-----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, U2HJpEvaooyS73goZIWoTjXmNf0Hc7y4G3gv9musKRWwXv9Ga9AkIX4oTtCS6qkp 8iAIrVvXUarwaUP9ch/itA== 0000950149-96-000301.txt : 19960329 0000950149-96-000301.hdr.sgml : 19960329 ACCESSION NUMBER: 0000950149-96-000301 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960328 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09259 FILM NUMBER: 96539710 BUSINESS ADDRESS: STREET 1: 733 FRONT ST STREET 2: P.O. BOX 193985 CITY: SAN FRANCISCO STATE: CA ZIP: 94119 BUSINESS PHONE: 4156279289 10-K405 1 FORM 10-K FOR THE YEAR ENDED DECEMBER 31,1995 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, 1995 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.) 733 Front Street, P.O. Box 193985, San Francisco, CA 94119 - ---------------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 627-9289 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. X --- Aggregate market value of Depositary Units, held by nonaffiliates of the registrant as of the close of business at March 22, 1996 was $66,575,950.00. 1 2 TABLE OF CONTENTS
PART I ------ Page ---- Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . 13 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . 14 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 PART III -------- Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . 20 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . 22 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . 23 PART IV ------- Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K . . . . . . . . . . . 24 Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Exhibits Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-15
2 3 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 PART I ITEM 1. BUSINESS General Airlease Ltd., A California Limited Partnership (the "Partnership"), was formed in 1986. The General Partner is Airlease Management Services, Inc., a wholly-owned subsidiary of USL Capital Corporation ("USL Capital"). There are 3,600,000 depositary units representing limited partners' interests ("Depositary Units" or "Units") held by the public and 1,025,000 units of limited partners' interests ("Units") held by United States Airlease Holding, Inc. ("Holding"), also a wholly-owned subsidiary of USL Capital. Terms used and not defined herein have the meaning set forth in the Amended and Restated Agreement of Limited Partnership, as amended (the "Partnership Agreement"), which is incorporated herein by reference. Principal Investment Objectives The business of the Partnership is to acquire and own, either directly or through joint ventures, commercial aircraft, including complete aircraft (airframes with installed engines), spare or separate engines and rotable parts (collectively "Aircraft") and to lease such Aircraft primarily to airlines. The Partnership's principal investment objectives are (i) to own and lease (or otherwise finance) a portfolio of leased Aircraft in order to generate income for quarterly cash distributions to holders of Units ("Unitholders"); (ii) until January 1, 2005, 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; and (iii) to refinance, sell or otherwise dispose of the Aircraft in such a manner as will maximize the proceeds to the Partnership on such disposition. The Partnership's 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. 3 4 Aircraft Portfolio The following table describes the Partnership's Aircraft portfolio at December 31, 1995 and March 1, 1996.
Number & Acquired Current Purchase type: year Ownership by lease price(in Type of Noise Lessee of delivery interest Partnership expiration millions) lease compliance(1) ------ ----------- -------- ----------- ---------- --------- ----- ---------- USAir, Inc. 5 MD-82 100% 1986 2001(3) $91.0 Direct Stage III ("USAir") 1981(2) Finance FedEx 1 727-200FH 100% 1987 2006 $18.5 Direct Stage III 1979 (4) Finance Trans World 1 MD-82 50% 1988 2002 $10.1 Direct Stage III Airlines 1984 Finance ("TWA") Continental 6 737-200 33.3% 1986-1987 1996 $14.4 Operating Stage II Airlines 1969 ("Continental") Finnair Oy 1 MD-82 50% 1992 1999 $8.5 Operating Stage III ("Finnair")(5) 1982 Sun Jet 1 DC-9-51 50% 1986 1997 $4.4 Operating Stage II International, 1975 (6) Inc. ("Sun Jet")
1. See "Government Regulation - 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 USAir aircraft 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 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. This Aircraft was sold on March 26, 1996. See "Disposition of Aircraft," below. 6. The purchase price includes $0.7 million related to the overhaul of the Aircraft. At December 31, 1995, the current book value of Aircraft by lessee as a percent of total assets was as follows: USAir, 69.8%; FedEx, 11.8%; TWA, 7.3%; Finnair, 6.5%, Continental, 2.1%, and Sun Jet, 1.4%. Revenues by lessee as a percentage of total revenue for 1995 and 1994, respectively, were as follows: USAir, 64% and 67.1%; Continental, 10.8% and 11.7%; TWA, 6.9% and 5.2%; Finnair, 9.6% and 9.6%; FedEx 4.6% and 4.6%; and Sun Jet 2.7% and 0.1%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further discussion of the Partnership's lessees. TWA was in bankruptcy for a portion of 1995. 4 5 Existing Participants in Leases USL Capital originally participated equally with the Partnership in all transactions except the USAir Aircraft. PS Group, Inc. ("PS Group") purchased the other one-third interest in the Continental transaction. 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. As to transactions entered jointly between USL Capital and the Partnership, USL Capital 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. As to the transactions entered jointly among USL Capital, the Partnership and PS Group, the parties have similar agreements with respect to transfers and rights of first refusal, and action under the trust agreement for those transactions requires the approval of parties holding 75% of the beneficial interest in the trust. 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 market value); 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 Regulations" 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. 5 6 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 of 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. 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. It should be noted, however, that the Partnership may enter into transactions where it is not entitled to the benefits of Section 1110 upon insolvency of a lessee airline. The Partnership has an interest in one Aircraft leased to an operator (Finnair) based outside the United States. This Aircraft is not registered in the United States and it is not possible to file liens on the Aircraft with the Federal Aviation Administration (the "FAA"). Further, in the event of a lessee default or bankruptcy, repossession and claims will 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. The remarketing of Aircraft may be through a lease or sale. The terms and conditions of any such lease will 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. The six 737-200 aircraft on lease to Continental (representing 2.1% of Partnership assets) are scheduled to come off lease at December 31, 1996. These aircraft do not comply 6 7 with the Stage III noise requirements and generally cannot be operated within the continental United States after 1999. See "Government Regulation -- Aircraft Noise," below, for further discussion. Discussions have been initiated with Continental and others to consider re-lease or sale alternatives for the aircraft. There were no Aircraft held for lease or sale at year-end 1994 or 1995. Disposition of Aircraft The General Partner intends to cause the Partnership to dispose of all its Aircraft by the year 2011, subject to prevailing market conditions and other factors including the income tax status of the Partnership. See "Federal Income Taxation" below for a discussion of United States tax law which may affect the timing of the disposition of the Partnership's Aircraft portfolio. Disposition of Aircraft with a view to the dissolution of the Partnership is subject to the approval of a majority of limited partners. 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. Since its inception, the Partnership has sold its interest in four Aircraft including the recent sale of the Finnair Aircraft as described below. In 1995, casualty proceeds were received on one 737-200 Aircraft on lease to Continental Airlines 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 amount of proceeds received were insufficient to reinvest in additional aircraft, and in the third quarter a special cash distribution of 10 cents per unit was declared. See discussion of "Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters -- Cash Available From Sale or Refinancing." In March 1996, the Partnership sold its 50% interest in one MD-82 aircraft on lease to Finnair OY to a third party for approximately $6.9 million, resulting in a net gain of approximately $600,000. The Partnership had acquired its interest in this Aircraft in April 1992, for approximately $8.5 million. A portion of the sale proceeds will be used to pay off the outstanding loan balance under the non-recourse loan agreement which was collateralized by this Aircraft. The General Partner has not yet determined the best use of the remaining sale proceeds, which may include reinvestment, repayment of debt, or a special cash distribution. The Partnership may 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 Except for the USAir Aircraft and the FedEx aircraft owned by the Partnership, the Partnership has made all of its Aircraft acquisitions on a joint venture basis with Related Entities (as defined in the Partnership Agreement) of the General Partner (e.g., USL Capital). See "Approved Partnership Investments" below, for a description of the provisions of the 7 8 Partnership Agreement governing acquisition of Aircraft by the Partnership jointly with USL Capital. Future acquisitions may or may not be made jointly. In addition, the Partnership may enter into joint ventures with other third parties (e.g., PS Group). Generally, each party to a joint venture is jointly responsible for all debts and obligations incurred by the joint venture, and 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. Borrowing Policies Under the terms of the Partnership Agreement, the Partnership may borrow funds or assume financing in an aggregate amount not exceeding 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% limits 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 Conditions and Results of Operations" and Note 5 of Notes to Financial Statements for a description of outstanding borrowing and credit facilities. Management of Aircraft Portfolio Aircraft management services are provided by the General Partner and its affiliates and by persons employed by USL Capital. The fees and expenses of 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 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 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. 8 9 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 and Aircraft Aging The Partnership, as the beneficial owner of Aircraft, bears the ultimate responsibility for compliance with certain federal regulations. However, under all of its 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 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. As a result of investigations into the causes of several incidents of rapid in-flight aircraft decompression and fatigue cracks in critical parts, the aircraft manufacturers issued service bulletins and the FAA has also issued airworthiness directives. These bulletins and directives provide instructions to aircraft operators in the maintenance of aircraft and are intended to prevent the occurrence of similar incidents. Compliance with Airworthiness Directives is mandatory. 9 10 On March 6, 1989, the FAA ordered extensive repairs of all older commercial aircraft. The Partnership has interests in seven such Aircraft representing 3.5% of its total 1995 assets. A formal program to control corrosion in all aircraft has also been added to 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. There are more than 12,000 jet aircraft in the western fleets of the principal airlines of the world. On average these aircraft are less than 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) and the date of lease termination of Partnership Aircraft. See "Aircraft Noise" below for a discussion of the residual value of the Partnership Aircraft portfolio at lease termination. 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. The Aviation Safety and Capacity Act of 1990 bans the operation of Stage II aircraft after December 31, 1999. There are only two exemptions allowable: if full compliance produces demonstrable commercial hardship, or if the airline cannot feasibly re- engine, hushkit or replace its Stage II fleet by December 31, 1999. The states of Alaska and Hawaii are exempt from these requirements. In either case the deadline could be extended to January 1, 2003. United States airlines will not be able to operate Stage II aircraft beyond January 1, 2003, nor will they be able to obtain an exemption for more than 15% of their fleet beyond the turn of the century. If an airline cannot comply by December 31, 1999, it must prove it has a firm contract in place to retrofit or replace its Stage II aircraft. Airlines are required to file a report annually detailing the current noise compliance status of their fleet and how they plan to achieve further compliance targets. The FAA has produced a phase-out schedule of Stage II aircraft in the United States. The noise policy includes a timetable setting out mandatory levels for the increased phase-in of Stage III aircraft by the airlines until the end of this century. The Aviation Safety and Capacity Act of 1990 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 the 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. 10 11 See "Aircraft Portfolio" above for a description of the Partnership's Portfolio. At December 31, 1995, the net book value of Stage II Aircraft owned by the Partnership was $3.6 million or 3.5% of total assets representing its interest in one DC-9-51 aircraft with a net book value of $1.5 million and six 737-200 aircraft with a net-book value of $2.1 million. A noise kit that will bring the DC-9-51 aircraft into compliance with Stage III noise requirements has not yet been developed. A noise kit for the 737- 200 aircraft was certificated in late 1994 which can bring these aircraft into compliance with Stage III noise requirements. The cost of the hushkit is approximately $2.0 million per Aircraft, and the Partnership will likely determine that it would be not be economically feasible to upgrade these 27 year-old aircraft. Acquisition of Additional Aircraft During the past five years, Airlease has added only one aircraft to its portfolio. In general, the Partnership cannot compete for new acquisitions because of its limited sources of capital. External financing is not readily available since most aircraft are already being used to secure existing partnership borrowings. Internal financing is limited as cash from operations is required to be distributed to unitholders and only cash from aircraft sales can be used for reinvestment. When sufficient funds do become available, the Partnership will consider additional aircraft investments. Absent attractive investment opportunities, the Partnership expects to return funds to Unitholders. In March 1996, the Partnership sold its 50% interest in one MD-82 Aircraft on lease to Finnair OY for approximately $6.9 million. A portion of the sale proceeds will be used to pay off the outstanding loan balance under the non-recourse loan agreement which was collateralized by this Aircraft. The General Partner has not yet determined the best use of the remaining sale proceeds, which may include reinvestment, repayment of debt, or a special cash distribution. See "Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters -- Cash Available from Sale or Refinancing." 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 Partnership Agreement. Management of the Partnership The General Partner of the Partnership is Airlease Management Services, Inc., a Delaware corporation, incorporated in July 1986 to act as the general partner of the Partnership. The General Partner is a wholly-owned subsidiary of USL Capital, which in turn is an indirect subsidiary of Ford Motor Company ("Ford"). The General Partner has agreed that it will remain the General Partner until at least October 1996, and USL Capital has agreed that, until such date, the General Partner will remain a Related Entity, as defined in the Partnership Agreement (unless in either case to do so would materially and adversely affect the Part- 11 12 nership). Ford has announced that it is investigating and considering the sale of all or a portion of USL Capital. Approved Partnership Investments 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. Since September 30, 1991, the General Partner and USL Capital may, but are not obligated to, continue to offer investment opportunities to the Partnership. The Partnership has agreed to accept suitable opportunities provided the General Partner and Related Entities make 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 elects not to make or to make only a portion of an investment offered to it by an affiliate, the remaining investment may be made by affiliates of the General Partner or third parties. A determination that an investment is not suitable for the Partnership will be subject to subsequent review by the Audit Committee of the board of directors of 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. Leasing Industry Competition The aircraft leasing industry is highly competitive, offering users alternatives to the purchase of nearly every type of aircraft. Competitive conditions vary considerably depending upon the type of aircraft to be leased and the nature of the prospective lessee. In attempting to obtain commitments to lease aircraft to specific lessees, the Partnership competes with aircraft manufacturers, airlines and other operators, equipment managers, leasing companies, financial institutions and other parties engaged in leasing, managing, marketing or remarketing aircraft. In addition, a number of unrelated limited partnerships exist whose investment objectives are similar to the Partnership. Many of these competitors have significantly greater financial resources than the Partnership and may have greater experience than the General Partner and its affiliates in managing, leasing, operating and selling aircraft. Such competitors may offer to lease aircraft at rates lower than those which the Partnership can reasonably offer and may provide certain benefits, such as maintenance, crews, support services and trade-in privileges, which the Partnership generally cannot provide. In general the Partnership's pricing is uncompetitive for new acquisitions because of its limited sources of capital. See "Acquisition of Additional Aircraft," above. 12 13 The Partnership could be deemed to be in competition with affiliates of the General Partner for aircraft, for purchasers, sellers or lessees of aircraft and for sources of financing. While the Partnership Agreement does not prohibit affiliates of the General Partner from making investments in aircraft, certain investments may be offered to the Partnership or be made jointly. See "Approved Partnership Investment" above. Federal Income Taxation The Partnership is considered a publicly traded partnership ("PTP") under the Revenue Act of 1987 and therefore is scheduled to lose its tax exemption effective January 1, 1998. As a result, the Partnership will be subject to Federal income tax on any taxable income at regular corporate rates prior to the payment of any cash distributions. Cash distributions to Unitholders would also be subject to personal taxation (similar to corporate dividends). Although alternatives may be available to avoid this additional level of taxation (de-listing from the New York Stock Exchange and substantially limiting trading or liquidating the Partnership), such alternatives have important consequences which must be considered carefully. Certain of these actions require Unitholder approval and will only be recommended after a thorough consideration of the advantages and disadvantages of each alternative and determining which action would be in the Unitholders' best interest. See Note 9 to Notes to Financial Statements for a description of the effect of the Partnership's use of different accounting methods for income tax and financial statement purposes and the impact of the sale of the Aircraft prior to 1998 which is an aspect of liquidating the Partnership. ITEM 2. PROPERTIES The Partnership owns no real property and shares office space in the offices of its USL Capital affiliates. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 13 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Partnership units of Airlease Ltd. are traded on the New York Stock Exchange under the symbol, FLY. As of February 29, 1996, there were 1,618 holders of record of Airlease Ltd. partnership units. See Note 11 of Notes to Financial Statements for quarterly trading information regarding the Units. Cash Distribution The Partnership makes quarterly cash distributions to unitholders which are based on its cash flow from operations 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. Distributions declared during 1994 and 1995 were as follows:
Record Date Payment Date Per Unit ----------- ------------ -------- March 31, 1994 May 13, 1994 46 cents June 30, 1994 August 15, 1994 46 cents September 30, 1994 November 15, 1994 46 cents December 30, 1994 February 15, 1995 47 cents 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
The first quarter 1996 distribution of 50 cents per unit was declared on February 28, 1996, payable on May 15, 1996 to unitholders of record on March 29, 1996. (1) Includes special cash distribution of 10 cents per unit from casualty proceeds received on one aircraft. Cash Available from Operations The Partnership distributes all Cash Available from Operations, as defined by the 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. 14 15 Cash Available from Sale or Refinancing Any Cash Available From Sale or Refinancing (including casualty proceeds), as defined in the Partnership Agreement, received prior to January 1, 2005, is expected to be retained for use in the Partnership's business. If, prior to January 1, 2005, the General Partner does not believe that attractive investment opportunities exist for the Partnership, the Partnership may distribute Cash Available from Sale or Refinancing. Any Cash Available from Sale or Refinancing received after January 1, 2005, will not be reinvested but will be distributed, unless the General Partner determines it would be in the Partnership's best interest to repay indebtedness. One of the Aircraft on lease to Continental was damaged in a ground accident and declared a total loss during 1995. The Partnership received casualty proceeds from this Aircraft which exceeded the net book value of the Aircraft and resulted in a gain on sale of $21,000. After considering the small amount of casualty proceeds and the lack of new investment opportunities which would provide an acceptable return to Unitholders, the Partnership distributed these proceeds to Unitholders. This special distribution of 10 cents per unit was declared for unitholders of record on September 29, 1995 and was paid November 15, 1995. In March 1996, the Partnership sold its 50% interest in one MD-82 Aircraft on lease to Finnair OY for approximately $6.9 million. A portion of the sale proceeds will be used to pay off the outstanding loan balance under the non-recourse loan agreement which was collateralized by this Aircraft. The General Partner has not yet determined the best use of the remaining sale proceeds, which may include reinvestment, repayment of debt, or a special cash distribution. 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 would likely 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. 15 16 ITEM 6. SELECTED FINANCIAL DATA The following tables set forth selected financial data and other data concerning the Partnership for each of the last five years:
For years ended December 31, (In thousands except per-unit amounts) 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------- OPERATING RESULTS ------------------------------------------------------ Total revenues $12,513 $12,538 $12,852 $12,375 $14,062 ------------------------------------------------------ Interest expense 2,366 2,660 2,557 2,529 2,531 Depreciation expense 2,129 2,146 2,426 2,921 2,845 Other expenses 1,196 1,401 1,786 1,259 1,330 ------------------------------------------------------ Total expenses 5,691 6,207 6,769 6,709 6,706 ------------------------------------------------------ Net income $ 6,822 $ 6,331 $ 6,083 $ 5,666 $ 7,356 ------------------------------------------------------ Net income per limited partnership unit (1) $ 1.46 $ 1.36 $ 1.30 $ 1.21 $ 1.57 Cash distributions declared per limited $ 2.07(2) $ 1.85 $ 1.69 $ 1.66 $ 1.64 partnership unit FINANCIAL POSITION Total assets $103,021 $107,542 $113,967 $112,337 $108,534 Long-term obligations $ 27,483 $ 29,525 $ 27,940 $ 30,861 $ 25,268 Total partners' equity $ 71,712 $ 74,562 $ 76,874 $ 78,685 $ 80,774
(1) After allocation of the 1% General Partner's interest (2) Includes special cash distribution of 10 cents per unit from casualty proceeds 16 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources At December 31, 1995, long-term borrowings of $27.5 million represented 18.7% of the cost of the aircraft presently owned by the partnership and 26.7% of total assets. This debt is outstanding under four long-term, non-recourse debt facilities collateralized by certain aircraft, two of which are at fixed rates and two of which are at floating rates. The partnership has entered into interest rate protection agreements which limits its risk on floating rate debt. At December 31, 1994 and 1995, $29.5 million and $27.5 million, respectively, were outstanding under these four facilities and approximately $2.1 million remained available. See Note 5 to Financial Statements. Net cash provided by operating activities was $10.5 million for 1993, $7.3 million for 1994, and $9.3 million for 1995. Total debt service for 1993, 1994, and 1995 was 54.3%, 95.8%, and 59.3%, respectively, of net cash provided by operating activities. In 1993 the partnership incurred costs to convert an off-lease Boeing 727 aircraft to a cargo configuration and lease it to FedEx under a finance lease. This caused debt service to increase in 1994 due to the payment of these conversion costs, and caused net cash from operating activities to decrease (since as a finance lease, the FedEx lease generates more cash from investing activities rather than operating activities). Total scheduled debt service in 1996 is $7.6 million and will be paid from revenues, primarily from the rental payments received from aircraft leases. Notes receivable of $933,000 represent advances under the partnership's agreement to finance certain aircraft modifications for Continental pursuant to a restructured lease agreement. The partnership's maximum financing obligation is $282,000 per aircraft, and a total of $251,000 remains available. These financings will be repaid with interest through the year 2000. Cash distributions paid by the partnership were $7.6 million ($1.63 per unit) in 1993, $8.6 million ($1.84 per unit) in 1994, and $9.5 million in 1995 ($2.04 per unit). Distributions in 1995 include a special cash distribution of 10 cents per unit made from the proceeds received from the casualty of one aircraft. The increase in cash distributions per unit reflects the re-lease of aircraft in 1993 and 1994 and the proceeds received from the casualty loss. Partnership net income was $6.1 million in 1993, $6.3 million in 1994, and $6.8 million in 1995. Pursuant to the Partnership Agreement, the partnership distributed all Cash Available From Operations. Since such distributions were in excess of earnings, partnership equity declined from $74.6 million at December 31, 1994, to $71.7 million at December 31, 1995. Results of Operations In 1993, revenues were earned from seven aircraft subject to finance leases (USAir, TWA, and FedEx) and eight aircraft subject to operating leases (Continental and Finnair). Finance lease income increased from 1992, reflecting the lease in April 1993 of an off-lease aircraft to 17 18 FedEx. Operating lease rentals increased $399,000 from 1992 as a result of the receipt of twelve months' rent from Finnair compared to eight months rent in the prior year. Leases with lessees in bankruptcy (Continental and TWA) contributed $2.3 million of gross revenues in 1993. At year-end 1993, off-lease aircraft represented 1.2% of total partnership assets. 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). Finance lease income declined from 1993 as the balances due declined, and there were two months of non-accrual of TWA revenue (November and December). TWA contributed 5.2% of 1994 total revenues (January 1994 through October 1994). Operating lease rentals increased over 1993, reflecting the December 1994 re-lease of an off-lease aircraft to Sun Jet. 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 had remitted all past-due amounts by the third quarter. TWA was in bankruptcy for a portion of 1995, and the TWA lease contributed $870,000 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. USAir, the partnership's major lessee (69.8% of total year-end assets), reported an after-tax profit of $119 million for 1995, compared with 1994's loss of $685 million. USAir has reported that discussions with two major airlines regarding possible acquisition of USAir ceased in November. The airline also elected Stephen M. Wolf as its new chairman and chief executive officer. For information regarding the percentage of total partnership assets and revenues represented by aircraft owned and leased by the partnership, see "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 1995 reflects an average interest rate of 8.3% based on average total outstanding debt of $28.5 million, compared to 1994's average interest rate of 8.9% based on average total outstanding debt of $29.9 million. Depreciation expense relates to aircraft subject to operating leases and those held for sale or lease. In 1994 depreciation expense decreased as an off-lease aircraft was placed on a finance lease with FedEx in April 1993. 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 18 19 lease to Sun Jet. The $700,000 provision for loss on aircraft in 1993 reflects a charge recorded by the partnership on its DC-9-51 aircraft (which had been off lease since 1991) to reduce the net book value of this aircraft to reflect a lower estimate of its then current market value. In 1994, the partnership incurred total expenses of $798,000, (of which $668,000 have been capitalized) to prepare this aircraft for re-lease. In March 1995, the 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 is not expected to be material. Subsequent Event In connection with the sale of an Aircraft in March 1996, one of the four outstanding long-term, non-recourse debt facilities has been paid in full. See "Business - Disposition of Aircraft." 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 a part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On March 21, 1994, the Board of Directors of Airlease Management Services, Inc., the General Partner, unanimously approved the appointment of Coopers & Lybrand L.L.P. as independent auditors of the Partnership for the year ending December 31, 1994, and dismissed the firm of Deloitte & Touche LLP. Separate action by the Audit Committee was not required. The change was made primarily to achieve efficiencies in the audit process and reduce costs as Coopers & Lybrand L.L.P. are also the auditors for the General Partner. Deloitte & Touche LLP were the independent auditors of the Partnership since its inception in October 1986. As required by Item 304(a) of Regulation S-K, the Partnership reported that during the two fiscal years immediately preceding such dismissal and subsequent interim period prior to March 21, 1994, there were no disagreements on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures. None of the reports of Deloitte & Touche LLP on the Partnership's financial statements for any of the two years immediately preceding such dismissal contained an adverse opinion or a disclaimer of opinion or was qualified or modified as to uncertainty, audit scope or accounting principles. 19 20 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Partnership has no directors or executive officers. Under the 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 unitholders. The directors and executive officers of the General Partner are as follows:
Name Position with the General Partner ---- --------------------------------- James G. Duff Chairman of the Board, Chief Executive Officer and Director David B. Gebler President, Chief Operating Officer and Director Stanley E. Gutman Vice President and Secretary William A. Hasler Director Robert A. Keyes, Jr. Vice President, Chief Financial Officer, Principal Accounting Officer and Director Henry Lerner Senior Vice President and General Counsel Leonard Marks, Jr. Director John R. Pettipher Director
JAMES G. DUFF (age 58), has been Chairman of USL Capital since April 1992, President and Chief Executive Officer since January 1990 and a Director of the General Partner since 1988. He was President and Chief Operating Officer of USL Capital from February 1988 through January 1990. From April 1980 through February 1988, Mr. Duff was an Executive Vice President of Ford Motor Credit Company, where he was responsible for its Diversified Operations. Mr. Duff holds a bachelors and a masters degree in Finance from the University of Kansas. DAVID B. GEBLER (age 46), Senior Vice President of the Transportation and Industrial Financing business unit of USL Capital, has been with USL Capital since November 1989 and has been a Director of the General Partner since 1990. Prior to that time he held various positions with Ford Motor Credit Company. Mr. Gebler holds a bachelors degree in mathematics from Clarkson University and graduate degrees in Engineering and Management from the University of Michigan. 20 21 STANLEY E. GUTMAN (age 61), has been Senior Counsel of USL Capital since June 1986. Prior to that time, Mr. Gutman was Assistant Vice President, Associate General Counsel and Secretary of GATX Leasing Corporation. Mr. Gutman holds an A.B. degree from the University of California, Berkeley; a L.L.B. from the University of California, Berkeley, (Boalt Hall); and an M.B.A. from Harvard University. WILLIAM A. HASLER (age 54), 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 the worldwide consulting business. He is a member of the board of governors of The Pacific Stock Exchange and the boards of The Gap, TCSI, RCM Strategic Global Fund 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. ROBERT A. KEYES, JR. (age 43), has been Vice President and Corporate Controller of USL Capital since January 1990 and has been a Director of the General Partner since 1990. From January 1984 through December 1989 he served as Senior Vice President and Chief Financial Officer of Wells Fargo Leasing Corporation. Mr. Keyes is a C.P.A. and previously served with Arthur Andersen & Co. on their audit staff. Mr. Keyes holds a B.S. degree in economics from Bates College and an M.B.A. in accounting from Rutgers University. HENRY LERNER (age 47), has been Senior Vice President and General Counsel of USL Capital since May 1994. From 1985 through April 1994, he was the senior litigation partner of the San Francisco law firm of Stein Lubin & Lerner. Prior to that time, he served as a senior attorney-adviser in the Office of the Legal Adviser of the U.S. Department of State in Washington, D.C. Mr. Lerner holds a B.A. in economics and English from the University of Michigan, an M.A. in English from the University of California at Berkeley, and a law degree from the University of California at Berkeley (Boalt Hall). LEONARD MARKS, JR. (age 74), 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. Mr. Marks holds a Ph.D in Business Administration from Harvard University. JOHN R. PETTIPHER (age 53), has been President of the Transportation and Industrial Financing business unit of USL Capital since November 1990 and has been a Director of the General Partner since 1990. Prior to that time he was the President of the U.S. Capital Equipment division of USL Capital from January 1989 to November 1990. From October 1987 to December 1988, Mr. Pettipher was the Manager of Capital Equipment Financing for Ford Motor Credit Company. Mr. Pettipher holds a BA in Economics from Michigan State University and an MBA in Finance/Marketing from Wayne State University. 21 22 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 USL Capital 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 1995, 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 is 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 As of January 31, 1996, the following person was known to the Partnership to be beneficial owners of more than five percent of the Partnership's equity securities:
TITLE NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF OF BENEFICIAL OF BENEFICIAL OF CLASS OWNER OWNERSHIP CLASS(1) ----- ---------------- ---------------- ----- Units of Limited U.S. Airlease Holding, Inc. 1,025,000(2) 22.2% Partnership 733 Front Street Interest San Francisco, CA 94111(2)
_______________________ (1) Represents percentage of all units of limited partnership interests whether or not held as Depositary Units. (2) USL Capital, 733 Front Street, San Francisco, CA 94111, owns all of the outstanding stock of Holding. Therefore, USL Capital is deemed also to be the beneficial owner of such Units. In addition, USL Capital, through a subsidiary, owns all the outstanding stock of the General Partner. Therefore, USL Capital is also indirectly the beneficial owner of the General Partner's 1% general partner interest. USL Capital is a wholly owned subsidiary of Ford Holdings, Inc. All of the outstanding common stock of Ford Holdings, Inc. is owned directly or indirectly by Ford Motor Company. 22 23 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.
TITLE NAME AND ADDRESS AMOUNT AND NATURE PERCENT OF OF BENEFICIAL OF BENEFICIAL OF CLASS OWNER OWNERSHIP CLASS(1) - ----- ---------------- ----------------- ----- Depositary Units James G. Duff 100 (2) David B. Gebler 700(3) (2) Leonard Marks, Jr. 500 (2) All directors and executive officers as a group 1300(4) (2)
_______________________ (1) Represents percentage of all Units of limited partnership interests whether or not held as Depositary Units. (2) Represents less than 1%. (3) Includes 200 units held by Mr. Gebler as custodian for a minor child as to which Mr. Gebler has shared voting and investment power and as to which beneficial ownership is disclaimed. (4) Includes the 200 Units described in note 3. 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 borrows funds from USL Capital, including advances for expense payments. All such borrowings have been unsecured and have borne interest at a floating rate not exceeding the prime rate. For a discussion of certain terms of the Partnership Agreement regarding the Partnership's participation in aircraft leasing investments made by the General Partner and its Related Entitles, see "Business -- Approved Partnership Investments." For a discussion of joint venture arrangements between the Partnership and USL Capital, see "Business -- Aircraft Portfolio", "Business -- Existing Participants in Leases" and "Business -- Joint Venture/General Arrangements." 23 24 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:
PAGE -------------------- Management's Responsibility for Financial Statements A-1 Independent Auditors' Report A-2 - A-3 Statements of Income for periods ended December 31, 1995, 1994, and 1993 A-4 Balance Sheets at December 31, 1995 and 1994 A-5 Statements of Cash Flows for periods ended December 31, 1995, 1994, and 1993 A-6 Statements of Changes in Partners' Equity for the periods ended December 31, 1995, 1994, and 1993 A-7 Notes to Financial Statements A-7
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 Report on Form 8-K in 1995. 24 25 (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, 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 Amendments to Amended and Restated Partnership Agreement. 4.1 (1) Form of Application for Transfer of Depositary Unit. 4.2 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 8.75% Secured Non-recourse Note of Meridian Trust Company dated March 31, 1987 in favor of The World Wing Company Limited. 4.4 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. 10.9 Lease Agreement dated as of November 6, 1986, between GATX, as lessor and NYA, as lessee, with respect to aircraft N7379F. 10.17 Trust Agreement dated as of December 30, 1986, with respect to aircraft N7379F together with related trust certificate.
____________________________ (1) Incorporated by reference to Partnership's Registration on Form S-1 (File No. 33-7985), as amended. (2) Incorporated by reference to Partnership's Annual Report on Form 10-K for the year ended December 31,1991. (3) Incorporated by reference to Partnership's Annual Report on Form 10-K for the year ended December 31, 1992. (4) Incorporated by reference to Partnership's Annual Report on Form 10-K for the year ended December 31, 1993. 25 26
Exhibit No. Description - ---------- ----------- 10.40 Trust Agreement dated as of August 15, 1988, between Trust Company for USL, Inc., as Trustee, United States Airlease, Inc., and the Registrant, with respect to aircraft N913TW. 10.41(2) 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 Trust Company for USL, Inc. concerning seven Boeing 737-200 aircraft and certain engines and related equipment. 10.43(3) Trust Agreement dated as of April 30, 1992 between United States Leasing International, Inc. as Owner Participant and Agent, Airlease Ltd., A California Limited Partnership, as Owner Participant and Trust Company for USL, Inc., as Owner Trustee, with respect to One (1) McDonnell Douglas MD-82 Aircraft with Finnish Registration Mark OH-LMO Leased to Finnair Oy. 10.44(4) Aircraft Lease Agreement dated as of April 15, 1993 between 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 Trust Agreement dated as of July 27, 1993 among Airlease Ltd., A California Limited Partnership, as Owner Participant, United States Leasing International, Inc., as Agent, and 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. 10.46(4) Loan and Security Agreement dated as of April 30, 1993 between Airlease Ltd., a California Limited Partnership as Borrower and ORIX USA Corporation as Lender. 10.47(4) Intercreditor Agreement dated as of April 30, 1993 between United States Leasing International, Inc., Airlease Ltd., a California Limited Partnership and ORIX USA Corporation.
________________________________________________________ (1) Incorporated by reference to Partnership's Registration on Form S-1 (File No. 33-7985), as amended. (2) Incorporated by reference to Partnership's Annual Report on Form 10-K for the year ended December 31,1991. (3) Incorporated by reference to Partnership's Annual Report on Form 10-K for the year ended December 31, 1992. (4) Incorporated by reference to Partnership's Annual Report on Form 10-K for the year ended December 31, 1993. 26 27
Exhibit No. Description - ----------- ----------- 10.48(5) Aircraft Lease Agreement dated as of December 1, 1994 and Lease Supplement dated December 13, 1994 between Trust Company for USL, Inc., as Owner Trustee, Lessor and Sun Jet International, Inc., Lessee; Instruction Letter dated as of December 12, 1994 between 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 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).
Omission of Substantially Identical Documents In accordance with Regulation 12b-31, Omission of Substantially Identical Documents, five additional Lease Agreements and five additional Trust Agreements which are substantially identical to Exhibit 10.9 and Exhibit 10.17, respectively, are not being filed. Exhibits 10.9 and 10.17. cover one of six aircraft. Each additional aircraft (aircraft registration numbers N7371F, N7372F, N7373F, N7374F, and N7378F) is covered by substantially identical documents. (1) Incorporated by reference to Partnership's Registration on Form S-1 (File No. 33-7985), as amended. (2) Incorporated by reference to Partnership's Annual Report on Form 10-K for the year ended December 31,1991. (3) Incorporated by reference to Partnership's Annual Report on Form 10-K for the year ended December 31, 1992. (4) Incorporated by reference to Partnership's Annual Report on Form 10-K for the year ended December 31, 1993. (5) Incorporated by reference to Partnership's Annual Report on Form 10-K for the year ended December 31, 1994. 27 28 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, 1996. AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP (Registrant) By: Airlease Management Services, Inc., General Partner By: /s/ David B. Gebler ------------------------------------ David B. Gebler President and Chief Operating Officer 28 29 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/ J. G. Duff March 28, 1996 - ------------------------------------------------ J. G. Duff Chairman of the Board, Chief Executive Officer and Director of AMSI /s/ D. B. Gebler March 28, 1996 - ------------------------------------------------ D. B. Gebler President, Chief Operating Officer and Director of AMSI /s/ R. A. Keyes, Jr. March 28, 1996 - ------------------------------------------------ R. A. Keyes, Jr. Vice President, Chief Financial Officer and Director of AMSI (Principal Financial Officer and Accounting Officer) /s/ J. R. Pettipher March 28, 1996 - ------------------------------------------------ J. R. Pettipher Director of AMSI
The foregoing constitute a majority of the members of the Board of Directors of Airlease Management Services, Inc. (the General Partner). 29 30 APPENDIX A Management's Responsibility for Financial Statements Airlease Management Services, Inc., the general partner of the partnership and a wholly owned subsidiary of USL Capital Corporation ("USL Capital"), 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 USL Capital'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, 1995 and December 31, 1994, and by Deloitte & Touche LLP, independent auditors for the year ended December 31, 1993. 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 President and Chief Operating Officer Airlease Management Services, Inc. /s/ Robert A. Keyes, Jr. - -------------------------- Robert A. Keyes, Jr. Chief Financial Officer Airlease Management Services, Inc. A-1 31 LETTERHEAD OF COOPERS & LYBRAND L.L.P. INDEPENDENT AUDITORS' REPORT To the Partners of Airlease Ltd., A California Limited Partnership: We have audited the financial statements of Airlease Ltd., A California Limited Partnership (listed in Part IV Item 14(a)1.) of this Form 10-K. 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, 1995 and 1994, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. - ------------------------------ Coopers & Lybrand L.L.P. San Francisco, California January 29, 1996 A-2 32 LETTERHEAD OF DELOITTE & TOUCHE LLP INDEPENDENT AUDITORS' REPORT To the Partners of Airlease Ltd., A California Limited Partnership: We have audited the accompanying statements of income, cash flows and changes in partners' equity of Airlease Ltd., A California Limited Partnership for the year ended December 31, 1993. 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 audit 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 audit provides a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the results of operations and cash flows of Airlease Ltd. for the year ended December 31, 1993, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP - --------------------------- Deloitte & Touche LLP January 21, 1994 A-3 33 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF INCOME
For the years ended December 31, (In thousands except per-unit amounts) 1995 1994 1993 - -------------------------------------------------------------------------------------- REVENUES Finance lease income $ 9,455 $ 9,635 $10,061 Operating lease rentals 2,883 2,743 2,667 Other income 175 160 124 ----------------------------- Total revenues 12,513 12,538 12,852 ----------------------------- EXPENSES Interest 2,366 2,660 2,557 Depreciation - operating leases 2,129 2,146 2,426 Provision for loss on aircraft held for lease or sale -- -- 700 Management fee - general partner 784 800 744 Investor reporting 258 213 192 General and administrative 154 388 150 ----------------------------- Total expenses 5,691 6,207 6,769 ----------------------------- NET INCOME $ 6,822 $ 6,331 $ 6,083 ----------------------------- NET INCOME ALLOCATED TO: General partner $ 68 $ 63 $ 61 ----------------------------- Limited partners $ 6,754 $ 6,268 $ 6,022 ----------------------------- NET INCOME PER LIMITED PARTNERSHIP UNIT $ 1.46 $ 1.36 $ 1.30 -----------------------------
See notes to financial statements A-4 34 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP BALANCE SHEETS
As of December 31, (IN THOUSANDS EXCEPT UNIT DATA) NOTES 1995 1994 - -------------------------------------------------------------------------------- ASSETS Cash $ 0 $ 0 Finance leases - net 1 & 2 91,564 93,697 Operating leases - net 1 & 3 10,259 12,853 Notes receivable 4 & 7 933 673 Prepaid expenses and other assets 265 319 ------------------ Total Assets $103,021 $107,542 ------------------ LIABILITIES AND PARTNERS' EQUITY LIABILITIES: Distribution payable to partners $ 2,336 $ 2,196 Accounts payable and accrued liabilities 1,490 1,259 Long-term notes payable 5 27,483 29,525 ------------------ Total liabilities 31,309 32,980 ------------------ COMMITMENTS AND CONTINGENCIES 6 PARTNERS' EQUITY: Limited partners (4,625,000 units outstanding) 70,995 73,816 General partner 717 746 ------------------ Total partners' equity 71,712 74,562 ------------------ TOTAL LIABILITIES AND PARTNERS' EQUITY $103,021 $107,542 ------------------
See notes to financial statements A-5 35 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS
For the years ended December 31, (In thousands) 1995 1994 1993 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,822 $ 6,331 $ 6,083 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and provision for loss 2,129 2,146 3,126 Increase (decrease) in accounts payable and accrued liabilities 231 (1,092) 1,227 Decrease (increase) in prepaid expenses and other assets 54 (157) (46) Decrease (increase) in accounts receivable 111 103 96 Gain on disposition of equipment (21) 0 0 --------------------------------- Net cash provided by operating activities 9,326 7,331 10,486 --------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Aircraft equipment purchase and refurbishment (net of accrued refurbishment costs of $66 in 1995, $250 in 1994 and $4,855 in 1993) (66) (4,401) (3,004) Casualty settlement proceeds 440 0 0 Increase (decrease) in notes receivable (260) (434) 78 Rental receipts in excess of earned finance lease income 2,133 4,513 2,976 --------------------------------- Net cash provided (used) by investing activities 2,247 (322) 50 --------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Revolving credit borrowing (repayment)-net 545 5,946 (7,582) Proceeds from issuance of long-term debt 575 0 7,800 Repayment of long-term debt (3,162) (4,361) (3,139) Distributions paid to partners (9,531) (8,596) (7,614) --------------------------------- Net cash used by financing activities (11,573) (7,011) (10,535) --------------------------------- Increase (decrease) in cash 0 (2) 1 Cash at beginning of year 0 2 1 --------------------------------- Cash at end of year $ 0 $ 0 $ 2 --------------------------------- Additional information: Cash paid for interest $ 2,052 $ 2,483 $ 2,449 ---------------------------------
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-6 36 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' EQUITY
For the years ended December 31, 1995, 1994, and 1993 General Limited (In thousands except per-unit amounts) Partner Partners Total - -------------------------------------------------------------------------------- Balance, December 31, 1992 $787 $77,898 $78,685 Net Income - 1993 61 6,022 6,083 Distributions to partners declared ($1.69 per limited partnership unit) (79) (7,815) (7,894) - -------------------------------------------------------------------------------- Balance, December 31, 1993 769 76,105 76,874 Net Income - 1994 63 6,268 6,331 Distributions to partners declared ($1.85 per limited partnership unit) (86) (8,557) (8,643) - -------------------------------------------------------------------------------- Balance, December 31, 1994 746 73,816 74,562 Net Income - 1995 68 6,754 6,822 Distributions to partners declared ($2.07 per limited partnership unit) (97) (9,575) (9,672) - -------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 $717 $70,995 $71,712 - --------------------------------------------------------------------------------
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., a wholly owned subsidiary of USL Capital Corporation ("USL Capital"). United States Airlease Holding, Inc. ("Holding"), an affiliate of the general partner, holds 1,025,000 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 A-7 37 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, 1995, all fifteen 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 USAir, Inc. 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 1995, 1994, and 1993, leases with USAir, Inc. resulted in finance lease revenues of $8,007,000, $8,409,000, and $8,768,000, respectively. A sixth aircraft subject to a finance lease expiring in 2002 is held jointly with USL Capital and leased to Trans World Airlines. In April 1993, the partnership leased two aircraft held jointly with USL Capital (which were previously off-lease) to FedEx under a 13-year finance lease which expires in 2006. In September 1993, the partnership exchanged its 50% interest in the two aircraft for a 100% ownership interest in one aircraft. No gain or loss was recognized on this exchange. The finance leases at December 31, 1995 and 1994, are summarized as follows (in thousands):
1995 1994 ----- ----- Receivable in installments $92,183 $103,771 Residual valuation 41,950 41,950 Unearned lease income (42,569) (52,024) ------- ------- NET INVESTMENT $91,564 $93,697 ======= =======
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, 1995, are due in installments of $17,307,000 in 1996, $14,348,000 annually through 1999, and $31,832,000 thereafter. A-8 38 3. OPERATING LEASES The partnership, jointly with USL Capital and PS Group, Inc., owns an undivided 1/3 interest in six aircraft, subject to an operating lease with Continental Airlines. A seventh aircraft was damaged and declared a casualty loss in July 1995 which resulted in a net gain of $21,000. Operating lease revenues to the partnership were $1,347,500 in 1995 and $1,470,000 each in 1994 and 1993. 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. Finnair resulted in operating lease revenues to the partnership of $1,197,000 in 1995 and 1994. In December 1994, the partnership leased one aircraft held jointly with USL Capital (which was previously off lease) to Sun Jet International, Inc. under a three-year operating lease which expires in 1997, and resulted in operating lease revenues to the partnership of $339,000 in 1995 and $14,000 in 1994. The operating leases at December 31, 1995 and 1994, are summarized as follows (in thousands):
1995 1994 ---- ---- Leased aircraft (at cost) $27,492 $29,830 Accumulated depreciation (17,344) (17,200) Rentals receivable 111 223 ------- ------- NET INVESTMENT $10,259 $12,853 ======= =======
Future minimum rentals on operating leases at December 31, 1995, are due in installments of $2,685,000 in 1996, $1,396,000 in 1997, $1,077,000 in 1998 and $269,000 in 1999. During 1995 and 1994, the partnership incurred capital expenditures of $66,000 and $668,000, respectively, for repair work on the DC-9-51 aircraft. 4. NOTES RECEIVABLE At December 1995 and 1994, the partnership had outstanding notes receivable of $933,000 and $673,000, respectively, from Continental Airlines for certain aircraft modifications pursuant to the restructured lease agreement on the aircraft. The weighted average interest rate at December 31, 1995 and 1994, was 11.11% and 10.81%, respectively, and the principal is due in subsequent years as follows: 1996, $691,000; 1997, $65,000; 1998, $73,000; 1999, $81,000, and $14,000 thereafter. 5. LONG-TERM NOTES PAYABLE At December 31, 1995 and 1994, the partnership had outstanding borrowings of $13,059,000 and $15,828,000, respectively, under an 8.75% note payable through September 30, 1998. The note is collateralized by three of the aircraft leased to USAir, Inc. under a finance lease with no other recourse to the partnership. A-9 39 The partnership has a non-recourse revolving variable interest rate loan facility which is collateralized by one of the aircraft leased to USAir, Inc. The partnership may borrow up to $7,178,000 which amount declines through 1998. At December 31, 1995 and 1994, $7,381,000 and $6,836,000 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. Borrowings under this facility will bear interest at LIBOR plus 2.5%. The partnership has entered into an interest-rate cap agreement which caps the LIBOR rate at 8.5%. At December 31, 1995, $2,910,000 was available under this facility, and this amount declines through 1998. At December 31, 1995 and December 1994, $575,000 and $0 were outstanding, respectively. 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, 1995 and 1994, $6,467,000 and $6,861,000, respectively, were outstanding under a 7.4% note payable through 2006. Based upon amounts outstanding at December 31, 1995, the minimum future principal payments on all outstanding long-term notes payable are due as follows (in thousands): 1996 $ 7,202 1997 6,639 1998 8,543 1999 529 2000 568 Thereafter 4,002 ------- TOTAL $27,483 =======
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, 1995, the partnership had one interest rate swap agreement outstanding, which was in a payable position, with a notional principal amount of $5,990,000 and a termination value of $208,000. Under interest rate cap agreements, the partnership pays a premium for the right to receive interest in excess of the capped rates. At December 31, 1995, the partnership had one interest rate cap agreement with a notional principal amount of $2,910,000 and a termination value of $0. A-10 40 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents carrying amounts and fair values of the partnership's financial instruments at December 31, 1995. 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.
1995 (In thousands) Carrying Amount Fair Value --------------- ---------- Notes receivable (Note 4) $ 933 $ 958 Long-term debt (Note 5) $27,483 $27,602 Derivatives relating to debt (Note 6) Interest rate swaps-net pay position n/a $ (208) Interest rate caps n/a 0
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 assumption used in estimating the fair values of financial instruments: 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 assumed rates that 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, 1995, 1994, and 1993, were as follows (in thousands):
1995 1994 1993 ---- ---- ---- Management fees $718 $735 $744 Disposition and remarketing fees 66 65 0 Reimbursement of other costs 79 79 72 Reimbursement of interest costs 15 39 14 ---- ---- ---- TOTAL $878 $918 $830 ==== ==== ====
A-11 41 The general partner was allocated its 1% share of the partnership net income and cash distributions. Holding, a limited partner and an affiliate of the general partner, was also allocated its 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 cause the partnership's taxable income to exceed financial statement income for years subsequent to 1997 by an estimated $70 million, would result in tax liabilities at the partnership level of approximately $28 million based upon current tax rates. The partnership is considering several tax planning strategies including the sale of the aircraft prior to 1998. These strategies may have the effect of accelerating the recognition of taxable income to years before 1998. Such taxable income would then be allocated to the partners and not taxed at the partnership level. In January 1993, the partnership adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes.". This standard requires income taxes to be recorded on the liability method. This accounting change did not have a material effect on the partnership. 10. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING The USAir aircraft were purchased subject to a tax benefit transfer lease ("TBT") which provided for the transfer of Federal income tax ownership of the USAir 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 resulted in tax deductions and the interest was included 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 42
1995 1994 1993 ---- ---- ---- Net income per financial statements: $ 6,822 $ 6,331 $ 6,083 Increases (decreases) resulting from Casualty gain 109 - - Lease rents less earned finance lease income 5,207 4,530 3,480 Depreciation and amortization (7,949) (6,577) (10,303) ---------------------------------- Income (loss) per income tax method 4,189 4,284 (740) Allocable to general partner (42) (43) (7) ---------------------------------- TAXABLE INCOME (LOSS) ALLOCABLE TO LIMITED PARTNERS $ 4,147 $ 4,241 $ (733) Taxable income (loss) per limited partnership unit after giving effect to taxable income allocable to general partner (amount based on a unit owned from October 10, 1986) $ 0.90 $ 0.92 $ (0.16) Partner's equity per financial statements $ 71,712 $ 74,562 $ 76,874 Increases (decreases) resulting from Casualty gain 109 - - Lease rents less earned finance lease income 28,273 23,066 18,536 Deferred underwriting discounts and commissions and organization costs 5,351 5,351 5,351 Accumulated depreciation and amortization (45,089) (37,140) (30,563) TBT interest income less TBT rental expense (54,030) (54,030) (54,030) ---------------------------------- PARTNERS' EQUITY PER INCOME TAX METHOD $ 6,326 $ 11,809 $ 16,168
A-13 43 11. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 1995 and 1994 (in thousands, except per unit amounts):
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 Unit $ 0.35 $ 0.38 $ 0.37 $ 0.36 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
1994 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - ---- -------- ------- -------- ------- Total Revenues $ 3,191 $ 3,194 $ 3,180 $ 2,973 Net Income $ 1,663 $ 1,675 $ 1,621 $ 1,372 Net Income Per Limited Partnership Unit $ 0.36 $ 0.36 $ 0.35 $ 0.29 Unit Trading Data: Unit Prices (high-low) on NYSE $16 1/8 - $15 1/4 $16 7/8 - $14 3/4 $17 - $15 1/2 $16 1/8 - $10 7/8 Unit Trading Volumes on NYSE 430 297 219 475
A-14 44 INDEX TO EXHIBITS
Exhibit No. Description ---------- ---------------------------- 3.5 Amendments to Amended and Restated Partnership Agreement. 4.2 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 8.75% Secured Non-recourse Note of Meridian Trust Company dated March 31, 1987 in favor of The World Wing Company Limited. 4.4 Instructions and Consent Agreement dated as of March 31, 1987 between the Registrant and The World Wing Company Limited. 10.9 Lease Agreement dated as of November 6, 1986, between GATX, as lessor and NYA, as lessee, with respect to aircraft N7379F. 10.17 Trust Agreement dated as of December 30, 1986, with respect to aircraft N7379F together with related trust certificate. 10.40 Trust Agreement dated as of August 15, 1988, between Trust Company for USL, Inc., as Trustee, United States Airlease, Inc., and the Registrant, with respect to aircraft N913TW. 10.45 Trust Agreement dated as of July 27, 1993 among Airlease Ltd., A California Limited Partnership, as Owner Participant, United States Leasing International, Inc., as Agent, and 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. 27. Financial Data Schedule.
