage set forth above shall contain a waiver of subrogation by Lessee's insurance carrier of any rights it may have against Lessor. Prior to the inspections and return delivery flight set forth herein, Lessee shall supply evidence satisfactory to Lessor of the insurance coverage set forth above. Section 6. Liens Lessee will not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Airframe or any Engine, title thereto or any interest therein or in this Lease or any interest of Lessor in any Rent except (i) the respective rights of Lessor and Lessee as herein provided; (ii) the rights of others under agreements or arrangements to the extent expressly permitted by the terms of Sections 7(b) and 8(b); (iii) Liens covered by Lessor's Warranty; (iv) Liens for taxes either not yet due or being contested in good faith (and for the payment of which adequate reserves have been provided) by appropriate proceedings so long as such proceedings, in Lessor's opinion, do not involve any unreasonable danger of the sale, forfeiture or loss of the Airframe or any Engine or interest therein; (v) materialmen's, mechanics', workmen's, repairmen's, employees' or other like liens arising in the ordinary course of business for amounts the payment of which is either not yet delinquent or is being contested in good faith (and for the payment of which adequate reserves have been provided) by appropriate proceedings so long as such proceedings do not involve any danger of the sale, forfeiture or lose of the Airframe or any Engine or interest therein; and (vi) Liens on Lessee's interest as Lessee under this Lease, arising out of judgments or awards against Lessee (for the payment of which adequate reserves have been provided with respect to which at the time an appeal or proceeding for review is being prosecuted in good faith and with respect to which there shall have been secured a stay of execution pending such appeal or proceeding after review. Lessee will promptly, at its own expense, take such action as may be necessary duly to discharge any such Lien not excepted above if the same shall arise at any time. Section 7. Registration, Maintenance and Operation; Possession; Insignia (a) Registration, Maintenance and Operation. Lessee, at its own cost and expense, shall: (i) forthwith upon the delivery thereof hereunder, cause the Aircraft to be duly registered, and at all times thereafter to remain duly -14- 19 registered, in the name of Lessor with the FAA pursuant to the Act; (ii) maintain, service, repair, overhaul, alter, modify, add to and test the Aircraft, the Airframe, and each Engine, and each other engine installed from time to time on the Airframe in accordance with its FAA approved maintenance program for McDonnell Douglas Model DC-9 Series 80 aircraft and Pratt & Whitney Aircraft Model JT8D-217A engines and comply with all service, inspection, maintenance, repair and overhaul regulations, directives and instructions which are made mandatory by the FAA upon United States operators of McDonnell Douglas Model DC-9 Series 80 aircraft and Pratt & Whitney Aircraft Model JT8D-217A engines so as to keep the Aircraft and Engines in as good operating condition as when delivered to Lessee hereunder, ordinary wear and tear excepted, and in such condition as may be necessary to enable the Standard Airworthiness Certification of the Aircraft to be maintained in good standing at all times under the Act; (iii) maintain all records, logs and other materials required by the FAA or any other governmental authority or agency having jurisdiction to be maintained in respect of the Aircraft, Airframe and each Engine; and (iv) promptly furnish to Lessor such information as may be required to enable Lessor to file any reports required to be filed by Lessor with any governmental authority because of Lessor's ownership of the Aircraft. Lessee shall pay for and provide all electric power, oil, fuel and lubricant consumed by and required for the operation of the Aircraft and any Engines, and all repairs, parts and supplies necessary therefor. Lessee agrees that the Aircraft and Engines will not be maintained, used or operated in violation of any law or any rule, regulation or order of any government or governmental authority having jurisdiction (domestic or foreign), or in violation of any airworthiness certificate, license or registration relating to the Aircraft or such Engine issued by any such authority. In the event that any such law, rule, regulation or order requires alteration of the Aircraft or any Engine, Lessee will conform thereto or obtain conformance therewith at no expense to Lessor and will maintain the Aircraft in proper operating condition under such laws, rules, regulations and orders; provided, however, that Lessee may, in good faith (after having delivered to Lessor a certificate signed by a responsible officer of Lessee stating the facts with respect thereto), contest the validity or application of any such law, rule, regulation or order in any reasonable manner which does not, in Lessor's opinion, materially adversely affect Lessor. Lessee also agrees not to operate, use or locate the Airframe or any Engine, or suffer the Airframe or any Engine to be operated, used or located, (i) in any area excluded from coverage by any insurance required by the terms of Section 11, except in the case of a requisition by the United States of America where Lessee obtains an indemnity (which need not be evidenced by written agreement) in lieu of such insurance from the United States of America against the risks and in the amounts required by Section 11 covering such areas; or (ii) in any recognized or, in Lessee's reasonable judgment, threatened area of hostilities unless fully covered to Lessor's satisfaction by war risk and -15- 20 allied perils insurance, or unless the Airframe or such Engine is operated or used under contract with the Government of the United States under which contract the Government assumes liability for any damage, loss, destruction or failure to return possession of the Airframe or such Engine at the end of the term of such contract or for injury to persons or damage to property of others; provided, however, that the Airframe or an Engine located in an area at the time it becomes a recognized or threatened area of hostilities may be flown from and through such area of hostilities to an area outside such area of hostilities. (b) Possession. Lessee will not, without the prior written consent of Lessor, sublease or otherwise in any manner deliver, transfer or relinquish possession of the Aircraft, Airframe or any Engine or install any Engine, or permit any Engine to be installed, on any airframe other than the Airframe; provided that, so long as no Event of Default (or event which would constitute an Event of Default but for the lapse of time or the giving of notice or both) shall have occurred and be continuing, and so long as Lessee shall comply with the provisions of Section 11 hereof, Lessee may, without the prior written consent of Lessor: (i) subject any Engine to normal interchange or pooling agreements or arrangements customary in the airline industry and entered into by Lessee in the ordinary course of its business with other United States certificated air carriers or with any "foreign air carrier" (as such term is defined in the Act) as to which there is in force a permit issued pursuant to Section 402 of said Act (any such United States certificated air carrier and any such foreign air carrier being hereinafter called a "Permitted Air Carrier"); provided that no transfer of the registration of such Engine shall be effected in connection therewith and so long as the terms of this Lease shall be observed and provided further that (A) no such agreement or arrangement contemplates or requires the transfer of title to such Engine, and (B) if Lessor's title to any such Engine shall be divested under any such agreement or arrangement, such divestiture shall be deemed to be an Event of Loss with respect to such Engine and Lessee shall comply with Section 10(c) in respect thereof; (ii) deliver possession of the Aircraft, Airframe or any Engine to the manufacturer thereof for testing or other similar purposes or to any organization for service, repair, maintenance or overhaul work on the Aircraft, Airframe or such Engine or any part thereof or for alterations or modifications in or additions to the Aircraft, Airframe or such Engine to the extent required or permitted by the terms of Sections 7(a) or 8(c); (iii) enter into a "wet" sublease with respect to the Aircraft in the ordinary course of Lessee's business -16- 21 pursuant to which Lessee retains exclusive control of the Aircraft, provides all maintenance and conducts all operations of such Aircraft; (iv) transfer possession of the Aircraft, Airframe or any Engine to the United States of America or any instrumentality or agency thereof in accordance with the Civil Reserve Air Fleet Program administered pursuant to Executive Order No. 10999, as amended, or any similar or substitute programs; (v) install an Engine on an airframe owned by Lessee free and clear of all Liens, except (A) those of the type permitted under clauses (iv), (v) and (vi) of Section 6, and those which apply only to the engines (other than Engines), appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment (other than Parts) installed on such airframe (but not to the airframe as an entirety), (B) Liens (including the Lien of the Indenture of Mortgage dated as of January 1, 1977, from Lessee to The Bank of New York as Trustee) which insofar as they relate to such Engine are subordinate to the rights of the Lessor hereunder, and (C) the rights of other Permitted Air Carriers under normal interchange agreements which are customary in the airline industry and do not contemplate, permit or require the transfer of title to the airframe or engines installed thereon; (vi) install an Engine on an airframe leased to Lessee or purchased by Lessee subject to a conditional sale or other security agreement; provided that such airframe is free and clear of all Liens except the rights of the parties to the lease or conditional sale or other security agreement covering such airframe which insofar as they relate to such Engine are subordinate to the rights of the Lessor hereunder and except Liens of the type permitted by clauses (A) and (B) of subparagraph (v) of this paragraph (b); (vii) install an Engine on an airframe owned by Lessee, leased to Lessee or purchased by Lessee subject to a conditional sale or other security agreement under circumstances where neither subparagraph (v) nor subparagraph (vi) of this paragraph (b) is applicable; provided, however, that prior to such installation, the Lessee shall convey or cause to be conveyed to the Lessor, as replacement for the Engine to be so installed, title to a Replacement Engine in the same manner as is provided in Section 10(c) for Engines suffering an Event of Loss, and the Lessee shall take all other action which would be required of it under said Section 10(c) if an Event of Loss had occurred with respect to such Engine, the Lessor not intending hereby to waive any right or interest it may have to or in such Engine under applicable law until compliance by the Lessee with Section 10(c); -17- 22 (viii) during the Base Lease Period but not during the Initial Lease Period, transfer possession of the Aircraft or the Airframe or an Engine to the United States of America or any instrumentality or agency thereof pursuant to a sublease a copy of which shall be furnished to Lessor; provided that the term of such sublease (including, without limitation, any option of the sublessee to renew or extend) shall not continue beyond the end of the Base Lease Period; (ix) during the Base Lease Period but not during the Initial Lease Period, sublease the Aircraft, or an Engine or the Airframe (together, in the case of the Airframe, with engines then installed on the Airframe) to any United States certificated air carrier or, if there has been no Material Adverse Change in Financial Condition, to any foreign air carrier listed in Exhibit D hereto, which sublessee shall not be the subject of a petition in bankruptcy filed under the Federal Bankruptcy laws or other insolvency laws now or hereafter in effect, for a term including, without limitation, any extension thereof, in the case of a United States certificated air carrier, not to exceed in the aggregate one-half of the remaining Base Lease Period or five years, whichever is greater, and, in the case of a foreign carrier, not to exceed in the aggregate five years; provided that no such sublease shall extend beyond the end of the Base Lease Period and Lessee may not sublease during any Renewal Period; provided, however, that no transfer of the registration of the Airframe or any Engine or engine shall be effected in connection therewith, and provided further, that the rights of any transferee who receives possession by reason of a transfer permitted by this paragraph (b) (other than the transfer of an Engine which is deemed an Event of Loss) shall be, and any sublease permitted by this Section shall be made expressly subject and subordinate to all the terms of this Lease, including without limitation, the covenants contained in Section 7(a) hereof and Lessor's rights to repossession pursuant to Section 15 and to avoid such sublease upon such repossession, and Lessee shall remain primarily liable hereunder for the performance of all of the terms of this Lease to the same extent as if such sublease or transfer had not occurred, and that any such sublease shall include appropriate provisions for the registration, maintenance, insurance and return of the Aircraft and each Engine subleased thereby. No interchange agreement, transfer, sublease or other relinquishment of possession permitted hereunder shall affect the United States registration of the Aircraft. In connection with any sublease, all necessary action shall be taken which is required to continue the perfection of Lessor's title and interest to the Aircraft, Airframe and Engines and Lessor's rights under this Lease, such sublease and all other necessary documents shall be duly filed, registered or recorded in such public offices as may be required fully to preserve the title of, and the -18- 23 priority of the interest