-----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, EdAlIRBM2iYFfcdk1vrggM5ZnmU59/12DjXfJHKw1BEub3k+3g6frfvd5YJi5qxc pjoSZTaku5ogNwHyGu21WQ== 0001092306-02-000076.txt : 20020415 0001092306-02-000076.hdr.sgml : 20020415 ACCESSION NUMBER: 0001092306-02-000076 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AIRLEASE LTD CENTRAL INDEX KEY: 0000799033 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE LESSORS [6172] IRS NUMBER: 943008908 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09259 FILM NUMBER: 02582573 BUSINESS ADDRESS: STREET 1: 555 CALIFORNIA STREET STREET 2: 4TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94104 BUSINESS PHONE: 4157651814 MAIL ADDRESS: STREET 1: 555 CALIFORNIA STREET STREET 2: 4TH FLOOR CITY: SAN FRANCISCO STATE: CA ZIP: 94104 10-K 1 form10-k.txt FORM 10-K ENDING DECEMBER 31, 2001 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, 2001 Commission File No. 1-9259 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP ______________________________________________________ (Exact name of registrant as specified in its charter) California 94-3008908 _______________________ ____________________________________ (State of Organization) (I.R.S. Employer Identification No.) 555 California Street, Fourth Floor, San Francisco, CA 94104 ____________________________________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 765-1814 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: TITLE OF EACH CLASS: NAME OF EACH EXCHANGE Depositary Units Representing ON WHICH REGISTERED: Limited Partnership Interests New York Stock Exchange SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Aggregate market value of Depositary Units, held by non-affiliates of the registrant as of the close of business at March 12, 2002 was $21,539,100.00. TABLE OF CONTENTS PAGE PART I ITEM 1. BUSINESS.......................................................... 3 ITEM 2. PROPERTIES........................................................ 14 ITEM 3. LEGAL PROCEEDINGS................................................. 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS............................................... 15 ITEM 6. SELECTED FINANCIAL DATA........................................... 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................... 19 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK....................................................... 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 24 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE............................... 24 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 24 ITEM 11. EXECUTIVE COMPENSATION............................................ 26 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 26 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.......................................................... 29 SIGNATURES.................................................................. 33 INDEX TO EXHIBITS....................................................A-13, A-14 2 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 PART I ITEM 1. BUSINESS GENERAL Airlease Ltd., A California Limited Partnership (the "Partnership" or "Airlease"), was formed in 1986. The General Partner of the Partnership (the "General Partner") is Airlease Management Services, Inc., a Delaware corporation. Until October 31, 1996 the General Partner was a wholly owned subsidiary of USL Capital Corporation ("USL Capital"), which in turn was an indirect subsidiary of Ford Motor Company. On October 31, 1996, BA Leasing & Capital Corporation ("BA Leasing & Capital"), a wholly owned indirect subsidiary of BankAmerica Corporation, purchased the stock of the General Partner from USL Capital and the General Partner became a wholly owned subsidiary of BA Leasing & Capital. On September 29, 1999, BA Leasing & Capital merged into Banc of America Leasing and Capital, LLC, a Delaware limited liability company ("BALCAP"). BALCAP is also a wholly owned indirect subsidiary of BankAmerica Corporation. A total of 4,625,000 Depository Units representing limited partnership interests ("Units") in the Partnership are outstanding, of which 3,600,000 are held by the public and 1,025,000 are owned by BALCAP and its subsidiaries. The Partnership invests in commercial aircraft and leases the aircraft to others, primarily airlines, pursuant to finance (full payout) or operating leases. PRINCIPAL INVESTMENT OBJECTIVES The business of the Partnership is to acquire and own, either directly or through joint ventures, aircraft and to lease such aircraft primarily to airlines. The Partnership's principal investment objectives are to generate income for quarterly cash distributions to Unitholders and to own a portfolio of leased aircraft. The Partnership's original intent was that until January 1, 2005, it would 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 were available. 3 As previously reported, as part of a plan to mitigate the adverse financial effects of changes in tax law, in 1997 Unitholders authorized the General Partner to decide not to make new aircraft investments, to sell aircraft when attractive opportunities arise, to distribute the proceeds and to liquidate the Partnership when all assets are sold. The General Partner will consider whether it is in the best interest of Unitholders to cease making new aircraft investments as opportunities arise, in light of market conditions and the Partnership's competitive position. Based on its investment experience and its knowledge of the market, the General Partner believes that attractive investment opportunities like those made by the Partnership in the past probably will not be available. In the event that aircraft are sold and appropriate alternative investments are not available, the Partnership will distribute sale proceeds to Unitholders (after repaying debt and establishing appropriate reserves), and this would result in a further reduction of the Partnership's portfolio. AIRCRAFT PORTFOLIO The Partnership's aircraft portfolio consists of 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 MD-11, or any turboprop or prop-fan powered aircraft. The following table describes the Partnership's aircraft portfolio at December 31, 2001:
__________________________________________________________________________________________________________________ Number & Current Purchase type; year of Ownership Acquired by lease price (in Type Noise Lessee Delivery Interest Partnership expiration millions) of lease compliance(1) __________________________________________________________________________________________________________________ CSI 2 MD-82 100% 1986 2006 (2) $36.4 Direct Stage III Aviation 1981 finance FedEx 1 727-200FH 100% 1987 2006 $18.5(3) Direct Stage III 1979 finance Held for 3 MD-82 100% 1986 N/A $54.6 N/A Stage III Sale or lease 1981(2) (1) See "Government Regulation-Aircraft Noise" below, for a description of laws and regulations governing aircraft noise. (2) CSI has the right to terminate the leases on any date on which CSI's agreement with the United States Marshals Service terminates. Unless earlier terminated, the leases will expire in 2006. (3) The purchase price includes $6.9 million of conversion costs for the upgrade of the aircraft from a Stage II passenger to a Stage III freighter aircraft.