A-15 EX-3.5 2 AMENDMENTS TO PARTNERSHIP AGREEMENT 1 Exhibit 3.5 1. PROPOSED AMENDMENT TO MAKE CERTAIN CHANCES IN THE MANNER IN WHICH PARTNERSHIP INVESTMENTS ARE MADE. Section 3.5(A)-(C) of the Partnership Agreement is amended and restated in full as follows and a new Section (D) is added to Section 3-5 to read as follows: 3.5 Participation in Aircraft Investment with Affiliates. (A) So long as Airlease Management Services, Inc. or another Related Entity is the General, Partner, the Partnership may only make Aircraft leasing investments offered to it in accordance with this Section. (B) Until September 30, 1991, the General Partner and Airlease hereby agree to offer the Partnership the right to acquire a 50% participation interest in all Aircraft leasing investments to be made by any Related Entity where the aggregate Aircraft Cost in such investment is greater than $10 million. The Partnership shall acquire such interest subject to the determination by the General Partner that the investment is suitable for the Partnership. If, after allocating an investment in accordance with the first two sentences above, the total investment made by Related Entities (including through their interest in the Partnership either as a General Partner or a Limited Partner) would exceed U.S. Leasing's then existing credit policy regarding maximum permissible investment for a single lessee, the General Partner and Airlease shall offer and, subject to a determination of suitability, the Partnership shall accept an additional participation interest in an amount necessary to reduce the total investment by Related Entities to an amount in compliance with U.S. Leasing's credit policy. Any offer required to be made by this subsection (i) is only required to be made at the time of the commitment (but may be made at a later time in the sole discretion of the General Partner or Airlease) to enter into the transaction and (ii) must be accepted by the Partnership at the time that the offer is made. Notwithstanding anything in this paragraph (B) to the contrary, if the Aircraft leasing investment to be made by Airlease or any Related Entity is a leveraged lease, as defined in Statement of Financial Accounting Standards No. 13, then Airlease may, in its discretion, decline to offer the Partnership a participation interest in such investment. (C) After September 30, 1991, neither the General Partner nor Airlease shall be under any obligation to offer the Partnership any investment opportunities. However, the General Partner and Airlease may continue to offer investment opportunities to the Partnership, and the Partnership shall accept opportunities deemed suitable by the General Partner, provided one or more Related Entities makes at least 20% (including the interest in the Partnership then owned by the General Partner and all Related Entities) of the total investment made by Related Entities and the Partnership in such transactions. (D) Notwithstanding anything in paragraphs (A), (B) or (C) of this Section 3.5 to the contrary, the Partnership may make Aircraft leasing investments in which Related Entities do not participate (i) where the investment committee of the board of directors of U.S. Leasing determines that such investment would cause U.S. Leasing or the affiliated group with which it files consolidated federal income tax returns to forego current utilization of foreign tax credits or would increase their foreign assets, or (ii) where the investment is in an Aircraft which is subject to a tax benefit transfer lease under the safe harbor lease rules enacted under the Economic Recovery Tax Act of 1981, or (iii) where the Aircraft investment is made by the Partnership after or in anticipation of the disposition of the Partnership's interest in another Aircraft in which a Related Entity does not or did not have an interest, and the board of directors of the General Partner determines that such new Aircraft investment is for the purpose of replacing the Partnership's interest in such other Aircraft. Page 5 of 7 2 2. PROPOSED AMENDMENT GIVING THE GENERAL PARTNER DISCRETION REGARDING DISTRIBUTION OF CERTAIN SALES PROCEEDS. Section 10.3 of the Partnership Agreement is amended and restated in full as follows: 10.3 Distributions of Cash Available From Sale or Refinancing. (A) Deleted. (B) Through December 31, 2004, any Cash Available From Sale or Refinancing may, at the discretion of the General Partner, be retained for use in the Partnership's business. (C) After December 31, 2004, subject to Section 3.3(B)(2), any Cash Available From Sale or Refinancing shall be distributed 99% of the Unitholders and 1 % to the General Partner. (D) Cash Available From Sale or Refinancing shall be distributed at such time as the General Partner in its discretion may determine to the holders of record on the first business day in the month during which such sale or refinancing occurs, unless a different Record Date is determined by the General Partner. 3. PROPOSED AMENDMENT TO CLARIFY THE MANNER IN WHICH THE PARTICIPATION IN AN INVESTMENT BY THE PARTNERSHIP AND A RELATED ENTITY IS DETERMINED. Section 3.5 is amended by adding a new Section (E) thereto to read in full as follows: (E) For purposes of this Section 3.5, a 50% participation interest in an Aircraft leasing investment by the Partnership and a Related Entity shall include, in the case of two Similar Aircraft, the acquisition of one Similar Aircraft by the Partnership and one Similar Aircraft by a Related Entity. As used herein, a Similar Aircraft shall mean substantially similar aircraft leased to the same lessee pursuant to substantially similar leases and acquired by the Partnership or a Related Entity at a substantially Similar Aircraft Cost (the difference not to exceed 5% of the lesser Aircraft Cost), all as determined by the General Partner at the time of acquisition. Page 6 of 7 3 AMENDMENT TO THE AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP Section 9.4(A) of the Partnership Agreement is hereby amended to read in full as follows: (A) Except as otherwise provided herein, the General Partner shall, in its sole discretion, determine whether to make any available election under the Code. The General Partner shall, in the Partnership's 1988 tax year, make the election under Section 754 of the Code in accordance with applicable regulations thereunder to cause the basis of Partnership Assets to be adjusted for Federal income tax purposes as provided by Sections 734 and 743 of the Code. In making Section 754 elections, the General Partner is authorized to make simplifying assumptions for computational purposes, in its sole discretion. Such election may also be made, in the General Partner's discretion, for the reconstituted Partnership upon any termination of the Partnership pursuant to Section 708 of the Code. The General Partner shall elect to deduct expenses incurred in organizing the Partnership ratably over a 60-month period as provided in Section 709 of the Code. Page 7 of 7 EX-4.2 3 LOAN AND SECURITY AGREEMENT 1 Exhibit 4.2 ================================================================================ 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 Three McDonnell Douglas DC-9 - Series 80 Airframes Six Pratt & Whitney JT8D-217 Turbofan Engines ================================================================================ 2 TABLE OF CONTENTS Loan and Security Agreement
Page ---- Loan and Security Agreement.............................................. 1 Granting Clause.......................................................... 2 ARTICLE I Definitions Section 1.01. Certain Definitions.................................... 6 Section 1.02. Terms Defined in the Lease............................. 10 Article II The Note Section 2.01. Form of Note........................................... 10 Section 2.02. Terms of Note.......................................... 17 Section 2.03. Payment From Collateral Only........................... 17 Section 2.04. Method of Payment; Payments on Non-Business Days........................... 17 Section 2.05. Application of Payments to Principal Amount, Interest and Prepayment Premium...................... 18 Section 2.06. Termination of Interest in Collateral.................................. 18 Section 2.07. Transfer of Notes...................................... 18 Section 2.08. Mutilated, Destroyed, Lost or Stolen Note................................. 18 Section 2.09. Payment of Transfer Taxes.............................. 19 Section 2.10. Prepayments............................................ 19 Section 2.11. Prepayment Premium..................................... 21 Section 2.12. United States Withholding Taxes........................ 21 Article III Receipt, Distribution and Application of Income From the Collateral Section 3.01. Payments Under Loan and Security Agreement................................... 22 Section 3.02. Payments for Loss or Terminated Aircraft.................................... 22
i 3 Section 3.03. Payments After Loan Default.............................. 23 Section 3.04. Other Payments........................................... 24 Section 3.05. Distribution to Airlease................................. 24 Section 3.06. Distribution of Excepted Property........................ 24 Article IV Remedies of Lender Upon a Loan Default Section 4.01. Loan Defaults............................................ 24 Section 4.02. Remedies with Respect to Mortgaged Property............................ 26 Section 4.03. Return of Aircraft, etc.................................. 27 Section 4.04. Right To Cure Certain Events of Default.................. 28 Section 4.05. Rights of Lessee......................................... 29 Section 4.06. Waiver of Borrower....................................... 29 Article V Additional Duties Section 5.01. Action Upon Loan Default................................. 30 Section 5.02. Actions by Lender........................................ 30 Section 5.03. Indemnification.......................................... 31 Section 5.04. No Duties Except as Specified in Loan and Security Agreement.................. 31 Section 5.05. Replacement Aircraft, Airframes and Engines..................................... 31 Section 5.06. Replacements After Default............................... 31 Section 5.07. Documents for Replacements............................... 32 Section 5.08. Effect of Replacements................................... 32 Article VI Borrower Section 6.01. Acceptance of Trust and Duties........................... 32 Section 6.02. Absence of Duties........................................ 33 Section 6.03. No Representations or Warranties as to the Aircraft.............................. 33 Section 6.04. [Reserved]............................................... 34 Section 6.05. Reliance; Agents; Advice of Counsel......................................... 34 Section 6.06. Not Acting in Individual Capacity........................ 34 Section 6.07. No Compensation From Lender or Collateral...................................... 34
ii 4 Article VII Indemnification of Lender Section 7.01. Scope of Indemnification................................. 35 Article VIII Successor Borrower Section 8.01. Notice of Successor Borrower............................. 35 Section 8.02. Resignation of Borrower; Appointment of Successor........................ 35 Article IX Supplements and Amendments to this Loan and Security Agreement and Other Documents Section 9.01. Consent of Lender; Limitations........................... 36 Section 9.02. Lender Protected......................................... 36 Section 9.03. Amendment to Loan and Security Agreement....................................... 36 Article X Representations and Warranties of Lender Section 10.01. Representations and Warranties of Lender.......................................... 36 Section 10.02. Covenants of Lender...................................... 37 Article XI Representations and Warranties of Borrower............................. 37 Article XII Conditions Precedent to Borrower's obligations.............................. 39 Article XIII Conditions Precedent to Funding.................... 39
iii 5 Article XIV Other Covenants Section 14.01. Other Covenants........................................... 43 Section 14.02. Borrower's Citizenship.................................... 44 Article XV Miscellaneous Section 15.01. Termination of Loan and Security Agreement........................................ 45 Section 15.02. Sale of Aircraft by Lender Is Binding.......................................... 45 Section 15.03. Remedies Cumulative....................................... 45 Section 15.04. Discontinuance of Proceeding.............................. 45 Section 15.05. Loan and Security Agreement and Note for Benefit of Lender, Holders of Note, Borrower, Airlease and Lessee Only.................................. 46 Section 15.06. Notices................................................... 46 Section 15.07. Severability.............................................. 48 Section 15.08. Separate Counterparts..................................... 48 Section 15.09. Successors and Assigns.................................... 48 Section 15.10. Headings.................................................. 49 Section 15.11. Governing Law............................................. 49 Exhibit A
iv 6 LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT, dated as of March 20, 1987, by and between MERIDIAN TRUST COMPANY, a trust company organized under the laws of the Commonwealth of Pennsylvania, not in its individual capacity except as provided herein, but solely as trustee under that certain Trust Agreement (as hereinafter defined) and any successor appointed in accordance with the terms hereof and of the Trust Agreement (herein in such capacity called the "Borrower"), and THE WORLD WING COMPANY LIMITED, a corporation formed and existing under the laws of the Bahamas ("Lender"); W I T N E S S E T H: Whereas Borrower and Airlease Ltd., A California Limited Partnership ("Airlease") entered into the Trust Agreement whereby, among other things, (i) Borrower established a certain trust for the use and benefit of Airlease, (ii) provision was made for the payment by Borrower to Airlease of amounts distributable to Airlease thereunder and (iii) Borrower is directed and authorized to take any action as Airlease may request through written instructions; and Whereas Borrower, PSA (as hereinafter defined), Airlease and PSA, Inc. (as hereinafter defined), entered into that certain Purchase Agreement (as hereinafter defined) whereby Borrower acquired all right, title and interest in and to the Aircraft (as hereinafter defined); and Whereas Borrower has leased the Aircraft to Lessee (as hereinafter defined) pursuant to that certain Lease (as hereinafter defined); and Whereas the Aircraft are subject to the terms and conditions of that certain TBT Lease (as hereinafter defined); and Whereas Lender has agreed to lend to Borrower, subject to the terms and conditions hereof, and Borrower desires to borrow from Lender thirty-six million dollars ($36,000,000); and Whereas to induce Lender to enter into this Loan and Security Agreement and the transactions contemplated hereby, Borrower shall grant to Lender a security interest in all of Borrower's right, title and interest in and to the Collateral (as hereinafter defined) to secure the obligations of Borrower: N o w, T h e r e f o r e, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the undersigned parties hereto agree as follows: 1 7 GRANTING CLAUSE A. To secure the prompt payment of the principal of and interest and Prepayment Premium, if any, on the Note and all other amounts payable hereunder and the performance and observance by Borrower of all the agreements, covenants and provisions herein for the benefit of Lender, and for the uses and purposes and subject to the terms and provisions hereof, and in consideration of the acceptance of the Note by Lender, Borrower does hereby assign, transfer, pledge, grant and confirm, unto Lender, its successors and assigns, a security, interest in and lien on all right, title and interest of Borrower in and to the following (other than Excepted Property) (all such property other than Excepted Property being referred to as "Collateral"): (1) the Lease, including, without limitation, all amounts of Basic Rent, Supplemental Rent, insurance proceeds and other payments of any kind for or with respect to the Aircraft, Airframes, Engines and Parts and the right to make all waivers, amendments and agreements, to give and receive duplicate copies of all notices and other instruments or communications, to take such action upon the occurrence of a Default or an Event of Default, including the commencements conduct and consummation of legal, administrative or other proceedings, as shall be permitted by the Lease or by law, and to do any and all other things whatsoever which Borrower or any lessor is or may be entitled to do under the Lease; (2) the Aircraft, Airframes, Engines and Parts whether now owned by Borrower or hereafter acquired, leased or intended to be leased under the Lease, and in the case of such Engines, whether or not any such Engine shall be installed in or attached to the Airframe or any other airframe, together with all substitutions, renewals and replacements of and additions, improvements, accessions, accumulations, modifications and alterations to the Airframe and Engines; (3) all the estate, right, title and interest of Borrower in and to the Assignment Agreement; (4) all the estate, right, title and interest of Airlease and Borrower in and to the Purchase Agreement; (5) all estate, right, title and interest of Borrower in and to the TBT Note and the TBT Lease; and (6) all Proceeds of the foregoing. The term "Proceeds" shall include, without limitation, all accounts, chattel paper, deposit accounts, instruments, equipment (excluding motor vehicles), inventory, documents, general intangibles and other proceeds which arise from the sale, lease, transfer or other use or disposition of any kind of any collateral or proceeds and all proceeds of any, type 2 8 described above acquired with cash proceeds. The words used herein have the meaning specified in the California Uniform Commercial Code. B. It is expressly agreed that anything herein contained to the contrary notwithstanding, Borrower shall remain liable under the Lease, TBT Lease, the Purchase Agreement and the Assignment Agreement to perform all of the obligations, if any, assumed by it thereunder, all in accordance with and pursuant to the terms and provisions thereof, and Lender shall have no obligation or liability in respect of any such obligations under the Lease, the Purchase Agreement, the Assignment Agreement and the TBT Lease by reason of or arising out of this assignment, nor shall Lender be required or obligated in any manner to perform or fulfill any obligations of either Borrower or Airlease under or pursuant to the Lease, the Purchase Agreement, the Assignment Agreement or the TBT Lease or, except as herein expressly provided, to make any payment, or to make any inquiry as to the nature or sufficiency of any payment received by it, or present or file any claim, or take any action to collect or enforce the payment of any amounts which may have been assigned to it or to which it may be entitled at any time or times. C. Notwithstanding this Granting Clause or any of the preceding paragraphs, there is hereby excluded from the foregoing sale, transfer, assignment, grant, pledge and security interest all Excepted Property. D. Borrower hereby constitutes and appoints Lender the true and lawful attorney of Borrower, irrevocably, with an interest and full power (in the name of Borrower or otherwise) to (i) ask, require, demand, receive and compound any and all Basic Rent, Supplemental Rent, insurance proceeds and any other monies and claims for money due and to become due under or arising out of the Lease, to endorse any checks or other instruments or orders in connection therewith, and to ask, demand, require and receive all rights to the property, rights, interests granted to Borrower and Airlease pursuant to the terms of the Purchase Agreement, the Assignment Agreement, the TBT Note and TBT Lease, and (ii) without limiting the provisions of the foregoing clause (i) hereof, during the continuance of any Loan Default, except as provided in Section 4.04 hereof, to sue for, compound and give acquittance for, to settle, adjust or compromise any claim for any and all such Rents, income and other sums and any and all other rights which are assigned under this Granting Clause as fully as Borrower could itself do, to accept any offer of Lessee to purchase the Aircraft, Airframes, Engines or Parts as provided in the Lease and upon any purchase to execute and deliver in the name of and on behalf of Borrower an appropriate bill of sale and other instruments of transfer relating to the Aircraft, Airframes, Engines or Parts, when purchased by Lessee in accordance with the Lease, and to perform all other necessary or appropriate acts with respect to any such purchase, and in its discretion to file any claims or take any action or institute any proceedings which Lender may deem to be necessary or advisable in the performance of its duties hereunder, all to the extent provided in this Loan and Security Agreement. E. Airlease has the right, power and authority under the Trust Agreement to cause Borrower to grant a lien on and security interest in the Aircraft, Airframes, 3 9 Engines, Parts, Lease, Assignment Agreement, Purchase Agreement, TBT Lease and TBT Note to Lender for the uses and purposes herein set forth; and Borrower has the right, power and authority under the Trust Agreement to grant a lien on and security interest in the Aircraft, Airframes, Engines, Parts, Lease, Assignment Agreement, Purchase Agreement, TBT Lease and TBT Note to Lender for the uses and purposes herein set forth. Borrower will warrant and defend such lien and security interest in the Collateral against all Lessor's Liens (as hereinafter defined). Borrower warrants that there is no financing statement or other filed or recorded instrument in which Borrower is named as debtor now on file in any public office covering any of the Collateral, except the financing statements or other instruments filed or to be filed in respect of and for the lien and security interest provided for herein. F. Borrower agrees that at any time and from time to time, upon the written request of Lender, Borrower will promptly and duly execute and deliver any and all such further instruments and documents as Lender may deem desirable in obtaining the full benefits of this assignment and of the rights and powers herein granted. G. Borrower will not without the prior written consent of Lender: (a) declare a default or exercise any remedies under, or terminate, modify or accept a surrender of, or offer or agree to any termination, modification or surrender of, any Assigned Agreement (except as otherwise expressly provided herein) or by affirmative act consent to the creation or existence of any security interest or other Lien (other than the security interest and Lien of this Loan and Security Agreement) to secure payment of indebtedness upon the leasehold estate created by the Lease or any part thereof, or upon any of Borrower's rights under the Assignment Agreement, Purchase Agreement, TBT Note and TBT Lease; or (b) receive or collect or permit the receipt or collection of any Rent or any other payment to be Made pursuant to the Lease to be made to Borrower prior to the date for the payment thereof provided for by the Lease or assign, transfer or hypothecate (other than to Lender hereunder) (except as otherwise expressly provided herein or in the Instructions and Consent Agreement) any Rent or any other payment to be made pursuant to the Lease, then due or to accrue in the future under the Lease; or (c) sell, mortgage, transfer, assign or hypothecate (other than to Lender hereunder) (except as otherwise expressly provided herein or in the Instructions and Consent Agreement) its interest in the Aircraft, Airframes, Engines, Parts or any part thereof or in any amount to be received by it from the use or disposition of the Aircraft, Airframes, Engines or Parts; or (d) sell, mortgage, transfer, assign or hypothecate (other than to Lender hereunder) (except as otherwise expressly provided herein or in the Instructions and Consent Agreement) Borrower's interest in the Assignment Agreement, Purchase Agreement, TBT Note and TBT Lease. 4 10 Notwithstanding any other provision of this Loan and Security Agreement, (a) unless and until a Loan Default shall have occurred and be continuing, all rights, powers, authorizations, approvals, privileges, benefits, notices and consents under or with respect to the Assigned Agreements, including, without limitation, the right to give waivers, consents and approvals, shall be exercised or given, as the case may be, by the Borrower, with the prior written consent of the Lender, which shall not be unreasonably withheld (Lender hereby agreeing to respond promptly to any request therefor by Borrower), provided that no consent shall be required for the exercise of rights, powers, privileges and notices of an administrative nature, and (b) after a Loan Default under Section 4.01(a) has occurred and is continuing when no other Loan Default (excepting an Event of Default) has occurred and is continuing: (i) Lender shall not enter into any modification, waiver or amendment to the Lease the effect or result of which is to extend the Term of the Lease, or alter the amount of any Rent or alter the terms and provisions of the Lease, or exercise or enforce any other of its rights and remedies under the Lease, prior to the expiration of the period during which Borrower may cure said default pursuant to Section 4.04, and (ii) in the event Borrower shall make the payments set forth in the first sentence of Section 4.04, then, subject to the conditions set forth below, Borrower shall be entitled, to the exclusion of Lender, notwithstanding the existence of one or more other Events of Default, to exercise in good faith having due regard for the interests of Lender, all of the remedies of the lessor under the Lease, including without limitation, the right to declare the Lease in default under Article 18 thereof, to terminate the Lease with Lessee, and to re-lease the Aircraft pursuant to a lease reasonably satisfactory in form and substance to Lender to one or more successive third party lessees each of which shall be an air carrier certificated by the Federal Aviation Administration and be capable of maintaining the Aircraft pursuant to a maintenance program reasonably satisfactory to Lender, and each of which lessee or lessees shall be approved in writing by Lender. Borrower's right to exercise the foregoing rights and powers is conditional upon (1) there being no existing Loan Default other than under Section 4.01(a) and (2) compliance by Borrower or a third party lessee approved by Lender pursuant to the preceding paragraph with all requirements of the Lease, to the extent that noncompliance could have a material adverse affect on the value of the Collateral including, without limitation, Section 6.05 (maintenance) and Sections 12.01 and 12.02 (insurance) of the Lease. Notwithstanding the foregoing, Lender reserves the right to call the Note pursuant to Section 2.10 (a) (iv). ARTICLE I DEFINITIONS 5 11 Section 1.01. Certain Definitions. For all purposes of this Loan and Security Agreement, the following terms shall have the meanings set forth below (such definitions to be equally applicable to both the singular and plural forms of the terms defined): "Agent" means Management when acting as agent for Borrower. "Aircraft" means (i) each of the Airframes delivered and leased under the Lease (or any replacement thereto), together with the Engines initially delivered and leased therewith under the Lease (or any replacement or substitution thereto), 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 or on any other aircraft, and (ii) any aircraft which may from time to time be substituted or be a replacement or addition in accordance with the terms of this Loan and Security Agreement for any such Aircraft. Except as otherwise set forth herein, at such time as a replacement Aircraft shall be so substituted and the Aircraft for which the substitution is made shall be released from the Lien of this Loan and Security Agreement, such replaced Aircraft shall cease to be an Aircraft hereunder. The term "Aircraft" also means, as of any date of determination if the context so requires, all Aircraft then leased under the Lease or in accordance with the terms of this Loan and Security Agreement and, if the context so requires, the Aircraft Records applicable to any Aircraft. "Airframe" means (i) each of the used McDonnell Douglas DC-9 Series 80 Aircraft designated in Lease Supplements Numbers 3, 4, and 5 (except the Engines and engines from time to time installed on an Airframe) leased under the Lease to Lessee and having the manufacturer's serial numbers 48040, 48041, and 48042 and the FAA registration numbers N932PS, N933PS and N934PS, (ii) any airframe which may from time to time be substituted or be a replacement or addition in accordance with the terms of the Lease or this Loan and Security Agreement for any such Airframe, and (iii) any and all Parts so long as the same shall be incorporated or installed in or attached to an Airframe, or so long as title thereto shall remain vested in Borrower in accordance with the terms of the Lease. "Airframe" also means, as of any date of determination, if the context so requires, all Airframes then leased under the Lease. Except as otherwise set forth herein, at such time as a replacement Airframe shall be so substituted and the Airframe for which the substitution is made shall be released from the Lien of this Loan and Security Agreement, such replaced Airframe shall cease to be an Airframe hereunder. "Airlease" means Airlease Ltd., A California Limited Partnership, of which Management is managing general partner. "Assigned Agreements" shall mean and include the Lease, the Purchase Agreement, the Assignment Agreement, the TBT Lease and the TBT Note. 6 12 "Assignment Agreement" means that certain Assignment Agreement No. 1 dated as of March 31, 1987 by and between Airlease and Borrower. "Borrower" means Meridian Trust Company, a trust company organized under the laws of the Commonwealth of Pennsylvania, not in its individual capacity, except as otherwise expressly provided herein, but solely as trustee under the Trust Agreement, and its successors and permitted assigns in accordance with the provisions of the Trust Agreement and this Loan and Security Agreement. "Code" means the United States Internal Revenue Code of 1986. "Collateral" is defined in the Granting Clause hereof. "Consent Agreement" shall mean that certain consent of PSA, dated as of March 31, 1987. "Default" shall mean any event which with a lapse of time or giving of notice, or both, would constitute an Event of Default. "Engine" means (i) each of the Pratt & Whitney JTBD-217 engines leased under the Lease to Lessee and having manufacturer's serial numbers P708117D, P708118D, P708115D, P708116D, P708113D and P708114D (each of which engine has 750 or more rated takeoff horsepower or the equivalent of such horsepower), whether or not from time to time installed on any Airframe or installed on any other airframe or on any other aircraft (ii) any engine which may from time to time be substituted or be a replacement or addition in accordance with the terms of the Lease or this Loan and Security Agreement for any such Engine, and (iii) 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 Borrower in accordance with the terms of the Lease after removal from such Engine. Except as otherwise set forth in the Lease, at such time as an Engine shall be so substituted or replaced and the Engine for which the substitution or replacement is made shall be released from the Lien of this Loan and Security Agreement, such replaced Engine shall cease to be an Engine hereunder. An aircraft engine which is not an Engine, but which is installed on an Aircraft, shall not be subject to the Lien of this Loan and Security Agreement except with respect to the rights, if any, of the Borrower relating thereto. The term "Engines" means, as of any date of determination if the context so requires, all Engines then leased under the Lease. "Event of Default" shall mean each of the events constituting an "Event of Default" under Article 17 of the Lease. "Excepted Property" shall mean (i) all rights of Airlease and Borrower to public liability insurance maintained by Lessee pursuant to Article 12 of the Lease and public liability insurance proceeds payable pursuant thereto as a result of public liability insurance claims paid or losses suffered by Airlease or Borrower, (ii) proceeds of insurance 7 13 separately maintained by and for the benefit of Borrower, Airlease or Lessee, so long as the separate maintenance of such insurance does not reduce the coverage or any amount payable under any insurance constituting part of the Collateral, (iii) any indemnity under Articles 10 and 13 and, to the extent Lender suffers no loss, Section 21.02 of the Lease which by their terms are payable to the account of Airlease or Borrower, or their respective officers and employees, whether or not included within the definition of Supplemental Rent, (iv) any indemnity under Section 13(a) and 13(b) of the Purchase Agreement, and (v) the rights of Airlease and Borrower to demand, collect and sue for any of the foregoing amounts provided that in no event shall the rights referred to in this definition of Excepted Property be deemed to include the exercise of any rights or remedies provided for in Article 18 of the Lease. "IBM" shall mean International Business Machines Corporation, a New York corporation, its successors and permitted assigns in accordance with the provisions of the TBT Lease and this Loan and Security Agreement. "IBM Consent Agreement" shall mean that certain Notice and Agreement Regarding Lessee's Interest in Safe Harbor Lease dated as of March 31, 1987 among Lender, Borrower, Airlease, PSA and IBM. "Instructions and Consent Agreement" shall mean that certain Instructions and Consent Agreement between Airlease and Lender dated as of March 31, 1987. "Lease" shall mean that certain Amended and Restated Lease Agreement No. 1 relating to the Aircraft dated as of March 31, 1987 between Borrower and Lessee, as said Lease Agreement may from time to time be supplemented or amended. The term "Lease" shall also include Lease Supplement Nos. 3, 4 and 5, evidencing delivery and acceptance of the Aircraft under the Lease pursuant to the terms of the Lease. "Lender" shall mean The World Wing Company Limited, a corporation formed and existing under the laws of the Bahamas, and its successors and assigns hereunder. "Loan and Security Agreement" shall mean this Loan and Security Agreement as it may from time to time be supplemented or amended as herein provided. "Loan Default" shall mean any event or condition described in Section 4.01 hereof. "Loan Value" of each Aircraft shall mean twelve million dollars ($12,000,000) less any principal payments deducted from such Loan Value during the term of the Note. Principal payments shall (contemporaneously with their payment to Lender) be deducted from the Loan Values of each Aircraft on an equal basis, except that any principal payment made on the termination of the Lease as to any Aircraft pursuant to 8 14 Sections 11.01 or 11.03(A) of the Lease shall be allocated solely to the payment of the Loan Value of the Aircraft as to which the Event of Loss has occurred. "Management" shall mean Airlease Management Services, Inc., a Delaware corporation. "Mortgaged Property" shall have the meaning specified in Section 4.02 hereof. "Note" shall mean the certificate, substantially in the form set forth in Section 2.01 hereof, issued by Borrower to Lender pursuant to Article II hereof in the principal amount, bearing interest at the rate and payable as to principal, interest and Prepayment Premium, if any, as provided in such Article II and secured as provided in the Granting Clause, and shall include any certificate issued in exchange therefor or in replacement thereof pursuant to Section 2.07 or 2.08 hereof. The term "Note" shall also mean, as of any date of determination if the context so requires, all Notes issued by Borrower pursuant to this Loan and Security Agreement then outstanding. "Parts" shall mean any and all appliances, parts, instruments, appurtenances, accessories, furnishings, seats and other equipment of whatever nature (other than complete Engines or engines), which (a) are from time to time incorporated or installed in or attached to an Airframe or Engines, or (b) having been so installed or attached, are later removed therefrom, so long as title thereto remains vested in Borrower in accordance with Article 9 of the Lease after such removal from an Airframe or Engines. "Part" means any one of the Parts. "Prepayment Premium" shall have the meaning specified in Section 2.11 hereof. "Prorated Portion of the Note" shall mean that portion of the outstanding principal amount of the Note equal to the Loan Value of the Aircraft as to which an Event of Loss has occurred. "PSA" shall mean Pacific Southwest Airlines, a California corporation. "PSA, Inc." shall mean PS Group Inc., a Delaware corporation. "Purchase Agreement" shall mean that certain Purchase Agreement dated as of July 10, 1986 among Borrower, as purchaser, PSA, as seller, Airlease and PSA, Inc., as it may be amended from time to time, solely to the extent such agreement relates to the Aircraft, Airframe, Engines and Parts. "TBT Lease" shall mean that certain Transfer and Lease Agreement dated as of November 12, 1981 between IBM, as lessor, and PSA, as lessee, as it may be 9 15 amended from time to time, solely to the extent such lease relates to the Aircraft, Airframes, Engines and Parts. "TBT Note" shall mean that certain Nonrecourse Promissory Note dated November 12, 1981 in the original principal amount of $75,768,673.40 by IBM to Borrower, solely to the extent such note relates to the Aircraft, Airframes, Engines and Parts. "Term" means, collectively, the Basic Term and any Renewal Term unless sooner terminated in accordance with the provisions of the Lease. "Trust Agreement" means that certain Trust Agreement dated as of July 10, 1986, as the same has been supplemented by Trust Agreement Supplements Nos. 3, 4 and 5 and may be supplemented or amended from time to time, solely to the extent such agreement relates to the Aircraft, Airframes, Engines, Parts and the Assigned Agreements. Section 1.02. Terms Defined in the Lease. For all purposes of this Loan and Security Agreement, the following terns shall have the meanings specified in the Lease: "Aircraft Records," "Basic Rent," "Business Day," "Event of Loss," "Lease Supplement," "Lessee," " Liens," "Lien," "Person," "Rent," "Stipulated Loss Value," "Supplemental Rent" and "Termination Payment." ARTICLE II THE NOTE Section 2.01. Form of Note. The Note shall be substantially in the form set forth below: 8.75% SECURED NOTE (Secured by Lease Obligations of Pacific Southwest Airlines, the Aircraft, Airframes, Engines and Parts, the Purchase Agreement, the Assignment Agreement, the TBT Note and the TBT Lease) Issued in Connection with the Aircraft containing Airframes having manufacturer's serial numbers 48040, 48041 and 48042 and FAA registration numbers N932PS, N933PS and N934PS. No. ________________ San Francisco, California $36,000,000 _______________ 1987 10 16 Meridian Trust Company, a trust company organized under the laws of the Commonwealth of Pennsylvania, not in its individual capacity, but solely as trustee under the Trust Agreement, hereby promises to pay to The World Wing Company Limited, or its registered assigns, the principal sum of $36,000,000 in lawful currency of the United States of America, in quarterly installments commencing June 30, 1987 payable on the last day of each March, June, September and December of each year thereafter to and including September 30, 1998, each such installment to be in an amount corresponding to the percentage of the original principal amount hereof payable on such payment date and based upon the amortization schedule attached hereto as Exhibit A, together with interest from and including the date hereof until such principal sum is due and payable, payable on June 30, 1987 and the last day of each March, June, September and December thereafter to the maturity date hereof at an interest rate of 8.75% per annum (computed on the basis of a 360-day year of 12 30-day months), and to pay interest at the rate of 10-1/2% per annum (computed on the same basis) on any overdue principal and (to the extent permitted by applicable law) overdue interest from the due date thereof until paid, payable on demand, all pursuant to the terms of the Loan and Security Agreement referred to below. All payments of principal and interest to be made hereunder and under the Loan and Security Agreement dated as of March 20, 1987 (herein called the "Loan and Security Agreement", the defined terms therein not otherwise defined herein being used herein with the same meanings) between Borrower and Lender shall be made only from the income and proceeds from the Lease and the security interests in the Aircraft, Airframes, Engines, Parts, the Purchase Agreement, the Assignment Agreement, the TBT Note and the TBT Lease and only to the extent of Borrower's and Airlease's interest thereto, except for Excepted Property. Each holder hereof agrees that it will look solely to the income and proceeds from the Lease and the security interests described above to the extent available for distribution to the holder hereof as provided in the Loan and Security Agreement, that this Note shall be nonrecourse to Airlease and Borrower, and that Airlease and Borrower shall not be personally liable to the holder hereof for any amount payable under this Note or the Loan and Security Agreement. Payments with respect to the principal amount hereof and interest and Prepayment Premium, if any, thereon shall be payable in U.S. dollars in immediately available funds in such manner as the registered owner of the Note may direct pursuant to Section 2.04 of the Loan and Security Agreement. Each such payment shall be made on the date such payment is due and without any presentment or surrender of this Note. Whenever the date scheduled for any payment to be made hereunder or under the Loan and Security Agreement shall not be a Business Day, then such payment need not be made on such scheduled date but shall be made on the next succeeding Business Day with the same force and effect as if made on such scheduled date and (provided such payment is made on such next succeeding Business Day) no interest shall accrue on the amount of such payment from and after such scheduled date to the time of such payment on such next succeeding Business Day. If, however, the next succeeding Business Day shall be two or more days after the scheduled date of payment, such payment shall be made on the 11 17 immediately preceding Business Day of the scheduled payment date, provided no adjustment of interest shall be made due to such early payment. Each holder hereof, by its acceptance of this Note, agrees that each payment received by it hereunder shall be applied, first, to the payment of accrued interest on this Note to the date of such payment, second, to the payment of the unpaid principal amount of this Note then due, and third to the payment of any Prepayment Premium, if any, on this Note then due. The balance, if any, remaining thereafter shall be applied to the payment of the installment or installments of principal next becoming due on the Note. This Note is issued by Borrower pursuant to the terms of the Loan and Security Agreement. The Collateral is held by Lender as security for the Note. The rights of Borrower under the Loan and Security Agreement in and to the Collateral are subject and subordinate to the rights of the holder of this Note to the extent provided for in the Loan and Security Agreement. Reference is hereby made to the Loan and Security Agreement for a statement of the rights of the holder of, and the nature and extent of the security for, this Note and the rights of Airlease and Borrower (including the right of Borrower under certain circumstances stated therein to prepay the Note) to all of which terms and conditions in the Loan and Security Agreement each holder hereof agrees by its acceptance of this Note. This Note is not subject to prepayment except as provided in Section 2.10 of the Loan and Security Agreement. Without limiting the foregoing, the holder hereof agrees to surrender this Note for a new Note pursuant to Section 2.08 of the Loan and Security Agreement. This Note is a registered Note and is transferable, as provided in the Loan and Security Agreement, only upon surrender of this Note for registration of transfer duly endorsed by, or accompanied by a written statement of transfer duly executed by, the registered holder hereof or his attorney duly authorized in writing. Prior to the due presentation for registration of transfer of this Note, Borrower may deem and treat the registered holder of this Note as the Absolute owner and holder hereof for the purpose of receiving payment of all amounts payable with respect hereto and for all other purposes and shall not be affected by any notice to the contrary. Unless the certificate of authentication hereon has been executed by or on behalf of Borrower by manual signature, this Note shall not be entitled to any benefit under the Loan and Security Agreement or be valid or obligatory for any purpose. 12 18 IN WITNESS WHEREOF, Borrower has caused this Note to be executed by one of its authorized officers as of the date hereof. MERIDIAN TRUST COMPANY, not in its individual capacity, but solely as trustee By _______________________________________ Its ___________________________ 13 19 [FORM OF BORROWER'S CERTIFICATE OF AUTHENTICATION] This is the Note referred to in the within-mentioned Loan and Security Agreement. MERIDIAN TRUST COMPANY, not in its individual capacity, but solely as trustee By _______________________________________ Authorized Officer 14 20 EXHIBIT A
Payment Beginning Date Balance Payment Interest Principal ---- ------- ------- -------- --------- 57,461,221 21,461,221 36,000,000 0 03/31/87 36,000,000 1 06/30/87 36,000,000 1,249,157 787,500 461,657 2 09/30/87 35,538,343 1,249,157 777,401 471,756 3 12/31/87 35,066,587 1,249,157 767,082 482,075 4 03/31/88 34,584,512 1,249,157 756,536 492,621 5 06/30/88 34,091,891 1,249,157 745,760 503,397 6 09/30/88 33,588,494 1,249,157 734,748 514,409 7 12/31/88 33,074,086 1,249,157 723,496 525,661 8 03/31/89 32,548,424 1,249,157 711,997 537,160 9 06/30/89 32,011,264 1,249,157 700,246 548,911 10 09/30/89 31,462,354 1,249,157 688,239 560,918 11 12/31/89 30,901,436 1,249,157 675,969 573,188 12 03/31/90 30,328,248 1,249,157 663,430 585,727 13 06/30/90 29,742,521 1,249,157 650,618 598,539 14 09/30/90 29,143,982 1,249,157 637,525 611,632 15 12/31/90 28,532,349 1,249,157 624,145 625,012 16 03/31/91 27,907,337 1,249,157 610,473 638,684 17 06/30/91 27,268,653 1,249,157 596,502 652,655 18 09/30/91 26,615,998 1,249,157 582,225 666,932 19 12/31/91 25,949,066 1,249,157 567,636 681,521 20 03/31/92 25,267,545 1,249,157 552,728 696,429 21 06/30/92 24,571,116 1,249,157 537,493 711,664 22 09/30/92 23,859,452 1,249,157 521,926 727,231 23 12/31/92 23,132,220 1,249,157 506,017 743,140 24 03/31/93 22,389,081 1,249,157 489,761 759,396 25 06/30/93 21,629,685 1,249,157 473,149 776,008 26 09/30/93 20,853,677 1,249,157 456,174 792,983 27 12/31/93 20,060,695 1,249,157 438,828 810,329 28 03/31/94 19,250,365 1,249,157 421,102 828,055 29 06/30/94 18,422,310 1,249,157 402,988 846,169 30 09/30/94 17,576,141 1,249,157 384,478 864,679 31 12/31/94 16,711,462 1,249,157 365,563 883,594 32 03/31/95 15,827,869 1,249,157 346,235 902,922 33 06/30/95 14,924,946 1,249,157 326,483 922,674 34 09/30/95 14,002,272 1,249,157 306,300 942,857 35 12/31/95 13,059,415 1,249,157 285,675 963,482 36 03/31/96 12,095,933 1,249,157 264,599 984,558 37 06/30/96 11,111,375 1,249,157 243,061 1,006,096
15 21 38 09/30/96 10,105,279 1,249,157 221,053 1,028,104 39 12/31/96 9,077,175 1,249,157 198,563 1,050,594 40 03/31/97 8,026,581 1,249,157 175,581 1,073,576 41 06/30/97 6,953,006 1,249,157 152,097 1,097,060 42 09/30/97 5,855,946 1,249,157 128,099 1,121,058 43 12/31/97 4,734,887 1,249,157 103,576 1,145,581 44 03/31/98 3,589,306 1,249,157 78,516 1,170,641 45 06/30/98 2,418,665 1,249,157 52,908 1,196,249 46 09/30/98 1,222,417 1,249,157 26,740 1,222,417
Interest rate = 8.75% Average life = 6.81 years 16 22 Section 2.02. Terms of Note. (a) There shall be issued and delivered to Lender one Note in connection with the funding under this Loan and Security Agreement duly authenticated by Borrower and dated as of March 31, 1987. The Note issued to Lender shall be in an aggregate principal amount equal to thirty-six million dollars ($36,000,000). The principal amount of, Prepayment Premium, if any, and interest on this Note shall be payable as set forth in the form thereof contained in Article II hereof. (b) No Note shall be entitled to any benefit under this Loan and Security Agreement or be valid or obligatory for any purpose, unless it shall have been authenticated by or on behalf of Borrower by manual signature. Section 2.03. Payment From Collateral Only. All payments to be made on the Note and under this Loan and Security Agreement shall be made only from the income and the proceeds from the Collateral and, with respect to the Lease, only to the extent that Borrower shall have received sufficient income or proceeds from Lessee to make such payments in accordance with the terms of Article 11 hereof. Lender, by its acceptance of such Note, agrees that it will look solely to the income and proceeds from the Collateral to the extent available for distribution as herein provided and that neither Airlease, Borrower, PSA nor PSA, Inc. are nor shall be personally liable to Lender for any amount payable under such Note or this Loan and Security Agreement. Section 2.04. Method of Payment; Payments on Non-Business Days. (a) The principal of, interest on and Prepayment Premium, if any, on the Note will be payable in U.S. dollars. Notwithstanding the foregoing or any provision in the Note to the contrary, Borrower will pay, or cause to be paid, if so requested by Lender by written notice to Borrower, all amounts payable by Borrower hereunder to Lender or a nominee therefor (including all amounts distributed pursuant to Article IV of this Loan and Security Agreement) either (i) by transferring by wire in immediately available funds to an account maintained by such holder with a bank in the United States or Japan the amount to be distributed to Lender or (ii) by mailing a check denominated in U.S. dollars to Lender at such address as Lender shall have specified in such notice, in any case without any presentment or surrender of the Note. In the event that Lender-requests that payments be made by wire transfer, immediately available funds shall be transferred to Lender no later than close of business San Francisco time on the date that payment is due. (b) Whenever the date scheduled for any payment to be made hereunder or under the Note shall not be a Business Day, then such payment need not be made on such scheduled date but shall be made on the next succeeding Business Day with the same force and effect as if made on such scheduled date and (provided such payment is made on such next succeeding Business Day) no interest shall accrue on the amount of such payment from and after such scheduled date to the time of such payment on such next succeeding 17 23 Business Day. If the next succeeding Business Day shall be two or more days after the scheduled payment date, such payment shall be made on the immediately preceding Business Day of the scheduled payment date, provided no adjustment of interest shall be made due to such early payment. Section 2.05. Application of Payments to Principal Amount, Interest and Prepayment Premium. Each payment on the Note shall be applied, first, to the payment of accrued but unpaid interest on the Note then due thereunder and second, to the payment of the unpaid principal amount of the Note then due thereunder and, third, to the payment of any, Prepayment Premium then due. The balance, if any, remaining thereafter shall be applied to the payment of the installment or installments of principal next becoming due on the Note. Section 2.06. Termination of Interest in Collateral. Lender shall have no further interest in, or other right with respect to, the Collateral when and if the principal amount of, interest and any Prepayment Premium, if any, on the Note and all other sums payable to Lender hereunder and under the Note shall have been paid in full. Section 2.07. Transfer of Notes. Management, as Agent, shall maintain at its offices in San Mateo, California, a register for the purpose of registering transfers and exchanges of the Note. The holder of the Note intending to transfer such Note to a new payee, or to exchange any Note held by it for a Note or Notes of a different denomination or denominations, and, in the case of a surrender for the registration of transfer, may surrender such Note to Agent at its corporate office, together with a written request from such holder for the issuance of a new Note or Notes, specifying the denomination or denominations of the same, and the name and address of the transferee or transferees. Promptly upon receipt of such documents, Agent will issue and authenticate a new Note or Notes in the same aggregate principal amount and dated the same date as the Note surrendered, and payable to such payee as shall be specified in the written request from such holder. Any Note issued upon any registration of transfer or exchange of a Note shall be the valid obligation of Borrower evidencing the same obligations, and entitled to the same security and benefits under this Loan and Security Agreement, as the Note surrendered upon such registration of transfer or exchange. Agent shall make a notation on each new Note of the amount of all payments or prepayments of principal and interest previously made on the old Note with respect to which such new Note is issued. From time to time, Agent will provide Lessee with such information as it may request as to the registered holder of the Note. Agent shall not be required to exchange any surrendered Note as above provided during the 10-day period preceding the due date of any payment on such Note. Prior to the due presentment for registration of transfer of a Note, Borrower and Agent may deem and treat the registered holder of such Note as the absolute owner and holder of the Note for the purpose of receiving payment of all amounts payable with respect to the Note and for all other purposes and shall not be affected by any notice to the contrary. 18 24 Agent will promptly notify Airlease and Lessee of each request for a registration of transfer of a Note. Section 2.08. Mutilated, Destroyed, Lost or Stolen Note. If the Note shall become mutilated, destroyed, lost or stolen, Agent shall, upon the written request of the holder of such Note, issue, authenticate and deliver in replacement thereof, a new Note, payable to the same holder in the same principal amount and dated the same date as the Note so mutilated, destroyed, lost or stolen. If the Note being replaced has become mutilated, such Note shall be surrendered to Agent. If the Note being replaced has been destroyed, lost or stolen, the holder of such Note shall furnish to Agent such security or indemnity as may be required by it to save Agent harmless and evidence satisfactory to Agent of the destruction, loss or theft of such Note and of the ownership thereof. If Lender or its affiliate or nominee is the owner of any destroyed, lost or stolen Note then the affidavit of its president, vice president, assistant vice president, cashier, assistant cashier, secretary or assistant secretary in form reasonably satisfactory to Agent setting forth the fact of destruction, loss or theft and Lender's or such affiliate's or nominee's ownership of the Note at the time of such destruction, loss or theft shall be accepted as satisfactory evidence thereof and no indemnity shall be required as a condition to execution and delivery of a new Note other than the written agreement of Lender or such affiliate or nominee, in form reasonably satisfactory to Agent, to indemnify Agent from all risks resulting from the authentication and delivery of the substitute Note. Agent will promptly cancel the Note surrendered for transfer, exchange or replacement pursuant to Section 2.07 hereof or this Section. In the event Agent fails to perform any of its duties set forth in Sections 2.07 and 2.08 hereof, Borrower will perform those duties or otherwise cause such duties to be performed. Section 2.09. Payment of Transfer Taxes. Upon the transfer of any Note pursuant to Section 2.07 hereof, Borrower may require from the party requesting such new Note payment of a sum to reimburse Borrower for, or to provide funds for the payment of, any tax or other governmental charge in connection herewith. Section 2.10. Prepayments. No prepayment of the Note may be made except to the extent and in the manner expressly permitted by this Loan and Security Agreement. Every prepayment of the Note required to be made pursuant to Section 3.02 shall be made in accordance with the provisions of this Section 2.10. (a) Mandatory Prepayments. (i) On the date of termination of the Lease as to any Aircraft pursuant to Sections 11.01 and 11.03(A) thereof, the Prorated Portion of the Note shall become due and payable and shall be prepaid at a price, in addition to any other amounts payable to 19 25 Lender under this Loan and Security Agreement or the Lease, equal to the unpaid principal amount of the Prorated Portion of the Note together with all accrued interest on such Prorated Portion of the Note and Prepayment Premium, if any, thereon to the date of prepayment. (ii) If an Event of Default has occurred and is continuing and Borrower has not cured said Event of Default, Lender must call for prepayment by Borrower (no later than one (1) year after the date such Event of Default shall have occurred and continued) of the Note, and the Note shall become due and payable and shall be prepaid at a price, in addition to any other amounts payable to Lender under this Loan and Security Agreement or the Lease, equal to the unpaid principal amount thereof together with all accrued interest and Prepayment Premium, if any, thereon to the date of prepayment. (iii) In the event that Lessee shall elect to terminate the Lease pursuant to Section 20.04 of the Lease, then and in such event the Note shall become due and payable on the date of termination of the Lease pursuant to said Section 20.04 of the Lease, and shall be prepaid at a price, in addition to any other amounts payable to Lender under this Loan and Security Agreement or the Lease, equal to the unpaid principal amount thereof together with all accrued interest and Prepayment Premium, if any, thereon to the date of prepayment. (iv) If an Event of Default has occurred and is continuing and no other Loan Default (other than an Event of Default) shall have occurred and be continuing, Borrower may exercise any remedy under Article 18 of the Lease as provided in the portion of the Granting Clause following Paragraph G hereof, but should Lender six months after such Event of Default shall have initially occurred deem itself insecure as a result of said actions taken by Borrower, then and in such event the Note shall become due and payable on the date Lender shall elect to accelerate the payment on the Note, and shall be prepaid at a price, in addition to any other amounts payable to Lender under this Loan and Security Agreement or the Lease, equal to the unpaid principal amount thereof together with all accrued interest and Prepayment Premium, if any, thereon to the date of prepayment. (b) Optional Prepayments. (i) At any time a Loan Default under Section 4.01(a) has occurred and is continuing, Borrower may effect a redemption of the Note, and the Note shall become due and payable and shall be prepaid at a price, in addition to any other amounts payable to Lender under this Loan and Security Agreement or the Lease, equal to the unpaid principal amount thereof together with all accrued interest and Prepayment Premium, if any, thereon to the date of prepayment. (ii) Provided Lender complies with the requirements of Section 881(c)(2)(B)(ii) of the Code, (x) all payments of principal, interest and Prepayment Premium, if any, payable to Lender under this Loan and Security Agreement and the Note shall be payable net of and after payment of all United States withholding taxes; and (y) 20 26 should any such payment be made subject to United States withholding taxes, Borrower agrees to pay to Lender such additional amounts as may be necessary to ensure that Lender receives a net amount equal to the full amount which it would have been entitled to receive had payment not been made subject to such United States withholding taxes, whether or not such taxes are covered by Section 7.01. If any or all of the payments to be made on the Note become subject to United States withholding taxes, Borrower may effect a redemption of the Note and the Note shall become due and payable and shall be prepaid at a price, in addition to any other amounts payable to Lender under this Loan and Security Agreement or the Lease, equal to the unpaid principal amount thereof together with all accrued interest and Prepayment Premium, if any, thereon to the date of prepayment. (c) Notice of Prepayment. Borrower shall give prompt written notice of any prepayment of the Note to Lender and Lessee as soon as Borrower shall have actual knowledge that such prepayment is to occur, which notice shall specify the principal amount of the Note to be prepaid, the date of prepayment and the section or sections of this Loan and Security Agreement or of the Lease under which the prepayment is to be made. Such notice of prepayment shall also certify all facts which are conditions precedent to any such prepayment and shall be accompanied by any certificate or other instruments required by the Lease. Section 2.11. Prepayment Premium. Any prepayment of the Note for whatsoever reason is subject to the Prepayment Premium as defined herein. The Prepayment Premium shall be equal to the aggregate of the present values, discounted at each applicable Treasury Yield, of the Earnings Difference (stated as a percentage) applied to each Prepaid Installment of the Note. "Earnings Difference" for each Prepaid Installment of the Note is defined as the interest rate on the Note (i.e., 8.75%) less the applicable Treasury Yield as applied to such Prepaid Installment of the Note. Each "Prepaid Installment" of the Note shall be determined to be that principal amount of the Note being prepaid which would have been paid on each payment date under the amortization schedule originally contemplated (as set forth in Exhibit A hereto). The applicable "Treasury Yield" for each Prepaid Installment of the Note means the interest rate on a United States Treasury Note purchasable by Lender at the time of the prepayment of the Note, the term of which shall be equal, as nearly as possible, to the period commencing on such date of prepayment and ending on the payment date for such Prepaid Installment of the Note. If the aggregate amount determined as set forth above is less than zero ($O), then Borrower may subtract from the amount of the prepayment such aggregate amount. Section 2.12. United States Withholding Taxes. As further discussed in and subject to Section 2.10(b)(ii) above, Borrower shall withhold and deduct from all payments made under this Loan and Security Agreement and the Note all requisite withholding and other taxes payable pursuant to the laws of the United States and shall provide evidence thereof to Lender to enable Lender to file all requisite tax returns with respect thereof, including, but not limited to, the United States withholding taxes payable on interest 21 27 payments made to Lender where such income is not effectively connected with the conduct of a United States trade or business. ARTICLE III RECEIPT, DISTRIBUTION AND APPLICATION OF INCOME FROM THE COLLATERAL Section 3.01. Payments Under Loan and Security Agreement. (a) Basic Rent Distribution. Except as otherwise provided in Section 3.03 hereof, each installment of Basic Rent as well as any installment of interest on overdue installments of Basic Rent, and any other monies paid over to Borrower for such purposes, shall be distributed as promptly as possible (it being understood that any payments of Basic Rent received by Borrower on a timely basis and in accordance with the provisions of Section 4.01 of the Lease shall be distributed on the date received in the funds so received) in the following order of priority: first, so much of such installment as shall be required for the purpose shall be distributed and paid to Lender to pay in full the aggregate amount of the payment or payments of principal and interest (as well as any interest on overdue principal or interest (to the extent permitted by applicable law)) then due; second, so much of such payment or amount as shall be required to reimburse Borrower for any reasonable fees or expenses not otherwise paid or reimbursed by Airlease as to which Borrower is entitled to be paid or reimbursed pursuant to Section 5.01 of the Trust Agreement; and third, the balance, if any, of such installment remaining thereafter shall be distributed to Airlease. Each such installment distributed to Lender shall be applied by Lender in payment of such Note in accordance with the terms of Section 2.05 hereof. (b) Supplemental Rent Distribution. Except as otherwise provided in Section 3.03 hereof, the amounts, if any, from time to time received by Borrower which constitute payments of Supplemental Rent pursuant to Section 4.02 of the Lease (other than Stipulated Loss Value payments and Termination Payments) shall be paid to or upon the order of the Person owed the same. Section 3.02. Payments for Lost or Terminated Aircraft. (a) Except as otherwise provided in Section 3.02(b) and Section 3.03 hereof, any amount received or receivable pursuant to Article 11 of the Lease with respect to the Aircraft shall in each case be distributed and paid in the following order of priority; first, to the Lessee to the extent required by the Lease; second, in the manner provided in clause "first" of Section 3.03 hereof; third, so much of such amount remaining as shall be required to pay in full the aggregate unpaid principal amount of the Prorated Portion of the Note plus the accrued but unpaid interest on such Prorated Portion of the Note and Prepayment Premium, if any, on such Note to the date of distribution, shall be distributed to Lender; fourth, so much of such amount as shall be required to reimburse the Borrower for any expenses not reimbursed by the Lessee in 22 28 connection with the collection or distribution of such amount shall be applied in reimbursement of such expenses; and fifth, in the manner provided in clause "fourth" of Section 3.03 hereof. (b) Except as otherwise provided in Section 3.03 hereof, any amounts received directly or through Lessee from any governmental authority or other party pursuant to Sections 11.02, 11.03(B) and 11.04 of the Lease with respect to the Airframe or the Airframe and the Engines or engines then installed on the Airframe, to the extent that such amounts are not at the time required to be paid to Lessee pursuant to said Sections 11.02, 11.03(B) or 11.04, and any amounts of insurance proceeds for damage to the Aircraft, Airframes, Engines or Parts received directly or through Lessee from any insurer pursuant to Article 12 of the Lease with respect thereto as the result of an Event of Loss, to the extent such amounts are not at the time required to be paid to Lessee pursuant to said Article 12, shall (unless Lessee has agreed to enter into a lease supplement pursuant to the terms of this Loan and Security Agreement and the Lease for the substitution or replacement of the Aircraft, Airframe or Engine subject to the Event of Loss), except as otherwise provided in the next sentence, be applied in reduction of Lessee's obligation to pay Stipulated Loss Value payments and Termination Payments as provided in the Lease. Any portion of any such amount referred to in the preceding sentence which is not required to be so paid to Lessee pursuant to the Lease, solely because a Default or an Event of Default shall have occurred, shall be held by Borrower as security for the obligations of Lessee under the Lease and at such time as there shall not be continuing any Default or Event of Default, such portion shall be paid to Lessee, unless Borrower shall have theretofore declared the Lease to be in default pursuant to Article 18 thereof, in which event such portion shall be distributed forthwith upon such declaration in accordance with the provisions of Section 3.03 hereof. Section 3.03. Payments After Loan Default. Subject only to the provision clause of this Section 3.03, all payments received and amounts (other than Excepted Property) realized by Borrower after a Loan Default shall have occurred and be continuing, as well as all payments or amounts then held or thereafter received by Borrower as part of the Collateral while such Loan Default shall be continuing, shall be distributed forthwith by Borrower in the following order of priority: first, so much of such payments or amounts as shall be required to reimburse Lender for costs, expenses and payments made by it or to pay such amounts payable to it pursuant to the provisions of the Lease or this Loan and Security Agreement, shall be distributed to Lender; second, so much of such payments or amounts as shall be required to pay in full the aggregate unpaid principal amount of the Note, plus the accrued but unpaid interest and Prepayment Premium, if any, thereon to the date of distribution, shall be distributed to Lender; third, so much of such payments or amounts as shall be required to reimburse Borrower for any tax, expense or other loss incurred by Borrower (to the extent not previously reimbursed and to the extent incurred in connection with its duties as Borrower); and fourth, the balance, if any, of such payments or amounts remaining thereafter shall be promptly distributed to, or as directed by, Airlease or Lessee if due and payable to Lessee pursuant to the terms of the Lease, or as otherwise provided by law, as the case may be. 23 29 Section 3.04. Other Payments. Except as otherwise provided in Sections 3.01, 3.02 and 3.03 hereof, (a) any payments received by Borrower for which no provision as to the application thereof is made in the Lease or elsewhere in this Article III, and (b) all payments received and amounts realized by Borrower under the Lease or otherwise with respect to the Aircraft to the extent received or realized at any time after payment in full of the principal of, interest and Prepayment Premium, if any, on the Note, as well as any other amounts remaining as part of the Collateral after payment in full of the principal of, interest and Prepayment Premium, if any, on the Note issued hereunder, shall be distributed forthwith by Borrower in the order of priority set forth in Section 3.03 hereof, except that in the case of any payment described in clause (b) above, such payment shall be distributed omitting clause "second" of such Section 3.03. Section 3.05. Distribution to Airlease. All amounts from time to time distributable under this Loan and Security Agreement by Borrower to Airlease shall be paid, by Borrower (in such funds as were received by Borrower) directly to Airlease, or retained by Borrower, in accordance with the provisions of the Trust Agreement. Section 3.06. Distribution of Excepted Property. All amounts constituting Excepted Property received by Borrower shall be paid by Borrower to the Person or Persons entitled thereto. ARTICLE IV REMEDIES OF LENDER UPON A LOAN DEFAULT Section 4.01. Loan Defaults. The following events shall constitute "Loan Defaults" (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): (a) an Event of Default (other than an Event of Default by reason of a default by Lessee to pay any amounts which are part of the Excepted Property); or (b) any failure by Airlease to observe or perform any covenant or obligation under the Instructions and Consent; or (c) any failure by Borrower, Airlease or IBM to observe or perform any covenant or obligation under the IBM Consent Agreement; or 24 30 (d) any default by Borrower in making any payment when due of principal of or interest on the Note and the continuance of such default unremedied for ten (10) days after the same shall have become due and payable; or (e) any failure by Borrower to observe or perform any covenant or obligation under this Loan and Security Agreement or the Note, if, but only if, such failure is not remedied within a period of thirty (30) days after there has been given to Borrower and Lessee by Lender a written notice specifying such failure and requiring it to be remedied; provided, however, that, to the extent that obligations of Borrower are also obligations of Lessee under the Lease, then, to the extent that Lessee performs or observes such obligations under the Lease, such obligations of Borrower contained in this Loan and Security Agreement shall be deemed to have been performed or observed and, to the extent that Lessee is excused from performing or observing such obligations, Borrower will be likewise excused; or, (f) any representation or warranty made by Borrower hereunder, by Airlease under the Instructions and Consent, by PSA under the Consent Agreement, or by Borrower, PSA, Airlease and IBM under the IBM Consent Agreement, or by Borrower or Airlease or Management or PSA or IBM in any document or certificate furnished to Lender in connection herewith or therewith or pursuant hereto or thereto, shall prove at any time to have been incorrect in any material respect as of the date made and shall continue to be incorrect for a period of thirty (30) days after written notice from Lender; or (g) Borrower or Airlease or Management shall consent to the appointment of a receiver, trustee or liquidate of itself or of a substantial part of its property or shall make a general assignment for the benefit of creditors; or (h) Borrower or Airlease or Management shall file, or consent by answer or otherwise to the filing against it of, a petition for relief or reorganization or arrangement or any other petition in bankruptcy, for liquidation or to take advantage of any bankruptcy or insolvency law of any Jurisdiction; or (i) an order, judgment or decree shall be entered by any court of competent jurisdiction appointing, without the consent of Borrower or Airlease or Management, a receiver, trustee or liquidate of Borrower or Airlease or Management, or of any substantial part of its property, or granting any order for relief in respect of Borrower or Airlease or Management under the Federal bankruptcy laws, and any such order, judgment or decree of appointment shall remain in force undismissed, unstayed or unvacated for a period of 90 days after the date of entry thereof; or (j) a petition against Borrower or Airlease or Management, in a proceeding under the Federal bankruptcy laws or other insolvency law, as now or hereafter in effect, shall be filed and shall not be withdrawn or dismissed within 90 days thereafter, or if, under the provisions of any law providing for reorganization or winding-up of corporations which may apply to Borrower or Airlease or Management, any court of 25 31 competent jurisdiction shall assume jurisdiction, custody or control of Borrower or Airlease or Management or of any substantial part of its property and such jurisdiction, custody or control shall remain in force unrelinquished, unstaved or unterminated for a period of 90 days. Upon the occurrence of any Loan Default and at any time thereafter so long as the same shall be continuing, Lender may declare the unpaid principal amount of the Note with accrued interest and Prepayment Premium, if any, thereon to be due and payable, and at any time thereafter, so long as Borrower shall not have remedied all outstanding Loan Defaults to the extent permitted by Section 4.04 hereof, Lender may exercise, and Borrower shall comply with, the remedies referred to in Sections 4.02, 4.03 and 4.06 hereof (subject to Section 4.05 hereof). In addition, in the event Lender shall at any time declare the Lease to be in default pursuant to Article 18 thereof or shall elect to foreclose or otherwise enforce this Loan and Security Agreement, the unpaid principal amount of the Note with accrued interest and Prepayment Premium, if any, thereon shall immediately be accelerated and become due and payable without further act or notice of any kind. Section 4.02. Remedies With Respect to Mortgaged Property. (a) After a Loan Default shall have occurred and so long as such Loan Default shall be continuing, then and in every such case Lender, as assignee hereunder of the Lease, Purchase Agreement, Assignment Agreement, TBT Note and TBT Lease or as mortgagee hereunder of the Aircraft, Airframes, Engines and Parts or otherwise, may, subject to the rights, if any, of Lessee under the Lease, and when required pursuant to the provisions of Article IV hereof shall, exercise subject to Sections 4.04 and 4.05, any or all of the rights and powers and pursue any and all of the remedies pursuant to Article 18 of the Lease and this Article IV and may take possession of all or any part of the properties (herein called the "Mortgaged Property") covered or intended to be covered by the Lien created hereby or pursuant hereto (in the case of the Aircraft, Airframes, Engines or Parts after declaring the Lease in default pursuant to Article 18 of the Lease) and may exclude Borrower and Airlease and all Persons claiming under any of them wholly or partly therefrom. (b) Subject to Sections 4.04 and 4.05, Lender may, if at the time such action may be lawful and always subject to compliance with any mandatory legal requirements, either with or without taking possession, and either before or after taking possession, and without instituting any legal proceedings whatsoever, and having first given notice of such sale by registered mail to Borrower, Airlease and Lessee once at least thirty days prior to the date of such sale, and any other notice which may be required by law, sell and dispose of the Mortgaged Property, or any part thereof, or interest therein, at public auction or private sale to the highest bidder, in one lot as an entirety or in separate lots, and either for cash or on credit and on such terms as Lender may determine, and at any place (whether or not it be the location of the Mortgaged Property or any part thereof) designated in the notice above referred to. Any such sale or sales may be adjourned from 26 32 time to time by announcement at the time and place appointed for such sale or sales, or for any such adjourned sale or sales, without further notice, and Lender may bid and become the purchaser at any such sale. Borrower hereby irrevocably constitutes Lender the true and lawful attorney-in-fact of Borrower (in the name of the Borrower or otherwise) for the purpose of effecting any sale, assignment, transfer or delivery for enforcement of the Lien of this Loan and Security Agreement, whether pursuant to foreclosure or power of sale or otherwise, to execute and deliver all such bills of sale, assignments and other instruments as Lender may consider necessary or appropriate, with full power of substitution, Borrower hereby ratifying and confirming all that such attorney or any substitute shall lawfully do by virtue hereof. Nevertheless, if so requested by Lender or any purchaser, Borrower shall ratify and confirm any such sales assignment, transfer or delivery, by executing and delivering to Lender or such purchaser all bills of sale, assignments, releases and other proper instruments to effect such ratification and confirmation as may be designated in any such request. If, pursuant to applicable law, prior notice of any such sale is required to be given to Borrower, Borrower hereby acknowledges that the minimum time required by such applicable law, or if no minimum is specified, ten Business Days, shall be deemed a reasonable notice period. (c) Subject to Sections 2.03, 4.04 and 4.05, Lender may proceed to protect and enforce this Loan and Security Agreement and the Note by suit or suits or proceedings in equity, at law or in bankruptcy, and whether for the specific performance of any covenant or agreement herein contained or in execution or aid of any power herein granted; or for foreclosure hereunder, or for the appointment of a receiver or receivers for the Mortgaged Property or any part thereof, or for the recovery of judgment for the indebtedness secured by the Lien of this Loan and Security Agreement or for the enforcement of any other proper legal or equitable remedy available under applicable law. Section 4.03. Return of Aircraft, etc. Subject to Sections 4.02, 4.04 and 4.05, in case one or more of the Loan Defaults shall have occurred and be continuing, then, in every such case, Lender may take possession of all or any part of the Mortgaged Property and may exclude Borrower and Airlease and all Persons claiming under any of them wholly or partly therefrom. At the request of Lender, Borrower shall promptly execute and deliver to Lender such instruments of title and other documents as Lender may deem necessary or advisable to enable Lender or an agent or representative designated by Lender, at such time or times and place or places as Lender may specify, to obtain possession of all or any part of the Mortgaged Property. If Borrower shall fail for any reason to execute and deliver such instruments and documents to Lender, Lender may, subject to Section 4.05, (a) obtain a judgment conferring on Lender the right to immediate possession and collection and requiring Borrower to deliver such instruments of title and other documents as Lender may deem necessary or advisable to enable Lender or an agent or representative designated by Lender, at such time or times and place or places as Lender may specify, to obtain possession of all or any part of the Mortgaged Property, and (b) pursue all or part of the Mortgaged Property wherever it may be found and may enter any of the premises of Lessee or Borrower wherever the Mortgaged Property may be or be supposed to be and search for the Mortgaged Property and, subject to Section 4.05, take 27 33 possession of and remove the Mortgaged Property. Upon every such taking of possession, Lender may, from time to time, at the expense of Borrower, make all such commercially reasonable expenditures for maintenance, insurance, repairs, replacements, alterations, additions and improvements to any of the Mortgaged Property. In each such case, Lender shall have the right to use, operate, store, control or manage the Mortgaged Property, and to carry on the business and to exercise all rights and powers of Borrower and Airlease relating to the Mortgaged Property, as Lender shall deem best, including the right to enter into any and all such agreements with respect to the maintenance, operation, leasing or storage of the Mortgaged Property or any part thereof as Lender may determine; and Lender shall be entitled to collect and receive all tolls, rents, revenues, issues, income, products and profits of the Mortgaged Property and every part thereof, without prejudice, however, to the right of Lender under any provision of this Loan and Security Agreement to collect and receive all cash held by, or required to be deposited with, Borrower hereunder. Such tolls, rents, revenues, issues, income, products and profits shall be applied to pay the expenses of holding and operating the Mortgaged Property and of conducting the business thereof, and of all maintenance, repairs, and replacements, alterations, additions and improvements to make all payments which the Lender may be required or may elect to make, if any, for taxes, assessments, insurance or other proper charges upon the Mortgaged Property or any part thereof (including the employment of engineers and accountants to examine, inspect and make reports upon the properties and books and records of Borrower and Airlease), and all other payments which Lender may be required or authorized to make under any provision of this Loan and Security Agreement, as well as just and reasonable compensation for the services of Lender and of all Persons properly engaged and employed by Lender. Section 4.04. Right To Cure Certain Events of Default. If Lessee shall fail to make any payment of Basic Rent within five days after the same shall become due, and if such failure of Lessee to make such payment of Basic Rent shall not constitute the fourth consecutive such failure or the eighth cumulative such failure, then as long as no other Loan Default (other than an Event of Default) shall have occurred and be continuing Borrower may (but need not) pay to Lender, at any time prior to the expiration of a period of five days (the "Five-Day Period") after the expiration of such five-day period (prior to the expiration of which Five-Day Period Lender shall not declare the Lease in default pursuant to Article 18 thereof or exercise any of the rights, powers or remedies pursuant to such Article 18 or this Article IV), an amount equal to the full amount of the principal payment due and interest accrued hereunder, together with any interest due thereon on account of the delayed payment thereof, and such payment by Borrower shall be deemed to cure any Loan Default which arose from such failure of Lessee (but such cure shall not relieve Lessee of any of its obligations). If Lessee shall fail to perform or observe any other covenant, condition or agreement to be performed or observed by it under the Lease, then as long as no other Loan Default (other than an Event of Default) shall have occurred and be continuing, Borrower may (but need not) cure such failure to perform or observe such other covenant, condition or agreement, and such curing of such failure to perform or observe any other covenant, condition or agreement by 28 34 Borrower shall be deemed to cure any Loan Default which arose from such failure of Lessee (but such cure shall not relieve Lessee of any of its obligations). Upon any payment of principal and interest by Borrower in accordance with the first sentence of this Section 4.04, or upon any curing of any of Lessee's defaults by Borrower in accordance with the second sentence of this Section 4.04, Borrower shall, to the extent of its payments, or actions to cure Lessee's defaults, be subrogated, in the case of any such payment in accordance with such first sentence, to the rights of Lender, as assignee hereunder of Borrower; or, in the case of any action to cure Lessee's defaults in accordance with such second sentence, to the rights of Lender or such other person, as the case may be, which actually received such benefits of the curing of Lessee's defaults (but in each case only if all amounts of principal, interest and Prepayment Premium, if any, at the time due and payable on the Note shall have been paid in full), provided that Borrower shall not attempt to recover any such amount paid by it on behalf of Lessee pursuant to this Section 4.04 through the exercise of any rights or remedies provided for in Article 18 of the Lease except pursuant to the portion of the Granting Clause following Paragraph G thereof. Section 4.05. Rights of Lessee. Notwithstanding the provisions of this Loan and Security Agreement, including, without limitation, Sections 4.01, 4.02 and 4.03 hereof, neither Lender nor Borrower shall take any action contrary to, or disturb, Lessee's rights under the Lease, except in accordance with the provisions of the Lease, including, without limitation, (i) the right to receive all monies due and payable to it in accordance with the provisions of the Lease and (ii) Lessee's rights to possession and use of, and of quiet enjoyment of, the Aircraft, Airframes, Engines or Parts. Notwithstanding the provisions of this Loan and Security Agreement, including, without limitation, Sections 4.01, 4.02 and 4.03 hereof, Lender shall not be entitled to exercise any remedy hereunder solely as a result of a Loan Default occurring under Section 4.01(a) hereof unless Lender shall have declared the Lease to be in default in accordance with Article 18 thereof. Section 4.06. Waiver of Borrower. To the extent now or at any time hereafter enforceable under applicable law, Borrower covenants that it will not at any time insist upon or plead, or in any manner whatsoever claim or take any benefit or advantage of, any stay or extension law now or at any time hereafter in force, nor claim, take or insist upon any benefit or advantage of or from any law now or hereafter in force providing for the valuation or appraisement of the Mortgaged Property or any part thereof, prior to any sale or sales thereof to be made pursuant to any provision herein contained, or to the decree, judgment or order of any court of competent jurisdiction; nor, after such sale or sales, claim or exercise any right under any statute now or hereafter made or enacted by any state or otherwise to redeem the property so sold or any part thereof, and hereby expressly waives for itself and on behalf of each and every Person, except decree or judgment creditors of Borrower acquiring any interest in or title to the Mortgaged Property or any part thereof subsequent to the date of this Loan and Security Agreement, all benefit and advantage of any such law or laws, and covenant that they will not invoke or utilize any such law or laws or otherwise hinder, delay or impede the execution of any power 29 35 herein granted and delegated to Lender, but will suffer and permit the execution of every such power as though no such law or laws had been made or enacted. ARTICLE V ADDITIONAL DUTIES Section 5.01. Action Upon Loan Default. In the event Borrower shall have knowledge of a Loan Default or an event or condition which after notice or lapse of time or both would constitute a Loan Default, Borrower shall give notice of such Loan Default or such event or condition in the same manner to Lessee, Airlease and Lender. Lender shall give written notice to Airlease, Borrower and Lessee of any action with respect to such Loan Default prior to or concurrently with such actions. For all purposes of this Loan and Security Agreement, in the absence of actual knowledge, Lender shall not be deemed to have knowledge of a Loan Default (except the failure to receive any scheduled quarterly principal or interest payment within five days after the same shall become due or the failure of Lessee to maintain insurance as required under Article 12 of the Lease if Lender shall receive notice thereof from an insurer or insurance broker) unless notified in writing by Lessee, Borrower or Airlease; and "actual knowledge" (as used in the foregoing clause) of Lender shall mean actual knowledge of an officer of Lender. Section 5.02. Actions by Lender. Subject to the terms of Sections 5.01 and 5.03 hereof, Lender shall take such of the following actions as it may deem reasonable or in its best interest: (i) give such notice, direction or consent, or exercise such right, remedy or power hereunder or under the Lease in respect of any part or all of the Collateral; and (ii) approve as satisfactory to it all matters required by the terms of the Lease to be satisfactory to Borrower. Upon the expiration or earlier termination of the Term with respect to any or all Aircraft under the Lease or the transfer by Borrower to Lessee of any or all Aircraft pursuant to Article 11 or Section 20.04 of the Lease, and in either such case after payment in full of the principal of the Prorated Portion of the Note and interest and Prepayment Premium, if any, on such Prorated Portion of the Note issued hereunder and of all other sums due and owing hereunder or, in the case of the substitution of any Engine pursuant to Article 11 of the Lease, satisfaction of the terms and provisions of said Article 11 relating thereto, or, in the case of the substitution of any Aircraft or Airframe in accordance with Article V hereof, satisfaction of the terms and provisions of this Article V hereof and said separate agreement regarding the replacement or substitution of such Aircraft or Airframe, Lender shall in each case, upon the written request of Borrower (provided that no Event of Default or Loan Default shall have occurred and be continuing), execute and deliver to, or as directed in writing by, Borrower an appropriate instrument (in due form for recording) releasing such property from the Lien of this Loan and Security Agreement. 