of, Lessor in the Aircraft, Airframe and Engines and provided, further, that any such instrument of transfer or sublease shall contain a provision comparable to that set forth in Section 16. Lessee shall deliver to Lessor promptly after execution thereof a duly executed copy of any sublease permitted hereunder. No interchange agreement, sublease or other relinquishment of possession of the Airframe or any Engine shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder or under the Participation Agreement. In the event Lessor shall have received from the lessor or secured party of any airframe leased to Lessee or purchased by Lessee subject to a conditional sale or other security agreement referred to in Section 7(b)(vi) a written agreement in which such lessor or secured party expressly agrees that neither it nor its successors and assigns will acquire or claim any right, title or interest in any Engine by reason of such Engine's being installed on such airframe at any time while such Engine is subject to this Lease or is owned by Lessor, and the lease or conditional sale or other security agreement covering such airframe also covers an engine or engines owned by the lessor under such lease or subject to a security interest in favor of the secured party under such conditional sale or other security agreement, Lessor hereby agrees for the benefit of such lessor or secured party that Lessor will not acquire or claim, as against such lessor or secured party, any right, title or interest in any such engine as the result of such engine being installed on the Airframe at any time while such engine is subject to such lease or conditional sale or other security agreement and owned by such lessor or subject to a security interest in favor of such secured party. (c) Insignia. Lessee agrees to affix and maintain in the cockpit of the Airframe adjacent to the airworthiness certificate therein and on each Engine a metal nameplate bearing the inscription "Owned by and leased from DC-9T-III, Inc., AS LESSOR." Section 8. Replacement and Pooling of Parts, Alterations, Modifications and Additions (a) Replacement of Parts. Lessee, at its own cost and expense, will promptly replace all Parts, which may from time to time be incorporated or installed in or attached to the Airframe or any Engine and which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or -19- 24 permanently rendered unfit for use for any reason whatsoever, except as otherwise provided in Section 8(c). In addition, Lessee may, at its own cost and expense, remove in the ordinary course of maintenance, service, repair, overhaul or testing, any Parts, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use; provided that Lessee, except as otherwise provided in Section 8(c), will, at its own cost and expense, replace such Parts as promptly as possible. All replacement Parts shall be free and clear of all Liens (except for pooling arrangements to the extent permitted by Section 8(b)) and shall be in as good operating condition as, and shall have performance and durability characteristics and a value and utility at least equal to, the Parts replaced assuming such replaced Parts were in the condition and repair required to be maintained by the terms hereof. All Parts at any time removed from the Airframe or any Engine shall remain the property of Lessor, no matter where located, until such time as such Parts shall be replaced by Parts which have been incorporated or installed in or attached to the Airframe or such Engine and which meet the requirements for replacement Parts specified above. Immediately upon any replacement Parts becoming incorporated or installed in or attached to the Airframe or any Engine as above provided, without further act, (i) title to the replaced Part shall thereupon vest in Lessee, free and clear of all rights of Lessor, and shall no longer be deemed a Part hereunder; (ii) title to such replacement Part shall thereupon vest in Lessor (subject only to a pooling arrangement to the extent permitted by Section 8(b)); and (iii) such replacement Part shall become subject to this Lease and be deemed part of the Airframe or such Engine for all purposes hereof to the same extent as the Parts originally incorporated or installed in or attached to the Airframe or such Engine. (b) Pooling of Parts. Any Part removed from the Airframe or any Engine as provided in Section 8(a) may be subjected by Lessee to a normal pooling arrangement customary in the airline industry entered into in the ordinary course of Lessee's business with Permitted Air Carriers; provided that the part replacing such removed Part shall be incorporated or installed in or attached to the Airframe or such Engine in accordance with Section 8(a) as promptly as possible after the removal of such removed Part. In addition, any replacement part when incorporated or installed in or attached to the Airframe or an Engine in accordance with Section 8(a) may be owned by a Permitted Air Carrier subject to such a normal pooling arrangement, provided that Lessee, at its expense, as promptly thereafter as possible, either (i) causes title to such replacement part to vest in Lessor in accordance with Section 8(a) by Lessee acquiring title thereto for the benefit of, and transferring such title to, Lessor free and clear of all Liens; or (ii) replaces such replacement Part by incorporating or installing in or attaching to the Airframe or such Engine a further replacement Part owned by Lessee free and clear of all Liens and by causing title to such further replacement Part to vest in Lessor in accordance with Section 8(a). (c) Alterations, Modifications and Additions. Lessee, at its own expense, will make such alterations and modifications in and additions to the Airframe or Engines as may be required -20- 25 from time to time to meet the standards of the FAA or other governmental authority having jurisdiction. In addition, Lessee, at its own expense, may from time to time make such alterations and modifications in and additions to the Airframe or any Engine as Lessee may deem desirable in the proper conduct of its business, including, without limitation, removal of Parts which Lessee deems obsolete or no longer suitable or appropriate for use in the Airframe, or such Engine, provided that no such alteration, modification or addition shall (i) diminish the value or utility of the Airframe or such Engine, or impair the condition or airworthiness thereof, below the value, utility, condition and airworthiness thereof immediately prior to such alteration, modification or addition assuming the Airframe or such Engine was then of the value or utility and in the condition and airworthiness required to be maintained by the terms of this Lease Agreement; (ii) materially adversely affect the capability of the Aircraft to be used in commercial, scheduled passenger service in the United States; (iii) materially adversely affect aerodynamic characteristics, performance, weight or ground or flight operation characteristics of the Aircraft; (iv) materially adversely affect the cost of performing Airframe or Engine maintenance; (v) adversely affect the service life of the Aircraft or such Engine, the interchangeability of spare parts and ground support equipment for the Airframe or such Engine or the commonality of (A) the Aircraft with other McDonnell Douglas DC-9 Series 80 aircraft; or (B) such Engine with other Pratt & Whitney Aircraft JT89-217A engines; or (vi) materially change the basic configuration thereof. Title to all Parts incorporated or installed in or attached or added to the Airframe or such Engine as the result of such alteration, modification or addition shall, without further act, vest in Lessor. Notwithstanding the foregoing sentence of this Section 8(c), so long as no Event of Default (or event which would constitute an Event of Default but for the lapse of time or the giving of notice or both) shall have occurred and be continuing, Lessee may, at any time during the Term remove any Part; provided that (x) such Part is in addition to, and not in replacement of or substitution for, any Part originally incorporated or installed in or attached to the Airframe or such Engine at the time of delivery thereof hereunder or any Part in replacement of, or substitution for any such Part; (y) such Part is not required to be incorporated or installed in or attached or added to the Airframe or such Engine pursuant to the terms of this Section 8, and (z) such Part can be removed from the Airframe or such Engine without diminishing or impairing the value, utility, condition or airworthiness required to be maintained by the terms of this Lease Agreement which the Airframe or such Engine would have had at such time had such alteration, modification or addition not occurred. Upon the removal by Lessee of any Part as above provided, title thereto shall, without further act, vest in Lessee and such Part shall no longer be deemed part of the Airframe or Engine from which it was removed. Any Part not removed by Lessee as above provided prior to the return of the respective Airframe or Engine to Lessor hereunder shall remain the property of Lessor. -21- 26 Section 9. Voluntary Termination (a) Termination During Initial Lease Period. During the Initial Lease Period, Lessee shall be entitled to terminate the Lease with respect to the Aircraft effective on a date when a payment of Basic Rent is due, if, on or before April 17, 1987, the Manufacturer has officially announced that it will no longer manufacture DC-9 aircraft or derivatives thereof, in which case Lessee will have a period of three (3) months following such announcement to decide whether or not to terminate the Lease, provided that the Lessee must give Lessor at least nine (9) months prior written notice of termination. If Lessee does not elect to terminate within said three (3) months, the Lease shall continue for the remainder of the Initial Lease Period, it being understood that Lessee retains the right not to renew the Lease for the Base Lease Period in accordance with Section 3(a) herein. (b) Termination for Obsolescence or Surplusage. (i) Right of Termination. So long as no Event of Default (or event which would constitute an Event of Default but for the lapse of time or the giving of notice or both) shall have occurred and be continuing, Lessee shall have the right at its option at any time after the seventh anniversary of the Delivery Date of the Aircraft, on at least six (6) months' prior written notice to Lessor specifying a proposed date of termination, to terminate this Lease with respect to the Aircraft if, in the good faith opinion of the Board of Directors of Lessee the Aircraft shall have become obsolete or shall be surplus to Lessee's requirements, such termination to be effective on the date of sale, if any, referred to in Section 9(b)(ii) hereof, provided that, prior to or concurrently with such termination, Lessee shall have provided to Lessor a copy of the resolutions of the Board of Directors of Lessee, certified by the Secretary or an Assistant Secretary of Lessee, by which such Board determined, in good faith, that the Aircraft shall have become obsolete or surplus to Lessee's requirements. Lessor shall notify Lessee of its intention to sell or retain the Aircraft no later than sixty (60) days prior to the proposed termination date; (ii) Election by Lessor to Sell. If Lessor elects to sell the Aircraft, Lessee, as agent for Lessor, shall, from the date of such election until the proposed date of termination specified, use its best efforts to obtain bids for the cash purchase of the Aircraft and Lessor may, after consulting with and giving notice to Lessee, seek to obtain such bids. In the event Lessee receives any bid, Lessee shall, promptly, and in any event at least ten (10) Business Days prior to the proposed date of sale, certify to Lessor in writing the amount and terms of such bid, the proposed date of such sale and the name and address of the party (who -22- 27 shall not be Lessee or any person, firm or corporation affiliated with Lessee) submitting such bids. In the event Lessee receives any bid, Lessor shall, at least five (5) Business Days prior to the proposed date of sale, certify to Lessor in writing the amount and terms of such bid, the proposed date of such sale and the name and address of the party or submitting such bid. On the date specified in such notice of termination or such earlier date as shall be consented to in writing by Lessor (1) Lessee shall deliver the Airframe and Engines or engines to the bidder, if any, which shall have submitted the highest bid prior to such date, in the same manner as if delivery were made to Lessor pursuant to Section 5 hereof and in full compliance with the terms thereof, and shall duly transfer to Lessor title to any such engines not owned by Lessor, all in accordance with the terms of Section 5 hereof; and (2) Lessor shall, without recourse or warranty (except for Lessor's Warranty and subject to the disclaimer set forth in Section 4(a) hereof), simultaneously therewith sell the Airframe and Engines or engines to such bidder for cash paid in the manner and in funds of the type specified in Section 3(d) hereof. The total selling price realized at such sale shall be paid to and retained by Lessor and, in addition, on the date of such sale, and as a condition precedent to such sale and the delivery of the Aircraft and Engines or engines to such bidder, Lessee shall pay to Lessor, in the manner and in funds of the type specified in Section 3(d) hereof, the excess, if any, of (A) the Termination Value for the Aircraft computed as of the date of sale over (B) the sale price of the Airframe and Engines or engines sold by Lessor after deducting the expenses incurred by Lessor in connection with such sale. Upon such payment, Lessor will transfer to Lessee, without recourse or warranty (except for Lessor's Warranty and subject to the disclaimer set forth in Section 4(a) hereof), all of Lessor's right, title and interest in and to any Engines constituting part of the Aircraft, but which were not then installed on the Airframe and sold therewith. If no sale shall have occurred on or as of the date specified in such notice of termination, either because no bids have been received or because Lessee, at its option, shall have elected that no