At December 31, 2001, the book value of aircraft by lessee as a percent of total assets was 4 as follows: FedEx, 13.2%; CSI, 27% and off-lease aircraft, 40.6%. Revenues by lessee as a percentage of total revenue for 2001 and 2000, respectively, were as follows: US Airways, 55.4% and 76.8%; TWA/American Airlines, 17.2% and 17.4%; CSI, 4.9% and 0%; and FedEx, 5.7% and 5.9%. At December 31, 2001, the Partnership's portfolio consisted of six Stage-III commercial aircraft. Two are leased to CSI Aviation Services, Inc., one to FedEx, and three are being marketed for lease. In January 2001 TWA, a lessee of a seventh aircraft in the Partnership's portfolio, filed for bankruptcy. In April 2001, American Airlines assumed a modified TWA lease and in December 2001 Airlease sold the aircraft under the terms of a previously negotiated sale. In April 2001 US Airways, at that time the lessee of five MD-82 aircraft, notified Airlease it would return these aircraft at end of lease on October 1, 2001. Two of the five aircraft were subsequently leased to CSI Aviation Services, Inc. ("CSI") and the other three aircraft are being marketed for lease. CSI operates the two aircraft it leases in charter services for the United States Marshals Service ("USMS"). CSI has the right to terminate its leases with the Partnership on any date on which CSI's agreement with USMS terminates. The initial contract between CSI and USMS expires in October 2002. Unless earlier terminated, the leases will expire on October 31, 2006. The Partnership also leases a 727-200 FH aircraft to FedEx. This lease is scheduled to terminate in 2006. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" for a further discussion of the Partnership's lessees. The Partnership's lessees have the following fair market value renewal options: Fedex has the right to renew its lease for one six-month term at the current rent payable under the lease, and thereafter for four successive one year terms at a fair market value rental, and CSI has the right to renew its leases from one to five years to coincide with any renewal of its contract with the USMS. COMPETITIVE POSITION OF THE PARTNERSHIP The aircraft leasing industry has become increasingly competitive. In making aircraft investments, leasing aircraft to lessees, and seeking purchasers of aircraft, the Partnership competes with large leasing companies, aircraft manufacturers, airlines and other operators, equipment managers, financial institutions and other parties engaged in leasing, managing, marketing or remarketing aircraft. Affiliates of the General Partner are engaged in many of these businesses and may be deemed to be in competition with the Partnership. There are many large 5 leasing companies which have the financial strength to borrow at very low rates and to obtain significant discounts when purchasing large quantities of aircraft. The lower capital and acquisition costs enjoyed by these large leasing companies permit them to offer airlines lower lease rates than smaller leasing companies can offer. The Partnership does not have the resources to purchase newer aircraft or to purchase aircraft at volume discounts and has only a limited ability to use tax deferrals in its pricing. As previously reported to Unitholders, the Partnership's access to capital is limited. Since all Cash Available from Operations, as defined in the Limited Partnership Agreement, is distributed, there is no build up of equity capital, and acquisitions must be funded from proceeds available when aircraft are sold or from debt. Access to debt is limited because the Partnership's aircraft leased under long-term leases are generally used to collateralize existing borrowings. In general, the Partnership's pricing is uncompetitive for new acquisitions because of its limited sources and high cost of capital. Because of these factors, finding new aircraft investments like those made by the Partnership in the past and that offer an appropriate balance of risk and reward has been difficult. During the past eight years the Partnership has made only two aircraft investments, both of which were possible because of special circumstances. In 1996, 1997 and 2001, the Partnership sold interests in nine aircraft (a 50% interest in an aircraft on lease to Finnair, a one-third interest in six aircraft on lease to Continental, a 50% interest in one aircraft leased to Sun Jet International, Inc., and a 100% interest in an aircraft previously on lease to TWA and American Airlines). See "Disposition of Aircraft" below. However, because of the factors described above, the Partnership was unable to reinvest the proceeds in aircraft at an acceptable return, and the General Partner determined that the best use of the net proceeds was to distribute them to Unitholders. These sales and distributions have reduced the size of the Partnership's portfolio. PARTICIPANTS IN LEASES USL Capital originally participated equally with the Partnership in the aircraft on lease to FedEx and the aircraft sold in December 2001. In April 1993 the Partnership leased two aircraft (held jointly with USL Capital), which were previously off lease, to FedEx. In September 1993 the Partnership exchanged its 50% interest in the two aircraft for a 100% interest in one aircraft and pledged the aircraft and the lease as collateral to obtain funds to upgrade the aircraft from a Stage II passenger aircraft to a Stage III freighter. In January 1997, the Partnership purchased from USL Capital a 50% interest in the aircraft at that time on lease to TWA, and owned a 100% interest in that aircraft until it was sold in December 2001. 6 DESCRIPTION OF LEASES The 727-200FH aircraft on lease to FedEx is leased pursuant to a full-payout (direct finance) lease, and the two MD-82 aircraft on lease to CSI are leased pursuant to operating leases. The two MD-82 aircraft on lease to CSI, together with the three off-lease aircraft, were previously leased to US Airways pursuant to full-payout leases. A sixth MD-82 aircraft was previously leased to TWA pursuant to a full-payout lease, and then to American Airlines pursuant to an operating lease, until the aircraft was sold in December 2001. Generally, operating leases are for a shorter term than full-payout leases and, therefore, it is necessary to remarket the aircraft in order to recover the full investment. Full-payout leases are generally for a longer term and hence provide more predictable revenue than operating leases. All of the Partnership's leases are net leases, which provide that the lessee will bear the direct operating costs a0nd the risk of physical loss of the aircraft; pay sales, use or other similar taxes relating to the lease or use of the aircraft; maintain the aircraft; indemnify the Partnership-lessor against any liability suffered by the Partnership as the result of any act or omission of the lessee or its agents; maintain casualty insurance in an amount equal to the specific amount set forth in the lease (which may be less than the fair value of the aircraft); and maintain liability insurance naming the Partnership as an additional insured with a minimum coverage which the General Partner deems appropriate. In general, substantially all obligations connected with the ownership and operation of the leased aircraft are assumed by the lessee and minimal obligations are imposed upon the Partnership. Default by a lessee may cause the Partnership to incur unanticipated expenses. See "Government Regulation" below. Certain provisions of the Partnership's leases may not be enforceable upon a default by a lessee or in the event of a lessee's bankruptcy. The enforceability of leases will be subject to limitations imposed by Federal, California, or other applicable state law and equitable principles. In order to encourage equipment financing to certain transportation industries, Federal bankruptcy laws traditionally have afforded special treatment to certain lenders or lessors who have provided such financing. Section 1110 ("Section 1110") of the United States Bankruptcy Code, as amended (the "Bankruptcy Code"), implements this policy by creating a category of aircraft lenders and lessors whose rights to repossession are substantially improved. If a transaction is eligible under Section 1110, the right of the lender or lessor to take possession of the equipment upon default is not affected by the automatic stay provisions of the Bankruptcy Code, 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 or 30 days after the default. One court has recently held that Section 1110 does not apply after the 60-day period, and thus the automatic stay may apply after such 60-day period. On October 22, 1994, the President signed the Bankruptcy Reform Act of 1994 (the "Reform Act"). The Reform Act made several changes to Section 1110, such that it now protects 7 all transactions involving qualifying equipment, whether the transaction is a lease, conditional sale, purchase money financing or customary refinancing. For equipment first placed in service on or prior to the date of enactment, the requirement that the lender provide purchase money financing continues to apply, but there is a "safe harbor" definition for leases, so that Section 1110 benefits will be available to the lessor without regard to whether or not the lease is ultimately determined to be a "true" lease. This safe harbor is not the exclusive test so that other leases which do not qualify under the safe harbor, but which are true leases, will continue to be covered as leases by Section 1110. The Partnership may not be entitled to the benefits of Section 1110 upon insolvency of a lessee airline under all of its leases. In the past, the Partnership had interests in aircraft leased to operators based outside the United States. It is possible that the Partnership's aircraft could be leased or subleased to foreign airlines. Aircraft on lease to such foreign operators are not registered in the United States and it is not possible to file liens on such foreign aircraft with the Federal Aviation Administration (the "FAA"). Further, in the event of a lessee default or bankruptcy, repossession and claims would be subject to laws other than those of the United States. AIRCRAFT REMARKETING On termination of a lease and return of the aircraft to the Partnership, the Partnership must remarket the aircraft to realize its full investment. Under the Amended and Restated Agreement of Limited Partnership, as amended ("Limited Partnership Agreement"), the remarketing of aircraft may be through a lease or sale. The terms and conditions of any such lease would be determined at the time of the re-lease, and it is possible (although not anticipated at this time) that the lease may not be a net lease. The General Partner will evaluate the risks associated with leases which are not net leases prior to entering into any such lease. The General Partner has not established any standards for lessees to which it will lease aircraft and, as a result, there is no investment restriction prohibiting the Partnership from doing business with any lessee, including "start-up" airlines. However, the General Partner will analyze the credit of a potential lessee and evaluate the aircraft's potential value prior to entering into any lease. DISPOSITION OF AIRCRAFT The Partnership's original intent was to dispose of all its aircraft by the year 2011, subject to prevailing market conditions and other factors. However, in 1997 unitholders authorized the General Partner not to make new investments, to sell aircraft when attractive opportunities arise, to distribute the proceeds and to liquidate the Partnership when all assets are sold. See "Principal Investment Objectives" above. Underthe Limited Partnership Agreement, aircraft may be sold at any time whether or not the aircraft are subject to leases if, in the judgment of the General Partner, it is in the best interest of the Partnership to do so. In March 1996, the Partnership sold its 50% interest in one MD-82 on lease to Finnair to 8 a third party for approximately $6.9 million, resulting in a net gain of approximately $556,000. The Partnership had acquired its interest in this aircraft in April 1992, for approximately $8.5 million. A portion of the sale proceeds were used to pay off the outstanding balance under a non-recourse loan which was collateralized by this aircraft and the balance, after retaining a reserve for liquidity purposes, was distributed to Unitholders. The Partnership sold its one-third interest in six 737-200 aircraft on lease to Continental at lease expiration on December 31, 1996, at a sale price of approximately $3.1 million, resulting in a net gain of approximately $1.9 million. The proceeds were distributed to Unitholders in the first quarter of 1997. On September 29, 1997 the Partnership sold its one-half ownership interest in a DC9-51 aircraft on lease to Sun Jet International, Inc. The sale price was $1.2 million, resulting in a gain of $393,000 even though the lessee had filed for bankruptcy in June 1997, and had ceased making the rent payments. The proceeds were distributed to Unitholders in the fourth quarter of 1997. In December 2001 the Partnership sold its 100% interest in an MD-82 aircraft previously on lease to American Airlines, at a sale price of approximately $9 million, resulting in a net gain of approximately $965,000. The proceeds were distributed to Unitholders in the first quarter of 2002. See "Competitive Position of the Partnership" above for a discussion of the General Partner's determination to distribute the proceeds of the sale of these aircraft to Unitholders. The Partnership is permitted to sell aircraft to affiliates of the General Partner at the fair market value of the aircraft at the time of sale as established by an independent appraisal. The General Partner will receive a Disposition or Remarketing Fee for any such sale. JOINT VENTURES/GENERAL ARRANGEMENTS Under the Limited Partnership Agreement, the Partnership may enter into joint ventures with third parties to acquire or own aircraft. No such joint ventures presently exist. 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. If party to a joint venture, 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. 9 BORROWING POLICIES Under the Limited Partnership Agreement, the Partnership may borrow funds or assume financing in an aggregate amount equal to less than 50% of the higher of the cost or fair market value at the time of the borrowing of all aircraft owned by the Partnership. The Partnership may exceed such 50% limit for short-term borrowing so long as the General Partner uses its best efforts to comply with such 50% limit within 120 days from the date such indebtedness is incurred or if the borrowed funds are necessary to prevent foreclosure on any Partnership asset. There is no limitation on the amount of such short-term indebtedness. The General Partner is authorized to borrow for working capital purposes and to make distributions. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources" and Note 6 of Notes to Financial Statements. MANAGEMENT OF AIRCRAFT PORTFOLIO Aircraft management services are provided by the General Partner and its affiliates. The fees and expenses for these services are reviewed annually and are subject to approval by the Audit Committee of the Partnership. See Note 8 of Notes to Financial Statements. REGISTRATION OF AIRCRAFT; UNITED STATES PERSON Under the Federal Aviation Act, as amended (the "FAA Act"), the operation of an aircraft not registered with the Federal Aviation Administration (the "FAA") in the United States is generally unlawful. Subject to certain limited exceptions, an aircraft may not be registered under the FAA Act unless it is owned by a "citizen of the United States" or a "resident alien" of the United States. In order to attempt to ensure compliance with the citizenship requirements of the FAA Act, the Limited Partnership Agreement requires that all Unitholders (and all transferees of Units) be United States citizens or resident aliens within the meaning of the FAA Act. 10 GOVERNMENT REGULATION GENERAL The ownership and operation of aircraft in the United States are strictly regulated by the FAA, which imposes certain minimum restrictions and economic burdens upon the use, maintenance and ownership of aircraft. The FAA Act and FAA regulations contain strict provisions governing various aspects of aircraft ownership and operation, including aircraft inspection and certification, maintenance, equipment requirements, general operating and flight rules, noise levels, certification of personnel and record keeping in connection with aircraft maintenance. FAA policy has given high priority to aviation safety, and a primary objective of FAA regulations is that an aircraft be maintained properly during its service life. FAA regulations establish standards for repairs, periodic overhauls and alterations and require that the owner or operator of an aircraft establish an airworthiness inspection program to be carried out by certified mechanics qualified to perform aircraft repairs. Each aircraft in operation is required to have a Standard Airworthiness Certificate issued by the FAA. MAINTENANCE The Partnership, as the beneficial owner of aircraft, bears the ultimate responsibility for compliance with certain federal regulations. However, under all of the Partnership's aircraft leases, the lessee has the primary obligation to ensure that at all times the use, operation, maintenance and repair of the aircraft are in compliance with all applicable governmental rules and regulations and that the Partnership/lessor is indemnified from loss by the lessee for breach of any of these lessee responsibilities. Changes in government regulations after the Partnership's acquisition of aircraft may increase the cost to, and other burdens on, the Partnership of complying with such regulations. The General Partner monitors the physical condition of the Partnership's aircraft and periodically inspects them to attempt to ensure that the lessees comply with their maintenance and repair obligations under their respective leases. Maintenance is further regulated by the FAA which also monitors compliance. At lease termination, the lessees are required to return the aircraft in airworthy condition. The Partnership may incur unanticipated maintenance expenses if a lessee were to default under a lease and the Partnership were to take possession of the leased aircraft without such maintenance having been completed. If the lessee defaulting is in bankruptcy, the General Partner will file a proof of claim for the required maintenance expenses in the lessee's bankruptcy proceedings and attempt to negotiate payment and reimbursement of a portion of these expenses. The bankruptcy of a lessee could adversely impact the Partnership's ability to recover maintenance expense. From time to time, aircraft manufacturers issue service bulletins and the FAA issues airworthiness directives. These bulletins and directives provide instructions to aircraft operators in the maintenance of aircraft and are intended to prevent the occurrence of accidents arising 11 from flaws discovered during maintenance or as the result of aircraft incidents. Compliance with airworthiness directives is mandatory. A formal program to control corrosion in all aircraft is included in the FAA mandatory requirements for maintenance for each type of aircraft. These FAA rules and proposed rules evidence the current approach to aircraft maintenance developed by the manufacturers and supported by the FAA in conjunction with an aircraft industry group. The Partnership may be required to pay for these FAA requirements if a lessee defaults or if necessary to re-lease or sell the aircraft. In January 1999 the FAA issued an airworthiness directive setting payload weight limitations on the Boeing 727 aircraft which were converted from passenger to freight configuration. The directive requires extensive structural modifications to strengthen the aircraft's floor, if the aircraft is to continue to operate under the existing payload limits. If these modifications are not performed, the directive sets substantially reduced payload limits. This airworthiness directive applies to the aircraft on lease to FedEx. Under the lease covering this aircraft, FedEx is required to take the steps necessary to comply with airworthiness directives imposed during the lease term. However, airworthiness directives may affect the residual value of the aircraft or FedEx's decision to exercise fair market value renewal options under the lease. 