30 36 Section 5.03. Indemnification. Lender shall not be required to take any action or refrain from taking any action under Article IV or V hereof unless it shall have been indemnified in manner and form reasonably satisfactory to Lender pursuant to Section 7.01. Lender shall not be required to take any action under Article IV or V hereof, nor shall any other provision of this Loan and Security Agreement be deemed to impose a duty on Lender to take any action, if Lender shall have been advised by independent counsel that such action is contrary to the terms hereof or of the Lease, the Purchase Agreement, the Assignment Agreement, the TBT Lease or the TBT Note, or is otherwise contrary to law. Section 5.04. No Duties Except as Specified in Loan and Security Agreement. Lender shall not have any duty or obligation to manage, control, use, sell, dispose of or otherwise deal with the Aircraft or any other part of the Collateral, or to otherwise take or refrain from taking any action under, or in connection with, this Loan and Security Agreement, the Purchase Agreement, the Assignment Agreement, the TBT Note, the TBT Lease or the Lease, except as expressly provided by the terms of this Loan and Security Agreement. Borrower agrees that it will, at its own cost and expense, promptly take such action as may be necessary duly to discharge any liens or encumbrances on any part of the Collateral, or on any properties of Borrower assigned, pledged or mortgaged as part of the Collateral, which result from claims against it in its individual capacity not related to the ownership of the Aircraft, administration of the Collateral or any other transaction under this Loan and Security Agreement or any document included in the Collateral. Section 5.05. Replacement Aircraft, Airframes and Engines. At any time and from time to time prior to the expiration of the Term any Engine is replaced pursuant to Sections 11.02 or 11.03(B) of the Lease or any Aircraft or Airframe is replaced pursuant to a separate written agreement among Lender, Borrower and Lessee, Borrower may, from time to time, direct Lender to execute and deliver to it, or as directed in writing by Borrower, an appropriate instrument releasing such Aircraft, Airframe or Engine from the Lien of this Loan and Security Agreement, but only in respect of such Aircraft, Airframe or Engine and Lender shall execute and deliver such instrument as aforesaid, but only upon receipt by or deposit with Lender of all of the required documentation set forth in Section 11.02 of the Lease with regard to any replacement Engine, and with regard to any replacement Aircraft or Airframe, Lender may request receipt of all documentation it may deem reasonable under the circumstances prior to the execution and delivery of any instrument releasing such Aircraft or Airframe from the Lien of this Loan and Security Agreement. Section 5.06. Replacements After Default. a) In case a Default or Event of Default under the Lease shall have occurred and be continuing, Lessee, while in possession of the Aircraft and other property covered by the Lease, may take the actions enumerated in Section 5.05 hereof (to the 31 37 extent set forth therein) if any Event of Loss with respect to any Engine shall have occurred under Sections 11.02 or 11.03(B) of the Lease. With regard to any replacement Aircraft or Airframe, Lessee shall comply with all requirements found in the separate written agreement among Lessee, Borrower and Lender regarding such replacement. (b) In case the Collateral shall be in the possession of a trustee, debtor in possession or receiver lawfully appointed, the powers hereinbefore conferred upon Lessee with respect to the disposition and release of any Engine in Section 5.05 (to the extent set forth therein) may be exercised by such trustee, debtor in possession or receiver, in which case the required documentation under Section 11.02 of the Lease and the requirements of Section 5.05 hereof may be signed by said receiver, debtor in possession or trustee. Section 5.07. Documents for Replacements. In the event an Engine is replaced or substituted as contemplated by Sections 11.02 or 11.03(B) of the Lease, or an Aircraft or Airframe is replaced or substituted pursuant to a separate written agreement among Lessee, Borrower and Lender, Borrower and Lender agree for the benefit of Lessee, subject to fulfillment of the conditions precedent and compliance by Lessee with its obligations set forth in Sections 11.02 or 11.03(B) of the Lease or in the separate written agreement of Lessee, Borrower and Lender, as applicable, provided no Default or Event of Default shall have occurred and be continuing, to execute and deliver to Lessee an appropriate instrument releasing the Engine, Aircraft or Airframe being replaced from the Lien of this Loan and Security Agreement. Section 5.08. Effect of Replacements. In the event of the replacement or substitution of an Engine as contemplated by Sections 11.02 or 11.03(B) of the Lease, or an Aircraft or Airframe pursuant to a separate written agreement among Lessee, Borrower and Lender, all provisions of this Loan and Security Agreement relating to the Engine, Engines, Aircraft, Airframe or Airframes being replaced shall be applicable to such Engine, Engines, Aircraft, Airframe or Airframes replacing the same, with the same force and effect as if such replacement Engine, Engines, Aircraft, Airframe or Airframes were the same Engine or Engines, Aircraft, Airframe or Airframes as the Engine Engines, Aircraft, Airframe or Airframes being replaced but for the Event of Loss with respect to the Engine or Engines being replaced or the separate agreement allowing for the replacement of the Aircrafts, Airframe or Airframes. ARTICLE VI BORROWER Section 6.01. Acceptance of Trust and Duties. Borrower has accepted the trust created pursuant to the Trust Agreement and applicable to it and agrees to perform the same but only upon the terms of the Trust Agreement and subject to this Loan and Security Agreement and agrees to receive and disburse all monies received by it constituting part of the Collateral in accordance with the terms thereof and hereof. Borrower shall not be answerable or accountable in its individual capacity under any circumstances, except for its 32 38 own willful misconduct, gross negligence or breach of any of its representations or warranties set forth herein or in the Trust Agreement, or the performance of its obligations under the last sentence of Section 5.04 hereof; and Borrower shall not be liable for any action or inaction of Airlease. Section 6.02. Absence of Duties. Except in accordance with written instructions or requests furnished pursuant to Section 5.01 or Section 5.02 hereof and except as provided in, and without limiting the generality of, Section 5.04 hereof, Borrower shall have no duty (i) to see to any registration of the Aircraft or any recording or filing of the Lease, or of this Loan and Security Agreement or any other document, or to see to the maintenance of any such registration, recording or filing, (ii) to see to any insurance on the Aircraft or to effect or maintain any such insurance, whether or not Lessee shall be in default with respect thereto, (iii) to see to the payment or discharge of any tax, assessment or other governmental charge or any lien or encumbrance of any kind owing with respect to, or assessed or levied against, any part of the Collateral, (iv) to confirm, verify or inquire into the failure to receive any financial statements of Lessee, or (v) to inspect the Aircraft at any time or ascertain or inquire as to the performance or observance of any of Lessee's covenants under the Lease with respect to the Aircraft. Notwithstanding the foregoing, (a) Borrower will furnish to Lender, promptly upon receipt thereof, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and other instruments furnished to Borrower under the Lease, including, without limitation, a copy of each report or notice from an insurer received pursuant to Section 12.07 of the Lease, to the extent that the same shall not have been furnished to Lender pursuant to the Lease, (b) Borrower will promptly give written notice to Lessee, Lender and Airlease as to any matters with respect to the Lease of which Borrower has notice, including notice of any matter which with notice or the passage of time would constitute an Event of Default, (c) Borrower will at the written request of Lender promptly give written notice to Lessee as to any matters with respect to the Lease of which Borrower has actual knowledge, including notice of any matter which with notice or the passage of time will constitute an Event of Default and (d) Borrower will furnish to Lender promptly upon receipt thereof, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and other instruments furnished to Borrower, to the extent that the same shall not have been otherwise furnished to Lender pursuant to this Loan and Security Agreement. Section 6.03. No Representations or Warranties as to the Aircraft. BORROWER DOES NOT MAKE NOR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE VALUE, AIRWORTHINESS, CONDITION, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF THE AIRCRAFT OR AS TO ITS TITLE THERETO, OR ANY OTHER REPRESENTATION OR WARRANTY WITH RESPECT TO THE AIRCRAFT WHATSOEVER, except that Borrower hereby represents and warrants that Borrower received whatever title was conveyed to it by PSA pursuant to the Purchase Agreement and Airlease pursuant to the Trust Agreement. 33 39 Section 6.04. [Reserved]. Section 6.05. Reliance; Agents; Advice of Counsel. Borrower shall incur no liability to anyone acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond or other document or paper believed by it to be genuine and believed by it to be signed by the proper party or parties. Borrower may accept a copy of a resolution of the board of directors of any party hereto, certified by the secretary or an assistant secretary of such party as duly adopted and in full force and effect, as conclusive evidence that such resolution has been duly adopted by said board of directors and that the same is in full force and effect. As to any fact or matter the manner of ascertainment of which is not specifically described herein, Borrower may for all purposes hereof rely, in the absence of bad faith on the part of Borrower, on a certificate, signed by an officer of Lessee, as to such fact or matter, and such certificate shall constitute full protection to Borrower for any action taken or omitted to be taken by it in good faith in reliance thereon. Lender shall furnish to Borrower upon request such information and copies of such documents as Lender may have and as are necessary for Borrower to perform its duties under Article II hereof. Lender shall assume, and shall be fully protected in assuming, that Borrower is authorized by the Trust Agreement to enter into this Loan and Security Agreement and to take all action permitted to be taken by it pursuant to the provisions hereof, and shall not inquire into the authorization of Borrower with respect thereto. In the administration of the trust hereunder, Borrower may execute any of the trusts or powers thereof and perform its powers and duties hereunder directly or through agents or attorneys and may, subject to and in compliance with the Trust Agreement, at the expense of Airlease, consult with independent counsel, accountants and other experts to be selected and employed by it, and Borrower shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the written advice or opinion of any such independent counsel, accountants or other experts acting within such persons' area of competence (so long as Borrower shall have exercised reasonable care in selecting such persons). Section 6.06. Not Acting in Individual Capacity. Borrower acts hereunder solely as trustee under the Trust Agreement and not in its individual capacity except as expressly provided herein; and all Persons, other Lender to the extent expressly provided in this Loan and Security Agreement, having any claim against Borrower or Airlease by reason of the transactions contemplated hereby shall, subject to the lien and priorities of payment as herein provided, look only to the Collateral for payment or satisfaction thereof. Section 6.07. No Compensation From Lender or Collateral. Borrower agrees that it shall have no right against Lender, except as provided in Sections 3.03 and 4.03 hereof, or the Collateral, for any fee as compensation for its services hereunder. ARTICLE VII INDEMNIFICATION OF LENDER 34 40 Section 7.01. Scope of Indemnification. Borrower hereby agrees, whether or not any of the transactions contemplated hereby shall be consummated, except as to matters covered by the indemnity furnished pursuant to Section 5.03 hereof, to assume liability for, and do hereby indemnify, protect, save and keep harmless Lender and its successors, assigns, agents and servants, from and against any and all liabilities (including strict tort liability), obligations, losses, damages, penalties, taxes (excluding any taxes, fees or other charges on, based on, or measured by, its gross or net receipts or its gross or net income, or any business or similar taxes, any transfer taxes, or any withholding taxes related to the payment of principal, Prepayment Premium, if any, or interest on the Note to Lender), claims, actions, suits, costs, expenses or disbursements (including reasonable legal fees and expenses) of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Collateral or Lender (whether or not also indemnified against by any other Person under any other document) in any way relating to or arising out of this Loan and Security Agreement, the Note, the Lease or the enforcement of any of the terms of any thereof, or in any way relating to or arising out of the manufacture, purchase, acceptance, nonacceptance, rejection, ownership, delivery, lease, registration, possession, use, operation, condition, sale, return or other disposition of the Aircraft (including, without limitation, latent and other defects, whether or not discoverable, and any claim for patent, trademark or copyright infringement), or in any way relating to or arising out of the administration of the Collateral or the action or inaction of Borrower or Lender hereunder except only in the case of willful misconduct or gross negligence of Lender in the performance of its duties hereunder or the breach of any of its representations and warranties set forth herein; provided that Lender shall not make any claim under this Section 7.01 for any claim or expense indemnified against by Lessee under the Lease. ARTICLE VIII SUCCESSOR BORROWER Section 8.01. Notice of Successor Borrower. In the case of any appointment of a successor to Borrower pursuant to the Trust Agreement or any merger, conversion, consolidation or sale of substantially all the business involving Borrower pursuant to the Trust Agreement, the successor Borrower shall give prompt written notice thereof to Lender and Lessee. Section 8.02. Resignation of Borrower; Appointment of Successor. Borrower or any successor thereto may resign and be succeeded pursuant to Article 10 of the Trust Agreement. Any Borrower hereunder shall comply with all requirements set forth in Article 10 of the Trust Agreement. ARTICLE IX 35 41 SUPPLEMENTS AND AMENDMENTS TO THIS LOAN AND SECURITY AGREEMENT AND OTHER DOCUMENTS Section 9.01. Consent of Lender; Limitations. Borrower shall not enter into any amendment of, or supplement to, the Lease, the Trust Agreement, the Purchase Agreement, the Assignment Agreement, the TBT Lease or the TBT Note, or execute and deliver any waiver or modification of, or consent or approval under, the terms of any such agreement, unless such supplement, amendment, waiver, modification, consent or approval is consented to in writing by Lender, which consent shall not be unreasonably withheld. Lender shall give or deny such request promptly after receipt of written request therefor. Section 9.02. Lender Protected. If in the opinion of Lender any document required to be executed pursuant to the terms of Section 9.01 hereof adversely affects any right, duty, immunity or indemnity in favor of Lender under this Loan and Security Agreement, the Assignment Agreement, the Purchase Agreement, the TBT Note, the TBT Lease or the Lease, Lender may in its discretion decline to execute such document. Section 9.03. Amendment to Loan and Security Agreement. No amendment, modification or waiver of, or supplement to, any term of this Loan and Security Agreement shall be effective without written consent of both parties hereto; and no waiver or modification of the terms hereof shall alter or modify the provisions of this Section or Section 4.05 hereof. The party initiating such amendment, modification or waiver of, or supplement to, this Loan and Security Agreement shall send a copy of the final version of any such amendment, modification, waiver or supplement to Lessee. ARTICLE X REPRESENTATIONS, WARRANTIES AND COVENANTS OF LENDER Section 10.01. Representations and Warranties of Lender. Lender hereby represents and warrants that: (a) The Note to be issued to it pursuant to this Loan and Security Agreement is being acquired for its own account and with its own assets and not with a view to any resale or distribution thereof, provided that the disposition of such Note shall at all times be within its control. (b) Neither it nor anyone acting on its behalf has directly or indirectly offered the Note, or any interest in and to the Collateral for sale to, or solicited any offer to acquire any of the same from, anyone. 36 42 (c) Lender is not a bank within the meaning of Section 881 (c) (3) (A) of the Code. Section 10.02. Covenants of Lender. Lender hereby covenants that: (a) Lender shall transfer or assign all or any interest in the Note (other than a transfer or assignment for security purposes only) only to a Person (i) who, as of the date of such transfer, is a "qualified person" within the meaning of Section 46(c)(8)(D)(iv) of the Code, (ii) who complies with the requirements of Section 881(c)(2)(B)(ii) or Section 871(h)(2)(B)(ii) of the Code, and (iii) who is not a bank within the meaning of Section 881(c)(3)(A) of the Code. Lender covenants and agrees that it shall not transfer or assign the Note to any Person if the effect of such a transfer is to increase the costs to Borrower under Section 2.10(b)(ii) or Section 2.12 hereof. (b) It shall from time to time upon written request of Borrower, cooperate and execute and deliver any and all such further instruments and documents and take such further action as Borrower may reasonably request in order to split the TBT Note such that a resulting note shall be solely and exclusively attributable to the Aircraft, Airframes, Engines and Parts. (c) It shall cause the TBT Note (or any Note held by Lender resulting from a split as described in Section 10.02(b) above) to be kept in the custody of Lender's American counsel. ARTICLE XI REPRESENTATIONS AND WARRANTIES OF BORROWER Borrower covenants, warrants and represents that: (a) Borrower is a trust company duly organized, validly existing and in good standing under the laws of the Commonwealth of Pennsylvania; (b) Borrower has the corporate power and authority to enter into and perform its obligations under the Trust Agreement; (c) Borrower has full corporate right, power and authority under the Trust Agreement to enter into and (assuming the due authorization, execution and delivery of the Instructions and Consent Agreement by Airlease) to perform its obligations, as Borrower, under this Loan and Security Agreement, the Assignment Agreement, the Purchase Agreement, the Lease and the Note, and to perform its obligations under the TBT Lease; 37 43 (d) There are no proceedings pending, or to the knowledge of Borrower threatened, and to the knowledge of Borrower there is no existing basis for any such proceedings, against or affecting Borrower in any court or before any governmental authority or arbitration board or tribunal which, if adversely determined, might materially and adversely affect the collateral or would call into question the right, power and authority of Borrower to enter into or perform this Loan and Security Agreement, the Lease, the Purchase Agreement, the Assignment Agreement, the Trust Agreement, the TBT Lease and the Note; (e) The Collateral is free and clear of any Lessor's Liens attributable to Borrower. Borrower has by affirmative act conveyed any interest in the Collateral to any Person or subjected the Collateral to any Lien except as contemplated by this Loan and Security Agreement; (f) Borrower is not in violation in any material respect of any term of any of this Loan and Security Agreement, the Lease, the Trust Agreement, the Purchase Agreement, the Assignment Agreement, the TBT Lease or the Note; (g) Borrower has no notice or knowledge of any Default or Event of Default by Lessee or any other condition or event which may adversely affect Lessee's ability to comply with any of the terms of the Lease; (h) This Loan and Security Agreement, the Trust Agreement, the Purchase Agreement, the Assignment Agreement, the Lease and the Note each has been duly authorized by all necessary corporate action on the part of Borrower, has been duly executed and delivered by Borrower, and constitutes (assuming the due authorization, execution and delivery of such agreements by the other parties thereto) the valid and binding obligation of Borrower to undertake to perform as provided therein enforceable against it with regard to such undertaking to perform in accordance with its terms; (i) Borrower is a "citizen of the United States" as defined in section 101 of the Federal Aviation Act; (j) The execution and delivery of this Loan and Security Agreement, the Trust Agreement, the Lease, the Purchase Agreement, the Assignment Agreement and the Note and compliance by Borrower with all of the provisions thereof do not and will not contravene any law of the United States or the Commonwealth of Pennsylvania governing the trust powers of Borrower, or any order of any court or governmental authority or agency applicable to or binding on Borrower or its Articles of Incorporation or its By-laws; and (k) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body of the United States or the Commonwealth of Pennsylvania governing the trust powers of Borrower is required for the due execution, delivery and performance of this Loan and Security Agreement, the 38 44 Assignment Agreement, the Purchase Agreement, the Trust Agreement, the Lease, the TBT Lease and the Note by Borrower. ARTICLE XII CONDITIONS PRECEDENT TO BORROWER'S OBLIGATIONS Borrower's obligations under this Loan and Security Agreement are subject to the fulfillment, prior to or on March 31, 1987, of the following conditions precedent: (a) Orrick, Herrington & Sutcliffe, counsel to Airlease, shall have advised Airlease that the provisions of the Loan and Security Agreement contain the terms of the commitment letter dated February 20, 1987 between Lender and Airlease and such other terms as negotiated between the parties to this Loan and Security Agreement. (b) Orrick, Herrington & Sutcliffe shall have provided Borrower with a opinion satisfactory to Borrower as to such matters with respect to United States tax law as Borrower may reasonably request. ARTICLE XIII CONDITIONS PRECEDENT TO FUNDING Lender shall fund the Loan, subject to the terms and conditions hereof, on March 31, 1987. Lender's obligations under this Loan and Security Agreement are subject to the fulfillment to the satisfaction of Lender, prior to or on March 31, 1987, of the following conditions precedent: (a) Lender shall have received a Note in the amount of thirty-six million dollars ($36,000,000). (b) The following documents shall have been duly authorized, executed and delivered by the respective party or parties thereto, shall be in full force and effect and copies thereof shall have been delivered to Lender or its American special counsel: (i) this Loan and Security Agreement; (ii) the Consent Agreement, in form and substance satisfactory to PSA, Borrower and Lender; (iii) the IBM Consent Agreement, in form and substance satisfactory to Borrower, Lender and IBM; 39 45 (iv) the Assignment Agreement, in form and substance satisfactory to Lender, PSA and Borrower; and (v) the Instructions and Consent Agreement, in form and substance satisfactory to Lender and Borrower. (c) Lender or its American special counsel shall have received the original Lease marked to indicate chattel paper copies. (d) Borrower has issued a receipt to Lender for the loan funds. (e) An independent insurance broker's report together with certificates of insurance from such broker, in form and substance satisfactory to Lender, as to the due compliance with the terms of Article 12 of the Lease. (f) A Uniform Commercial Code financing statement or statements covering all the security interests created by or pursuant to the Granting Clause shall have been executed and delivered by Borrower, as debtor, and by Lender, as secured party, or by Lessee, as debtor, and by Lender, as secured party, and by Airlease, as debtor, and by Lender, as secured party, with regard to the Collateral except the Assignment Agreement, and such financing statement or statements shall have been duly filed in Pennsylvania and California, and all other actions shall have been taken, which in the opinion of American special counsel for Lender are necessary and desirable to perfect such security interests, and a Uniform Commercial Code financing statement or statements describing the Lease as a lease and naming Lender as assignee of Borrower shall have been executed and delivered by Borrower and by Lessee, and shall have been duly filed in Pennsylvania and California and in all places in which in the opinion of American special counsel for Lender such filing is necessary or desirable. (g) Lender or its American special counsel shall have received letters as to the number of investors to whom debt and equity interests were offered. (h) Lender or its American special counsel shall have received: (i) Certificate of the Secretary of State of Pennsylvania listing all corporate documents and copies of the articles of incorporation of Borrower; (ii) Certificate from the Secretary of State of Pennsylvania certifying that Borrower is duly incorporated and in good standing and has paid all of its franchise taxes; (iii) Certificate of the Secretary of Borrower as to the changes in organizational documents, by-laws resolutions of its board of directors and the incumbency and signatures of the officers of Borrower; and 40 46 (iv) Officer's Certificate of Borrower as to the accuracy of representations and warranties and other matters. (i) Lender or its American special counsel shall have received: (i) Certificate of the Secretary of State of California as to organization of Airlease and good standing and payment of franchise taxes; (ii) Certificate showing authorization of Airlease to enter into transaction; and (iii) Officer's Certificate of Management, certifying as to the accuracy of representations and warranties made by Airlease and as to other matters. (j) Lender or its American special counsel shall have received: (i) Certificate of the Secretary of State of Delaware listing all corporate documents and copies of the certificate of incorporation of Management and other documents filed with the Secretary of State of Delaware; (ii) Certificate of the Secretary of State of Delaware certifying that Management is duly incorporated and in good standing and has paid all of its franchise taxes; (iii) Certificate of the Secretary of State of California that Management is qualified as a foreign corporation authorized to transact business therein; (iv) Certificate of the Franchise Tax Board of California that management is in good standing as a foreign corporation and has paid its franchise taxes; (v) Certificate of the Secretary of Management as to changes in its charter in organizational documents, by-laws, resolutions of its board of directors, and incumbency and signatures of the officers of Management; and (vi) Officer's Certificate of Management as to the accuracy of representations and warranties and other matters. (k) Lender or its American special counsel shall have received: (i) Certificate of the Secretary of State of California listing all corporate documents relating to PSA, copies of the articles of incorporation of PSA, and other documents and stating that PSA is in good standing in the State of California; (ii) Certificate of the Franchise Tax Board of California that PSA is in good standing and has paid its franchise taxes; 41 47 (iii) Certificate of the Secretary of PSA as to changes in its organizational documents, its by-laws, any applicable resolutions of its board of directors, and incumbency and signatures of its officers; and (iv) Officer's Certificate of PSA as to the accuracy of representations and warranties and other matters. (1) All approvals and consents of any trustees or holders of any indebtedness or obligations of Lessee, which are required in connection with any transaction contemplated by this Loan and Security Agreement, shall have been duly obtained. (m) Borrower has good and marketable title to the Aircraft, Airframes, Engines and Parts free and clear of Liens, except the rights of IBM under the TBT Lease, the Lien of the Lease and this Loan and Security Agreement, and all Permitted Liens under Article 14 of the Lease. (n) The Aircraft has received a Standard Certificate of Airworthiness, and Lender or its American special counsel has received copies of said Certificates certified by Borrower or Lessee. (o) This Loan and Security Agreement shall have been duly filed for recordation with the Federal Aviation Administration pursuant to the Federal Aviation Act of 1958 as amended (the "Federal Aviation Act"). (p) No material adverse change shall have occurred in the financial condition of Lessee from that shown in the balance sheet of Lessee as of December 31, 1986. (q) Nothing shall have occurred since the signing of the Loan and Security Agreement which will materially adversely affect the ability of Lessee to carry on its business or to perform its obligations under the Lease. (r) No event shall have occurred and be continuing, which constitutes an Event of Default or Default under the Lease. (s) Lender shall have received possession of the TBT Note. (t) Opinion of Counsel for Airlease. Lender shall have received a favorable opinion addressed to it from Airlease's general counsel and from Orrick, Herrington & Sutcliffe, special counsel for Airlease. (u) Opinion of Counsel for Borrower. Lender shall have received a favorable opinion addressed to it from Stevens & Lee, Pennsylvania counsel for Borrower, 42 48 and shall have received a favorable opinion addressed to it from Orrick, Herrington & Sutcliffe, California counsel for Borrower. (v) Opinion of Counsel for PSA. Lender shall have received a favorable opinion addressed to it from O'Melveny and Meyers, counsel for PSA. (w) Opinion of Counsel for Management. Lender shall have received a favorable opinion addressed to it from Stanley Gutman, Esq., counsel for Management. (x) Opinion of FAA Counsel. Lender shall have received a favorable opinion addressed to it from Zuckert, Scoutt, Rasenberger & Johnson, special FAA Counsel. (y) Appraisal. Lender shall have received a report prepared by Avmark Inc., or another independent expert approved by Lender, substantially confirming the valuation in the report prepared by Avmark Inc. and furnished to Airlease dated as of August 20, 1986 regarding the Aircraft. (z) Lender's American and Japanese special counsel shall have advised Lender that the provisions of the Loan and Security Agreement contain the terms of the commitment letter dated as of February 20, 1987 between Lender and Airlease and the terms negotiated between the parties to this Loan and Security Agreement. (aa) Such other documents and evidence with respect to Airlease, Lessee or Borrower as Lender may reasonably request. Promptly upon the recording of this Loan and Security Agreement and the Lease, pursuant to the Federal Aviation Act, Borrower will cause Zuckert, Scoutt, Rasenberger & Johnson, special counsel in Washington, D.C. to deliver to Lender, Borrower, Lessee and Airlease an opinion as to the due recording of the Loan and Security Agreement and the Lease and the lack of filing of any intervening documents with respect to the Aircraft, Airframes and Engines. All of the foregoing certificates and opinions of this Article XIII shall cover such matters reasonably requested by Lender and shall be in form and substance reasonably satisfactory to Lender. ARTICLE XIV OTHER COVENANTS Section 14.01. Other Covenants. Regardless of whether the transactions contemplated by this Loan and Security Agreement are consummated, Borrower agrees 43 49 promptly to pay or, if previously paid by Lessee or Lender, to reimburse Lessee or Lender for, (x) the initial fees of Lender in connection with the transactions contemplated hereby and (y) all the reasonable out-of-pocket costs and expenses incurred by Lender in connection with the preparation, execution and delivery of this Loan and Security Agreement, the Consent Agreement, the IBM Consent Agreement, the Instructions and Consent Agreement and any other documents or instruments referred to herein or therein, including, without limitation, (i) the reasonable fees, expenses and disbursements of (A) Pillsbury, Madison & Sutro, American special counsel for Lender, (B) Tomita & Kanazawa, Japanese special counsel for Lender, and (C) Zuckert, Scoutt, Rasenberger & Johnson, special FAA counsel in Washington, D.C.; and (ii) all other reasonable expenses incurred in connection with such actions and transactions, including, without limitation, the fees and expenses of one aircraft appraiser, printing and document production or reproduction expenses and all fees, taxes and other charges payable in connection with the recording or filing of the instruments and financing statements described in this Loan and Security Agreement, the Consent Agreement, the Instructions and Consent Agreement and the IBM Consent Agreement. Notwithstanding the foregoing, Borrower or Airlease shall pay the reasonable fees, expenses and disbursements of Orrick, Herrington & Sutcliffe, counsel for Airlease. In the event that the transactions contemplated by this Loan and Security Agreement, the Consent Agreement, the Instructions and Consent Agreement and the IBM Consent Agreement and the agreements referred to herein or therein are not consummated, Borrower shall bear and pay all costs, expenses and fees referred to above and if requested to do so by Lender shall pay all reasonable costs, expenses and fees and any actual out-of-pocket losses and damages incurred by Lender in canceling any funding or hedging transaction initiated or entered into by Lender in contemplation of the provisions herein or as a result of any such transaction and any additional transaction entered into by Lender to counter any such transaction; provided that, if the transaction fails to be consummated as a result of Lender's breach of the terms hereof or of the commitment letter dated February 20, 1987 between Lender and Airlease, Lender shall be responsible for all costs, expenses and fees otherwise payable by Airlease pursuant to this Section 14.01. Lender shall provide Borrower with documents evidencing all fees, expenses, losses or damages for which Borrower may be liable hereunder. Section 14.02. Borrower's Citizenship. Borrower covenants that if at any time it shall cease to be a "citizen of the United States" within the meaning of section 101(16) of the Federal Aviation Act, it will resign immediately as Trustee under the Trust Agreement (if and so long as such citizenship is necessary under the Federal Aviation Act as in effect at such time or, if it is not necessary, if and so long as Borrower's citizenship would have any adverse effect on Lessee or Lender); and Borrower shall promptly transfer, pursuant to the Trust Agreement and Article VIII hereof, such of its right, title and interest 44 50 in and to the Collateral and this Loan and Security Agreement, or shall take such other action, as may be necessary to prevent any deregistration of the Aircraft. Borrower agrees that it will at its own cost and expense promptly take such action as may be necessary to duly discharge and satisfy in full (i) all Lessor's Liens attributable to Borrower in its individual capacity and (ii) any other liens or encumbrances attributable to Borrower in its individual capacity on any part of the Collateral which result from claims against Borrower in its individual capacity not related to the ownership of the Aircraft or the administration of the Collateral pursuant to the Trust Agreement. ARTICLE XV MISCELLANEOUS Section 15.01. Termination of Loan and Security Agreement. This Loan and Security Agreement shall terminate and shall be of no further force or effect upon the payment in full of the principal amount of the Note, Prepayment Premium, if any, and interest on the Note hereunder, and all other sums payable to Lender hereunder, under the Note, the Lease, the Assignment Agreement, the Purchase Agreement, the TBT Note, the TBT Lease, the Instructions and Consent Agreement and the IBM Consent Agreement. Section 15.02. Sale of Aircraft by Lender Is Binding. Any sale or other conveyance of the Aircraft by Lender made pursuant to the terms of this Loan and Security Agreement, the Lease or the Consent Agreement shall bind Borrower, Airlease and Lessee and shall be effective to transfer or convey all right, title and interest of Lender and Borrower in and to the Aircraft. No purchaser or other grantee shall be required to inquire as to the authorization, necessity, expediency or regularity of such sale or conveyance or as to the application of any sale or other proceeds with respect thereto by Lender. Section 15.03. Remedies Cumulative. Each and every right, power and remedy herein specifically given to Lender or otherwise in this Loan and Security Agreement or the Consent Agreement or the Instructions and Consent Agreement or the IBM Consent Agreement shall be cumulative and shall be in addition to every other right, power and remedy herein specifically given or now or hereafter existing at law, in equity or by statute, and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by Lender, and the exercise or the beginning of the exercise of any power or remedy shall not be construed to be a waiver of the right to exercise at the time or thereafter any other right, power or remedy. No delay or omission by Lender in the exercise of any right, remedy or power or in the pursuance of any remedy shall impair any such right, power or remedy or be construed to be a waiver of any default on the part of Borrower, Airlease or Lessee or to be an acquiescence therein. 45 51 Section 15.04. Discontinuance of Proceeding. In case Lender shall have proceeded to enforce any right, power or remedy under this Loan and Security Agreement or the Instructions and Consent Agreement by foreclosure, entry or otherwise, and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely to Lender, then and in every such case Lender, Airlease, Borrower and Lessee shall be restored to their former positions and rights hereunder with respect to the Mortgaged Property, and all rights, remedies and powers of Lender shall continue subject to the resolutions of such proceedings. Section 15.05. Loan and Security Agreement and Note for Benefit of Lender, Holders of Note, Borrower, Airlease and Lessee only. Nothing in this Loan and Security Agreement, whether express or implied, shall be construed to give to any Person other than Lender, any holder of the Note, Borrower (individually and as trustee), Airlease (as set forth herein) and Lessee (as set forth herein) any legal or equitable right, remedy or claim under or in respect of this Loan and Security Agreement or the Note. Nevertheless it is hereby agreed that, subject to the terms hereof, Lender may assign, transfer or pledge to its lenders all or part of the security interest in and lien on all right, title and interest of Borrower in and to the Collateral granted hereby. Section 15.06. Notices. Unless otherwise expressly specified or permitted by the terms hereof, all notices required or permitted under the terms and provisions hereof shall be in writing, and shall become effective three days after deposit in the United States mail, with proper postage for first class registered or certified mail prepaid, when delivered personally, or, if promptly confirmed by mail as provided above, when dispatched by telegram, telex, telecopier or other written telecommunication addressed (i) if to Lender, at its office at: The World Wing Company Limited Nassau, Bahamas c/o Mr. Taketoshi Watanabe All Nippon Airways Co., Ltd. Yasumigaseki Building, 3-2-5 Kasumigaseki, Chiyoda-ku, Tokyo 100 Japan Telecopier: 011 81 3 5923239 with a copy to: Pillsbury, Madison & Sutro 225 Bush Street P.O. Box 7880 San Francisco, California 94120 Attn: George P. Haley, Esq. Telex: 34743 Telecopier: (415) 398-2096 46 52 (ii) if to Borrower, at its office at: Meridian Trust Company 35 North Sixth Street Reading, Pennsylvania 19603 Attn: Corporate Trust Division Telex: 173702 ABT UT with a copy to: United Staes Airlease, Inc. 615 Battery Street San Francisco, California 94111 Attn: President Telex: 278031 Telecopier: (415)398-7029 (iii) if to Lessee, at its office at: Pacific Southwest Airlines 3225 North Harbor Drive San Diego, California 92101 Attn: Chief Financial officer (iv) if to Airlease, at its office at: Airlease Ltd., A California Limited Partnership 2988 Campus Drive San Mateo, California 94405 Attn: President, Airlease Management Services, Inc. with a copy to: United States Airlease, Inc. 733 Front Street San Francisco, California 94111 Attn: President Telex: 278031 Telecopier: (415) 398-7029 47 53 and (v) if to any of the foregoing Persons, at such other address as such Person shall from time to time designate by written notice to the other parties hereto in accordance with this Section 15.06. Notwithstanding the foregoing provisions, for purposes of Sections 4.01, 4.02, 5.01 and 5.02 hereof, written notice shall be deemed given when it is in fact received (by mail or otherwise) by an addressee at the respective addresses specified above. Notwithstanding any other provision hereof, if an installment of any payment of principal of, Prepayment Premium, if any, and interest on the Note or any other amounts payable hereunder or under the Lease is not received by Lender when due, Lender shall on the next succeeding Business Day use its reasonable best efforts to give immediate written notice by telex or its equivalent or by telephone (confirmed in writing) to Borrower, Airlease and Lessee, which shall be effective when given. Notice herein shall not become effective unless notice shall have been made as to all appropriate parties noted above at the addresses stated under this Section 15.06. Section 15.07. Severability. Any provision of this Loan and Security Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or enforceability 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. In the event of any inconsistency or conflict between any provision of this Loan and Security Agreement and any provision of the instructions and Consent Agreement, except as explicitly stated in the Instructions and Consent Agreement, such provision in this Loan and Security Agreement shall govern and control. Section 15.08. Separate Counterparts. This Loan and Security Agreement may be executed in any number of counterparts (and each of the parties hereto shall not be required to execute the same counterpart). Each counterpart of this Loan and Security Agreement including a signature page executed by each of the parties hereto shall be an original counterpart of this Loan and Security Agreement, but a11 of such counterparts together shall constitute one instrument. Section 15.09. Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, Lender and its successors and permitted assigns and Borrower and its successors and permitted assigns, all as herein provided. Notwithstanding any other provision of this Loan and Security Agreement, no transfer of any beneficial interest in the Collateral by foreclosure or in lieu of foreclosure may occur unless the Person succeeding to Borrower's or Airlease's interest in the Collateral first executes an agreement substantially in the form of the IBM Consent Agreement where such Person undertakes the obligations of Lender thereunder. 48 54 Section 15.10. Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define, limit or expand any of the terms or provisions hereof. Section 15.11. Governing Law. This Loan and Security Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of California, including all matters of construction, validity and performance. This Loan and Security Agreement is being delivered in the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Loan and Security Agreement to be duly executed by their respective officers, thereunto duly authorized, as of the day and year first above written. BORROWER: MERIDIAN TRUST COMPANY, not in its individual capacity but solely as trustee under the Trust Agreement By AIRLEASE MANAGEMENT SERVICES, INC., as Agent By /s/Douglas C.Kay ---------------- Title: President LENDER: THE WORLD WING COMPANY LIMITED, a corporation formed and existing under the laws of the Bahamas By /s/ Taketoshi Watanabe ---------------------- Title: General Manager All Nippon Airways Co. Ltd. 49 55 EXHIBIT A
Payment Beginning Date Balance Payment Interest Principal ---- ------- ------- -------- --------- 57,461,221 21,461,221 36,000,000 0 03/31/87 36,000,000 1 06/30/87 36,000,000 1,249,157 787,500 461,657 2 09/30/87 35,538,343 1,249,157 777,401 471,756 3 12/31/87 35,066,587 1,249,157 767,082 482,075 4 03/31/88 34,584,512 1,249,157 756,536 492,621 5 06/30/88 34,091,891 1,249,157 745,760 503,397 6 09/30/88 33,588,494 1,249,157 734,748 514,409 7 12/31/88 33,074,086 1,249,157 723,496 525,661 8 03/31/89 32,548,424 1,249,157 711,997 537,160 9 06/30/89 32,011,264 1,249,157 700,246 548,911 10 09/30/89 31,462,354 1,249,157 688,239 560,918 11 12/31/89 30,901,436 1,249,157 675,969 573,188 12 03/31/90 30,328,248 1,249,157 663,430 585,727 13 06/30/90 29,742,521 1,249,157 650,618 598,539 14 09/30/90 29,143,982 1,249,157 637,525 611,632 15 12/31/90 28,532,349 1,249,157 624,145 625,012 16 03/31/91 27,907,337 1,249,157 610,473 638,684 17 06/30/91 27,268,653 1,249,157 596,502 652,655 18 09/30/91 26,615,998 1,249,157 582,225 666,932 19 12/31/91 25,949,066 1,249,157 567,636 681,521 20 03/31/92 25,267,545 1,249,157 552,728 696,429 21 06/30/92 24,571,116 1,249,157 537,493 711,664 22 09/30/92 23,859,452 1,249,157 521,926 727,231 23 12/31/92 23,132,220 1,249,157 506,017 743,140 24 03/31/93 22,389,081 1,249,157 489,761 759,396 25 06/30/93 21,629,685 1,249,157 473,149 776,008 26 09/30/93 20,853,677 1,249,157 456,174 792,983 27 12/31/93 20,060,695 1,249,157 438,828 810,329 28 03/31/94 19,250,365 1,249,157 421,102 828,055 29 06/30/94 18,422,310 1,249,157 402,988 846,169 30 09/30/94 17,576,141 1,249,157 384,478 864,679 31 12/31/94 16,711,462 1,249,157 365,563 883,594 32 03/31/95 15,827,869 1,249,157 346,235 902,922 33 06/30/95 14,924,946 1,249,157 326,483 922,674 34 09/30/95 14,002,272 1,249,157 306,300 942,857 35 12/31/95 13,059,415 1,249,157 285,675 963,482 36 03/31/96 12,095,933 1,249,157 264,599 984,558 37 06/30/96 11,111,375 1,249,157 243,061 1,006,096
50 56 38 09/30/96 10,105,279 1,249,157 221,053 1,028,104 39 12/31/96 9,077,175 1,249,157 198,563 1,050,594 40 03/31/97 8,026,581 1,249,157 175,581 1,073,576 41 06/30/97 6,953,006 1,249,157 152,097 1,097,060 42 09/30/97 5,855,946 1,249,157 128,099 1,121,058 43 12/31/97 4,734,887 1,249,157 103,576 1,145,581 44 03/31/98 3,589,306 1,249,157 78,516 1,170,641 45 06/30/98 2,418,665 1,249,157 52,908 1,196,249 46 09/30/98 1,222,417 1,249,157 26,740 1,222,417
Interest rate = 8.75% Average life = 6.81 years 51 EX-4.3 4 8.75% SECURED NON-RECOURSE NOTE OF MERIDIAN TRUST 1 Exhibit 4.3 8.75% SECURED NONRECOURSE NOTE (Secured by Lease Obligations of Pacific Southwest Airlines, the Aircraft, Airframes, Engines and Parts, the Purchase Agreement,the Assignment Agreement, the TBT Note and the TBT Lease) Issued in Connection with the Aircraft containing Airframes having manufacturer's serial numbers 48040, 48041 and 48042 and FAA registration numbers N932PS, N933PS and N934PS. No. 1 San Francisco, California $36,000,000 March 31, 1987 Meridian Trust Company, a trust company organized under the laws of the Commonwealth of Pennsylvania, not in its individual capacity, but solely as trustee under the Trust Agreement, hereby promises to pay to The World Wing Company Limited, or its registered assigns, the principal sum of $36,000,000 in lawful currency of the United States of America, in quarterly installments commencing June 30, 1987 payable on the last day of each March, June, September and December of each year thereafter to and including September 30, 1998, each such installment to be in an amount corresponding to the percentage of the original principal amount hereof payable on such payment date and based upon the amortization schedule attached hereto as Exhibit A, together with interest from and including the date hereof until such principal sum is due and payable, payable on June 30, 1987 and the last day of each March, June, September and December thereafter to the maturity date hereof at an interest rate of 8.75% per annum (computed on the basis of a 360-day year of 12 30-day months), and to pay interest at the rate of 10-1/2% per annum (computed on the same basis) on any overdue principal and (to the extent permitted by applicable law) overdue interest from the due date thereof until paid, payable on demand, all pursuant to the terms of the Loan and Security Agreement referred to below. All payments of principal and interest to be made hereunder and under the Loan and Security Agreement dated as of March 20, 1987 (herein called the "Loan and Security Agreement", the defined terms therein not otherwise defined herein being used herein with the same meanings) between Borrower and Lender shall be made only from the income and proceeds from the Lease and the security interests in the Aircraft, Airframes, Engines, Parts, the Purchase Agreement, 1 2 the Assignment Agreement, the TBT Note And the TBT Lease and only to the extent of Borrower's and Airlease's interest thereto, except for Excepted Property. Each holder hereof agrees that it will look solely to the income and proceeds from the Lease and the security interests described above to the extent available for distribution to the holder hereof as provided in the Loan and Security Agreement, that this Note shall be nonrecourse to Airlease and Borrower, and that Airlease and Borrower shall not be personally liable to the holder hereof for any amount payable under this Note or the Loan and Security Agreement. Payments with respect to the principal amount hereof and interest and Prepayment Premium, if any, thereon shall be payable in U.S. dollars in immediately available funds in such manner as the registered owner of the Note may direct pursuant to Section 2.04 of the Loan and Security Agreement. Each such payment shall be made on the date such payment is due and without any presentment or surrender of this Note. Whenever the date scheduled for any payment to be made hereunder or under the Loan and Security Agreement shall not be a Business Day, then such payment need not be made on such scheduled date but shall be made on the next succeeding Business Day with the same force and effect as if made on such-scheduled date and (provided such payment is made on such next succeeding Business Day) no interest shall accrue on the amount of such payment from and after such scheduled date to the time of such payment on such next succeeding Business Day. If, however, the next succeeding Business Day shall be two or more days after the scheduled date of payment, such payment shall be made on the immediately preceding Business Day of the scheduled payment date, provided no adjustment of interest shall be made due to such early payment. Each holder hereof, by its acceptance of this Note, agrees that each payment received by it hereunder shall be applied, first, to the payment of accrued interest on this Note to the date of such payment, second, to the payment of the unpaid principal amount of this Note then due, and third to the payment of any Prepayment Premium, if any, on this Note then due. The balance, if any, remaining thereafter shall be applied to the payment of the installment or installments of principal next becoming due on the Note. This Note is issued by Borrower pursuant to the terms of the Loan and Security Agreement. The Collateral is held by Lender as security for the Note. The rights of Borrower under the Loan and Security Agreement in and to the Collateral are subject and subordinate to the rights of the holder of this Note to the extent provided for in the Loan and Security 2 3 Agreement. Reference is hereby made to the Loan and Security Agreement for a statement of the rights of the holder of, and the nature and extent of the security for this Note and the rights of Airlease and Borrower (including the right of Borrower under certain circumstances stated therein to prepay the Note) to all of which terms and conditions in the Loan and Security Agreement each holder hereof agrees by its acceptance of this Note. This Note is not subject to prepayment except as provided in Section 2.10 of the Loan and Security Agreement. Without limiting the foregoing, the holder hereof agrees to surrender this Note for a new Note pursuant to Section 2.08 of the Loan and Security Agreement. This Note is a registered Note and is transferable, as provided in the Loan and Security Agreement, only upon surrender of this Note for registration of transfer duly endorsed by, or accompanied by a written statement of transfer duly executed by, the registered holder hereof or his attorney duly authorized in writing. Prior to the due presentation for registration of transfer of this Note, Borrower may deem and treat the registered holder of this Note as the absolute owner and holder hereof for the purpose of receiving payment of all amounts payable with respect hereto and for all other purposes and shall not be affected by any notice to the contrary. Unless the certificate of authentication hereon has been executed by or on behalf of Borrower by manual signature, this Note shall not be entitled to any benefit under the Loan and Security Agreement or be valid or obligatory for any purpose. IN WITNESS WHEREOF, Borrower has caused this Note to be executed by one of its authorized officers as of the date hereof. MERIDIAN TRUST COMPANY, not in its individual capacity, but solely as trustee By AIRLEASE MANAGEMENT SERVICES, INC., as Agent By /s/ Douglas C. Kay ----------------------------- Its President ------------------------- 3 4 [BORROWER'S CERTIFICATE OF AUTHENTICATION] This is the Note referred to in the within-mentioned Loan and Security Agreement. MERIDIAN TRUST COMPANY, not in its individual capacity, but solely as trustee By AIRLEASE MANAGEMENT SERVICES, INC., as Agent By /s/ Douglas C. Kay ----------------------------- Its President ------------------------- 4 EX-4.4 5 INSTRUCTIONS AND CONSENT AGREEMENT 1 EXHIBIT 4.4 INSTRUCTIONS AND CONSENT AGREEMENT THIS INSTRUCTIONS AND CONSENT AGREEMENT, dated as of March 31, 1987, by and between AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP, of which Airlease Management Services, Inc. is general partner ("Airlease"), and THE WORLD WING COMPANY LIMITED, a corporation formed and existing under the laws of the Bahamas ("Lender"); W I T N E S S E T H: Whereas MERIDIAN TRUST COMPANY, a trust company organized under the laws of the Commonwealth of Pennsylvania, not in its individual capacity except as provided in the Loan and Security Agreement referred to below, but solely as trustee under that certain Trust Agreement (as defined in the Loan and Security Agreement) ("Borrower") and Lender have entered into that certain Loan and Security Agreement dated as of March 20, 1987 (the "Loan Agreement") (all terms defined in the Loan Agreement shall have the same meaning when used herein); and Whereas Borrower and Airlease have entered into the Trust Agreement whereby, among other things, (i) Borrower established a certain trust for the use and benefit of Airlease, (ii) provision was made for the payment by Borrower to Airlease of amounts distributable to Airlease thereunder and (iii) Borrower is directed and authorized to take any action as Airlease may request through written instructions; and Whereas execution of this Instructions and Consent Agreement by Airlease is a condition precedent to the loan under the Loan Agreement; N o w, T h e r e f o r e, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, and in order to induce Lender to make the loan provided for in the Loan Agreement, the parties hereto agree as follows: 1. Instructions to Borrower. Airlease acknowledges and agrees that it has the right, power and authority under the Trust Agreement to cause Borrower to grant a lien on and security interest in the Aircraft, Airframes, Engines, Parts, Lease, Assignment Agreement, Purchase Agreement, TBT Note and TBT Lease to Lender for the uses and purposes set forth in the Loan Agreement, and that Borrower has the right, power and authority 1 2 under the Trust Agreement to grant a lien on and security interest in the Aircraft, Airframes, Engines, Parts, Lease, Assignment Agreement, Purchase Agreement, TBT Note and TBT Lease to Lender for the uses and purposes set forth in the Loan Agreement. Airlease hereby ratifies the Loan Agreement and instructs Borrower to enter into the Loan Agreement and to perform al1 obligations under the Loan Agreement undertaken by the Borrower thereunder and ratifies any action previously taken by Borrower in entering into and performing its obligations under the Loan Agreement. Airlease acknowledges that its interest in the Collateral is bound by and subject to the Loan Agreement. Lender shall assume, and shall be fully protected in assuming, that Borrower is authorized by the TRUST Agreement to enter into the Loan Agreement and to take all action permitted to be taken by it pursuant to the provisions thereof, and need not inquire into the authorization of Borrower with respect thereto. In the administration of the trust pursuant to the Loan Agreement, Borrower may execute any of the trusts or powers thereof and perform its powers and duties thereunder directly or through agents or attorneys and may, subject to and in compliance with the Trust Agreement, at the expense of Airlease, consult with independent counsel, accountants and other experts to be selected and employed by it, and Borrower shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the written advice or opinion of any such independent counsel, accountants or other experts acting within such persons' area of competence (so long as Borrower shall have exercised reasonable care in selecting such persons). 2. Airlease Liens. Airlease will warrant and defend the lien and security interest in all Collateral against all Liens arising out of acts of or claims against Airlease. Airlease warrants that there is no financing statement or other filed or recorded instrument in which Airlease is named as debtor now on file in any public office covering any of the Collateral except the financing statements or other instruments filed or to be filed in respect of and for the lien and security interest provided for in the Loan Agreement. Airlease agrees that it will at its own cost and expense promptly take such action as may be necessary to duly discharge and satisfy in full all liens or encumbrances attributable to Airlease on any part of the Collateral. 3. Lender as Airlease's Attorney-in-Fact. Airlease hereby constitutes and appoints Lender the true and lawful attorney of Airlease, irrevocably, with an interest and full power (in the name of Airlease or otherwise) to ask, demand, require and 2 3 receive all rights to the property, rights and interests granted to Airlease and Borrower pursuant to the terms of the Purchase Agreement, Assignment Agreement, TBT Note and TBT Lease and without limiting the provisions of the foregoing, during the continuance of any Loan Default, to sue for, give acquittance for, settle, adjust or compromise any claim for any and all rights which are assigned under the Granting Clause of the Loan Agreement as fully as Airlease could itself do. Notwithstanding any other provision of these Instructions and Consent Agreement, (a) unless and until a Loan Default shall have occurred and be continuing, all rights, powers, authorizations, approvals, privileges, benefits, notices and consents under or with respect to the Assigned Agreements, including, without limitation, the right to give waivers, consents and approvals, shall be exercised or given, as the case may be, by the Borrower (at the direction of Airlease), with the prior written consent of the Lender, which shall not be unreasonably withheld (Lender hereby agreeing to respond promptly to any request therefor by Borrower or Airlease), provided that no consent shall be required for the exercise of rights, powers, privileges and notices of an administrative nature, and (b) after a Loan Default under Section 4.01(a) of the Loan Agreement has occurred and is continuing when no other Loan Default (excepting an Event of Default) has occurred and is continuing: (i) Lender shall not enter into any modification, waiver or amendment to the Lease the effect or result of which is to extend the Term of the Lease, or alter the amount of any Rent or alter the terms and provisions of the Lease, or exercise or enforce any other of its rights and remedies under the Lease, prior to the expiration of the period during which Borrower (at the direction of Airlease) may cure said default pursuant to Section 4.04 of the Loan Agreement, and (ii) in the event Borrower (at the direction of Airlease) shall make the payments set forth in the first sentence of Section 4.04 of the Loan Agreement, then, subject to the conditions set forth below, Borrower (at the direction of Airlease) shall be entitled, to the exclusion of Lender, notwithstanding the existence of one or more other Events of Default, to exercise in good faith having due regard for the interests of Lender, all of the remedies of the lessor under the Lease, including 3 4 without limitation, the right to declare the Lease in default under Article 18 thereof, to terminate the Lease with Lessee, and to re-lease the Aircraft pursuant to a lease reasonably satisfactory in form and substance to Lender to one or more successive third party lessees each of which shall be an air carrier certificated by the Federal Aviation Administration and be capable of maintaining the Aircraft pursuant to a maintenance program reasonably satisfactory to Lender, and each of which lessee or lessees shall be approved in writing by Lender. Airlease's right to direct Borrower to exercise the foregoing rights and powers is conditional upon (1) there being no existing Loan Default other than under Section 4.01(a) of the Loan Agreement and (2) compliance by Borrower, Airlease or a third party lessee approved by Lender pursuant to the preceding paragraph with all requirements of the Lease, to the extent that noncompliance could have a material adverse affect on the value of the Collateral including, without limitation, Section 6.05 (maintenance) and Sections 12.01 and 12.02 (insurance) of the Lease. Notwithstanding the foregoing, Lender reserves the right to call the Note pursuant to Section 2.10(a)(iv) of the Loan Agreement. 4. Further Assurances. Airlease agrees that at any time and from time to time, upon the written request of Lender, Airlease will promptly and duly execute and deliver any and all such further instruments and documents as Lender may deem desirable in obtaining the full benefits of this Instructions and Consent Agreement and the Loan Agreement and of the rights and powers herein or therein granted. 5. Action by Airlease. Except as provided herein, Airlease will not without the prior written consent of Lender: (a) declare a default or exercise any remedies under, or terminate, modify or accept a surrender of, or offer or agree to any termination, modification or surrender of, any Assigned Agreement or by affirmative act consent to the creation or existence of any security interest or other Lien (other than the security interest and Lien of the Loan Agreement) to secure payment of indebtedness upon the leasehold estate created by the 4 5 Lease or any part thereof, or upon any of Airlease's and Borrower's rights under the Assignment Agreement, Purchase Agreement, TBT Note and TBT Lease; or (b) sell, mortgage, transfer, assign or hypothecate (other than to Lender) Airlease's and Borrower's interests in the Aircraft, Lease, Assignment Agreement, Purchase Agreement, TBT Note and TBT Lease, provided that Airlease may sell, transfer or assign (other than any sale, transfer or assignment for security) all of Airlease's interest in any Aircraft or portion thereof and the Assigned Agreements to the extent related to such Aircraft owned through the Trust to any affiliate of Airlease or, with Lender's consent (which consent shall not be unreasonably withheld, and which shall be given or denied promptly after any request) to any Person organized under the law of any state of the United States, which has a consolidated net worth of $25 million or more, so long as (i) such purchaser, transferee or assignee (the "Transferee") assumes all obligations of Airlease under this Instructions and Consent Agreement, the Trust Agreement and the Assigned Agreements to the extent any such agreements relate to the Aircraft or portion thereof being transferred, (ii) Airlease transfers all interest in the Trust Agreement and each of the Assigned Agreements to the extent an,7 such agreements relate to the Aircraft or portion thereof being transferred, and (iii) no Loan Default has occurred and is continuing; and provided further, Airlease may remove the Trustee and appoint a successor Trustee under the Trust Agreement without regard to any net worth requirements so long as such successor Trustee is an affiliate of Airlease. Upon a transfer of all, but not less than all, of Airlease's right, title and interest in the Aircraft and the Assigned Agreements to a Person which is not an affiliate of Airlease in compliance with this Section 5, Airlease shall be released of all obligations under this Instructions and Consent Agreement. 6. Notice of Default. In the event Airlease shall have actual knowledge of a Loan Default or an event or condition which after notice or lapse of time or both would constitute a Loan Default, Airlease shall give notice of such Loan Default or such event or condition to Lender, Borrower and Lessee. 7. Indemnification. Airlease hereby agrees, whether or not any of the transactions contemplated hereby shall be consummated, to assume liability for, and does hereby indemnify, protect, save and keep harmless Lender and its successors, assigns, agents and 5 6 servants, from and against any and all liabilities (including strict tort liability), obligations, losses, damages, penalties, taxes (excluding any taxes, fees or other charges on, based on, or measured by, its gross or net receipts or its gross or net income, or any business or similar taxes, any transfer taxes, or any withholding taxes related to the payment of principal, Prepayment Premium, if any, or interest on the Note to Lender), claims, actions, suits, costs, expenses or disbursements (including reasonable legal fees and expenses) of any kind and nature whatsoever which may be imposed on, incurred by or asserted against the Collateral or Lender (whether or not also indemnified against by any other Person under any other document) in any way relating to or arising out of this Instructions and Consent Agreement, the Loan Agreement, the Note, the Lease or the enforcement of any of the terms of any thereof, or in any way relating to or arising out of the manufacture, purchase, acceptance, nonacceptance, rejection, ownership, delivery, lease, registration, possession, use, operation, condition, sale, return or other disposition of the Aircraft (including, without limitation, latent and other defects, whether or not discoverable, and any claim for patent, trademark or copyright infringement), or in any way relating to or arising out of the administration of the Collateral or the action or inaction of Borrower, Airlease or Lender except only in the case of willful misconduct or gross negligence of Lender, or in any way relating to or arising out of the TBT Lease or the IBM Consent Agreement (including, without limitation, any breach by Lender of the TBT Lease or the IBM Consent Agreement or the last sentence of Section 15.09 of the Loan Agreement); provided that Lender shall not make any claim under this section for any claim or expense indemnified against by Lessee under the Lease or Purchase Agreement. 8. Consent of Lender. Neither Borrower nor Airlease shall enter into any amendment of, or supplement to, the Lease, the Trust Agreement, the Purchase Agreement, the Assignment Agreement, the TBT Note or the TBT Lease, or execute and deliver any waiver or modification of, or consent or approval under, the terms of any such agreement, unless such supplement, amendment, waiver, modification, consent or approval is consented to in writing by Lender, which consent shall not be unreasonably withheld. Lender shall give or deny such request promptly after receipt of written instructions therefor. 9. Lender Protected. If in the opinion of Lender any document required to be executed pursuant to the terms of Section 6 7 9.01 of the Loan Agreement adversely affects any right, duty, immunity or indemnity in favor of Lender under this Instructions and Consent Agreement, the Loan Agreement, the Assignment Agreement, the Purchase Agreement, the Lease, the TBT Note or the TBT Lease, Lender may in its discretion decline to execute such document. 10. Representations and Warrants of Airlease. Airlease covenants, warrants and represents that: (a) Airlease is a limited partnership duly organized, validly existing and in good standing under the laws of the State of California; (b) Airlease has the full power and authority to enter into and perform its obligations under this Instructions and Consent Agreement, the Purchase Agreement, the Trust Agreement and the Assignment Agreement, and has full power and authority to perform its obligations under the TBT Lease; (c) There are no proceedings pending, or to the knowledge of Airlease threatened, and to the knowledge of Airlease, there is no existing basis for any such proceedings, against or affecting Airlease in any court or before any governmental authority or arbitration board or tribunal which, if adversely determined, might materially and adversely affect the Collateral or would call into question the right, power and authority of Airlease to enter into or perform this Instructions and Consent Agreement, the Assignment Agreement, the Trust Agreement, the TBT Lease or the Purchase Agreement; (d) The Collateral is free and clear of any Liens attributable to Airlease. Airlease has not by affirmative act conveyed any interest in the Collateral to any Person or subjected the Collateral to any Lien except as contemplated by the Loan Agreement; (e) Airlease is not in violation in any material respect of any term of this Instructions and Consent Agreement, the Trust Agreement, the Assignment Agreement, the TBT Lease or the Purchase Agreement; (f) Airlease has no actual knowledge of any Default or Event of Default by Lessee or any other condition or event which may materially adversely affect Lessee's ability to comply with 7 8 any of the terms of the Lease; Airlease has no notice or knowledge of any other Loan Default; (g) This Instructions and Consent Agreement, the Assignment Agreement, the Purchase Agreement and the Trust Agreement have been duly authorized by all necessary action on the part of Airlease, have been duly executed and delivered by Airlease, and constitute (assuming the due authorization, execution and delivery of such agreements by the other parties thereto) the valid and binding obligations of Airlease enforceable against it with regard to any undertakings by Airlease pursuant to the terms thereof; (h) The execution and delivery of this Instructions and Consent Agreement, the Assignment Agreement, the Trust Agreement and the Purchase Agreement and compliance by Airlease with all of the provisions hereof and thereof do not and will not contravene any law of the United States or the State of California governing the powers of Airlease, or any order of any court or governmental authority or agency applicable to or binding on Airlease or the provisions of its limited partnership agreement; and (i) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body of the United States or the State of California governing the powers of Airlease is required for the due execution, delivery and performance of this Instructions and Consent Agreement, the Purchase Agreement, the Trust Agreement or the Assignment Agreement by Airlease. 11. Payments to Borrower. Airlease agrees to pay and deliver all Rent and any other monies due under or arising out of the Lease actually received by Airlease under the Lease to Borrower to the extent necessary to allow Borrower to perform its obligations under the Note and the Loan Agreement. Notwithstanding any other provisions of this Instructions and Consent Agreement, all payments of principal and interest to be made under the Note and under the Loan Agreement shall be made only from the income and proceeds from the Lease and the security interests in the Aircraft, Airframes, Engines, Parts, the Purchase Agreement, the Assignment Agreement, the TBT Lease and the TBT Note and only to the extent of Borrower's and Airlease's interest thereto, except for Excepted Property. Lender agrees that it will look solely to the income and proceeds from the Lease and the security interests described above to the extent available for 8 9 distribution to the Lender as provided in the Loan Agreement, that the Note shall be nonrecourse to Airlease and Borrower, and that Airlease and Borrower shall not be personally liable to the holder of the Note for any amount payable under the Note or the Loan Agreement. 12. Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, Lender and its successors and permitted assigns, Airlease and its successors and permitted assigns, and Borrower and its successors, all as herein provided. 13. Headings. The headings of the various Sections herein are for convenience of reference only and shall not define, limit or expand any of the terms or provisions hereof. 14. Severability. Any provision of this Instructions and Consent Agreement which is prohibited and unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 15. Governing Law. This Instructions and Consent Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of California, including all matters of construction, validity and performance. This Instructions and Consent Agreement is being delivered in the State of California. 9 10 IN WITNESS WHEREOF, the parties hereto have caused this Instructions and Consent Agreement to be duly executed by their duly authorized officers, as of the day and year first above written. AIRLEASE: AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP By AIRLEASE MANAGEMENT SERVICES, INC., as General Partner By /s/ Douglas C. Kay --------------------------------- Title President ------------------------------ LENDER: THE WORLD WING COMPANY LIMITED, a corporation formed and existing under the laws of the Bahamas By /s/ T. Watanabe --------------------------------- Title Treasurer ------------------------------ 10 EX-10.9 6 LEASE AGREEMENT 1 Exhibit 10.9 ================================================================================ LEASE AGREEMENT (N7379F) Dated as of November 6, 1986 between GATX LEASING CORPORATION, as Lessor and NEW YORK AIRLINES, INC., as Lessee One Boeing 737-2CO Passenger Aircraft Manufacturer's Serial Number 20071 FAA Registration Number N7379F Two Pratt & Whitney JT8D-9 Engines ================================================================================ i 2 TABLE OF CONTENTS
Article/Section Page - -------------------- 1. Definitions......................................................... 2 2. Effective Date; Commencement of Term................................ 7 2.01 Time and Place................................................. 7 2.02 A Letting Only................................................. 7 2.03 Conditions to Delivery......................................... 7 3. Term ............................................................... 10 4. Rent ............................................................... 10 4.01 Basic Rent.................................................... 10 4.02 Supplemental Rent............................................. 10 4.03 Prohibition Against Setoff, Counterclaim, etc................. 11 4.04 Waiver of Certain Rights of Lessee............................ 11 4.05 Manner and Place of Payment................................... 11 5. Representation and Warranties: Covenants of Lessee.................. 11 5.01 Lessor's Representations and Warranties; Delivery Condition... 11 5.02 Lessee's Representations and Warranties....................... 12 6 Possession; Use; Lawful Insured Operations; Maintenance; Registration and Insignia .......................................... 13 6.01 Possession.................................................... 13 6.02 Assignment by Lessee.......................................... 16 6.03 Use........................................................... 16 6.04 Lawful Insured Operaitions.................................... 16 6.05 Maintenance................................................... 16 6.06 Registration and Insignia..................................... 16 7. Inspection: Financial Information................................... 17 7.01 Inspection.................................................... 17 7.02 Financial Information......................................... 17 8. Lessee's Covenants.................................................. 18 8.01 Corporate Existence........................................... 18 8.02 Merger........................................................ 19 8.03 Certificated Air Carrier...................................... 20 8.04 .............................................................. 20 9. Replacement and Pooling of Parts; Alterations, Modifications and Additions....................................................... 20 9.01 Replacement of Parts.......................................... 20 9.02 Title to Replaced and Replacement Parts....................... 20 9.03 Pooling....................................................... 21 9.04 Alterations, Modifications and Additions...................... 21 9.05 Credit for Approved Modifications............................. 22
i 3 10. Tax Indemnity....................................................... 22 10.01 Scope....................................................... 23 10.02 Contest..................................................... 24 10.03 After-Tax Nature of Indemnity .............................. 24 10.04 Payment..................................................... 24 11. Assignment.......................................................... 24 11.01 Assignment of Lease to Continental.......................... 24 12. Loss; Destruction, Requisition Etc. ................................ 24 12.01 Event of Loss with Respect to the Aircraft................. 24 12.01(A) Replacement of Airframe and Engines........................ 24 12.01(B) Payment of Stipulated Loss Value and Rent.................. 25 12.01(C)............................................................ 25 12.01(D) Payment of Basic Rent Pending Replacement.................. 25 12.01(E) Conditions to Replacement of Aircraft...................... 26 12.01(F) Recordation and Opinions................................... 27 12.01(G) Conveyance................................................. 27 12.02 Event of Loss with Respect to an Engine....................... 27 12.02(A) Event of Loss.............................................. 27 12.02(B) Conditions; Lessee's Obligations........................... 27 12.02(C) Recordation and Opinions................................... 28 12.02(D) Conveyance; Replacement Engine............................. 28 12.02 (E) No Reduction of Basic Rent............................... 28 12.03 Application of Payments from Governmental Authorities for Requisition of Title...................................... 28 12.03 (A) Replacement of Airframe and Engines...................... 29 12.03 (B) Replacement of Engine.................................... 29 12.03 (C) Nonreplacement........................................... 29 12.04 Requisition for Use by the United States Government of the Airframe and the Engines Installed Thereon.............. 29 12.05 Requisition for Use by Government of an Engine.............. 30 12.06 Application of Payments During Existence of Event of Default..................................................... 30 13. Insurance .......................................................... 30 13.01 Public Liability and Property Damage Liability Insurance... 30 13.02 Insurance Against Loss or Damage to the Aircraft............ 31 13.03 War-Risk Insurance.......................................... 32 13.04 Application of Proceeds in an Event of Loss................. 32 13.05 Application of Proceeds in the Absence of an Event of Loss.. 33 13.06 Reports, etc................................................ 33 13.07 Governmental Indemnification in Lieu of Insurance........... 33 13.08 Lessor's Additional Insurance............................... 33 14. General Indemnification............................................. 34 14.01 Scope....................................................... 34 14.02 Exceptions.................................................. 34 14.03 Lessee's Release............................................ 34
ii 4 14.04 Contest..................................................... 35 14.05 Repayment................................................... 35 14.06 Payment..................................................... 35 15. Liens ............................................................ 35 16. FAA Recordation and Further Assurances.............................. 36 16.01 FAA Recordation............................................. 36 16.02 Further Assurances.......................................... 36 17. Return of Items and Records......................................... 36 17.01 Time and Place.............................................. 36 17.02 Condition................................................... 36 17.03 Time and Cycle Adjustment-Airframe.......................... 37 17.04 Time and Cycle Adjustment-Engine............................ 37 17.05 Special Markings............................................ 38 17.06 Inspection Upon Redelivery.................................. 38 17.07 Return Delivery Flight...................................... 38 17.08 Manuals; Service Bulletins, Etc............................. 38 17.09 Return of Other Engines..................................... 38 17.10 Fuel........................................................ 39 17.11 Storage Upon Return......................................... 39 17.12 Certain Airworthiness Directives............................ 39 17.13 Maintenance at Lessor's Request............................. 39 17.14 Failure to Return Aircraft.................................. 39 17.15 Aid in Disposition.......................................... 40 18. Events of Default................................................... 40 19. Rights and Remedies................................................. 42 19.01 Remedies.................................................... 42 19.02 Further Rights.............................................. 43 19.03 Definition of Fair Market Value............................. 43 19.04 Remedies Cumulative......................................... 43 20. Miscellaneous....................................................... 44 20.01 Construction and Applicable Law............................. 44 20.02 Notices..................................................... 44 20.03 Lessor's Right to Perform................................... 45 20.04 Counterparts................................................ 45 20.05 Transfer of Interest by Lessor.............................. 45 20.06 Assignment of Warranties.................................... 45 20.07 Surviva..................................................... 46 20.08 Successors and Assigns...................................... 46 21. Renemal and Purchase Options........................................ 46 21.01 Lessor's Election........................................... 46 21.02 Renewal Options............................................. 46 21.03 Purchase Option............................................. 47