bid be accepted, this Lease shall continue in full force and effect as to the Aircraft. In the event of any such sale and receipt by Lessor of such sale price as provided herein, and upon compliance by Lessee with the provisions of this Section 9(b)(ii), the obligation of Lessee to pay Basic Rent hereunder for the Aircraft shall cease for any period commencing on or after the Basic Rent payment date occurring on or after the date as of which Termination Value is computed and the Term for the Aircraft shall end effective as of the date of such sale. Lessor shall be under no duty to solicit bids, to inquire into the efforts of Lessee to obtain bids or otherwise take any action in connection with any such sale other than to transfer to the purchaser named -23- 28 in the highest bid as referred to above (or to such purchaser and to Lessee, as the case may be), without recourse or warranty (except for Lessor's Warranty and subject to the disclaimer set forth in Section 4(a) hereof), all of Lessor's right, title and interest in and to the Airframe and Engines, against receipt of the payments provided for herein; and (iii) Retention of Aircraft by Lessor. In the event that Lessor elects to retain the Aircraft as provided in Section 9(b)(i) hereof, Lessee, on the proposed termination date, shall deliver the Aircraft as provided in Section 5, Lessor shall repay to Lessee that amount of prepaid Basic Rent representing the amount of Basic Rent prepaid multiplied by a fraction, the denominator of which shall be 30 and the numerator of which shall be 30 minus the number of days from and including the date of return to but excluding the Basic Rent payment date next succeeding the termination date, and no further payment of Basic Rent or any payment of Termination Value will be owed to Lessor by Lessee and this Lease shall terminate. Section 10. Loss; Destruction; Requisition; etc. (a) Event of Loss with Respect to the Aircraft or the Airframe During Initial Lease Period. Upon the occurrence of an Event of Loss with respect to the Aircraft or the Airframe during the Initial Lease Period, Lessee shall, within sixty (60) days of such occurrence, pay to Lessor (i) all installments of Basic Rent due with respect to the Aircraft to that date; (ii) the Stipulated Loss Value in respect of the Aircraft; and (iii) interest at the Incentive Rate on any amounts of overdue Rent outstanding. Upon the payment of the Stipulated Loss Value in respect of the Aircraft, Lessee's obligation to pay future installments of Basic Rent in respect of the Aircraft shall cease. Lessor will transfer to Lessee, without recourse or warranty (except for Lessor's Warranty and subject to the disclaimer set forth in Section 4(a) hereof), all Lessor's right, title and interest, if any, in and to the Airframe and Engines (if any) with respect to which such Event of Loss occurred, as well as all Lessor's right, title and interest in and to any Engines constituting part of the Aircraft with respect to which such Event of Loss occurred but not installed thereon when such Event of Loss occurred. (b) Event of Loss with Respect to the Aircraft or the Airframe During Base Lease Period or any Renewal Period. Upon the occurrence of an Event of Loss with respect to the Aircraft or Airframe during the Base Lease Period or any Renewal Period, Lessee shall forthwith (and, in any event, within fifteen (15) days after such occurrence) give Lessor written notice of such Event of Loss and of its election, subject to the terms hereof, to perform one of the following two options (it being agreed that -24- 29 if Lessee shall not have given Lessor notice of such election within twenty (20) calendar days after such occurrence, Lessee shall be deemed to have elected to perform the option set forth in the following clause (ii)), provided that Lessee shall not have the right to select the option set forth in clause (i) if an Event of Default, or an event which would constitute an Event of Default upon the lapse of time or the giving of notice or both, shall have occurred and is continuing or, if Lessee shall have suffered a Material Adverse Change in Financial Condition: (i) within one year after the date of occurrence of such Event of Loss, during which time Lessee's obligation to pay Basic Rent shall continue, Lessee shall convey or cause to be conveyed to Lessor, to be leased by Lessee hereunder in replacement of the Airframe, title to a Replacement Airframe (together with the same number of Replacement Engines as the Engines, if any, installed on the Airframe at the time such Event of Loss occurred), such Replacement Airframe and Replacement Engines to be free and clear of all Liens other than Liens permitted by Section 6, to have a value, utility and useful life at least equal to, and to be in as good operating condition as, the Airframe and the Engines, if any, so replaced (assuming the Airframe and such Engines were in the condition and repair required by the terms of this Agreement), provided that if Lessee shall not perform its obligation to effect such replacement under this clause (i) promptly upon receipt of any insurance proceeds paid in accordance with Section 11 hereof, but in any event no later than ninety (90) days after the date of the occurrence of such Event of Loss, Lessee shall deposit with Lessor the amount that would be required by the terms of clause (ii) below to be paid with respect to the Aircraft, such amount to be held by the Lessor until paid over to the Lessee or applied to reduce the Lessor's investment, and such amount may be invested by the Lessor as provided in Section 24; provided further that (A) if the replacement occurs pursuant to Section 10(d) hereof, during the one (1) year period, Lessor shall pay to Lessee the amount held at such time (giving effect to any increase or decrease thereof on account of actions taken pursuant to Section 24, hereof) which was deposited with Lessor by Lessee pursuant to this clause (i) and Lessor will execute and deliver any documents requested by Lessee to terminate Lessor's interest, if any in such amount, or (B) if no replacement occurs by the end of the one (1) year period, the Event of Loss with respect to the Airframe shall be deemed to have occurred on the last day of such one (1) year period and Lessee shall comply with the provisions of clause (ii) of this Section 10(b) except that the amount to be paid to Lessor by Lessee as the Stipulated Loss Value of the Aircraft shall be -25- 30 paid on the date on which the Event of Loss is deemed to have occurred and shall be reduced by the amount then held by Lessor (giving effect to any increase or decrease in such amount on account of actions taken pursuant to Section 24 hereof) which was deposited with Lessor by Lessee pursuant to this clause (i), and Lessor shall retain such amount, or if such amount held by Lessor exceeds the Stipulated Loss Value of the Aircraft to be paid to Lessor by Lessee, Lessor shall, upon compliance by Lessee with the provisions of clause (ii) of this Section 10(b), pay over to Lessee the amount of such excess, and the Lease shall terminate. At such time Lessor will execute and deliver to Lessee any documents requested by Lessee to terminate the interest, if any, granted by Lessee to Lessor in such amount; and (ii) (1) On or before ninety (90) days after the date of Event of Loss, Lessee shall pay to Lessor, in immediately available funds the Stipulated Loss Value of the Aircraft, whereupon the obligation of Lessee to pay Basic Rent hereunder with respect to the Aircraft for any period commencing on or after the Basic Rent payment date occurring on or after the date as of which such Stipulated Loss Value is computed shall terminate, provided that Lessee shall remain liable for all payments of Basic Rent for the Aircraft due on or before the date of such payment of Stipulated Loss Value, (2) the Term for the Aircraft shall end, and (3) Lessor will transfer to Lessee, without recourse or warranty (except for Lessor's Warranty and subject to the disclaimer set forth in Section 4(a) hereof), all Lessor's right, title and interest, if any, in and to the Airframe and Engines (if any) with respect to which such Event of Loss occurred, as well as all Lessor's right, title and interest in and to any Engines constituting part of the Aircraft with respect to which such Event of Loss occurred but not installed thereon when such Event of Loss occurred. (c) Event of Loss with Respect to an Engine. Upon the occurrence of an Event of Loss with respect to an Engine only, under circumstances in which there has been no Event of Loss to the Airframe Lessee shall give Lessor prompt written notice thereof and shall, within thirty (30) days after the occurrence of such Event of Loss, convey or cause to be conveyed to Lessor, as replacement for the Engine with respect to which such Event of Loss occurred, title to a Replacement Engine free and clear of all Liens not excepted in Section 6 and having performance and durability characteristics and a value and utility at least equal to, and being in as good operating condition as, the Engine with respect to which such Event of Loss occurred assuming such Engine was of the value or utility and in the condition and repair required by the terms hereof immediately prior to the occurrence -26- 31 of such Event of Loss. Prior to or at the time of any such conveyance, Lessee, at its own expense, will promptly (i) furnish Lessor with a bill of sale, in form and substance satisfactory to Lessor, with respect to such Replacement Engine; (ii) cause a supplement hereto, in form and substance satisfactory to Lessor, subjecting such Replacement Engine to this Lease, to be duly executed by Lessee, and recorded pursuant to the Act, as amended; (iii) furnish Lessor with such evidence of title to such Replacement Engine and of compliance with the insurance provisions of Section 11 hereof with respect to such Replacement Engine as Lessor may reasonably request; (iv) furnish Lessor with an opinion of Lessee's counsel to the effect that title to such Replacement Engine has been duly conveyed to Lessor free and clear of all Liens (except those permitted under Section 6 of this Lease) and is duly leased hereunder; (v) furnish to Lessor a certificate signed by a duly authorized financial officer or executive of Lessee certifying that the Lessee's representations and warranties contained in the Participation Agreement are true and accurate on and as of said date as though made on and as of said date and that upon consummation of such replacement, no Event of Default (or other event which after lapse of time or notice or both would become an Event of Default) will exist hereunder; (vi) furnish to Lessor such documents and evidence with respect to Lessee, as Lessor or its counsel may reasonably request in order to establish the Lessor's title to such Engine, free and clear of all liens, except those permitted hereby, the consummation of the transactions contemplated by this Section 10(c), the taking of all corporate proceedings in connection therewith and compliance with the conditione set forth in this Section 10(c), in each case in form and substance satisfactory to such party; and (vii) furnish to Lessor evidence that all amounts payable by Lessee on or prior to said date pursuant to the provisions of this Lease shall have been paid in full. Upon full compliance by Lessee with the terms of this paragraph (c), Lessor will transfer to Lessee all of the right, title and interest in the Engine with respect to which the Event of Loss occurred and which was originally conveyed to Lessor without recourse or warranty (except for Lessor's Warranty and subject to the disclaimer set forth in Section 4(a) hereof). For all purposes hereof, each such Replacement Engine shall be deemed part of the property leased hereunder, shall be deemed an "Engine" as defined herein and shall be deemed part of the same Aircraft as was the Engine replaced thereby. No Event of Loss covered by this Section 10(c) shall result in any reduction in Basic Rent. (d) Conveyance of Replacement Airframe. Prior to or at the time of any conveyance of a Replacement Airframe pursuant to subsection (b) above, Lessee, at its own expense, will furnish Lessor with the following documents which shall have been duly authorized, executed and delivered by the respective parties as parties thereto and shall be in full force and effect on said date: (i) a full warranty bill of sale, in the form and substance satisfactory to Lessor, and an AC Form 8050-2 Bill of Sale (or such other form of bill of sale as may be approved by the FAA on -27- 32 said date), executed by the owner thereof, in favor of Lessor, with respect to such Replacement Airframe and Engines, if any, and in the case of the latter, recorded pursuant to the Act; (ii) a supplement hereto, in form and substance satisfactory to Lessor, covering such Replacement Airframe and Engines, if any, duly executed by Lessee and recorded pursuant to the Act; (iii) such evidence of compliance with the insurance provisions of Section 11 with respect to such Replacement airframe and Engines, if any, as Lessor may reasonably request, including an independent insurance broker's report with Certificates of Insurance; (iv) an opinion of Lessee's counsel (and such other evidence of title as Lessor may reasonably request) to the effect that, upon such conveyance, Lessor is entitled to the benefits of 11 U.S.C. Section 1110 with respect to the Replacement Airframe and Engines, if any, and Lessor will acquire good and marketable title to such Replacement Airframe and Engines, if any, free and clear of all Liens other than the rights of Lessee hereunder and such Liens as are permitted by this Lease, and that such Replacement Airframe and Engines, if any, will be leased hereunder to the same extent as the Airframe and Engines, if any, replaced thereby; (v) a certificate signed by a duly authorized financial officer or executive of Lessee certifying that the representations and warranties made by Lessee contained in the Participation Agreement are true and accurate on and as of said date as though made on and as of said date and that, upon consummation of such replacement, no Event of Default (or other event which after lapse of time or notice or both would become an Event of Default) will exist