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. Stage I and Stage II aircraft are no longer allowed to operate from civil airports in the United States. See "Aircraft Portfolio" above, for a description of the Partnership's aircraft portfolio. At December 31, 2001, all of the aircraft in the Partnership's portfolio were Stage III aircraft ACQUISITION OF ADDITIONAL AIRCRAFT In 1997 Unitholders authorized the General Partner to decide not to make new aircraft investments, to sell aircraft when attractive opportunities arise, to distribute the proceeds and to liquidate the Partnership when all assets are sold. See "Principal Investment Objectives" above. Not withstanding the above, if the Partnership were to acquire additional aircraft, it could do so in many different forms, such as in sale/leaseback transactions, by purchasing interests in existing leases from other lessors, by making loans secured by aircraft or by acquiring or financing leasehold interests in aircraft. The Partnership is permitted to acquire aircraft from affiliates of the General Partner subject to limitations set forth in the Limited Partnership Agreement. 12 Prior to September 30, 1991, the General Partner and USL Capital ("Related Entities") were required to offer the Partnership a 50% participation interest in certain aircraft leasing investments made by Related Entities. After September 30, 1991 and while the General Partner was an affiliate of USL Capital, the General Partner and USL Capital could, but were not obligated to, offer investment opportunities to the Partnership. The Partnership was required to accept suitable opportunities provided that the General Partner and Related Entities made at least 20% (including their investment through ownership of Units and the General Partner's interest) of the total investment made by Related Entities and the Partnership in such transactions. In the event that the Partnership elected not to make or to make only a portion of an investment offered to it by an affiliate, the remaining investment could be made by affiliates of the General Partner or third parties. The General Partner believes that since it is no longer affiliated with USL Capital, the limitation as to making investments with Related Entities should no longer apply and that the Partnership should be able to invest in any aircraft leasing transactions deemed suitable by the General Partner. In determining whether an investment is suitable for the Partnership, the General Partner will consider the following factors: the expected cash flow from the investment and whether existing Unitholders' investment will be diluted; the existing portfolio of the Partnership and the effect of the investment on the diversification of the Partnership's assets; the amount of funds available to finance the investment; the ability of the Partnership to obtain additional funds through debt financing, by issuing Units, or otherwise; the cost of such additional funds and the time needed to obtain such funds; the amount of time available to remove contingencies prior to making the investment; projected Federal income tax effect of the investment; projected residual value, if any; any legal or regulatory restrictions; and other factors deemed relevant by the General Partner. The General Partner and its affiliates are not obligated to make any investment opportunity available to the Partnership, and if any of them are presented with a potential investment opportunity, it may be made by any of them without being offered to the Partnership. In addition, in determining which entity should invest in a particular transaction, it may be possible to structure the transaction in various ways to make the acquisition more or less suitable for the Partnership or for the General Partner or its affiliates. FEDERAL INCOME TAXATION The Partnership is considered a publicly traded partnership ("PTP") under the Revenue Act of 1987 with a special tax status, whereby it has not been subject to federal income taxation. This special tax status was scheduled to expire at the beginning of 1998. However, during 1997 federal and California tax laws were amended to provide that PTPs may elect to continue to be publicly traded and retain their Partnership tax status if they pay a federal tax of 3.5% and a California state tax of 1% on their applicable annual gross income beginning in January 1998. The Partnership made an election to pay this tax beginning in 1998. 13 EMPLOYEES The Partnership has no employees. See "DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - General" below. Employees of the General Partner provide services on behalf of the Partnership. ITEM 2. PROPERTIES The Partnership does not own any real property, and shares office space in the offices of BALCAP and its affiliates. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS UNITS OUTSTANDING The Units are traded on the New York Stock Exchange under the symbol FLY. As of February 12, 2002, there were 869 unitholders of record. MARKET PRICE The following chart sets forth the high and low closing prices on the New York Stock Exchange and the trading volume for each of the quarters in the years ended December 31, 2001 and 2000. Trading Volume Quarter Ended (in thousands) Unit Prices (high-low) - ------------- -------------- ---------------------- March 31, 2001 409 $13.05 - $11.56 June 30, 2001 630 $11.89 - $8.75 September 30, 2001 573 $10.35 - $4.26 December 31, 2001 640 $8.85 - $5.30 March 31, 2000 227 $12 - $10.63 June 30, 2000 239 $12.25 - $10.56 September 30, 2000 230 $13.13 - $11.56 December 31, 2000 291 $12.50 - $11.56 DISTRIBUTIONS TO UNITHOLDERS CASH DISTRIBUTIONS The Partnership makes quarterly cash distributions to Unitholders which are based on Cash Available from Operations (as defined in the Limited Partnership Agreement) and are partially tax sheltered. From time to time the Partnership also has made cash distributions from Cash Available from Sale or Refinancing (as defined in the Limited Partnership Agreement.) 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. The size of the Partnership's portfolio and future aircraft sales will affect distributions. 15 Distributions declared during 2001 and 2000 were as follows: Record Date Payment Date Per Unit ----------- ------------ -------- March 31, 2001 May 14, 2001 38 cents June 29, 2001 August 15, 2001 38 cents September 28, 2001 November 15, 2001 30 cents December 31, 2001 February 15, 2002 11 cents March 31, 2000 May 15, 2000 45 cents June 30, 2000 August 15, 2000 45 cents September 29, 2000 November 15, 2000 45 cents December 29, 2000 February 15, 2001 45 cents CASH AVAILABLE FROM OPERATIONS The Partnership distributes all Cash Available from Operations (as defined in the Limited Partnership Agreement). The Partnership is authorized to make distributions from any source, including reserves and borrowed funds. Distributions of Cash Available from Operations are allocated 99% to Unitholders and 1% to the General Partner. The Partnership makes distributions each year of Cash Available from Operations generally on the fifteenth day of February, May, August and November to Unitholders of record on the last business day of the calendar quarter preceding payment. CASH AVAILABLE FROM SALE OR REFINANCING The Partnership's original intent was that Cash Available From Sale or Refinancing (as defined in the Limited Partnership Agreement) received prior to January 1, 2005 would be retained for use in the Partnership's business, provided that if the General Partner did not believe that attractive investment opportunities exist for the Partnership, the Partnership could distribute Cash Available from Sale or Refinancing. Any Cash Available from Sale or Refinancing received after January 1, 2005 was not to be reinvested but was to be distributed. However, in 1997, Unitholders authorized the General Partner to decide not to make new aircraft investments, to sell aircraft when attractive opportunities arise, to distribute the proceeds and to liquidate the Partnership when all assets are sold. See "BUSINESS--Principal Investment Objectives." For information as to the sales giving rise to distributions from Cash Available from Sales or Refinancing, see "BUSINESS--Disposition of Aircraft." 16 TAX ALLOCATIONS Allocations for tax purposes of income, gain, loss deduction, credit and tax preference are made on a monthly basis to Unitholders who owned Units on the first day of each month. Thus, for example, if an aircraft were sold at a gain, that gain would be allocated to Unitholders who owned Units on the first day of the month in which the sale occurred. If proceeds from this sale were distributed to Unitholders, such proceeds would be distributed to Unitholders who owned Units on the record date for such distribution, which, because of notice requirements, likely would not occur in the same month as the sale. In addition, a Unitholder who transfers his or her Units after the commencement of a quarter but prior to the record date for that quarter will be allocated a share of tax items for the first two months of that quarter without any corresponding distribution of Cash Available from Operations for, among other things, payment of any resulting tax. 17 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data and other data concerning the Partnership for each of the last five years:
For years ended December 31, (In thousands except per-unit amounts) 2001 2000 1999 1998 1997 - ---------------------------------------------- ------- ------- ------- ------- ------- OPERATING RESULTS Lease and other income $ 5,102 $ 6,736 $ 7,614 $ 8,400 $ 9,210 Gain on disposition of aircraft 965 -- -- -- 393 ------- ------- ------- ----------- ------- Total revenues 6,067 6,736 7,614 8,400 9,603 ------- ------- ------- ----------- ------- Interest expense 550 909 1,270 1,704 2,028 Depreciation expense 1,268 -- -- -- 273 Other expenses 1,742 1,082 1,088 1,123 1,820 Tax on gross income 884 548 548 699 0 ------- ------- ------- ----------- ------- Total expenses 4,444 2,539 2,906 3,526 4,121 ------- ------- ------- ----------- ------- Net income $ 1,623 $ 4,197 $ 4,708 $ 4,874 $ 5,482 ------- ------- ------- ----------- ------- Net income per unit(1) $ 0.35 $ 0.90 $ 1.01 $ 1.04 $ 1.17 Cash distributions declared per unit(2) $ 2.67 $ 1.80 $ 1.64 $ 1.64 $ 2.02 FINANCIAL POSITION Total assets $52,529 $61,836 $67,787 $75,813 $82,859 Long-term obligations $3,389 $ 7,992 $10,092 $14,505 $19,115 Total partners' equity $40,285 $51,135 $55,347 $58,301 $61,089 Limited partners' equity per unit $ 8.62 $ 10.95 $ 11.85 $ 12.48 $ 13.08 (1) After allocation of the 1% General Partner's interest. (2) Includes special cash distributions of $1.50 per unit in 2001, and $.22 per unit in 1997.