iii 5 ATTACHMENTS TO LEASE AGREEMENT: Exhibit A - Lease Supplement Exhibit B - Stipulated Loss Values Exhibit C - Permitted Foreign Air Carriers Exhibit D - FAA Recording Information 1 6 LEASE AGREEMENT (N7379F) LEASE AGREEMENT, dated as of November 6. 1986 (this "Lease"), between GATX LEASING CORPORATION, a Delaware corporation ("Lessor"), and NEW YORK AIRLINES, INC. a Delaware corporation ("Lessee"). RECITALS 1. Lessor, as successor in interest to GATX Second Aircraft Corporation, and Frontier Airlines, Inc., a Nevada corporation ("Frontier") are parties to a Lease dated November 7. 1969, which has been amended by an Extension and Option Agreement and Amendment of Lease dated October 1, 1981, an Amendatory Agreement to Extension and Option Agreement and Amendment of Lease dated September 23. 1982, a Second Amendatory Agreement to Extension and Option Agreement and Amendment of Lease dated as of August 22, 1984, and a Restated Second Amendatory Agreement to Extension and Option Agreement and Extension of Lease dated as of January 15, 1985, covering, among others, one Boeing Model 737-2CO aircraft, Manufacturer's Serial No. 20071, FAA Registration No. N7379F, and two Pratt & Whitney JT8D-9 engines, Manufacturer's Serial Nos. P674314B and P674384B, respectively (each of which has more than 750 takeoff rated horsepower or the equivalent thereof). (Such Lease, as amended, is hereafter called the "GATX/Frontier Lease"); 2. The GATX/Frontier Lease was duly recorded by the Federal Aviation Administration as indicated on Exhibit D hereto; 3. Frontier, Frontier Leaseco One, Inc., a Nevada corporation, and Frontier Leaseco Two, Inc., a Nevada corporation, (collectively, the "Frontier Companies") are presently debtors and debtors-in-possession in Chapter 11 cases pending in the United States Bankruptcy Court for the District of Colorado (the "Bankruptcy Court"). 4. Pursuant to that certain Asset Purchase Agreement dated September 15, 1986 between Texas Air Corporation ("TAC") and the Frontier Companies (the "Asset Purchase Agreement"), the GATX/Frontier Lease is to be assumed by Frontier and assigned to the Lessee. 5. The Asset Purchase Agreement was approved by order of the Bankruptcy Court, dated October 17, 1986. 6. All conditions precedent to closing required to be satisfied on or before the Closing Date under the Asset Purchase Agreement have been satisfied or waived by the parties thereto. 7. Pursuant to the terms of an Assumption and Assignment Agreement ("Assignment Agreement") and an Agreement Concerning Assumption of New Leases ("Assumption Agreement") with respect to the Aircraft, (collectively the "Assignment and 1 7 Assumption Agreements"), the obligations of Frontier with respect to the Aircraft under the GATX/Frontier Lease have been assumed by the Lessee. 8. Lessor and Lessee have agreed that, effective upon the Closing Date, the GATX/Frontier Lease will be amended and restated as set forth herein. NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein set forth, Lessor and Lessee hereby agree that the GATX/Frontier Lease with respect to the Aircraft (as defined below) is hereby amended and restated as follows: SECTION 1 Definitions Unless context requires otherwise, the following terms shall have the following meanings for all purposes of this Lease and such meanings shall be equally applicable to both the singular and the plural forms of the terms defined: "Aircraft" means the Airframe (as defined below) together with the two Engines initially installed on the Airframe when delivered and leased hereunder or any Engine substituted for any such Engine, whether or not such initial or substituted Engine may from time to time no longer be installed on the Airframe or may be installed on any other airframe or on any other aircraft. "Airframe" means (i) the Boeing 737-2CO passenger aircraft more specifically described in the Lease Supplement (except for any engines or Engines from time to time installed thereon); (ii) any Replacement Airframe; and (iii) any and all Parts incorporated or installed therein or attached thereto or, so long as title thereto shall remain vested in the Lessor or a Transferee in accordance with the terms of Section 9 hereof, removed therefrom. "Basic Rent" means the rent payable pursuant to Section 4.01 hereof, or during any Renewal Term, the rent payable pursuant to Section 21.01. "Basic Rent Payment Date" means each date on which Basic Rent is payable pursuant to Section 3 of the Lease Supplement. "Business Day" means any day other than a Saturday, Sunday or day on which commercial banking institutions in Houston, Texas, New York, New York or San Francisco, California are authorized by law to be closed. "Code" means the Internal Revenue Code of 1954, as amended from time to time, and analogous provisions of any successor statute. "Commencement Date" means the effective date of this Lease Agreement, which date shall be the date of the Lease Supplement covering the Aircraft. 2 8 "Continental" means Continental Airlines, Inc., a Delaware corporation, and its successors and permitted assigns. "Default" means any event or condition which, with the lapse of time or the giving of notice or both, would constitute an Event of Default. "Engine" means: (i) each of the two Pratt & Whitney JTBD-9 turbofan engines listed by manufacturers' serial numbers in the Lease Supplement whether or not from time to time thereafter installed on the Airframe or on any other airframe or on any other aircraft; (ii) any engine which may from time to time be substituted or be a replacement for any such engine pursuant to Section 12 or 17 hereof; and (iii) any and all Parts incorporated or installed in or attached thereto or, so long as title thereto shall remain vested in the Lessor or a Transferee in accordance with the terms of Section 9 hereof, removed therefrom; provided, however, that the term "Engine" shall not include any engine with respect to which this Lease shall have been terminated. "Event of Default" has the meaning specified in Section 18. "Event of Loss" means, with respect to any Item of Equipment, any of the following: (i) loss of such Item or the use thereof due to theft, disappearance for a period of 30 consecutive days or more, destruction, damage beyond repair or rendition of such Item permanently unfit for normal use for any reason whatsoever; (ii) any damage to such Item which results in an insurance settlement with respect to such Item on the basis of a total loss; (iii) the condemnation, confiscation, seizure, or requisition of title to such Item, (iv) the confiscation or seizure of, or requisition of use of, such Item for a period in excess of 180 consecutive days, other than a requisition for use by the Government (unless and until such Item shall have been modified or adapted during such requisition in such a manner as would render conversion of such Item for use in normal commercial passenger service impractical or uneconomical); (v) as a result of any rule, regulation, order or other action by the FAA or other governmental body having jurisdiction, the use of such Item 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-month period, shall have caused to be undertaken and diligently carried forward all steps which are necessary or desirable to permit the use of such property in the normal course of interstate air transportation or in any event, if such use shall have been prohibited for a period of twelve consecutive months: or (vi) any divestiture of title to an Engine treated as an Event of, Loss Pursuant to Section 6.01 or other provision hereof: or (vii) the operation or location of the Aircraft, while under requisition for use be the Government in any area excluded from coverage by any insurance policy in effect with respect to the Aircraft required by Section 13, if Lessee shall be unable to obtain an indemnity in lieu thereof from the Government. 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, as context requires, the United States Federal Aviation Administration and/or the Administrator of the United States Federal Aviation Administration, or 3 9 any person, governmental department, bureau, commission or agency succeeding to the functions of either of the foregoing. "Federal Aviation Act" means the United States Federal Aviation Act of 1958, as amended, as in effect on the date of this Lease, or any successor or substituted legislation at the time in effect and applicable. "Flight Hour" means each hour or portion thereof during each period commencing with the start of the takeoff run and concluding when the Aircraft touches down upon landing. "Foreign Air Carrier" means a "foreign air carrier" as such term is defined in the Federal Aviation Act as to which there is in force a permit issued pursuant to Section 402 of such Act. "Government" means the government of the United States of America or any instrumentality or agency thereof (provided the credit of such instrumentality or agency is backed by the full faith and credit of the government of the United States of America). "Guaranty" means a guaranty of Texas Air Corporation of the Lessee's obligations under this Lease, in form and scope satisfactory to Lessor. "Hereby", "herein", "hereof", "hereunder", and other like words shall refer to this Lease as originally executed or as amended, modified or supplemented pursuant to the applicable provisions of this Lease, including, without limitation, as supplemented by the Lease Supplement. "Incentive Rate" with respect to any amount means a rate of interest equal to the Prime Rate plus 2%, in each case computed on the basis of actual days elapsed over a 360 day year but in no event greater than the maximum rate permitted by applicable. "Independent Appraisal" with respect to the determination of the fair market value or fair market rental value of the Aircraft means an appraisal conducted by three nationally recognized independent appraisers, one of which shall be chosen by the Lessor, one by the Lessee, and a third appraiser chosen by the mutual consent of the first two appraisers, which three appraisals shall be averaged and such average shall be deemed to be the fair market value or fair market rental value of the Aircraft as the case may be. "Initial Sublease" means the Sublease Agreement, dated the date Lessee and Continental, in form and scope satisfactory to Lessor. "Initial Sublease Assignment" means an assignment to Lessor of all Lessee's right, title, and interest in and to the Initial Sublease, in form and scope satisfactory to Lessor. "Item of Equipment" or "Item" means the Aircraft, the Airframe, and of the Engines or any Part. 4 10 "Lease" means this agreement, as supplemented by the Lease Supplement, and as the same may be modified, amended or supplemented from time to time pursuant to the applicable provisions hereof. "Lease Supplement" means the Lease Supplement, substantially in the form of Exhibit A hereto, to be entered into by Lessor and Lessee on the Commencement Date for the purpose of leasing the Aircraft pursuant to the terms of this Lease." "Lessor's Cost" for the Aircraft means $6,750,000. "Lessor's Liens" means liens arising as a result of (i) claims against or affecting Lessor (or a Transferee) not related to the transactions contemplated by this Lease; or (ii) acts or omissions of Lessor (or a Transferee) not related to the transactions contemplated by this Lease or not contemplated thereunder; or (iii) taxes imposed against Lessor (or a Transferee) not indemnified against by Lessee pursuant to Section 10 hereof; or (iv) claims against Lessor (or a Transferee) arising out of the voluntary transfer, without the consent of Lessee, of its interest in the Aircraft, other than transfers pursuant to Sections 12 or 19 of this Lease. "Lien" means any mortgage, pledge, lien, charge, encumbrance, lease, exercise of rights, security interest or claim. "Manufacturer" means the Boeing Company, a Delaware corporation, and its successors and assigns. "Parts" means any and all appliances, parts, instruments, accessories, furnishings, seats and other equipment of whatever nature (other than complete Engines or engines), which are from time to time incorporated or installed in or attached to the Airframe or any Engines, or having been so installed or attached, are later removed therefrom, so long as title thereto remains vested in the Lessor or a Transferee, in accordance with Section 9 hereof. "Permitted Air Carrier" means (i) any solvent United States Air Carrier which is not in default in the payment of or otherwise in material default in connection with its obligations for borrowed money or the deferred purchase price of aircraft or lease of aircraft and is meeting its material financial obligations as and when they fall due or (ii) any Foreign Air Carrier listed on Exhibit C hereto, provided, however, that Lessor may, in the exercise of its reasonable business judgment, by written notice to Lessee, remove any Foreign Air Carrier from Exhibit C and provided, further, that Foreign Air Carrier be added to Exhibit C, subject to Lessor's being understood and agreed that no such consent shall be required to be given to any Foreign Air Carrier which does not perform maintenance, preventive maintenance and inspection for the Aircraft and/or any Engine to standards which are approved by, or which are substantially equivalent to those required by the FAA. "Permitted Sublessee" means a sublessee meeting the qualifications set forth in Sections 6.01 (G) and (H). 5 11 "Prime Rate" means a fluctuating rate equal to the rate of interest publicly announced from time to time by Wells Fargo Bank, N.A.. San Francisco, California, as its prime rate. "Rent" means Basic Rent and Supplemental Rent, collectively. "Replacement Airframe" means a Boeing model 737-200 passenger aircraft or an improved model airframe of the same manufacturer (except Engines or engines from time to time installed thereon) which shall have been leased hereunder pursuant to Section 12.01 (A), together with all Parts relating thereto so long as the same shall be incorporated or installed therein or attached thereto or, so long as title thereto shall remain vested in the Lessor or a Transferee, in accordance with the terms of Section 9 hereof, removed therefrom. "Replacement Engine" means a Pratt & Whitney model JT8D-9 engine (or an improved model engine of the same manufacturer which is suitable for installation and use on the Airframe and fully compatible with the other Engine installed on the Airframe) which shall have been substituted for an Engine leased hereunder pursuant to Section 12.02 or 17.09, together with all Parts relating thereto so long as the same, shall be incorporated-or installed therein or attached thereto or, so long as title thereto shall remain vested in the Lessor or a Transferee, in accordance with the terms of Section 9 hereof, removed therefrom. "Stipulated Interest Rate" means a fluctuating rate per annum equal to the Prime Rate plus 1%, computed on the basis of actual days elapsed over a 365- or 366-day year, as the case may be. "Stipulated Loss Value" for the Aircraft means, as of any date of determination, the amount determined by multiplying the Lessor's Cost for the Aircraft by the percentage set forth in Exhibit B hereto opposite the Basic Rent Payment Date next preceding such date of determination (or, if such date of determination is a Basic Rent Payment Date, by the percentage set forth opposite such Basic Rent Payment Date). "Stipulated Loss Value" as of any date of determination for the Airframe, any Engine, or part thereof means a portion of the Stipulated Loss Value for the Aircraft, computed as of such date, which bears the same ratio to such Stipulated Loss Value for the Aircraft as the original cost to the Lessor of the Airframe or such Engine or part bears to Lessor's Cost for the Aircraft. "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees to pay hereunder to Lessor or others. "Term" shall mean the period for .which the Aircraft is leased pursuant to Section 3 hereof. If such period is extended pursuant to Section 21.01 hereof, the word "Term" shall be deemed to refer to such period as so extended, and all provisions of this Lease shall apply until the expiration date of such period, except as may be otherwise specifically provided herein. 6 12 "Texas Air" means Texas Air Corporation, a Delaware corporation, and its successors and permitted assigns. "Transferee" means any person to whom Lessor shall have transferred all or any portion of its interest in the Items of Equipment, this Lease, or any proceeds thereof, pursuant to Section 20.05 hereof. "United States Air Carrier" means any "air carrier" as defined in the Federal Aviation Act as to which there is in force a certificate issued pursuant to Section 401 of such Act. SECTION 2 Effective Date; Commencement of Term 2.01. Time and Place. Subject to the satisfaction of the conditions set forth in Section 2.03 hereof, Lessor agrees to deliver and lease the Aircraft to Lessee hereunder, and upon such delivery, Lessee shall accept the Aircraft hereunder, as evidenced by the execution by Lessor and Lessee of the Lease Supplement. Lessor shall authorize one or more employees of Lessee as the authorized representative of Lessor to accept delivery of the Aircraft on Lessor's behalf. Lessee hereby agrees that such acceptance of delivery by such authorized representative shall, without further act, irrevocably constitute acceptance by Lessee of the Aircraft for all purposes of this Lease, and thereupon the Aircraft shall be deemed subject to this Lease. 2.02. A Letting Only. At all times during the Term, full legal title to the Items of Equipment shall remain vested in the Lessor (or a Transferee, as the case may be), to the exclusion of Lessee, notwithstanding the delivery of the Items of Equipment to, and the possession and use thereof by, Lessee. 2.03. Conditions to Delivery. Lessor's obligation to deliver and lease the Items of Equipment to Lessee hereunder shall be subject to satisfaction of the following conditions: (A) On the Commencement Date, the following statements shall be correct, and Lessor shall have received evidence satisfactory to it that: (1) The GATX/Frontier Lease covering the Aircraft shall have been assumed by Frontier, and assigned to Lessee, with the approval of the Bankruptcy Court, and the obligations of Frontier thereunder shall have been assumed by Lessee pursuant to the terms of the Assignment and Assumption Agreements, and all monetary defaults thereunder as of the Closing Date shall have been cured by payment of the amounts set forth in the Consent Agreement dated the Closing Date with respect to the Aircraft. (2) either (i) Lessor shall have good and marketable title to the Engines or engines installed on the Aircraft, free and clear of all Liens other than Permitted Liens, (ii) Lessee shall have acquired title to, or the right to lease, any engine not owned by Lessor which is currently installed on the Airframe, or (iii) Lessee shall have made arrangements reasonably 7 13 satisfactory to Lessor with respect to the purchase or leasing by Lessee of any airframe on which any Engine may be installed; (B) On or before the Commencement Date. Lessor shall have received: (1) written evidence of appropriate corporate action, certified by the Secretary or an Assistant Secretary of Lessee, duly authorizing or ratifying the lease of the Items of Equipment hereunder and the execution, delivery and performance of this Lease, together with an incumbency certificate as to the person or persons authorized to execute and deliver said, certification and said documents on behalf of Lessee; (2) the Lease Supplement, the Initial Sublease, the Initial Sublease Assignment, and the Guaranty, each duly executed by the parties thereto; (3) certificates executed by independent aircraft insurance brokers as to Lessee's compliance with the insurance provisions of Section 13 hereof: (4) an opinion of special counsel to Lessee, or other counsel (who may be in-house counsel) satisfactory to Lessor, dated the Commencement Date, to the effect that: (a) Lessee (i) is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware, (ii) is a "citizen of the United States" within the meaning of Section 101(16) of the Federal Aviation Act, (iii) is duly certificated as an air carrier of passengers under the laws of The United States, and (iv) holds a certificate of convenience and necessity for purposes of 11 U.S.C. Section 1110; (b) the execution, delivery and performance by Lessee of this Lease, the Lease Supplement, the Initial Sublease, and the Initial Sublease Assignment, the consummation by Lessee of the transactions contemplated herein and therein and compliance by Lessee with the terms and provisions hereof and thereof are within Lessee's corporate powers, will not result in a violation of Lessee's charter or by-laws as in effect on the date of such opinion; and, to the knowledge of such counsel, will not conflict with, or result in a breach of any term or provision of, or constitute a default under, or result in the imposition of any Lien upon the Lease or any Item of Equipment under, any indenture, mortgage, or other agreement or instrument to which Lessee is a party or by which it or any of its properties is or may be bound, or contravene or result in the violation of any existing applicable law, rule or regulation, or any judgment, order or decree, of any government, governmental instrumentality or court having jurisdiction over Lessee or any of its properties; (c) this Lease, the Lease Supplement, the Initial Sublease and the Initial Sublease Assignment have each been duly authorized, executed and delivered by Lessee, and each such instrument is a legal, valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms, except as its enforceability may be limited by general principles of equity and by bankruptcy, insolvency, reorganization and other laws of general application affecting the enforcement of creditors' rights; 8 14 (d) no authorization or approval of, giving of notice to, or filing or recording with, any regulatory body or authority is a condition to the validity or enforceability of this Lease or Lessee's performance of the terms hereof; and (e) such other matters as Lessor may reasonably request. (5) an opinion of special counsel to Texas Air, or other counsel (who may be in-house counsel) satisfactory to Lessor, dated the Commencement Date, to the effect that: (a) Organization and Qualification. Texas Air (I) is a corporation duly incorporated and validly existing in good standing under the laws of the State of Delaware; (ii) is a "citizen of the United States" within the meaning of Section 101(16) of the Act; (iii) has the corporate power and authority to carry on its business as presently conducted, to own or hold under lease its properties and to enter into and perform its obligations under the Guaranty; and (iv) is duly qualified to do business as a foreign corporation in good standing in each state in which the conduct of its business makes such qualification necessary; (b) Corporate Authority, Etc. The execution, delivery and performance of the Guaranty have been duly authorized by all necessary corporate action on the part of Texas Air, do not require any stockholder approval or approval or consent of any trustee or holders of indebtedness or obligations of Texas Air or any of its subsidiaries or of any lessor under any lease to Texas Air or any of its subsidiaries, except such as have been duly obtained, and do not and will not contravene any law, judgment, governmental rule, regulation or order applicable to or binding on Texas Air or any of its subsidiaries or the Certificate of Incorporation or by-laws of Texas Air or contravene or result in any breach of, or constitute a default under, or result in the creation of any Lien upon any Property of Texas Air or any of its subsidiaries under any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, lease, note or bond purchase agreement, license, bank loan or other credit agreement or other contract, agreement or instrument to which Texas Air or any of its subsidiaries is a party or by which Texas Air or any of its subsidiaries or their respective properties may be bound or affected; (c) Government Approvals. Neither the execution and delivery by Texas Air of the Guaranty, nor the consummation of any of the transactions contemplated thereby, requires the consent or approval of, the giving of notice to, or the registration with, or the taking of any other action in respect of, any Federal, state or foreign governmental authority or agency or court; (d) Valid and Binding Agreements. The Guaranty has been duly executed an delivered by Texas Air and constitutes a legal, valid and binding obligation of Texas Air enforceable against Texas Air in accordance with its terms, except as its enforceability may be limited by general principle of equity and by 9 15 bankruptcy, insolvency, reorganization and other laws of general application affecting the enforcement of creditor's rights; (6) an opinion of special counsel to Continental, or other counsel (who may be in-house counsel) satisfactory to Lessor, dated the Commencement Date, satisfactory in form and scope to Lessor. (7) a certificate of a duly authorized officer of Lessee, dated the Commencement Date, to the effect that: (a) the representations and warranties contained in Section 5.02 hereof are true and correct on and as of such date as though made on and as of such date, and all authorizations and approvals of, givings of notice to, and filings and recordings with, all regulatory bodies and authorities which may be conditions to the validity or enforceability of this Lease or Lessee's performance of the terms hereof have been duly accomplished; and (b) no Default or Event of Default has Occurred and is continuing, or would result from the lease of the Items of Equipment; (8) evidence satisfactory to Lessor confirming that this Lease and the Lease Supplement, the Initial Sublease and the Initial Sublease Assignment have each been duly filed with the FAA; (9) such other documents as Lessor may reasonably request, in form and substance satisfactory to Lessor. SECTION 3 Term The Term of this Lease shall commence on the Commencement Date and shall expire on the date set forth in the Lease Supplement. SECTION 4 Rent 4.01. Basic Rent. Lessee hereby agrees to pay Lessor Basic Rent for the Aircraft throughout the Term, in eighty-three (83) monthly installments, in advance, on each Basic Rent Payment Date which shall each be in an amount equal to $115,000. 4.02. Supplemental Rent. Lessee shall also pay to Lessor or, at Lessor's direction to whomsoever shall be entitled thereto, any and all Supplemental Rent promptly as the same shall become due and payable. Lessee shall pay to Lessor, as Supplemental Rent, interest at the 10 16 Incentive Rate on any part of any installment of Rent not paid on the due date thereof for any period for which the same shall be overdue. 4.03. Prohibition Against Setoff, Counterclaim. Etc. Except as expressly provided herein. Lessee's obligation to pay Rent hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation: (A) any setoff, counterclaim, recoupment, defense or other right or claim which Lessee may have against Lessor. (B) any defect in the title, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, any Item of Equipment or any interruption or cessation-in the use or possession thereof by Lessee, (C) any insolvency, bankruptcy, reorganization or similar proceeding brought by or against Lessor or Lessee, or (D) any breach or alleged breach by Lessor of any representation, warranty or covenant of Lessor made herein or in connection herewith, including, without limitation, the representations, warranties and covenants of Lessor contained in Section 5.01 hereof. 4.04. Waiver of Certain Rights of Lessee. Lessee hereby waives, to the extent permitted by law, all rights (other than those expressly provided for herein) now or hereafter conferred upon it by statute or otherwise to terminate or surrender this Lease or any Item of Equipment or to any abatement, suspension, deferment, diminution or reduction of Rent. Each payment of Rent shall be absolutely final and net to Lessor, so that this Lease will yield to Lessor the full amount of the installments of Rent throughout the term without deduction. 4.05. Manner and Place of Payment. All amounts to be paid by Lessee hereunder shall be paid by wire transfer of immediately available funds, consisting of lawful currency of the United States of America, to Lessor's account (No. 4075-013060: Route 2AU371) at Wells Fargo Bank, N.A., Market and Montgomery Branch, San Francisco, California, or to such other account as Lessor shall designate in writing. Whenever any payment of Basic Rent or Supplemental Rent is due on a day other than a Business Day such payment shall be made on the next succeeding Business Day. SECTION 5 Representations and Warranties: Covenants of Lessee 5.01. Lessor's Representations and Warranties: Delivery Condition. LESSOR LEASES AND LESSEE TAKES THE AIRCRAFT "AS-IS, WHERE-IS", AND LESSOR DOES NOT MAKE NOR SHALL BE DEEMED TO HAVE MADE ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, AIRWORTHINESS, CONDITION, VALUE, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY ITEM OF EQUIPMENT OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT THERETO, and any risks with respect thereto shall be assumed by Lessee, except that Lessor represents that it has the lawful right to lease the Aircraft to Lessee in accordance with the terms hereof. 11 17 5.02. Lessee's Representations and Warranties. Lessee represents, warrants and covenants that: (A) Lessee (i) is a corporation duly organized, validly existing and in good standing under the laws of Delaware; (ii) is duly certificated as an air carrier of passengers under the laws of the United States; and (iii) holds a "certificate of convenience and necessity issued by the Civil Aeronautics Board" within the meaning of 11 U.S.C. Section 1110; (B) the execution and delivery by Lessee of this Lease, the Lease Supplement, the Initial Sublease and the Initial Sublease Assignment, the consummation by Lessee of the transactions contemplated herein and therein and compliance by Lessee with the terms and Provisions hereof are within Lessee's corporate powers, will not result in a violation of Lessee's charter or by-laws as currently in effect; and will not conflict with, or result in a breach of any term or provision of, or constitute a default under, or result in the imposition of any Lien upon the Lease or any Item of Equipment under, any indenture, mortgage, or other agreement or instrument to which Lessee is a party or by which it or any of its properties, is or may be bound, or any existing applicable law, rule or regulation, or any judgment, order or decree, of any government, governmental instrumentality or court having jurisdiction over Lessee or any of its properties; (C) upon its delivery hereunder no Item of Equipment shall become subject to any Lien except for such, if any, as is permitted by Section 15 hereof; (D) this Lease, the Lease Supplement, the Initial Sublease and the Initial Sublease Assignment have each been duly authorized, executed and delivered by Lessee, and are the legal, valid and binding obligations of Lessee, enforceable against Lessee in accordance with their respective terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization and other laws of general application affecting the enforcement of creditors' rights; (E) neither the execution and delivery by Lessee of this Lease, Lease Supplement, the Initial Sublease or the Initial Sublease Assignment, nor the consummation of any of the transactions by Lessee contemplated hereby or thereby, requires the consent or approval of, or the giving of notice to, or the registration with, or the taking of any other action in respect of, the FAA, the Department of Transportation, the SEC, any court (including any bankruptcy court) or any other federal or state or foreign governmental authority or agency, except for the filings referred to in Section 2.03 (B)(7), and filings pursuant to any routine recording or regulatory requirements applicable to Lessee. (F) except as disclosed in the prospectus dated October 30, 1986 of Texas Air, there are no suits or proceedings pending or, to the knowledge of Lessee, threatened before any court or regulatory commission, board or other governmental agency which, in Lessee's opinion, might have a material adverse effect on the financial condition or business of Lessee, or the ability of Lessee to perform its obligations under this Agreement. SECTION 6 12 18 Possession; Use; Lawful Insured Operations; Maintenance; Registration and Insignia 6.01. Possession. Lessee shall not without Lessor's prior written consent sublease or otherwise deliver, relinquish or transfer Possession of the Aircraft or any Engine or Item of Equipment or install any Engine, or permit any Engine to be installed, on any airframe other than the Airframe, provided, however, that, so long as no Default or Event of Default shall have occurred and be continuing, and so long as all applicable approvals of the FAA and the Department of Transportation have been obtained for such purpose Lessee may: (A) subject or permit a Permitted Sublessee to subject the Airframe to normal interchange agreements or any Engine to normal interchange or pooling agreements or arrangements in each case customary in the United States commercial airline industry and entered into by Lessee or such Permitted Sublessee in the ordinary course of its business, provided that (i) no such agreement or arrangement contemplates, requires or results in the transfer or divestiture of title to or encumbrance of, the Aircraft, the Airframe or any Engine and (ii) if Lessor's (or its Transferee's) title to the Aircraft, the Airframe or any Engine shall be transferred or divested under any such agreement or arrangement, such transfer or divestiture shall be deemed to be an Event of Loss with respect thereto and Lessee shall comply with Section 12.01 or 12.02 in respect thereof; (B) deliver or permit a Permitted Sublessee to deliver possession of the Airframe or any Engine or Part to the manufacturer thereof for testing or other similar purposes or to any organization for service, repair, maintenance or overhaul work on the Airframe or such Engine or such Part or for alterations or modifications in or additions to the Airframe or such Engine or such Part to the extent required or permitted by the terms of Sections 9.01 and 9.04; (C) transfer or permit any Permitted Sublessee, if required by law to do so, to transfer possession of the Aircraft, Airframe or any Engine to the Government pursuant to the Civil Reserve Air Fleet Program administered pursuant to Executive Order No. 10999, as amended, or any similar or substitute programs, so-long as such transfer of possession does not continue beyond the end of the Term and so long as Lessee shall (A) promptly notify Lessor upon the subjection of the Airframe or any Engine to such program and provide Lessor with the name and address of the appropriate party to whom notice must be given pursuant to Section 20 hereof, and (B) promptly notify Lessor upon transferring possession of the Airframe or any Engine to the Government pursuant to such program; (D) install or permit a Permitted Sublessee to install any Engine on an airframe owned by Lessee free and clear of all Liens, except (i) those of the type permitted by Section 15 hereof 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) and (ii) the rights of other air carriers under normal interchange agreements which are customary in the United States 13 19 commercial airline industry and do not contemplate, permit or require the transfer of title to the airframe or engines installed thereon; (E) install or permit a Permitted Sublessee to install any Engine on an airframe registered under the laws of the United States and leased to Lessee or such Permitted Sublessee or purchased by Lessee or such Permitted Sublessee subject to a conditional sale or other security agreement, but only if (i) 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 and except Liens of the type permitted by clauses (i) and (ii) of Section 6.01 (C), and (ii) Lessee or such Permitted Sublessee shall have received from the lessor or secured party of such airframe a written agreement (which may be the lease or conditional sale or other security agreement covering such airframe), in form and substance satisfactory to such parties, whereby such lessor or secured party expressly agrees that neither it nor its successors or assigns will acquire or claim any right, title or interest in any Engine by-reason of such Engine being installed on such airframe at any time while such Engine is subject to this Lease, or owned by Lessor (or a Transferee); (F) install or permit a Permitted Sublessee to install an Engine on an airframe owned by Lessee or such Permitted Sublessee, leased to Lessee or such Permitted Sublessee or purchased by Lessee or such Permitted Sublessee subject to a conditional sale or other security agreement under circumstances where neither subparagraph (C) nor subparagraph (D) of this Section 6.01 is applicable, provided that such installation shall be deemed an Event of Loss with respect to such Engine and Lessee shall comply with Section 12.02 in respect thereof; (G) sublease the Aircraft in the ordinary course of business to any Permitted Air Carrier, and under arrangements which provide for the use of such property for a total period not exceeding 36 months during any 48-month period; provided that (i) the term (including any option of the sublessee to renew or extend) of any such sublease shall not continue beyond the fourteenth anniversary of the Commencement Date, and (ii) such Permitted Air Carrier shall not have the right to further sublease the Aircraft; (H) sublease the Aircraft in the ordinary course of business to a United States Air Carrier which is a Permitted Air Carrier owned or controlled by Texas Air, provided that (i) the term of such sublease (including any option of the sublessee to renew or extend) shall not continue beyond the expiration of the Term, (ii) such sublessee shall not have the right to further sublease the Aircraft, (iii) such sublessee shall remain owned or controlled by Texas Air, and (iv) neither Texas Air nor such sublessee shall then be the subject of any bankruptcy or insolvency proceedings and none of the events specified in Section 18 (H), (1) or (J) shall have occurred and be continuing. Provided, further with respect to this Section 6.01, that: (1) the rights of any transferee who receives possession by reason of a transfer permitted by this Section 6.01 (other than the transfer of an Engine which is deemed an Event of Loss) shall be subject and subordinate to, and any sublease permitted by this Section 6.01 shall be made expressly subject and subordinate to, all the terms of this Lease, and to Lessor's rights, 14 20 powers and remedies thereunder, including the rights to repossession pursuant to Section 19 and to terminate and avoid such sublease upon such repossession and to require such sublessee to forthwith deliver the Aircraft, Airframe and Engines subject to such sublease upon such repossession: (2) Lessee shall remain primarily liable hereunder for the performance of all the terms of this Lease to the same extent as if such sublease or transfer had not occurred; (3) any such sublease shall be consistent with the requirements of this Lease and the applicable requirements of the Indemnity Agreement, and shall include appropriate provisions for the continued registration, maintenance, operation, insurance and return of the subleased property as required hereunder, and for the avoidance of such sublease or any use of the subleased property thereunder if the same would result in Lessor (or a Transferee) losing any portion of the tax benefits which would otherwise be available to Lessor (or a Transferee): (4) no permitted interchange agreement, transfer, sublease or other relinquishment of possession permitted hereunder shall affect the United States registration of the Aircraft; (5) in the case of any such sublease, Lessee shall have duly executed and delivered to Lessor an assignment of such sublease in favor of Lessor in form and substance reasonably satisfactory to Lessor; (6) in connection with any such sublease, all necessary action shall be taken which is required to continue the perfection of Lessor's (or any Transferee's) title and interest in and to the Aircraft, Airframe and Engines and in such sublease, Lessor's rights under this Lease, Airframe and Engines and in and to such sublease; in and to the Aircraft, such sublease, sublease assignment and all other necessary documents shall be duly filed, registered or recorded in such public offices as may be required or advisable fully to preserve the title of, and the priority of the interest of, Lessor (or any Transferee) in and to the Aircraft, Airframe and Engines and in and to such sublease and this Lease; and Lessor and any Transferee shall have received a favorable opinion of counsel for Lessee to such effect; and (7) Lessee shall give written notice to Lessor at least 10 days prior to the commencement of a sublease permitted by this Section 6.01 naming the Permitted Air Carrier which will be the Permitted Sublessee under such Sublease. Lessee shall deliver to Lessor promptly after execution thereof a duly executed copy of any sublease or interchange or pooling agreement permitted hereunder. No interchange agreement, sublease, transfer or other relinquishment of possession of the Aircraft, Airframe or any Engine shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder, or under the Indemnity Agreement. In the event Lessee shall have received from the lessor, conditional seller, indenture trustee or secured party of any airframe lease to, or purchased by, Lessee or any Permitted Sublessee subject to a lease, conditional sale, trust indenture or other security agreement a written agreement complying with clause (E) of Section 6.01, Lessor hereby agrees for the 15 21 benefit of such lessor, conditional seller, indenture trustee or secured party that Lessor will not acquire or claim, as against such lessor, conditional seller, indenture trustee or secured party, any right, title or interest in any engine as the result of such engines being installed on the Airframe at any time while such engine is subject to such lease, conditional sale, trust indenture or other security agreement and owned by such lessor or conditional seller or subject to a trust indenture or security interest in favor of such indenture trustee or secured party. 6.02. Assignment by Lessee. Except as expressly permitted herein, Lessee shall not assign this Lease or any interest in this Lease or any of its rights hereunder or in any item of Equipment, and any such purported assignment shall be void ab initio. 6.03. Use. Lessee shall use the Items of Equipment solely in commercial operations for which Lessee is duly authorized. Lessee shall not use, or permit the use of, any Item of Equipment for any purpose for which it is not suitable. Lessee shall strictly enforce FAA regulations relating to the transport of restricted articles. As between Lessor and Lessee. Lessee shall pay for and provide all electric power, oil, fuel and lubricant consumed by and required for the operation of the Aircraft. 6.04. Lawful Insured Operations. Lessee will not cause or permit any to be maintained, used or operated in violation of any law, treaty, statute, rule, regulation or order of any government or governmental authority having jurisdiction or contrary to any manufacturer's operating manuals and instructions, or, in the case of the Aircraft and the Engines, in violation of any airworthiness certificate or registration relating thereto, except to the extent Lessee is contesting in good faith the validity or application of such law, rule, regulation or order in any reasonable manner which does not materially adversely affect Lessor's interest in the Aircraft. Lessee agrees not to operate any Item, or suffer such Item to be operated, (A) unless such Item is covered by insurance as required by the provisions of Section 13 hereof, or (B) contrary to the terms of the insurance required by the provisions of Section 13 hereof. 6.05. Maintenance. Lessee, at its own expense, shall: (A) cause the Items of equipment to be serviced, repaired, overhauled and maintained (i) by FAA-certificated personnel, (ii) in accordance with Lessee's FAA approved Part 121 maintenance program and the operations and maintenance manuals of the manufacturers thereof, (iii) so as to keep such Item in as good operating condition and appearance as when delivered to Lessee hereunder, ordinary wear and tear excepted, and (iv) so as to keep such Item in such operating condition as may be necessary to enable the air worthiness certificate of such Item to be maintained in good standing at all times under the applicable rules and regulations of the FAA, except to the extent Lessee is contesting in good faith the validity or applicability of such rule or regulation in any reasonable manner which does not materially adversely affect Lessor's interest in the Aircraft. Lessee, at its own expense, shall also maintain all records, logs and other materials required by the FAA to be maintained in respect of each Item of Equipment and promptly furnish to Lessor upon Lessor's written request such information as may be required to enable Lessor to file any reports required to be filed with any governmental authority because of Lessor's interest in the Aircraft. 16 22 6.06. Registration and Insignia. Lessee shall not take or abet any action inconsistent with the continued registration of the Aircraft in the name of the Lessor under the Federal Aviation Act. Lessee shall on or before the Commencement Date, affix (A) in the cockpit of the Airframe, in a prominent location adjacent to the airworthiness certificate for the Aircraft, and (B) on each Engine, in a prominent location, a metal nameplate bearing the inscription "GATX Leasing Corporation, Owner and Lessor," or such other inscription reflecting the interests of the Lessor and any Transferee as Lessor may request. Lessee shall not allow the name of any other person association or corporation to be placed on the Airframe or any Engine as a designation that might be interpreted as a claim of ownership or of any interest therein; provided, however, that Lessee may cause the Airframe to be, lettered or otherwise marked in an appropriate manner for convenience of identification of the interest of Lessee or any permitted sublessee therein. SECTION 7 Inspection: Financial Information 7.01. Inspection. During the Term, Lessee shall furnish to Lessor such information concerning the location, condition, use and operation of the Items of Equipment as Lessor may reasonably request. Lessee shall permit any person designated in writing by Lessor to, at Lessor's expense, visit and inspect (at any reasonable time, provided that such inspection shall not interfere with Lessee's operational commitments) the Items of Equipment, their condition, use and operation and the records maintained in connection therewith and, at Lessee's expense, to make copies of such records as Lessor may reasonably designate. 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. 7.02. Financial Information. The Lessee also agrees to furnish to the Lessor during the Term: (A) as soon as possible and in any event within ten (10) days after the occurrence of a Default or an Event of Default, a certificate of the Lessee, signed by a vice president of the Lessee, setting forth in detail the nature of such Default or Event of Default and the action which the Lessee proposes to take with respect thereto; (B) as soon as available, and in any event within sixty (60) days after the end of each of the first three (3) fiscal quarters, an unaudited balance sheet of the Lessee and its consolidated subsidiaries, as of the end of such quarter and related unaudited statements of income and retained earnings of the Lessee and its consolidated subsidiaries, setting forth in each case in comparative form the corresponding figures for the corresponding period of the proceeding fiscal year: (C) as soon as available, and in any event within one hundred twenty (120) days after the end of each fiscal year of the Lessee, a financial report for the Lessee for such year, including therein a balance sheet of the Lessee as of the end of such fiscal year and related 17 23 statements of income and retained earnings and changes in financial position of the Lessee for such fiscal year, setting forth in each case in comparative form corresponding figures for the preceding fiscal year, all in reasonable detail and as certified by the Lessee's independent public accountants, including their certificate and accompanying comments; (D) within 120 days after the close of each fiscal year of Lessee, a certificate, of a responsible financial officer of Lessee to the effect that the signer has reviewed the relevant terms of the Lease and the Indemnity Agreement and has made, or caused to be made, under his supervision, a review of the transactions and condition of Lessee and its subsidiaries 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 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; (E) within thirty days after receiving service of process or equivalent notice, written notice of any litigation, including arbitrations, involving any claim in excess of $10,000,000 and of any proceeding by or before any governmental agency which litigation or proceeding is not frivolous in nature and which, if adversely determined, could materially adversely affect the properties, business, prospects or financial condition of Lessee and its subsidiaries on a consolidated basis; (F) promptly upon the sending or filing thereof, copies of all proxy statements, financial statements and reports which the Lessee may file with the Securities and Exchange Commission or any person, governmental bureau, commission or agency succeeding to the functions thereof so long as the same is available for review by the public; (G) from time to time such information as the Lessor may reasonably request with respect to the financial condition and operations of the Lessee in order to determine whether the covenants, terms and provisions of this Lease have been complied with by the Lessee. Section 8 Lessee's Covenants Lessee covenants and agrees that, during the Term: 8.01. Corporate Existence. Except as permitted by Section 8.02, Lessee shall at all times maintain its corporate existence. Lessee will do or cause to be done all things necessary to preserve and keep in full force and effect its rights (charter and statutory) and franchises; except that Lessee shall not be required to preserve any right or franchise if its board of directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of Lessee and if the loss thereof does not materially adversely affect or diminish the rights of Lessor 18 24 or any Transferee or the ability of Lessee to perform its obligations under the Lease and the Indemnity Agreement. 8.02. Merger. Lessee shall not consolidate with or merge into any other corporation, or convey, transfer or lease all of substantially all of its assets as an entirety to any person, unless: (A) Certain Conditions. The corporation formed by such consolidation or merger or the person which acquires by conveyance, transfer or lease all or substantially all of the assets of Lessee as an entirety (the "Successor") (i) shall be a corporation organized and existing under the laws of the United States of America or any State or the District of Columbia, (ii) shall be a "citizen of the United States" as defined in Section 101(16) of the Act (iii) shall be an air carrier (as defined in Section 101(13) of the Act) certificated under Sections 401 and 604(b) of the Act, (iv) shall execute and deliver to Lessor and each Transferee an agreement in form and substance satisfactory to Lessor and each Transferee containing an assumption by the Successor of the due and punctual performance and observance of each covenant and condition of the Lease and any sublease assignment and (v) shall make such filings and recordings, including any filing or recording with the FAA pursuant to the Act, as shall be necessary or desirable to evidence such consolidation, merger, conveyance, transfer or lease with or to the Successor; (B) No Default. Immediately after giving effect to such transaction, (i) no Default or Event of Default shall have occurred and be continuing and (ii) the ability of Lessee to perform its obligations under this Lease shall not be materially adversely affected by such transaction; (C) Certificate and Opinion. Lessee shall have delivered to Lessor and each Transferee an officer's certificate and an opinion of counsel satisfactory to each of them, each stating that such consolidation, merger, conveyance, transfer or lease and the assumption agreement described in Section 8.02 (A) comply with this Section 8.02 that the agreements entered into to affect such consolidation, merger, conveyance, transfer or lease and such assumption agreement are legal, valid and binding obligations of the Successor, enforceable in accordance with their respective terms, and that all conditions precedent herein provided for relating to such transaction have been complied with. Upon any such consolidation, merger, conveyance, transfer or lease, the Successor shall succeed to be substituted for, and may exercise every right and power of Lessee under the Lease and Indemnity Agreement to which Lessee is a party with the same effect as if the Successor had been named as Lessee therein. No such conveyance transfer or lease of substantially all the assets of Lessee as an entirety shall have the effect of releasing Lessee or any Successor which shall theretofore have become such in the manner prescribed in this Section 8.02 from its liability hereunder. Nothing contained herein shall permit any lease, sublease or other arrangement for the use, operation or possession of the Aircraft except in compliance with the applicable provisions of the Lease. 19 25 8.03. Certificated Air Carrier. Lessee will continue to be a certificated air carrier authorized to engage in scheduled domestic passenger air transportation under the Act and Lessee shall be otherwise certified or registered to the extent necessary to fall within the purview of, and to provide to Lessor the benefits contemplated by, 11 U.S.C. Section 1110 or any analogous section of the federal bankruptcy laws, as amended from time to time. 8.04. Lessee will pay or cause to be paid all taxes, assessments and governmental charges or levies imposed upon it or upon its income and profits, or upon any property belonging to it, prior to the date on which penalties attach thereto and all lawful claims, which, if not paid, might become a lien or charge upon the property of Lessee; provided, however, that Lessees shall not be required to pay any such tax, assessment, charge, levy or claim the payment of which is being contested in good faith and by appropriate proceedings, but only so long as such proceedings do not involve any material danger of material adverse impact on business interests of Lessor or of the sale, forfeiture or loss of any Item of Equipment or interest therein. SECTION 9 Replacement and Pooling of Parts; Alterations, Modifications and Additions 9.01. Replacement of Parts. Lessee, at its cost and expense, shall promptly replace all Parts which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever. In addition, in the ordinary course of maintenance, service, repair, overhaul or testing, Lessee may remove any Part, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use; provided that Lessee shall replace such Part as promptly as practicable. All replacement Parts shall be free and clear of all Liens, except Liens permitted by Section 15 and pooling arrangements permitted under Section 9.03 hereof and shall be in as good operating condition as, and shall have 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. 9.02. Title to Replaced and Replacement Parts. All Parts removed or any Engine shall remain the property of the Transferee) and subject to this Lease, 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 Part becoming incorporated, installed or attached to the Airframe or an Engine as above provided, without further act, (A) title to the replaced Part shall thereupon vest in Lessee, free and clear of all rights of the Lessor (and any Transferee); (B) such replaced Part shall no longer be deemed a Part hereunder; (C) title to the replacement Part shall thereupon vest in the Lessor (or its Transferee), (subject to no Lien other than Liens permitted by Section 15 and pooling arrangements permitted by Section 9.03); and (D) such replacement Part shall become subject to this Lease and be deemed to be a Part hereunder to the same extent as the Parts originally incorporated or installed in or attached to the Airframe or such Engine. 20 26 9.03. Pooling. Any Part removed from the Airframe or Engine as provided in Sections 9.01 and 9.02 may be subjected to a normal pooling arrangement customary in the United States commercial airline industry entered into by Lessee or a Permitted Sublessee in the ordinary course of its business, 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 this Section as promptly as possible after the removal of such removed Part. Any replacement Part when incorporated or installed in or attached to the Airframe or an Engine in accordance with such Sections may be owned by an 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 the Lessor (or its Transferee) in accordance with such Section by Lessee acquiring title thereto for the benefit of, and transferring such title to, the Lessor (or its Transferee) free and clear of all Liens (except Liens permitted by Section 15) or (ii) replaces such replacement Part by causing to be incorporated or installed in or attached to the Airframe or such Engine a further replacement Part owned by Lessee free and clear of all Liens (except Liens permitted by Section 15) and by causing title to such further replacement Part to vest in the Lessor (or its Transferee) in accordance with such Sections. 9.04. Alterations, Modifications and Additions. Lessee, at its own expense, will make such alterations and modifications in and additions to the Airframe and the Engines as may be required from time to time to meet the standards of the FAA or other governmental authority having jurisdiction and to maintain the Standard Certificate of Airworthiness for the Aircraft provided, however, that Lessee may in good faith and by appropriate procedures contest the validity or application of such requirements in any reasonable manner which does not materially adversely affect the Lessor's (or any Transferee's) interest in the Aircraft. 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, addition or removal shall 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, addition or removal, assuming the Airframe or such Engine was then of the value and utility and in the condition and airworthiness 21 27 required to be maintained by the terms of this Lease. 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 the Lessor (or its Transferee), notwithstanding the foregoing sentence of this Section 9.04., so long as no Default or Event of Default shall have occurred and be continuing, Lessee may, at any time during the Term, remove any Part, provided that (i) such Part is in addition to, and not in replacement of or substitution for (x) any Part originally incorporated or installed in or attached to the Airframe or such Engine at the time of delivery thereof hereunder, or (y) any Part in replacement of, or substitution for any such Part (ii) 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 9.04, and (iii) such Part can be removed from the Airframe or such Engine without causing material damage to the Airframe or such Engine and without diminishing or impairing the value, utility, condition or airworthiness required to be maintained by the terms of this Lease 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 provided in the immediately preceding two sentences, title thereto shall, without further act, vest in Lessee and such Part shall no longer be deemed part of the Airframe or the Engine from which it was removed. Any Part not removed by Lessee as provided in such sentence prior to the return of the Airframe or Engine to Lessor hereunder shall remain the property of the Lessor (or its Transferee). 9.05. Credit for Approved Modifications. At the option of Lessee, Lessor will allow a credit for Approved Modifications (as defined below) to the Aircraft in an amount not to exceed $150.000. The credit will be available against invoices endorsed by Lessee evidencing completion of Approved Modifications. As used herein an "Approved Modification" means a change in equipment approved by Lessor that enhances the value of the Aircraft by an amount substantially equivalent to the cost of such change (such as replacement of hatracks with wide-body overhead luggage bins). SECTION 10 Tax Indemnity 10.01. Scope. Lessee shall hold Lessor and any Transferee and their successors and assigns (each an "Indemnitee") harmless from liability for any and all license and registration fees, taxes, levies, imposts, duties, charges, assessments or withholdings of any nature whatsoever together with any penalties, additions to tax, fines or interest thereon (collectively, "Taxes") imposed against Lessor or any Item of Equipment, by any Federal, state or local government or taxing authority in the United States, or by any taxing authority or governmental subdivision of a foreign country, upon or with respect to any Item of Equipment or interest therein, or upon the purchase, ownership, delivery, leasing, possession, use, operation (including, but not limited to, landings and take-offs), return or other disposition thereof, or upon the rentals, receipts or earnings arising therefrom; provided, however, Lessee shall have no such obligation with respect to: (a) Taxes imposed on any Indemnitee which are imposed on, measured by, or based upon the net income of such Indemnitee and Taxes that are, in effect, similar to, in lieu of, or in substitution for such Taxes, including any gross income taxes imposed by any jurisdiction in a foreign country and any withholding Taxes: provided, however, that, notwithstanding the foregoing exclusions, there shall not be excluded any Taxes imposed by any jurisdiction (other than the United States or a jurisdiction in which such Indemnitee has its principal place of business or is incorporated) which would not have been imposed but for the activities in the jurisdiction of Lessee or any sublessee or other user of the Aircraft; (b) Taxes which are imposed upon a sale, transfer or other disposition (whether voluntary or involuntary) by any Indemnitee of any interest of such Indemnitee in the Aircraft, the Airframe, any Engine, any Part, or the Lease, unless such sale, transfer or other disposition shall have occurred at any time while an Event of Default shall be continuing or results from any 22 28 exercise of any of the remedies as provided in or permitted by Section 19 of the Lease or applicable law; (c) So long as no Event shall be continuing, Taxes to the extent incurred or imposed in respect of any period after (i) the expiration or earlier termination of the Lease with respect to the Aircraft (other than pursuant to Section 19 of the Lease or applicable law), and (ii) delivery of possession of the Aircraft, as the case may be, to Lessor (or its Transferee), or placement in storage of the Aircraft at the request of Lessor (or its Transferee) (if such delivery or placement is required under the terms of the Lease), in each case pursuant to Section 19 of the Lease upon such expiration or termination; (d) Taxes which have been included in Lessor's Cost; (e) Taxes imposed on any Indemnitee which result from the gross negligence or willful misconduct of such Indemnitee. 10.02. Contest. If written claim is made against an Indemnitee for any Taxes indemnified against in this Section 10, Lessor shall promptly notify Lessee. If requested by Lessee in writing, the Indemnitee shall, upon receipt of an indemnity satisfactory to such Indemnitee for the expenses of contest (including, without limitation, all costs, expenses, legal and accountants' fees and disbursements, penalties and interest) and for any liability or loss which such Indemnitee may incur as a result of its contesting any Tax., in good faith contest in the name of such Indemnitee (or if the contest with respect to such Taxes concerns an aspect of such Taxes that is applicable to the possession, maintenance, situs, lease or use of aircraft and such Taxes are not generally applicable to the properties or assets (other than aircraft and engines) owned or leased by such Indemnitee or any members of its consolidated group for United States Federal income tax purposes, such Indemnitee shall, to the extent permitted by applicable law, permit Lessee to contest in the name of such Indemnitee) the validity, applicability or amount of such Taxes by (i) resisting payment thereof if practicable in the Indemnitee's sole discretion. (ii) not paying the same except under protest, if protest is necessary and proper, and (iii) if payment is made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings. If an Indemnitee shall obtain a refund of all or any part of such Taxes paid by Lessee, such Indemnitee shall pay Lessee the amount of such refund; provided that such amount shall not be payable before such time as Lessee shall have made all payments of indemnities to such Indemnitee then due under this Section 10. If in addition to such refund an Indemnitee shall receive an amount representing interest on the amount of such refund, Lessee shall be paid that proportion of such interest which is fairly attributable to the Taxes paid by Lessee prior to the receipt of such refund. Lessee shall not be deemed to be in default under any of the above indemnification provisions so long as it or Lessor shall diligently prosecute such contest. In case any report or return is required to be made with respect to any obligation of Lessee under this Section 10 or arising out of this Section 10, Lessee will either make such report or return in such manner as will show the interest of the Indemnitee in each Item of Equipment, and send a copy of such report or return to Lessor and such Indemnitee or will notify Lessor and such Indemnitee of such requirement and make such report or return in such manner as shall be satisfactory to Lessor and such Indemnitee. In the event of a contest of any Taxes hereunder, whichever of the 23 29 Indemnitee or Lessee is prosecuting such contest shall apprise the other of all material developments with respect to such contest, shall forward to the other copies of all material submissions made in such contest, shall consider in good faith any request by the other concerning the conduct of any such contest (including with respect to the submission of materials provided by the other and any participation by the other in the proceeding) and shall not settle or concede any such contest without the consent of the other. 10.03. After-Tax Nature of Indemnity. Lessee further agrees that, with respect to any payment or indemnity hereunder, such payment or indemnity shall include any amount necessary to hold the Indemnitee harmless on an after-tax basis from all taxes required to be paid by such Indemnitee, with respect to such payment or indemnity under the laws of any Federal, state or local government or taxing authority in the United States, or under the laws of any taxing authority or governmental subdivision of a foreign country; provided that, if such Indemnitee realizes a tax benefit by reason of such payment or indemnity, such Indemnitee shall pay Lessee an amount equal to the sum of such tax benefit plus any tax benefit realized as the result of any payment made Pursuant to this provision, when, as, if and to the extent realized; but not before Lessee shall have made all payments or indemnities to such Indemnitee required pursuant to this Section 10; provided further, however, that if such Indemnitee loses such tax benefit subsequent to any payment to Lessee with respect thereto, Lessee shall indemnify such Indemnitee with respect to such loss pursuant to the provision of this Section 10. 10.04 Payment. Subject to the provisions of Section 10.02 hereof. Lessee shall, to the extent permissible, pay all Taxes directly and shall reimburse an Indemnitee for all Taxes paid or payable by such Indemnitee within 30 days of receipt of notice that reimbursement is due. SECTION 11 Assignment 11.01. Assignment of Lease to Continental. So long as (i) no Default or Event of Default shall have occurred and be continuing, and (ii) Continental qualifies as a Permitted Sublessee, Lessee may assign all of its right, title and interest in the Aircraft and this Lease to Continental, provided that Continental concurrently assumes all of Lessee's obligations under this Lease pursuant to a written assignment and assumption agreement in form and substance reasonably satisfactory to Lessor. SECTION 12 Loss, Destruction, Requisition Etc. 12.01 (A). Replacement of Airframe and Engines. As promptly as practicable, and in any event on or before the Business Day next preceding the 120th day following the date of occurrence of such Event of Loss, Lessee shall convey or cause to be conveyed to Lessor (or its Transferee), to be leased by Lessee hereunder in replacement thereof, a Replacement Airframe 24 30 (which need not be a new 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, which Replacement Airframe and Replacement Engines shall be free and clear of all Lien: (except Liens permitted by Section 15 and shall have in Lessor's sole opinion a value and utility and performance and durability characteristics at least equal to, and which shall be in as good operating condition as, the Airframe and Engines, if any, so replaced (for such purpose, it shall be assumed that the Airframe and such Engines were in the condition and repair required by the terms of this Lease). If Lessee shall not perform its obligation to effect such replacement hereunder during the period of time provided herein, then Lessee shall pay to Lessor, on the 120th day following the date of occurrence of such Event of Loss in the manner and in funds of the type specified in Section 4.06, the stipulated Loss Value for the Aircraft in accordance with Section 12.01 (B); or 12.01 (B). Payment of Stipulated Loss Value and Rent. On or before the Business Day next preceding the earlier of (I) the 91st day following the date of the occurrence of such Event of Loss, or (ii) five days following the receipt of insurance proceeds with respect to such occurrence, (the "Loss Payment Date") Lessee shall pay to Lessor, in the manner and in funds of the type specified in Section 4.06, an amount equal to the sum of (i) the Stipulated Loss Value calculated as of the Basic Rent Payment Date next preceding the Event of Loss (the "Loss Computation Date"), (ii) the installment of Basic Rent due on ,the Loss Computation Date, (iii) all installments of Basic Rent due and unpaid as of the Loss Computation Date, (iv) all Supplemental Rent due and owing on the Loss Payment Date, and (v) interest on the amounts described in clause (i) and (ii) hereof at the Stipulated Interest Rate, Lessee shall be entitled to a credit against the amount determined in accordance with the preceding sentence an amount equal to the sum of any amounts of Basic Rent paid by Lessee for any period commencing after the Loss Computation Date plus (v) interest on each such amount of Basic Rent at the Stipulated Interest Rate from the date of the respective Rent Payment Date to the Loss Payment Date. 12.01 (C). Upon payment in full of the amounts due pursuant to Section 12.01 (B), and provided no Default or Event of Default shall have occurred and be continuing, (i) the obligation of Lessee to pay Basic Rent hereunder with respect to the Aircraft for any period commencing after the Loss Payment Date shall terminate (but Lessee shall remain liable for all payments of Rent, including Basic Rent or Renewal Rent for the Aircraft, due through and including the date of such payment, subject, however, to the credit provided for in Section 12.01 (B)), (ii) the Term for the Aircraft shall end, and (iii) Lessor will (or will cause its Transferee to) transfer all of its right, title and interest in the Aircraft to Lessee, "as-is, where-is," free and clear of Lessor's Liens but otherwise without recourse or warranty, express or implied. 12.01 (D). Payment of Basic Rent Pending Replacement. In the event of the replacement of the Airframe and Engines pursuant to Section 12.01 (A), during the period between the occurrence of the Event of Loss and the date of such replacement, the obligation of Lessee to pay Basic Rent or Renewal Rent shall continue unchanged, except that upon such replacement, it shall become an obligation to pay Basic Rent in respect of the Replacement Aircraft or the Replacement Engine. 25 31 12.01 (E). Conditions to Replacement of Aircraft. Lessee's right to exercise the replacement options contemplated by Section 12.01. (A) with respect to the Aircraft shall be subject to the fulfillment, in addition to the requirements contained in Section 12.01 (A), of the conditions precedent set forth below: (i) No Event of Default or Default shall have occurred and be continuing. (ii) Lessee will promptly (all writings referred to below to be satisfactory in form and substance to Lessor): (a) furnish Lessor (or its Transferee) with a bill or bills of sale duly conveying to Lessor (or its Transferee) the Replacement Airframe and Replacement Engines, if any, together with such evidence of title as Lessor may reasonably request; (b) cause a Lease Supplement subjecting such Replacement Airframe and Replacement Engines to this Lease, duly executed by Lessee, to be delivered to Lessor for execution and, upon such execution, to be duly filed for recordation with the FAA; (c) furnish Lessor with such evidence of compliance with the insurance provisions of Section 13 with respect to the Replacement Airframe and Replacement Engines as Lessor may reasonably request. (d) furnish Lessor with an opinion or opinions (e) furnish Lessor with an officer's certificate stating that, upon consummation of such replacement, no Event of Default or Default will exist hereunder; (f) furnish Lessor with a certificate or certification of qualified independent aircraft engineers reasonably satisfactory to Lessor certifying that the Replacement Airframe and Replacement Engines have performance and durability characteristics and a value and utility at least equal to, and are in at least as good operating condition as, the Airframe and Engines so replaced (assuming the Airframe and Engines were in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of Loss); and (g) take such other actions and furnish such other certificates and documents as Lessor may reasonably request in order that the Replacement Airframe and Replacement Engines be duly and properly titled in Lessor (or its Transferee) and leased hereunder to the same extent as the Airframe and Engines replaced thereby. 26 32 12.01 (F). Recordation and Opinions. In the case of the Replacement Airframe and Replacement Engines conveyed to Lessor (or a Transferee) under this Section 12.01, promptly upon the registration of the Replacement Aircraft and the recordation of the Lease Supplement covering the Replacement Airframe and Replacement Engines pursuant to the Act, Lessee will cause to be delivered to Lessor an opinion of counsel satisfactory to Lessor as to the due registration of the Replacement Aircraft and the due recordation of such Lease Supplement and Indenture Supplement. 12-01 (G). Conveyance. Upon compliance by Lessee of all of the terms of this Section 12.01, Lessor will (or will cause its Transferee to) transfer all of its right, title and interest in the replaced Airframe and Engines (if any) installed thereon at the time such Event of Loss occurred to Lessee, "as-is, where-is," free and clear of Lessor's Liens but otherwise without recourse or warranty, express or implied. 12.02. Event of Loss With Respect to an Engine. 12.02 (A). Event of Loss. Upon the occurrence of an Event of Loss with respect to an Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe, Lessee shall give Lessor prompt written notice thereof and shall, as promptly as possible and in any event within 60 days after the occurrence of such Event of Loss, convey or cause to be conveyed to Lessor (or its Transferee), 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, other than Liens permitted by Section 15, 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 and utility and in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of Loss. 12.02 (B). Conditions: Lessee's obligations. Prior to or at the time of any such conveyance. Lessee will promptly: (i) furnish Lessor with a bill of sale duly conveying to Lessor (or its Transferee) such Replacement Engine, together with such evidence of title as Lessor may reasonably request; (ii) cause a Lease Supplement, in form and substance satisfactory to Lessor, subjecting such Replacement Engine to this Lease, duly executed by Lessee, to be delivered to Lessor for execution and, upon such execution, to be duly filed for recordation with the FAA: (iii) furnish Lessor with such evidence of compliance with the insurance provisions of Section 13 with respect to such Replacement Engine as Lessor may reasonably request; 27 33 (iv) furnish Lessor with an opinion or opinions of Lessee's counsel, in form, substance and scope satisfactory to Lessor, to the effect that, upon such conveyance, Lessor (or its Transferee) will acquire good and marketable title to such Replacement Engine free and clear of all Liens other than such Liens as are permitted by Section 13, and that such Replacement Engine will be leased hereunder to the same extent as the Engine replaced thereby and to such further effect as Lessor may reasonably request; (v) furnish Lessor with an Officer's Certificate certifying that, upon consummation of such replacement, no Event of Default or Default will exist hereunder; (vi) furnish Lessor with a certificate of a qualified aircraft engineer (who may be an employee of Lessee) certifying that such Replacement Engine has performance and durability characteristics and a value and utility at least equal to, and is in at least as good operating condition as, the Engine so replaced assuming such Engine was in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of Loss; and (vii) take such other actions and furnish such other certificates and documents as Lessor may reasonably request in order that such Replacement Engine be duly and properly titled in Lessor (or its Transferee) and leased hereunder to the same extent as the Engine replaced thereby. 12.02 (C). Recordation and Opinions. In the case of any Replacement Engine conveyed to any Lessor under this Section 12.02, promptly upon the recordation of the Lease Supplement and Indenture Supplement covering such Replacement Engine pursuant to the Act, Lessee will cause to be delivered to Lessor an opinion of counsel satisfactory to Lessor as to the due recordation of such Lease Supplement and Indenture Supplement. 12.02 (D). Conveyance; Replacement Engine. Upon full compliance by Lessee with the terms of this Section 12.02, Lessor will (or will cause its Transferee to transfer all of its right, title and interest in the Engine with respect to which such Event of Loss occurred to Lessee, "as-is, where-is," free-and-clear of Lessor's Liens but otherwise without recourse or warranty, express or implied. 12.02 (E). No Reduction of Basic Rent. No Event of Loss with respect to an Engine under the circumstances contemplated by the terms of this Section 12.02 shall result in any reduction of basic Rent or Renewal Rent. 12.03. 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 13) received at any time by Lessor, Lessee or any Permitted Sublessee from any governmental authority or other Person with respect to any Event of Loss, other than a requisition for use by the Government not constituting an Event of Loss, will be applied as follows: 28 34 12.03 (A). Replacement of Airframe and Engines, if such payments are received with respect to the Airframe and the Engines (or engines) installed on the Airframe that have been or are being replaced by Lessee pursuant to Section 12.01, such payments shall be paid over to, or retained by, Lessor, and concurrently with such replacement be paid over to Lessee. 12.03 (B). Replacement of Engine. If such payments are received with respect to an Engine under circumstances contemplated by Section 12.02, so much of such payments remaining after reimbursement of Lessor and any Transferee for costs and expenses shall be paid over to, or retained by, Lessee, but only if Lessee shall have fully performed or concurrently therewith shall fully perform the terms of Section 12.02 with respect to the Event of Loss for which such payments are made. 12.03 (C). Nonreplacement. 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 or have not been and will not be replaced pursuant to Section 12.01 or 12.02., so much of such payments remaining after reimbursement of Lessor and any Transferee for costs and expenses as shall not exceed the amounts payable pursuant to 12.01 (B) (in the case of the Aircraft) or the Stipulated Loss Value (in the case of an Engine) shall be applied in reduction of Lessee's obligation to pay such amount or such Stipulated Loss Value, if not already paid by Lessee, or, if already paid by Lessee, shall be applied to reimburse Lessee for its payment of such amount or such Stipulated Loss Value. The balance, if any, of such payment remaining thereafter shall be divided between Lessor and Lessee by (i) paying to Lessee an amount which bears the same proportion to such balance as the value of Lessee's leasehold interest in the Airframe or the Airframe and the Engines or engines installed thereon bears to the fair market sales value (determined by Independent Appraisal) of the Airframe or the Airframe and the Engines or engines installed thereon without subtracting the value of such leasehold interest and assuming that the Event of Loss had not occurred and (ii) paying to Lessor, or by Lessor retaining the remaining portion of such balance. The value of Lessee's leasehold interest in the Airframe or the Airframe and the Engines or engines installed thereon shall be deemed to be an amount equal to the excess, if any, of (x) the fair market rental value (determined by Independent Appraisal) of the Airframe or the Airframe and the Engines or engines installed thereon for the remainder of the Base Lease Term or the applicable Renewal Lease Term, as the case may be, after discounting such fair market rental value monthly (effective on each Rental Payment Date) by a rate equal to two percent per annum above the rate applicable to U.S. Treasury notes maturing at the expiration of the Term (or as nearly as possible thereto) in effect on the date of determination to present value as of the date of the Event of Loss over (y) the value of all future installments of Basic Rent or Renewal Rent payable with respect to the Airframe or the Airframe and the Engines or engines installed thereon during the Base Lease Term or the Renewal Lease Term, as the case may be, discounted to present value as of the date of the Event of Loss in the same manner and at the same rate. 12.04. Requisition for Use by the United States Government of the Airframe and the Engines Installed Thereon. In the event of the requisition for use by the United States Government (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 29 35 Lessee's obligations under this Lease shall continue to the same extent as if such requisition had not occurred, that if the Airframe and such Engines or engines are not returned by the Government prior to the end of the Term, then either (x) such event will be deemed to constitute an Event of Loss and Lessee will be obligated upon expiration of the Term to pay the amounts provided in Section 12.01, or (y) at the option of Lessor, upon notice given by it to Lessee not less than 30 days before the end of the Term, such event shall not be treated as an Event of Loss and 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 17 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 (so long as no Event of Default shall have occurred and be continuing) 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 (or so long as an Event of Default shall have occurred and be continuing) shall be paid over to, or retained by, Lessor, unless such requisition for use by the Government is treated as an Event of Loss in which case all such payments shall be applied in accordance with Section 12.03 (C). 12.05. Requisition for Use by Government of an Engine. In the event of the requisition for use by the Government of any Engine (but not the Airframe), Lessee will replace such Engine hereunder by complying with the terms of Section 12.02 to the same extent as if an Event of Loss 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. 12.06. Application of Payments During Existence of Event of Default. Any amount referred to in this Section 12 which is payable to lessee shall not be paid to Lessee, or, if it has been previously paid directly to Lessee, shall be held in trust by Lessee and shall not be retained by lessee, if at the time of such payment a Default or Event of Default shall have occurred and be continuing, but shall be paid to Lessor and applied against the obligations of Lessee under this Lease, Default or Event of Default, such amount shall be paid to Lessee. SECTION 13 Insurance 13.01. Public Liability and Property Damage Liability Insurance. Lessee, at its own expense, shall maintain in effect third party aircraft public liability insurance (providing inter alia coverage with respect to liabilities arising while the Items of Equipment are not in operation), passenger legal liability insurance, contractual liability and property damage liability insurance during the Term of the type, insuring against such risks, and in such amounts as are customarily carried and maintained by corporations engaged in interstate air transportation and in the same or similar business and similarly situated with Lessee and with respect to aircraft and engines similar to the Aircraft and Engines, but not less than that carried by Lessee on similar equipment owned or leased by Lessee, provided that such liability insurance shall in no event be less than $350,000,000 for any one accident, or series of accidents arising out of any one event, with respect to the Items 30 36 of Equipment. Lessee shall not self-insure with respect to any public liability coverage except that Lessee may self-insure, by way of deductible not exceeding the deductible which is customarily maintained by United States Air Carriers generally, per occurrence, in respect of baggage liability insurance. In any event all such policies shall be maintained in effect with insurers of recognized reputation and responsibility, reasonably satisfactory to Lessor. Any policies of insurance carried in accordance with this Section 13.01 and any policies taken out in substitution or replacement for any of such policies shall: (1) name Lessor and any Transferee (each an "Additional Insured") as an additional insured as its interests may appear; (2) provide that in respect of the interest of such Additional Insured in such policies, the insurance shall not be invalidated by any action or inaction of the Lessee and shall insure such Additional Insured regardless of any breach or violation of any warranty, declarations or conditions contained in such policies by Lessee; (3) provide that if the insurers cancel such insurance for any reason whatever, or the same is allowed to lapse for nonpayment of premium, or if there is any substantial change in policy terms and conditions or coverage, such cancellation, lapse or change shall not be effective as to such Additional Insured until thirty (30) days (7 days, or such other period as may from time to time be customarily obtainable in the industry, in the case of war risk and allied perils coverage), after receipt by Lessor of, written notice from such insurers of such cancellation, lapse or change; and (4) shall provide that such Additional Insured shall have no obligation or liability for premiums, commissions, assessments or calls in connection with such insurance. Each liability policy shall (i) be primary without right of contribution from any other insurance which is carried by such Additional Insured and (ii) expressly provide that all of the provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each insured. 13.02. Insurance Against Loss or Damage to the Aircraft. Lessee, at its own expense, shall maintain in effect with insurers of recognized reputation and responsibility reasonably satisfactory to Lessor: (A) all-risk ground and flight aircraft hull insurance covering the Aircraft; (B) fire, transit and extended coverage with respect to any Engine or Parts while removed from the Aircraft; and (C) at all times that the Aircraft or any Engine is not covered by the insurance described in Section 13.03, coverage against the perils of (i) strikes, riots, civil commotions or later disturbance, (ii) any vandalism, malicious act or act of sabotage, and (iii) hijacking, or any unlawful seizure or wrongful exercise of control of the Aircraft or crew in flight made by any person or persons on board the Aircraft without the consent of the insured other than hijacking committed by persons engaged in a program of irregular warfare for terrorist purposes. All such insurance shall be in full force and effect throughout any geographical areas at any time traversed by the Aircraft, shall be payable in dollars in the United States and shall be of the type and in such amount as is customarily carried and maintained by United States Air Carriers engaged in interstate and foreign air transportation and in the same or similar business and similarly situated with Lessee; provided that such insurance shall be for an amount not less than the Stipulated Loss Value (plus all other amounts due and payable pursuant to Section 12) per occurrence (the "Insured Value"). Lessee may self-insure, by way of deductible or premium adjustment provisions in insurance policies, in respect of damage not constituting an Event of Loss, the risks required to be insured against pursuant to the preceding two sentences in such reasonable amounts as are from time to time in effect in the aviation insurance industry generally with respect to other similar aircraft or engines, and which are customarily maintained by major United States commercial air carriers generally; provided, however, such deductibles shall not be 31 37 more than the deductibles generally maintained by Lessee with respect to its fleet of Boeing 737 aircraft generally. Any policies carried in accordance with this Section 13.02 shall (1) name each Additional Insured, as a loss payee as its interests may appear; (2) provide that insurance proceeds for any loss in excess of $1,500,000, up to the Incurred Value, shall be payable to the Lessor for application pursuant to the provisions of this Lease: (3) provide that if such insurance is canceled for any reason whatever, or any substantial change is made in policy terms, conditions or coverage, or the same is allowed to lapse for non-payment of premium, such cancellation, change or lapse shall not be effective as to an Additional Insured for thirty (30) days (7 days, or such other period as may from time to time be customarily obtainable in the industry, in the case of war risk and allied perils coverage) after receipt by such Additional Insured of written notice from such insurers of such cancellation or lapse or change in policy terms conditions or coverage; (4) shall provide that losses shall be adjusted with Lessee, subject to the reasonable approval of the Lessor; (5) shall provide that in respect of the interest of such Additional Insured in such policies the insurance shall not be invalidated by any action or inaction of Lessee and shall insure such parties regardless of any breach or violation of any warranties, declarations or conditions contained in such policies by Lessee; (6) shall provide that the insurers shall waive all rights of subrogation against such Additional Insured; (7) shall be primary without right of contribution from any other insurance which is carried by such Additional Insured with respect to its interest in the Aircraft; and (8) shall provide that such Additional Insured shall have no obligations or liability for premiums, commissions, assessments or calls in connection with such insurance. 13.03. War-Risk Insurance. If at any time the Aircraft, Airframe or any Engine shall be operated or is proposed to be operated in any area in which war-risk insurance is maintained by Lessee or any Permitted Sublessee subleasing the Aircraft or any Engine with respect to other aircraft owned or operated by Lessee or such Permitted Sublessee on the same routes, or if the Aircraft or any other aircraft owned or operated by Lessee or such Permitted Sublessee is operated on routes where the custom in the industry is to carry war-risk insurance, Lessee shall maintain war-risk insurance of the type and in substantially the amounts carried by major United States commercial air carriers operating the same or comparable models of aircraft in such areas; such insurance shall be in an amount not less than prudent industry practice nor less than that specified in Sections 13.01 and 13.02 and shall cover the perils of (i) war, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, martial law, military or usurped power or attempts at usurpation of power, (ii) strikes, riots, civil commotions or labor disturbances, (iii) any act of one or more persons, whether or not agents of a sovereign power, for political or terrorist purposes, and whether the loss or damage resulting therefrom is accidental or intentional, (iv) any vandalism, malicious act or act of sabotage, (v) confiscation, nationalization, seizure, restraint, detention, diversion, requisition for title or use by or under the order of any government (whether civil, military or de facto) or public or local authority, and (vi) hijacking, or any unlawful seizure or wrongful exercise of control of the Aircraft or crew in flight (including any attempt at such seizure or control) made by any person or persons on board the Aircraft acting without the consent of the insured. 