hereunder; (vi) such documents and evidence with respect to Lessee, as Lessor, or its counsel may reasonably request in order to establish the consummation of the transactions contemplated by this Section 10(d), the taking of all corporate proceedings in connection therewith and compliance with the conditions set forth in this Section 10(d), in each case in form and substance satisfactory to Lessor, including evidence that the Replacement Aircraft has been duly certificated by the FAA as to type and airworthiness in accordance with the terms of this Lease and application for registration of the Replacement Aircraft in the name of Lessor has been duly made with the FAA and Lessee has temporary or permanent authority to operate the Replacement Aircraft; and (vii) evidence that all amounts payable by Lessee on or prior to said date pursuant to the provisions of this Lease shall have been paid in full. Upon full compliance by Lessee with the terms of this paragraph (d), Lessor will transfer to Lessee, without recourse or warranty (except for Lessor's Warranty and is subject to the disclaimer set forth in Section 4(a) hereof) all of Lessor's right, title and interest, if any, in and to the Aircraft with respect to which such Event of Loss occurred. No Event of Loss with respect to the Aircraft under the circumstances contemplated by the terms of this paragraph (d) shall result in any reduction in Basic Rent. For all purposes of this Lease, each such Replacement Aircraft (together with any Engines constituting part of the Aircraft being replaced which were not installed on such Aircraft -28- 33 when the Event of Loss occurred) shall be deemed part of the property leased hereunder, and shall be deemed the "Aircraft" as defined herein. (e) Application of Payments from Governmental Authorities for Requisition of Title. Any payments (other than insurance proceeds the application of which is provided for in Section 11) received at any time by Lessor or by Lessee from any governmental authority or other person with respect to an Event of Loss resulting from the condemnation, confiscation, theft or seizure of, or requisition of title to or use of the Airframe or any Engine, other than a requisition for use by the United States Government or any instrumentality or agency thereof (for purposes of this Section 10 called the "Government") not constituting an Event of Loss, will be applied as follows: (i) if such payments are received with respect to the Airframe or the Airframe and the Engines or engines installed on the Airframe that has been or is being replaced by Lessee as contemplated by Sections 10(b) and 10(d), such payments shall be paid over to, or retained by, Lessor and upon completion of such replacement be paid over to, or retained by Lessee; and (ii) if such payments are received with respect to the Airframe or the Airframe and the Engines or engines installed on the Airframe that has not been and will not be replaced as contemplated by Sections 10(b) and 10(d), so much of such payments remaining after reimbursement of Lessor for costs and expenses as shall not exceed the Stipulated Loss Value require to be paid by Lessee pursuant to Section 10(b), shall be paid to or retained by Lessor and applied in reduction of Lessee's obligation to pay such Stipulated Loss Value, if not already paid by Lessee, or, if already paid by Lessee, shall be paid to or retained by Lessee and applied to reimburse Lessee for its payment of such Stipulated Loss Value, and the balance, if any, of such payment remaining thereafter shall be retained by the Lessee; and (iii) if such payments are received with respect to an Engine under circumstances contemplated by Section 10(c), so much of such payments remaining after reimbursement of Lessor for costs and expenses shall be paid over to, or retained by, Lessee provided that Lessee shall have fully performed the terms of Section 10(c) with respect to the Event of Loss for which such payments are made. (f) Requisition for Use by the Government of the Airframe and the Engines Installed Thereon. In the event of the requisition for use by the Government of the Airframe and the Engines or engines installed on the Airframe during the Term, Lessee shall promptly notify Lessor of such requisition and all of Lessee's obligations under this Lease Agreement with respect -29- 34 to the Aircraft shall continue to the same extent as if such requisition had not occurred provided that, if the Airframe and such Engines or engines are not returned by the Government prior to the end of the Term, Lessee shall be obligated to return the Airframe and such Engines or engines to Lessor pursuant to, and in all other respects to comply with the provisions of, Section 5 promptly upon their return by the Government. All payments received by Lessor or Lessee from the Government for the use of the Airframe and such Engines or engines during the Term shall be paid over to, or retained by, Lessee; and all payments received by Lessor or Lessee from the Government for the use of the Airframe and such Engines or engines after the Term shall be paid over to, or retained by, Lessor. (g) Requisition for Use by the Government of an Engine. In the event of the requisition for use by the Government of any Engine, Lessee will replace such Engine hereunder by complying with the terms of Section 10(c) to the same extent as if an Event of Lose had occurred with respect to such Engine, and any payments received by Lessor or Lessee from the Government with respect to such requisition shall be paid over to, or retained by, Lessee, provided that Lessee shall have fully performed the terms of Section 10(c) with respect to the Engine requisitioned for use for which such payments are made. (h) Application of Payments During Existence of Event of Default. Any amount referred to in clause (i), (ii) or (iii) of Section 10(e), Section 10(f) or Section 10(g) which is payable to Lessee shall not be paid to Lessee, or if it has been previously paid directly to Lessee, shall not be retained by Lessee, if at the time of such payment an Event of Default, or any event which after lapse of time or the giving of notice or both would constitute an Event of Default, shall have occurred and be continuing, but shall be paid to and held by Lessor as security for the obligations of Lessee under this Lease, and at such time as the following shall be true and Lessor shall receive a certificate of an officer of Lessee stating that there is not continuing any such Event of Default or event which after lapse of time or the giving of notice or both would become an Event of Default, all such amounts paid during such Event of Default in excess of Basic Rent shall be paid to Lessee. Section 11. Insurance (a) Airlines Public Liability and Property Damage Insurance. Lessee will carry at its own expense airlines public liability insurance (which shall include contractual liability insurance) including passenger legal liability and property damage insurance with respect to the operation of the Aircraft (i) in amounts which are not lest than the public liability and property damage insurance applicable to similar aircraft and engines which comprise Lessee's fleet on which Lessee carries insurance; (ii) of the type usually carried by corporations -30- 35 engaged in the same or a similar business, similarly situated with Lessee, and owning or operating similar aircraft and engines; and (iii) which is maintained in effect with insurers of recognized responsibility. Furthermore, any policies of insurance carried in accordance with this Section 11(a), and any policies taken out in substitution or replacement for any of such policies (A) shall be amended to name Lessor (in the case of any manufacturers of the Aircraft or Engines, not in their capacities as such), its assigns and officers, directors, shareholders, agents, employees and servants as additional insured(s) (Additional Insureds), (B) shall provide that in respect of the interests of Lessor in such policies the insurance shall not be invalidated by any action or inaction of Lessee and shall insure Lessor regardless of any breach or violation of any warranty, declaration or condition contained in such policies by Lessee, and (C) shall provide that if such insurance is cancelled for any reason, or any substantial change is made in the coverage which affects the interests of Lessor or if such insurance is allowed to lapse for nonpayment of premium, Lessee will cause to be sent to Lessor immediate notification of such cancellation, change or lapse which cancellation, change or lapse shall not be effective as to the Lessor for thirty (30) days, except seven (7) days or such shorter period as from time to time may be customarily obtainable in the industry, in the case of war risk or allied perils coverage, after receipt by the Lessor of written notice from such insurers of such cancellation change or lapse. Each liability insurance policy (1) shall be primary without right of contribution from any other insurance which is carried by any Additional Insureds with respect to its interest as such in each Aircraft, (2) shall expressly provide that all of the provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each Additional Insureds, and (3) shall contain other provisions as required by (f) hereof. (b) Insurance Against Loss or Damage to Aircraft. Subject to the rights of Lessee to establish and maintain self-insurance with respect to loss or damage to the Aircraft as hereinafter provided, Lessee shall maintain in effect with insurers of recognized responsibility, at its own expense, all-risk aircraft hull insurance covering the Aircraft and ground property insurance with respect to any Engines or Parts while removed from the Aircraft. Lessee shall also maintain war risk and allied perils hull insurance if the Aircraft is operated on routes where the custom in the industry or Lessee's practice is to carry war risk and allied perils hull insurance. Such war risk and allied perils hull insurance will be of the type and in substantially the amount usually carried by airlines similarly situated with Lessee; provided that such all-risk and war risk and allied perils insurance (including the permitted self-insurance) shall at all times while the Aircraft is subject -31- 36 to this Lease be for an amount not less than the Stipulated Loss Value for the Aircraft (as from time to time determined). Provision in the aircraft hull insurance for deductible amounts per occurrence shall be permitted in addition to self insurance; provided that such deductible amount shall not exceed the greater of: (i) the deductible amounts carried by United States airlines operating similar aircraft, or (ii) the greater of $600,000 or two (2%) percent of the insured value of the Aircraft (except that in the case of damage to Engines caused by ingestion, such deductible amounts may not be in excess of four (4%) percent of the insured value). Lessee may self-insure the risks required to be insured against pursuant to this Section 11 to a reasonable level. The self-insurance with respect to all of the aircraft in the Lessee's fleet may not exceed for any twelve-month-policy year, the lesser of (i) $12,000,000 (or the largest replacement value of any single aircraft on which Lessee carries insurance, if such value is greater than $12,000,000), or (ii) one and one-half (1-1/2%) percent of the average aggregate insurable value of Lessee's fleet for the preceding year. Any policies carried in accordance with this Section 11(b) covering the Aircraft and any policies taken out in substitution or replacement for any such policies shall (A) be amended to name Lessor as loss payee as its interests may appear as Owner and Lessor, (B) provide that in respect of the interest of Lessor, the insurance shall not be invalidated by any action or inaction of Lessee and shall insure Lessor's interest, regardless of any breach or violation by Lessee of any warranties, declarations or conditions contained in such policies, (C) provide for a waiver of subrogation in respect of Lessor, (D) provide that if such insurance is cancelled for any reason whatsoever, or any substantial change is made in the coverage which affects the interest of the Lessor, or if such insurance is allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to the Lessor for 30 days (seven days, or such shorter period as may from time to time be customarily obtainable in the industry, in the case of any war risk and allied perils coverage) after receipt by the Lessor of written notice from such insurers of such cancellation, change or lapse, and (E) be primary and without right of contribution from other insurance which may be available to the Lessor. In the case of a lease or contract with the United States of America or any agency or instrumentality thereof in respect of the Aircraft, a valid agreement by the United States of America or such agency or instrumentality to indemnify Lessee against the same risks which Lessee is required hereunder to insure against in an amount at least equal to the Stipulated Loss Value of the Aircraft from time to time shall be considered adequate insurance with respect to the Aircraft while subject to -32- 37 such lease or contract, to the extent of the risks and in the amounts that are the subject of any such agreement to indemnify. (c) Proceeds of Insurance. As between Lessor and Lessee it is agreed that all insurance payments received under policies required to be maintained by Lessee hereunder, exclusive of any payments received in excess of the Stipulated Loss Value for the Aircraft, as the result of the occurrence of an Event of Loss with respect to the Airframe or any Engine will be applied as follows: (i) if such payments are received with respect to the Airframe or Airframe and Engines or engines installed on the Airframe that has been or is being replaced by Lessee, such payments shall be paid over to, or retained by, Lessor, and upon completion of such replacement be paid over to, or retained by Lessee; and (ii) if such payments are received with respect to the Airframe or Airframe and Engines or engines installed on the Airframe that has not been and will not be replaced, so much of such payments remaining after reimbursement of Lessor for costs and expenses shall be applied in reduction of Lessee's