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 The Partnership has included in this annual report certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the Partnership's business, operations and financial condition. The words or phrases "can be", "may affect", "may depend", "expect", "believe", "anticipate", "intend", "will", "estimate", "project" and similar words and phrases are intended to identify such forward-looking statements. Such forward-looking statements are subject to various known and unknown risks and uncertainties and the Partnership cautions you that any forward-looking information provided by or on behalf of the Partnership is not a guarantee of future performance. Actual results could differ materially from those anticipated in such forward-looking statements due to a number of factors, some of which are beyond the Partnership's control, in addition to those discussed in the Partnership's public filings and press releases, including (i) changes in the aircraft or aircraft leasing market, (ii) economic downturn in the airline industry, (iii) default by lessees under leases causing the Partnership to incur uncontemplated expenses or not to receive rental income as and when expected, (iv) the impact of the events of September 11, 2001 on the aircraft or aircraft leasing market and on the airline industry, (v) changes in interest rates and (vi) legislative or regulatory changes that adversely affect the value of aircraft. All such forward-looking statements are current only as of the date on which such statements were made. The Partnership does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any such statement is made or to reflect the occurrence of unanticipated events. LIQUIDITY AND CAPITAL RESOURCES The Partnership presently has one long-term debt facility. At December 31, 2001, the 7.4% non-recourse note collateralized by one aircraft leased to FedEx had an outstanding balance of $3.4 million. The facility matures in April 2006. A 9.35% non-recourse loan facility collateralized by the aircraft that was leased to TWA and subsequently to American Airlines was terminated in December 2001, when the aircraft was sold. A long-term variable rate revolving loan facility collateralized by two aircraft on lease to US Airways expired on October 1, 2001, the end of the lease term. Long-term borrowings at December 31, 2001 represented 2.78% of the original cost of the aircraft presently owned by the Partnership, including capital expenditures for upgrades. The terms of the Limited Partnership Agreement permit debt to be at a level not exceeding 50% of such cost. Total scheduled debt service in 2002 is $0.9 million. Debt service will be paid from the rental payments received under the FedEx lease. 19 Net cash provided by operating activities was $4.1 million for 1999, $4.5 million for 2000, and $2.7 million for 2001. Aside from the cash flow activity associated with taxes payable, the net cash flow provided by operating activities showed a moderate decrease from 1999 to 2000. The decrease in 2001 as compared with 2000 was primarily due to reduced revenue as a result of the termination of the US Airways leases. Total debt service on the fixed loans as a percentage of net cash provided by operating activities was 78%, 67%, and 123% for 1999, 2000 and 2001, respectively. However, cash flow from operating activities does not fully reflect cash receipts from lease payments. When the excess of rental receipts above finance lease income is added to cash flow from operating activities, the ratios become 26%, 29%, and 27%, respectively. Cash distributions paid by the Partnership were $7.7 million ($1.64 per unit) in 1999, $8.2 million ($1.76 per unit) in 2000, and $7.1 million ($1.51 per unit) in 2001. There were no special cash distributions paid in 1999, 2000 or 2001. A special cash distribution of $7.0 million ($1.50 per unit) was declared in December 2001, but will be paid in 2002. Pursuant to the Limited Partnership Agreement, the Partnership distributes all Cash Available from Operations net of expenses and reserves. Since such distributions were in excess of earnings, Partnership equity declined from $51.1 million at December 31, 2000 to $40.3 million at December 31, 2001, and limited partner equity per unit declined from $10.95 to $8.62. From a limited partner perspective, the portion of the distribution in excess of net income constitutes a return of capital. Total cash distributions declared since inception of the Partnership have exceeded total net income by $10.16 per unit. At December 31, 2001, the Partnership had cash on hand in the amount of $1.9 million (net of amounts payable to Unitholders on February 15, 2002). In the event that the Partnership's cash on hand is significantly reduced as a result of unanticipated expenses, including unanticipated maintenance and refurbishing expenses with respect to the three MD-82 aircraft currently off lease, cash distributions to Unitholders may be reduced. RESULTS OF OPERATIONS 2000 VS. 1999 In 2000, all revenues were earned from aircraft subject to finance leases. The revenue reduction in 2000 as compared with 1999 is primarily due to the scheduled decline in finance lease income as the balances due from the lessees declined. 2001 VS. 2000 In 2001, revenues were earned from seven aircraft subject to finance and operating leases and from the gain on sale of one aircraft. The lease revenue reduction in 2001 as compared with 2000 is primarily due: to the scheduled decline in finance lease income as the balances due from the lessees declined, to the expiration of the lease with US Airways for five aircraft, three of 20 which remain off lease, and to the restructure of the TWA lease. In 2001, five MD-82 aircraft leased to US Airways generated $3,363,000 in finance lease income prior to lease expiration. Two of the five aircraft were leased to CSI Aviation Services, Inc. ("CSI") in November 2001 under operating leases, which generated $296,000 in operating lease income. The remaining three aircraft were being held for lease as of December 31, 2001. The finance lease of one MD-82 aircraft with TWA was assumed by American Airlines in April of 2001, and was reclassified as an operating lease. In 2001, the finance lease generated $293,000 in finance lease income, and the operating lease generated $750,000 in operating lease rental income (before depreciation expense). In December of 2001, the aircraft was sold, generating a gain on sale before remarketing fee of $965,000. The lease of one 727-200FH aircraft to FedEx generated $346,000 in finance lease income. For information regarding the percentage of total Partnership assets and revenues represented by aircraft owned and leased by the Partnership, see "BUSINESS - Aircraft Portfolio." Interest expense decreased in 2001 by $359,000 as compared with 2000, as a result of declining debt balances. Depreciation expense of $1,268,000 in 2001 related to aircraft subject to operating leases and to aircraft available for lease. No depreciation expense was recorded in 2000 as the Partnership's portfolio did not include any aircraft subject to operating lease or held for lease. Management fees and tax on gross income increased in 2001 as compared with the prior year as a result of the sale of the MD-82 aircraft. The increase in general and administrative expenses is primarily due to aircraft maintenance and refurbishing expenses incurred in the preparation of two MD-82 aircraft for delivery to CSI. The lease with US Airways for five MD-82 aircraft was scheduled to terminate on October 1, 2001, but remains in effect pending satisfaction of aircraft return conditions relating to aircraft maintenance as specified in the lease. Under the lease, US Airways is obligated to pay rent for each aircraft on a prorated basis until the required maintenance has been completed and the aircraft has been returned. The lease requires the maintenance to be completed within 60 days of the expiration of the lease term. In November 2001 the Partnership entered into an agreement with US Airways with respect to the two MD-82 aircraft now on lease to CSI, providing for US Airways to pay hold-over rent and to pay for certain agreed-upon maintenance work. US Airways made a cash 21 payment covering a portion of the rent and maintenance costs and delivered an unsecured note for the remaining amount. See Note 4 of Notes to Financial Statements. The Partnership is currently in negotiation with US Airways concerning satisfaction of aircraft return conditions and payment of hold-over rent with respect to the remaining three aircraft leased by US Airways. The Partnership expects to enter into an agreement with US Airways with respect to these leases. To date, the Partnership has not taken legal action to enforce its rights under the leases as negotiations concerning the specific terms of US Airways' obligations are ongoing. Any required maintenance work with respect to the three aircraft currently off lease that is not performed or paid for by US Airways, together with any refurbishing expenses incurred in preparation of these aircraft for delivery to future lessees, will result in additional expenses to the Partnership. Due to the ongoing negotiations with US Airways, management cannot establish the amount of such additional expenses, if any, although such expenses, if significant, could have a material adverse effect on the Partnership's results of operations or financial condition and result in reduced cash distributions to Unitholders. IMPACT OF EVENTS OF SEPTEMBER 11, 2001 On September 11, 2001, four aircraft operated by United Airlines and American Airlines were hijacked and destroyed in terrorist attacks against the United States. Immediately after the attacks, the Federal Aviation Administration closed U.S. airspace for several days. In the months after the attacks, most major U.S.-based have announced significant reductions in worldwide capacity, and many have reduced or announced plans to reduce their fleets. The Partnership believes that the events of September 11, 2001 have had an adverse effect on the market for lease and sale of used aircraft, as airlines are less likely to renew or enter into leases and may seek to sell aircraft surplus to meet their reduced needs. The reduced demand for aircraft is likely to have an adverse effect on the Partnership's ability to re-lease its three aircraft currently off lease, and to re-lease other aircraft as their leases terminate. The events of September 11, 2001 may also affect the ability of existing lessees to meet their obligations to the Partnership, and may have other adverse effects on the Partnership. OUTLOOK The market conditions for aircraft leasing have declined during 2001, in particular since September 11, 2001, as there has been a reduction in air-traffic demand, causing the supply of aircraft to exceed demand. It has been reported that there are more than 90 MD-81/82 aircraft available for sale or lease, approximately 15% of the MD-80 aircraft listed in operation. While there are signs of increases in air traffic from September 2001 levels which could lead to increased demand (among U.S. based airlines a reported 34% decline in year over year system-wide traffic for the month of September 2001 has improved to a 14% decline for the month of December 2001), it is widely believed that it will take time before the industry recovers fully. 22 Consequently, the Partnership is experiencing significant competitive pressure in marketing the three aircraft currently off lease, and management is not able to predict when these aircraft may be leased again or the terms of any such future leasing. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Partnership believes that as of December 31, 2001, it does not have any material interest rate risk exposures. 23 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and Notes to Financial Statements described in Item 14(a) are set forth in Appendix A and are filed as part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT GENERAL The Partnership has no directors or executive officers. Under the Limited Partnership Agreement, the General Partner has full power and authority in the management and control of the business of the Partnership, subject to certain provisions requiring the consent of the Limited Partners. DIRECTORS AND EXECUTIVE OFFICERS Set forth below is certain information about the directors and executive officers of the General Partner as of February 28, 2002. As used below, "BALCAP" refers both to BALCAP and to BA Leasing & Capital prior to its merger into BALCAP in September 1999.