13.04. Application of Proceeds in an Event of Loss. Provided no Default or Event of Default occurred and be continuing, all insurance payments received under policies required to 32 38 be maintained by Lessee pursuant to Section 13 as the result of the occurrence of an Event of Loss shall be applied in accordance with Section 12.03 (A), 12.03 (B), or 12.03 (C), as the case may be (except that the balance referred to in Section 12.03 (C) shall be paid over to, or retained by, Lessee). In any event, Lessor shall be entitled to receive all insurance proceeds derived from insurance coverage paid for by Lessor and to apply the same in Lessor's sole discretion. 13.05. Application of Proceeds in the Absence of an Event of Loss. As between Lessor and Lessee, the insurance payments of any property damage loss to the Aircraft or any Engine not constituting an Event of Loss with respect thereto will be applied in payment for repairs or for replacement property in accordance with the terms of Sections 6 and 9 hereof, if not already paid for by Lessee (or to reimburse Lessee for such repairs or replacements already paid for by Lessee), and any balance remaining after compliance with such Sections with respect to such loss shall be paid to Lessee. Any amount referred to in the preceding sentence or in Section 13.04 which is payable to Lessee shall not be paid to Lessee if at the time of such payment a Default or an Event of Default shall have occurred and be continuing, but shall be held by Lessor as security for the obligations of Lessee under this Lease and such amount shall be paid to Lessee at such time as there no longer exists any Default or Event of Default. 13.06. Reports, etc. On or before the Commencement Date, and annually on the anniversary thereof, Lessee will furnish to Lessor a report signed by a firm of independent insurance brokers, appointed by Lessee and not objected to by the Lessor, stating that in the opinion of such firm the insurance then carried and maintained on the Aircraft complies with the terms hereof. Lessee will cause such firm to advise Lessor in writing promptly of any default in the payment of any premium and of any other act or omission on the part of Lessee of which they have knowledge which might invalidate or render unenforceable, in whole or in part, any insurance on the Aircraft. Lessee shall also cause such firm to advise Lessor in writing at least thirty (30) days (seven days in the case of war risk and allied perils coverage) prior to the expiration or termination date of any insurance policy maintained with respect to the Aircraft pursuant to this Section 13 and of the details of the replacement policy of insurance obtained by Lessee. 13.07. Governmental Indemnification in Lieu of Insurance. In the event of the requisition for use by the Government of the Aircraft during the Term or any Renewal Term. Lessee shall maintain or cause to be maintained such insurance as would otherwise be required hereunder: provided that Lessor shall accept, in lieu of insurance coverage, indemnification or insurance from the Government which is substantially the same as that required hereunder. 13.08. Lessor's Additional Insurance. The Lessor at its option and at its sole expense may obtain insurance with respect to its interest in the Aircraft; provided that such insurance does not prevent Lessee from obtaining the insurance required by this Section 13 and that no such insurance shall be subject to this Section 13 nor provide for or result in a reduction in the coverage of or the proceeds payable under any insurance required to be provided and maintained by Lessee pursuant to this Section 13. 33 39 SECTION 14 General Indemnification 14.01. Scope. Lessee hereby agrees to pay, assume liability for and indemnify, protect, defend, save and keep harmless Lessor and any Transferee (each an "Indemnitee") from and against any and all liabilities, obligations, losses, damages, settlements, claims, actions, suits, penalties, costs and expenses (including but not limited to legal and investigative fees and expenses) of whatsoever kind and nature, including but not limited to negligence, strict or absolute liability and liability in tort (any of the foregoing being called a "Loss") which may from time to time be imposed on, incurred by or asserted against any Indemnitee or the Aircraft, Airframe, any Engine or Any Part (whether or not any such Loss is also indemnified or insured against by any other person or such Indemnitee has also indemnified any other person against such Loss) in any way relating to or arising out of (a) this Lease, the enforcement thereof or any of the transactions contemplated thereby, (b) the purchase, sale acceptance or rejection of the Aircraft or (c) the Aircraft, the Airframe any Engine, or any Part, any data or any other thing delivered or to be delivered under this Lease, including without limitation the purchase, ownership, delivery, nondelivery, lease, sublease, assignment, registration, reregistration, deregistration, rental, possession, use, presence, operation, condition, storage, preparation, installation, testing, manufacture, design, modification, alteration, maintenance, repair, re-lease, sale, return, transportation, transfer, abandonment or other disposition thereof (including, without limitation, latent and other defects, whether or not discoverable, and any claim for patent, trademark or copyright infringement). 14.02. Exceptions. The indemnity set forth in Section 14.01 shall not extend to any Loss with respect to such Indemnitee (a) to the extent that such Loss is caused by acts or events which occur after full and final compliance by Lessee with all the terms of the Lease (b) to the extent such Loss is caused by acts or events which occur after the Aircraft, Airframe, Engine or Part is no longer subject to the Lease, (c) which is a Tax, whether or not Lessee is required to indemnify therefor pursuant to Section 10, (d) with respect to any Loss which is directly attributable to the willful misconduct or gross negligence of such Indemnitee or any material misrepresentation or violation or breach of any obligations of such Indemnitee contained herein or (c) resulting from the failure of the Lessor or a Transferee (in the event the Indemnified Party is the Lessor or such Transferee to discharge any Lessor Liens attributable to it. This Section 14.02 does not constitute a guarantee of the useful life or residual value of the Aircraft. 14.03. Lessee's Release. Lessee hereby waives and releases any claim now or hereafter existing against any Indemnitee on account of any and all claims, demands, suits, causes of action and all legal proceedings, whether civil or criminal, damages, losses, liabilities (including, but not limited to, strict liability in tort), obligations, penalties, judgments, fines and other sanctions, and any costs and expenses in connection therewith, including legal fees and expenses of whatever kind and nature, which may result from or arise out of injury to or death of personnel of Lessee or loss or damage to property of Lessee or the loss of use of any property which may result from or arise out of (A) the condition, use or operation during the Term of any 34 40 Item of Equipment, either in the air or on the ground, or (B) any maintenance, service, repair, overhaul or testing of any Item during the Term, whether or not such Item is at the time in the possession of Lessee or in the United States of America. 14.04. Contest. If requested by Lessee in writing, an indemnitee shall upon receipt of (A) an indemnity from Lessee satisfactory to such Indemnitee for the expenses of contest (including, without limitation, all costs, expenses, legal and accountants' fees and disbursements, penalties and interest) and for any liability or loss which Lessor may incur as a result of indemnified occurrence (an "indemnified Amount"), and (B) an opinion of Lessee's counsel stating that reasonable grounds exist to take the action requested, in good faith and to the extent permitted by applicable law, contest (after consultation with Lessee and a determination by such Indemnitee that the action to be taken will not result in the imposition of a Lien upon any Item of Equipment or any interest therein (other than a Lien permitted by Section 15 hereof) will not result in a risk of the sale, forfeiture or other loss of any Item of Equipment or any interest therein, and will not involve the potential imposition of criminal liability on such Indemnitee or materially compromise or jeopardize any substantial interest of such Indemnitee) the validity, applicability or amount of such Indemnified Amount in such Indemnitee's sole discretion by (1) resisting payment thereof. (2) not paying the same except under protest if protest is necessary and proper, or (3) if payment is made, use reasonable efforts to obtain a refund in appropriate administrative or judicial proceedings; provided, however, that such Indemnitee need not contest the applicability of any such Indemnified Amount, if the matter in question is of a continuing nature and has previously been resolved against the interests of such Indemnitee following a contest pursuant to the provisions of this Section 14.04. 14.05. Repayment. If an Indemnitee shall obtain a repayment of any Indemnified Amount paid by Lessee, such Indemnitee shall, so long as there exists no Default or Event of Default, promptly pay to Lessee the amount of such repayment, together with the amount of any interest received by such Indemnitee on account of such repayment. 14.06. Payment. Subject to the provisions of Section 14.04 hereof, Lessee shall pay directly to each party indemnified hereunder all amounts due under this Section 14 within 30 days of the receipt of notice that such payment is due. SECTION 15 Liens Lessee shall not, directly or indirectly, create, incur, assume or suffer to exist any Lien on or with respect to any Item of Equipment or any interest therein, except (i) the respective rights of Lessor, any Transferee and Lessee as herein provided, including the rights of Lessee and others permitted by Sections 6 and 9 hereof; (ii) Lessor's Liens; (iii) Liens for taxes, assessments or other governmental charges, either not yet due or being contested in good faith (and for the payment of which adequate reserves have been provided) and by appropriate proceedings so long as such proceedings do not involve any danger of the sale, forfeiture or loss of the Airframe or any 35 41 Engine or interest therein; and (iv) materialmen's, mechanics', workmen's, repairmen's, employees' or other like liens arising in the ordinary course of business and 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 sale, forfeiture or loss of any Item of Equipment or any interest therein; (v) Liens arising out of any judgment or award against Lessee, unless the judgment secured shall not, within 45 days after entry thereof, have been discharged, vacated or reversed or unless execution thereof shall not have been stayed pending appeal or unless such judgment shall not have been discharged, vacated or reversed within 45 days after the expiration of such stay, and (vi) any other Lien with respect to which Lessee shall have provided a bond adequate in the reasonable judgment of Lessor. Lessee shall promptly, at no expanse to Lessor, take (or cause to be taken) such action as may be necessary to duly discharge any such Lien not excepted above if the same shall arise at any time with respect to any Item of Equipment. SECTION 16 Recordation and Further Assurances 16.01 FAA Recordation. Lessee shall, at its own expense, cause this Lease, the Lease Supplement and any and all additional instruments which shall be executed pursuant to the terms hereof so far as permitted by applicable law or regulations, to be duly kept, filed and recorded in the office of the FAA. 16.02. Further Assurances. Each party hereto shall, at its respective expense, promptly and duly execute and deliver to the other party such further documents and promptly take such further action not inconsistent with the terms hereof as the other party may from time to time reasonably request in order to more effectively carry out the intent and purpose of this Lease or to perfect and protect the rights and, with respect to Lessor, remedies created or intended to be created hereunder. SECTION 17 Return of Items and Records 17.01. Time and Place. At the expiration of the Term or upon the termination of this Lease pursuant to Section 19 hereof, Lessee, at its own expense, shall return the items of Equipment by delivering the Same forthwith to Lessor at Oakland International Airport or at such other airport in the United States as may reasonably be designated by Lessor. At the time of return, each Airframe shall have installed thereon two Engines, or other Pratt & Whitney JT8D-9 engines (or two engines of an improved model suitable for installation and use on the Aircraft) owned by Lessee. 17.02. Condition. When returned to Lessor at the expiration or earlier termination of this Lease the Aircraft shall be clean by airline operating standards, shall be returned with the Parts installed thereon on the Commencement Date or replacements therefor incorporated, 36 42 installed, or attached pursuant to Section 9 hereof, and shall be in as good operating condition and appearance as when delivered to Lessee, ordinary wear and tear and such alterations and modifications as may be authorized or required hereby excepted, shall be airworthy with all pilot discrepancies cleared from the log book, shall possess a currently effective Airworthiness Certificate issued by the FAA, shall have all systems operating properly, shall comply with any then applicable rules and regulations imposed by the FAA and shall be free and clear of all Liens and righted of others except Lessor's Liens. Lessee will have caused to be performed, at its expense, within the lesser of (i) 30 days or (ii) 200 Flight Hours prior to such return, all phases of a C-Check, or its equivalent, of the Aircraft, together with the segment of a P Check (or equivalent major overhaul segment) falling due at the time of such C Check or within 5,000 hours of such C Check under Lessee's maintenance program (such C Check and P Check segments are herein called the "Return Inspection"). Lessee will also cause to be Performed, at its expense, during such Return Inspection, all work required as a result of such Return Inspection to assure that the Aircraft is in compliance with applicable service bulletins of the Manufacturer, Airworthiness Directives issued by the FAA, and for all work, repair and services that may be determined to be necessary by the FAA approved repair facility which conducted such Return inspection to enable Lessee to return the Aircraft to Lessor as herein required. In addition, at the time of such return: (A) the Engines shall not together have less than 6,000 hours or cycles (whichever may be applicable) remaining to the next scheduled limiting factor for removal (no single Engine having less than 2,000 hours or cycles, whichever may be applicable, remaining) and shall have been maintained in accordance with the Lessee's then current approved engine maintenance program, authorized by and performed to FAA requirements applicable to the Lessee; and (B) no life-limited Part shall have less than one-half of the allowable hours or cycles remaining (other than landing gear Parts, which will have at least 4,000 cycles remaining) prior to the normally scheduled replacement of such Part. In the event any required work, repairs or services should delay the return of the Aircraft to Lessor beyond the expiration date of the Term of this Lease, Lessee shall continue to pay Rent on a prorated daily basis in the same manner as if there had been no expiration of the Term of this Lease until such required work, repair or servicing has been completed and the Aircraft returned to Lessor as provided hereinabove. Such payments shall be made when the Aircraft is returned to Lessor (but no less frequently than monthly). 17.03 Time and Cycle Adjustment - Airframe. In the event that the Lessee does not meet the conditions Of Section 17.02 hereof with respect to the Airframe and its life-limited Parts, the Lessee shall pay the Lessor an amount per hour (or cycle) for each hour (or cycle) by which the then remaining time with respect to such items shall be less than the Lessee's allowable time under such Section; such amount to be based upon the Lessee's average current rates for airframe maintenance (or the rates charged by a reputable FAA approved repair facility designated by Lessor, if Lessee does not perform airframe maintenance) and the manufacturer's cost for such Part. 17.04. Time and Cycle Adjustment - Engine. In the event that the Engines have been operated for more than the allowable hours or cycles set forth in Section 17.02, the Lessee shall pay the Lessor an amount per hour or cycle (whichever is the limiting factor) with respect to each Engine for which said requirements are not met the dollar amount which reflects the product of (1) the ratio that the time (or cycles) in excess of the Lessee's allowable time (or cycles) bears to 37 43 the time (or cycles) allowable under such Section and (2) the current rates charged by the engine manufacturer (or such other repair agency as may be mutually agreed between Lessor and Lessee) for such maintenance. 17.05. Special Markings. Prior to Lessee's return of the Items of Equipment as aforesaid, Lessee shall, at its own expense, sand and overpaint the exterior of the Aircraft to remove all insignias and other distinctive markings of Lessee. 17.06. Inspection Upon Redelivery. During the seven (7) days prior to the expiration of this Lease, Lessee shall provide up to three (3) days for a ground functional inspection, including engine runs. Such inspections shall be conducted at Lessee's base of operations 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 for the account of Lessee. 17.07. Return Delivery Flight. During the return delivery flight, a pilot and other personnel appointed by Lessor or its designee, 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 for the account of Lessee. 17.08. Manuals; Service Bulletins, Etc. Seven (7) days prior to the return of the Aircraft at the expiration or termination of this Lease, Lessee shall make available and at the expiration or termination of this Lease Lessee shall deliver or cause to be delivered to Lessor all logs, manuals, drawings and data and inspection, modification and overhaul records in respect of the Aircraft, including but not limited to those required to be maintained under applicable rules and regulations of the FAA, updated through the date of return. All "no-charge" service bulletin kits received by or on behalf of Lessee, the manufacturers or vendors for the Aircraft and Engines and not incorporated therein shall be returned at no charge to Lessor as cargo on board the Aircraft at the time of its return. At the time the Aircraft is returned, Lessor shall have the option to purchase from Lessee, at Lessee's cost therefor, any "charge" service bulletin kits purchased by Lessee which have not been incorporated in the Aircraft. All such items shall thereupon become the property of Lessor. 17.09. Return of Other Engines. In the event that any engine not owned by the Lessor shall be delivered with the Airframe as set forth in Section 17.01, Lessee, concurrently with such delivery, will, at its own expense and at no cost to Lessor, furnish the Lessor or its Transferee with a full warranty bill of sale, in form and substance satisfactory to the Lessor, with respect to each such engine and with an opinion of Lessee's counsel to the effect that, upon such delivery, the Lessor or its Transferee will acquire full title to such engine free and clear of all Liens and Lessee shall take such other action as Lessor may reasonably request, and thereupon Lessor will transfer (or cause its Transferee to transfer) to Lessee, without recourse or warranty (except as to Lessor's 38 44 Liens) all Lessor's right, title and interest in and to any Engine constituting part of the Aircraft but not installed on the Airframe at the time of the return of the Airframe. 17.10. Fuel. Upon the return of the Airframe at the end of the Term, each fuel tank and oil tank shall contain the same quantity of fuel or oil as was contained in the fuel and oil tanks when the original Airframe was delivered to Lessee on the Commencement Date, 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, at the location of return. 17.11. Storage Upon Return. Upon written request of Lessor received on or prior to the end of the Term, Lessee will provide Lessor with storage facilities for the Aircraft for a period not exceeding 60 days after the end of the Term at a location in the continental United States selected by Lessee. Lessee will bear the expenses of storage for the first 30 days; Lessor will bear the expenses (calculated at Lessee's incremental cost) for the remainder of such period. Lessee will, at its expense, cause the Aircraft to be flown at any time during or after such storage period to a reasonable location selected by Lessor in the continental United States. Lessee, at its expense, will maintain all insurance required by Section 13 hereof during the first 30 days of such storage period and during such ferry flight. Lessee shall maintain such other insurance on the Aircraft as Lessor may request during such storage period and Lessor shall bear the expenses thereof. 17.12. Certain Airworthiness Directives. In the event the FAA shall issue any directive which would require modifications to the Aircraft in order for the airworthiness certificate of the Aircraft to be maintained in good standing, and which by its terms or by the terms of any extension thereof is not applicable to the Aircraft prior to the return thereof pursuant to this Section 17, Lessee shall nevertheless cause such directive to be complied with with respect to the Aircraft prior to such return, (x) United States air carriers similarly situated with Lessee have commenced compliance with such directive with respect to aircraft affected by such directive and in use by such air carriers and (y) subsequent to any such commencement the Aircraft is subjected to a maintenance check of the type at which such modifications is made, in accordance with the maintenance program Lessee has caused to be adopted with respect to the Aircraft. 17.13 Maintenance at Lessor's Request. Upon receipt of written notice from the Lessor not less than 60 (nor more than 120) days prior to any expiration or termination of this Lease, the Lessee agrees to perform maintenance to the Airframe and/or the Engines. Such maintenance shall be done in the same manner and with the same care as used by the Lessee with similar airframes and engines of its own and shall be completed as promptly as possible after any such termination of this Lease as to the Airframe or Engines, and the Lessor shall reimburse the Lessee in an amount equal to (1) the lesser of (x) the sum of 120% of the Lessee's direct costs for materials plus 200% of the Lessee's direct hourly labor costs incurred in connection with such maintenance, or (y) the Lessee's standard contract rates, if any, therefor, or (2) if such maintenance is performed by someone other than the Lessee, the actual amount paid therefor by the Lessee. 17.14. Failure to Return Aircraft. If Lessee shall, for any reason whatsoever, return the Aircraft or any Engine at the time specified herein, the obligations of Lessee as provided 39 45 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; but this Section 17.14 shall not be construed as permitting Lessee to fail to meet its obligation to return the Aircraft or such Engine in accordance with the requirements of this Lease or constitute a waiver of a Lease Event of Default. 17.15. Aid in Disposition. Lessee agrees that during the last year of the Term (and during the storage period set forth in Section 17.11) it will cooperate in all reasonable respects with the efforts of Lessor to lease or sell the Aircraft, including without limitation permitting potential lessees or purchasers to inspect the Aircraft and the records relating thereto, provided that Lessee shall not be required for such purpose to interfere unreasonably with the use of the Aircraft or incur out-of-pocket expenses for which it is not reimbursed. SECTION 18 Event of Default The following events shall constitute Events of Default: (A) Lessee shall fail to make any payment of Rent within five days after the same shall have become due hereunder; or (B) Lessee shall fail to procure and maintain any insurance required by Section 12 hereof; or (C) Lessee shall fail to perform or observe any of the covenants, conditions or agreements to be performed or observed by it under, or sublease the Aircraft in a manner not permitted by, Section 6.01 (G) or (H) hereof; or (D) Lessee shall fail to perform or observe any of the surviving obligations (as such term is defined in the Assumption Agreement dated the Closing Date with respect to the Aircraft between Lessee and Frontier), and such failure shall continue for a period in excess of thirty (30) days after written notice; or (E) Lessee shall fail to perform or observe in any material respect any other of the covenants, conditions, or agreements to be performed or observed by it hereunder and such failure shall continue for a period in excess of thirty (30) days after written notice; or (F) Any representation or warranty made by Lessee herein or in any document or certificate furnished Lessor in connection herewith or pursuant hereto (other than the Indemnity Agreement) shall prove to be incorrect in any material respect when made; or (G) Lessee consents to the appointment of a custodian, receiver, trustee or liquidator of itself or of a substantial part of its property, or Lessee shall be unable to pay its debts generally as they become due, or makes a general assignment for the benefit of creditors, or Lessee 40 46 files a voluntary petition in bankruptcy or a voluntary Petition or an answer seeking reorganization in a proceeding under any bankruptcy law (as now or hereafter in effect) or an answer admitting the material allegation of a petition filed against Lessee in any such proceeding, or Lessee by voluntary petition, answer or consent seeks relief under the provisions of any other now existing or future bankruptcy or other similar law providing for the reorganization or winding-up of corporations or providing for an agreement, composition, extension or adjustment with its creditors; or (H) Lessee shall fail to make any payment when due in respect of any indebtedness for which it is liable (contingently or otherwise), or for the payment of the deferred purchase price of any property, or for payment of any obligation under any lease of aircraft or aircraft-related equipment shall not be paid when the same becomes due, in each case after giving effect to any grace period applicable thereto, or the Lessee fails to perform or observe any other provision of any such obligation or in any agreement relating to such obligation, provided that the obligation in respect of which such failure has occurred shall be in an aggregate amount then outstanding in excess of $5,000,000 or more and, as a result of such failure to pay or perform, the other party to, or the beneficiary of or trustee or agent acting in accordance with such instrument or agreement shall have accelerated payment of the amounts owing thereunder; or (I) An order, judgment or decree is entered in any proceedings by any court of competent jurisdiction appointing with or without the consent of Lessee, a custodian, receiver, trustee or liquidator of Lessee or of any substantial part of its property or of the Aircraft, or the Aircraft or any substantial part of the property of Lessee is sequestered, and any such order, judgment or decree of appointment or sequestration remains in force undismissed, unstayed or unvacated for a period of sixty (60) days after the date of entry thereof; or (J) A petition against Lessee in a proceeding under any bankruptcy or other insolvency law (as now or hereafter in effect) is filed, and any decree or order adjudging Lessee a bankrupt or insolvent in such proceeding remains in force undismissed or unstayed for a period of sixty (60) days after such adjudication or, in case the approval of such petition by a court of competent jurisdiction is required, the petition as filed or amended shall be approved by such a court as properly filed and such approval shall not be withdrawn or the proceeding dismissed within sixty (60) days thereafter, or if, under the provisions of any law providing for reorganization or winding-up of corporations which may apply to Lessee, any court of competent jurisdiction shall assume jurisdiction, custody or control of Lessee or of any substantial part of its property and such jurisdiction, custody or control remains in force unrelinquished, unstayed or unterminated for a period of sixty (60) days; provided, however that this clause (I) shall not apply to the Bankruptcy Case; or (K) Judgment for the payment of money in excess of $5,000,000 is 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. 41 47 SECTION 19 Rights and Remedies 19.01. Remedies. Upon the occurrence of any Event of Default 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 exercise one or more of the following remedies as Lessor, in its sole discretion, shall elect: (A) Terminate this Lease. (B) Demand that Lessee, and Lessee shall upon written demand of Lessor and at Lessee's expense, forthwith return the Items of Equipment to Lessor in the manner and condition required by, and otherwise in accordance with all of the provisions of, Section 17 hereof as if the Items of Equipment were being returned at the end of the Term; or Lessor may enter upon the premises where the Items of Equipment are located and take immediate possession of and remove the same (together with any engine or any part which is not an Engine or a Part but which is installed on the Airframe, subject to all of the rights of the owner, lessor, lienor or secured party of such engine or part, provided that such engine or part 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 for an Engine or Part in accordance with the provisions of Sections 9 and 12) by summary proceedings or otherwise, all without liability 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. (C) Proceed by appropriate court action or actions, either at law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease and to recover damages for the breach thereof. (D) Sell or cause to be sold any Airframe, any Engine or any Item of Equipment at public or private sale, as the Lessor may determine, or otherwise dispose of, hold, use, operate, lease to others or keep idle any Aircraft or any item of Equipment as the Lessor in its sole discretion may determine, all free of any rights of the Lessee and, without any duty to account to the Lessee with respect to such action or inaction or for any proceeds with respect thereto. (E) Whether or not the Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights specified above with respect to the Aircraft or any item the Lessor, by written notice to the Lessee specifying a payment date not earlier than ten (10) days from such written notice, may demand that the Lessee pay to the Lessor and the Lessee shall pay to the Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent for the Aircraft due for periods commencing on or after the date specified for payment in such notice), any unpaid Basic Rent for the Aircraft due for periods prior to the payment date specified in such notice plus whichever of the following amounts the Lessor, in its sole discretion, shall specify in such notice: (i) an amount equal to the excess, if any, of the present worth of the aggregate unpaid Rent due under this Lease for such Item discounted at the rate of eight and one-half percent (8.5%) per annum to the date specified in said 42 48 notice over the aggregate fair market rental value (computed as hereafter in this Section provided) of such Item for the remainder of the Term for such Item after discounting such fair market rental value to present worth as of the payment date specified in such notice at the rate of eight and one-half percent (8.5%) per annum; or (ii) an amount equal to the excess, if any, of the Stipulated Loss Value for such Item computed as of the date specified for payment in such notice over the fair market sales value (computed as hereafter in this Section provided) as of the date specified in the notice. The amount specified in said notice shall bear interest at the Incentive Rate from the payment date specified in said notice until receipt of payment by the Lessor. Lessor and Lessee agree that it is difficult or impossible to ascertain, estimate or prove the entire or exact cost, damage or injury that may result from a breach by Lessee of its obligations under this Lease and that liquidated damages as provided hereby bear a reasonable proportion to the probable loss occasioned by such a breach. (F) In the event the Lessor, pursuant to subparagraph (E) above, shall have sold or caused to have sold, any Item, the Lessor in lieu of exercising its rights under subparagraph (E) above with respect to such Item, may, if it shall so elect, demand that the Lessee pay the Lessor and the Lessee shall pay to the Lessor, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent for such Item due after such sale occurs), any unpaid Basic Rent for such Item due for periods up to the time of sale plus the amount by which the Stipulated Loss Value of such item computed as of the date of such sale exceeds the net cash proceeds of such sale, together with interest at the Incentive Rate on the sum of such excess and such unpaid Rent from date of sale to the date such payment is received by the Lessor. 19.02 Further Rights. Lessee shall be liable for any and all unpaid Rent 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 any Item in accordance with the terms of Section 17 hereof or in placing such Item in the condition and with airworthiness certificates as required by said Section. 19.03. Definition of Fair Market Value. For the purpose of Section 19.01 above, the "fair market rental value" or the "fair market sales value" of any Item shall be as specified in an appraisal by a recognized independent aircraft appraiser, chosen by the Lessor, who shall determine such value(s) on the basis of the actual location and condition of the Item. At any sale of any Item pursuant to this Section 19, Lessor, or any assignee, successor or affiliate of Lessor, may, but the Lessee may not, bid for and purchase such property. 19.04. Remedies Cumulative. No remedy referred to in this Section 19 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity; and the exercise or beginning of exercise by Lessor or 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 Lessor of any Event of Default shall in any way be, or be construed to be, a waiver of any future or further Event of Default. To the extent permitted by applicable law, Lessee hereby waives any and all rights to notice and to a judicial hearing with respect to the repossession of any Item by Lessor upon the 43 49 occurrence of an Event of Default and agrees that, except as may be required by law, no profit accruing to Lessor by virtue of Lessee's default and Lessor's subsequent sale or reletting of the Items of Equipment shall reduce, offset or mitigate the damages for which Lessee is liable hereunder. SECTION 20 Miscellaneous 20.01. Construction and Applicable Law. 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 provisions hereof prohibited or unenforceability in any respect. No term or provision of this Lease may be changed, waived, discharged or terminated orally, but only by a written instrument signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. The captions in this Lease are for convenience of reference only and shall not define or limit any of the term or provisions hereof. This Lease 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. 20.02. Notices. All notices provided for herein shall be in writing and shall be deemed to have been given when delivered personally, when telexed or when deposited in the United States mail, postage prepaid, addressed as follows: If to Lessee: New York Airlines, Inc. Hangar No. 5 LaGuardia Airport Flushing, NY 11371 Attn: Chief Financial Officer with a copy to: Continental Airlines, Inc. 2929 Allen Parkway Houston, TX 77014 Attn: Chief Financial Officer Telex: If to Lessor: GATX Leasing Corporation Four Embarcadero Center San Francisco, CA 94111 Attn: Contracts Administration Telex: 171064 44 50 or to any party at such other address as the party may designate by notice duly given in accordance with this Section 20.02. 20.03. Lessor's Right to Perform. If Lessee fails to perform any of its obligations hereunder, Lessor may (but shall not be obligated to) discharge such obligation, and the amount of the expenses of Lessor incurred in connection with such discharge shall be deemed Supplemental Rent, payable by Lessee upon demand. 20.04 Counterparts. This Lease and each Lease Supplement may be executed in several counterparts, each of which shall be deemed an original, and all such counterparts shall constitute one and the same instrument. 20.05. Transfer of Interest by Lessor. Lessor shall have absolute right to transfer or assign to any Transferee (as hereinafter defined) any or all of Lessor's rights, obligations, benefits and interest in the Equipment and under this Lease, including, without limitation, the right to receive Rent or any other payment due under this lease, including, without limitation, the right to receive Rent or any other payment due under this Lease, the right to sell or assign its interest in any Item of Equipment or to transfer or assign the right to purchase any Item and the right to make all waivers and agreements, to give all notices, consents and releases, to take all action upon the occurrence of an Event of Default, or to do any and all other things which Lessor is or may become entitled to do under this Lease, Lessee agrees that if Lessor should sell the Item of Equipment to a Transferee or Transferees the provisions of this Lease with respect to transfer of title to any Items, payment of proceeds of insurance, and indemnification shall apply to and are made expressly for the benefit of such Transferee, mutatis mutandis, as if such Transferee were originally the Lessor and Lessee agrees to do such other acts and execute such other further documents and instruments as may be required by law or reasonably requested by Lessor to perfect and preserve the rights and interests of any such Transferee on the Items of Equipment as contemplated by the terms hereof. Any assignment, pledge or other conveyance, for security or otherwise, of this Lease by Lessor shall be subject to Lessee's rights-under this Lease, so long as no Default or Event of Default shall have occurred and be continuing, and shall not be effective unless and until Lessee shall have been given notice of such assignment identifying the transferee hereof. All expenses incurred in connection with any such transfer shall be for the account of Lessor. As used herein, the term "Transferee" shall mean and include any person, firm, corporation or other entity, except that so long as no Default or Event of Default shall have occurred and be continuing, Lessor agrees not to transfer all or any portion of its interest in the Items of Equipment to any person whose ownership of the Items of Equipment would cause Lessee to lose the benefits of United States registration of the Aircraft. 20.06. Assignment of Warranties. (a) Assignment to Lessee. If and so long as an Event of Default shall not have occurred and be continuing, Lessor authorizes Lessee, to the exclusion of Lessor, to exercise in Lessor's name any warranty, aircraft performance guarantee or indemnity against the 45 51 manufacturers of the Airframe or Engines, or any Part, and any recovery in respect thereof shall be paid to Lessee for distribution between the Lessee and Lessor as their respective interests may appear. Any payments or amounts which, pursuant to the preceding sentence, would have been required to be paid to Lessee but for the existence of an Event of Default shall be held by Lessor or paid over to Lessor and may be applied by Lessor to cure any Event of Default or as otherwise provided in the Lease and shall, at such time as there shall not be existing any Event of Default and to the extent not used to cure any Event of Default, be paid over to Lessee. (b) Notices to the Seller. For all purposes of this Section 20.06, the Seller shall not be deemed to have knowledge of and need not recognize nor take any action with respect to the existence of any Event of Default the Seller shall have received from the Lessor written notice thereof. If the Lessor shall have notified the Seller of the existence of an Event of Default under this Agreement, the Lessor shall also give written notice to the Seller when such Event of Default has been cured or waived. 20.07. Survival. The representations, warranties, covenants, agreements and indemnities of Lessee set forth in this Lease, and Lessee's obligations hereunder, shall survive the expiration or other termination of this Lease to the extent required for full performance and satisfaction thereof. 20.08. Successors and Assigns. This Lease shall be binding on and shall inure to the benefit of Lessee, Lessor and their respective successors and permitted assigns. SECTION 21 Renewal and Purchase Options 21.01. Lessor's Election. Not less than twelve months prior to the end of the original Term or any renewal Term, Lessor shall send written notice to Lessee stating either (i) Lessor intends to sell the Aircraft at the end of such Term, or (ii) Lessor intends to retain ownership of the Aircraft at the end of such Term. Not less than nine months prior to the end of such Term, Lessor shall, by irrevocable written notice to Lessee, inform Lessee of Lessor's decision to sell or retain the Aircraft. Upon receipt of such notice, Lessee may elect, upon written notice, to (a) purchase the Aircraft pursuant to the terms of Section 21.03 if Lessor has elected to sell the Aircraft or (b) to renew this Lease for a renewal Term pursuant to the terms of Section 21.02 if Lessor has elected to retain ownership of the Aircraft provided, however, if Lessee so elects to renew or purchase its rights to either thereof shall expire at the close of business on the date which is six months prior to the expiration of the original Term or renewal Term, as the case may be, unless Lessee and Lessor shall have theretofore entered into a definitive agreement for such lease or sale (it being agreed that Lessor and Lessee shall negotiate such agreement in good faith). If Lessee makes no such election, Lessee shall return the Aircraft to Lessor at the end of the original Term or such renewal Term, as the case may be, as provided herein. 21.02. Renewal Options. If Lessee has elected to renew this Lease for a renewal Term so long as no Event of Default or Default has occurred and is continuing on the date of such 46 52 notice of the date of renewal, this Lease shall be renewed at the end of the original Term or renewal Term, as the case may be, for a renewal Term mutually agreed to by Lessor and Lessee. The Basic Rent payable for such renewal Term hereunder shall be the fair market rental value of the Aircraft calculated as of the commencement of such renewal Term. Such fair market rental value shall be determined not later than nine months prior to the commencement of such renewal Term by mutual consent of Lessor and Lessee or, if they shall be unable so to agree, by Independent Appraisal. If either Lessor or Lessee shall fail to appoint an appraiser by the date which is eight months prior to the commencement of such renewal Term or if such two appraisers cannot agree on the amount of such appraisal and fail to appoint a third appraiser by the date which is seven months before the commencement of such renewal Term, then either Lessor or Lessee may apply to any court having jurisdiction to make such appointment. Fair market rental value shall be the cash rental obtainable in an arm's length lease between an informed and willing lessee (under no compulsion to lease) and in informed and willing lessor (under no compulsion to lease) and shall be determined on the assumption that the Aircraft is in the United States, available for use by the Lessee and in the return condition required by Section 17 of this Lease and otherwise in compliance with the requirements of this Lease. Stipulated Loss Value amounts that are payable during such renewal Term shall be calculated as of the date of commencement of such renewal Term and shall be the fair market sales value of the Aircraft on such date determined in accordance with Section 21.03. 21.03. Purchase Option. If Lessee has elected to purchase the Aircraft at the end of the original Term or any renewal Term and provided no Event of Default or Default shall have occurred and be continuing on the date of such notice or by the closing date of the purchase, Lessee shall purchase the Aircraft on the last Business Day of the original Term or renewal Term, as the case may be, at a purchase price equal to the fair market sales value thereof as of such last Business Day. Such fair market sales value shall be determined not later than nine months prior to such last Business Day by mutual consent of Lessor and Lessee or, if they shall be unable so to agree by Independent Appraisal. If either Lessor or Lessee shall fail to appoint an appraiser by the date which is eight months prior to such last Business Day or if such two appraisers cannot agree on the amount of such appraisal and fail to appoint a third appraiser by the date which is seven months before such last Business Day, then either Lessor or Lessee may apply to any court having jurisdiction to make such appointment. Fair market sales value shall be the cash price obtainable in an arm's-length sale between an informed and willing buyer (under no compulsion to buy) and an informed and willing seller (under no compulsion to sell) and shall be determined on the assumption that the Aircraft is in the United States of America, available for use by the buyer and in the return condition required by Section 17 of this Lease and otherwise in compliance with the requirements of this Lease. Upon receipt of such purchase price from Lessee and all Rent and other amounts due hereunder and under any other Operative Agreement, Lessor will transfer (or cause its Transferee to transfer) the Aircraft to Lessee without recourse or warranty (except as to Lessor's Liens). 47 53 IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be duly executed by their authorized officers on the date first above written. GATX LEASING CORPORATION as Lessor By: Title: VICE PRESIDENT --------------- NEW YORK AIRLINES, INC. as Lessee By: Title: VICE PRESIDENT --------------- 48 54 LEASE SUPPLEMENT (N7379F) THIS LEASE SUPPLEMENT, dated __________, 1986 (this "Lease Supplement"), between GATX LEASING CORPORATION ("Lessor") and NEW YORK AIRLINES, INC., ("Lessee"); W I T N E S S E T H: WHEREAS, Lessor and Lessee have executed a certain Lease Agreement (N7379F), dated as of November 6. 1986 (the "Lease"), which provides for the execution and delivery of a Lease Supplement in substantially the form hereof for the purpose of leasing the Items of Equipment in accordance with the terms thereof; NOW, THEREFORE, in consideration of the premises, and pursuant to Article 2 of the Lease, Lessor and Lessee hereby agree as follows: 1. All capitalized terms used herein which are defined in the Lease shall have, for all purposes hereof, the respective meanings given them in the Lease. 2. Lessor hereby delivers and leases to Lessee, and Lessee hereby accepts and leases from Lessor under the Lease, as hereby supplemented, the Items of Equipment as follows: A. Aircraft: One (1) Boeing 737-2CO aircraft, consisting of the following: (i) Airframe: FAA Registration No. N7379F; Manufacturer's Serial No. 20071; (ii) Engines: Two (2) Pratt & Whitney JT8D-9 engines (each of which engines has 750 or more rated takeoff horsepower or the equivalent thereof), bearing, respectively, Manufacturer's Serial Nos.: Engine No. Manufacturer's Serial No. ---------- ------------------------- 1 P674314B 2 P674384B 55 Lessee confirms that the Items of Equipment have been examined by its duly appointed and authorized representatives and conform to the information set forth above. 3. Basic Rent shall be payable in 83 monthly installments, in advance, commencing on December 1, 1986, and on the same day of each month thereafter throughout the Term. 4. Lessor hereby delivers and Lessee hereby accepts the manuals, log books, records and other documents relating to the Aircraft. 5. The Commencement Date of the Lease is the date of this Lease Supplement, as set forth in the opening paragraph hereof, and the Items of Equipment are hereby delivered and accepted on such date at Denver, Colorado. 6. Unless renewed or extended pursuant to Section 21.02, the expiration dated of this Lease shall be October 31, 1993. 7. This Lease Supplement 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 Lease Supplement to be duly executed by their authorized officers on the date first above written. GATX LEASING CORPORATION as Lessor By: ------------------------ Title: --------------------- NEW YORK AIRLINES, INC. as Lessee By: ------------------------ Title: --------------------- 56 EXHIBIT B STIPULATED LOSS VALUES (N7379F)
Basic Rent Payment Date Percentage ------------ ---------- November 1986 98.296296 December 1986 97.880630 January 1987 97.459517 February 1987 97.032886 March 1987 96.600664 April 1987 96.162779 May 1987 95.719155 June 1987 95.269719 July 1987 94.814394 August 1987 94.353102 September 1987 93.885765 October 1987 93.412305 November 1987 92.932641 December 1987 92.446691 January 1988 91.954373 February 1988 91.455605 March 1988 90.950301 April 1988 90.438375 May 1988 89.919742 June 1988 89.394312 July 1988 88.861997 August 1988 88.322708 September 1988 87.776351 October 1988 87.222835 November 1988 86.662066 December 1988 86.093950 January 1989 85.518388 February 1989 84.935285 March 1989 84.344541 April 1989 83.746056 May 1989 83.139729 June 1989 82.525457 July 1989 81.903135 August 1989 81.272659 September 1989 80.633921 October 1989 79.986814
57 STIPULATED LOSS VALUES (Cont.)
Basic Rent Payment Date Percentage ------------ ---------- November 1989 79.331227 December 1989 78.667050 January 1990 77.994169 February 1990 77.312471 March 1990 76.621841 April 1990 75.922160 May 1990 75.213312 June 1990 74.495175 July 1990 73.767628 August 1990 73.030547 September 1990 72.283808 October 1990 71.527284 November 1990 70.760846 December 1990 69.984366 January 1991 69.197711 February 1991 68.400747 March 1991 67.593341 April 1991 66.775355 May 1991 65.946650 June 1991 65.107086 July 1991 64.256521 August 1991 63.394810 September 1991 62.521808 October 1991 61.637366 November 1991 60.741335 December 1991 59.833563 January 1992 58.913896 February 1992 57.982177 March 1992 57.038250 April 1992 56.081954 May 1992 55.113127 June 1992 54.131604 July 1992 53.137221 August 1992 52.129807 September 1992 51.109192 October 1992 50.075204 November 1992 49.027667 December 1992 47.966403 January 1993 46.891233
58 February 1993 45.801974 March 1993 44.698442 April 1993 43.580450 May 1993 42.447808 June 1993 41.300324 July 1993 40.137804 August 1993 38.960051 September 1993 37.766865 October 1993 36.558044
59 EXHIBIT C to Lease Agreement Permitted Foreign Air Carriers Aero Transporti Italiani S.A.F.E. Aerolineas Argentinas Saudia Air Canada Scandinavian Airline System (SAS) Air Inter Singapore Airlines Ltd- Air Micronesia South African Airways Alitalia Swissair All Nippon Airways Company Ansett Transport Thai Airways International Ltd. Austrian Airlines TOA-Domestic Airlines Co. Ltd. British Airways Trans-Australia British Caledonian Airways Transavia Holland BWIA Trans European Airways CAAC UTA Cathay Pacific Airways, Ltd. Varig, S.A. China Airlines CP Air Dan-Air Finnair Oy Air France Garuda Indonesian Airways, P.D. Hapag-Lloyd Iberia International Airlines Icelandair Indian Airlines Japan Air Lines. Inc. KLM - Royal Dutch Airlines Korean Air Lines Kuwait Airways Corporation Malaysian Airline System BHD MartinAir Mexicana Air New Zealand Ltd. Olympic Airways, S.A. Phillipine Airways Qantas Airways Ltd. Lufthansa German Airlines Sabena (Belgium World Airlines) 60 EXHIBIT D FAA Recording Information (N7379F)
Lease Dated FAA Recording Date Conveyance No. - ----------- ------------------ -------------- November 7, 1969 2/9/70 D49657 November 7, 1969 2/24/70 D50105 (Acceptance Supplement No. 2 dated January 11. 1970) November 7, 1969 2/26/70 D50192 (Acceptance Supplement No. 3 dated January 27, 1970) Extension and 2/5/82 Z41387 Option Agreement and Amendment of Lease dated October 1. 1981 Amendatory 12/8/82 P57635 Agreement to Extension and Option Agreement and Amendment of Lease dated September 23, 1982
61 LEASE SUPPLEMENT (N7379F) THIS LEASE SUPPLEMENT, dated November 6, 1986 (this "Lease Supplement"), between GATX LEASING CORPORATION ("Lessor") and NEW YORK AIRLINES, INC., ("Lessee"); W I T N E S S E T H: WHEREAS, Lessor and Lessee have executed a certain Lease Agreement (N7379F), dated as of November 6, 1986 (the "Lease"), which provides for the execution and delivery of a Lease Supplement in substantially the form hereof for the purpose of leasing the Items of Equipment in accordance with the terms thereof; NOW, THEREFORE, in consideration of the premises, and pursuant to Article 2 of the Lease, Lessor and Lessee hereby agree as follows: 1. All capitalized terms used herein which are defined in the Lease shall have, for all purposes hereof, the respective meanings given them in the Lease. 2. Lessor hereby delivers and leases to Lessee, and Lessee hereby accepts and leases from Lessor under the Lease, as hereby supplemented, the Items of Equipment as follows: A. Aircraft: One (1) Boeing 737-2CO aircraft, consisting of the following: (i) Airframe: FAA Registration No. N7379F; Manufacturer's Serial No. 20071; (ii) Engines: Two (2) Pratt & Whitney JT8D-9 engines (each of which engines has 750 or more rated takeoff horsepower or the equivalent thereof), bearing, respectively, Manufacturer's Serial Nos.: Engine No. Manufacturer's Serial No. ---------- ------------------------- 1 P674314B 2 P674384B Lessee confirms that the Items of Equipment have been examined by its duly appointed and authorized representatives and conform to the information set forth above. 3. Basic Rent shall be payable in 83 monthly installments, in advance, commencing on December 1, 1986, and on the same day of each month thereafter throughout the Term. 62 4. Lessor hereby delivers and Lessee hereby accepts the manuals, log books, records and other documents relating to the Aircraft. 5. The Commencement Date of the Lease is the date of this Lease Supplement, as set forth in the opening paragraph hereof, and the Items of Equipment are hereby delivered and accepted on such date at Denver, Colorado. 6. Unless renewed or extended pursuant to Section 21.02, the expiration dated of this Lease shall be October 31, 1993. 7. This Lease Supplement 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 Lease Supplement to be duly executed by their authorized officers on the date first above written. GATX LEASING CORPORATION as Lessor By: ---------------------- Title: ------------------- NEW YORK AIRLINES, INC. as Lessee By: ---------------------- Title: ------------------- 63 Aircraft Sublease Agreement between New York Airlines, Inc., Sublessor and Continental Airlines, Inc., Sublessee (Aircraft No. N 7379F) To the extent that this Sublease constitutes chattel paper (as defined in the Uniform Commercial Code) no security interest in this Sublease may be created through the transfer or possession of any counterpart other than the original executed counterpart, which shall be identified as the counterpart containing the receipt therefor executed by the Lessor on the signature page thereof. 1 64 Aircraft Sublease Agreement between New York Airlines, Inc., Sublessor and Continental Airlines, Inc., Sublessee (Aircraft No. N 7379F) THIS AIRCRAFT SUBLEASE AGREEMENT (hereinafter called the "Sublease") made this 6th day of November, 1986 by and between NEW YORK AIRLINES, INC., a Delaware Corporation, having its principal place of business in the City of New York State of New York, U.S.A. (hereinafter referred to as ("Sublessor") and CONTINENTAL AIRLINES, INC., a Delaware corporation, having its principal place of business in the City of Houston, State of Texas, U.S.A. (hereinafter referred to as "Sublessee") W I T N E S S E T H: WHEREAS Sublessor has leased that certain aircraft together with the engines initially installed thereon, each described in Exhibit A hereto (collectively, the "Aircraft"), pursuant to a Lease Agreement (the "Lease") between Sublessor and GATX Leasing Corporation (the "Lessor"), dated as of November 6, 1986. WHEREAS, Sublessee desires to sublease the Aircraft which is the subject of the Lease and Sublessor is willing to sublease said Aircraft to Sublessee upon the terms and conditions set forth below. NOW, THEREFORE, in consideration of the mutual covenants and promises set forth below, the parties hereto agree as follows: 1. Definitions. Except as otherwise defined herein, capitalized terms used herein shall have the meanings set forth in the Lease. 2. Sublease of Aircraft. Sublessor hereby agrees to sublease to Sublessee, and Sublessee hereby agrees to sublease from Sublessor the Aircraft. 3. Delivery, Acceptance and Return. 2 65 (a) Sublessor hereby delivers the Aircraft for sublease hereunder by delivery of same to Sublessee in a mutually satisfactory location in Wichita, Kansas and Sublessee hereby accepts such delivery. (b) The parties agree that the Aircraft shall be returned by Sublessee to Sublessor at a location designated by Sublessor on the route system of Sublessee. 4. Sublease Term. The term of this Sublease shall be for successive one month periods unless one of the parties hereto gives the other party hereto on at least 24 hours' notice prior to the termination of any given month term of its intention to terminate this Sublease. 5. Rent and Supplemental Rent. Sublessee promises to pay to Sublessor, with respect to the Aircraft, without any deduction, counterclaim, set-off, further notice or demand, 105% of all of the amounts of rent specified in the Lease and such rent shall be payable in advance, at the times and places and in the manner specified by the Sublessor. Sublessee promises to pay Sublessor (or to such parties as Sublessor directs) with respect to the Aircraft without any deduction, counterclaim, set-off, further notice or demand, the amount of Supplemental Rent specified in the Lease payable at the times and places and in the manner specified in the Lease and by the Sublessor. 6. Applicability of Lease Provisions to Sublease Agreement. Sublessee acknowledges receipt of a copy of the Lease. Sublessee hereby agrees, during the term of this Sublease, to be bound by the terms of and to perform each of the obligations of Sublessor as set forth in the Lease, which Lease is incorporated herein by reference in its entirety, as though, unless the context otherwise requires, each reference therein to "Lessee" were to Sublessee, each reference therein to "Lease" were to this Sublease and each reference therein to Commencement Date were to the Sublease delivery date hereunder. Sublessee further agrees that upon the failure of Sublessee to perform or observe any of its obligations under the Sublease, Sublessor shall be entitled to exercise, to the extent permitted by the Lease, all the rights and remedies conferred by Section 19 of the Lease (other than the right to sell the Aircraft) as though Sublessor were the Lessor and Sublessee were the Lessee thereunder. 7. Sublease Subject to Lease. Sublessee expressly agrees and acknowledges that this Sublease and the rights of Sublessee hereunder are expressly made subject to and subordinate to all the terms of the Lease, including, without limitation, the covenants contained in the Lease and the Lessor's rights to repossession pursuant to the Lease. Sublessee further agrees that it will commit no act which would constitute an Event of Default under the Lease. 8. Notices. All communications and notices provided for herein shall be addressed as follows: (a) if to Sublessor, at La Guardia Airport Station, Flushings New York 11371, Attention: Senior Vice President, Finance and Administration, and (b) if to Sublessee, at Continental Airlines, Inc., 2929 Allen Parkway, Houston, Texas 77029, Attention: Vice President, General Counsel and Vice President, Chief Financial Officer. 3 66 IN WITNESS WHEREOF, Sublessor and Sublessee have each caused this Sublease to be duly executed by their officers thereunto duly authorized as of the date first set forth above. NEW YORK AIRLINES, INC. By: ----------------------- Title: -------------------- CONTINENTAL AIRLINES, INC. By: ----------------------- Title: -------------------- Receipt of the original counterpart of this Sublease is acknowledged this 6th day of November, 1986. - -------------------------- GATX Corporation 4 67 Exhibit A One (1) Boeing 737-2CO Aircraft which consists of the following components: a) airframe: FAA Registration Mark M-7379T Manufacturer's Serial No. 20071 b) engines: two (2) Pratt a Whitney JT8D-9 engines bearing, respectively, Manufacturer's Serial Nos.P674314B and P 6743849 5 68 ASSIGNMENT OF SUBLEASE dated as of November 6, 1986, from NEW YORK AIRLINES, INC., a Delaware corporation ("Assigner"), to GATX LEASING CORPORATION, a Delaware corporation. Assignor and Assignee have entered into that certain Lease Agreement, dated as of November 6, 1986 (as at any time amended, supplemented or modified, the "Lease"), pursuant to which Assignee has agreed to lease to Assignor a certain Boeing Model 737-2CO aircraft bearing manufacturer's Serial No. 20071 and FAA Registration No. N7379F (together with the two Pratt & Whitney engines initially installed thereon, the "Aircraft"). Pursuant to the terms and conditions of the Sublease Agreement, dated as of November 6, 1986 (as at any time amended, supplemented or modified, the "Sublease"), Assignor has agreed to sublease the Aircraft to Continental Airlines, Inc. ("Sublessee"), subject and subordinate to the Lease. It is a condition precedent to the sublease of the Aircraft by Assignor to Sublessee that Assignor execute and deliver to Assignee this Assignment, together with the Consent and Agreement of Sublessee attached hereto. Capitalized terms used in this Assignment which are not otherwise defined in this Assignment are used as they are defined in the Lease. Accordingly, the parties hereto hereby agree as follows: 1. Assignment of Sublease. For value received and to secure the due and punctual payment and performance of all of Assignor's obligations under the Lease which obligations are hereby incorporated by this reference as fully as if set forth in their entirety herein (the "Obligations"), including without limitation the due and punctual payment of all Rent, Assignor hereby assigns, transfers and conveys, to the extent provided below, to Assignee, its successors and assigns, its right, title and interest in, to and under the Sublease, including but not limited to: (a) all Assignor's rights and interests in the Aircraft, Airframe, Engines, Parts and related equipment at any time subject to the Sublease; (b) any and all rents, insurance and condemnation proceeds, stipulated loss value payments and other moneys due or to become due, and any and all claims, rights, powers, remedies, title and interest of Assignor in and to or under or arising out of the Sublease (including without limitation all claims for damages or other sums arising upon sale or other disposition of or loss of use of or requisition of title or use of the Aircraft, Airframe, Engines, Parts and related equipment at any time subject to the Sublease or upon any event of default specified therein 1 69 (hereinafter referred to as a "Sublease Event of Default")) and all security which Assignor now or hereafter may hold for the obligations of Sublessee under the Sublease; (c) except as provided in Section 10, all rights, powers, privileges, remedies and other benefits of Assignor under the Sublease and all rights to make determinations, exercise options or elections, give or withhold consents, waivers and approvals, give notices and exercise remedies (including the right to declare a Sublease Event of Default and to repossess any property), or to take any other action under or in respect of the Sublease; and (d) all proceeds of the foregoing. This Assignment is a present assignment and shall be effective, and the security interests created hereby shall attach, immediately upon execution of this Assignment and shall not be conditioned upon the occurrence of a Sublease Event of Default. 2. Payments. All payments made by Sublessee pursuant to the Sublease shall be paid directly to Assignee or as Assignee shall otherwise direct from time to time. So long as no Event of Default or Default has occurred and is continuing, such payments shall be applied to the comparable obligation of Lessee under the Lease and any balance remaining after such application shall be paid promptly to Assignor or its order. Upon the occurrence of an Event of Default or Default, all payments shall be applied as provided in the Lease; at such time as there shall not be continuing any such Event of Default or Default, and provided that none of the remedies under the Lease or this Assignment shall have been exercised, such amounts, to the extent not theretofore applied, shall be paid to Assignor or its order. 3. Performance of Lessee's Obligations. It is expressly agreed that anything herein contained to the contrary notwithstanding, (i) Assignor shall remain liable under the Sublease to perform all the obligations assumed by it thereunder to the same extent as if this Assignment had not been executed, (ii) Assignee shall have no obligation or liability under the Sublease by reason of or arising out of this Assignment and Assignee shall not be required or obligated in any manner to perform or fulfill any obligation of Assignor under or pursuant to the Sublease, or to make any payment, or to make any inquiry as to the nature or sufficiency of any payment received by it, or to present or file any claim or to take any other action to collect or enforce the payment of any amounts to which it or they may be entitled hereunder at any time or times and (iii) at Assignee's option, Assignee may perform, or cause to be performed, all or any part of the obligations and agreements of Assignor under the Sublease, without releasing Assignor therefrom. Nothing in this Assignment shall in any way diminish or limit the provisions of Assignor's indemnities in Section 10 or Section 14 of the Lease with respect to any actual or alleged liability of Assignee to Sublessee in any way relating to or arising out of this Assignment or the Sublease. 4. Event of Default. Upon the occurrence of any Event of Default and at any time thereafter so long as the same shall be continuing, Assignee may, at its option, exercise one or more of the remedies set forth below, in the Lease or which may be available to it under the New York Uniform Commercial Code whether or not applicable in the relevant jurisdiction, as 2 70 Assignee in its sole discretion may determine, which remedies are cumulative and in addition to every other right or remedy provided by law: 4.1 Collection of Sublease Payments. Assignee may collect and retain all rents, proceeds, payments and other moneys due or to become due under the Sublease and apply such amounts to the payment of the obligations, all as Assignee, in its discretion, shall determine; and/or 4.2 Maintenance of Sublease. Assignee may assume all or any part of Assignor's right, title and interest in the Sublease and maintain the Sublease in full force and effect, with Assignee substituted for Assignor as sublessor therein, and in any such event all of the right, title and interest of Assignor therein shall be extinguished and Assignee shall be entitled to collect and retain all rents and payments made by Sublessee thereunder; and/or 4.3 Sale. Assignee may sell at public or private sale, without appraisal, for such price as it may deem fair, the Sublease and all Assignor's right, title and interest therein. 5. Expenses and Fees. Assignor shall pay to Assignee on demand all reasonable attorneys' fees and other reasonable expenses incurred by Assignee in protecting its interests granted hereunder or in exercising its rights and remedies provided hereunder. 6. Priority of Lease. The Sublease shall at all times be subject and subordinate to the Lease. Nothing in this Assignment, including without limitation the exercise of any rights or remedies hereunder, shall preclude or in any way affect Assignee's right to exercise the rights, powers and remedies provided or permitted under the Lease, including Assignee's rights to terminate and avoid the Sublease, to repossess the Aircraft, Airframe, any Engine or any Part as permitted by the Lease and to require Assignor and/or Sublessee to deliver such Aircraft, Airframe, Engine or Part forthwith upon such repossession. 7. Waiver, Invalidity of Remedies. Assignor waives any right to require Assignee to pursue any other remedy it may have against Assignor, any guarantor or any surety. The invalidity or unenforceability of any remedy in any jurisdiction shall not invalidate such remedy or render it unenforceable in any other jurisdiction. The invalidity or unenforceability of any of the remedies provided herein in any jurisdiction shall not in any way affect the right to enforcement in such jurisdiction or elsewhere of any of the other remedies provided herein. 8. Power of Attorney. Assignor does hereby constitute Assignee, and its successors and assigns, Assignor's true and lawful attorney-in-fact, with power of substitution, irrevocably, and coupled with an interest, with full power (in the name of Assignor or otherwise) and at the expense of Assignor but for the use and benefit of Assignee, so long as an Event of Default has occurred and is continuing, to enforce each and every term and provision of the Sublease, to ask, require, demand, receive, collect, compound and give acquittance and discharge for any and all moneys and claims for moneys due and to become due under or arising out of the Sublease, to endorse any checks or other instruments or orders in connection therewith, to settle, compromise, compound or adjust any such claims, to exercise and enforce any and all claims, 3 71 rights, powers or remedies of every kind and description of Assignor under or arising out of the Sublease, to file, commence, prosecute, compromise and settle in the name of Assignor or Assignee or otherwise any suits, actions or proceedings at law or in equity in any court, to collect any such moneys or to enforce any rights in respect thereto on all other claims, rights, powers and remedies of every kind and description of Assignor under or arising out of the Principal Sublease and generally to sell, assign, transfer, pledge or make any agreement with respect to or otherwise deal with any of such claims, rights, powers and remedies as fully and completely as though Assignee were the absolute owner thereof for all purposes, and at such times and in such manner as may seem to Assignee to be necessary or advisable or convenient or proper in its absolute discretion. 9. Execution of Documents. Assignor agrees that at any time or from time to time, upon the written request of Assignee, Assignor shall promptly and duly execute and deliver any and all such further instruments, documents and financing statements and do such other acts and things as Assignee may deem necessary or desirable in order to obtain the full benefits of this Assignment and of the rights and powers granted herein. 10. Exercise of Sublease Rights. Unless and until an Event of Default shall have occurred and be continuing, Assignor shall be permitted, to the exclusion of Assignee, to amend, modify or supplement the Sublease, to exercise any election or option or give any notice, consents waiver or approval under or in respect of the Sublease and to exercise all other rights, powers or remedies thereunder. Notwithstanding the foregoing, Assignor will not, without Assignee's consent, amend, modify or supplement the Sublease or waive any provision thereof if such amendment, modification, supplement or waiver would materially adversely affect the rights of Assignee in the Aircraft or the Lease or would conflict with any provision of the Lease. 11. Assignor's Representations and Warranties. Assignor represents and warrants that the Sublease is in full force and effect and is enforceable in accordance with its terms, that Assignor is not in default thereunder and that it has not assigned, transferred or pledged, and hereby covenants that it will not assign, transfer or pledge, the whole or any part of the rents, moneys, claims, rights, powers, remedies, titles or interests hereby assigned to anyone other than Assignee, its successors and assigns. 12. Assignment. The Assignee may at any time sell, assign, transfer or otherwise dispose of its interest in all or any part of the Lease, this Assignment and in the property and security created thereby and hereby in accordance with the provisions of the Lease. Assignor shall not assign or delegate any or its rights or obligations hereunder, except pursuant to the Lease. 13. Governing Law. This Assignment is being delivered in the State of New York. This Assignment, including all matters of construction, validity and performance, shall in all respects be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made in such State by residents thereof and to be performed entirely within such State. 4 72 14. Counterparts. This Assignment may be executed in several counterparts, each of which shall be deemed an original, and all such counterparts shall constitute one and the same instrument. 15. Miscellaneous. This Assignment may not be amended, supplemented, modified or waived without the prior written consent of Assignee, its successors and assigns. This Assignment shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. Except as otherwise provided in this Agreement, all notices hereunder shall be in writing and shall be given by mail, cable, telex, teletype or any other customary means of written communication at the addresses set forth on the signature pages hereof, or at such other addresses as may be specified by written notice to the parties hereto, and shall become effective when received by the addressee. IN WITNESS WHEREOF, Assignor and Assignee have duly executed this Assignment as of the date first set forth above. NEW YORK AIRLINES, INC. By: ------------------------- Title: ---------------------- GATX LEASING CORPORATION By: ------------------------- Title: ---------------------- 5 73 CONSENT AND AGREEMENT CONTINENTAL AIRLINES, INC., a Delaware corporation ("Sublessee"), hereby acknowledges receipt of notice of and consents to all the terms of the foregoing Assignment of Sublease (the "Assignment") and agrees that: 1. Sublessee shall be fully bound by all terms and conditions of the Assignment. The capitalized terms used herein shall have the meanings provided for in the Assignment. 2. All representations, warranties, indemnities, covenants and agreements of Sublessee under the Sublease shall inure to the benefit of Assignee, its successors and assigns, to the same extent as if originally named the lessor therein. 3. Assignee, its successors and assigns, shall not be liable for any of the obligations or duties of Assignor under the Sublease, nor shall the Assignment give rise to any duties or obligations whatsoever on the part of Assignee, its successors and assigns, owing to Sublessee. 4. The Sublease is fully subject and subordinate in all respects to the Lease and to Assignee's rights, powers and remedies thereunder including the right to terminate the Lease and repossess the Aircraft. 5. Notwithstanding the exercise of any rights, powers and remedies under or in respect of the Sublease or the Lease, Sublessee shall not be relieved of the obligation to perform any or all of the terms and provisions to be performed by Sublessee under the Sublease and the Sublease shall not terminate or be otherwise affected by reason of any such exercise of any such rights and remedies, except only by termination thereof at the election of Assignor or Assignee, its successors and assigns, in connection with the exercise of their respective rights and remedies under the Sublease or the Lease. 6. As provided in paragraph 2 of the Assignment, Sublessee shall pay all amounts referred to in paragraph l(b) of the Assignment due and to become due to Assignor under the Sublease directly to Assignee or as otherwise directed from time to time by Assignee. 7. Sublessee's obligation to make all payments due under the Sublease shall be absolute and unconditional and shall in no event be subject to any rights of set-off, recoupment, deduction or counterclaim or any other defense which Sublessee may now or hereafter have against Assignor, Assignor or any other Person, all of which Sublessee hereby waives. All such payments so made shall be final, and Sublessee will not seek to recover for any reason whatsoever any payments so made. 1 74 8. Sublessee shall not amend, modify or supplement the Sublease or waive any of the provisions thereof without the prior written consent of Assignee, except that Sublessee may amend, modify or supplement the Sublease without such prior written consent to the extent that Assignor may amend, modify or supplement the Sublease without Assignee's prior written consent as provided in Section 10 of the Assignment. 9. Sublessee hereby represents and warrants that (a) Sublessee is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, (b) the making and performance of the Sublease and this Consent and Agreement have been duly authorized by all necessary corporate action on the part of Sublessee, do not require any stockholder approval and do not contravene Sublessee's Certificate of Incorporation or by-laws or any indenture, credit agreement or other contractual agreement to which Sublessee is a party or by which it is bound, (c) the Sublease constitutes, as of the date thereof and at all times thereafter to and including the date of this Consent and Agreement, and this Consent and Agreement constitutes, valid and binding obligation of Sublessee enforceable against Sublessee in accordance with its terms, and (d) no Sublease Event of Default has occurred and is continuing. CONTINENTAL AIRLINES, INC. By: ------------------------ Title: 2 75 GUARANTEE, dated as of November 6, 1986 from TEXAS AIR CORPORATION, a Delaware corporation ("Guarantor"), to GATX Leasing Corporation (the "Beneficiary") Relating to Lease of Aircraft VII A. Pursuant to the terms of that certain Lease Agreement, dated as of November 7, 1969, as amended and supplemented as of the date hereof (the "Original Lease Agreement") the Beneficiary has leased to Frontier Airlines, Inc. ("Frontier") certain aircraft together with engines initially installed thereon and each described in Exhibit A hereto (collectively, the "Aircraft"). One of the Aircraft bears FAA Registration No. N 737OF (hereinafter referred to as "Aircraft V"), the second Aircraft bears FAA Registration No. N 7378F (hereinafter referred to as "Aircraft VIII), and the third Aircraft bears FAA Registration No. N 7379F (hereinafter referred to as "Aircraft VII"). B. Frontier Airlines, Inc., a Nevada corporation, Frontier Leaseco One, Inc., a Nevada corporation, and Frontier Leaseco Two, Inc., a Nevada corporation, (collectively, the "Frontier Companies") are presently debtors and debtors-in-possession in Chapter 11 cases pending in the United States Bankruptcy Court for the District of Colorado (the "Bankruptcy Court"). C. Pursuant to that certain Asset Purchase Agreement dated September 15, 1986 between Texas Air Corporation ("Texas Air") and the Frontier Companies (the "Asset Purchase Agreement"), the Original Lease Agreement is to be assumed by Frontier and assigned to New York Airlines, Inc. (the "Lessee") subject to the terms thereof. D. Pursuant to the Asset Purchase Agreement, Beneficiary will execute a consent of even date herewith to the Assumption and Assignment of even date herewith assigning the Original Lease Agreement to Lessee (the "Consent"). E. Pursuant to an Agreement Concerning Assumption of New Leases between Beneficiary and Lessee of even date herewith, (the "Assumption Agreement"), such parties will enter into a New Lease Agreement of even date herewith relating to Aircraft VII (the "Lease"). F. It is a condition precedent to the execution of the Consent, the Assumption Agreement and the Lease that the Guarantor enter into this Guarantee (as at any time amended, supplemented and modified, the "Guarantee"). 1. Definitions. Unless otherwise defined herein or otherwise required by the context, terms used herein (including terms used in the above recitals) which are defined in the Lease are used in this Guarantee as so defined. 2. Guarantee. For value received and to induce Beneficiary to enter into the Consent, the Assumption Agreement and the Lease, Guarantor does hereby absolutely, unconditionally and irrevocably guarantee to Beneficiary, its successors and assigns: the due and punctual performance and observance by Lessee of each and every covenant and agreement to be 1 76 performed or observed by Lessee under the Lease, including, without limitation, the due and punctual payment by Lessee of Rent, including Basic Rent, Renewal Rent, if any, and Supplemental Rent, if any, and each and every amount which Lessee is or at any time may become obligated to pay under the Lease (all such covenants, agreements, payments and other obligations referred to in this Section are hereinafter referred to as the "Obligations"). 3. Absolute Guarantee. This Guarantee shall be an absolute, continuing, unconditional and irrevocable guarantee and shall remain in full force and effect as to Guarantor until such time as the Obligations are paid, performed and observed in full. 4. Strict Observance. Guarantor hereby agrees that the Obligations will be paid, performed and observed strictly in accordance with their terms and strictly in accordance with the terms and provisions of the Lease, regardless of the enforceability thereof against Lessee and regardless of any law, regulation or decree now or hereafter in effect which might in any manner affect the Obligations, or the rights of Lessee with respect thereto as against Beneficiary. The obligations of Guarantor under this Guarantee are absolute, irrevocable and unconditional, without regard to the obligations of any other Person, and shall not in any manner be affected by reason of any action taken or not taken by Beneficiary, which action or inaction is herein consented and agreed to, or of any lack of prior enforcement or retention of any rights against Lessee, Guarantor or any other Person or any property or of the partial or complete illegality, unenforceability or invalidity of the Obligations or the Lease, any other guarantee or surety agreement, pledge, assignment or other security for any Obligations, or any other circumstances or condition (whether or not Guarantor or Lessee shall have any knowledge or notice thereof), including without limitation: (a) any termination, amendment or modification of, or deletion from, or addition or supplement to, or other change in any of the Lease, or any other instrument or agreement applicable to any of the parties to such agreements, or to the Aircraft or any part thereof, or any assignment, mortgage or transfer of any thereof, or of any interest therein, or any sale, leasing or subleasing of the Aircraft, or any furnishing or acceptance of additional security, or any release of any security, for the obligations of Lessee under the Lease , or the failure of any security or the failure of any Person to perfect any interest in any collateral security; (b) any failure, omission or delay on the part of Lessee or any other Person to conform or comply with any term of the Lease, including without limitation, failure to give notice to Guarantor of the occurrence of a default or an Event of Default under the Lease; (c) any waiver of the payment, performance or observance of any of the obligations, conditions, covenants or agreements contained in the Lease, or any other waiver, consent, extension, indulgence, compromise, settlement, release or other action or inaction under or in respect of the Lease, or any obligation or liability of Lessee or the Beneficiary, or any exercise or nonexercise of any right, remedy, power or privilege under or in respect of the Lease or any such obligation or liability; (d) any extension of time for payment of Rent, or any other Obligation, or of the time for performance of any other obligations, covenants or agreements under or arising out of the Lease, or the extension or the renewal of any thereof; (e) the exchange, surrender, substitution or modification of any collateral security for any of the Obligations; (f) any failure, omission or delay on the part of the Beneficiary to enforce, assert or exercise any right, power or remedy conferred on it in this Guarantee, or any such failure, omission or delay on the part of the Beneficiary in connection with the Lease, or any other action on the part of the Beneficiary; (g) any voluntary or involuntary bankruptcy, 2 77 insolvency, reorganization, arrangement, readjustment, assignment for the benefit of creditors, composition, receivership, conservatorship, custodianship, liquidation, marshaling of assets and liabilities or similar proceedings with respect to Lessee, Guarantor, any other Person or any of their respective properties or creditors, or any action taken by any trustee or receiver or by any court in any such proceeding; (h) any limitation on the liability or obligations of Lessee or any other Person under the Lease, or any discharge, termination, cancellation, frustration, irregularity, invalidity or unenforceability, in whole or in part, of the Lease; (i) any defect in the title, compliance with specifications, 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 of the Aircraft or any portion thereof by Lessee or any other Person for any reason whatsoever (including, without limitation, any governmental prohibition or restriction, condemnation, requisition, seizure or any other act on the part of any governmental or military authority, or any act of God or of the public enemy) regardless of the duration thereof (even though such duration would otherwise constitute a frustration of the Lease), whether or not resulting from accident and whether or not without fault on the part of Lessee or any other Person; (j) any merger or consolidation of Lessee or Guarantor into or with any other corporation, or any sale, lease or transfer of any of the assets of Lessee or Guarantor to any other Person; (k) any change in the ownership of any shares of capital stock of Lessee, or any change in the corporate relationship between Lessee and Guarantor, or any termination of such relationship; (1) to the extent permitted by law, any release or discharge, by operation of law, of Guarantor from the performance or observance of any obligation, covenant or agreement contained in this Guarantee; or (m) any other condition or circumstance which might otherwise constitute a legal or equitable discharge, release or defense of a surety or guarantor, or which might otherwise limit recourse against Guarantor, it being agreed that the obligations of Guarantor hereunder shall not be discharged except by payment or performance as herein provided. No delay in making demand on Guarantor for satisfaction of the obligations of Guarantor hereunder shall prejudice the right of the Beneficiary to enforce the obligations of Guarantor hereunder. Guarantor further agrees not to cause or permit any alteration in the time, amount, currency or manner of payment, performance or observance by Lessee of any of or all the Obligations. 5. Waivers of Notice, Etc. Guarantor hereby waives diligence, presentment, demand, protest or notice of any kind whatsoever with respect to this Guarantee or the Obligations, including without limitation, (a) notice of acceptance of this Guarantee, notice of nonpayment or nonperformance of any of the Obligations, notice of an Event of Default or other default and notice of any of the matters described in Paragraph 4, (b) any right to the enforcement, assertion or exercise against Lessee or any other Person or the Aircraft or Spare Engine or any other collateral security for the Obligations of any right, power, privilege or remedy conferred in the Lease or otherwise, (c) any requirement to exhaust any remedies or to mitigate the damages resulting from a default under the Lease, (d) any notice of any sale, transfer or other disposition of any right, title to or interest in the Lease or the Aircraft, or any part thereof, (e) any exoneration or release from the Obligations hereunder resulting from any loss by Guarantor of its rights of subrogation hereunder, (f) any requirement of promptness in commencing suit against any Person who may be or become liable thereon and the giving of notice to or making any claim or demand on Guarantor, Lessee or any other Person or (g) any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge, release or defense of a guarantor or surety or 3 78 which might otherwise limit recourse against Guarantor. Guarantor agrees that it shall not be required to consent to, or to receive any notice of, any supplement to or amendment of, or waiver or modification of, the terms of the Lease. 6. Extensions, Etc. (a) Guarantor consents and agrees that the Beneficiary, may in its sole discretion, at any time or from time to time, (i) renew, extend, change or modify the time, manner, place or terms of payment, performance or observance of any or all of the Obligations, (ii) apply payments by Lessee or Guarantor to any Obligations, (iii) exchange, release or surrender any security or property which may at any time be held by them, or any of them, (iv) release any surety or guarantor for or of any of the Obligations, (v) settle or compromise any or all of the Obligations with Lessee or any Person liable thereon or (vi) subordinate the payment, performance or observance of all or any part thereof to the payment, performance or observance of any other debts or obligations which may be due or owing to them or any other Person, all in such manner and upon such terms as the Beneficiary, may deem proper, without notice to or further assent from Guarantor, who agrees to remain bound under this Guarantee notwithstanding any such extension, change, modification, amendment, release, surrender, settlement, compromise or subordination. (b) The obligations of Guarantor hereunder shall terminate and be of no force or effect upon the assumption by Continental Airlines, Inc. of all of Lessee's obligations under the Lease, whether by merger, agreements operation of law or otherwise so long as Continental Airlines, Inc. then qualifies as a permitted Sublessee pursuant to Section 6.O1H of the Lease and no Event of Default shall have occurred and be continuing. 7. No Waiver. No failure or delay in exercising any right under this Guarantee shall operate as a waiver thereof, nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right of the Beneficiary, under this Guarantee or the Lease. B. Guarantee of Performance. This Guarantee is a guarantee of performance and not of collection and Guarantor waives any right to require that any action against Lessee be taken or exhausted prior to action being taken against Guarantor. Guarantor shall pay to Beneficiary, on demand all reasonable attorneys' fees and other reasonable expenses incurred by the Beneficiary in protecting its interests hereunder or in exercising its rights and remedies provided hereunder, together with interest on such sums at the Incentive Rate, from the date when such expenses are so incurred. 9. Bankruptcy, Etc. Guarantor agrees that if at any time all or any part of any payment or performance theretofore applied by any Beneficiary to any of the Obligations is or must be rescinded or returned by the Beneficiary for any reason whatsoever (including, without limitation, the insolvency, bankruptcy or reorganization of Lessee), such Obligations shall, for the purposes of this Guarantee, to the extent that such payment or performance is or must be rescinded or returned, be deemed to have continued in existence, notwithstanding such application by the Beneficiary, and this Guarantee shall continue to be effective or be reinstated, as the case may be, as to such Obligations, all as though such application by the Beneficiary had not been made. If an 4 79 event permitting the declaration of default under the Lease shall at any time have occurred and be continuing, and such declaration of default shall at such time be prevented by reason of the pendency against Lessee or any other Person of a case or proceeding under a bankruptcy or insolvency law, Guarantor agrees that, for purposes of this Guarantee and its obligations hereunder, the Lease shall be deemed to have been declared in default with the same effect as if the Lease had been enforceable in accordance with the terms thereof, and Guarantor shall forthwith pay the amounts specified by the Beneficiary to be paid thereunder, any interest thereon and any other amounts guaranteed hereunder without further notice or demand. 10. Guarantor's Representations, Warranties and Covenants. The representations, warranties and covenants of Guarantor set forth in Article V of the Asset Purchase Agreement are hereby incorporated by reference herein as if set forth in full at this place. 11. Assignment. The Beneficiary may at any time sell, assign, transfer or otherwise dispose of its interest in all or any part of the Lease, this Guarantee, and in the property and interests subject thereto and hereto, in accordance with the provisions of the Lease. Guarantor shall not assign any of its rights or obligations hereunder, including any claim arising by subrogation, except pursuant to a consolidation, merger or conveyance, transfer or lease of all or substantially all its assets. 12. Guarantor's Obligations; No Setoff. Guarantor's obligation to make all payments due hereunder, and to perform its other obligations hereunder shall be absolute and unconditional and shall in no event be subject to any right of setoff, recoupment, deduction or counterclaim or any other defense which Guarantor or any other Person may now or hereafter have against the Beneficiary or any other Person, which Guarantor hereby waives; all such payments so made shall be final, and Guarantor will not seek to recover for any reason whatsoever any payments so made. 13. Subrogation. The Guarantor shall be subrogated to the rights, if any, of the Beneficiary in respect of any ;matter with respect to which an amount has been payable by the Guarantor hereunder; provided, however, any subrogation rights to which Guarantor becomes entitled by reason of performance of any of its obligations hereunder shall be subject and subordinate to the rights of Beneficiary against Lessee under the Lease, and the exercise of any such subrogation rights of Guarantor shall be deferred until all Obligations have been fully performed. No payment or performance hereunder by Guarantor shall give rise to any claim of Guarantor against the Beneficiary. 14. Governing Law. This Guarantee, including all matters of construction, validity and performance, shall in all respects be governed by, and construed in accordance with, the laws of the State of New York applicable to contracts made in such state by residents thereof and to be performed entirely within such state. Wherever possible, each provision of this Guarantee shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Guarantee shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition without invalidating the remainder of such provision or the remaining provisions of this Guarantee. 5 80 15. Amendments, Changes, Etc. No term or provision of this Guarantee may be amended, changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which enforcement of the amendment, change, waiver, discharge or termination is sought. TEXAS AIR CORPORATION By: ------------------ Title: 6 81 Exhibit A 1) One (1) Boeing 737-2CO Aircraft which consists of the following components: a) airframe: FAA Registration Mark N-737OF Manufacturer's Serial No. 20073 b) engines: Two (2) Pratt & Whitney JT8D-9 engines bearing, respectively, Manufacturer's Serial Nos. P674344B and P 674380B 2) One (1) Boeing 737-2CO Aircraft which consists of the following components: a) airframe: FAA Registration Mark N-7379F Manufacturer's Serial No. 20071 b) engines: two (2) Pratt & Whitney JT8D-9 engines bearing, respectively, manufacturer's Serial Nos. P 674314B and P 674384B 3) One (1) Boeing 737-2CO Aircraft which consists of the following components: a) airframe: FAA Registration Mark N-7378F Manufacturer's Serial No. 20070 b) engines: Two (2) Pratt & Whitney JT8D-9 engines, bearing, respectively, Manufacturer's Serials Nos. P 674250B and P 674299B Each of the engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 7 EX-10.17 7 TRUST AGREEMENT 1 EXHIBIT 10.17 TRUST AGREEMENT (N7379F) DATED AS OF DECEMBER 30, 1986 AMONG AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP, as Owner Participant, NORTH AMERICAN AIRCRAFT FINANCE CORPORATION, as Owner Participant, UNITED STATES AIRLEASE, INC. as Owner Participant and Agent, AND TRUST COMPANY FOR USL, INC., as Trustee Concerning One (1) Boeing 737-200 Series Aircraft with FAA Registration No. N7379F Leased to New York Airlines, Inc. and Subleased to Continental Airlines, Inc. 1 2 TABLE OF CONTENTS