obligations pursuant to Section 10(b)(ii) hereof, if not already paid by Lessee, or, if payment for such obligations has been already made by Lessee, shall be applied to reimburse Lessee for such payment, and the balance, if any, will be paid over to, or retained by, Lessee; and (iii) if such payments are received with respect to an Engine replaced pursuant to Section 10(c) hereof, so much of such payments remaining after reimbursement of Lessor for costs and expenses shall be paid over to, or retained by, Lessee, provided that Lessee shall have fully performed the terms of Section 10(c) with respect to such Engine; provided, however, if at the time of such payment an Event of Default or an event which but for the giving of notice or lapse of time would constitute an Event of Default shall have occurred and be continuing, such insurance payments shall be paid to the Lessor and either (i) held by the Lessor as security for the obligations of the Lessee under this Agreement, or (ii) applied by the Lessor on behalf of the Lessee for repairs or for replacement property in accordance with the terms of Sections 7 and 10 hereof. At such time as there shall not be continuing any such Event of Default or event which with the lapse of time or giving of notice or both would become an Event of Default, the Lessor will pay to the Lessee any such amount then held by the Lessor. As between Lessor and Lessee the insurance payments with respect to any property damage not constituting an Event of -33- 38 Loss with respect to the Airframe or an Engine shall be retained by the Lessee, provided that Lessee repairs or causes to be repaired such damage in accordance with the provisions hereof. (d) Reports, etc. In the case of the Aircraft, (i) on or before the Delivery Date thereof, and upon each renewal or change of insurance, Lessee will furnish to Lessor certificates of the insurer or insurers (or their authorized representatives) stating the amounts and types of insurance in force as to the Aircraft, and (ii) on or before the Delivery Date thereof and annually on the anniversary date hereof, Lessee will furnish to Lessor a report signed by a fire of independent aircraft insurance brokers, appointed by Lessee and not objected to by Lessor, stating the opinion of such firm to the effect that Lessee's insurance coverage complies with the insurance requirements of this Section, provided, that all information contained therein shall be held confidential by Lessor and shall not be furnished to anyone other than as necessary to any affiliate of Lessor, who shall also hold such information confidential and shall not furnish or disclose such information to anyone, except, in each case as may be required by an order of any court or administrative agency or by any statute, rule, regulation or final order of any governmental authority. In the event that Lessee shall fail to maintain insurance as herein provided, Lessor may at its option, provide such insurance and, in such event, Lessee shall, upon demand, reimburse Lessor, for the cost thereof. (e) Insurance for Own Account. Nothing in this Section shall limit or prohibit the Lessor or the Lessee from obtaining insurance for its own account; and any proceeds payable thereunder shall be payable as provided in the insurance policy relating thereto, provided that no such insurance may be obtained which would limit or otherwise adversely affect the coverage of any insurance required to be obtained or maintained pursuant to this Section. (f) General Requirements. Any policies carried in accordance with this Section 11 and any policies taken out in substitution or replacement for any such policies shall (A) be primary and without right of contribution from other insurance which may be available to Lessor or any Additional Insured and shall expressly provide that all the provisions thereof, except limits of liability, shall operate in the same manner as if there were a separate policy covering each insured, (B) waive any right of the insurers to any setoff, recoupment, counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of the Lessee or the Additional Insureds, (C) provide that the Additional Insureds shall not be liable for any insurance premium of the Lessee arising out of or resulting from this Agreement and (D) specifically refer to this Section 11. The Lessee will cause such insurers to advise the Lessor in writing promptly of any default in the payment of any premium and of any other act or omission on the part of the Lessee of which they -34- 39 have knowledge and which might invalidate on render unenforceable, in whole or in part, any insurance on the Aircraft. Section 12. Inspection At all reasonable times Lessor or its authorized representatives may inspect the Aircraft and the books and records of Lessee relative thereto. Lessor shall have no duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. Section 13. Assignment Except as otherwise provided in Section 7(b) or in the case of any requisition by the United States of America referred to in Section 10(f), Lessee will not, without prior written consent of Lessor, assign any of its rights hereunder. The terms and provisions of this Lease shall be binding upon and inure to the benefit of Lessor and Lessee and their respective successors and assigns. Section 14. Events of Default The following events shall constitute Events of Default (whether any such event shall be voluntary or involuntary or come about or be effected 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 administrative or governmental body) and each such Event of Default shall be deemed to exist and continue so long as, but only so long as, it shall not have been remedied: (a) Failure to Pay Rent. Lessee shall fail to make any payment of Rent within ten (10) days after the same shall have become due; or (b) Failure to Carry Insurance. Lessee shall fail to carry and maintain insurance on or with respect to the Aircraft in accordance with the provisions of Section 11 provided that, in the case of insurance with respect to which cancellation, change, or lapse for nonpayment of premium shall not be effective as to Lessor for thirty (30) days (seven (7) days, or such shorter period as may from time to time be customarily obtainable in the industry, in the case of any war risk and allied perils coverage) after receipt of notice by Lessor of such cancellation, change, or lapse, no such failure to carry and maintain insurance shall constitute an Event of Default hereunder until the earlier of (i) the date such failure shall have continued unremedied for a period of fifteen (15) days (three (3) days or 24 hours less than any shorter notice period in the case of any war risk and allied perils coverage) after receipt by Lessor of the notice of -35- 40 cancellation, change, or lapse referred to in Section 11(a)(C) or 11(b)(D) hereof or (ii) such insurance not being in effect as to either of Lessee or Lessor; or (c) Public Liability Insurance not in Effect. Lessee shall operate any Aircraft at a time when public liability insurance required by Section 11(a) shall not be in effect; or (d) Failure to Perform Covenants. Lessee shall (i) fail to comply with its obligations under clause (i) of Section 7(a) hereof; or (ii) fail to perform or observe any other covenant, condition or agreement to be performed or observed by it hereunder or under the Participation Agreement, and such failure shall continue unremedied for a period of thirty (30) days after written notice thereof to Lessee; or (e) Incorrect Representation or Warranty. Any representation or warranty made by Lessee herein or in the Participation Agreement or in any document or certificate furnished by Lessee in connection herewith or pursuant hereto shall at any time prove to have been incorrect in any material respect at the time made or deemed to have been made; or (f) Entry of a Decree in Bankruptcy. The entry of a decree or order for relief by a court having Jurisdiction in the premises in respect of Lessee in an involuntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or other similar official) of Lessee or for any substantial part of its property, or ordering the winding-up or liquidation of its affairs and the continuance of any such decree or order undismissed, unstayed or unvacated for a period of ninety (90) days after the date of entry thereof; or (g) Commencement of a Voluntary Case in Bankruptcy. The commencement by Lessee of a voluntary case under any applicable bankruptcy, insolvency or other similar law now or hereafter in effect, or the consent by it to the entry of an order for relief in an involuntary case under any such law or to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of Lessee or of any substantial part of its property, or the making by it of any general assignment for the benefit of creditors, or the failure of Lessee generally to pay its debts as such debts become due (within the meaning of 11 U.S.C. Section 303(h)), or the taking of corporate action by Lessee in furtherance of any of the foregoing; or (h) Undischarged Final Judgment in Excess of $1,000,000. Final judgment for the payment of money in excess of $1,000,000 shall be rendered against Lessee and the same shall remain undischarged for a period of sixty (60) days during which execution of such judgment shall not be effectively stayed; or -36- 41 (i) Acceleration of Indebtedness Exceeding $5,000,000. The Lessee shall fail to pay an indebtedness of the Lessee for borrowed money or the deferred purchase price of property or the rental of any personal property (excluding the Lessee's obligations hereunder), or any interest or premium thereon, when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such payment and the maturity of such indebtedness, deferred purchase price or rental shall have been accelerated by the holder or holders thereof or such payment shall not be made at final maturity and the aggregate amount over the term of this Lease, whether or not later repaid or pardoned, of all such indebtedness, deferred purchase price or rental which shall have been so accelerated or which shall not have been made at final maturity shall equal or exceed $5,000,000; or (j) Failure to Remain Air Carrier. The Lessee shall fail to remain an "air carrier" as that term is used in 11 U.S.C. Section 1110; or (k) Voluntary Suspension of Airline Operations. The Lessee shall voluntarily suspend all or substantially all of its commercial airline operations (except a suspension resulting from a labor action) or the franchises, concessions, permits, rights or privileges require for the conduct of the business and operations of the Lessee shall be revoked, cancelled or otherwise terminated or the free and continued use and exercise thereof curtailed or prevented, and as a result thereof the preponderant business activity of the Lessee shall cease to be that of a commercial airline. Promptly after Lessee has knowledge thereof, Lessee shall give Lessor notice of any event that has occurred and is continuing which constitutes an Event of Default or would constitute an Event of Default but for the lapse of time or the giving of notice or both. Section 15. Remedies Upon the occurrence of any Event of Default and at any time thereafter so long as the same shall be continuing, Lessor may, at its option, declare this Lease to be in default; and at any time thereafter, so long as Lessee shall not have remedied all outstanding Events of Default, Lessor may do one or more of the following with respect to all or any part of the Airframe or any and all Engines as Lessor in its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, applicable law then in effect: (a) Return of Airframe and Engines. Cause Lessee, upon the written demand of Lessor and at Lessee's expense, to return -37- 42 promptly, and Lessee shall return promptly, all or such part of the Airframe or any Engine as Lessor may so demand to Lessor or its order in the manner and condition required by, and otherwise in accordance with all the provisions of, Section 5 as if the Airframe or Engine were being returned at the end of the Term, or Lessor, at its option, may enter upon the premises where all or any part of the Airframe or any Engine is located and take immediate possession of and remove the same (together with any engine which is not an Engine but which is installed on the Airframe), subject to all of the rights of the owner, lessor, lienor or secured party of such engine; provided that the Airframe with an engine (which is not an Engine) installed thereon may be flown only to a location within the continental United States, and such engine shall be held for the account of any such owner, lessor, lienor or secured party or, if owned by Lessee, may, at the option of Lessor, be exchanged with Lessee for an Engine in accordance with the provisions of Section 5(e), by summary proceedings or otherwise, all without liability accruing to Lessor for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise and Lessee expressly waives any right it may have under applicable law to a hearing prior to repossession of the Aircraft, Airframe or any Engine; (b) Sale of Airframe or Engines. With or without taking possession thereof, sell all or any part of the Airframe or any Engine at public or private sale at such times and places and to such Person or Persons, with or without advertisement, for cash or upon credit, as Lessor may determine, or otherwise dispose of, hold, use, operate, lease to others or keep idle all or any part of such Airframe or Engine as Lessor in its sole discretion, may determine, all free and clear of any rights of Lessee except as hereinafter set forth in this Section 15 and without any duty to account to Lessee with respect to such action or inaction or for any proceeds with respect thereto; (c) Liquidated Damages. Whether or not Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under paragraph (a) or paragraph (b) above with respect to all or any part of the Airframe or any Engine, Lessor, by written notice to Lessee specifying a payment date (which shall also be the date on which Stipulated Loss Value is determined under (i) or (ii) below) which shall be a date not earlier than ten (10) days from the date of such notice, may demand Lessee to pay to Lessor, and Lessee shall pay Lessor, on the payment date specified