POSITION WITH PRINCIPAL OCCUPATION AND NAME GENERAL PARTNER AGE EMPLOYMENT FOR LAST 5 YEARS - --------------------- --------------------- --- ------------------------------------------ David B. Gebler Chairman of the 52 Mr. Gebler is a Managing Director of Bank of America Board, President, National Association ("Bank of America") and of Chief Executive BALCAP. He has been with BALCAP since September Officer and a 1996. From 1993 to September 1996 he was Senior Vice Director President of the Transportation and Industrial Financing business unit of USL Capital. Mr. Gebler has since 1989 and a Director since 1990, and has been Chairman and CEO since September 1996. Mr. Gebler holds a bachelor degree in mathematics from Clarkson University and graduate degrees in Engineering and Management from the University of Michigan. Richard V. Harris Director 53 Mr. Harris is Managing Director and Head of Global Leasing of Bank of America, and Chairman and President of BALCAP. He was elected President and CEO in 1982, adding the title of Chairman in 1988. He has been a Director of the General Partner since October 1996. Other assignments at Bank of America have included responsibilities for Project Finance and Asset-Backed Finance along with Leasing. Prior to assuming his present responsibilities, Mr. Harris held both transactional and marketing management positions at BankAmerica Leasing. Mr. Harris holds a B.S.E.E. degree in Electrical Engineering from Brigham Young 24 University and a Master of Business Administration degree also from BYU. William A. Hasler Director 60 Mr. Hasler has been the Co-Chief Executive Officer of Aphton Corporation , a biopharmaceutical company, since July 1998 and a Director of the General Partner since 1995. From August 1991 to June 1998 he was the Dean of the Haas School of Business at the University of California at Berkeley. From 1984 to 1991, he was vice chairman and director of KPMG Peat Marwick and was responsible for its worldwide consulting business. He is a member of the board of governors of The Pacific Stock Exchange and of the board of directors of Selectron Corp., Schwab Funds, Mission West, Tenera, Walker Interactive, and Aphton Corporation. He is a graduate of Pomona College and earned his MBA from Harvard . Leonard Marks, Jr. Director 80 Mr. Marks retired as Executive Vice President of Castle & Cooke, Inc. in 1985. Prior to that time, he was also President of the real estate and diversified activities group of that company. Mr. Marks has been a Director of the General Partner since 2001, and previously was a Director to the General Partner from 1986 to 1997. 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 holds a Ph.D in Business Administration from Harvard University. Richard P. Powers Director 61 Mr. Powers is a Financial Consultant and Private Investor. Frorm 1996 to 2000 he was an Executive Vice President of Finance and Administration of Eclipse Surgical Technologies, Inc., a medical device company, since 1996 and a Director of the General Partner since 1996. From 1981 to 1994, he was with Syntex Corporation, a pharmaceutical company, serving as Senior Vice President and Chief Financial Officer of that company from 1986 to 1994. From 1994 to 1996 he served as consultant to various companies, including advising and assisting in the sale of Syntex Corporation to Roche Corporation in 1994. Mr. Powers holds a Bachelor of Science degree in Accounting from Canisius College and a Masters in Business Administration from the University of Rochester. K. Thomas Rose Director 56 Mr. Rose has been Managing Director, Credit of BALCAP since 1992. He has been a Director of the General Partner since October 1996. Prior to his present responsibilities, Mr. Rose was with Security Pacific Leasing Corporation as Executive Vice President - Lease Services since 1973. Mr. Rose holds a B.A. from California State University, Fullerton and a Juris Doctorate degree from Golden Gate University, School of Law. Robert A. Keyes Chief Financial 49 Mr. Keyes has been Senior Vice President and Senior Officer and a Finance Manager of BALCAP since December 2000. Prior Director to assuming his present responsibilities at BALCAP, Mr. Keyes was with Citicorp Bankers Leasing as Vice President and Head of Operations from 1997 to 2000. From 1990 to 1997 Mr. Keyes was with USL Capital Corporation (former parent of the General Partner) as Vice President and Corporate Controller. While at USL Capital, Mr. Keyes served as Chief Financial Officer and as a Director of the General Partner. From 1980 to 1990 Mr. Keyes held various Finance positions with Wells Fargo Leasing Corporation, including Senior Vice President and Chief Financial Officer. Mr. Keyes holds a Bachelor of Science degree in Economics from Bates College and a Masters in Business Administration and Accounting from Rutgers University.
25 ITEM 11. EXECUTIVE COMPENSATION The Partnership does not pay or employ directly any directors or officers. Each of the officers of the General Partner is also an officer or employee of BALCAP and is not separately compensated by the General Partner or the Partnership for services on behalf of the Partnership. Thus, there were no deliberations of the General Partner's Board of Directors with respect to compensation of any officer or employee. The Partnership reimburses the General Partner for fees paid to Directors of the General Partner who are not otherwise affiliated with the General Partner or its affiliates. In 2001, such unaffiliated directors were paid an annual fee of $14,500 plus $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 UNIT OWNERSHIP BY CERTAIN BENEFICIAL OWNERS As of February 28, 2002, the following persons were known to the Partnership to be beneficial owners of more than five percent of the Partnership's equity securities: Name and Address Amount and Nature of Title of class Of beneficial owner Beneficial Ownership Percent of Class - -------------- ------------------- -------------------- ---------------- Depositary Units United States Airlease 231,250(1) 5% Holding, Inc. 555 California Street San Francisco, CA 94104 Depositary Units BALCAP 793,750(2) (3) 17.2% 555 California Street San Francisco, CA 94104 __________________ (1) United States Airlease Holding, Inc. ("Holding") reported that it had sole voting and dispositive power over these Units. (2) BALCAP owns all of the outstanding stock of Holding. Therefore, BALCAP may be deemed also to be the indirect beneficial owner of the Units owned by Holding. In addition, BALCAP owns all the outstanding 26 stock of the General Partner. Therefore, BALCAP may be deemed to be the indirect beneficial owner of the General Partner's 1% General Partner interest. BALCAP is a wholly owned indirect subsidiary of BankAmerica Corporation. Therefore, BankAmerica Corporation and each BankAmerica Corporation subsidiary which is the direct or indirect parent of BALCAP may also be deemed to be the indirect beneficial owner of all Units and of the General Partner's 1% General Partner interest owned or deemed owned by BALCAP. (3) BALCAP reported that it had sole voting and dispositive power over these Units. UNIT OWNERSHIP BY MANAGEMENT Set forth below is information regarding interests in the Partnership owned by each director of and all directors and executive officers, as a group, of the General Partner. Unless otherwise noted, each person has sole voting and investment power over all units owned.
Name of Amount and Nature of Title of Class Beneficial Owner Beneficial Ownership Percent of Class -------------- ---------------- -------------------- ---------------- Depositary Units David B. Gebler 700(1) (2) Depositary Units William A. Hasler 8,700 (2) Depositary Units Leonard Marks Jr. 750 (2) All directors and executive 10,150 (2) officers as a group __________________ (1) Includes 200 Units held by Mr. Gebler as custodian for a minor child as to which Mr. Gebler has shared voting and dispositive power and as to which beneficial ownership is disclaimed. (2) Represents less than 1%.