ARTICLE PAGE - ------- ---- I Definitions 6 1.01 6 1.02 9 II Authority to Execute and Perform Various 9 Documents; Declaration of Trust by Trustee 2.01 Authority to Execute and Perform Various 9 Documents 2.02 Replacements 9 2.03 Declaration of Trust by Trustee 10 III Beneficial Interest of Owner Participants in 10 Trust Estate and Certificates 3.01. Beneficial Interest of Each Owner 10 Participant 3.02. The Certificates 10 3.03. Issuance of Certificates 11 3.04 Payments from Trust Estate Only 11 3.05 Payment to Holder of Certificate 12 3.06 Transfer of Certificate 12 3.07 Mutilated, Restored, Lost, or Stolen Certificates 12 3.08 Payment of Expenses upon Transfer 12 3.09 Payments by Each Owner Participant 12 IV Acceptance of Lease Property 13 4.01 Acceptance of Lease Property 13 4.02 Conditions Precedent 13 4.03 Authority Without Express Instructions 13 V. Omitted 13 VI Distributions 13 6.01 Distribution of Basic Rent 14 6.02 Distribution of Payments 14
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ARTICLE - ------- 6.03 Distribution of Trust Estate 14 VII Duties of the Trustee 14 7.01 Notice of Event of Default 14 7.02 Action Upon Instructions 15 7.03 Indemnification 15 7.04 No Duties Except as Specified in 15 Trust Agreement or Instructions 7.05 No Action Except Under Specified 16 Documents or Instructions 7.06 Absence of Duties 16 VIII The Trustee 16 8.01 Acceptance of Trusts and Duties 16 8.02 Furnishing of Documents 16 8.03 No Representations or Warranties as to 17 Lease Property or Documents 8.04 No Segregation of Monies; No Interest 17 8.05 Reliance; Advice of Counsel 17 8.06 Not Acting in Individual Capacity 17 IX Indemnification of Trustee by 18 Owner Participants 9.01 Owner Participants to Indemnify 18 Trustee 9.02 Compensation and Expense 19 X Termination of Trust Agreement 19 10.01 Termination of Trust Agreement 19 10.02 Termination at Option of Owner 20 Participants XI Successor Trustees, Co-Trustees and Separate 20 Trustees 11.01 Resignation of Trustee; Appointment of 20 Successor 11.02 Co-Trustees and Separate Trustees 21 XII Concerning the Agent 21
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ARTICLE - ------- 12.01 Appointment of Agent 21 12.02 Agent's Acceptance of Appointment 22 12.03 Agreements of the Agent 22 12.04 Standard of Care and Diligence 22 12.05 Resignation or Removal of Agent 22 12.06 Estates and Rights of Successor Agent 23 12.07 Merger or Consolidation of Agent 23 12.08 Agent's Duty to Indemnify 23 XIII Supplements and Amendments 23 XIV Sale, Transfer or Mortgage of Lease 24 Property 14.01 General 24 14.02 Permitted Transfers by the Owner 24 Participants (a) Transfers by Airlease 24 (b) Transfers by the Partnership 24 (c) Transfer by NAF 24 14.03 Right of First Refusal as to an 24 Owner Participant's Trust Estate Interest (a) Offering Notice 24 (b) Requirements of Offer 25 (c) Procedure 25 (d) Acceptance of Sale Offer 25 (e) Right to Sell to Third Party 26 (f) Limitations on Exercise 26 14.04 Closings 26 (a) Location and Time Periods 26 (b) Closing Conditions 27 (c) Event of Loss 27 (d) Partial Loss 27 14.05 Termination of Obligations 27 14.06 Agreements with Transferees 27 14.07 Restraining Order 28
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ARTICLE - ------- 14.08 Sale by an Owner Participant of an Owner Participant's Trust Estate 28 XV Miscellaneous 28 15.01 No Legal Title to Trust Estate in 28 Owner Participants 15.02 Sale of Aircraft, etc., by Trustee is 28 Binding 15.03 Limitations on Rights of Others 29 15.04 No Partnership for Tax Purposes 29 15.05 Notices 29 15.06 Severability 30 15.07 Limitation on Liability of Owner 30 Participants and Agent 15.08 Separate Counterparts 30 15.09 Successors and Assigns 30 15.10 Headings 30 15.11 Governing Law 30 Schedule 1
5 6 TRUST AGREEMENT (for N7379F) THIS TRUST AGREEMENT dated as of December 30, 1986, by and among Trust Company for USL, Inc., a trust company organized under the laws of the State of Illinois, in its individual capacity as expressly stated herein and otherwise not in its individual capacity but solely as trustee hereunder (herein in such capacity with its permitted successors and assigns called the "Trustee"); Airlease Ltd., A California Limited Partnership (herein referred to as the "Partnership" or "Owner Participant"); North American Aircraft Finance Corporation, a California corporation (herein referred to as "NAF" or "Owner Participant"); and United States Airlease, Inc., a California corporation, (herein sometimes referred to as "Airlease" or "Owner Participant" in its separate capacity as Owner Participant and at other times, herein sometimes referred to as "Agent" in its separate capacity as Agent). (The Partnership, NAF, and Airlease are herein sometimes referred to collectively as the "Owner Participants.") W I T N E S S E T H WHEREAS, the Owner Participants are entering into this Trust Agreement with the Trustee for the purpose of acquiring an aircraft and the Trustee shall purchase such aircraft upon the instructions of the Owner Participants; with funds advanced by each of the Owner Participants. WHEREAS, Each of NAF, the Partnership, and Airlease shall hold, an undivided one-third (1/3) beneficial interest in the Lease Property (as hereinafter defined); WHEREAS, upon the instructions of the owner Participants, the Trustee is entering into an agreement with GATX Leasing Corporation ("Lessor") to acquire the Lessor's interest in seven (7) Boeing 737-200 series aircraft each subject to a lease ("Lease") between Lessor and New York Airlines, Inc. ("NYA"), and a sublease ("Sublease") between NYA, as Sublessor, and Continental Airlines, Inc., as Sublessee ("Continental"); NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows: ARTICLE I Definitions Section 1.01. For all purposes of this Agreement, the following terms shall have the following meanings (such definitions to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" means any individual, partnership, joint venture, estate, association, corporation, trust company, trust or other entity (collectively, "Person") that directly or indirectly controls, is controlled by, or is under common control with the Person in question. 6 7 "Agreement" means this Trust Agreement, as it may hereafter from time to time be supplemented, amended, waived, or modified pursuant to the applicable provisions hereof. "Aircraft" means the Boeing 737-200 series airframe together with the engines pertaining thereto as more particularly described and identified in Schedule 1 hereto. "Aircraft" also means, if the context so requires the Aircraft Records. "Aircraft Records" means with respect to any Aircraft, (i) the maintenance log books, flight log book, summaries of operations or work performed, reports of repair, alterations, rebuild, installation, modification, removal and replacement and inspection or overhaul of the Airframe, Engine or Part and (ii) all publications, notebooks, data, operations manuals, maintenance manuals, Aeronautics Authority-approved maintenance program, balance loading manuals and equipment lists. "Airframe" means (A) the used Boeing 737-200 series Airframe having the Manufacturer's serial number and the FAA registration number as set forth in Schedule 1 attached hereto, and (8) any and all Parts so long as the same shall be , incorporated or installed in or attached to the Airframe, or so long as title thereto shall remain vested in the Trustee, after removal from the Airframe. "Application for Aircraft Registration" means the Application for Aircraft Registration (AC Form 8050-1) with respect to the Aircraft. "Assigned Contracts" means all of the agreements identified in Section 7 of Schedule 2 to the Purchase Agreement with respect to the Aircraft. "Certificate" means a certificate substantially in the form included in Article III hereof issued by the Trustee hereunder. "Closing Date" means the date the Aircraft is purchased by the Trustee pursuant to the Purchase Agreement. "Engine" means: (i) any of the engines listed by manufacturer's serial number in Schedule 1 attached hereto whether or not from time to time thereafter installed on the Airframe or installed on any other airframe or any other aircraft; (ii) any engine which may from time to time be substituted, or be a replacement or addition pursuant to the Lease for any such Engine; and (iii) 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 the Trustee in accordance with the terms of the applicable Lease after removal from any such Engine. "FAA" shall mean the Federal Aviation Administration and/or Administrator of the Federal Aviation Administration or any person, governmental department, bureau, commission or agency succeeding to the functions thereof, "FAA Bill of Sale" means the bill of sale (AC Form 8050-2), covering the Aircraft, executed by Lessor, in favor of the Trustee, dated the Closing Date. 7 8 "Lease" means a Lease Agreement, dated as of November 6, 1986, including the Lease Supplement executed pursuant thereto, between Lessor, as Lessor, and NYA, as Lessee, covering the Aircraft as said Lease Agreement may hereafter from time to time be supplemented, amended, waived or modified. "Lease Assignment" means an Assignment and Assumption Agreement between the Trustee and Lessor with respect to the Aircraft and the Assigned Contracts in the form of Exhibit B to the Purchase Agreement as such Assignment and Assumption Agreement may hereafter from time to time be supplemented, amended, waived or modified. "Lease Property" means the Lease, the Assigned Contracts, the Aircraft, and all income, deductions, credits and other benefits to which an owner of property would be entitled to as lessor under the Lease, and owner of the Aircraft, including without limitation, all rental payments under the Lease and Assigned Contracts, the right to possession of the Aircraft, and all proceeds upon the sale or re-lease of the Aircraft. "Lender" means any Person whose principal business is providing financing and which provides financing to the Trustee or Owner Participants and is granted a Lien on the Aircraft, or the Airframe, or an Engine or Part. "Lessee" means NYA and its permitted successors and assigns. "Lien" means any mortgage, pledge, lien, charge, encumbrance, lease, exercise of rights, security interest or claim. "Majority in Interest of Owner Participants", as of a particular date of determination, means the Owner Participant(s) having in excess of 75% of the aggregate original investment of all Owner Participants paid to the Trustee for payment of the Lease Property as of such date. "Operative Documents" means this Agreement, the Assigned Contracts, the Lease Assignment, the Certificates, the Purchase Agreement, the Application for Aircraft Registration, the FAA Bill of Sale and the Warranty Bill of Sale, and all other agreements, instruments and certificates contemplated by such agreements. "Parts" means any and all appliances, parts, instruments, appurtenances, accessories, furnishings, seats and other equipment of whatever nature (other than complete Engines or engines), which (A) are from time to time incorporated or installed in or attached to the Airframe or an Engine, or (B) having been so installed or attached, are later removed therefrom, so long as title thereto remains vested in the Trustee in accordance with the Lease. "Part" means any one of the Parts. "Purchase Agreement" means the Aircraft Purchase Agreement, dated as of December 30, 1986, between the Trustee and Lessor, as such Purchase Agreement may hereafter from time to time be supplemented, amended, waived or modified. "Sublessee" means Continental. 8 9 "Trust Estate" means all estate, right, title and interest of the Trust in and to the Operative Documents, any funds given to the Trustee by the Owner Participants, and the Lease Property, including, without limitation, all amounts of rent, insurance proceeds, stipulated loss value payments, and requisition, indemnity or other payments of any kind (1) for or with respect to the Lease Property or (2) payable to the Trustee under the Purchase Agreement, Lease Assignment, Lease, or Assigned Contracts, or with respect to the Lease Property, excluding any indemnity payments paid directly to an Owner Participant. "Warranty Bill of Sale" means the bill of sale covering the Aircraft in the form of Exhibit A to the Purchase Agreement. Section 1.02. For all purposes of this Agreement, any term used but not defined herein shall have the meanings assigned to it in the Lease, including, without limitation, the following: "Basic Rent," "Default" and, "Event of Default." ARTICLE II Authority to Execute and Perform Various Documents Declaration of Trust by Trustee Section 2.01 Authority to Execute and Perform Various Documents-. Each Owner Participant hereby authorizes and directs the Trustee (i) to execute and deliver the Purchase Agreement, the Lease Assignment, the Certificates and the Application for Aircraft Registration with respect to the Aircraft, and all other agreements, instruments and certificates contemplated by the Operative Documents, and to accept the FAA Bill of Sale and the Warranty Bill of Sale and (ii) subject to the terms of this Agreement, to take other action in connection with the foregoing as the Owner Participants may from time to time direct in writing. Section 2.02 Replacements. The Owner Participants hereby authorize and direct the Trustee, and the Trustee agrees for the benefit of the Owner Participants that, in the event of a replacement airframe or engine, if any, being substituted pursuant to Section 12.01(A) of the Lease, it will, subject to Section 7.02 hereof and in compliance with the terms of Section 12.01(A) of the Lease: (a) to the extent not previously accomplished by a prior authorization, authorize a representative of the Trustee (who may be an employee of the Lessee) to accept delivery of the replacement airframe or engine; (b) accept from the Lessee or other vendor of a replacement airframe or engine a bill of sale or bills of sale and the invoice, if any, with respect to such replacement airframe or engine being furnished pursuant to Section 12.01(A) of the Lease; (c) execute and deliver a Lease Supplement covering such replacement engine and, to the extent requested by special counsel to any Owner Participant, execute and deliver any required amendments to this Agreement or any other Operative Document to which the Trustee is a party and request any required consent from the manufacturer of such replacement airframe or engine; and (d) transfer title to the airframe or engine being replaced to the Lessee. 9 10 Section 2.03 Declaration of Trust by Trustee. The Trustee hereby declares that it will and does hold the Trust Estate upon the trusts set forth herein for the sole use and benefit of the Owner Participants. ARTICLE III Beneficial Interest of Owner Participants in Trust Estate and Certificates Section 3.01. Beneficial Interest of Each Owner Participant. (a) Each Owner Participant shall have and retain an undivided one-third (1/3) beneficial interest in the Trust Estate, such interest to be evidenced by Certificate(s) to be issued hereunder. The Owner Participants have jointly agreed to participate in the purchase of the Lease Property on the Closing Date on the terms set forth in the Purchase Agreement, and each Owner Participant shall, on the Closing Date, wire transfer to the Lessor on behalf of the Trustee its pro-rata portion of the purchase price for the Aircraft and the other related Lease Property. Section 3.02. The Certificates. The Owner Participants hereby authorize and direct the Trustee, and the Trustee agrees that it will issue to each Owner Participant a Certificate substantially in the form set forth below as provided in Section 3.03 hereof. Trust Company for USL, Inc., Trustee Under Trust Agreement Dated as of December -, 1986 CERTIFICATE Issued in connection with the Aircraft hereinafter described: Boeing 737-200 series aircraft, Serial No. _________________ __________________,1986. $__________________ Trust Company for USL, Inc., not in its individual capacity but solely as Trustee (herein in such capacity called the "Trustee") under the Trust Agreement hereinafter referred to hereby certifies as follows: (i) this Certificate is one of the Certificates referred to in the certain Trust Agreement (N7379F) dated as of December 30, 1986, by and among the Trustee, Airlease Ltd., A California Limited Partnership, United States Airlease, Inc., and North American Aircraft Finance Corporation (herein called "Trust Agreement"); the defined terms therein not otherwise defined herein being herein used with the same meaning), which Certificates have been or are to be issued by the Trustee pursuant to the Trust Agreement; (ii) is an Owner Participant and owns an undivided % interest in the Trust Estate; and (iii) the holder of this Certificate has, ratably with the holders of the other Certificates, an undivided beneficial interest in the Trust Estate and is entitled to receive, ratably with the holders of the other Certificates issued with respect to the Trust Estate as provided in the Trust Agreement, a share of a portion of (1) the rental received or to be received by the Trustee with respect to the Trust Estate, or (2) upon the sale or lease of all or any part of the Trust Estate, any 10 11 proceeds received or receivable therefrom, as well as a share of certain other payments which may be received by the Trustee pursuant to the terms of the Trust Agreement as more particularly set forth therein. All amounts payable hereunder and under the Trust Agreement shall be paid only from the income and the proceeds from the Trust Estate and only to the extent that the Trustee shall have sufficient income or proceeds from the Trust Estate to make such payments in accordance with the terms of the Trust Agreement, except as specifically provided in Section 8.01 thereof; and each holder hereof, by its acceptance of this Certificate, agrees that it will look solely to the income and proceeds from the Trust Estate to the extent available for distribution to such holder as above provided and that neither the Owner Participants nor the Trustee (except to the extent provided in Section 8.01 of the Trust Agreement) are personally liable to the holder hereof for any amounts payable under this Certificate or the Trust Agreement. Reference is hereby made to the Trust Agreement for a statement of the rights of the holder of this Certificate and of the rights of the holders of the other Certificates, as well as for a statement of the terms and conditions of the trusts created by, and the rights, limitations of rights, obligations and duties of the Trustee set forth in, the Trust Agreement, to all of which terms and conditions each holder hereof agrees by its acceptance of this Certificate. Each holder hereof, by its acceptance of this Certificate, agrees not to transfer this Certificate except in accordance with the terms of Article XIV and Section 3.06 of the Trust Agreement. These Certificates have not been registered under the Securities Law of 1933, as amended, and may be transferred only in compliance with such law. IN WITNESS WHEREOF, the Trustee has duly executed this Certificate as of the date first above written. -------------- TRUSTEE Section 3.03. Issuance of Certificates. Each Certificate issued to an Owner Participant shall contain a statement by the Trustee that the holder of such Certificate has, ratably with the holders of the other Certificates, an undivided beneficial interest in the Trust Estate, and is entitled to receive, ratably with the holders of the other like Certificates as provided herein, a share of a portion of (i) the rental received or to be received by the Trustee for such Trust Estate, or (ii) upon the sale or lease of all or any part of the Trust Estate, any proceeds received or receivable therefrom, as well as a share of certain other payments which may be received by the Trustee pursuant to the terms hereof as more particularly set forth herein. Section 3.04. Payments from Trust Estate Only. All payments to be made under the Certificates and under this Trust Agreement shall be made only from the income and the proceeds from the Trust Estate and only to the extent that the Trustee shall have sufficient income or proceeds from the Trust Estate to make such payments in accordance with the terms of Article VI hereof, except as specifically provided in Section 8.01 hereof. Each holder of a Certificate, by its acceptance of such Certificate, agrees that it will look solely to the income and proceeds from the Trust Estate, to the extent available for distribution to such holder as above provided and that the Owner Participants are not personally liable to the holder of any Certificates. 11 12 Except as specifically provided herein, the Trustee is not liable to the Owner Participants for any amounts payable under this Agreement and is not subject to any liability in its individual capacity under this Agreement. Section 3.05. Payment to Holder of Certificate. Subject to Article VI, any amounts received by the Trustee and payable to each holder of a Certificate pursuant to this Trust Agreement will be payable to each such holder by wire transfer of immediately available funds to the bank for the account of each Owner Participant as such Owner Participant shall direct in writing, without any presentment or surrender of any Certificate. The Trustee may deem and treat the person in whose name any Certificate shall have been issued by the Trustee as the absolute owner and holder of such Certificate for the purpose of receiving payment of all amounts payable by the Trustee with respect to such Certificate and for all other purposes, and the Trustee shall not be affected by any notice to the contrary. Section 3.06. Transfer of Certificate. Subject to Article XIV, a holder of a Certificate intending to transfer any Certificate held by such holder to a new holder shall surrender such Certificate to the Trustee, together with a written request from such holder for the issuance of a new Certificate, specifying the name and address of the transferee and evidence that the conditions set forth herein for such transfer have been satisfied. Promptly upon receipt of such documents the Trustee will issue a new Certificate of the same type, dated the same date or dates, in the amounts indicated, and designated as issued in connection with the Aircraft as the Certificate surrendered, and naming such transferee as shall be specified in the written request from such holder, the Trustee shall not be required to exchange any surrendered Certificate as above , provided during the 10-day period preceding the due date of any payment on such Certificate. Section 3.07. Mutilated, Destroyed, Lost, or Stolen Certificates. If any Certificate shall become mutilated, destroyed, lost or stolen, the Trustee shall, upon the written request of the holder of such Certificate, execute and deliver in replacement thereof a new Certificate, in the same original amount, dated the same date, as the Certificate so mutilated, destroyed, lost or stolen. If the Certificate being replaced has become mutilated, such Certificate shall be surrendered to the Trustee. If the Certificate being replaced has been destroyed, lost or stolen the holder of such Certificate shall furnish to the Trustee such security or indemnity as may be required by either of them to save it harmless and evidence satisfactory to the Trustee of the destruction, loss or theft of such Certificate and of the ownership thereof. If such holder is an original Owner Participant, the written undertaking of such Owner Participant shall be sufficient indemnity. Section 3.08. Payment of Expenses Upon Transfer. Upon the issuance of a new Certificate or Certificates pursuant to Section 3.06 or 3.07 hereof, the Trustee may require the payment from the party or parties to whom such new Certificate or Certificates are issued of a sum to reimburse itself for, or to provide funds for, the payment of any tax or other governmental charge or any charges and expenses connected therewith paid or payable by the Trustee. Section 3.09. Payments by Each Owner Participant. Payments and contributions (including, without limitation, Trustee's fees and expenses and indeminifications of the Trustee) provided for herein to be made by each Owner Participant shall be made by each Owner Participant in proportion to its beneficial interest in the Trust Estate at the time such payments or contributions are due and payable. In the event that any Owner Participant makes a payment for any costs or expenses (including legal fees and expenses) pursuant to the written instructions of the Trustee or a Majority in Interest of Owner Participants, such Owner Participant all 12 13 be entitled to immediate reimbursement therefor from the other Owner Participants in proportion to its beneficial interest in the Trust Estate. ARTICLE IV Acceptance of Lease Property Section 4.01 Acceptance of Lease Property. The Owner Participants hereby authorize and direct the Trustee to, and the Trustee agrees for the benefit of the Owner Participants, that on the Closing Date, it will, ubject to due compliance with the terms of Section 4.02 hereof, take such actions as are required of the Trustee hereunder or under the Operative Documents, including without limitation, the following: (a) authorize a representative or representatives of the Trustee to accept the FAA Bill of Sale, Warranty Bill of Sale and original counterpart of the Lease and the applicable Assigned Contracts on such Closing Date; (b) execute and deliver a Lease Assignment relating to the Lease Property; and (c) upon the payment by each Owner Participant of its proportionate share of the purchase price for the Aircraft, the Trustee shall cause the Agent, without further act, authorization, or direction by the Owner Participants to the Trustee, to file on behalf of the Trustee the FAA Bill of Sale, UCC-1 Financing Statements and the Aircraft Registration Application in the name of the Trustee; and (d) execute and deliver each of the Operative Documents and all other related documents to which it is a party; and (e) issue a Trust Certificate for such interest in the Trust Estate to each of the Owner Participants. Section 4.02 Conditions Precedent. The right and obligation of the Trustee to take the action required by Section 4.01 hereof shall be subject to the conditions precedent enumerated in Article III of the Purchase Agreement. Section 4.03 Authority Without Express Instructions. The Trustee, without the necessity of further instructions from the Owner Participants, is hereby authorized and directed by the Owner Participants to take any action in connection with postponing the Closing Date; provided, however, that the Trustee shall not give any consent, waive any right or benefit or enter into any modification or amendment of the Operative Documents or take any other action to perform any obligations whatsoever except at the direction of all of the Owner Participants or a Majority in Interest Owner Participants, as applicable. ARTICLE V Article V is intentionally omitted. ARTICLE VI Distributions 13 14 Section 6.01 Distribution of Basic-Rent. Each payment of Basic Rent, as well as payment of interest on overdue installments of Basic Rent, received by the Trustee at any time shall be distributed in accordance with Section 3.05 by the Trustee on the date such payment is due from the Lessee, (or as soon thereafter as such payment shall be received by the Trustee) to each Owner Participant without priority of one over the other ratably in proportion to its undivided beneficial interest in the Trust Estate. The Trustee agrees to take all reasonable steps necessary to collect any rent or other amounts due under the Operative Documents. Section 6.02. Distribution of Payments. All payments and amounts, except for Basic Rent, if any, received by the Trustee shall be distributed forthwith upon receipt, provided, however, all such amounts in excess of $10,000 shall be distributed no later than twenty four (24) hours after the Trustee has knowledge of its receipt, in the following order of priority: first, so much of such payment or amount as shall be required to reimburse the Trustee for any reasonable fees or expenses not otherwise paid or reimbursed by the Owner Participants as to which the Trustee is entitled to be paid or reimbursed hereunder shall be retained by the Trustee; second, to reimburse an Owner Participant for payments made by it and not by all Owner Participants, pursuant to Section 7.03 or 9.01 hereof, or an instruction from the Trustee pursuant to a written instruction from all of the Owner Participants or a Majority in Interest of Owner Participants, as required, ratably in proportion to the aggregate amount of such payments made by each Owner Participant; and third, the balance, if any, of such payment or amount remaining thereafter shall be distributed to the Owner Participants ratably, without priority of one over the other, in proportion to the beneficial interest of each Owner Participant in the Trust Estate. Section 6.03 Distribution of Trust Estate. Whenever the terms of this Agreement shall require the Trustee to distribute or transfer the entire Trust Estate to any person(s), the Trustee shall be entitled to retain such monies and securities, if any, as shall then be held by the Trustee as a part of the Trust Estate and as shall be required to reimburse or pay the Trustee for any reasonable fees, expenses, or liabilities not reimbursed or paid by the Owner Participants as to which the Trustee is entitled to be paid or reimbursed hereunder or under any Operative Document and shall distribute the Trust Estate in accordance with Section 6.02. ARTICLE VII Duties of the Trustee Section 7.01 Notice of Event of Default. In the event the Trustee shall have knowledge of a Default or Event of Default, the Trustee shall give prompt written notice thereof to each Owner Participant. Subject to the terms of Section 7.03 hereof, the Trustee shall take or refrain from taking such action with respect to a Default or Event of Default as the Trustee shall be instructed in a written instrument executed by a Majority in Interest of Owner Participants. If the Trustee shall not have received instructions within twenty (20) days after giving notice of a Default or Event of Default as above provided, the Trustee may, but shall be under no duty to, and it shall have no liability for its failure or refusal, to take or refrain from taking any action with respect to such Default or Event of Default as it shall deem advisable and in the best interests of the Owner Participants; provided, however, that the Trustee shall give the Owner Participants ten days' notice thereof prior to taking any such action. For all purposes of this Agreement, in the absence of actual knowledge of an officer of the Trustee, the Trustee shall not be deemed to have knowledge of a Default or an Event of Default unless it receives written notification thereof given by or on behalf of the Lessee or any Owner Participant. 14 15 Section 7.02 Action upon Instructions. Subject to the terms of Sections 7.01 and 7.03 hereof, upon the written instructions of a Majority in Interest of Owner Participants, the Trustee will take or refrain from taking such action or actions, as may be specified in such instructions, including, without limitation, (i) enforcing provisions of the Lease, (ii) executing and filing UCC-1 Financing Statements for informational purposes, (iii) executing and delivering loan agreements with any Lender(s) (but only upon the written instruction of all of the Owner Participants), (iv) executing and delivering amendments to the Lease, (v) giving such notice of direction or exercising such right, remedy or power hereunder or under any of the Assigned Contracts or the Purchase Agreement or in respect of all or any part of the Trust Estate, or taking such other action as shall be specified in such instructions; (vi) taking such action to pressure or protect the Trust Estate (including the discharge of liens and encumbrances) as may be specified in such instructions; (vii) approving as satisfactory to it or consenting to all matters required by the terms of the Assigned Contracts to be satisfactory to the Trustee, it being understood that without the written instructions of a Majority in Interest of Owner Participants, the Trustee shall not approve any such matter as satisfactory to it or consent to any such action; and (viii) taking such other action as a Majority in Interest of Owner Participants shall direct in writing. Section 7.03 Indemnification. The Trustee shall not be required to take or refrain from taking any action under this Agreement or any Operative Document (other than the actions specified in the first sentence of Section 7.01 hereof) unless the Trustee shall have been indemnified by the owner Participants, in accordance with Article IX hereof, against any liability, fee, cost or expense (including attorneys' fees) which may be incurred or charged in connection therewith; and, if the Owner Participants or a Majority in Interest of Owner Participants, as required, shall have directed the Trustee to take or refrain from taking any action under this Agreement or any Operative Document, the Owner Participants agree to furnish the Trustee, with the indemnification more particularly set forth in Article IX hereof, and, in addition, to pay the reasonable compensation of the Trustee for the services performed or to be performed by it pursuant to such direction. The Trustee shall not be required to take any action under this Agreement or any Operative Document if the Trustee shall reasonably determine, or shall have been advised by counsel, that such action is contrary to the terms hereof or of any document contemplated hereby to which the Trustee is a party or is otherwise contrary to law. Section 7.04 No Duties Except as Specified in Trust Agreement or Instructions. The Trustee shall not have any duty or obligation to manage, control, make any payment in respect of, register, record, insure, inspect, instruct, use, sell, dispose of or otherwise deal with the Lease Property, or any other part of the Trust Estate, or to otherwise take or refrain from taking any action under, or in connection with, any document contemplated hereby to which the Trustee is a party, except as expressly provided by the terms of this Agreement, or in written instructions from a Majority in Interest of Owner Participants received pursuant to Section 7.01 or 7.02 hereof; and no implied duties or obligations shall be read into this Agreement against the Trustee. The Trustee, in its individual capacity, nevertheless agrees that it will, at its own cost and expense, promptly take all action as may be necessary to discharge any Liens (including Lessor's Liens) on any part of the Trust Estate which result from actions or commissions or omissions by or claims against the Trustee, in its individual capacity, or the trusts created hereby not related to the Trustee's ownership of the Lease Property or any other part of the Trust Estate or the administration of the Trust Estate or the transactions contemplated by the Operative Documents or this Agreement. 15 16 Section 7.05 No Action Except Under Specified Documents or Instructions. The Trustee agrees that it will not manage, control, use, sell, dispose of or otherwise deal with the Lease Property or any other part of the Trust Estate except (i) as required by this Agreement and the Operative Documents, or (ii) in accordance with the powers granted to, or the authority conferred upon, or the directions given to, the Trustee pursuant to or under this Agreement. Section 7.06 Absence of Duties. Except in accordance with written instructions furnished pursuant to Section 7.02 hereof, and without limitation of the generality of Section 7.04 and the last sentence of Section 11.01(b) hereof, the Trustee shall have no duty (i) to file, record or deposit any Operative Documents, any financing statements or this Agreement, or to maintain any such filing, recording or deposit or to refile, rerecord or re-deposit any such document, except as specified in Section 7.02 hereof, (ii) to obtain insurance on the Aircraft, the Airframe, or an Engine, or Part or to effect or maintain any such insurance, (iii) to maintain or mark the Aircraft, the Airframe, or an Engine, or Part, (iv) to pay or discharge any tax, assessment or other governmental charge or any lien or encumbrance of any kind owing with respect to or assessed or levied against any part of the Trust Estate, except as provided in the last sentence of Section 7.04 hereof, (v) to confirm, verify, investigate or inquire into the failure to receive any reports or financial statement of Lessee and Sublessee, or (vi) to inspect the Aircraft, the Airframe, or an Engine, or Part at any time or to ascertain or inquire as to the performance or observance of any covenants of Lessee under any Operative Document with respect to the Aircraft, the Airframe, or an Engine or Part. ARTICLE VIII The Trustee Section 8.01 Acceptance of Trusts and Duties. The Trustee accepts the trusts hereby created and agrees to perform the same but only upon the terms of this Agreement. The Trustee also agrees to disburse all monies, if any, actually received by it constituting part of the Trust Estate upon the terms of this Agreement. The Trustee shall not be answerable or accountable under any circumstances, in its individual capacity, except (i) for its own willful misconduct or gross negligence, (ii) in the case of the inaccuracy of any representation or warranty of the Trustee contained in Section 8.03 hereof or any representation or warranty of the Trustee in its individual capacity contained in the Operative Documents, (iii) as arising from the failure by the Trustee to perform its obligations under the last sentence of Section 7.04 hereof, (iv) for taxes, fees or other charges on, based on or measured by any fees, commissions or compensation received by Trustee for acting as Trustee in connection with any of the transactions contemplated by the Operative Documents. Section 8.02 Furnishing of Documents. The Trustee will furnish to each Owner Participant, promptly upon receipt thereof, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and any other instruments furnished to the Trustee hereunder or under the Operative Documents. In case any tax report or tax return is required to be made with respect to the Trust Estate and the Lessee or Sublessee is not required to prepare and file the same pursuant to the Lease or Sublease, the Trustee will prepare such tax report or return and deliver a copy thereof to each Owner Participant. Upon the request of the Trustee, each Owner Participant will provide such instruments, documents, certificates or other information as is reasonably necessary to enable the Trustee to prepare any such tax report or return. The Trustee agrees to 16 17 forward to each Owner Participant a copy of any communications with respect to taxes pertaining to the Trust Estate which are received by the Trustee. Section 8.03 No Representations or Warranties as to Lease Property or Documents. THE TRUSTEE, IN ITS INDIVIDUAL CAPACITY, MAKES (i) NO REPRESENTATION OR WARRANTY AS TO THE TITLE, VALUE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF THE AIRCRAFT OR ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT, AIRFRAME; OR ANY ENGINE OR PART WHATSOEVER, or the validity or enforceability of the Lease and Assigned Contracts, and (ii) no representation or warranty as to the validity or enforceability of this Agreement or the Operative Documents, or as to the correctness of any statement contained in any thereof, except to the extent that any such statement is made therein by the Trustee, in its individual capacity, and except that the Trustee, in its individual capacity, hereby represents and warrants to each Owner Participant that this Agreement has been and each of such other documents which contemplates execution thereof by the Trustee has been or will be, executed and delivered by its officers who are or will be duly authorized to execute and deliver such document on its behalf, and except that the Trustee, in its individual capacity, hereby represents and warrants to each Owner Participant that the Lease Property is free and clear of any liens attributable to it and that it will comply with the last sentence of Section 7.04 hereof. Section 8.04 No Segregation of Monies; No Interest. Except as otherwise provided herein, monies, if any, received by the Trustee hereunder need not be segregated in any manner except to the extent required by law and may be deposited under such general conditions as may be prescribed by law, and the Trustee shall not be liable for any interest thereon. Section 8.05 Reliance; Advice of Counsel. The Trustee shall incur no liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond or other document or paper believed by it to be genuine and believed by it to be signed by the proper party or parties. The Trustee may accept a certified copy of a resolution of the Board of Directors or other governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the manner of ascertainment of which is not specifically prescribed herein, the Trustee may for all purposes hereof rely on a certificate, signed by a duly authorized officer of the relevant party, as to such fact or matter, and such certificate shall constitute full protection to the Trustee for any action taken or omitted to be taken by it in good faith in reliance thereon. In the administration of the trusts hereunder, the Trustee may execute any of the trusts or powers hereof and perform its powers and duties hereunder directly or through agents or attorneys and may consult, with counsel, accountants and other skilled persons to be selected and employed by it, and the Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the advice or opinion of any such counsel, accountants or other skilled persons and not contrary to this Agreement, so long as such advice or opinion pertains to such matters as the Trustee may reasonably presume to be within the scope of such person's expertise. Section 8.06 Not Acting in Individual Capacity. Except as provided in this Article VIII, in accepting the trusts hereby created the Trustee acts solely as trustee hereunder and not in its individual capacity; and all persons having any claim against the Trustee by reason of the transactions contemplated hereby or by the 17 18 other Operative Documents shall look only to the Trust Estate for payment or satisfaction thereof, except as specifically provided in this Article VIII. ARTICLE IX Indemnification of Trustee by Owner Participants Section 9.01 Owner Participants to Indemnify Trustee. Each Owner Participant agrees to pay, severally, in proportion to its respective beneficial interest in the Trust Estate, to the extent not paid by the Lessee pursuant to the Lease, (or reimburse the Trustee for) all reasonable expenses of the Trustee hereunder, including, without limitation, the reasonable compensation, expenses and disbursements of such agents, representatives, experts and counsel as the Trustee may employ in connection with the exercise and performance of its rights and duties hereunder or under the other Operative Documents, whether or not the transactions contemplated hereby are consummated; provided, however, that if the Trustee deems it advisable to employ any such agent, representative, expert or counsel, and the Trustee reasonably believes that the fees of such agent, representative, expert or counsel will exceed $5,000, the Trustee shall notify the Owner Participants thereof and shall employ such agent, representative, expert or counsel only if a Majority in Interest of Owner Participants has approved such employment. The Owner Participants agree to assume liability for, and to indemnify the Trustee in its individual capacity and its successors, assigns, agents and servants against and from any and all liabilities (including without limitation, any liability of the Owner Participants, and liability without fault and any strict liability), obligations, losses, damages, taxes (such term "taxes" or the term "tax" as used in this Article IX shall include, without limitation, all taxes specifically related to this Agreement and the Trust Estate created hereby excluding, however, any income taxes or fees or other compensation received by the trustee in its capacity as Trustee), claims, actions, suits, costs, expenses and disbursements (including legal fees and expenses) of any kind and nature whatsoever (collectively, "Expenses") which may be imposed on, incurred by or asserted at any time against the Trustee (whether or not indemnified against by the Lessee or any other parties) in any way relating to or arising out of the existence or administration of this Agreement, the Trust Estate or the action or inaction of the Trustee hereunder or under the other Operative Documents, or the enforcement of any of the terms of any thereof, or in any way relating to or arising out of the manufacture, purchase, acceptance, non-acceptance, rejection, ownership, delivery, lease, financing, possession, use, operation, condition, sale, return or other disposition of the Aircraft, the Airframe, or an Engine (including, without limitation, latent and other defects, whether or not discoverable, and any claim for patent, trademark or copyright infringement) or in any way relating to or arising out of the Assigned Contracts, except that the foregoing indemnities shall not cover the Trustee (i) for its own willful misconduct or gross negligence, (ii) in the case of the inaccuracy of any representation or warranty of the Trustee contained in Section 7.03 hereof or any representation or warranty of the Trustee in its individual capacity contained in the operative Documents, and (iii) as arising from the failure by the Trustee to perform its obligations under the last sentence of Section 7.04 hereof, or obligations in its individual capacity contained in the Operative Documents. In addition, if necessary, the Trustee shall be entitled to indemnification from the Trust Estate, for any liability, obligation, loss, damage, penalty, tax, claim, action, suit, cost, expense or disbursement indemnified against pursuant to this Section 9.01 to the extent not reimbursed by Lessee, the Owner Participants or others, but without releasing any of them from their respective agreements of reimbursement; and, to secure the same, the Trustee shall have a lien on the Trust Estate, subject to the Lien, if any, of any Lender, which shall be prior to any interest therein of the Owner Participants, but only in the event and to the extent that the Trustee does not receive payment from 18 19 the Lessee or pursuant to any other provision of any Operative Document, except only that the Owner Participants shall not be required to indemnify the Trustee for expenses arising or resulting from any of the matters described in the last sentence of Section 8.01 hereof. The indemnities contained in this Section 9.01 shall survive the termination of this Agreement. Section 9.02 Compensation and Expense. The Trustee shall receive the following as compensation for its services hereunder, and as payment for all its costs, fees and expenses incurred in connection with the administration of the Trust Estate (including legal fees and expenses): (a) An acceptance fee of $2,500 and an administration fee of $2,000 ("Annual Administration Fee") for the one year period commencing on the Closing Date, and each year thereafter in which it is the Trustee hereunder and under the Operative Documents; provided, however, that such Annual Administrative Fee shall be increased or decreased annually by any change in the Gross National Product Implicit Price Deflator or should such index be discontinued or abolished, the replacement index therefor or a comparable index thereof. Notwithstanding anything to the contrary herein, to the extent the Trustee has received the acceptance fee and the Annual Administration Fee with respect to any trust created as of the date of this Agreement by the original Owner Participants, Trustee shall not be entitled to any fees hereunder. Such Annual Administration Fee shall cover all of the Trustee's costs, fees and expenses of any kind incurred in connection with the administration of the Trust-Estate, including, without limitation, any fees paid to the Agent and executing and delivering loan agreement(s) and other agreements with any Lender and taking such other action under or in connection with the Operative Documents as the Owner Participants shall direct in writing. (b) The Trustee shall be entitled to compensation for any of its reasonable out-of-pocket expenses and the reasonable fees and expenses of any agent, representative, expert or counsel employed by the Trustee, incurred in connection with its administration of the Trust Estate hereunder; provided, however, that if the Trustee reasonably believes that such expenses, fees and expenses will exceed $5,000, the Trustee will obtain the prior approval thereof of a Majority in Interest of Owner Participants. ARTICLE X Termination of Trust Agreement Section 10.01 Termination of Trust Agreement. Subject to Section 10.02 of this Agreement, this Agreement and the trusts created hereby shall terminate and the Trust Estate shall, subject to Article VI hereof, be distributed to the Owner Participants, and this Agreement shall be of no further force or effect, upon the earlier of (i) the sale or other final disposition by the Trustee of all property constituting part of the Trust Estate and the final distribution by the Trustee or any other party of all monies or other property or proceeds constituting part of the Trust Estate in accordance with the terms of Article VI hereof, provided that at such time the Lessee shall have fully complied with all the terms of the Lease, or (ii) twenty-one (21) years less one day after the death of the last survivor of all of the descendants living on the date of this Agreement of the present members of the Boards of Directors of the Trustee and the Owner Participants; but if this Agreement and the trusts created hereby shall be or become valid under applicable law for a period subsequent to the 21st anniversary of the death of such last survivor, or if legislation shall become effective providing for the validity thereof for a period in gross exceeding the period hereinabove stated, then this Agreement and the trusts created hereby shall not terminate as aforesaid but shall extend to and continue in 19 20 effect, but only if such nontermination and extension shall then be valid under applicable law, until such time as the same shall, under applicable law, cease to be valid. Section 10.02 Termination at Option of Owner Participants. The provisions of Section 10.01 hereof notwithstanding, this Agreement and the trusts created hereby shall terminate and the Trust Estate shall be distributed to the Owner Participants in accordance with the terms of Article VI hereof, and this Agreement shall be of no further force and effect, upon the election, in their sole discretion, of all of the owner Participants by notice to the Trustee, if such notice shall be accompanied by the written agreement of all of the Owner Participants assuming all the obligations of the Trustee under the Operative Documents and all other obligations of the Trustee incurred by it as Trustee hereunder. Such written agreement shall fully and completely release the Trustee from all further obligations and liabilities of the Trustee hereunder and under the agreements and other instruments mentioned in the preceding sentence; provided, however, that the obligations and liabilities of any party hereinunder arising prior to the date of such written agreement shall survive such termination of the Trustee. ARTICLE XI Successor Trustees, Co-Trustees and Separate Trustees Section 11.01 Resignation of Trustee; Appointment of Successor. (a) The Trustee may resign at any time without cause by giving at least 30 days' prior written notice to each Owner Participant, such resignation to be effective upon the acceptance of appointment by a successor Trustee under Section 11.01(b) hereof. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Article XI, the Trustee shall resign immediately by giving written notice to each Owner Participant, such resignation to be effective upon the acceptance of appointment by a successor Trustee under Section 11.01(b) hereof. In addition, the Trustee may be removed at any time without cause by an instrument in writing executed by each Owner Participant and delivered to the Trustee, such removal to be effective upon the acceptance of appointment by a successor Trustee under Section 11.01(b) hereof. In case of the resignation or removal of the Trustee, a Majority in Interest of Owner Participants may appoint a successor Trustee by an instrument signed by such a Majority in Interest of Owner Participants. If a successor Trustee shall not have been appointed within thirty (30) days after the giving of written notice of such resignation or the delivery of the written instrument with respect to such removal, the Trustee or a Majority in Interest of Owner Participants may apply to any court of competent jurisdiction to appoint a successor Trustee to act until such time, if any, as a successor Trustee so appointed by such court shall immediately and without further act be superseded by any successor Trustee appointed as above provided within one year from the date of the appointment by such court. (b) Any successor Trustee, however appointed, shall execute and deliver to the predecessor Trustee and each Owner Participant an instrument accepting such appointment, and thereupon such successor Trustee, without further act, shall become vested with all the estates, properties, rights, powers, duties and trusts of the predecessor Trustee in the trusts hereunder with like effect as if originally named the Trustee herein; but nevertheless, upon the written request of such successor Trustee, such predecessor Trustee shall execute and deliver an instrument transferring to such successor Trustee, upon the trusts herein expressed, all the estates, properties, rights, powers, duties and trusts of such predecessor Trustee, and such predecessor 20 21 Trustee shall duly assign, transfer, deliver and pay over to such successor Trustee all monies or other property then held by such predecessor Trustee upon the trusts herein expressed. The predecessor Trustee will cooperate in causing registration of the Aircraft to be transferred to the successor Trustee in accordance with applicable law. (c) The Trustee and any successor Trustee, however appointed, must resign if at any time it is unable to obtain or maintain at all times satisfactory registration of each Aircraft pursuant to the Federal Aviation Act, as amended (the "Act"). Any successor Trustee shall be a bank or trust company incorporated and doing business within the United States of America and having a combined capital and surplus of at least $50,000,000, or the subsidiary of an institution having a combined capital and surplus of at least $50,000,000, which guarantees the obligations of such subsidiary. (d) The Trustee shall be and any successor Trustee will be "a citizen of the United States" as defined in Section 101(16) of the Act. (e) Any corporation into which the Trustee may be merged or with which it may be consolidated, or any corporation resulting from any merger, or consolidation to which the Trustee shall be a party, or any corporation to which substantially all the corporate trust business of the Trustee may be transferred, shall, subject to the terms of Section 11.01(c) hereof, be the Trustee under this Agreement without further act. Section 11.02 Co-Trustees and Separate Trustees. Whenever the Trustee or a Majority in Interest of Owner Participants shall deem it necessary or prudent in order either to conform to any law of any jurisdiction in which all or any part of the Trust Estate shall be situated or to make any claim or bring any suit with respect to the Trust Estate or the Operative Documents, or either the Trustee or a Majority in Interest of Owner Participants shall be advised by counsel satisfactory to it that it is so necessary or prudent, the Trustee and a Majority in Interest of Owner Participants shall execute and deliver an agreement supplemental hereto and all other instruments and agreements, and shall take all other action, necessary or proper to constitute one or more persons (and the Trustee may appoint one or more of its officers) (any and all of which shall be a "citizen of the United States" as defined in Section 101(16) of the Act) either as co-trustee or co-trustees jointly with the Trustee of all or any part of the Trust Estate, or as separate trustee or separate trustees of all or any part of the Trust Estate, and to vest in such persons, in such capacity, such title to the Trust Estate or any part thereof, and such rights or duties as may be necessary or desirable, all for such period and under such terms and conditions as are satisfactory to the Trustee and a Majority in Interest of Owner Participants. In case any co-trustee or separate trustee shall die, become incapable of acting, resign or be removed, the title to the Trust Estate and all rights and duties of such co-trustee or separate trustee shall, so far as permitted by law, vest in and be exercised by the Trustee, without the appointment of a successor to such co-trustee or separate trustee. ARTICLE XII Concerning the Agent Section 12.01. Appointment of Agent. The Owner Participants authorize and direct the Trustee to appoint, and the Trustee hereby does appoint, Airlease, in its separate capacity as Agent and not as Owner Participant, as its agent to do all such acts and things and execute all such documents, instruments and other 21 22 agreements as the Trustee hereafter may from time to time direct, in its place and stead, in accordance with the terms of this Agreement and the Operative Documents. Section 12.02. Agent's Acceptance of Appointment. The Agent agrees to act as Agent for the Trustee hereunder and to accept possession of and hold such items of the Trust Estate as it may from time to time receive on behalf of the Trustee subject to the trusts hereby created and the terms and conditions of this Agreement. Section 12.03. Agreements of the Agent. The Agent hereby agrees: (a) to exercise the rights and perform the duties of the Trustee as directed by the Trustee in accordance with the terms hereof; (b) to assume liability for and indemnify the Owner Participants, Trustee, and Trust Estate from and against Liens attributable to it; and (c) pursuant to the instructions of the Trustee in accordance with the terms hereof, to conduct negotiations with respect to the documents contemplated by this Agreement and the Operative Documents and to use its best efforts by administrative means to cause the Operative Documents to be executed and to consummate the purchase of the Aircraft, Airframe, and Engines and delivery of the Aircraft, Airframe, and Engines under the Purchase Agreement in the manner contemplated by the Operative Documents. Section 12.04. Standard of Care and Diligence (a) Agent's Liability. Except as provided in Section 12.03 hereof, the Agent assumes no liability for anything other than its own willful misconduct or gross negligence. It shall give each Owner Participant prompt notice of any Events of Default or claimed Events of Default under the Lease of which it shall have actual knowledge. For all purposes of this Agreement, in the absence of actual knowledge of an officer of the Agent, the Agent shall not be deemed to have actual knowledge of a Default or an Event of Default unless it receives written notification thereof given by or on behalf of the Lessee, the Trustee, any Owner Participant, or any other party. (b) Use of Agents. Subject to the same limitations as the Trustee herein, the Agent may exercise its powers and perform its duties by or through such attorneys, agents and servants as it shall appoint; and it shall be entitled to the advice of counsel (who may, in cases deemed by the Agent in its reasonable discretion to be appropriate, be counsel for the Agent) and shall be protected by the advice of such counsel in anything done or omitted to be done in accordance with such advice. Section 12.05. Resignation or Removal of Agent. The Agent or any successor thereto may resign at any time without cause by giving at least 30 days prior written notice to the Trustee and each Owner Participant, such resignation to be effective on the date specified in such notice. In addition, a Majority in Interest of Owner Participants may at any time remove the Agent without cause by an instrument in writing executed by a Majority in Interest of Owner Participants delivered to the Agent and the Trustee. In the case of the resignation or removal of the Agent, a Majority in Interest of Owner Participants may, at their sole cost and expense, appoint a successor Agent by an instrument signed by a Majority in Interest of Owner 22 23 Participants. If a Majority in Interest of Owner Participants shall not have appointed a successor Agent within 30 days after such resignation or removal, the Trustee may apply to any court of competent jurisdiction to appoint a successor Agent to act until such time, if any, as a successor shall have been appointed by a Majority in Interest of Owner Participants as above provided. The successor Agent so appointed by such court shall immediately and without further act be superseded by any successor Agent appointed by a Majority in Interest of Owner Participants within one year from the date of the appointment by such court. Section 12.06. Estates and Rights of Successor Agent. Any Agent, whether appointed by a Majority in Interest of Owner Participants or a court, shall execute and deliver to the Trustee and to the predecessor Agent an instrument accepting such appointment, and thereupon such successor Agent, without further act, shall become vested with all the estates, properties, rights, powers and duties of the predecessor Agent hereunder with like effect as if originally named the Agent herein; but nevertheless upon the written request of the Trustee or such successor Agent, such predecessor Agent shall execute and deliver an instrument transferring to such successor Agent all the estates, properties, rights and powers of such predecessor Agent, and such predecessor Agent shall duly assign, transfer, deliver and pay over to such successor Agent all monies or other property then held by such predecessor Agent hereunder. Section 12.07. Merger or Consolidation of Agent. Any corporation into which the Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Agent shall be a party, or any corporation to which substantially all the business of the Agent may be transferred, shall be the Agent under this Agreement without further act. Section 12.08. Agent's Duty to Indemnify. The obligation of the Agent under Section 12.03(b) to indemnify the Owner Participants, Trust Estate, and Trustee shall survive the resignation or removal of the Agent and the termination of the Trust. ARTICLE XIII Supplements and Amendments This Agreement shall be amended only by a written instrument signed by the Trustee and a Majority in Interest of Owner Participants and to the extent any such amendment affects the Agent, signed by the Agent; but if in the reasonable opinion of the Trustee or Agent, as the case may be, any instrument required to be so executed adversely affects any right, duty, liability of, or immunity or indemnity in favor of it under this Agreement or any of the documents contemplated hereby to which it is a party, or would cause or result in any conflict with or breach of any terms, conditions or provisions of, or default under the charter documents or by-laws of the Trustee or Agent or any document contemplated hereby to which the Trustee or Agent is a party, the Trustee or Agent, as the case may be, may in its sole discretion decline to execute such instrument and upon the request of a Majority in Interest of Owner Participants immediately shall resign as the Trustee or Agent, as the case may be, under this Agreement, any Operative Document, or other related document. No supplement, amendment or modification of the Agreement shall impair any requirement in this Agreement that the consent of a Majority in Interest of or all of the Owner Participants be obtained for any purpose and no such supplement, amendment or modification shall require any Owner Participant to invest or advance funds or shall entail any additional personal liability or the surrender of any 23 24 indemnification, claim or individual right on the part of any Owner Participant with respect to any agreement or obligation or create or suffer to exist any additional obligation of or liability on the Trust Estate, except with the written consent of each of the Owner Participants. ARTICLE XIV Sale, Transfer or Mortgage of Lease Property Section 14.01. General. Except as hereinafter expressly permitted, no Owner Participant may sell, assign, transfer, mortgage, charge or otherwise encumber, or suffer any third party to sell, assign, transfer, mortgage, charge or otherwise encumber, or contract to do or permit any of the foregoing, whether voluntarily or by operation of law (herein sometimes collectively called a "transfer"), any part or all of its interest hereunder or in the Trust Estate without the written consent of the other Owner Participants and any attempt to do so shall be void. The giving of such consent in any one or more instances shall not limit or waive the need for such consent in any other or subsequent instances. Section 14.02. Permitted Transfers by the Owner Participants. (a) Transfers by Airlease. Notwithstanding the provisions of Subsection 14.01, without the consent of the other Owner Participants, Airlease may from time to time transfer all or any portion of its interest hereunder to an Affiliate. (b) Transfers by the Partnership. Notwithstanding the provisions of Section 14.01, without the consent of the other Owner Participants, the Partnership may from time to time transfer all or any portion of its interest hereunder to an Affiliate. (c) Transfer by NAF. Notwithstanding the provisions of Section 14.01, without the consent of the other Owner Participants, NAF may from time to time transfer all or any portion of its interest hereunder to an Affiliate. (d) Notwithstanding anything to the contrary in this Article XIV, the Trustee and each of the Owner Participants acknowledge and agree that Section 13.3 and the Agreements of the Owner Participants in the Purchase Agreement, with respect to the sale, assignment or transfer of the Aircraft or Assigned Contracts, are for the mutual benefit of and binding on each of the parties hereto. Section 14.03. Right of First Refusal as to an Owner Participant's Trust Estate Interest. (a) Offering Notice. Except for permitted transfers under Section 14.02 above, if any Owner Participant receives a bona fide offer for the purchase of either (i) all of its interest hereunder or (ii) less than all of its interest hereunder, (the recipient of any such offer being hereinafter called the "Offeror"), which offer complies with the provisions of Section 14.03(b) and which offer it desires and intends to accept, before accepting such offer it shall give notice (the "Offering Notice") to the other Owner Participants (the "Offerees") which shall include a true copy of such offer, whereupon the provisions set forth in this Section 14.03 shall apply. Except for permitted transfers under Section 14.02 above, no Owner Participant shall accept an offer unless such offer complies with the provisions of Section 14.03(b). 24 25 (b) Requirements of Offer. Such an offer shall comply with the following requirements: (1) the proposed purchase price (which shall be net of any Trust Estate debts or liabilities which the proposed purchaser has agreed to assume in its offer to purchase the Offeror's interest) is payable solely in lawful money of the United States and, if not payable in its entirety in cash, under no circumstances may payment of the non-cash portion of the proposed purchase price be secured by any charge, encumbrance or hypothecation of the Trust Estate; (2) the offer contains provisions whereby the proposed purchaser is obligated to comply with the provisions of Section 14.06 hereof, requiring it to assume certain obligations prior to or at closing; (3) the offer is accompanied by a certified check of the prospective purchaser for a sum equal to at least ten percent (10%) of the proposed purchase price; provided, however, that if the sale to the third party purchaser is not consummated for any reason other than due to the failure of the Owner Participants to perform their obligations pursuant to the offer, each Owner Participant shall be entitled to a pro rata portion of such sum; (4) the Offeror shall not have caused or permitted an Owner Participant Event of Default (as hereinafter defined); and (5) the prospective purchaser shall be capable of carrying out all obligations of an Owner Participant under this Agreement and all related agreements; and as shown by the audited financial statements of such prospective purchaser for the two (2) most recent fiscal years of such prospective purchaser, shall have a tangible net worth satisfactory to the offerees, determined in accordance with generally accepted accounting principles. (c) Procedure. In the Offering Notice, the Offeror shall offer (the "Sale Offer") to each Offeree the right to purchase a portion of the interest (the "Portion of the Interest") of the Offeror referred to in said offer, at a portion of the same price and subject to the same terms and conditions as set forth in said offer and the Offeror shall submit with the offering Notice a true copy of said offer. The portion shall be equal to the full amount of the interest offered multiplied by a fraction, the numerator of which is such Offeree's then interest in the Trust Estate and the denominator is the then interest in the Trust Estate of all Offerees. Each Offeree shall notify the Offeror and the other Offeree(s) of its election within fifteen (15) days of the date of its receipt of the Offering Notice; provided, however, that such election shall be as to all of the Portion of the Interest. (d) Acceptance of Sale Offer. (1) If the Sale Offer is accepted by each Offeree, and notice in writing is given within the period specified in Section 14.03(c), the Offeror shall thereupon be bound to sell to such Offeree and the offeror shall thereupon be bound to purchase the Portion of the Interest 25 26 referred to in the Sale Offer in accordance with the terms of the Sale offer and the closing of the purchase shall take place in accordance with Section 14.04. (2) If one Offeree has not accepted the Sale Offer or has not accepted the Sale Offer within such fifteen (15) day period and one or more of the other Offerees has accepted the Sale Offer ("Accepting Offeree"), the Accepting Offeree(s) shall have the right to purchase the entire interest referred to in the Sale Offer (but not less than such entire interest) in accordance with the terms of the Sale Offer and the purchase shall take place in accordance with Section 14.04 and the procedures included in Section 14.03(c). Except that the Accepting Offerees shall notify the Offeror and other Offerees of such election within ten (10) days of the end of the initial fifteen (15) day period referred to in Section 14.03(c). The Offeror shall thereupon be bound to sell to such Accepting Offeree(s) and the Accepting Offeree(s) shall thereupon be bound to purchase the entire interest referred to in the Sale Offer in accordance with the terms of the Sale Offer and the closing of the purchase shall take place in accordance with Section 14.04. (e) Right to Sell to Third Party. If the Offerees have not accepted the Sale Offer as provided in Section 14.03(c) within the time limits referred to therein, or if the Accepting Offeree(s) have not accepted the Sale Offer as provided in Section 14.03(d)(2) within the time limits referred to therein, the Sale Offer shall be deemed to have been declined by such Offerees and the Offeror shall be free to sell its interest to the maker of said offer at a price and upon terms and conditions not less favorable to the Offeror than those set forth in the Offering Notice within the time period set forth below. If in any instance such Offerees elect not to exercise their rights hereunder or to waive such rights, such election shall not constitute a waiver of the Offerees' right to an Offering Notice in the case of any subsequent offer. If such interest is not so sold and the transfer not consummated within thirty (30) days, unless extended by mutual agreement, from the expiration of the time limits referred to in Section 14.03(c) or Section 14.03(d)(2), as applicable, the relevant interest shall then again become subject to all the provisions of this Section 14.03. (f) Limitations on Exercise. Notwithstanding anything to the contrary contained in this Section 14.03, no Offeree which has failed to perform or observe any of its obligations, covenants, conditions, or agreements under this Agreement or any related document (an "Owner Participant Event of Default"), which Owner Participant Event of Default is still continuing, shall be entitled to exercise its right to purchase (or sell, unless the Owner Participant Event of Default is cured by such sale) any portion of the Offeror's interest. Section 14.04. Closings. (a) Location and Time Periods. The closing of any sale of an interest in the Trust Estate pursuant to this Article XIV shall be held at a mutually acceptable place and on a mutually acceptable date not more than thirty (30) days, unless extended by mutual agreement, after the receipt by the Offeror of the written notices of election by the Offerees, Accepting Offeree, or Third Party Accepting Offeree, as applicable, or after the expiration of the time within which the Offeree must so elect, as provided in Sections 14.03(c) or 14.03(d). 26 27 (b) Closing Conditions. Any Owner Participant transferring its interest shall transfer such interest free and clear of all liens, encumbrances or any interests of any third party (excepting any liens permitted under the Lease) and shall execute or cause to be executed any and all documents required to fully transfer such interest to the acquiring third party or acquiring Owner Participant(s), including, but not limited to, any documents necessary to evidence such transfer and to evidence the agreement by the acquiring third party or acquiring Owner Participant(s) to be bound by all applicable provisions of the Operative Documents, and all documents required to release any interest in such selling Owner Participant's interest. Any sums owed by the selling Owner Participants to the Trust Estate or the other Owner Participants shall be paid concurrently from the proceeds from such sale at the closing. Following the date of closing, unless otherwise agreed, the selling Owner Participant(s) shall have no further rights to any rent or proceeds from the Trust Estate assets attributable to any period or event following the date of closing and all such rights shall vest in the transferee of the interest purchased from the selling Owner Participant(s). (c) Event of Loss. If an Event of Loss (as defined in the Lease) shall occur with respect to the Aircraft between (i) the date an election is made by an Owner Participant, the Owner Participants, or a third party transferee to purchase pursuant to Section 14.03, and (ii) the closing of such purchase, the offer to purchase shall automatically terminate, without any further action or notice required. (d) Partial Loss. If a partial loss shall occur with respect to the Aircraft under the Lease, subject to the performance by Lessee of its obligations under the Lease and so long as there is no Event of Default thereunder, the purchase of the interest hereunder shall be consummated as contemplated by the parties. Section 14.05. Termination of obligations. As of the closing date of any transfer not prohibited hereunder by an owner Participant of its entire interest in the Trust Estate to the other Owner Participant(s) or to a third party purchaser, such transferring Owner Participant's rights and obligations hereunder shall terminate except as to any of its unperformed obligations accrued as of such date and except as to any unperformed indemnity obligations of such Owner Participant attributable to acts or events occurring prior to such closing date. Thereupon, except as limited by the preceding sentence, this Agreement shall terminate as to the transferring Owner Participant(s) but all terms and conditions thereof shall remain in effect as to the other Owner Participant(s) and the third party purchaser shall become an Owner Participant hereunder. In the event of a transfer of its entire Trust Estate interest by an Owner Participant to the other Owner Participant(s) or to a third party purchaser, the Owner Participant(s) or third party purchaser to which such interest is transferred, shall indemnify, defend and hold harmless the Owner Participant so transferring its interest from and against any and all claims, demands, losses, liabilities, expenses, actions, lawsuits, and other proceedings, judgments, awards, and costs and expenses (including but not limited to reasonable attorneys' fees) incurred in or rising directly or indirectly, in whole or in part, out of the Trust Estate, excluding only those liabilities, if any, accruing prior to the closing date of such transfer. Section 14.06. Agreements with Transferees. In the event that pursuant to the provisions of this Article XIV, any Owner Participant shall transfer its interest hereunder to any person or entity other than the other Owner Participant(s), no such transfer shall 27 28 be made or shall be effective to make such transferee an Owner Participant or entitle such transferee to any benefits or rights hereunder or under the Operative Documents until the proposed Transferee agrees in writing to assume and be bound by all the obligations of the selling Owner Participant and be subject to all the restrictions to which the selling Participant is subject under the terms of this Agreement, the Operative Documents, and any further agreement which may be required with respect to the Trust Estate. In the event an Owner Participant's interest hereunder is transferred by operation of law, such Owner Participant's transferee shall sign such a writing within fifteen (15) days of the closing date as an express condition to the effectiveness of any such transfer. Section 14.07. Restraining Order. In the event that any Owner Participant shall at any time transfer or attempt to transfer its interest hereunder in violation of the provisions of this Agreement and any rights hereby granted, then the other Owner Participant(s) shall, in addition to all rights and remedies at law and in equity, be entitled to a decree or order restraining and enjoining such transfer and the defaulting owner Participant shall not plead in defense thereto that there would be an adequate remedy at law; it being hereby expressly acknowledged and agreed by the parties hereto that damages at law will be an inadequate remedy for a breach or threatened breach of the violation of the provisions concerning transfer of a Trust Estate interest as set forth in this Agreement. Section 14.08. Sale by an Owner Participant of an Owner Participant's Trust Estate. The parties agree that in the event that one of the Owner Participants should decide to purchase the Trust Estate interest of the other Owner Participants, the parties shall negotiate the terms and conditions of such purchase in good faith, including, without limitation, the purchase price, any financing arrangements, and like matters. Such purchase shall take place in accordance with Section 14.04. ARTICLE XV Miscellaneous Section 15.01 No Legal Title to Trust Estate in Owner Participants. The Owner Participants shall not have legal title to any part of the Trust Estate. No transfer, by operation of law or otherwise, of any right, title and interest of the Owner Participants in and to the Trust Estate or hereunder shall operate to terminate this Agreement or the trusts hereunder or entitle any successor or transferee to an accounting or to the transfer to it of legal title to any part of the Trust Estate. Section 15.02 Sale of Aircraft, etc., by Trustee is Binding. Any sale or other conveyance of the Aircraft, the Airframe, an Engine or Part by the Trustee made pursuant to the terms of this Agreement (so long as such sale is not contrary to the provisions of the Operative Documents) shall bind the Owner Participants and shall be effective to transfer or convey all right, title and interest of the Trustee and the Owner Participants in and to the Aircraft, the Airframe, or an Engine or Part. No purchaser or other grantee shall be required to inquire as to the authorization, necessity, expediency or regularity of such sale or conveyance or as to the application of any sale or other proceeds with respect thereto by the Trustee. 28 29 Section 15.03 Limitations on Rights of Others. Nothing in this Agreement shall be construed to give to any person other than the Trustee, Owner Participants, and the Agent (to the extent provided in Article XII hereof) any legal or equitable right, remedy or claim under or in respect of this Agreement, any covenants, conditions or provisions contained herein or the Trust Estate. Section 15.04 No Partnership for Tax Purposes. The Owner Participants agree that this Trust Estate is not to be construed as a partnership for tax purposes; provided, however, that if it is determined to be a partnership for tax purposes, each of Airlease and NAF agree to be bound by an election under Section 754 of the Internal Revenue Code of 1954, as amended, made by the Partnership. Section 15.05 Notices. Unless otherwise expressly specified or permitted by the terms hereof, all notices required under-the terms and provisions hereof shall be in writing by first class mail, personal delivery, cable, telex or telecopy (with such cable, telex or telecopy confirmed in writing, mailed by first-class mail, postage prepaid) addressed to such person at the address set forth herein with copies to Trustee, Owner Participants, or Agent, as the case may be. Whenever any notice is required to be given, such notice shall be deemed given and such requirement satisfied if such notice is (i) mailed, on the day of deposit into the mail, or (ii) personally delivered, when delivered, or (iii) cabled, when such notice is delivered to the telegraph company, or (iv) telecopied, when the telecopy has been received, or (v) telexed, when the answer back of the addressee is received. Any person entitled to notice hereunder may change the address to which notices to such person will be sent by giving notice of such change to Trustee, Owner Participant, or Agent. If to Trustee: Trust Company for USL, Inc. 615 Battery Street San Francisco, Ca 94111 Attn: President Telex: 278031 If to Airlease: United States Airlease, Inc. 615 Battery Street San Francisco, Ca 94111 Attn: President If to the Partnership: Airlease Ltd., A California Limited Partnership c/o Airlease Management Services, Inc. 2988 Campus Drive San Mateo, Ca 94403 Attn: President If to NAF: North American Aircraft Finance Corporation 3225 North Harbor Drive San Diego, California 92101 Attn: Executive Vice President 29 30 Section 15.06 Severability. Any provision of this Agreement 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. Section 15.07 Limitation on Liability of Owner Participants and Agent. The Owner Participants or Agent shall not have any liability for the performance of this Agreement except as expressly set forth herein or, with respect to the Agent, in any written instructions of the Trustee pursuant to this Agreement. Section 15.08 Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 15.09 Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, the Trustee and its successors and assigns, the Owner Participants and their successors and, to the extent permitted by Article XIV hereof, its assigns, all as herein provided, and the Agent and its successors and assigns, to the extent permitted by Article XII hereof. Any request, notice, direction, consent, waiver or other instrument or action by the Owner Participants, shall bind the successors and assigns of such Owner Participant. Section 15.10 Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. The remainder of this page is intentionally omitted. Section 15.11 Governing Law. This Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of California, including all matters of construction, validity and performance. 30 31 IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be duly executed by their respective officers hereto duly authorized, as of the day and year first above written. AIRLEASE LTD., A CALIFORNIA UNITED STATES AIRLEASE, INC., LIMITED PARTNERSHIP, as as Owner Participant Owner Participant /s/ Douglas C. Kay ------------------- By: Airlease Management Services, Inc., By: Douglas C. Kay General Partner Vice President /s/ Douglas C. Kay - ------------------ By: Douglas C. Kay TRUST COMPANY FOR USL, INC. Vice President as Trustee /s/ Frances E. Liu ------------------- NORTH AMERICAN AIRCRAFT By: Frances E. Liu FINANCE CORPORATION, Vice President as Owner Participant /s/ George M. Shortley - ----------------------- By: George M. Shortley UNITED STATES AIRLEASE, INC. Executive Vice President as Agent /s/ Douglas C. Kay ------------------- By: Douglas C. Kay Vice President 31 32 SCHEDULE 1 AIRCRAFT DATA