In such notice, as liquidated damages for lose of a bargain and not as a penalty (in lieu of Basic Rent for the Aircraft due on or after the date specified for payment in such notice), in addition to all Basic Rent due up to such date, the following: (i) in the event that the Aircraft, Airframe or such Engine has been sold, Stipulated Loss Value less the net proceeds of such sale; or -38- 43 (ii) in the event the Aircraft, Airframe or such Engine is being re-leased by Lessor to another lessee, for the whole, or any portion of the remaining Initial and Base Lease Term, Stipulated Loss Value less the present value of such rentals under such lease through the end of the Base Lease Term, and in the event that there are subsequent re-lease agreements entered into prior to the end of the Base Lease Term, such subsequent re-lease rentals through the end of the Base Lease Term shall be paid to Lessee as received by Lessor. If Lessor sells the Aircraft either before or after any re-lease period or periods, but before the end of the Base Lease Period, Lessee shall receive the net sales proceeds of such sale; provided, however, that any payments to Lessee or reductions from payments of Stipulated Loss Value due from Lessee shall not be made until Lessor shall have been paid in full Stipulated Loss Value and, provided further, however, that the total of the present value, as of the date of determination of Stipulated Loss Value, of all credits and payments to Lessee pursuant to (i) and (ii) above, shall not exceed Stipulated Loss Value. The present value of any re-lease rentals or sales proceeds shall be determined using a discount rate equal to the sum of two (2%) percent plus a rate equal to the average of the latest two weeks of the Ten Year Treasury Constant Maturity Rate as contained in the most recent Federal Reserve Statistical Release H.15 published by the Board of Governors of the Federal Reserve System (or any successor publication thereto) prior to the Delivery Date for the Aircraft. (d) Other Remedies. Lessor may terminate this Lease Agreement as to the Airframe or any and all Engines or may exercise any other right or remedy which may be available to it under applicable law or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof. In addition, Lessee shall be liable, except as otherwise provided above, for any and all unpaid Rent due hereunder before, after or during the exercise of any of the foregoing remedies and for all legal fees and other costs and expenses incurred by reason of the occurrence of any Event of Default or the exercise of Lessor's remedies with respect thereto, including all costs and expenses incurred in connection with the return of the Airframe or any Engine in accordance with the terms of Section 5 or in placing the Airframe or such Engine in the condition and airworthiness. required by such Section. At any sale of the Airframe or an Engine or part thereof pursuant to this Section 15, Lessor may bid for and purchase such property. Except as otherwise expressly provided above, no remedy referred to in this Section 15 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity, and the exercise or beginning of exercise of any one or more of such remedies shall not preclude the simultaneous or later exercise by Lessor of any or all of such other remedies. No express or implied waiver by -39- 44 Lessor of any Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. To the extent permitted by applicable law, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use the Airframe or any Engine or part thereof in mitigation of Lessor's damages as set forth in this Section or which may otherwise limit or modify any of Lessor's rights or remedies under this Section 15. Section 16. Federal Bankruptcy Act. Pursuant to the provisions of 11 U.S.C. Section 1110, or any analogous section of the Federal bankruptcy laws, as amended from time to time, it is hereby expressly agreed and provided that, notwithstanding any other provisions of the Federal bankruptcy laws, as amended from time to time, the title of Lessor to the Aircraft, Airframe and each Engine and any right of Lessor to take possession of the Aircraft, Airframe and each Engine in compliance with the provisions of this Lease shall not be affected by the provisions of the Federal bankruptcy laws, as amended from time to time. Section 17. Further Assurances; Financial Information Forthwith upon the execution and delivery of each Lease Supplement, Lessee will cause such Lease Supplement (and, in the case of the initial Lease Supplement, this Lease as well) to be duly filed and recorded in accordance with the Act. In addition, Lessee will promptly and duly execute and deliver to Lessor such further documents and assurances and take such further action as Lessor may from time to time reasonably request in order to more effectively carry out the intent and purpose of this Lease and to establish and protect the rights and remedies created or intended to be created in favor of Lessor hereunder, including, without limitation, if requested by Lessor, at the expense of Lessee, the execution and delivery of supplements or amendments hereto, in recordable form, subjecting to this Lease any Replacement Airframe or Replacement Engine and the recording or filing of counterparts hereof, in accordance with the laws of such Jurisdictions as Lessor may from time to time deem advisable, provided that this sentence is not intended to impose upon Lessee any additional liabilities not otherwise contemplated by this Lease. Lessee also agrees to furnish Lessor (i) within sixty (60) days after the end of each of the first three quarterly fiscal periods in each fiscal year of Lessee, a consolidated balance sheet of Lessee and its consolidated subsidiaries prepared by it as of the close of such period, together with the related consolidated statements of income and of surplus and statements of changes in financial position for such period; (ii) within 120 days after the close of each fiscal year of Lessee, a consolidated balance sheet of Lessee and its consolidated subsidiaries as of the close of such fiscal year, together with -40- 45 the related consolidated statements of income and of surplus and statements of changes in financial position for such fiscal year, as certified by independent public accountants, including their certificate and accompanying comments; (iii) within 120 days after the close of each fiscal year of Lessee, a certificate of Lessee, signed by a duly authorized financial officer of Lessee to the effect that the signer has reviewed the relevant terms of this Lease and has made, or caused to be made under his supervision, a review of the transactions and condition of Lessee during the accounting period covered by the financial statements referred to in clause (ii) above, and that such review has not disclosed the existence during such accounting period, nor does the signer have knowledge of the existence as at the date of such certificate, of any condition or event which constitutes an Event of Default or which, after notice or lapse of time or both, would constitute an Event of Default, or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action Lessee has taken or is taking or proposes to take with respect thereto, together with a certificate of Lessee as to the condition of the Aircraft; and (iv) from time to time such other information as Lessee sends to its lenders (except periodic reports that may be sent more frequently than quarterly). Section 18. Notices All notices required under the terms and provisions hereof shall be in writing by telex, teletype, telecommunication or other customary means of business communication; if by writing, any such notice shall become effective when received, addressed (i) if to Lessee, at 605 Third Avenue, New York, New York 10158, Attention: Vice President and Treasurer, or at such other address as Lessee shall from time to time designate in writing to Lessor; and (ii) if to Lessor, c/o UT Credit Corporation, United Technologies Building, Hartford, Connecticut, 06101, Attention: Treasurer, or at such other address as Lessor shall from time to time designate in writing to Lessee. Section 19. No Setoff; Counterclaim; etc. Lessee's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any setoff, counterclaim, recoupment, defense or other right which Lessee may have against Lessor, the Manufacturer, Pratt & Whitney Aircraft or anyone else for any reason whatsoever (including any thereof based upon or relating to Lessor's representations or warranties in Section 4 hereof or elsewhere); (ii) any defect in the title, airworthiness, condition, design, operation, or fitness for use of, or any damage to or loss or destruction of, the Aircraft, or any interruption or cessation in the use or possession thereof by Lessee for any reason whatsoever; (iii) any insolvency, -41- 46 bankruptcy, reorganization or similar proceedings by or against Lessee; or (iv) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise, except as specifically provided herein, Lessee nonetheless agrees to pay to Lessor an amount equal to each Basic Rent payment at the time such payment would have become due and payable in accordance with the terms hereof had this Lease not been terminated in whole or in part. Lessee hereby waives, to the extent permitted by applicable law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease except in accordance with the express terms hereof. Each payment of Rent made by Lessee shall be final as to Lessor and Lessee. Lessee will not seek to recover all or any part of any such payment of Rent from Lessor for any reason whatsoever. Section 20. Purchase Option and Renewal Option (a) Purchase Option. In the case of the Aircraft, upon not less than eight (8) months' prior written notice from Lessee to Lessor, Lessee may, on the last Business Day of the Base Lease Period if no Event of Default (or other event or condition which after lapse of time or notice or both would become an Event of Default) hereunder shall have occurred and be continuing on such day and the last payment of Rent required to be paid hereunder on or before such day shall have been made, elect to purchase the Aircraft at a purchase price equal to the fair market value for the Aircraft determined by mutual consent of Lessor and Lessee or, if they shall be unable to agree, by Independent Appraisal. Such election to purchase shall be revocable by Lessee (by written notice from Lessee to Lessor) until a date which shall be no later than six (6) months before the end of the Base Lease Period at which time such election to purchase shall become irrevocable. Upon receipt of the purchase price (in the type of funds and in the manner specified in Section 3(d) hereof) for the Aircraft, Lessor will transfer to Lessee, without recourse or warranty (except for Lessor's Warranty and subject to the disclaimer set forth in Section 4(a) hereof), all of Lessor's right, title and interest in and to the Aircraft. (b) Renewal Option. Lessee shall have the right, subject to the provisions set forth herein, to elect to extend this Lease in respect of the Aircraft for one period of one, two, three, or four years, such period commencing on the date immediately following the final day of the Base Lease Period (such period being hereinafter referred to as the "Renewal Period"). Such election to renew shall be exercised upon written notice (such notice to specify whether the term of such Renewal Period shall be one, two, three, or four years) from Lessee to Lessor given not less than eight (8) months prior to the final day of the Base Lease Period which election to renew shall be revocable (by written notice from Lessee to Lessor) until a date -42- 47 which shall be six (6) months before the end of the Base Lease Period, at which time such election to renew shall become irrevocable and, if, on the last day of the Base Lease Period, no Event of Default shall have occurred and be continuing and no payment ia due and owing under the Participation Agreement, then this Lease shall be extended for the Renewal Period specified in Lessee's notice, on the same conditione provided for herein, at a rental rate equal to the fair market rental value for such Aircraft determined by mutual consent of Lessor and Lessee or, if they shall be unable to agree, as determined by an Independent Appraisal. (c) Determination of Fair Value. If Lessee elects either to purchase the Aircraft or to renew this Lease with respect to the Aircraft pursuant to this Section 20 and the parties do not determine a fair market purchase price or fair market rental value, as the case may be, with respect to the Aircraft by mutual consent by the date which is three months prior to the expiration of the Base Lease Term then such purchase price or rental value shall be determined by an Independent Appraisal and each party shall have 15 days from such date to appoint an appraiser, instructing such appraiser that such Independent Appraisal must be completed not less than 15 days prior to the end of the Base Lease Term. Section 21. Not Applicable. Section 22. Lessor's Right to Perform for Lessee If Lessee fails to make any payment of Rent required to be made by it hereunder or fails to perform or comply with any of its agreements contained herein, Lessor may itself make such payment or perform or comply with such agreement, and the amount of such payment and the amount of the reasonable expenses of Lessor incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Incentive Rate, shall be deemed Supplemental Rent, payable by Lessee upon demand provided, however, that no such payment, performance or compliance by Lessor shall (i) be deemed to have satisfied the obligation of Lessee to make such payment or to perform or comply with such agreement, as the case may be, unless and until Lessee shall have paid all such Supplemental Rent as may be payable pursuant to this Section 22 by reason of such failure; or (ii) be deemed waiver of Lessor's rights and remedies against Lessee hereunder. Section 23. Maintenance of Certain Engines Notwithstanding anything to the contrary contained herein, an aircraft engine which is not an Engine, but which is installed on the Airframe, shall be maintained in accordance with Sections 7(a) and 8 hereof. -43- 48 Section 24. Investment of Security Funds; Miscellaneous Any monies required to be paid to or retained by Lessor which are not required to be paid to Lessee pursuant to Section 1O(e) or 11(c) hereof solely because an Event of Default hereunder (or other event which after notice or lapse of time or both would constitute such an Event of Default) shall have occurred, or which are required to be paid to Lessee pursuant to Section 1O(e) or 11(c) hereof after completion of a replacement to be made pursuant to Section 1O(b) hereof shall, until paid to Lessee as provided in Section 10 or 11 hereof or applied as provided herein, be invested by Lessor from time to time as directed in writing by Lessee and at the expense of Lessee (i) in obligations of the United States Government maturing within ninety (90) days, (ii) in repurchase agreements fully collateralized by such obligations, (iii) in certificates of deposit maturing within ninety (90) days issued by commercial banks organized under the laws of the United States or of any political subdivision thereof and having commercial paper rated P1 by Moody's Investors Service, Inc. or A1 by Standard & Poor's Corp. (provided, however, that the aggregate amount at any one time so invested in certificates of deposit issued by any one bank shall not be in excess of the lesser of $10,000,000 or 5% of such bank's capital and surplus) or (iv) in commercial paper rated P1 by Moody's Investors Service, Inc., or A1 by Standard & Poor's Corp. at the time of purchase thereof. There shall be promptly remitted to Lessee any gain (including interest received) realized as the result of any such investment (net of any fees, commissions and other expenses, if any, incurred in connection with such investment) unless an Event of Default (or other event which after lapse of time or notice or both would become an Event of Default shall have occurred and be continuing and Lessee will promptly pay to Lessor, on demand, the amount of any loss of principal realized as the result of any such investment together with and fees, commissions and other expenses, if any, incurred in connection with such investment). Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law Lessee hereby waives any provision of law which renders any provision hereof prohibited or unenforceable in any respect. No term or provision of this Lease may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. This Lease shall constitute an agreement of lease, and nothing herein shall be construed as conveying to Lessee any right, title or interest in the Aircraft except as lessee only. The section and paragraph headings in this Lease and the table of -44- 49 contents are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereto and all references herein to numbered sections, unless otherwise indicated, are to sections of this Lease. This Lease has been delivered in the State of New York and shall in all respects be governed by, and construed in accordance with, the laws of the State of New York, including all matters of construction, validity and performance. IN WITNESS WHEREOF, Lessor and Lessee have each caused this Agreement to be duly executed as of the day and year first above written. LESSOR DC-9T-III, INC. By: /s/ Scott W. Cleveland --------------------------------- Title: Vice President LESSEE TRANS WORLD AIRLINES, INC. By: /s/ [signature] --------------------------------- Title: Vice President and Treasurer -45- 50 EXHIBIT A LEASE SUPPLEMENT NO. 1 LEASE SUPPLEMENT NO. 1 dated ____________, 1984 between DC-9T-III, Inc., a Delaware Corporation ("Lessor"), and Trans World Airlines, Inc., a Delaware corporation ("Lessee"). Lessor and Lessee have heretofore entered into that certain Lease Agreement dated as of March 15, 1984 (herein called the "Lease Agreement" and the defined terms therein being hereinafter used with the same meaning). The Lease Agreement provides for execution and delivery from time to time of Lease Supplements each substantially in the form hereof for the purpose of leasing each Aircraft under the Lease Agreement as and when delivered by Lessor to Lessee in accordance with the terms thereof. The Lease Agreement relates to the aircraft and engines described below, and a counterpart of the Lease Agreement is attached hereto and made a part hereof and this Lease Supplement, together with such attachment, is being filed for recordation on the date hereof with the Federal Aviation Administration as one document. NOW, THEREFORE, in consideration of the premise. and other good and sufficient consideration, Lessor and Lessee hereby agree as follows: 1. Lessor hereby delivers and leases to Lessee under the Lease Agreement and Lessee hereby accepts and leases from Lessor under the Lease Agreement, the following described McDonnell Douglas Model DC-9-82 Aircraft ("Delivered Aircraft") which Delivered Aircraft as of the date hereof consists of the following components: (i) airframe U.S. Identification Number ___________; manufacturer's serial No. ______________; (ii) two (2) Pratt & Whitney Aircraft Model JT8D-217A engines bearing, respectively; manufacturer's serial Nos. ____________ and ____________ (each of which engines has 750 or more rated takeoff horsepower or the equivalent of such horsepower). 2. The Delivery Date of the Delivered Aircraft is the date of this Lease Supplement as set forth in the opening paragraph hereof. 3. The Initial Lease Period for the Delivered Aircraft shall commence on the Delivery Date and shall end on ____________, 1989. 51 -2- 4. Lessee hereby agrees to pay Lessor Basic Rent for the Delivered Aircraft during the Initial Lease Period in 60 payments, monthly in advance, of $ ________ each and thereafter, the Base Lease Period, in 156 payments, monthly in advance, of $ ____________ each. 5. Lessee hereby confirms to Lessor that the Delivered Aircraft and each delivered Engine have been duly marked in accordance with the terms of Section 7(c) of the Lease Agreement and that Lessee has accepted the Delivered Aircraft for all purposes hereof and of the Lease Agreement, as being airworthy, in accordance with specifications, in good working order and repair and without defect or inherent vice in title, condition, design, operation or fitness for use, whether or not discoverable by Lessee as of the date hereof, and free and clear of all Liens except such Liens as are covered by Lessor's Warranty. 6. All of the terms and provisions of the Lease Agreement are hereby incorporated by reference in the Lease Supplement to the same extent as if fully set forth herein. IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed as of the day and year first above written and to be delivered in the State of New York. LESSOR DC-9T-III, INC. By: ______________________________ Title: LESSEE TRANS WORLD AIRLINES, INC. By: ______________________________ Title: Vice President and Treasurer 52 EXHIBIT B
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 1 101.5 2 102.1 3 102.7 4 103.2 5 103.7 6 104.2 7 104.8 8 105.2 9 105.7 10 106.2 11 106.6 12 107.1 13 107.5 14 104.5 15 104.8 16 105.1 17 105.5 18 105.8 19 106.1 20 106.4 21 106.7 22 107.0 23 107.3 24 107.6 25 107.9 26 106.2 27 106.5 28 106.8 29 107.0 30 107.3 31 107.6 32 107.9 33 108.2 34 108.4 35 108.7
53
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 36 109.0 37 109.2 38 107.5 39 107.7 40 108.0 41 108.3 42 108.5 43 108.8 44 109.0 45 109.2 46 109.5 47 109.7 48 109.9 49 110.2 50 108.4 51 108.6 52 108.9 53 109.1 54 109.3 55 109.5 56 109.8 57 110.0 58 110.4 59 110.7 60 111.0 61 111.8 62 109.4 63 109.5 64 109.4 65 109.2 66 109.1 67 109.0 68 108.8 69 108.6 70 108.4 71 108.1 72 107.8
2 54
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 73 107.5 74 107.2 75 106.9 76 106.6 77 106.2 78 105.9 79 105.5 80 105.1 81 104.7 82 104.3 83 103.9 84 103.5 85 103.1 86 102.6 87 102.2 88 101.8 89 101.4 90 100.9 91 100.5 92 100.0 93 99.6 94 99.2 95 98.7 96 98.3 97 97.8 98 97.4 99 96.9 100 96.5 101 96.0 102 95.5 103 95.1 104 94.6 105 94.1 106 93.7 107 93.2 108 92.7 109 92.2
3 55
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 110 91.7 111 91.3 112 90.8 113 90.3 114 89.8 115 89.3 116 88.8 117 88.3 118 87.8 119 87.3 120 86.7 121 86.2 122 85.7 123 85.2 124 84.7 125 84.1 126 83.6 127 83.1 128 82.5 129 82.0 130 81.4 131 80.9 132 80.3 133 79.8 134 79.2 135 78.7 136 78.1 137 77.6 138 77.0 139 76.4 140 75.8 141 75.3 142 74.7 143 74.1 144 73.5 145 72.9 146 72.3
4 56
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 147 71.7 148 71.1 149 70.5 150 69.9 151 69.3 152 68.7 153 68.1 154 67.4 155 66.8 156 66.2 157 65.6 158 64.9 159 64.3 160 63.6 161 63.0 162 62.3 163 61.7 164 61.0 165 60.4 166 59.7 167 59.0 168 58.4 169 57.7 170 57.0 171 56.3 172 55.6 173 54.9 174 54.2 175 53.5 176 52.8 177 52.1 178 51.4 179 50.7 180 50.0 181 49.3 182 48.5 183 47.8
5 57
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 184 47.1 185 46.3 186 45.6 187 44.8 188 44.1 189 43.3 190 42.6 191 41.8 192 41.0 193 40.2 194 39.5 195 38.7 196 37.9 197 37.1 198 36.3 199 35.5 200 34.7 201 33.9 202 33.1 203 32.3 204 31.4 205 30.6 206 29.8 207 28.9 208 28.1 209 27.3 210 26.4 211 25.5 212 24.7 213 23.8 214 23.0 215 22.1 216 21.2 End of Term and Thereafter: 20.0
6 58 EXHIBIT C
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 1 101.5 2 102.0 3 102.6 4 103.1 5 103.5 6 104.0 7 104.4 8 104.8 9 105.3 10 105.7 11 106.0 12 106.4 13 106.8 14 103.9 15 104.2 16 104.4 17 104.7 18 105.0 19 105.3 20 105.5 21 105.8 22 106.0 23 106.2 24 106.5 25 106.7 26 105.0 27 105.2 28 105.4 29 105.6 30 105.9 31 106.1 32 106.3 33 106.5 34 106.7 35 106.9
59
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 36 107.1 37 107.3 38 105.5 39 105.7 40 105.9 41 106.1 42 106.2 43 106.4 44 106.6 45 106.8 46 106.9 47 107.1 48 107.2 49 107.4 50 105.5 51 105.7 52 105.8 53 106.0 54 106.1 55 106.2 56 106.4 57 106.6 58 106.8 59 107.0 60 107.3 61 107.1 62 104.6 63 104.5 64 104.4 65 104.3 66 104.1 67 104.0 68 103.9 69 103.7 70 103.6 71 103.4 72 103.3
2 60
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 73 103.1 74 102.9 75 102.7 76 102.5 77 102.3 78 102.1 79 101.9 80 101.7 81 101.5 82 101.2 83 100.9 84 100.7 85 100.4 86 100.1 87 99.9 88 99.6 89 99.3 90 99.0 91 98.7 92 98.4 93 98.0 94 97.7 95 97.3 96 97.0 97 96.6 98 96.2 99 95.9 100 95.5 101 95.1 102 94.7 103 94.3 104 93.8 105 93.4 106 93.0 107 92.5 108 92.1 109 91.6
3 61
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 110 91.1 111 90.6 112 90.1 113 89.6 114 89.1 115 88.6 116 88.1 117 87.6 118 87.0 119 86.5 120 85.9 121 85.4 122 84.8 123 84.3 124 83.7 125 83.1 126 82.5 127 82.0 128 81.4 129 80.8 130 80.2 131 79.6 132 79.0 133 78.4 134 77.8 135 77.1 136 76.5 137 75.9 138 75.3 139 74.7 140 74.0 141 73.4 142 72.8 143 72.1 144 71.5 145 70.9 146 70.2
4 62
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 147 69.6 148 68.9 149 68.3 150 67.6 151 66.9 152 66.3 153 65.6 154 64.9 155 64.3 156 63.6 157 62.9 158 62.2 159 61.5 160 60.8 161 60.1 162 59.4 163 58.7 164 58.0 165 57.3 166 56.6 167 55.9 168 55.2 169 54.5 170 53.7 171 53.0 172 52.3 173 51.5 174 50.8 175 50.0 176 49.3 177 48.6 178 47.8 179 47.0 180 46.3 181 45.5 182 44.8 183 44.0
5 63
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- --------- 184 43.2 185 42.4 186 41.6 187 40.8 188 40.1 189 39.3 190 38.5 191 37.7 192 36.8 193 36.0 194 35.2 195 34.4 196 33.5 197 32.8 198 31.9 199 31.1 200 30.2 201 29.4 202 28.6 203 27.7 204 26.8 205 26.0 206 25.1 207 24.3 208 23.4 209 22.5 210 21.6 211 20.7 212 19.8 213 18.9 214 18.1 215 17.2 216 16.3 End of Term and Thereafter: 15.0
6 64 EXHIBIT D Foreign Air Carriers Constituting Permitted Sublessees Under Section 7(b)(ix) of the Lease _________________________________ Aeromexico Air Canada Air France Air New Zealand Alitalia Austrian Airlines British Airways British Caledonian Airways CP Air Finnair Iberia Japan Air Lines KLM-Royal Dutch Airlines Kuwait Airways Lufthansa German Airlines Qantas Airways Sabena-Belgian Airlines SAS-Scandinavian Airlines Singapore Airlines Swissair Varig-Brazil Viasa-Venezuela Any successor to any such foreign air carrier 65 LEASE SUPPLEMENT NO. 1 LEASE SUPPLEMENT NO. 1 dated March 22, 1984 between DC-9T-III, Inc., a Delaware Corporation ("Lessor"), and Trans World Airlines, Inc., a Delaware corporation ("Lessee"). Lessor and Lessee have heretofore entered into that certain Lease Agreement dated as of March 15, 1984 (herein called the "Lease Agreement" and the defined terms therein being hereinafter used with the same meaning). The Lease Agreement provides for execution and delivery from time to time of Lease Supplements each substantially in the form hereof for the purpose of leasing each Aircraft under the Lease Agreement as and when delivered by Lessor to Lessee in accordance with the terms thereof. The Lease Agreement relates to the aircraft and engines described below, and a counterpart of the Lease Agreement is attached hereto and made a part hereof and this Lease Supplement, together with such attachment, is being filed for recordation on the date hereof with the Federal Aviation Administration as one document. NOW, THEREFORE, in consideration of the premise. and other good and sufficient consideration, Lessor and Lessee hereby agree as follows: 1. Lessor hereby delivers and leases to Lessee under the Lease Agreement and Lessee hereby accepts and leases from Lessor under the Lease Agreement, the following described McDonnell Douglas Model DC-9-82 Aircraft ("Delivered Aircraft") which Delivered Aircraft as of the date hereof consists of the following components: (i) airframe U.S. Identification Number N913TW; manufacturer's serial No. 49184; (ii) two (2) Pratt & Whitney Aircraft Model JT8D-217A engines bearing, respectively; manufacturer's serial Nos. P709733D, and P709734D (each of which engines has 750 or more rated takeoff horsepower or the equivalent of such horsepower). 2. The Delivery Date of the Delivered Aircraft is the date of this Lease Supplement as set forth in the opening paragraph hereof. 3. The Initial Lease Period for the Delivered Aircraft shall commence on the Delivery Date and shall end on March 21, 1989. 