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 has borrowed funds from BALCAP or BA Leasing & Capital, including advances for expense payments. All such borrowings were unsecured and bore interest at a floating rate not exceeding the prime rate. At December 31, 2001 Airlease owed BALCAP $323,702 for such borrowings. 27 For a discussion of certain terms of the Limited Partnership Agreement regarding the Partnership's participation in aircraft leasing investments made by USL Capital and its Related Entities, see "BUSINESS-Acquisition of Additional Aircraft." For a discussion of aircraft formerly held jointly between the Partnership and USL Capital, see "BUSINESS- Participants in Leases." 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) The following financial statements of the Partnership are included in this report as Appendix A: PAGE Management's Responsibility for Financial Statements......... A-1 Report of Independent Auditors .............................. A-2 Financial Statements: Statements of Income for the Years Ended December 31, 2001, 2000 and 1999 .......................................... A-3 Balance Sheets, as of December 31, 2001 and 2000........ A-4 Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999..................................... A-5 Statements of Changes in Partners' Equity for the Years Ended December 31, 2001, 2000 and 1999........................ A-6 Notes to Financial Statements ............................... A-6 Financial statement schedules other than those listed above are omitted because the required information is included in the financial statements or the notes thereto or because of the absence of conditions under which they are required. (b) The Partnership did not file any reports on Form 8-K during the last quarter of the fiscal year ended December 31, 2001. 29 (c) Exhibits required by Item 601 of Regulation S-K: EXHIBIT NO. DESCRIPTION 3.1(1) Amended and Restated Agreement of Limited Partnership of Partnership. 3.2(1) Form of Certificate for Limited Partnership Units of Partnership. 3.3(1) Form of Depositary Agreement among Partnership, Chase-Mellon Shareholder Services (formerly Manufacturers Hanover Trust Company), the General Partner and Limited Partners and Assignees holding Depositary Receipts. 3.4(1) Form of Depositary Receipt for Units of Limited Partners' Interest in the Partnership 3.5 Amendments to Amended and Restated Partnership Agreement. 4.1(1) Form of Application for Transfer of Depositary Unit. 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. __________________ (1) Incorporated by reference to the Partnership's Registration Statement on Form S-1 (File No. 33-7985), as amended. 30 10.44(2) Aircraft Lease Agreement dated as of April 15, 1993 between Taurus Trust Company, Inc. (formerly Trust Company for USL, Inc.) as Owner Trustee, Lessor, and Federal Express Corporation, Lessee with respect to one (1) Boeing 727-2D4 Aircraft, U.S. Registration No. 362PA (manufacture serial no. 21850). 10.49(3) Assignment and Assumption Agreement dated as of January 31, 1997 between USL Capital Corporation and the Registrant. 10.50(3) Lease, together with Lease Supplement No. 1, dated as of March 15, 1984 between DC-9T-III, Inc., as Lessor, and Trans World Airlines, Inc., as Lessee, with respect to one (1) McDonnell Douglas DC-9-82 Aircraft, as amended by Amendment Agreement dated as of December 15, 1986. 10.51(4) Loan agreement secured by two aircraft leased to US Airways dated as of December 22, 1997, amended and restated as of December 15, 1998, between Meridian Trust Company, as Trustee, as Borrower and Credit Lyonnais/PK AIRFINANCE, as Lender. 10.52(5) Assignment, Assumption and Amendment Agreement dated April 9, 2001 among Trans World Airlines, Inc., American Airlines, Inc., the registrant and First Security Bank, National Association, as Owner Trustee. 10.53 Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 806USAirframe. 10.54 Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 807USAirframe. 10.55 Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N806US (manufacture serial no. 48038). 10.56 Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N807US (manufacture serial no. 48039). _________________ (2) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 2000. 31 (3) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1996. (4) Incorporated by reference to the Partnership's Annual Report on Form 10-K for the year ended December 31, 1998. (5) Incorporated by reference to the Partnership's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2001. 32 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 XX, 2002. AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP (Registrant) By: Airlease Management Services, Inc., General Partner By: /s/ DAVID B. GEBLER ______________________________________ David B. Gebler Chairman, Chief Executive Officer and President 33 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. For Airlease Management Services, Inc. ("AMSI"), General Partner /s/ DAVID B. GEBLER March XX, 2002 ____________________________________________ David B. Gebler Chairman, Chief Executive Officer, President and Director of AMSI /s/ ROBERT A. KEYES March XX, 2002 ____________________________________________ Robert A. Keyes Chief Financial Officer and Director of AMSI /s/ RICHARD V. HARRIS March XX, 2002 ____________________________________________ Richard V. Harris Director of AMSI /s/ K. THOMAS ROSE March XX, 2002 ____________________________________________ K. Thomas Rose Director of AMSI The foregoing constitute a majority of the members of the Board of Directors of Airlease Management Services, Inc. (the General Partner). 34 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Airlease Management Services, Inc. ("AMSI"), the General Partner of the Partnership 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 accounting principles generally accepted in the United States. 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 staff of operating control specialists of Banc of America Leasing and Capital, LLC., which owns 100% of the stock of AMSI, who conduct reviews of adherence to the Partnership's procedures and policies. The Partnership's financial statements have been audited by Ernst & Young L.L.P., independent auditors for the years ended December 31, 2001 and 2000. Their audits were conducted in accordance with auditing standards generally accepted in the United States, which included consideration of the General Partner's internal control structure. The Report of Independent Auditors appears on page A-2. The board of directors of the General Partner, acting through its Audit Committee composed solely of directors who are not employees of the General Partner, is responsible for overseeing the General Partner's fulfillment of its responsibilities in the preparation of the Partnership's financial statements and the financial control of its operations. The independent auditors have full and free access to the Audit Committee and meet with it to discuss their audit work, the Partnership's internal controls, and financial reporting matters. /s/ DAVID B. GEBLER ____________________________________________ David B. Gebler Chairman, Chief Executive Officer and President Airlease Management Services, Inc. /s/ ROBERT A. KEYES ____________________________________________ Robert A. Keyes Chief Financial Officer Airlease Management Services, Inc. A-1 REPORT OF INDEPENDENT AUDITORS To the Partners of Airlease Ltd., A California Limited Partnership: We have audited the accompanying balance sheets of Airlease Ltd. as of December 31, 2001 and 2000, and the related statements of income, changes in Partners'equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Airlease Ltd. at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP. _________________________ Ernst & Young LLP San Francisco, California February 8, 2002 A-2
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF INCOME For the years ended December 31, (In thousands except per unit amount) 2001 2000 1999 ___________________________________________________________________________________________ REVENUES Finance lease income $ 4,002 $ 6,736 $ 7,614 Operating lease rentals 1,046 0 0 Gain on sale of equipment 965 0 0 Other income 54 0 0 _____________________________________ Total revenues 6,067 6,736 7,614 _____________________________________ EXPENSES Interest 550 909 1,270 Depreciation - aircraft 1,268 0 0 Management fee - general partner 984 603 629 Investor reporting 365 316 339 General and administrative 393 163 120 Tax on gross income 884 548 548 _____________________________________ Total expenses 4,444 2,539 2,906 _____________________________________ NET INCOME $ 1,623 $ 4,197 $ 4,708 _____________________________________ NET INCOME ALLOCATED TO: GENERAL PARTNER $ 16 $ 42 $ 47 _____________________________________ Limited partners $ 1,607 $ 4,155 $ 4,661 _____________________________________ NET INCOME PER LIMITED PARTNERSHIP UNIT $ 0.35 $ 0.90 $ 1.01 _____________________________________ See notes to financial statements
A-3 AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP BALANCE SHEETS As of December 31, (IN THOUSANDS) 2001 2000 _____________________________________________________________________________ ASSETS Cash and cash equivalent $ 9,432 $ 17 Finance leases - net 6,949 61,657 Operating leases - net 14,218 0 Aircraft held for lease 21,326 0 Notes receivable (interest and discount) 544 0 Prepaid expenses and other assets 60 162 __________________________ Total assets $ 52,529 $ 61,836 ========================== LIABILITIES AND PARTNERS' EQUITY LIABILITIES: Distribution payable to partners $ 7,521 $ 2,102 Deferred income 509 0 Accounts payable and accrued liabilities 602 468 Taxes payable 223 139 Long-term notes payable 3,389 7,992 __________________________ Total liabilities 12,244 10,701 ========================== COMMITMENTS AND CONTINGENCIES PARTNERS' EQUITY: Limited partners (4,625,000 units outstanding) 39,883 50,624 General partner 402 511 __________________________ Total partners' equity 40,285 51,135 ========================== TOTAL LIABILITIES AND PARTNERS' EQUITY $ 52,529 $ 61,836 ========================== See notes to financial statements A-4