FAA Manufacturer's Pratt & Whitney Registration Serial JT8D-9 Engines No. No. Serial Nos. - -------------------------------------------------------------------------------- N7379F 20071 P674314B P673484B
32 33 EXHIBIT 10.17 Trust Company for USL, Inc., Trustee Under Trust Agreement Dated as of December 30, 1986 CERTIFICATE Issued in connection with the Aircraft hereinafter described: Boeing 737-200 series aircraft, FAA Registration No. N7379F. January 6, 1987 $2,366,666.67 Trust Company for USL, Inc., not in its individual capacity but solely as Trustee (herein in such capacity called the "Trustee") under the Trust Agreement hereinafter referred to hereby certifies as follows: (i) this Certificate is one of the Certificates referred to in the certain Trust Agreement (N7379F) dated as of December 30, 1986 by and among the Trustee, Airlease Ltd., A California Limited Partnership, United States Airlease, Inc., and North American Aircraft Finance Corporation (herein called "Trust Agreement"): the defined terms therein not otherwise defined herein being herein used with the same meaning), which Certificates have been or are to be issued by the Trustee pursuant to the Trust Agreement; (ii) United States Airlease, Inc. is an Owner Participant and owns an undivided one-third (1/3) interest in the Trust Estate; and (iii) the holder of this Certificate has, ratably with the holders of the other Certificates, an undivided beneficial interest in the Trust Estate and is entitled to receive ratably with the holders of the other Certificates issued with respect to the Trust Estate as provided in the Trust Agreement, a share of a portion of (1) the rental received or to be received by the Trustee with respect to the Trust Estate or (2) upon the sale or lease of all or any part of the Trust Estate any proceeds received or receivable therefrom as well as a share of certain other payments which may be received by the Trustee pursuant to the terms of the Trust Agreement as more particularly set forth therein. All amounts payable hereunder and under the Trust Agreement shall be paid only from the income and the proceeds from the Trust Estate and only to the extent that the Trustee shall have sufficient income or proceeds from the Trust Estate to make such payments in accordance with the terms of the Trust Agreement, except as specifically provided in Section 8.01 thereof, and each holder hereof by its acceptance of this Certificate, agrees that it will look solely to the income and proceeds from the Trust Estate to the extent available for distribution to such holder as above provided and that neither the Owner Participants nor the Trustee (except to the extent provided in Section 8.01 of the Trust Agreement) are personally liable to the holder hereof for any amounts payable under this Certificate or the Trust Agreement. 34 Trust Company for USL, Inc., Trustee Under Trust Agreement Dated as of December 30, 1986 CERTIFICATE Issued in connection with the Aircraft hereinafter described: Boeing 737-200 series aircraft, FAA Registration No. N7379F January 6, 1987 $2,366,666.67 Trust Company for USL, Inc., not in its individual capacity but solely as Trustee (herein in such capacity called the "Trustee") under the Trust Agreement hereinafter referred to hereby certifies as follows: (i) this Certificate is one of the Certificates referred to in the certain Trust Agreement (N7379F) dated as of December 30, 1986, by and among the Trustee, Airlease Ltd., A California Limited Partnership, United States Airlease, Inc., and North American Aircraft Finance Corporation (herein called "Trust Agreement"); the defined terms therein not otherwise defined herein being herein used with the same meaning), which Certificates have been or are to be issued by the Trustee pursuant to the Trust Agreement; (ii) Airlease Ltd., A California Limited Partnership is an Owner Participant and owns an undivided one-third (1/3) interest in the Trust Estate; and (iii) the holder of this Certificate has, ratably with the holders of the other Certificates, an undivided beneficial interest in the Trust Estate and is entitled to receive, ratably with the holders of the other Certificates issued with respect to the Trust Estate as provided in the Trust Agreement, a share of a portion of (1) the rental received or to be received by the Trustee with respect to the Trust Estate, or (2) upon the sale or lease of all or any part of the Trust Estate, any proceeds received or receivable therefrom, as well as a share of certain other payments which may be received by the Trustee pursuant to the terms of the Trust Agreement as more particularly set forth therein. All amounts payable hereunder and under the Trust Agreement shall be paid only from the income and the proceeds from the Trust Estate and only to the extent that the Trustee shall have sufficient income or proceeds from the Trust Estate to make such payments in accordance with the terms of the Trust Agreement, except as specifically provided in Section 8.01 thereof, and each holder hereof, by its acceptance of this Certificate, agrees that it will look solely to the income and proceeds from the Trust Estate to the extent available for distribution to such holder as above provided and that neither the Owner Participants nor the Trustee (except to the extent provided in Section 8.01 of the Trust Agreement) are personally liable to the holder hereof for any amounts payable under this Certificate or the Trust Agreement. Reference is hereby made to the Trust Agreement for a statement of the rights of the holder of this Certificate and of the rights of the holders of the other Certificates as well as for a statement of the terms and conditions of the trusts created by, and the rights limitations of rights obligations and duties of the Trustee set forth in, the Trust Agreement, to all of which terms and conditions each holder hereof agrees by its acceptance of this Certificate. 35 Each holder hereof by its acceptance of this Certificate, agrees not to transfer this Certificate except in accordance with the terms of Article XIV and Section 3.06 of the Trust Agreement. These Certificates have not been registered under the Securities Law of 1933, as amended, and may be transferred only in compliance with such law. IN WITNESS WHEREOF the Trustee has duly executed this Certificate as of the date first above written. Trust Company for USL, Inc. as Trustee, /s/ Douglas C. Kay ----------------------------- By Douglas C. Kay Vice President 2 36 Trust Company for USL. Inc., Trustee Under Trust Agreement Dated as of December 30, 1986 CERTIFICATE Issued in connection with the Aircraft hereinafter described: Boeing 737-200 series aircraft. FAA Registration No. N7379F. January 6, 1987 $2,366,666.67 Trust Company for USL, Inc. not in its individual capacity but solely as Trustee (herein in such capacity called the "Trustee") under the Trust Agreement hereinafter referred to hereby certifies as follows: (i) this Certificate is one of the Certificates referred to in the certain Trust Agreement (N7379F) dated as of December 30, 1986, by and among the Trustee. Airlease Ltd., A California Limited Partnership. United States Airlease, Inc. and North American Aircraft Finance Corporation (herein called "Trust Agreement"), the defined terms therein not otherwise defined herein being herein used with the same meaning), which Certificates have been or are to be issued by the Trustee pursuant to the Trust Agreement, (ii) North American Aircraft Finance Corporation is an Owner Participant and owns an undivided one-third (1/3) interest in the Trust Estate, and (iii) the holder of this Certificate has, ratably with the holders of the other Certificates, an undivided beneficial interest in the Trust Estate and is entitled to receive, ratably with the holders of the other Certificates issued with respect to the Trust Estate as provided in the Trust Agreement, a share of a portion of (1) the rental received or to be received by the Trustee with respect to the Trust Estate or (2) upon the sale or lease of all or any part of the Trust Estate, any proceeds received or receivable therefrom as well as a share of certain other payments which may be received by the Trustee pursuant to the terms of the Trust Agreement as more particularly set forth therein. All amounts payable hereunder and under the Trust Agreement shall be paid only from the income and the proceeds from the Trust Estate and only to the extent that the Trustee shall have sufficient income or proceeds from the Trust Estate to make such payments in accordance with the terms of the Trust Agreement, except as specifically provided in Section 8.01 thereof, and each holder hereof, by its acceptance of this Certificate agrees that it will look solely to the income and proceeds from the Trust Estate to the extent available for distribution to such holder as above provided and that neither the Owner Participants nor the Trustee (except to the extent provided in Section 8.01 of the Trust Agreement) are personally liable to the holder hereof for any amounts payable under this Certificate or the Trust Agreement. Reference is hereby made to the Trust Agreement for a statement of the rights of the holder of this Certificate and of the rights of the holders of the other Certificates, as well as for a statement of the terms and conditions of the trusts created by and the right a limitations of rights obligations and duties of the Trustee 37 set forth in, the Trust Agreement, to all of which terms and conditions each holder hereof agrees by its acceptance of this Certificate. Each holder hereof by its acceptance of this Certificate agrees not to transfer this Certificate except in accordance with the terms of Article XIV and Section 3.06 of the Trust Agreement. These Certificates have not been registered under the Securities Law of 1933, as amended, and may be transferred only in compliance with such law. IN WITNESS WHEREOF, the Trustee has duly executed this Certificate as of the date first above written. Trust Company for USL, Inc., as Agent /s/ Douglas C. Kay ----------------------------- By: Douglas C. Kay Vice President 2 EX-10.40 8 TRUST AGREEMENT 1 Exhibit 10.40 ================================================================================ TRUST AGREEMENT DATED AS OF August 15, 1988 AMONG AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP, as Owner Participant, UNITED STATES AIRLEASE, INC. as Owner Participant and Agent, AND TRUST COMPANY FOR USL, INC., as Trustee Concerning One (1) McDonnell Douglas DC-9-82 Aircraft with FAA Registration No. N913TW Leased to Trans World Airlines, Inc. ================================================================================ -1- 2 TABLE OF CONTENTS
ARTICLE PAGE - ------- ---- I Definitions . . . . . . . . . . . . . . . . . . . . 4 II Authority to Execute and Perform Various Documents; Declaration of Trust by Trustee . . . . . . . . . . . 6 III Beneficial Interest of Owner Participants in Trust Estate and Certificates . . . . . . . . . . . . . . . . . 6 IV Acceptance of Lease Property . . . . . . . . . . . . . . . . . . 10 V Management and Administrative Services . . . . . . . . . . . . . 11 VI Distributions . . . . . . . . . . . . . . . . . . . . 12 VII Duties of the Trustee . . . . . . . . . . . . . . . . . . . . . 13 VIII The Trustee . . . . . . . . . . . . . . . . . . . . 15 IX Indemnification of Trustee by Owner Participants . . . . . . . . . . . . . . . . . . . . 17 X Termination of Trust Agreement . . . . . . . . . . . . . . . . . 18 XI Successor Trustees, Co-Trustees and Separate Trustees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 XII Concerning the Agent . . . . . . . . . . . . . . . . . . . . . . 21 XIII Supplements and Amendments . . . . . . . . . . . . . . . . . . . 23 XIV Sale, Transfer or Mortgage of Lease Property . . . . . . . . . . 23 XV Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 28 Schedule I - Description of Aircraft and Engines . . . . . . . . . . . . 32
-2- 3 TRUST AGREEMENT THIS TRUST AGREEMENT dated as of August 15, 1988, by and among Trust Company for USL, Inc., a trust company organized under the laws of the State of Illinois, in its individual capacity as expressly stated herein and otherwise not in its individual capacity but solely as trustee hereunder (herein in such capacity with its permitted successors and assigns called the "Trustee"); Airlease Ltd., A California Limited Partnership (herein referred to as the "Partnership" or "Owner Participant"); and United States Airlease, Inc., a California corporation, (herein sometimes referred to as "Airlease" or "Owner Participant" in its separate capacity as Owner Participant and at other times, herein sometimes referred to as "Agent" in its separate capacity as Agent). (The Partnership and Airlease are herein sometimes referred to collectively as the "Owner Participants.") W I T N E S S E T H WHEREAS, DC-9T-III, a Delaware corporation ("Seller"), is the owner of the full legal and beneficial title to one (1) McDonnell Douglas DC-9-82-Aircraft, which is subject to the Lease (as hereinafter defined); WHEREAS, the Owner Participants are entering into this Trust Agreement with the Trustee for the purpose of acquiring the Aircraft and the Trustee shall purchase the Aircraft upon the instructions of the Owner Participants, with funds advanced by each of the Owner Participants; WHEREAS, Each of the Partnership and Airlease shall hold an undivided fifty percent (50%) beneficial interest in the Lease Property (as hereafter defined); WHEREAS, upon the instructions of the Owner Participants, the Trustee is entering into an agreement with Intercontinental Pacific Group, Inc., a California corporation ("IPG"), Seller, and the Owner Participants to acquire the Seller's interest in the Aircraft; WHEREAS, the parties hereto desire to set forth certain of their rights and obligations in respect of their interests under the Certificates and in the Trust Estate (as such terms are hereafter defined); NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows: -3- 4 ARTICLE I Definitions Section 1.01. For all purposes of this Agreement, the following terms shall have the following meanings (such definitions to be equally applicable to both the singular and plural forms of the terms defined): "Affiliate" means any individual, partnership, joint venture, estate, association, corporation, trust company, trust or other entity (collectively, "Person") that directly or indirectly controls, is controlled by, or is under common control with the Person in question. "Agreement" means this Trust Agreement, as it may hereafter from time to time be supplemented, amended, waived, or modified pursuant to the applicable provisions hereof. "Aircraft" means the McDonnell Douglas DC-9-82 aircraft, FAA Registration No. N913TW, Serial No. 49184, identified in Schedule 1 to this Agreement, as more particularly defined in the applicable Lease, including the Engines pertaining thereto. "Application for Aircraft Registration" means the Application for Aircraft Registration (AC Form 8050-1) with respect to the Aircraft. "Assumption Agreement" means the Assumption Agreement dated as of the Closing Date among Seller, Buyer, Security Pacific Equipment Leasing, Inc., IPG, and Pegasus Capital Corporation. "Certificate" means a certificate substantially in the form included in Article III hereof issued by the Trustee to the Owner Participants. "Closing Date" means the date the Aircraft is purchased by the Trustee pursuant to the Purchase Agreement. "Engine" in respect of the Aircraft means the two (2) Pratt & Whitney JT8D-217A engines identified by serial number in Schedule 1 hereto. "FAA" means the Federal Aviation Administration and any agency succeeding to the powers thereof. "FAA Bill of Sale" means the bill of sale for the Aircraft on AC Form 8050-2 or such other form as may be approved by the FAA on the Closing Date for the Aircraft. "IPG" means Intercontinental Pacific Group, Inc., a California corporation. -4- 5 "Lease" means the Aircraft Lease Agreement, dated as of March 15, 1984 relating to the Aircraft between Seller as Lessor and Lessee, as supplemented by Lease Supplement No. 1 thereto dated March 22, 1984, recorded as one instrument by the FAA on April 26, 1984, and assigned Conveyance Number S47200, and as amended by the Amendment Agreement dated as of December 15, 1986, recorded by the FAA on January 26, 1987 and assigned Conveyance Number E91224, and all Exhibits attached thereto. "Lease Assignment" means an Assignment and Assumption Agreement between the Trustee, the Owner Participants and Seller, with respect to the Aircraft, the Lease and the Participation Agreement in the form attached to the Purchase Agreement as such Assignment and Assumption Agreement may hereafter from time to time be supplemented, amended, waived or modified. "Lease Property" means the Lease, the Aircraft, the Purchase Agreement, and the Participation Agreement and all income, deductions, credits and other benefits to which an owner of property would be entitled to as lessor under the Lease, and owner of the Aircraft, including without limitation, all rental payments under the Lease, the right to possession of the Aircraft, and all proceeds upon the sale or re-lease of the Aircraft. "Lender" means any Person whose principal business is providing financing and which provides financing to the Trustee or Owner Participants and is granted a Lien on the Aircraft, or the Airframe, or an Engine or Part. "Lessee" means Trans World Airlines, Inc., a Delaware corporation. "Majority in Interest of Owner Participants", as of a particular date of determination, means the Owner Participant(s) having in excess of 75% of the then outstanding amount of all Certificates. "Operative Documents" means this Agreement, the Lease, the Lease Assignment, the Assumption Agreement, the Certificates, the Purchase Agreement, the Application for Aircraft Registration, the FAA Bill of Sale and the Warranty Bill of Sale, the Participation Agreement and all other agreements, instruments and certificates contemplated by such documents. "Participation Agreement" means the Participation Agreement between Seller and Lessee dated as of March 15, 1984, relating to the Lease and the Aircraft. "Partnership Agreement" means the Amended and Restated Agreement of Limited Partnership, dated as of October 10, 1986, among Airlease Management Services, Inc. ("General Partner"), United States Airlease Holding, Inc., and other limited partners specified therein (the "Partnership Agreement") to acquire, own, lease, and otherwise hold interests in aircraft lease transactions. -5- 6 "Purchase Agreement" means the Aircraft Purchase Agreement, dated as of August 15, 1988, by and among the Trustee, IPG, Seller and the Owner Participants, as such Purchase Agreement may hereafter from time to time be supplemented, amended, waived or modified. "Seller" means DC-9T-III, Inc., a Delaware corporation. "Trust Estate" means all estate, right, title and interest of the Trust in and to the Operative Documents, any funds given to the Trustee by the Owner Participants, and the Lease Property, including, without limitation, all amounts of Basic Rent, insurance proceeds, stipulated loss value payments, and requisition, indemnity or other payments of any kind (1) for or with respect to the Lease Property or (2) payable to the Trustee under the Purchase Agreement, Lease Assignment or Lease, or with respect to the Lease Property, excluding any indemnity payments paid directly to an Owner Participant. "Warranty Bill of Sale" means the bill of sale covering the Aircraft in the form attached to the Purchase Agreement. Section 1.02. For all purposes of this Agreement, any term used but not defined herein shall have the meanings assigned to it in the Lease, including, without limitation, "Airframe," "Parts," "Default," "Event of Default," "Basic Rent" or "rental," and "Lien." ARTICLE II Authority to Execute and Perform Various Documents; Declaration of Trust by Trustee Section 2.01 Authority to Execute and Perform Various Documents. Each Owner Participant hereby authorizes and directs the Trustee (i) to execute and deliver the Purchase Agreement, the Lease Assignment, the Certificates, the Assumption Agreement, the Application, for Aircraft Registration and the Affidavit pursuant to Section 47.7(c)(2)(ii) of the Federal Aviation Regulations with respect to the Aircraft, and all other agreements, instruments and certificates contemplated by the Operative Documents, and to accept the FAA Bill of Sale and the Warranty Bill of Sale and (ii) subject to the terms of this Agreement, to take other action in connection with the foregoing as the Owner Participants may from time to time direct in writing. Section 2.02 Declaration of Trust by Trustee. The Trustee hereby declares that it will and does hold the Trust Estate upon the trusts set forth herein for the sole use and benefit of the Owner Participants. ARTICLE III Beneficial Interest of Owner Participants in Trust Estate and Certificates Section 3.01. Beneficial Interest of Each Owner Participant. -6- 7 (a) Each Owner Participant shall have and retain an undivided fifty percent (50%) beneficial interest in the Trust Estate, such interest to be evidenced by Certificate(s) to be issued hereunder. The Owner Participants have jointly agreed to participate in the purchase of the Lease Property on the Closing Date on the terms set forth in the Purchase Agreement, and each Owner Participant shall, on the Closing Date, wire transfer to the Seller on behalf of the Trustee its pro-rata portion of the purchase price for the Aircraft. Section 3.02. The Certificates. The Owner Participants hereby authorize and direct the Trustee, and the Trustee agrees that it will issue to each Owner Participant a Certificate substantially in the form set forth below as provided in Section 3.03 hereof. Trust Company for USL, Inc., Trustee Under Trust Agreement Dated as of August 15, 1988 CERTIFICATE Issued in connection with the Aircraft hereinafter described: McDonnell Douglas DC-9-82 Aircraft, Serial No. 49184, FAA Registration No. N913TW. August _____, 1988. Trust Company for USL, Inc., not in its individual capacity but solely as Trustee (herein in such capacity called the "Trustee") under the Trust Agreement hereinafter referred to hereby certifies as follows: (i) this Certificate is one of the Certificates referred to in the certain Trust Agreement dated as of August 15, 1988, by and among the Trustee, Airlease Ltd., A California Limited Partnership, and United States Airlease, Inc., (herein called "Trust Agreement"); the defined terms therein not otherwise defined herein being herein used with the same meaning), which Certificates have been or are to be issued by the Trustee pursuant to the Trust Agreement; (ii)_________ is an Owner Participant and owns an undivided 50% interest in the Trust Estate; and (iii) the holder of this Certificate has, ratably with the holders of the other Certificates, an undivided beneficial interest in the Trust Estate and is entitled to receive, ratably with the holders of the other Certificates issued with respect to the Trust Estate as provided in the Trust Agreement, a share of a portion of (1) the rental received or to be received by the Trustee with respect to the Trust Estate, or (2) upon the sale or lease of all or any part of the Trust Estate, any proceeds received or receivable therefrom, as well as a share of certain other payments, which may be received by the Trustee pursuant to the terms of the Trust Agreement as more particularly set forth therein. All amounts payable hereunder and under the Trust Agreement shall be paid only from the income and the proceeds from the Trust Estate and only to the extent that the Trustee shall have sufficient income or proceeds from the Trust Estate to make such payments in accordance with the terms of the Trust Agreement, except as specifically provided in Section 8.01 thereof; and each holder hereof, by its acceptance of this Certificate, agrees that it will look solely to the income and proceeds from the Trust Estate to the extent available for distribution to such holder as above provided and that neither the Owner Participants nor the Trustee (except to the -7- 8 extent provided in Section 8.01 of the Trust Agreement) are personally liable to the holder hereof for any amounts payable under this Certificate or the Trust Agreement. Reference is hereby made to the Trust Agreement for a statement of the rights of the holder of this Certificate and of the rights of the holders of the other Certificates, as well as for a statement of the terms and conditions of the trusts created by, and the rights, limitations of rights, obligations and duties of the Trustee set forth in, the Trust Agreement, to all of which terms and conditions each holder hereof agrees by its acceptance of this Certificate. Each holder hereof, by its acceptance of this Certificate, agrees not to transfer this Certificate except in accordance with the terms of Article XIV and Section 3.06 of the Trust Agreement. These Certificates have not been registered under the Securities Law of 1933, as amended, and may be transferred only in compliance with such law. IN WITNESS WHEREOF, the Trustee has duly executed this Certificate as of the date first above written. --------------------------- Name: Stanley E. Gutman Title: Vice President TRUST COMPANY FOR USL, INC. Section 3.03. Issuance of Certificates. Each Certificate issued to an Owner Participant shall contain a statement by the Trustee that the holder of such Certificate has, ratably with the holders of the other Certificates, an undivided beneficial interest in the Trust Estate, and is entitled to receive, ratably with the holders of the other like Certificates as provided herein, a share of a portion of (i) the rental received or to be received by the Trustee for such Trust Estate, or (ii) upon the sale or lease of all or any part of the Trust Estate, any proceeds received or receivable therefrom, as well as a share of certain other payments which may be received by the Trustee pursuant to the terms hereof as more particularly set forth herein. Section 3.04. Payments from Trust Estate Only. All payments to be made under the Certificates and under this Trust Agreement shall be made only from the income and the proceeds from the Trust Estate and only to the extent that the Trustee shall have sufficient income or proceeds from the Trust Estate to make such payments in accordance with the terms of Article VI hereof, except as specifically provided in Section 8.01 hereof. Each holder of a Certificate, by its acceptance of such Certificate, agrees that it will look solely to the income and proceeds from the Trust Estate, to the extent available for distribution to such holder as above provided and that the Owner Participants are not personally liable to the holder of any Certificates. Except as specifically provided herein, the Trustee is not liable to the Owner Participants for any amounts payable under this Agreement and is not subject to any liability in its individual capacity under this Agreement. -8- 9 Section 3.05. Payment to Holder of Certificate. Subject to Article VI, any amounts received by the Trustee and payable to each holder of a Certificate pursuant to this Trust Agreement will be payable to each such holder by wire transfer of immediately available funds to the bank for the account of each Owner Participant as such Owner Participant shall direct in writing, without any presentment or surrender of any Certificate. The Trustee may deem and treat the person in whose name any Certificate shall have been issued by the Trustee as the absolute owner and holder of such Certificate for the purpose of receiving payment of all amounts payable by the Trustee with respect to such Certificate and for all other purposes, and the Trustee shall not be affected by any notice to the contrary. Section 3.06. Transfer of Certificate. Subject to Article XIV, a holder of a Certificate intending to transfer any Certificate held by such holder to a new holder shall surrender such Certificate to the Trustee, together with a written request from such holder for the issuance of a new Certificate, specifying the name and address of the transferee and evidence that the conditions set forth herein for such transfer have been satisfied. Promptly upon receipt of such documents the Trustee will issue a new Certificate of the same type, dated the same date or dates, in the amounts indicated, and designated as issued in connection with the Aircraft as the Certificate surrendered, and naming such transferee as shall be specified in the written request from such holder, the Trustee shall not be required to exchange any surrendered Certificate as above provided during the 10-day period preceding the due date of any payment on such Certificate. Section 3.07. Mutilated, Destroyed, Lost, or Stolen Certificates. If any Certificate shall become mutilated, destroyed, lost or stolen, the Trustee shall, upon the written request of the holder of such Certificate, execute and deliver in replacement thereof a new Certificate, in the same original amount, dated the same date, as the Certificate so mutilated, destroyed, lost or stolen. If the Certificate being replaced has become mutilated, such Certificate shall be surrendered to the Trustee. If the Certificate being replaced has been destroyed, lost or stolen the holder of such Certificate shall furnish to the Trustee such security or indemnity as may be required by either of them to save it harmless and evidence satisfactory to the Trustee of the destruction, loss or theft of such Certificate and of the ownership thereof. If such holder is an original Owner Participant, the written undertaking of such Owner Participant shall be sufficient indemnity. Section 3.08. Payment of Expenses Upon Transfer. Upon the issuance of a new Certificate or Certificates pursuant to Section 3.06 or 3.07 hereof, the Trustee may require the payment from the party or parties to whom such new Certificate or Certificates are issued of a sum to reimburse itself for, or to provide funds for, the payment of any tax or other governmental charge or any charges and expenses connected therewith paid or payable by the Trustee. Section 3.09. Payments by Each Owner Participant. Payments and contributions (including, without limitation, Trustee's fees and expenses and indemnifications of the Trustee) provided for herein to be made by each Owner Participant shall be made by each Owner Participant in proportion to its beneficial interest in the Trust Estate at the time such payments or contributions are due and payable. In the event that any Owner Participant makes a payment for any costs or expenses (including legal fees and expenses) pursuant to the written instructions of the Trustee or a Majority in Interest of Owner Participants, such Owner Participant shall be entitled to immediate -9- 10 reimbursement therefor from the other Owner Participants in proportion to its beneficial interest in the Trust Estate. ARTICLE IV Acceptance of Lease Property Section 4.01 Acceptance of Lease Property. The Owner Participants hereby authorize and direct the Trustee to, and the Trustee agrees for the benefit of the Owner Participants, that on the Closing Date, it will, subject to due compliance with the terms of Section 4.02 hereof, take such actions as are required of the Trustee hereunder or under the Operative Documents, including without limitation, the following: (a) authorize a representative or representatives of the Trustee to accept the FAA Bill of Sale, Warranty Bill of Sale, a complete copy of the Lease and an executed counterpart of the Participation Agreement, on such Closing Date; (b) execute and deliver a Lease Assignment relating to the Lease Property; and (c) execute and deliver the Assumption Agreement; and (d) upon the payment by each Owner Participant of its proportionate share of the purchase price for the Aircraft, the Trustee shall cause the Agent, without further act, authorization, or direction by the Owner Participants to the Trustee, to file on behalf of the Trustee the FAA Bill of Sale, UCC-1 Financing Statements, the Aircraft Registration Application, and other related documents in the name of the Trustee; and (e) execute and deliver, and accept, each of the Operative Documents and all other related documents to which it is a party; and (f) issue a Certificate for such interest in the Trust Estate to each of the Owner Participants. Section 4.02 Conditions Precedent. The right and obligation of the Trustee to take the action required by Section 4.01 hereof shall be subject to the conditions precedent enumerated in Article III of the Purchase Agreement. Section 4.03 Authority Without Express Instructions. The Trustee, without the necessity of further instructions from the Owner Participants, is hereby authorized and directed by the Owner Participants to take all action specified in the Operative Documents as action to be taken by the Trustee; provided, however, that the Trustee shall not give any consent, waive any right or benefit or enter into any modification or amendment of the Operative Documents or take any other action to perform any obligation of Lessee under the Lease except at the direction of all of the Owner Participants or a Majority in Interest Owner Participants, as applicable. -10- 11 Section 4.04 Replacements. The Owner Participants hereby authorize and direct the Trustee, and the Trustee agrees for the benefit of the Owner Participants that, in the event of a replacement airframe or engine, if any, being substituted pursuant to the applicable provisions of the Lease, it will, subject to Section 7.02 hereof and in compliance with the terms of the Lease: (a) to the extent not previously accomplished by a prior authorization, authorized a representative of the Trustee (who may be an employee of the Lessee) to accept delivery of the replacement airframe or engine; (b) accept from the Lessee or other vendor of a replacement airframe or engine a bill of sale or bills of sale and the invoice, if any, with respect to such replacement airframe or engine; (c) execute and deliver a Lease Supplement covering such replacement airframe or engine and, to the extent requested by counsel to any Owner Participant, execute and deliver any required amendments to this Agreement or any other Operative Document to which the Trustee is a party and request any required consent form the manufacturer of such replacement airframe or engine; and (d) transfer title to the airframe or engine being replaced to the Lessee. ARTICLE V Management and Administrative Services Section 5.1. Partnership Agreement. Pursuant to the Partnership Agreement (i) the General Partner or Airlease or other Affiliates (as defined in the Partnership Agreement) will perform certain management, administrative, and remarketing services for the Partnership, including, without limitation, the payment of operating expenses, lease management, collection of lease income, negotiation and review of leases, servicing indebtedness secured by aircraft, disposing and remarketing of aircraft, the payment of distributions and allocations to the limited partners of the Partnership, and preparing the books and records and tax returns of the Partnership; and (ii) the Partnership will pay certain fees (as specified in the Partnership Agreement) as compensation for the performance of such services. All of the terms, conditions, and agreements under the Partnership Agreement are incorporated by reference herein as though set forth at length, and in the event of any inconsistency between the provisions of this Agreement and the Partnership Agreement, the provisions of the Partnership Agreement shall control. Section 5.2. Compensation and Reimbursement of Owner Participants. (a) No Compensation. Except as may be expressly provided for herein, no payment will be made by or to any Owner Participant for the services of such Owner Participant or any officer, shareholder, director, or employee of such Owner Participant. -11- 12 (b) Reimbursable Expenditures. Airlease or its Affiliates shall receive fees and compensation and be reimbursed by the Partnership in accordance with the Partnership Agreement, for expenditures incurred in connection with negotiating and consummating the transaction contemplated by the Purchase Agreement and this Agreement, performing management and administrative services in connection with the Trust Estate and disposing of or remarketing the Aircraft for lease. Section 5.3. Scope of Owner Participant's Authority. Except as otherwise specified in this Agreement: (a) no Owner Participant shall have any authority to bind or act for, or assume any obligations or responsibility on behalf of, the other Owner Participant, and (b) no Owner Participant shall be responsible or liable for any indebtedness or obligation of the other Owner Participant relating to the Trust Estate, or otherwise. Section 5.4. Joint Directions Under Trust Agreement. In the event it shall be necessary or appropriate at any time, or from time to time, for the Owner Participants to give any directions, authorizations or instructions to the Trustee under the Trust Agreement, or otherwise, the Partnership and Airlease hereby agree that all such directions, authorizations or instructions shall be given by them jointly, and that each will act in good faith to reach agreement as to such directions, authorizations or instructions, and each will join with the other to execute any and all joint written directions, authorizations or instructions to the Trustee as may be necessary or appropriate in the premises. ARTICLE VI Distributions Section 6.01 Distribution of Rental. Each payment of rental, as well as payment of interest on overdue rental installments, received by the Trustee at any time shall be distributed in accordance with Section 3.05 by the Trustee on the date such payment is due from the Lessee (or as soon thereafter as such payment shall be received by the Trustee) to each Owner Participant without priority of one over the other ratably in proportion to its undivided beneficial interest in the Trust Estate. The Trustee agrees to take all reasonable steps necessary to collect any rent or other amounts due under the operative Documents. Section 6.02. Distribution of Payments. All payments and amounts, except for rental, if any, received by the Trustee shall be distributed forthwith upon receipt, provided, however, all such amounts in excess of $10,000 shall be distributed no later than twenty four (24) hours after the Trustee has knowledge of its receipt, in the following order of priority: first, so much of such payment or amount as shall be required to reimburse the Trustee for any reasonable fees or expenses not otherwise paid or reimbursed by the Owner Participants as to which the Trustee is entitled to be paid or reimbursed hereunder shall be retained by the Trustee; second, to reimburse an Owner Participant for payments made by it and not by all Owner Participants, pursuant to Section 7.03 or 9.01 hereof, or an instruction from the Trustee pursuant to a written instruction from all of the Owner Participants or a Majority in Interest of Owner Participants, as required, ratably in proportion to the aggregate amount of such payments made by each Owner -12- 13 Participant; and third, the balance, if any, of such payment or amount remaining thereafter shall be distributed to the Owner Participants ratably, without priority of one over the other, in proportion to the beneficial interest of each Owner Participant in the Trust Estate. Section 6.03 Distribution of Trust Estate. Whenever the terms of this Agreement shall require the Trustee to distribute or transfer the entire Trust Estate to any person(s), the Trustee shall be entitled to retain such monies and securities, if any, as shall then be held by the Trustee as a part of the Trust Estate and as shall be required to reimburse or pay the Trustee for any reasonable fees, expenses, or liabilities not reimbursed or paid by the Owner Participants as to which the Trustee is entitled to be paid or reimbursed hereunder or under any Operative Document and shall distribute the Trust Estate in accordance with Section 6.02. ARTICLE VII Duties of the Trustee Section 7.01 Notice of Event of Default. In the event the Trustee shall have knowledge of a Default or Event of Default, the Trustee shall give prompt written notice thereof to each Owner Participant. Subject to the terms of Section 7.03 hereof, the Trustee shall take or refrain from taking such action with respect to a Default or Event of Default as the Trustee shall be instructed in a written instrument executed by a Majority in Interest of Owner Participants. If the Trustee shall not have received instructions within twenty (20) days after giving notice of a Default or Event of Default as above provided, the Trustee may, but shall be under no duty to, and it shall have no liability for its failure or refusal, to take or refrain from taking any action with respect to such Default or Event of Default as it shall deem advisable and in the best interests of the Owner Participants; provided, however, that the Trustee shall give the owner Participants ten days' notice thereof prior to taking any such action. For all purposes of this Agreement, in the absence of actual knowledge of an officer of the Trustee, the Trustee shall not be deemed to have knowledge of a Default or an Event of Default unless it receives written notification thereof given by or on behalf of the Lessee, any Owner Participant or any other party. Section 7.02 Action upon Instructions. Subject to the terms of Sections 7.01 and 7.03 hereof, upon the written instructions of a Majority in Interest of Owner Participants, the Trustee will take or refrain from taking such action or actions, as may be specified in such instructions, including, without limitation, (i) enforcing provisions of the Lease;(ii) executing and filing UCC-1 Financing Statements; (iii) executing and delivering loan agreements with any Lender(s) (but only upon the written instruction of all of the Owner Participants); (iv) executing and delivering amendments to the Lease; (v) giving such notice of direction or exercising such right, remedy or power hereunder or under any of the Lease, the Assumption Agreement or the Purchase Agreement or in respect of all or any part of the Trust Estate, or taking such other action as shall be specified in such instructions; (vi) taking such action to preserve or protect the Trust Estate (including the discharge of liens and encumbrances) as may be specified in such instructions; (vii) approving as satisfactory to it or consenting to all matters required by the terms of the Operative Documents to be satisfactory to the Trustee, it being understood that without the written instructions of a Majority in Interest of Owner Participants, the Trustee shall not approve any such -13- 14 matter as satisfactory to it or consent to any such action; and (viii) taking such other action as a Majority in Interest of Owner Participants shall direct in writing. Section 7.03 Indemnification. The Trustee shall not be required to take or refrain from taking any action under this Agreement or any Operative Document (other than the actions specified in the first sentence of Section 7.01 hereof) unless the Trustee shall have been indemnified by the Owner Participants, in accordance with Article IX hereof, against any liability, fee, cost or expense (including attorneys' fees) which may be incurred or charged in connection therewith; and, if the Owner Participants or a Majority in Interest of Owner Participants, as required, shall have directed the Trustee to take or refrain from taking any action under this Agreement or any Operative Document, the Owner Participants agree to furnish the Trustee with the indemnification more particularly set forth in Article IX hereof, and, in addition, to pay the reasonable compensation of the Trustee for the services performed or to be performed by it pursuant to such direction. The Trustee shall not be required to take any action under this Agreement or any Operative Document if the Trustee shall reasonably determine, .or shall have been advised by counsel, that such action is contrary to the terms hereof or of any document contemplated hereby to which the Trustee is a party or is otherwise contrary to law. Section 7.04 No Duties Except as Specified in Trust Agreement or Instructions. The Trustee shall not have any duty or obligation to manage, control, make any payment in respect of, register, record, insure, inspect, instruct, use, sell, dispose of or otherwise deal with the Lease Property, or any other part of the Trust Estate, or to otherwise take or refrain from taking any action under, or in connection with, any document contemplated hereby to which the Trustee is a party, except as expressly provided by the terms of this Agreement, or in written instructions from a Majority in Interest of Owner Participants received pursuant to Section 7.01 or 7.02 hereof; and no implied duties or obligations shall be read into this Agreement against the Trustee. The Trustee, in its individual capacity, nevertheless agrees that it will, at its own cost and expense, promptly take all action as may be necessary to discharge any Liens (including Seller's Liens) on any part of the Trust Estate which result from actions or commissions or omissions by or claims against the Trustee, in its individual capacity, or the trusts created hereby not related to the Trustee's ownership of the Lease Property or any other part of the Trust Estate or the administration of the Trust Estate or the transactions contemplated by the Operative Documents or this Agreement. Section 7.05 No Action Except Under Specified Documents or Instructions. The Trustee agrees that it will not manage, control, use, sell, dispose of or otherwise deal with the Lease Property or any other part of the Trust Estate except (i) as required by this Agreement and the Operative Documents, or (ii) in accordance with the powers granted to, or the authority conferred upon, or the directions given to, the Trustee pursuant to or under this Agreement. Section 7.06 Absence of Duties. Except in accordance with written instructions furnished pursuant to Section 7.02 hereof, and without limitation of the generality of Section 7.04 and the last sentence of Section 11.01(b) hereof, the Trustee shall have no duty (i) to file, record or deposit any Operative Documents, any financing statements or this Agreement, or to maintain any such filing, recording or deposit or to refile, rerecord or redeposit any such document, except as specified in Section 7.02 hereof, (ii) to obtain insurance on the Aircraft, or to effect or maintain any -14- 15 such insurance, (iii) to maintain or mark the Aircraft, (iv) to pay or discharge any tax, assessment or other governmental charge or any lien or encumbrance of any kind owing with respect to or assessed or levied against any part of the Trust Estate, except as provided in the last sentence of Section 7.04 hereof, (v) to confirm, verify, investigate or inquire into the failure to receive any reports or financial statement of Lessee or any sublessee, or (vi) to inspect the Aircraft at any time or to ascertain or inquire as to the performance or observance of any covenants of Lessee or any sublessee under any Operative Document with respect to the Aircraft. ARTICLE VIII The Trustee Section 8.01 Acceptance of Trusts and Duties. The Trustee accepts the trusts hereby created and agrees to perform the same but only upon the terms of this Agreement. The Trustee also agrees to disburse all monies, if any, actually received by it constituting part of the Trust Estate upon the terms of this Agreement. The Trustee shall not be answerable or accountable under any circumstances, in its individual capacity, except (i) for its own willful misconduct or gross negligence, (ii) in the case of the inaccuracy of any representation or warranty of the Trustee contained in Section 8.03 hereof or any representation or warranty of the Trustee in its individual capacity contained in the Operative Documents, (iii) as arising from the failure by the Trustee to perform its obligations under the last sentence of Section 7.04 hereof, (iv) for taxes, fees or other charges on, based on or measured by any fees, commissions or compensation received by Trustee for acting as Trustee in connection with any of the transactions contemplated by the Operative Documents. Section 8.02 Furnishing of Documents. The Trustee will furnish to each Owner Participant, promptly upon receipt thereof, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and any other instruments furnished to the Trustee hereunder or under the Operative Documents. In case any tax report or tax return is required to be made with respect to the Trust Estate and the Lessee is not required to prepare and file the same pursuant to the Lease, the Trustee will prepare such tax report or return and deliver a copy thereof to each Owner Participant. Upon the request of the Trustee, each Owner Participant will provide such instruments, documents, certificates or other information as is reasonably necessary to enable the Trustee to prepare any such tax report or return. The Trustee agrees to forward to each Owner Participant a copy of any communications with respect to taxes pertaining to the Trust Estate which are received by the Trustee. Section 8.03 No Representations or Warranties as to Lease Property or Documents. THE TRUSTEE, IN ITS INDIVIDUAL CAPACITY, MAKES (i) NO REPRESENTATION OR WARRANTY AS TO THE TITLE, VALUE, CONDITION, DESIGN, OPERATION, AIRWORTHINESS, MERCHANTABILITY OR FITNESS FOR USE OF THE AIRCRAFT OR ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT, AIRFRAME, OR ANY ENGINE OR PART WHATSOEVER, -15- 16 and (ii) no representation or warranty as to the validity or enforceability of this Agreement or the Operative Documents, or as to the correctness of any statement contained in any thereof, except to the extent that any such statement is made therein by the Trustee, in its individual capacity, and except that the Trustee, in its individual capacity, hereby represents and warrants to each Owner Participant that this Agreement has been and each of such other documents which contemplates execution thereof by the Trustee has been or will be, executed and delivered by its officers who are or will be duly authorized to execute and deliver such document on its behalf, and except that the Trustee, in its individual capacity, hereby represents and warrants to each Owner Participant that the Lease Property is free and clear of any liens attributable to it and that it will comply with the last sentence of Section 7.04 hereof. Section 8.04 No Segregation of Monies; No Interest. Except as otherwise provided herein, monies, if any, received by the Trustee hereunder need not be segregated in any manner except to the extent required by law and may be deposited under such general conditions as may be prescribed by law, and the Trustee shall not be liable for any interest thereon. Section 8.05 Reliance; Advice of Counsel. The Trustee shall incur no liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond or other document or paper believed by it to be genuine and believed by it to be signed by the proper party or parties. The Trustee may accept a certified copy of a resolution of the Board of Directors or other governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the manner of ascertainment of which is not specifically prescribed herein, the Trustee may for all purposes hereof rely on a certificate, signed by a duly authorized officer of the relevant party, as to such fact or matter, and such certificate shall constitute full protection to the Trustee for any action taken or omitted to be taken by it in good faith in reliance thereon. In the administration of the trusts hereunder, the Trustee may execute any of the trusts or powers hereof and perform its powers and duties hereunder directly or through agents or attorneys and may consult, with counsel, accountants and other skilled persons to be selected and employed by it, and the Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the advice or opinion of any such counsel, accountants or other skilled persons and not contrary to this Agreement, so long as such advice or opinion pertains to such matters as the Trustee may reasonably presume to be within the scope of such person's expertise. Section 8.06 Not Acting in Individual Capacity. Except as provided in this Article VIII, in accepting the trusts hereby created the Trustee acts solely as trustee hereunder and not in its individual capacity; and all persons having any claim against the Trustee by reason of the transactions contemplated hereby or by the other Operative Documents shall look only to the Trust Estate for payment or satisfaction thereof, except as specifically provided in this Article VIII. -16- 17 ARTICLE IX Indemnification of Trustee by Owner Participants Section 9.01 Owner Participants to Indemnity Trustee. Each Owner Participant agrees to pay, severally, in proportion to its respective beneficial interest in the Trust Estate, to the extent not paid by the Lessee pursuant to the Lease (or reimburse the Trustee for), all reasonable expenses of the Trustee hereunder, including, without limitation, the reasonable compensation, expenses and disbursements of such agents, representatives, experts and counsel as the Trustee may employ in connection with the exercise and performance of its rights and duties hereunder or under the other Operative Documents, whether or not the transactions contemplated hereby are consummated; provided, however, that if the Trustee deems it advisable to employ any such agent, representative, expert or counsel, and the Trustee reasonably believes that the fees of such agent, representative, expert or counsel will exceed $5,000, the Trustee shall notify the Owner Participants thereof and shall employ such agent, representative, expert or counsel only if a Majority in Interest of Owner Participants has approved such employment. The Owner Participants agree to assume liability for, and to indemnify the Trustee in its individual capacity and its successors, assigns, agents and servants against and from any and all liabilities (including without limitation, any liability of the Owner Participants, and liability without fault and any strict liability), obligations, losses, damages, taxes (such term "taxes" or the term "tax" as used in this Article IX shall include, without limitation, all taxes specifically related to this Agreement and the Trust Estate created hereby excluding, however, any income taxes or fees or other compensation received by the trustee in its capacity as Trustee), claims, actions, suits, costs, expenses and disbursements (including legal fees and expenses) of any kind and nature whatsoever (collectively, "Expenses") which may be imposed on, incurred by or asserted at any time against the Trustee (whether or not indemnified against by the Lessee or any other parties) in any way relating to or arising out of the existence or administration of this Agreement, the Trust Estate or the action or inaction of the Trustee hereunder or under the other Operative Documents, or the enforcement of any of the terms of any thereof, or in any way relating to or arising out of the manufacture, purchase, acceptance, non-acceptance, rejection, ownership, delivery, lease, financing, possession, use, operation, condition, sale, return or other disposition of the Aircraft, the Airframe, or an Engine (including, without limitation, latent and other defects, whether or not discoverable, and any claim for patent, trademark or copyright infringement) or in any way relating to or arising out of the Operative Agreements, except that the foregoing indemnities shall not cover the Trustee (i) for its own willful misconduct or gross negligence, (ii) in the case of the inaccuracy of any representation or warranty of the Trustee contained in Section 8.03 hereof or any representation or warranty of the Trustee in its individual capacity contained in the Operative Documents, and (iii) as arising from the failure by the Trustee to perform its obligations under the last sentence of section 7.04 hereof, or obligations in its individual capacity contained in the operative Documents. In addition, if necessary, the Trustee shall be entitled to indemnification from the Trust Estate, for any liability, obligation, loss, damage, penalty, tax, claim, action, suit, cost, expense or disbursement indemnified against pursuant to this Section 9.01 to the extent not reimbursed by Lessee, the Owner Participants or others, but without releasing any of them from their respective agreements of reimbursement; and, to secure the same, the Trustee shall have a lien on the Trust Estate, subject to the Lien, if any, of any Lender, which shall be prior to any interest therein of the Owner Participants, but only in the -17- 18 event and to the extent that the Trustee does not receive payment from the Lessee or pursuant to any other provision of any Operative Document, except only that the Owner Participants shall not be required to indemnify the Trustee for expenses arising or resulting from any of the matters described in the last sentence of Section 8.01 hereof. The indemnities contained in this Section 9.01 shall survive the termination of this Agreement. Section 9.02 Compensation and Expense. The Trustee shall receive the following as compensation for its services hereunder, and as payment for all its costs, fees and expenses incurred in connection with the administration of the Trust Estate (including legal fees and expenses): (a) An acceptance fee of $2,500 and an administration fee of $2,000 ("Annual Administration Fee") for the one year period commencing on the Closing Date, and each year thereafter in which it is the Trustee hereunder and under the Operative Documents; provided, however, that after two (2) years from the date of this Agreement, the Trustee may request an increase in the Annual Administration Fee, and the Owner Participants shall consider such request and make its determination with respect thereto in good faith. Such Annual Administration Fee shall cover all of the Trustee's costs, fees and expenses of any kind incurred in connection with the administration of the Trust Estate, including, without limitation, any fees paid to the Agent and executing and delivering loan agreement(s) and other agreements with any Lender and taking such other action under or in connection with the Operative Documents as the Owner Participants shall direct in writing. (b) The Trustee shall be entitled to compensation for any of its reasonable out-of-pocket expenses and the reasonable fees and expenses of any agent, representative, expert or counsel employed by the Trustee, incurred in connection with its administration of the Trust Estate hereunder; provided, however, that if the Trustee reasonably believes that such expenses, fees and expenses will exceed $5,000, the Trustee will obtain the prior approval thereof of a Majority in Interest of Owner Participants. ARTICLE X Termination of Trust Agreement Section 10.01 Termination of Trust Agreement. Subject to Section 10.02 of this Agreement, this Agreement and the trusts created hereby shall terminate and the Trust Estate shall, subject to Article VI hereof, be distributed to the Owner Participants, and this Agreement shall be of no further force or effect, upon the earlier of (i) the sale or other final disposition by the Trustee of all property constituting part of the Trust Estate and the final distribution by the Trustee or any other party of all monies or other property or proceeds constituting part of the Trust Estate in accordance with the terms of Article VI hereof, provided that at such time the Lessee and any parties to the Operative Documents other than Trustee and Owner Participants shall have fully complied with all the terms of the Operative Documents to which it is a party or (ii) twenty-one (21) years less one day after the death of the last survivor of all of the descendants living on the date of this Agreement of the present members of the Boards of Directors of the Trustee and the Owner Participants; but if this Agreement and the trusts created hereby shall be or become valid -18- 19 under applicable law for a period subsequent to the 21st anniversary of the death of such last survivor, or if legislation shall become effective providing for the validity thereof for a period in gross exceeding the period hereinabove stated, than this Agreement and the trusts created hereby shall not terminate as aforesaid but shall extend to and continue in effect, buy only if such non-termination and extension shall then be valid under applicable law, until such time as the same shall, under applicable law, cease to be valid. Section 10.02 Termination at Option of Owner Participants The provisions of_Section 10.01 hereof notwithstanding, this Agreement and the trusts created hereby shall terminate and the Trust Estate shall be distributed to the Owner Participants in accordance with the terms of Article VI hereof, and this Agreement shall be of no further force and effect, upon the election, in their sole discretion, of all of the Owner Participants by notice to the Trustee, if such notice shall be accompanied by the written agreement of all of the Owner Participants assuming all the obligations of the Trustee under the Operative Documents and all other obligations of the Trustee incurred by it as Trustee hereunder. Such written agreement shall fully and completely release the Trustee from all further obligations and liabilities of the Trustee hereunder and under the agreements and other instruments mentioned in the preceding sentence; provided, however, that the obligations and liabilities of any party hereinunder arising prior to the date of such written agreement shall survive such termination of the Trustee. ARTICLE XI Successor Trustees, Co-Trustees and Separate Trustees Section 11.01 Resignation of Trustee; Appointment of Successor. (a) The Trustee may resign at any time without cause by giving at least thirty (30) days' prior written notice to each Owner Participant, such resignation to be effective upon the acceptance of such appointment by a successor Trustee under Section 11.01(b) hereof. In case at any time the Trustee shall cease to be eligible in accordance with the provisions of this Article XI, the Trustee shall resign immediately by giving written notice to each Owner Participant, such resignation to be effective upon the acceptance of appointment by a successor Trustee under Section 11.01(b) hereof. In addition, the Trustee may be removed at any time without cause by an instrument in writing executed by each Owner Participant and delivered to the Trustee, such removal to be effective upon the acceptance of appointment by a successor Trustee under Section 11.01(b) hereof. In case of the resignation or removal of the Trustee, a Majority in Interest of Owner Participants may appoint a successor Trustee by an instrument signed by such a Majority in Interest of Owner Participants. If a successor Trustee shall not have been appointed within thirty (30) days after the giving of written notice of such resignation or the delivery of the written instrument with respect to such removal, the Trustee or a Majority in Interest of Owner Participants may apply to any court of competent jurisdiction to appoint a successor Trustee to act until such time, if any, as a successor Trustee so appointed by such court shall immediately and without further act be superseded by any successor Trustee appointed as above provided within one year from the date of the appointment by such court. -19- 20 (b) Any successor Trustee, however appointed, shall execute and deliver to the predecessor Trustee and each Owner Participant an instrument accepting such appointment, and thereupon such successor Trustee, without further act, shall become vested with all the estates, properties, rights, powers, duties and trusts of the predecessor Trustee in the trusts hereunder with like effect as if originally named the Trustee herein; but nevertheless, upon the written request of such successor Trustee, such predecessor Trustee shall execute and deliver an instrument transferring to such successor Trustee, upon the trusts herein expressed, all the estates, properties, rights, powers, duties and trusts of such predecessor Trustee, and such predecessor Trustee shall duly assign, transfer, deliver and pay over to such successor Trustee all monies or other property then held by such predecessor Trustee upon the trusts herein expressed. The predecessor Trustee will cooperate in causing registration of the Aircraft to be transferred to the successor Trustee in accordance with applicable law. (c) The Trustee and any successor Trustee, however appointed, must resign if at any time it is unable to obtain or maintain at all times satisfactory registration of each Aircraft pursuant to the Federal Aviation Act, as amended (the "Act"). Any successor Trustee shall be a bank or trust company incorporated and doing business within the United States of America and having a combined capital and surplus of at least $25,000,000, or the subsidiary of an institution having a combined capital and surplus of at least $25,000,000, which guarantees the obligations of such subsidiary. (d) The Trustee shall be and any successor Trustee will be "a citizen of the United States" as defined in Section 101(16) of the Act. (e) Any corporation into which the Trustee may be merged or with which it may be consolidated, or any corporation resulting from any merger, or consolidation to which the Trustee shall be a party, or any corporation to which substantially all the corporate trust business of the Trustee may be transferred, shall, subject to the terms of Section 11.01(c) hereof, be the Trustee under this Agreement without further act. Section 11.02 Co-Trustees and Separate Trustees. Whenever the Trustee or a Majority in Interest of Owner Participants shall deem it necessary or prudent in order either to conform to any law of any jurisdiction in which all or any part of the Trust Estate shall be situated or to make any claim or bring any suit with respect to the Trust Estate or the Operative Documents, or either the Trustee or a Majority in Interest of Owner Participants shall be advised by counsel satisfactory to it that it is so necessary or prudent, the Trustee and a Majority in Interest of Owner Participants shall execute and deliver an agreement supplemental hereto and all other instruments and agreements, and shall take all other action, necessary or proper to constitute one or more persons (and the Trustee may appoint one or more of its officers)(any and all of which shall be a "citizen of the United States" as defined in Section 101(16) of the Act) either as co-trustee or co-trustees jointly with the Trustee of all or any part of the Trust Estate, or as separate trustee or separate trustees of all or any part of the Trust Estate, and to vest in such persons, in such capacity, such title to the Trust Estate or any part thereof, and such rights or duties as may be necessary or desirable, all for such period and under such terms and conditions as are satisfactory to the Trustee and a Majority in Interest of Owner Participants. In case any co-trustee or separate trustee shall -20- 21 die, become incapable of acting, resign or be removed, the title to the Trust Estate and all rights and duties of such co-trustee or separate trustee shall, so far as permitted by law, vest in and be exercised by the Trustee, without the appointment of a successor to such co-trustee or separate trustee. ARTICLE XII Concerning the Agent Section 12.01. Appointment of Agent. The Owner Participants authorize and direct the Trustee to appoint, and the Trustee hereby does appoint, Airlease, in its separate capacity as Agent and not as Owner Participant, as its agent to do all such acts and things and execute all such documents, instruments and other agreements as the Trustee hereafter may from time to time direct, in its place and stead, in accordance with the terms of this Agreement and the Operative Documents. Section 12.02. Agent's Acceptance of Appointment. The Agent agrees to act as Agent for the Trustee hereunder and to accept possession of and hold such items of the Trust Estate as it may from time to time receive on behalf of the Trustee subject to the trusts hereby created and the terms and conditions of this Agreement. Section 12.03. Agreements of the Agent. The Agent hereby agrees: (a) to exercise the rights and perform the duties of the Trustee as directed by the Trustee in accordance with the terms hereof; (b) to assume liability for and indemnify the Owner Participants, Trustee, and Trust Estate from and against Liens attributable to it; and (c) pursuant to the instructions of the Trustee in accordance with the terms hereof, to conduct negotiations with respect to the documents contemplated by this Agreement and the Operative Documents and to use its best efforts by administrative means to cause the Operative Documents to be executed and to consummate the purchase of the Aircraft, Airframe, and Engines and delivery of the Aircraft, Airframe, and Engines under the Purchase Agreement in the manner contemplated by the operative Documents. Section 12.04. Standard of Care and Diligence (a) Agent's Liability. Except as provided in Section 12.03 hereof, the Agent assumes no liability for anything other than its own willful misconduct or gross negligence. It shall give each Owner Participant prompt notice of any Events of Default or claimed Events of Default under the Lease of which it shall have actual knowledge. For all purposes of this Agreement, in the absence of actual knowledge of an officer of the Agent, the Agent shall not be deemed to have actual knowledge of a Default or an Event of Default unless it receives written notification thereof given by or on behalf of the Lessee, the Trustee, any Owner Participant, or any other party. -21- 22 (b) Use of Agents. Subject to the same limitations as the Trustee herein, the Agent may exercise its powers and perform its duties by or through such attorneys, agents and servants as it shall appoint; and it shall be entitled to the advice of counsel (who may, in cases deemed by the Agent in its reasonable discretion to be appropriate, be counsel for the Agent) and shall be protected by the advice of such counsel in anything done or omitted to be done in accordance with such advice. Section 12.05. Resignation or Removal of Agent. The Agent or any successor thereto may resign at any time without cause by giving at least thirty (30) days prior written notice to the Trustee and each Owner Participant, such resignation to be effective on the date specified in such notice. In addition, a Majority in Interest of Owner Participants may at any time remove the Agent without cause by an instrument in writing executed by a Majority in Interest of Owner Participants delivered to the Agent and the Trustee. In the case of the resignation or removal of the Agent, a Majority in Interest of Owner Participants may, at their sole cost and expense, appoint a successor Agent by an instrument signed by a Majority in Interest of Owner Participants. If a Majority in Interest of Owner Participants shall not have appointed a successor Agent within thirty (30) days after such resignation or removal, the Trustee may apply to any court of competent jurisdiction to appoint a successor Agent to act until such time, if any, as a successor shall have been appointed by a Majority in Interest of Owner Participants as above provided. The successor Agent so appointed by such court shall immediately and without further act be superseded by any successor Agent appointed by a Majority in Interest of Owner Participants within one year from the date of the appointment by such court. Section 12.06. Estates and Rights of Successor Agent. Any Agent, whether appointed by a Majority in Interest of Owner Participants or a court, shall execute and deliver to the Trustee and to the predecessor Agent an instrument accepting such appointment, and thereupon such successor Agent, without further act, shall become vested with all the estates, properties, rights, powers and duties of the predecessor Agent hereunder with like effect as if originally named the Agent herein; but nevertheless upon the written request of the Trustee or such successor Agent, such predecessor Agent shall execute and deliver an instrument transferring to such successor Agent all the estates, properties, rights and powers of such predecessor Agent, and such predecessor Agent shall duly assign, transfer, deliver and pay over to such successor Agent all monies or other property then held by such predecessor Agent hereunder. Section 12.07. Merger or Consolidation of Agent. Any corporation into which the Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Agent shall be a party, or any corporation to which substantially all the business of the Agent may be transferred, shall be the Agent under this Agreement without further act. Section 12.08. Agent's Duty to Indemnity. The obligation of the Agent under Section 12.03(b) to indemnify the Owner Participants, Trust Estate, and Trustee shall survive the resignation or removal of the Agent and the termination of the Trust. -22- 23 ARTICLE XIII Supplements and Amendments This Agreement shall be amended only by a written instrument signed by the Trustee and a Majority in Interest of Owner Participants and to the extent any such amendment affects the Agent, signed by the Agent; but if in the reasonable opinion of the Trustee or Agent, as the case may be, any instrument required to be so executed adversely affects any right, duty, liability of, or immunity or indemnity in favor of it under this Agreement or any of the documents contemplated hereby to which it is a party, or would cause or result in any conflict with or breach of any terms, conditions or provisions of, or default under the charter documents or by-laws of the Trustee or Agent or any document contemplated hereby to which the Trustee or Agent is a party, the Trustee or Agent, as the case may be, may in its sole discretion decline to execute such instrument and upon the request of a Majority in Interest of Owner Participants immediately shall resign as the Trustee or Agent, as the case may be, under this Agreement, any Operative Document, or other related document. No supplement, amendment or modification of the Agreement shall impair any requirement in this Agreement that the consent of a Majority in Interest of or all of the Owner Participants be obtained for any purpose and no such supplement, amendment or modification shall require any Owner Participant to invest or advance funds or shall entail any additional personal liability or the surrender of any indemnification, claim or individual right on the part of any Owner Participant with respect to any agreement or obligation or create or suffer to exist any additional obligation of or liability on the Trust Estate, except with the written consent of each of the Owner Participants. ARTICLE XIV Sale, Transfer or Mortgage of Lease Property Section 14.01. General. Except as hereinafter expressly permitted, no Owner Participant may sell, assign, transfer, mortgage, charge or otherwise encumber, or suffer any third party to sell, assign, transfer, mortgage, charge or otherwise encumber, or contract to do or permit any of the foregoing, whether voluntarily or by operation of law (herein sometimes collectively called a "transfer"), any part or all of its interest hereunder or in the Trust Estate without the written consent of the other Owner Participants and any attempt to do so shall be void. The giving of such consent in any one or more instances shall not limit or waive the need for such consent in any other or subsequent instances. Section 14.02. Permitted Transfers by the Owner Participants. Notwithstanding the provisions of Subsection 14.01, without the consent of the other Owner Participants, either party may at any time or from time to time transfer all or any portion of its interest hereunder to an Affiliate. Section 14.03. Right of First Refusal as to an Owner Participant's Trust Estate Interest. -23- 24 (a) Offering Notice. Except for permitted transfers under Section 14.02 above, if any Owner Participant receives a bona fide offer for the purchase of either (i) all of its interest hereunder or (ii) less than all of its interest hereunder, (the recipient of any such offer being hereinafter called the "Offeror"), which offer complies with the provisions of Section 14.03(b) and which offer it desires and intends to accept, before accepting such offer it shall give notice (the "Offering Notice") to the other Owner Participants (the "Offerees") which shall include a true copy of such offer, whereupon the provisions set forth in this Section 14.03 shall apply. Except for permitted transfers under Section 14.02 above, no Owner Participant shall accept an offer unless such offer complies with the provisions of Section 14.03(b). (b) Requirements of Offer. Such an offer shall comply with the following requirements: (1) the proposed purchase price (which shall be net of any Trust Estate debts or liabilities which the proposed purchaser has agreed to assume in its offer to purchase the Offeror's interest) is payable solely in lawful money of the United States and, if not payable in its entirety in cash, under no circumstances may payment of the non-cash portion of the proposed purchase price be secured by any charge, encumbrance or hypothecation of the Trust Estate; (2) the offer contains provisions whereby the proposed purchaser is obligated to comply with the provisions of Section 14.06 hereof, requiring it to assume certain obligations prior to or at closing; (3) the offer is accompanied by a certified check of the prospective purchaser for a sum equal to at least ten percent (10%) of the proposed purchase price; provided, however, that if the sale to the third party purchaser is not consummated for any reason other than due to the failure of the Owner Participants to perform their obligations pursuant to the offer, each Owner Participant shall be entitled to a pro rata portion of such sum; (4) the Offeror shall not have caused or permitted an Owner Participant Event of Default (as hereinafter defined) ; and (5) the prospective purchaser shall be capable of carrying out all obligations of an Owner Participant under this Agreement and all related agreements; and as shown by the audited financial statements of such prospective purchaser for the two (2) most recent fiscal years of such prospective purchaser, shall have tangible net worth satisfactory to the Offerees, determined in accordance with generally accepted accounting principles. (c) Procedure. In the Offering Notice, the Offeror shall offer (the "Sale offer") to each Offeree the right to purchase a portion of the interest (the "Portion of the Interest") of the Offeror referred to in said offer, at a portion of the same price and subject to the same terms and conditions as set forth in said offer and the Offeror shall submit with the Offering Notice a true -24- 25 copy of said offer. The portion shall be equal to the full amount of the interest offered multiplied by a fraction, the numerator of which is such Offeree's then interest in the Trust Estate and the denominator is the then interest in the Trust Estate of all Offerees. Each Offeree shall notify the Offeror and the other Offeree(s) of its election within fifteen (15) days of the date of its receipt of the Offering Notice; provided, however, that such election shall be as to all of the Portion of the Interest. (d) Acceptance of Sale Offer. (1) If the Sale Offer is accepted by each Offeree, and notice in writing is given within the period specified in Section 14.03(c), the Offeror shall thereupon be bound to sell to such Offeree and the Offeree shall thereupon be bound to purchase the Portion of the Interest referred to in the Sale Offer in accordance with the terms of the Sale Offer and the closing of the purchase shall take place in accordance with Section 14.04. (2) If one Offeree has not accepted the Sale Offer or has not accepted the Sale Offer within such fifteen (15) day period and one or more of the other Offerees has accepted the Sale Offer ("Accepting Offeree"), the Accepting Offeree(s) shall have the right to purchase the entire interest referred to in the Sale Offer (but not less than such entire interest) in accordance with the terms of the Sale Offer and the purchase shall take place in accordance with Section 14.04 and the procedures included in Section 14.03(c). Except that the Accepting Offerees shall notify the Offeror and other Offerees of such election within ten (10) days of the end of the initial fifteen (15) day period referred to in Section 14.03(c). The Offeror shall thereupon be bound to sell to such Accepting Offeree(s) and the Accepting Offeree(s) shall thereupon be bound to purchase the entire interest referred to in the Sale Offer in accordance with the terms of the Sale Offer and the closing of the purchase shall take place in accordance with Section 14.04. (e) Right to Sell to Third Party. If the Offerees have not accepted the Sale Offer as provided in Section 14.03(c) within the time limits referred to therein, or if the Accepting Offeree(s) have not accepted the Sale Offer as provided in Section 14.03(d)(2) within the time limits referred to therein, the Sale Offer shall be deemed to have been declined by such Offerees and the Offeror shall be free to sell its interest to the maker of said offer at a price and upon terms and conditions not less favorable to the Offeror than those set forth in the Offering Notice within the time period set forth below. If in any instance such Offerees elect not to exercise their rights hereunder or to waive such rights, such election shall not constitute a waiver of the Offerees' right to an Offering Notice in the case of any subsequent offer. If such interest is not so sold and the transfer not consummated within thirty (30) days, unless extended by mutual agreement, from the expiration of the time limits referred to in Section 14.03(c) or Section 14.03(d)(2), as applicable, the relevant interest shall then again become subject to all the provisions of this Section 14.03. (f) Limitations on Exercise. Notwithstanding anything to the contrary contained in this Section 14.03, no Offeree which has failed to perform or observe any of its -25- 26 obligations, covenants, conditions, or agreements under this Agreement or any related document (an "Owner Participant Event of Default"), which Owner Participant Event of Default is still continuing, shall be entitled to exercise its right to purchase (or sell, unless the Owner Participant Event of Default is cured by such sale) any portion of the Offeror's interest. Section 14.04. Closings. (a) Location and Time Periods. The closing of any sale of an interest in the Trust Estate pursuant to this Article XIV shall be held at a mutually acceptable place and on a mutually acceptable date not more than thirty (30) days, unless extended by mutual agreement, after the receipt by the Offeror of the written notices of election by the Offerees, Accepting Offeree, or Third Party Accepting Offeree, as applicable, or after the expiration of the time within which the Offeree must so elect, as provided in Sections 14.03(c) or 14.03(d). (b) Closing Conditions. Any Owner Participant transferring its interest shall transfer such interest free and clear of all liens, encumbrances or any interests of any third party (excepting any liens permitted under the Lease) and shall execute or cause to be executed any and all documents required to fully transfer such interest to the acquiring third party or acquiring Owner Participant(s), including, but not limited to, any documents necessary to evidence such transfer and to evidence the agreement by the acquiring third party or acquiring Owner Participant(s) to be bound by all applicable provisions of the Operative Documents, and all documents required to release any interest in such selling Owner Participant's interest. Any sums owed by the selling Owner Participants to the Trust Estate or the other Owner Participants shall be paid concurrently from the proceeds from such sale at the closing. Following the date of closing, unless otherwise agreed, the selling Owner Participant(s) shall have no further rights to any rent or proceeds from the Trust Estate assets attributable to any period or event following the date of closing and all such rights shall vest in the transferee of the interest purchased from the selling Owner Participant(s). (c) Event of Loss. If an Event of Loss (as defined in the Lease) shall occur with respect to the Aircraft between (i) the date an election is made by an Owner Participant, the Owner Participants, or a third party transferee to purchase pursuant to Section 14.03, and (ii) the closing of such purchase, the offer to purchase shall automatically terminate, without any further action or notice required. (d) Partial Loss. If a partial loss shall occur with respect to the Aircraft under the Lease, subject to the performance by Lessee of its obligations under the Lease and so long as there is no Event of Default thereunder, the purchase of the interest hereunder shall be consummated as contemplated by the parties. 14.05. Termination of Obligations. As of the closing date of any transfer not prohibited hereunder by an Owner Participant of its entire interest in the Trust Estate to the other Owner Participant(s) or to a third party purchaser, such transferring Owner Participant's rights and obligations hereunder shall terminate except as to any of its unperformed obligations accrued as of such date and except as to any unperformed indemnity obligations of such Owner Participant attributable to acts or events occurring prior to such closing date. Thereupon, except as limited by -26- 27 the preceding sentence, this Agreement shall terminate as to the transferring Owner Participant(s) but all terms and conditions thereof shall remain in effect as to the other Owner Participant(s) and the third party purchaser shall become an Owner Participant hereunder. In the event of a transfer of its entire Trust Estate interest by an Owner Participant to the other Owner Participant(s) or to a third party purchaser, the Owner Participant(s) or third party purchaser to which such interest is transferred, shall indemnify, defend and hold harmless the Owner Participant so transferring its interest from and against any and all claims, demands, losses, liabilities, expenses, actions, lawsuits, and other proceedings, judgments, awards, and costs and expenses (including but not limited to reasonable attorneys' fees) incurred in or rising directly or indirectly, in whole or in part, out of the Trust Estate, excluding only those liabilities, if any, accruing prior to the closing date of such transfer. Section 14.06. Agreements with Transferees. In the event that pursuant to the provisions of this Article XIV, any Owner Participant shall transfer its interest hereunder to any person or entity other than the other Owner Participant(s), no such transfer shall be made or shall be effective to make such transferee an Owner Participant or entitle such transferee to any benefits or rights hereunder or under the Operative Documents until the proposed Transferee agrees in writing to assume and be bound by all the obligations of the selling Owner Participant and be subject to all the restrictions to which the selling Participant is subject under the terms of this Agreement, the Operative Documents, and any further agreement which may be required with respect to the Trust Estate. In the event an Owner Participant's interest hereunder is transferred by operation of law, such Owner Participant's transferee shall sign such a writing within fifteen (15) days of the closing date as an express condition to the effectiveness of any such transfer. Section 14.07. Restraining Order. In the event that any Owner Participant shall at any time transfer or attempt to transfer its interest hereunder in violation of the provisions of this Agreement and any rights hereby granted, then the other Owner Participant(s) shall, in addition to all rights and remedies at law and in equity, be entitled to a decree or order restraining and enjoining such transfer and the defaulting Owner Participant shall not plead in defense thereto that there would be an adequate remedy at law; it being hereby expressly acknowledged and agreed by the parties hereto that damages at law will be an inadequate remedy for a breach or threatened breach of the violation of the provisions concerning transfer of a Trust Estate interest as set forth in this Agreement. Section 14.08. Sale by an Owner Participant of an Owner Participant's Trust Estate. The parties agree that in the event that one of the Owner Participants should decide to purchase the Trust Estate interest of the other Owner Participants, the parties shall negotiate the terms and conditions of such purchase in good faith, including, without limitation, the purchase price, any financing arrangements, and like matters. Such purchase shall take place in accordance with Section 14.04. Section 14.09 Amendment to Agreement on Transfer. Upon either (i) the transfer by the Partnership of all its Certificates or (ii) the transfer by Airlease of all its Certificates to a person which is not an Affiliate of the Partnership, then Section 5.1 and 5.2(b) shall no longer be a part of this Agreement. -27- 28 ARTICLE XV Miscellaneous Section 15.01 No Legal Title to Trust Estate in Owner Participants. The Owner Participants shall not have legal title to any part of the Trust Estate. No transfer, by operation of law or otherwise, of any right, title and interest of the Owner Participants in and to the Trust Estate or hereunder shall operate to terminate this Agreement or the trusts hereunder or entitle any successor or transferee to an accounting or to the transfer to it of legal title to any part of the Trust Estate. Section 15.02 Sale of Aircraft, etc., by Trustee is Binding. Any sale or other conveyance of the Aircraft, the Airframe, an Engine or Part by the Trustee made pursuant to the terms of this Agreement (so long as such sale is not contrary to the provisions of the Operative Documents) shall bind the Owner Participants and shall be effective to transfer or convey all right, title and interest of the Trustee and the Owner Participants in and to the Aircraft, the Airframe, or an Engine or Part. No purchaser or other grantee shall be required to inquire as to the authorization, necessity, expediency or regularity of such sale or conveyance or as to the application of any sale or other proceeds with respect thereto by the Trustee. Section 15.03 Limitations on Rights of Others. Nothing in this Agreement shall be construed to give to any person other than the Trustee, Owner Participants, and the Agent (to the extent provided in Article XII hereof) any legal or equitable right, remedy or claim under or in respect of this Agreement, any covenants, conditions or provisions contained herein or the Trust Estate. Section 15.04 No Partnership for Tax Purposes. The Owner Participants agree that this Trust Estate is not to be construed as a partnership for tax purposes; provided, however, that if it is determined to be a partnership for tax purposes, each Owner Participant agrees to be bound by an election under Section 754 of the Internal Revenue Code of 1986, as amended, made by the Partnership. Section 15.05 Notices. Unless otherwise expressly specified or permitted by the terms hereof, all notices required under the terms and provisions hereof shall be in writing by first class mail, personal delivery, cable, telex or telecopy (with such cable, telex or telecopy confirmed in writing, mailed by first-class mail, postage prepaid) addressed to such person at the address set forth herein with copies to Trustee, Owner Participants, or Agent, as the case may be. Whenever any notice is required to be given, such notice shall be deemed given and such requirement satisfied if such notice is (i) mailed, on the day of deposit into the mail, or (ii) personally delivered, when delivered, or (iii) cabled, when such notice is delivered to the telegraph company, or (iv) telecopied, when the telecopy has been received, or (v) telexed, when the answer back of the addressee is received. Any person entitled to notice hereunder may change the address to which notices to such person will be sent by giving notice of such change to Trustee, Owner Participant, or Agent. -28- 29 If to Trustee: Trust Company for USL, Inc. 615 Battery Street San Francisco, CA 94111 Attn: President Telex: 278031 Telecopy: 415/398-7029 If to Airlease: United States Airlease, Inc. 615 Battery Street San Francisco, California 94111 Attn: President Telex: 278031 Telecopy: 415/398-7029 If to the Partnership: Airlease Ltd. A California Limited Partnership c/o Airlease Management Services, Inc. 2988 Campus Drive San Mateo, California 94403 Attn: President Section 15.06 Severability. Any provision of this Agreement 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. Section 15.07 Limitation on Liability of Owner Participants and Agent. The Owner Participants or Agent shall not have any liability for the performance of this Agreement except as expressly set forth herein or, with respect to the Agent, in any written instructions of the Trustee pursuant to this Agreement. Section 15.08 Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 15.09 Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, the Trustee and its successors and assigns, the Owner Participants and their successors and, to the extent permitted by Article XIV hereof, its assigns, all as herein provided, and the Agent and its successors and assigns, to the extent permitted by Article XII hereof. Any request, notice, direction, consent, waiver or other instrument or action by the Owner Participants, shall bind the successors and assigns of such Owner Participant. -29- 30 Section 15.10 Headings. The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 15.11 Arbitration. If the Owner Participants are unable to agree with respect to any matter hereunder, or under any of the Operative Documents, the same shall be settled and finally determined by arbitration in accordance with the Rules of Commercial Arbitration of the American Arbitration Association ("AAA"), or if agreed by the parties, by any arbitration association authorized by or in the State of California ("CAA") or its successors, and the provisions of Article 9, Arbitration, of the California Code of Civil Procedure, or any successor or amended statute or law containing similar provisions, shall be applicable in any such arbitration; or in any case where the AAA or CAA, as applicable, or its successor, is not in existence or fails or refuses to act within a reasonably prompt period of time (but in no event exceeding thirty (30) days from the date a request for arbitration is filed), the arbitration shall proceed in accordance with the laws relating to arbitration then in effect in the State of California, including but not limited to Article 9, Arbitration, of the California Code of Civil Procedure, as the same may be amended or modified from time to time. Any arbitration pursuant to this Agreement shall be conducted by three arbitrators. All Owner Participants shall collectively select two disinterested arbitrators approved by the AAA or CAA, as applicable. The two (2) arbitrators selected by the Owner Participants shall select a third disinterested arbitrator approved by the AAA or CAA, as applicable. The judgment upon the award rendered in any such arbitration by the three (3) arbitrators shall be final and binding upon the parties and may be entered in any court having jurisdiction thereof. All fees and expenses of the arbitrators and all other expenses of the arbitration, except for attorneys' fees, shall be shared equally by the Owner Participants. Each Owner Participant shall bear its own attorneys' fees. Section 15.11 Governing Law. This Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of California, including all matters of construction, validity and performance. -30- 31 IN WITNESS WHEREOF, the parties hereto have caused this Trust Agreement to be duly executed by their respective officers hereto duly authorized, as of the day and year first above written. AIRLEASE LTD., A CALIFORNIA UNITED STATES AIRLEASE, INC., LIMITED PARTNERSHIP, as Owner as Owner Participant Participant By Airlease Management /s/ Douglas C. Kay Services, Inc., ------------------------------- General Partner By: Douglas C. Kay Title: President /s/Douglas C. Kay - ----------------------------- By: Douglas C. Kay Title: President UNITED STATES AIRLEASE, INC., TRUST COMPANY FOR USL, INC., as as Agent Trustee /s/ Douglas C. Kay /s/ Stanley E. Gutman - ----------------------------- ------------------------------- By: Douglas C. Kay By: Stanley E. Gutman Title: President Title: Vice President -31- 32 SCHEDULE 1 IDENTIFICATION OF AIRCRAFT AND ENGINES Aircraft Make and Model: McDonnell Douglas DC-9-82 Manufacturer's Serial Number: 49184 U.S. FAA Registration Number: N913TW Engine 1 Serial Number: P709733D Engine 2 Serial Number: P709734D Including without limitation, all equipment, components, fittings, parts or accessories made a part of, or installed on or attached to the Aircraft which are the property of Lessor pursuant to the Lease Documents or otherwise subject to the Lease Documents. -32- EX-10.45 9 TRUST AGREEMENT 1 Exhibit 10.45 - -------------------------------------------------------------------------------- TRUST AGREEMENT (N362) DATED AS OF JULY 27, 1993 AMONG AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP, as Owner Participant, UNITED STATES LEASING INTERNATIONAL, INC. As Agent, AND TRUST COMPANY FOR USL, INC., as Trustee Concerning One (1) Boeing 727-2D4 Aircraft with FAA Registration No. N362PA Leased to Federal Express Corporation - ------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