4. Lessee hereby agrees to pay Lessor Basic Rent for the Delivered Aircraft during the Initial Lease Period in 60 payments, monthly in advance, of $210,000 each and thereafter, 66 -2- the Base Lease Period, in 156 payments, monthly in advance, of $225,000 each. 5. Lessee hereby confirms to Lessor that the Delivered Aircraft and each delivered Engine have been duly marked in accordance with the terms of Section 7(c) of the Lease Agreement and that Lessee has accepted the Delivered Aircraft for all purposes hereof and of the Lease Agreement, as being airworthy, in accordance with specifications, in good working order and repair and without defect or inherent vice in title, condition, design, operation or fitness for use, whether or not discoverable by Lessee as of the date hereof, and free and clear of all Liens except such Liens as are covered by Lessor's Warranty. 6. All of the terms and provisions of the Lease Agreement are hereby incorporated by reference in the Lease Supplement to the same extent as if fully set forth herein. IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed as of the day and year first above written and to be delivered in the State of New York. LESSOR DC-9T-III, INC. By: /s/ Scott W. Cleveland ------------------------------- Title: Vice President LESSEE TRANS WORLD AIRLINES, INC. By: /s/ [signature] ------------------------------- Title: Vice President and Treasurer 67 DC-9T-III AMENDMENT AGREEMENT This AMENDMENT AGREEMENT dated as of December 15, 1986 between TRANS WORLD AIRLINES, INC., a Delaware corporation (the "Lessee") and DC-9T-III, INC., a Delaware Corporation (the "Lessor") WITNESSETH: WHEREAS, the Lessor and Lessee are parties to a Participation Agreement and a Lease Agreement, each dated as of March 15, 1984; WHEREAS, pursuant to the Lease, Lessor leased the Aircraft to Lessee (the capitalized terms used herein without definition having the respective meanings ascribed to them in the Lease); WHEREAS, the Lease, to which was attached Lease Supplement No. 1 dated March 22, 1984, was recorded with the FAA on April 26, 1984 as Conveyance No. S47200. WHEREAS, the parties acknowledge, for purposes of reference, that the Aircraft consists of (i) one McDonnell Douglas Model DC-9-82 airframe, bearing U.S. Identification Number N913TW and manufacturer's serial No. 49184; and (ii) two Pratt & Whitney Model JT8D-217A engines bearing, respectively, manufacturer's serial Nos. P709733D and P709734D; and WHEREAS, the parties desire to amend the Lease, Lease Supplement and Participation Agreement as provided herein. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereby consent and agree as follows: 68 1. Section 1 of the Lease is amended by deleting the definition of "Initial Lease Period" and inserting in lieu thereof the following: "'Initial Lease Period' means the period commencing on the Delivery Date for the Aircraft and ending on December 21, 1986." 2. Section 3(a) of the Lease is amended to read as follows: "(a) Term for Aircraft. The Term for the Aircraft shall consist of (i) the Initial Lease Period; (ii) the Base Lease Period; and (iii) upon written notice given at least six (6) months prior to the end of the Base Lease Period, any Renewal Period elected by the Lessee pursuant to Section 20(b) hereof." 3. The Stipulated Loss Value and Termination value Schedules attached to the Lease are deleted in their entirety and replaced with the Stipulated Loss Value and Termination Value Schedules attached hereto as Exhibits A and B, respectively. 4. Section 3 of Lease Supplement No. 1 is amended to read as follows: "The Initial Lease Period for the Aircraft shall commence on the Delivery Date and end on December 21, 1986. The Base Lease Period shall commence on December 22, 1986." 5. Section 4 of Lease Supplement No. 1 is amended to read as follows: "Lessee hereby agrees to pay Lessor Basic Rent for the Aircraft during the Initial Lease Period in 33 payments, monthly in advance, of $210,000 each, and during the Base Lease Period in 183 payments, monthly in advance, of $200,000 each. The first Basic Rent payment for the Base Lease Period will be due December 22, 1986 and the last such payment will be due February 22, 2002." -2- 69 6. Section 13 of the Participation Agreement is amended by deleting "$225,000" in clause (ii) and inserting in lieu thereof "$200,000". 7. Each party represents and warrants to the other party that: (i) It is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and has all requisite corporate power and authority to enter into and perform its obligations under this Amendment Agreement. (ii) This Amendment Agreement has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation enforceable against it in accordance with its terms. (iii) Neither the execution, delivery or performance by it of this Amendment Agreement nor the consummation of any of the transactions by it contemplated hereby contravenes any Federal or state law, regulation, order or judgment applicable to it, or any provision of its charter or by-laws or will result in a breach of, or constitute a default under, or contravene any provisions of, any material indenture, mortgage, credit agreement, or other similar agreement to which it is a party or by which it is bound. -3- 70 8. On the date of execution of this Amendment Agreement, counsel to each party agrees to provide to the other party an opinion of its counsel substantially to the effect set forth in the preceding Section 7. 9. Except as amended hereby, the Lease and the Participation Agreement are in all respects ratified and confirmed and the terms thereof shall remain in full force and effect. 10. This Amendment Agreement may be executed by the parties hereto in separate counterparts, all of which when so executed and delivered shall be an original for all purposes but all such counterparts shall together constitute one and the same instrument. 11. This Amendment Agreement shall in all respects be governed by and construed in accordance with the laws of the State of New York, including all matters of construction, validity and performance. -4- 71 IN WITNESS WHEREOF, the parties hereto have caused this Amendment Agreement to be executed as of the date hereinabove first set forth. LESSOR LESSEE DC-9T-III, INC. TRANS WORLD AIRLINES, INC. By /s/ R.P. Webb By /s/ Robert J. Mitchell ------------------------------------ --------------------------------- Name R.P. Webb Name Robert J. Mitchell ---------------------------------- ------------------------------- Title President Title Treasurer --------------------------------- ------------------------------ -5- 72 Lessor: DC-9T-III, Inc. EXHIBIT A Lessee: TWA to Amendment Agreement Aircraft: N913TW dated as of December 15, 1986
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- ---------- 1 100.483133 2 100.942457 3 101.502794 4 101.785635 5 102.282305 6 102.774523 7 103.196116 8 103.654750 9 104.108126 10 104.536001 11 104.946788 12 105.352426 13 102.400618 14 102.785383 15 103.180497 16 103.573328 17 103.970729 18 104.362895 19 104.754706 20 105.157476 21 105.555038 22 105.951641 23 105.535490 24 105.785296 25 102.720403 26 102.958925 27 103.206610 28 103.379554 29 103.619979 30 103.853844 31 104.086102 32 104.327976 33 104.563392 34 104.796642 35 104.472566 36 104.616783 37 101.448266 38 101.574874 39 101.709837 40 101.589542 41 101.715167 42 101.833833 43 101.950244 44 102.075246 45 102.193277 46 102.308370
73 Lessor: DC-9T-III, Inc. EXHIBIT A Lessee: TWA to Amendment Agreement Aircraft: N913TW dated as of December 15, 1986
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- ---------- 47 101.995759 48 101.969908 49 98.630489 50 98.584155 51 98.545074 52 98.076959 53 98.025965 54 97.967292 55 97.905004 56 97.849962 57 97.786639 58 97.718944 59 97.389321 60 97.176944 61 93.648727 62 93.412035 63 93.178092 64 92.355873 65 92.125474 66 91.885349 67 91.639420 68 91.396702 69 91.144242 70 90.886704 71 91.185494 72 90.928384 73 90.663962 74 90.402045 75 90.143291 76 89.308075 77 89.052282 78 88.786466 79 88.514675 80 88.245970 81 87.967321 82 87.683375 83 87.944274 84 87.660194 85 87.368467 86 87.078951 87 86.792457 88 85.941118 89 85.656958 90 85.362479 91 85.061823 92 84.764108 93 84.456230 94 84.142807
74 Lessor: DC-9T-III, Inc. EXHIBIT A Lessee: TWA to Amendment Agreement Aircraft: N913TW dated as of December 15, 1986
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- ---------- 95 84.362756 96 84.048585 97 83.726392 98 83.406034 99 83.088378 100 82.217765 101 81.902838 102 81.577303 103 81.245321 104 80.915956 105 80.576162 106 80.230592 107 80.401481 108 80.054699 109 79.699559 110 79.346130 111 78.995056 112 78.108552 113 77.760520 114 77.401515 115 77.035785 116 76.672322 117 76.298188 118 75.918038 119 76.032275 120 75.650375 121 75.259719 122 74.870596 123 74.483485 124 73.583589 125 73.199723 126 72.804571 127 72.402342 128 72.002055 129 71.590802 130 71.173288 131 71.222898 132 70.803052 133 70.374002 134 69.946287 135 69.520209 136 68.609239 137 68.186575 138 67.752253 139 67.310594 140 66.870457 141 66.419054 142 65.961103
75 Lessor: DC-9T-III, Inc. EXHIBIT B Lessee: TWA to Amendment Agreement Aircraft: N913TW dated as of December 15, 1986
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- ---------- 143 65.937690 144 65.476675 145 65.006087 146 64.536601 147 64.068356 148 63.148591 149 62.683881 150 62.207158 151 61.722741 152 61.239465 153 60.744580 154 60.242834 155 60.137696 156 59.631762 157 59.116172 158 58.601452 159 58.087624 160 57.161290 161 56.650607 162 56.127544 163 55.596434 164 55.066108 165 54.523807 166 53.974283 167 53.779671 168 53.224699 169 52.659899 170 52.095594 171 51.531802 172 50.598280 173 50.037190 174 49.463332 175 48.881038 176 48.299138 177 47.704863 178 47.102966 179 46.810228 180 46.201549 181 45.582808 182 44.964152 183 44.345590 184 43.404206 185 42.787845 186 42.158308 187 41.519908 188 40.881474 189 40.230227 190 39.570923
76 Lessor: DC-9T-III, Inc. EXHIBIT B Lessee: TWA to Amendment Agreement Aircraft: N913TW dated as of December 15, 1986
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- ---------- 191 39.170569 192 38.503073 193 37.825204 194 37.146969 195 36.468371 196 35.518388 197 34.841423 198 34.150852 199 33.450952 200 32.750548 201 32.036851 202 31.314618 203 30.796241 204 30.064331 205 29.321649 206 28.578106 207 27.833698 208 26.874310 209 26.130893 210 25.373421 211 24.606106 212 23.837773 213 23.055621 214 22.264409 215 21.616589 216 20.814140 End of Term and Thereafter 20.000000
77 Lessor: DC-9T-III, Inc. EXHIBIT B Lessee: TWA to Amendment Agreement Aircraft: N913TW dated as of December 15, 1986
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- ---------- 1 100.477874 2 100.920743 3 101.463449 4 101.732204 5 102.211895 6 102.687051 7 103.092167 8 103.533292 9 103.969564 10 104.380325 11 104.774208 12 105.162872 13 102.194070 14 102.561835 15 102.939706 16 103.315178 17 103.695076 18 104.069621 19 104.443697 20 104.828476 21 105.207967 22 105.586372 23 105.161037 24 105.393246 25 102.309499 26 102.531014 27 102.761478 28 102.920878 29 103.144014 30 103.360530 31 103.575327 32 103.799500 33 104.017151 34 104.232528 35 103.893781 36 104.021277 37 100.835642 38 100.945510 39 101.063545 40 100.933336 41 101.041931 42 101.143575 43 101.242858 44 101.350509 45 101.451133 46 101.548719
78 Lessor: DC-9T-III, Inc. EXHIBIT B Lessee: TWA to Amendment Agreement Aircraft: N913TW dated as of December 15, 1986
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- ---------- 47 101.218618 48 101.176560 49 97.820372 50 97.757845 51 97.702321 52 97.227867 53 97.160453 54 97.085290 55 97.006427 56 96.934604 57 96.854464 58 96.769873 59 96.420239 60 96.192308 61 92.648008 62 92.395857 63 92.146240 64 91.321417 65 91.075224 66 90.819237 67 90.557398 68 90.298614 69 90.030073 70 89.756392 71 90.025251 72 89.751704 73 89.470739 74 89.192126 75 88.916513 76 88.078637 77 87.805839 78 87.522969 79 87.234058 80 86.948071 81 86.652119 82 86.350798 83 86.579317 84 86.277564 85 85.968038 86 85.660561 87 85.355940 88 84.501893 89 84.199458 90 83.886641 91 83.567578 92 83.251285 93 82.924795 94 82.592690
79 Lessor: DC-9T-III, Inc. EXHIBIT B Lessee: TWA to Amendment Agreement Aircraft: N913TW dated as of December 15, 1986
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- ---------- 95 82.777628 96 82.444466 97 82.103136 98 81.763475 99 81.426323 100 80.552962 101 80.218440 102 79.873171 103 79.521406 104 79.172067 105 78.812274 106 78.446617 107 78.579723 108 78.212535 109 77.836818 110 77.462640 111 77.090633 112 76.201314 113 75.832171 114 75.451977 115 75.064974 116 74.680052 117 74.284406 118 73.882667 119 73.956171 120 73.552355 121 73.139581 122 72.728158 123 72.318548 124 71.415708 125 71.009155 126 70.591206 127 70.166159 128 69.742789 129 69.308423 130 68.867690 131 68.873434 132 68.430064 133 67.977240 134 67.525551 135 67.075302 136 66.161221 137 65.714172 138 65.255376 139 64.789131 140 64.324232 141 63.847979 142 63.365072
80 Lessor: DC-9T-III, Inc. EXHIBIT B Lessee: TWA to Amendment Agreement Aircraft: N913TW dated as of December 15, 1986
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- ---------- 143 63.294781 144 62.808187 145 62.312047 146 61.816802 147 61.322594 148 60.399501 149 59.908588 150 59.405567 151 58.894741 152 58.384843 153 57.863261 154 57.334695 155 57.179171 156 56.645773 157 56.102720 158 55.560329 159 55.018607 160 54.088676 161 53.549850 162 52.998538 163 52.439055 164 51.880134 165 51.309154 166 50.730819 167 50.482060 168 49.897611 169 49.303316 170 48.709289 171 48.115543 172 47.178150 173 46.586829 174 45.982638 175 45.369876 176 44.757274 177 44.132201 178 43.499366 179 43.148480 180 42.508170 181 41.857758 182 41.207191 183 40.556476 184 39.610926 185 38.962108 186 38.300013 187 37.628910 188 36.957525 189 36.273218 190 35.580698
81 Lessor: DC-9T-III, Inc. EXHIBIT B Lessee: TWA to Amendment Agreement Aircraft: N913TW dated as of December 15, 1986
BEGINNING PERCENT OF OF BASE MONTH NO. LOSS COST --------- ---------- 191 35.117906 192 34.416497 193 33.704636 194 32.992156 195 32.279058 196 31.324593 197 30.612801 198 29.887298 199 29.152306 200 28.416551 201 27.667382 202 26.909500 203 26.324110 204 25.555846 205 24.776696 206 23.996419 207 23.215009 208 22.250813 209 21.470026 210 20.675091 211 19.870142 212 19.063901 213 18.243705 214 17.414271 215 16.694584 216 15.853194 End of Term and Thereafter 15.000000
EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 580 0 41,342 0 0 0 4,501 3,411 85,130 0 14,071 0 0 0 65,042 85,130 13,099 13,248 0 1,500 1,266 0 1,830 8,652 0 8,652 0 0 0 8,652 1.85 1.85
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