ARTICLE PAGE - ------- ---- I Definitions................................................................ 2 II Authority to Execute and Perform Various Documents; Declaration of Trust by Trustee............................................ 5 III Beneficial Interest of Owner Participants in Trust Estate and Certificates........................................... 5 IV Acceptance and Delivery of Aircraft........................................ 9 V Article V is intentionally omitted......................................... 10 VI Distributions.............................................................. 11 VII Duties of Trustee.......................................................... 12 VIII Trustee.................................................................... 14 IX Indemnification of Trustee by Owner Participants........................... 16 X Termination of this Agreement.............................................. 18 Successor Trustees, Co-Trustees and XI Separate Trustees.......................................................... 19 XII Agent...................................................................... 21 XIII Supplements and Amendments................................................. 23 XIV Sale, Transfer or Mortgage of Lease Property............................... 24 XV Miscellaneous.............................................................. 29
3 TRUST AGREEMENT (N362) THIS TRUST AGREEMENT (N362) dated as of July 27, 1993, is by and among: (1) TRUST COMPANY FOR USL, INC., a trust company organized under the laws of the State of Illinois, in its individual capacity as expressly stated herein and otherwise not in its individual capacity but solely as trustee hereunder (in such capacity, with its permitted successors and assigns, "Trustee"); (2) AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP ("Airlease") ; and (3) UNITED STATES LEASING INTERNATIONAL, INC., a Delaware corporation (in such capacity, "Agent"). RECITALS A. Airlease and United States Leasing International, Inc. ("USLI") each hold 50% undivided interests in a trust estate established pursuant to that certain Trust Agreement [1987 N362PA] dated as of November 10, 1987 (as amended, the "Original Trust Agreement") among Trust Company for USL, Inc., as trustee ("Original Trustee) and Airlease and USLI, pursuant to which Original Trustee holds title to the Aircraft and the Lease. B. Airlease intends to enter into that certain Trust Termination and Assignment and Assumption Agreement dated as of July 27, 1993 by and among Airlease, USLI, Trustee and Original Trustee (the "Trust Termination Agreement") to terminate the trust created under the Original Trust Agreement and to provide for the distribution to each of USLI and Trustee (on behalf of Airlease) of 50% undivided interests in the assets of such trust. C. Airlease and Agent are entering into this Trust Agreement with Trustee for the purpose of causing Trustee to acquire Airlease's undivided 50% interest in such assets upon the instructions of Airlease. AGREEMENT NOW, THEREFORE, in consideration of the mutual agreements herein contained, the parties hereto agree as follows: 4 ARTICLE I Definitions Section 1.01. Defined Terms. For all purposes of this Agreement, the following terms shall have the following meanings (such definitions to be equally applicable to both the singular and plural forms of the terms defined): "Act" shall have the meaning given to such term in Section 11.01(c) hereof. "Affiliate" means Person that directly or indirectly controls, is controlled by, or is under common control with the Person in question. "Agent" shall have the meaning given to such term in clause (3) of the introductory paragraph hereof. "Agreement" means this Trust Agreement (N362), as it may hereafter from time to time be supplemented, amended, waived, or modified pursuant to the applicable provisions hereof. "Aircraft" means and includes the used Boeing 727-2D4 ADV Airframe together with the Engines pertaining thereto as more particularly described and identified in Schedule 1 hereto. "Aircraft" also means, if the context so requires, the Aircraft Records of the Aircraft. "Aircraft Records" means (a) the maintenance log books, flight log book, summaries of operations or work performed, reports of repair, alterations, rebuild, installation, modification, removal and replacement and inspection or overhaul of the Airframe, Engines or Parts and (b) all publications, notebooks, data, operations manuals, maintenance manuals, Aeronautics Authority-approved maintenance program, balance loading manuals and equipment lists. "Airframe" means and includes (A) the Boeing 727-2D4 ADV Airframe (excluding Engines or engines from time to time installed thereon) having the Manufacturer's serial number and the FAA registration number as set forth in Schedule 1 attached hereto, and (B) any and all Parts so long as the same shall be incorporated or installed in or attached to the Airframe, or so long as title thereto shall remain vested in Trustee, after removal from the Airframe. "Airlease" shall have the meaning given to such term in clause (2) of the introductory paragraph hereof. "Application for Aircraft Registration" means the Application for Aircraft Registration (AC Form 8050-1) executed by USLI and Trustee with respect to the Aircraft. 5 "Bill of Sale" means the bill of sale covering the Aircraft executed by Original Trustee in favor of USLI and Trustee pursuant to the Trust Termination Agreement. "Certificate" means a certificate substantially in the form included in Section 3.02 hereof issued by Trustee hereunder. "Delivery Date" means the date Trustee acquires its 50% undivided interest in the Lease Property, including the Aircraft, pursuant to the Trust Termination Agreement. "Engine" means and includes: (a) any of the Engines listed by manufacturer's serial number in Schedule 1 attached hereto whether or not from time to time thereafter installed on the Airframe or installed on any other airframe or any other aircraft; (b) any engine which may from time to time be substituted, or be a replacement or addition pursuant to the Lease for any such Engine; and (c) 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 Trustee in accordance with the terms of the applicable Lease after removal from any such Engine. "FAA" shall mean the Federal Aviation Administration and/or Administrator of the Federal Aviation Administration or any person, governmental department, bureau, commission or agency succeeding to the functions thereof. "FAA Bill of Sale" means the bill of sale (AC Form 8050-2), covering the Aircraft, executed by Original Trustee, in favor of USLI and Trustee. "Lease" means the Aircraft Lease Agreement dated as of April 15, 1993 with Lessee, as supplemented by a Lease Supplement dated [April 22], 1993, covering the Aircraft, as the Lease may hereafter from time to time be supplemented, amended, waived or modified. "Lease Property" means the Lease Documents, including the Lease and the Participation Agreement, the Aircraft, and all income, deductions, credits and other benefits to which an owner of property would be entitled to as lessor under the Lease, and owner of the Aircraft, including without limitation, all rental payments under the Lease, the right to possession of the Aircraft, and all proceeds upon the sale or re-lease of the Aircraft. "Lessee" means Federal Express Corporation and its permitted successors and assigns. "Majority in Interest of Owner Participants", as of a particular date of determination, means the Owner Participant(s) having in excess of 75% of the then outstanding amount of all Certificates. 3 6 "Operative Documents" means this Agreement, the Certificates, the Lease Documents, the Trust Termination Agreement, the Application for Aircraft Registration, the FAA Bill of Sale, the Bill of Sale, and all other agreements, instruments and certificates contemplated by such documents. "Original Trust Agreement" shall have the meaning given to such term in Recital A hereof. "Original Trustee" shall have the meaning given to such term in Recital A hereof. "Owner Participant" means, at any particular time, each holder of a Certificate at such time. "Person" means any individual, partnership, joint venture, estate, association, corporation, trust company, trust or other entity. "Trustee" shall have the meaning given to such term in clause (1) of the introductory paragraph hereof. "Trust Estate" means all estate, right, title and interest of the trust created by this Agreement in and to the Operative Documents, any funds given to Trustee by an Owner Participant, and the Lease Property, including, without limitation, all amounts of rent, insurance proceeds, stipulated loss value payments, and requisition, indemnity or other payments of any kind (1) for or with respect to the Lease Property or (2) payable to Trustee under the Lease, or with respect to the Lease Property, excluding any indemnity payments paid directly to an Owner Participant. "Trust Termination Agreement" shall have the meaning given to such term in Recital B hereof. "USLI" shall have the meaning given to such term in Recital A hereof. Section 1.02. Other Terms. For all purposes of this Agreement, any term used but not defined herein shall have the meanings assigned to it in the Lease, including, without limitation, the following: "Basic Rent," "Default", "Event of Default", "Event of Loss", "Lease Documents", "Lessor Liens", "Lien", "Parts", and "Participation Agreement"; provided, however, in the event of any conflict hereunder ,with the meaning of any term defined in the Lease, the definition in the Lease shall control. 4 7 ARTICLE II Authority to Execute and Perform Various Documents; Declaration of Trust by Trustee Section 2.01. Authority to Execute and Perform Various Documents. Airlease, as an Owner Participant, hereby authorizes and directs Trustee (a) to execute and deliver the Trust Termination Agreement, a Certificate naming Airlease as an Owner Participant pursuant to Section 3.01 hereof, and the Application for Aircraft Registration, and all other agreements, instruments and certificates contemplated by the Operative Documents, and to accept the FAA Bill of Sale and the Bill of Sale and (b) subject to the terms of this Agreement, to take such other action in connection with the foregoing as any Owner Participant may from time to time direct in writing. Section 2.02. Declaration of Trust by Trustee. Trustee hereby declares that it will and does hold the Trust Estate upon the trusts set forth herein for the sole use and benefit of the Owner Participants. ARTICLE III Beneficial Interest of Owner Participants in Trust Estate and Certificates Section 3.01. Beneficial Interest of the Owner Participants. Airlease, as an Owner Participant, shall have and retain a one hundred-percent (100%) beneficial interest in the Trust Estate, such interest to be evidenced by a Certificate to be issued hereunder. Airlease has agreed to participate in the acquisition by Trustee of a 50% undivided interest in the Lease Property on the Delivery Date on the terms set forth in the Trust Termination Agreement. Section 3.02. The Certificates. Airlease, as an Owner Participant, hereby authorizes and directs Trustee to, and Trustee agrees that it will, issue to Airlease a Certificate substantially in the form set forth below, completed as provided in Section 3.03 hereof. 5 8 OWNER CERTIFICATE Trust Company for USL, Inc., Trustee Under Trust Agreement (N362) Dated as Of July 27, 1993 (_________________________) Name of Owner Participant Issued in Connection with the Boeing Model 727-2D4 Aircraft bearing United States Registration No. 362PA and Manufacturer's Serial No. 21850 (the "Aircraft") ____________________1993 $_______________________ Trust Company for USL, Inc., not in its individual capacity but solely as Trustee (in such capacity, "Trustee") under the Trust Agreement hereinafter referred to, hereby certifies as follows: (a) this Certificate is one of the Certificates referred to in the certain Trust Agreement (N362) dated as of July 27, 1993, by and among Trustee, Airlease Ltd., A California Limited Partnership and United States Leasing International, Inc., (the "Trust Agreement") (the terms defined in the Trust Agreement and not otherwise defined herein are used herein as defined in the Trust Agreement), which Certificates have been or are to be issued by Trustee pursuant to the Trust Agreement; (b)_______________ is an Owner Participant and owns an undivided __%. interest in the Trust Estate; and (c) the holder of this Certificate has, ratably with the holders of the other Certificates, an undivided beneficial interest in the Trust Estate and is entitled to receive, ratably with the holders of the other Certificates issued with respect to the Trust Estate as provided in the Trust Agreement, a proportionate share of (1) the rental received or to be received by Trustee with respect to the Trust Estate, and (2) upon the sale or lease of all or any part of the Trust Estate, any proceeds received or receivable therefrom, as well as a share of certain other payments which may be received by Trustee pursuant to the terms of the Trust Agreement as more particularly set forth therein. All amounts payable hereunder and under the Trust Agreement shall be paid only from the income and the proceeds from the Trust Estate and only to the extent that Trustee shall have sufficient income or proceeds from the Trust Estate to make such payments in accordance with the terms of the Trust Agreement, except as specifically provided in Section 8.01 thereof; and each holder hereof, by its acceptance of this Certificate, agrees that it will look solely to the income and proceeds from the Trust Estate to the extent available for distribution to such holder as above provided and that no Owner Participant nor Trustee (except to the extent provided in Section 8.01 of the Trust Agreement) are personally liable to the holder hereof for any amounts payable under this Certificate or the Trust Agreement. 6 9 Reference is hereby made to the Trust Agreement for a statement of the rights of the holder of this Certificate and of the rights of the holders of the other Certificates, as well as for a statement of the terms and conditions of the trusts created by, and the rights, limitations of rights, obligations and duties of Trustee set forth in, the Trust Agreement, to all of which terms and conditions each holder hereof agrees by its acceptance of this Certificate. Each holder hereof, by its acceptance of this Certificate, agrees not to transfer this Certificate except in accordance with the terms of Article XIV and Section 3.06 of the Trust Agreement. These Certificates have not been registered under the Securities Act of 1933, as amended, and may be transferred only in compliance with such law. IN WITNESS WHEREOF, Trustee has duly executed this Certificate as of the date first above written. TRUST COMPANY FOR USL, INC. , AS TRUSTEE BY: ----------------------- ITS: ---------------------- Section 3.03. Issuance of Certificates. Each Certificate issued to an Owner Participant shall contain a statement by Trustee that the holder of such Certificate has, ratably with the holders of the other Certificates, an undivided beneficial interest in the Trust Estate, and is entitled to receive, ratably with the holders of the other Certificates as provided herein, a proportionate share of (a) the rental received or to be received by Trustee with respect to the Trust Estate, and (b) upon the sale or lease of all or any part of the Trust Estate, any proceeds received or receivable therefrom, as well as a share of certain other payments which may be received by Trustee pursuant to the terms hereof as more particularly set forth herein. Section 3.04. Payments from Trust Estate Only. All payments to be made under the Certificates and under this Trust Agreement shall be made only from the income and the proceeds from the Trust Estate and only to the extent that Trustee shall have sufficient income or proceeds from the Trust Estate to make such payments in accordance with the terms of Article VI hereof, except as specifically provided in Section 8.01 hereof. Each holder of a Certificate, by its acceptance of such Certificate, agrees that it will look solely to the income and proceeds from the Trust Estate, to the extent available for distribution to 7 10 such holder as above provided and that no Owner Participant is personally liable to the holder of any Certificate. Except as specifically provided herein, Trustee is not liable to any Owner Participant for any amounts payable under this Agreement and is not subject to any liability in its individual capacity under this Agreement. Section 3.05. Payment to Holder of Certificate. Subject to Article VI hereof, any amounts received by Trustee and payable to each holder of a Certificate pursuant to this Trust Agreement will be payable to each such holder by wire transfer of immediately available funds to the bank for the account of such holder as such holder shall direct in writing, without any presentment or surrender of any Certificate. Trustee may deem and treat the person in whose name any Certificate shall have been issued by Trustee as the absolute owner and holder of such Certificate for the purpose of receiving payment of all amounts payable by Trustee with respect to such Certificate and for all other purposes, and Trustee shall not be affected by any notice to the contrary. Section 3.06. Transfer of Certificates. Subject to Article XIV hereof, a holder of a Certificate intending to transfer any Certificate held by such holder to a new holder shall surrender such Certificate to Trustee, together with a written request from such holder for the issuance of a new Certificate, specifying the name and address of the transferee and evidence that the conditions set forth herein for such transfer have been satisfied. Promptly upon receipt of such documents Trustee will issue a new Certificate, dated the same date as the Certificate surrendered, in the amounts indicated, and naming such transferee as shall be specified in the written request from such holder. Trustee shall not be required to exchange any surrendered Certificate as above provided during the 10-day period preceding the due date of any payment on such Certificate. Section 3.07. Mutilated, Destroyed, Lost or Stolen Certificates. If any Certificate shall become mutilated, destroyed, lost or stolen, Trustee shall, upon the written request of the holder of such Certificate, execute and deliver in replacement thereof a new Certificate, in the same original amount, dated the same date, as the Certificate so mutilated, destroyed, lost or stolen. If the Certificate being replaced has become mutilated, such Certificate shall be surrendered to Trustee. If the Certificate being replaced has been destroyed, lost or stolen the holder of such Certificate shall furnish to Trustee such security or indemnity as may be required by either of them to save it harmless and evidence satisfactory to Trustee of the destruction, loss or theft of such Certificate and of the ownership thereof. If such holder is Airlease the written undertaking of Airlease shall be sufficient indemnity. 8 11 SCHEDULE 1 AIRCRAFT DATA
FAA REGISTRATION NO. MANUFACTURER'S SERIAL NO. PRATT & WHITNEY - -------------------- ------------------------- JT8D-15 ENGINES SERIAL NOS. ----------- N363PA 21850 P700267 P708902 P70036
12 Section 3.08. Payment of Expenses Upon Transfer. Upon the issuance of a new Certificate or Certificates pursuant to Section 3.06 or 3.07 hereof, Trustee may require the payment from the party or parties to whom such new Certificate or Certificates are issued of a sum to reimburse itself for, or to provide funds for, the payment of any tax or other governmental charge or any charges and expenses connected therewith paid or payable by Trustee. Section 3.09. Payments by Each Owner Participant. Payments and contributions (including, without limitation, Trustee's fees and expenses and indemnification of Trustee) provided for herein to be made by each Owner Participant shall be made by each Owner Participant in proportion to its beneficial interest in the Trust Estate at the time such payments or contributions are due and payable. If any Owner Participant makes a payment for any costs or expenses (including legal fees and expenses) pursuant to the written instructions of Trustee or a Majority in Interest of Owner Participants, such Owner Participant shall be entitled to immediate reimbursement therefor from the other Owner Participants in proportion to their respective beneficial interests in the Trust Estate. ARTICLE IV Acceptance and Delivery of Aircraft Section 4.01. Acceptance of Aircraft. Airlease, as an Owner Participant, hereby authorizes and directs Trustee to, and Trustee agrees for the benefit of the Owner Participants, that on the Delivery Date, it will, subject to due compliance with the terms of Section 4.02 hereof, take such actions as are required of Trustee hereunder or under the Operative Documents, including without limitation, the following: (a) authorize a representative or representatives of Trustee to accept delivery on behalf of Trustee of a 50% undivided interest in the Aircraft, and to accept the FAA Bill of Sale, Bill of Sale, the Trust Termination Agreement and the Lease on the Delivery Date; (b) upon the execution by Airlease of the Trust Termination Agreement, Trustee shall cause Agent, without further act, authorization, or direction by any Owner Participant to Trustee, to file on behalf of Trustee the FAA Bill of Sale, and the Aircraft Registration Application in the name of Trustee; (c) execute and deliver each of the Operative Documents and all other related documents to which it is a party; and (d) issue a Certificate to Airlease to evidence Airlease's interest in the Trust Estate. 9 13 Section 4.02. Conditions Precedent. The right and obligation of Trustee to take the action required by Section 4.01 hereof shall be subject to the condition precedent that Airlease has executed the Trust Termination Agreement. Section 4.03. Authority Without Express Instructions. Trustee, without the necessity of further instructions from Airlease as an Owner Participant, is hereby authorized and directed by Airlease, as an Owner Participant, to take any action in connection with postponing the Delivery Date; provided, however, that Trustee shall not give any consent, waive any right or benefit or enter into any modification or amendment of the Operative Documents or take any other action to perform any obligations whatsoever except at the direction of all Owner Participants or a Majority in Interest of Owner Participants, as applicable. Section 4.04. Replacements. Airlease, as an Owner Participant, hereby authorizes and directs Trustee, and Trustee agrees for the benefit of the Owner Participants that, if a replacement airframe or engine, if any, is substituted pursuant to the Lease, Trustee will, subject to Section 7.02 hereof and in compliance with the terms of the Lease: (a) to the extent not previously accomplished by a prior authorization, authorize a representative of Trustee (who may be an employee of Lessee) to accept delivery of the replacement airframe or engine; (b) accept from Lessee or other vendor of the replacement airframe or engine a bill of sale or bills of sale and the invoice, if any, with respect to such replacement airframe or engine; (c) execute and deliver a Lease Supplement covering such replacement airframe or engine and, to the extent requested by counsel to the Owner Participants, execute and deliver any required amendments to this Agreement or any other Operative Document to which Trustee is a party and request any required consent from the manufacturer of such replacement airframe or engine; and (d) transfer title to the airframe or engine being replaced to Lessee. ARTICLE V Article V is intentionally omitted. 10 14 ARTICLE VI Distributions Section 6.01. Distribution of Basic Rent. Each payment of Basic Rent, as well as payment of interest on overdue installments of Basic Rent, received by Trustee at any time shall be distributed in accordance with Section 3.05 hereof by Trustee on the date such payment is due from the Lessee, (or as soon thereafter as such payment shall be received by Trustee) to each holder of a Certificate without priority of one over the other ratably in proportion to its undivided beneficial interest in the Trust Estate. Trustee agrees to take all reasonable steps necessary to collect any rent or other amounts due under the Operative Documents. Section 6.02. Distribution of Payments All payments and amounts, except for Basic Rent, if any, received by Trustee shall be distributed forthwith upon receipt; provided, however, all such amounts in excess of $10,000 shall be distributed no later than twenty four (24) hours after Trustee has knowledge of its receipt, in the following order of priority: first, so much of such payment or amount as shall be required to reimburse Trustee for any reasonable fees or expenses not otherwise paid or reimbursed by an Owner Participant as to which Trustee is entitled to be paid or reimbursed hereunder shall be retained by Trustee; second, to reimburse an Owner Participant for payments made by it and not by all Owner Participants, pursuant to Section 7.03 or 9.01 hereof, or an instruction from Trustee pursuant to a written instruction from all Owner Participants or a Majority in Interest of Owner Participants, as required, ratably in proportion to the aggregate amount of such payments made by each Owner Participant; and third, the balance, if any, of such payment or amount remaining thereafter shall be distributed to the Owner Participants ratably, without priority of one over the other, in proportion to the beneficial interest of each Owner Participant in the Trust Estate. Section 6.03. Distribution of Trust Estate. Whenever the terms of this Agreement shall require Trustee to distribute or transfer the entire Trust Estate to any person, Trustee shall be entitled to retain such monies and securities, if any, as shall then be held by Trustee as a part of the Trust Estate and as shall be required to reimburse or pay Trustee for any reasonable fees, expenses, or liabilities not reimbursed or paid by an Owner Participant as to which Trustee is entitled to be paid or reimbursed hereunder or under any Operative Document and shall distribute the Trust Estate in accordance with Section 6.02 hereof. 11 15 ARTICLE VII Duties of Trustee Section 7.01. Notice of Event of Default. If Trustee shall have knowledge of a Default or Event of Default, Trustee shall give prompt written notice thereof to each Owner Participant. Subject to the terms of Section 7.03 hereof, Trustee shall take or refrain from taking such action with respect to a Default or Event of Default as Trustee shall be instructed in a written instrument executed by a Majority in Interest of Owner Participants. If Trustee shall not have received instructions within twenty (20) days after giving notice of a Default or Event of Default as above provided, Trustee may, but shall be under no duty to, and it shall have no liability for its failure or refusal, to take or refrain from taking any action with respect to such Default or Event of Default as it shall deem advisable and in the best interests of the Owner Participants; provided, however, that Trustee shall give the Owner Participants ten days notice thereof prior to taking any such action. For all purposes of this Agreement, in the absence of actual knowledge of an officer of Trustee, Trustee shall not be deemed to have knowledge of a Default or an Event of Default unless it receives written notification thereof given by or on behalf of Lessee or any Owner Participant. Section 7.02. Action upon Instructions. Subject to the terms of Sections 7.01 and 7.03 hereof, upon; the written instructions of a Majority in Interest of Owner Participants, Trustee will take or refrain from taking such action or actions, as may be specified in such instructions, including, without limitation, (a) enforcing provisions of the Lease, the Trust Termination Agreement, or the Participation Agreement, (b) executing and filing UCC-1 Financing Statements for informational purposes, (c) executing and delivering loan agreements with any lender (but only upon the written instruction of all Owner Participants), (d) executing and delivering amendments or supplements to the Lease, the Participation Agreement, or the other Operative Documents, (e) giving such notice of direction or exercising such right, remedy or power hereunder or under the Lease, the Participation Agreement, the other Operative Documents, or in respect of all or any part of the Trust Estate, or taking such other action as shall be specified in such instructions; (f) taking such action to preserve or protect the Trust Estate (including the discharge of liens and encumbrances) as may be specified in such instructions; (g) approving as satisfactory to it or consenting to all matters required by the terms of the Lease, the Participation Agreement or the other Operative Documents to be satisfactory to Trustee, it being understood that without the written instructions of a Majority in Interest of Owner Participants, Trustee shall not approve any such matter as satisfactory to it or consent to any 12 16 such action; and (h) taking such other action as a majority in Interest of Owner Participants shall direct in writing. Section 7.03. Indemnification. Trustee shall not be required to take or refrain from taking any action under this Agreement or any Operative Document (other than the actions specified in the first sentence of Section 7.01 hereof) unless Trustee shall have been indemnified by the Owner Participants, in accordance with Article IX hereof, against any liability, fee, cost or expense (including attorneys fees) which may be incurred or charged in connection therewith; and, if the Owner Participants or a Majority in Interest of Owner Participants, as required, shall have directed Trustee to take or refrain from taking any action under this Agreement or any Operative Document, the Owner Participants agree to furnish Trustee with the indemnification more particularly set forth in Article IX hereof, and, in addition, to pay the reasonable compensation of Trustee for the services performed or to be performed by it pursuant to such direction. Trustee shall not be required to take any action under this Agreement or any Operative Document if Trustee shall reasonably determine, or shall have been advised by counsel, that such action is contrary to the terms hereof or of any document contemplated hereby to which Trustee is a party or is otherwise contrary to law. Section 7.04. No Duties Except as Specified in Trust Agreement or Instructions. Trustee shall not have any duty or obligation to manage, control, make any payment in respect of, register, record, insure, inspect, instruct, use, sell, dispose of or otherwise deal with the Lease Property, or any other part of the Trust Estate, or to otherwise take or refrain from taking any action under, or in connection with, any document contemplated hereby to which Trustee is a party, except as expressly provided by the terms of this Agreement, or in written instructions from a Majority in Interest of Owner Participants received pursuant to Section 7.01 or 7.02 hereof; and no implied duties or obligations shall be read into this Agreement against Trustee. Trustee, in its individual capacity, nevertheless agrees that it will, at its own cost and expense promptly take all action as may be necessary to discharge any Liens (including Lessor Liens) on any part of the Trust Estate which result from actions or commissions or omissions by, or claims against, Trustee, in its individual capacity, or the trusts created hereby not related to Trustee's ownership of the Lease Property or any other part of the Trust Estate or the administration of the Trust Estate or the transactions contemplated by the Operative Documents or this Agreement. Section 7.05. No Action Except Under Specified Documents or Instructions. Trustee agrees that it will not manage, control, use, sell, dispose of or otherwise deal with the Lease Property or any other part of the Trust Estate except (a) as required by this Agreement and the Operative Documents, or (b) in accordance with the powers granted to, or the authority 13 17 conferred upon, or the directions given to, Trustee pursuant to or under this Agreement. Section 7.06. Absence of Duties. Except in accordance with written instructions furnished pursuant to Section 7.02 hereof, and without limitation of the generality of Section 7.04 and the last sentence of Section 11.01(b) hereof, Trustee shall have no duty (a) to file, record or deposit any Operative Document, any financing statement or this Agreement, or to maintain any such filing, recording or deposit or to refile, rerecord or redeposit any such document, except as specified in Section 7.02 hereof, (b) to obtain insurance on the Aircraft, the Airframe, any Engine, or Parts or to effect or maintain any such insurance , (c) to maintain or mark the Aircraft, the Airframe, any Engine, or Parts, (d) to pay or discharge any tax, assessment or other governmental charge or any lien or encumbrance of any kind owing with respect to or assessed or levied against any part of the Trust Estate, except as provided in the last sentence of Section 7.04 hereof, (e) to confirm, verify, investigate or inquire into the failure to receive any reports or financial statement of Lessee or any Sublessee, or (f) to inspect the Aircraft, the Airframe, any Engine, or Parts at any time or to ascertain or inquire as to the performance or observance of any covenants of Lessee under any Operative Document with respect to the Aircraft, the Airframe, any Engine or Parts. ARTICLE VIII Trustee Section 8.01. Acceptance of Trusts and Duties. Trustee accepts the trusts hereby created and agrees to perform the same but only upon the terms of this Agreement. Trustee also agrees to disburse all monies, if any, actually received by it constituting part of the Trust Estate upon the terms of this Agreement. Trustee shall not be answerable or accountable under any circumstances, in its individual capacity, except (a) for its own willful misconduct or gross negligence, (b) in the case of the inaccuracy of any representation or warranty of Trustee contained in Section 8.03 hereof or any representation or warranty of Trustee in its individual capacity contained in the Operative Documents, (c) as arising from the failure by Trustee to perform its obligations under the last sentence of Section 7.04 hereof, (d) for taxes, fees or other charges on, based on or measured by any fees, commissions or compensation received by Trustee for acting as Trustee in connection with any of the transactions contemplated by the Operative Documents. Section 8.02. Furnishing of Documents. Trustee will furnish to each Owner Participant, promptly upon receipt thereof, duplicates or copies of all reports, notices, requests, demands, certificates, financial statements and any other instruments furnished to Trustee hereunder or under the Operative Documents. 14 18 In case any tax report or tax return is required to be made with respect to the Trust Estate and Lessee or any Sublessee is not required to prepare and file the same pursuant to the Lease or any sublease, Trustee will prepare such tax report or return and deliver a copy thereof to each Owner Participant. Upon the request of Trustee, each Owner Participant will provide such instruments, documents, certificates or other information as is reasonably necessary to enable Trustee to prepare any such tax report or return. Trustee agrees to forward to each Owner Participant a copy of any communications with respect to taxes pertaining to the Trust Estate which are received by Trustee. Section 8.03. No Representations or warranties as to Lease Property or Documents. TRUSTEE, IN ITS INDIVIDUAL CAPACITY, MAKES (a) NO REPRESENTATION OR WARRANTY AS TO THE TITLE, VALUE, CONDITION, DESIGN, OPERATION, AIRWORTHINESS, MERCHANTABILITY OR FITNESS FOR USE OF THE AIRCRAFT OR ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT, AIRFRAME, OR ANY ENGINE OR PARTS WHATSOEVER, and (b) no representation or warranty as to the validity or enforceability of this Agreement or the other Operative Documents, or as to the correctness of any statement contained in any thereof, except to the extent that any such statement is made therein by Trustee, in its individual capacity, and except that Trustee, in its individual capacity, hereby represents and warrants to each Owner Participant that this Agreement has been, and each of such other documents which contemplates execution thereof by Trustee has been or will be, executed and delivered by its officers who are or will be duly authorized to execute and deliver such document on its behalf, and except that Trustee, in its individual capacity, hereby represents and warrants to each Owner Participant that the Lease Property is free and clear of any Liens attributable to it and that it will comply with the last sentence of Section 7.04 hereof. Section 8.04. No Segregation of Monies; No Interest. Except as otherwise provided herein, monies, if any, received by Trustee hereunder need not be segregated in any manner except to the extent required by law and may be deposited under such general conditions as may be prescribed by law, and Trustee shall not be liable for any interest thereon. Section 8.05. Reliance; Advice of Counsel. Trustee shall incur no liability to anyone in acting upon any signature, instrument, notice, resolution, request, consent, order, certificate, report, opinion, bond or other document or paper believed by it to be genuine and believed by it to be signed by the proper party or parties. Trustee may accept a certified copy of a resolution of the Board of Directors or other governing body of any corporate party as conclusive evidence that such resolution has been duly adopted by such body and that the same is in full force and effect. As to any fact or matter the manner of ascertainment of which is not specifically prescribed herein, Trustee may for all purposes hereof rely on a certificate, signed 15 19 by a duly authorized officer of the relevant party, as to such fact or matter, and such certificate shall constitute full protection to Trustee for any action taken or omitted to be taken by it in good faith in reliance thereon. In the administration of the trusts hereunder, Trustee may execute any of the trusts or powers hereof and perform its powers and duties hereunder directly or through Agent or other agents or attorneys and may consult, with counsel, accountants and other skilled persons to be selected and employed by it, and Trustee shall not be liable for anything done, suffered or omitted in good faith by it in accordance with the advice or opinion of any such counsel, accountants or other skilled persons and not contrary to this Agreement, so long as such advice or opinion pertains to such matters as Trustee may reasonably presume to be within the scope of such person's expertise. Section 8.06. Not Acting in Individual Capacity. Except as provided in this Article VIII, in accepting the trusts hereby created Trustee acts solely as trustee hereunder and not in its individual capacity; and all persons having any claim against Trustee by reason of the transactions contemplated hereby or by the other Operative Documents shall look only to the Trust Estate for payment or satisfaction thereof, except as specifically provided in this Article VIII. ARTICLE IX Indemnification of Trustee by Owner Participants Section 9.01. Owner Participants to Indemnity Trustee. Each Owner Participant agrees to pay, severally, in proportion to its respective beneficial interest in the Trust Estate, to the extent not paid by Lessee pursuant to the Lease, (or reimburse Trustee for) all reasonable expenses of Trustee hereunder, including, without limitation, the reasonable compensation, expenses and disbursements of such agents, representatives, experts and counsel as Trustee may employ in connection with the exercise and performance of its rights and duties hereunder or under the other Operative Documents, whether or not the transactions contemplated hereby are consummated; provided, however, that if Trustee deems it advisable to employ any such agent, representative, expert or counsel, and Trustee reasonably believes that the fees of such agent, representative, expert or counsel will exceed $5,000, Trustee shall notify the Owner Participants thereof and shall employ such agent, representative, expert or counsel only if a Majority in Interest of Owner Participants has approved such employment. The Owner Participants agree to assume liability for, and to indemnify Trustee in its individual capacity and its successors, assigns, agents and servants against and from any and all liabilities (including without limitation, any liability of any Owner Participant, and liability without fault and any strict liability), obligations, losses, damages, taxes (such term 16 20 "taxes" or the term "tax" as used in this Article IX shall include, without limitation, all taxes specifically related to this Agreement and the Trust Estate created hereby excluding, however, any income taxes or fees or other compensation received by the trustee in its capacity as Trustee), claims, actions, suits, costs, expenses and disbursements (including legal fees and expenses) of any kind and nature whatsoever (collectively, "Expenses") which may be imposed on, incurred by or asserted at any time against Trustee (whether or not indemnified against by Lessee or any other parties) in any way relating to or arising out of the existence or administration of this Agreement, the Trust Estate or the action or inaction of Trustee hereunder or under the other Operative Documents, or the enforcement of any of the terms of any thereof, or in any way relating to or arising out of the manufacture, purchase, acceptance, non-acceptance, rejection, ownership, delivery, lease, financing, possession, use, operation, condition, sale, return or other disposition of the Aircraft, the Airframe, or an Engine (including, without limitation, latent and other defects, whether or not discoverable, and any claim for patent, trademark or copyright infringement) or in any way relating to or arising out of the Lease or the Participation Agreement, except that the foregoing indemnities shall not cover Trustee (a) for its own willful misconduct or gross negligence, (b) in the case of the inaccuracy of any representation or warranty of Trustee con-tained in Section 7.03 hereof or any representation or warranty of Trustee in its individual capacity contained in the Operative Documents, and (c) as arising from the failure by Trustee to perform its obligations under the last sentence of Section 7.04 hereof, or obligations in its individual capacity contained in the Operative Documents. In addition, if necessary, Trustee shall be entitled to indemnification from the Trust Estate, for any liability, obligation, loss, damage, penalty, tax, claim, action, suit, cost, expense or disbursement indemnified against pursuant to this Section 9.01 to the extent not reimbursed by Lessee, the Owner Participants or others, but without releasing any of them from their respective agreements of reimbursement and, to secure the same, Trustee shall have a lien on the Trust Estate, subject to the Lien, if any, of any lender, which shall be prior to any interest therein of the Owner Participants, but only in the event and to the extent that Trustee does not receive payment from Lessee or pursuant to any other provision of any Operative Document, except only that the Owner Participants shall not be required to indemnify Trustee for expenses arising or resulting from any of the matters described in the last sentence of Section 8.01 hereof. The indemnities contained in this Section 9.01 shall survive the termination of this Agreement. Section 9.02. Compensation and Expense. Trustee shall receive the following as compensation for its services hereunder, and as payment for all its costs, fees and expenses incurred in connection with the administration of the Trust Estate (including legal fees and expenses): 17 21 (a) An acceptance fee of $2,500 and an administration fee of $2,000 (the "Annual Administration Fee") or the one year period commencing on the Delivery Date, and each year thereafter in which it is Trustee hereunder and under the Operative Documents; provided, however, after 3 years from the date of this Agreement, Trustee may request an increase in the Annual Administration Fee, and the Owner Participants shall consider such request and make their determination with respect thereto in good faith. Such Annual Administration Fee shall cover all of Trustee's costs, fees and expenses of any kind incurred in connection with the administration of the Trust Estate, including, without limitation, any fees paid to Agent and executing and delivering loan agreements and other agreements with any lender and taking such other action under or in connection with the Operative Documents as the Owner Participants shall direct in writing. (b) Trustee shall be entitled to compensation for any of its reasonable out-of-pocket expenses and the reasonable fees and expenses of any agent, representative, expert or counsel employed by Trustee, incurred in connection with its administration of the Trust Estate hereunder; provided, however, that if Trustee reasonably believes that such expenses, fees and expenses will exceed $5,000, Trustee will obtain the prior approval thereof of a Majority in Interest of Owner Participants. ARTICLE X Termination of this Agreement Section 10.01. Termination of this Agreement. Subject to Section 10.02 hereof, this Agreement and the trusts created hereby shall terminate and the Trust Estate shall, subject to Article VI hereof, be distributed to the Owner Participants, and this Agreement shall be of no further force or effect, upon the earlier of (a) the sale or other final disposition by Trustee of all property constituting part of the Trust Estate and the final distribution by Trustee or any other party of all monies or other property or proceeds constituting part of the Trust Estate in accordance with the terms of Article VI hereof, provided that at such time Lessee shall have fully complied with all the terms of the Lease, or (b) twenty-one (21) years less one day after the death of the last survivor of all of the descendants living on the date of this Agreement of the present members of the Boards of Directors of Trustee and the general partner of Airlease; but if this Agreement and the trusts created hereby shall be or become valid under applicable law for a period subsequent to the 21st anniversary of the death of such last survivor, or if legislation shall become effective providing for the validity thereof for a period in gross exceeding the period hereinabove stated, then this Agreement and the trusts created hereby shall not terminate as aforesaid but shall extend to and continue in effect, but only if such nontermination and extension shall then 18 22 be valid under applicable law, until such time as the same shall, under applicable law, cease to be valid. Section 10.02. Termination at Option of Owner Participants. The provisions of Section 10.01 hereof notwithstanding, this Agreement and the trusts created hereby shall terminate and the Trust Estate shall be distributed to the Owner Participants in accordance with the terms of Article VI hereof, and this Agreement shall be of no further force and effect, upon the election, in their sole discretion, of all of the Owner Participants by notice to Trustee, if such notice shall be accompanied by the written agreement of all of the Owner Participants assuming all the obligations of Trustee under the Operative Documents and all other obligations of Trustee incurred by it as Trustee hereunder; provided, however, that so long as the Lease shall be in effect, no such termination of this Agreement shall occur without Lessee's prior written consent, which consent shall not be unreasonably withheld. Such written agreement shall fully and completely release Trustee from all further obligations and liabilities of Trustee hereunder and under the agreements and other instruments mentioned in the preceding sentence; provided, however, that the obligations and liabilities of any party hereunder arising prior to the date of such written agreement shall survive such termination of Trustee. ARTICLE XI Successor Trustees, Co-Trustees and Separate Trustees Section 11.01. Resignation of Trustee; Appointment of Successor. (a) Resignation of Trustee. Trustee may resign at any time without cause by giving at least 30 days' prior written notice to each Owner Participant, such resignation to be effective upon the acceptance of appointment by a successor Trustee under Section 11.01(b) hereof. In case at any time Trustee shall cease to be eligible in accordance with the provisions of this Article XI, Trustee shall resign immediately by giving written notice to each Owner Participant, such resignation to be effective upon the acceptance of appointment by a successor Trustee under Section 11.01(b) hereof. In addition, Trustee may be removed at any time without cause by an instrument in writing executed by each Owner Participant and delivered to Trustee, such removal to be effective upon the acceptance of appointment by a successor Trustee under Section 11.01(b) hereof. In case of the resignation or removal of Trustee, a Majority in Interest of Owner Participants may appoint a successor Trustee by an instrument signed by such a Majority in Interest of Owner Participants. If a successor Trustee shall not have been appointed within thirty (30) days after the giving of written notice of such resignation or the delivery of the written 19 23 instrument with respect to such removal, Trustee or a Majority in Interest of Owner Participants or Lessee may apply to any court of competent jurisdiction to appoint a successor Trustee to act until such time, if any, as a successor Trustee so appointed by such court shall immediately and without further act be superseded by any successor Trustee appointed as above provided within one year from the date of the appointment by such court. (b) Appointment of Successor Trustee. Any successor Trustee, however appointed, shall execute and deliver to the predecessor Trustee and each Owner Participant an instrument accepting such appointment, and thereupon such successor Trustee, without further act, shall become vested with all the estates, properties, rights, powers, duties and trusts of the predecessor Trustee in the trusts hereunder with like effect as if originally named Trustee herein; but nevertheless, upon the written request of such successor Trustee, such predecessor Trustee shall execute and deliver an instrument transferring to such successor Trustee, upon the trusts herein expressed, all the estates, properties, rights, powers, duties and trusts of such predecessor Trustee, and such predecessor Trustee shall duly assign, transfer, deliver and pay over to such successor Trustee all monies, or other property then held by such predecessor Trustee) upon the trusts herein expressed. The predecessor Trustee will cooperate in causing registration of the Aircraft to be transferred to the successor Trustee in accordance with applicable law. (c) Mandatory Resignation. Trustee and any successor Trustee, however appointed, must resign if at any time it is unable to obtain or maintain at all times satisfactory registration of each Aircraft pursuant to the Federal Aviation Act, as amended (the "Act"). Any successor Trustee shall be a bank or trust company incorporated and doing business within the United States of America and having a combined capital and surplus of at least $50,000,000, or the subsidiary of an institution having a combined capital and surplus of at least $50,000,000, which guarantees the obligations of such subsidiary. (d) Citizen of the United States. Trustee shall be and any successor Trustee will be "a citizen of the United States" as defined in Section 101(16) of the Act. (e) Merger of trustee. Any corporation into which Trustee may be merged or with which it may be consolidated, or any corporation resulting from any merger, or consolidation to which Trustee shall be a party, or any corporation to which substantially all the corporate trust business of Trustee may be transferred, shall, subject to the terms of Section 11.01(c) hereof, be Trustee under this Agreement without further act. Section 11.02. Co-Trustees and Separate Trustees. Whenever Trustee or a Majority in Interest of Owner Participants shall deem it necessary or prudent in order either to conform to any law of any jurisdiction in which all or any part of the Trust 20 24 Estate shall be situated or to make any claim or bring any suit with respect to the Trust Estate or the Operative Documents, or either Trustee or a Majority in Interest of Owner Participants shall be advised by counsel satisfactory to it that it is so necessary or prudent, Trustee and a Majority in interest of Owner Participants shall execute and deliver an agreement supplemental hereto and all other instruments and agreements, and shall take all other action, necessary or proper to constitute one or more Persons (and Trustee may appoint one or more of its officers) (any and all of which shall be a "citizen of the United States" as defined in Section 101(16) of the Act) either as co-trustee or co-trustees jointly with Trustee of all or any part of the Trust Estate, or as separate trustee or separate trustees of all or any part of the Trust Estate, and to vest in such Persons, in such capacity, such title to the Trust Estate or any part thereof, and such rights or duties as may be necessary or desirable, all for such period and under such terms and conditions as are satisfactory to Trustee and a Majority in Interest of Owner Participants. In case any co-trustee or separate trustee shall die, become incapable of acting, resign or be removed, the title to the Trust Estate and all rights and duties of such co-trustee or separate trustee shall, so far as permitted by law, vest in and be exercised by Trustee, without the appointment of a successor to such co-trustee or separate trustee. ARTICLE XII Agent Section 12.01. Appointment of Agent. The Owner Participants authorize and direct Trustee to appoint, and Trustee hereby does appoint, Agent as its agent to do all such acts and things and execute all such documents, instruments and other agreements as Trustee hereafter may from time to time direct, in its place and stead, in accordance with the terms of this Agreement and the Operative Documents. Section 12.02. Agent's Acceptance of Appointment. Agent agrees to act as agent for Trustee hereunder and to accept possession of and hold such items of the Trust Estate as it may from time to time receive on behalf of Trustee subject to the trusts hereby created and the terms and conditions of this Agreement. Section 12.03. Agreements of Agent. Agent hereby agrees: (a) to exercise the rights and perform the duties of Trustee as directed by Trustee in accordance with the terms hereof; 21 25 (b) to assume liability for, and indemnify the Owner Participants, Trustee, and the Trust Estate from and against, Liens attributable to it; and (c) pursuant to the instructions of Trustee in accordance with the terms hereof, to conduct negotiations with respect to the documents contemplated by this Agreement and the Operative Documents and to use its best efforts by administrative means to cause the Operative Documents to be executed and to consummate the acquisition of the 50% undivided interest in the Aircraft under the Trust Termination Agreement in the manner contemplated by the Operative Documents. Section 12.04. Standard of Care and Diligence (a) Agent's Liability. Except as provided in Section 12.03 hereof, Agent assumes no liability for anything other than its own willful misconduct or gross negligence. It shall give each Owner Participant prompt notice of any Event of Default or claimed Event of Default under the Lease of which Agent shall have actual knowledge. For all purposes of this Agreement, in the absence of actual knowledge of an officer of Agent, Agent shall not be deemed to have actual knowledge of a Default or an Event of Default unless it receives written notification thereof given by or on behalf of Lessee, Trustee, any Owner Participant, or any other party. (b) Use of Agents. Subject to the same limitations as apply hereunder to Trustee, Agent may exercise its powers and perform its duties by or through such attorneys, agents and servants as it shall appoint; and it shall be entitled to the advice of counsel (who may, in cases deemed by Agent in its reasonable discretion to be appropriate, be counsel for Agent) and shall be protected by the advice of such counsel in anything done or omitted to be done in accordance with such advice. Section 12.05. Resignation or Removal of Agent. Agent or any successor thereto may resign at any time without cause by giving at least 30 days prior written notice to Trustee and each Owner Participant, such resignation to be effective on the date specified in such notice. In addition, a Majority in Interest of Owner Participants may at any time remove Agent without cause by an instrument in writing executed by a Majority in Interest of Owner Participants delivered to the Agent and Trustee. In the case of the resignation or removal of Agent, a Majority in Interest of Owner Participants may, at their sole cost and expense, appoint a successor Agent by an instrument signed by a Majority in Interest of Owner Participants. If a Majority in Interest of Owner Participants shall not have appointed a successor Agent within 30 days after such resignation or removal, Trustee may apply to any court of competent jurisdiction to appoint a successor Agent to act until such time, if any, as a successor shall have been appointed by a Majority in Interest of Owner Participants as above provided. The successor Agent so 22 26 appointed by such court shall immediately and without further act be superseded by any successor Agent appointed by a Majority in Interest of Owner Participants within one year from the date of the appointment by such court. Section 12.06. Estates and Rights of Successor Agent. Any Agent, whether appointed by a Majority in Interest of Owner Participants or a court, shall execute and deliver to Trustee and to the predecessor Agent an instrument accepting such appointment, and thereupon such successor Agent, without further act, shall become vested with all the estates, properties, rights, powers and duties of the predecessor Agent hereunder with like effect as if originally named Agent herein; but nevertheless upon the written request of Trustee or such successor Agent, such predecessor Agent shall execute and deliver an instrument transferring to such successor Agent all the estates, properties, rights and powers of such predecessor Agent, and such predecessor Agent shall duly assign, transfer, deliver and pay over to such successor Agent all monies or other property then held by such predecessor Agent hereunder. Section 12.07. Merger or Consolidation of Agent. Any corporation into which Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which Agent shall be a party, or any corporation to which substantially all the business of Agent may be transferred, shall be Agent under this Agreement without further act. Section 12.08. Agent's Duty to Indemnity. The obligation of Agent under Section 12.03(b) to indemnify the Owner Participants, the Trust Estate, and Trustee shall survive the resignation or removal of Agent and the termination of this Agreement. ARTICLE XIII Supplements and Amendments This Agreement shall be amended only by a written instrument signed by Trustee and a Majority in Interest of Owner Participants; but if in the reasonable opinion of Trustee, any instrument required to be so executed adversely affects any right, duty, liability of, or immunity or indemnity in favor of it under this Agreement or any of the documents contemplated hereby to which it is a party, or would cause or result in any conflict with or breach of any terms, conditions or provisions of, or default under the charter documents or by-laws of Trustee or any document contemplated hereby to which Trustee is a party, Trustee may in its sole discretion decline to execute such instrument and upon the request of a Majority in Interest of Owner Participants immediately shall resign as Trustee under this Agreement, any Operative Document, or other related document. No 23 27 supplement, amendment or modification of the Agreement shall impair any requirement in this Agreement that the consent of a Majority in Interest of Owner Participants or of all of the Owner Participants be obtained for any purpose and no such supplement, amendment or modification shall require any Owner Participant to invest or advance funds or shall entail any additional personal liability or the surrender of any indemnification, claim or individual right on the part of any Owner Participant with respect to any agreement or obligation or create or suffer to exist any additional obligation of or liability on the Trust Estate, except with the written consent of each of the Owner Participants. ARTICLE XIV Sale, Transfer or Mortgage of Lease Property Section 14.01. General. Except as hereinafter expressly permitted, no Owner Participant may sell, assign, transfer, mortgage, charge or otherwise encumber, or suffer any third party to sell, assign, transfer, mortgage, charge or otherwise encumber, or contract to do or permit any of the foregoing, whether voluntarily or by operation of law (herein sometimes collectively called a "transfer"), any part or all of its interest hereunder or in the Trust Estate without the written consent of the other Owner Participant(s) and any attempt to do so shall be void. The giving of such consent in any one or more instances shall not limit or waive the need for such consent in any other or subsequent instances. Section 14.02. Permitted Transfers. (a) Transfers by Agent. Notwithstanding the provisions of Section 14.01 hereof, without the consent of the other Owner Participants, Agent may from time to time transfer all or any portion of its interest hereunder to an Affiliate. (b) Transfers by Airlease. Notwithstanding the provisions of Section 14.01 hereof, without the consent of the other Owner Participants, Airlease may from time to time transfer all or any portion of its interest hereunder to an Affiliate. Section 14.03. Right of First Refusal as to an Owner Participant's Trust Estate Interest. (a) Offering Notice. Except for permitted transfers under Section 14.02 above, if any Owner Participant receives a bona fide offer for the purchase of either (i) all of its interest hereunder or (ii) less than all of its interest hereunder, (the recipient of any such offer being hereinafter called the "Offerer"), which offer complies with the provisions of Section 14.03(b) hereof and which offer it desires and intends to accept, before accepting such offer it shall give notice (the 24 28 "Offering Notice") to the other Owner Participants (the "Offerees") which shall include a true copy of such offer, whereupon the provisions set forth in this Section 14.03 shall apply. Except for permitted transfers under Section 14.02 above, no Owner Participant shall accept an offer unless such offer complies with the provisions of Section 14.03(b) hereof. (b) Requirements of Offer. Such an offer shall comply with the following requirements: (i) the proposed purchase price (which shall be net of any Trust Estate debts or liabilities which the proposed purchaser has agreed to assume in its offer to purchase the Offeror's interest) is payable solely in lawful money of the United States and, if not payable in its entirety in cash, under no circumstances may payment of the non-cash portion of the proposed purchase price be secured by any charge, encumbrance or hypothecation of the Trust Estate; (ii) the offer contains provisions whereby the proposed purchaser is obligated to comply with the provisions of Section 14.06 hereof, requiring it to assume certain obligations prior to or at closing;. (iii) the offer is accompanied by a certified check of the prospective purchaser for a sum equal to at least ten percent (10%) of the proposed purchase price; provided, however, that if the sale to the third party purchaser is not consummated for any reason other than due to the failure of the Offeror and the Offerees to perform their obligations pursuant to the offer, the Offeror and the Offerees shall be entitled to a pro rata portion of such sum; (iv) the Offeror shall not have caused or permitted an Owner Participant Event of Default (as hereinafter defined); and (v) the prospective purchaser shall be capable of carrying out all obligations of an Owner Participant under this Agreement and all related agreements; and as shown by the audited financial statements of such prospective purchaser for the two (2) most recent fiscal years of such prospective purchaser, shall have a tangible net worth satisfactory to the Offerees, determined in accordance with generally accepted accounting principles. (c) Procedure. In the Offering Notice, the Offeror shall offer (the "Sale Offer") to each Offeree the right to purchase a portion of the interest (the "Portion of the Interest") of the Offeror referred to in said offer, at a portion of the same price and subject to the same terms and conditions as 25 29 set forth in said offer and the Offeror shall submit with the Offering Notice a true copy of said offer. The portion shall be equal to the full amount of the interest offered multiplied by a fraction, the numerator of which is such Offeree's then interest in the Trust Estate and the denominator is the then interest in the Trust Estate of all Offerees. Each Offeree shall notify the Offeror and the other Offeree(s) of its election within fifteen (15) days of the date of its receipt of the Offering Notice; provided, however, that such election shall be as to all of the Portion of the Interest. (d) Acceptance of Sale Offer. (i) If the Sale Offer is accepted by each Offeree, and notice in writing is given within the period specified in Section 14.03(c) hereof, the Offeror shall thereupon be bound to sell to such Offeree and the Offeree shall thereupon be bound to purchase the Portion of the Interest referred to in the Sale offer in accordance with the terms of the Sale Offer and the closing of the purchase shall take place in accordance with Section 14.04 hereof. (ii) If one Offeree has not accepted the Sale Offer or has not accepted the Sale Offer within such fifteen (15) day period and one or more of the other Offerees has accepted the Sale Offer ("Accepting Offeree"), the Accepting Offeree(s) shall have the right to purchase the entire interest referred to in the Sale Offer (but not less than such entire interest) in accordance with the terms of the Sale Offer and the purchase shall take place in accordance with Section 14.04 hereof and the procedures included in Section 14.03(c) hereof. Except that the Accepting Offerees shall notify the Offeror and other Offerees of such election within ten (10) days of the end of the initial fifteen (15) day period referred to in Section 14.03(c) hereof. The Offeror shall thereupon be bound to sell to such Accepting Offeree(s) and the Accepting Offeree(s) shall thereupon be bound to purchase the entire interest referred to in the Sale Offer in accordance with the terms of the Sale Offer and the closing of the purchase shall take place in accordance with Section 14.04 hereof. (e) Right to Sell to Third Party. If the Offerees have not accepted the Sale Offer as provided in Section 14.03(c) hereof within the time limits referred to therein, or if the Accepting Offeree(s) have not accepted the Sale Offer as provided in Section 14.03(d)(2) hereof within the time limits referred to therein, the Sale Offer shall be deemed to have been declined by such Offerees and the Offeror shall be free to sell its interest to the maker of said offer at a price and upon terms and conditions not less favorable to the Offeror than those set forth 26 30 in the offering Notice within the time period set forth below. If in any instance such Offerees elect not to exercise their rights hereunder or to waive such rights, such election shall not constitute a waiver of the Offerees' right to an Offering Notice in the case of any subsequent offer. If such interest is not so sold and the transfer not consummated within thirty (30) days, unless extended by mutual agreement, from the expiration of the time limits referred to in Section 14.03(c) or Section 14.03(d)(2) hereof , as applicable, the relevant interest shall then again become subject to all the provisions of this Section 14.03. (f) Limitations on Exercise. Notwithstanding anything to the contrary contained in this Section 14.03, no Offeree which has failed to perform or observe any of its obligations, covenants, conditions, or agreements under this Agreement or any related document (an "Owner Participant Event of Default"), which Owner Participant Event of Default is still continuing, shall be entitled to exercise its right to purchase (or sell, unless the Owner Participant Event of Default is cured by such sale) any portion of the Offeror's interest. Section 14.04. Closings. (a) Location and Time Periods. The closing of any sale of an interest in the Trust Estate pursuant to this Article XIV shall be held at a mutually acceptable place and on a mutually acceptable date not more than thirty (30) days, unless extended by mutual agreement, after the receipt by the Offeror of the written notices of election by the Offerees, Accepting Offeree, or Third Party Accepting Offeree, as applicable, or after the expiration of the time within which the Offeree must so elect, as provided in Sections 14.03(c) or 14.03(d) hereof. (b) Closing Conditions. Any Owner Participant transferring its interest shall transfer such interest free and clear of all liens, encumbrances or any interests of any third party (excepting any liens permitted under the Lease) and shall execute or cause to be executed any and all documents required to fully transfer such interest to the acquiring third party or acquiring Owner Participants, including, but not limited to, any documents necessary to evidence such transfer and to evidence the agreement by the acquiring third party or acquiring Owner Participants to be bound by all applicable provisions of the Operative Documents, and all documents required to release any interest in such selling Owner Participant's interest. Any sums owed by the selling Owner Participants to the Trust Estate or the other Owner Participants shall be paid concurrently from the proceeds from such sale at the closing. Following the date of closing, unless otherwise agreed, the selling Owner Participant shall have no further rights to any rent or proceeds from the Trust Estate assets attributable to any period or event following the date of closing and all such rights shall vest in the 27 31 transferee of the interest purchased from the selling owner Participant. (c) Event of Loss. If an Event of Loss shall occur with respect to the Aircraft between (i) the date an election is made by any Owner Participant or a third party transferee to purchase pursuant to Section 14.03, and (ii) the closing of such purchase, the offer to purchase shall automatically terminate, without any further action or notice required. (d) Partial Loss. If a partial loss shall occur with respect to the Aircraft under the Lease, subject to the performance by Lessee of its obligations under the Lease and so long as there is no Event of Default thereunder, the purchase of the interest hereunder shall be consummated as contemplated by the parties. 14.05. Termination of Obligations. As of the closing date of any transfer not prohibited hereunder by an owner Participant of its entire interest in the Trust Estate to the other Owner Participants or to a third party purchaser, such transferring Owner Participant's rights and obligations hereunder shall terminate except as to any of its unperformed obligations accrued as of such date and except as to any unperformed indemnity obligations of such Owner Participant attributable to acts or events occurring prior to such closing date. Thereupon, except as limited by the preceding sentence, this Agreement shall terminate as to the transferring Owner Participant but all terms and conditions thereof shall remain in effect as to the other Owner Participants and the third party purchaser shall become an Owner Participant hereunder. In the event of a transfer of its entire Trust Estate interest by an Owner Participant to the other Owner Participants or to a third party purchaser, the Owner Participants or third party purchaser to which such interest is transferred, shall indemnify, defend and hold harmless the Owner Participant so transferring its interest from and against any and all claims, demands, losses, liabilities, expenses, actions, lawsuits, and other proceedings, judgments, awards, and costs and expenses (including but not limited to reasonable attorneys' fees) incurred in or rising directly or indirectly, in whole or in part, out of the Trust Estate, excluding only those liabilities, if any, which accrued prior to the closing date of such transfer. Section 14.06. Agreements with Transferees. If pursuant to the provisions of this Article XIV, any Owner Participant shall transfer its interest hereunder to any person or entity other than the other Owner Participants, no such transfer shall be made or shall be effective to make such transferee an Owner Participant or entitle such transferee to any benefits or rights hereunder or under the Operative Documents until the proposed Transferee agrees in writing to assume and be bound by all the obligations of the selling Owner Participant and be subject to all the restrictions to which the selling 28 32 Participant is subject under the terms of this Agreement, the Operative Documents, and any further agreement which may be required with respect to the Trust Estate. If an Owner Participant's interest hereunder is transferred by operation of law, such Owner Participant's transferee shall sign such a writing within fifteen (15) days of the closing date as an express condition to the effectiveness of any such transfer. Section 14.07. Restraining Order. If any Owner Participant shall at any time transfer or attempt to transfer its interest hereunder in violation of the provisions of this Agreement and any rights hereby granted, then the other Owner Participants shall, in addition to all rights and remedies at law and in equity, be entitled to a decree or order restraining and enjoining such transfer and the defaulting Owner Participant shall not plead in defense thereto that there would be an adequate remedy at law; it being hereby expressly acknowledged and agreed by the parties hereto that damages at law will be an inadequate remedy for a breach or threatened breach of the violation of the provisions concerning transfer of a Trust Estate interest as set forth in this Agreement. Section 14.08. Sale by an Owner Participant of an Owner Participant's Trust Estate. The parties agree that if one of the Owner Participants should decide to purchase the Trust Estate interest of the other Owner Participants, the parties shall negotiate the terms and conditions of such purchase in good faith, including, without limitation, the purchase price, any financing arrangements, and like matters. Such -purchase shall take place in accordance with Section 14.04 hereof. ARTICLE XV Miscellaneous Section 15.01. No Legal Title to Trust Estate in Owner Participants. The Owner Participants shall not have legal title to any part of the Trust Estate. No transfer, by operation of law or otherwise, of any right, title and interest of the Owner Participants in and to the Trust Estate or hereunder shall operate to terminate this Agreement or the trusts hereunder or entitle any successor or transferee to an accounting or to the transfer to it of legal title to any part of the Trust Estate. Section 15.02. Sale of Aircraft, etc., by Trustee is Binding. Any sale or other conveyance of the Aircraft, the Airframe, an Engine or Parts by Trustee made pursuant to the terms of this Agreement (so long as such sale is not contrary to the provisions of the Operative Documents) shall bind the Owner Participants and shall be effective to transfer or convey all right, title and interest of Trustee and the Owner Participants in and to the Aircraft, the Airframe, or an Engine or Parts. No purchaser or other grantee shall be required to -inquire as to the 29 33 authorization, necessity, expediency or regularity of such sale or conveyance or as to the application of any sale or other proceeds with respect thereto by Trustee. Section 15.03. Limitations on Rights of Others. Except as provided in Sections 10.02 and 11.01 hereof, nothing in this Agreement shall be construed to give to any person other than Trustee, the Owner Participants or the Agent any legal or equitable right, remedy or claim under or in respect of this Agreement, any covenants, conditions or provisions contained herein or the Trust Estate. Section 15.04. No Partnership for Tax Purposes. The Owner Participants agree that this Trust Estate is not to be construed as a partnership for tax purposes; provided, however, that if it is determined to be a partnership for tax purposes, Agent agrees to be bound by an election under Section 754 of the Internal Revenue Code of 1954, as amended, made by Airlease. Section 15.05. Notices. Unless otherwise expressly specified or permitted by the terms hereof, all notices required under the terms and provisions hereof shall be in writing by first class mail, personal delivery, cable, telex or telecopy (with such cable, telex or telecopy confirmed in writing, mailed by first-class mail, postage prepaid) addressed to such person at the address set forth herein with copies to Trustee or the Owner Participants, as the case may be. Whenever any notice is required to be given, such notice shall be deemed given and such requirement satisfied in such notice is (a) mailed, on the day of deposit into the mail, or (b) personally delivered, when delivered, or (c) cabled, when such notice is delivered to the telegraph company, or (d) telecopied, when the telecopy has been received, or (e) telexed, when the answer back of the addressee is received. Any Person entitled to notice hereunder may change the address to which notices to such Person will be sent by giving notice of such change to Trustee, the Owner Participants, or Agent. If to Trustee: Trust Company for USL, Inc. 615 Battery Street San Francisco, CA 94111 Attn: President Telex: 278031 If to Agent: United States Leasing International, Inc. 615 Battery Street San Francisco, California 94111 Attn: President 30 34 If to Airlease: Airlease Ltd., A California Limited Partnership c/o Airlease Management Services, Inc. 615 Battery Street San Francisco, California 94111 Attn: President Section 15.06. Severability. Any provision of this Agreement 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. Section 15.07. Limitation on Liability of the Owner Participants and Agent. The Owner Participants and Agent shall not have any liability for the performance of this Agreement except as expressly set forth herein. Section 15.08. Separate Counterparts. This Agreement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. Section 15.09. Successors and Assigns. All covenants and agreements contained herein shall be binding upon, and inure to the benefit of, Trustee and its successors and assigns, Agent and its successors and assigns, and the Owner Participants and their respective successors and, to the extent permitted by Article XIV hereof, assigns, all as herein provided. Any request, notice, direction, consent, waiver or other instrument or action by any Owner Participant, shall bind the successors and assigns of such Owner Participant. Section 15.10. Headings The headings of the various Articles and Sections herein are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Section 15.11. Governing Law. This Agreement shall in all respects be governed by, and construed in accordance with, the laws of the State of Illinois, including all matters of construction, validity and performance. 31 35 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective officers hereto as of the day and year first above written. AIRLEASE LTD., A CALIFORNIA UNITED STATES LEASING LIMITED PARTNERSHIP, as INTERNATIONAL, INC., as Agent Owner Participant By: Airlease Management /s/ Martin W. Gruen Services, Inc., ------------------- General Partner By: Investment Officer - Transportation and Facilities Financing /s/ David B. Gebler - ------------------- By: President TRUST COMPANY FOR USL, INC., as Trustee /s/ Stanley E. Gutman --------------------- By: Vice President [Aircraft N362PA - New Trust Agreement] 32 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 0 0 102,756 0 0 0 0 17,344 103,021 0 27,483 0 0 0 71,712 103,021 12,513 12,513 0 2,129 0 0 2,366 6,822 0 6,822 0 0 0 6,822 0 0
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