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF CASH FLOWS For the years ended December 31, (In thousands) 2001 2000 1999 ____________________________________________________________________________________________________________________ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 1,623 $ 4,197 $ 4,708 Adjustments to reconcile net income to net cash provided by operating activities: Increase in operating lease depreciation 1,268 0 0 Increase in deferred income 509 0 0 Gain on sale of equipment (965) 0 0 Increase in accounts payable and accrued liabilities 134 39 36 Decrease in prepaid expenses and other assets 94 114 85 Increase/(decrease) in taxes payable 84 135 (695) _____________________________________ Net cash provided by operating activities 2,747 4,485 4,134 _____________________________________ CASH FLOWS FROM INVESTING ACTIVITIES Rental receipts in excess of earned finance and operating lease income 9,869 5,852 7,934 Proceeds from sale of equipment 9,000 0 0 Increase in notes receivable (544) 0 0 _____________________________________ Net cash provided by investing activities 18,325 5,852 7,934 _____________________________________ CASH FLOWS FROM FINANCING ACTIVITIES Revolving credit repayment-net (1,765) (18) (2,474) Repayment of long-term notes payable (2,838) (2,082) (1,939) Distributions paid to partners (7,054) (8,222) (7,662) _____________________________________ Net cash used by financing activities (11,657) (10,322) (12,075) _____________________________________ Increase/(decrease) in cash and cash equivalents 9,415 15 (7) Cash at beginning of year 17 2 9 _____________________________________ Cash and cash equivalents at end of year $ 9,432 $ 17 $ 2 _____________________________________ Additional information: Cash paid for interest $ 510 $ 858 $1,187 _____________________________________ See notes to financial statements
A-5
AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP STATEMENTS OF CHANGES IN PARTNERS' EQUITY For the years ended December 31, 2000, 1999, and 1998 General Limited (In thousands except per unit amounts) Partner Partners Total ___________________________________________________________________________________________ Balance, December 31, 1998 583 57,718 58,301 Net Income - 1999 47 4,661 4,708 Distributions to partners declared ($1.64 per limited partnership unit) (77) (7,585) (7,662) ___________________________________________________________________________________________ Balance, December 31, 1999 553 54,794 55,347 Net Income - 2000 42 4,155 4,197 Distributions to partners declared ($1.80 per limited partnership unit) (84) (8,325) (8,409) ___________________________________________________________________________________________ Balance, December 31, 2000 511 50,624 51,135 Net Income - 2001 16 1,607 1,623 Distributions to partners declared ($2.67 per limited partnership unit) (125) (12,348) (12,474) ___________________________________________________________________________________________ BALANCE, DECEMBER 31, 2001 $402 $39,883 $40,285 ___________________________________________________________________________________________ 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 Banc of America Leasing and Capital, LLC. ("BALCAP"). BALCAP also holds 793,750 limited partnership units and United States Airlease Holding, Inc. ("Holding"), a wholly owned subsidiary of BALCAP, holds 231,250 limited partnership units. An additional 3,600,000 units are publicly held. BASIS OF PRESENTATION - The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. CASH EQUIVALENTS - The Partnership considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. A-6 FINANCE LEASES - Lease agreements, under which the partnership recovers substantially all its investment from the minimum lease payments are accounted for as finance leases. At lease commencement, the partnership records the lease receivable, estimated residual value of the leased aircraft, and unearned lease income. The original unearned income is equal to the receivable plus the residual value less the cost of the aircraft (including the acquisition fee paid to an affiliate of the general partner). The remaining unearned income is recognized as revenue over the lease term 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 carrying value of the aircraft at lease inception. Aircraft are depreciated over the related lease terms, generally five to nine years on a straight-line basis to an estimated salvage value, or over their estimated useful lives for aircraft held for lease, 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). LONG LIVED ASSETS - The Partnership accounts for its long-lived assets, including Operating Leases and Aircraft Held for Lease, in accordance with 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." Consistent with SFAS No. 121, the Company identifies and records impairment losses, as circumstances dictate, on long-lived assets used in operations when events and circumstances indicate that assets might be impaired and undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of the assets. If these conditions are present, the impairment loss is measured as the amount by which the carrying amount of the asset exceeds the fair value. Fair value of an impaired asset is considered to be the amount at which the asset could be bought or sold by willing parties. RECENT ACCOUNTING PRONOUNCEMENTS - In August 2001, the Financial Accounting Standards Board issued SFAS No 144 "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS", which addresses financial accounting and reporting for the impairment or disposal of long-lived assets, including operating leases and aircraft held for lease. SFAS 144 supersedes SFAS 121 and the accounting and reporting provisions of APB Opinion No. 30, "REPORTING THE RESULTS OF OPERATIONS REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS," for the disposal of a segment of a business (as previously defined in that Opinion). SFAS 144 also amends Accounting Research Bulletin No. 51, "CONSOLIDATED FINANCIAL STATEMENTS," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS 144 is required to be applied starting with fiscal years beginning after December 15, 2001, with certain early adoption permitted. SFAS 144 retains the requirements of SFAS 121 whereby an impairment loss is recognized in an amount equal to the difference between the carrying value and the fair value if the carrying value of an asset is not recoverable based on undiscounted future cash flows. The Company will be required to adopt this statement no later than January 1, 2002 and A-7 management believes that it will not alter the timing nor magnitude of future impairment losses, if any, than would be recognized under the pre SFAS 144 authoritative accounting literature. 2. FINANCE LEASES During 2001, the partnership owned seven aircraft, which were subject to finance leases. Five of the aircraft were leased to US Airways, Inc. until the lease expired October 1, 2001. In 2001, 2000, and 1999, leases with US Airways, Inc. resulted in finance lease revenues of $3,363,000, $5,175,000, and $5,873,000, respectively. After the return of the five aircraft, two were re-leased to a new lessee (CSI) subject to two operating lease agreements. The remaining three aircraft were being held for lease as of December 31, 2001. The sixth aircraft was leased to Trans World Airlines (TWA) under a finance lease expiring in 2002. In April 2001, the lease was restructured and subsequently assumed by American Airlines, at which time it was reclassified as an operating lease. In December 2001, the aircraft was sold for a gain of $965,000. In 2001, 2000, and 1999 this lease generated finance lease income of $293,000, $1,172,000, and $1,310,000, respectively. The seventh aircraft is leased to Federal Express Corporation (FedEx) under a 13-year finance lease which expires in 2006. In 2001, 2000, and 1999 this lease with FedEx resulted in finance lease income of $346,000, $389,000, and $431,000, respectively. As of December 31, 2001, this lease was the only finance lease on the Partnership's balance sheet. The finance leases at December 31, 2001 and 2000, are summarized as follows (in thousands): 2001 2000 ---- ---- Receivable in installments $5,893 $22,044 Residual valuation 2,000 45,500 Unearned lease income (944) (5,887) ----- ------- NET INVESTMENT $6,949 $61,657 ====== ======= 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, 2001 are due in installments of $1,310,000 in each year from 2002 through 2005, and $653,000 in 2006. 3. OPERATING LEASES During 2001, the Partnership had three aircraft that were subject to operating lease treatment. As mentioned above, two aircraft were leased to CSI and generated $296,000 in operating lease rental income in 2001. The third aircraft was leased to American Airlines and generated $750,000 in operating lease rental income during 2001. The aircraft was sold in December 2001. A-8 The operating leases at December 31, 2001 and 2000 are summarized as follows (in thousands): 2001 ------- Leased aircraft (at cost) $14,560 Accumulated depreciation (342) -------- NET INVESTMENT $14,218 There were no operating leases in 2000. 4. NOTES RECEIVABLE In November 2001, the Partnership accepted a note receivable of $606,231 in exchange for past due rent obligations owed to the Partnership. The note accrues interest at a rate of 7% and provides for twelve equal monthly payments beginning in January 2003. The note was recorded at fair market value determined by discounting the future cash flows. Rental income associated with this note was deferred and will be recognized as the note is repaid. 5. AIRCRAFT HELD FOR LEASE In October 2001, US Airways, Inc. returned five aircraft that had been on lease under a finance lease to the Partnership. Since their return from US Airways, two of these aircraft were re-leased under two operating lease agreements to another lessee prior to December 31, 2001, and are included in the Operating Leases-net in the accompanying balance sheet as of December 31, 2001. The other three aircraft had not been re-leased by the Partnership as of December 31, 2001 and the Partnership is in the process of marketing them for re-lease. These aircraft are classified as held for lease at December 31, 2001. The aircraft are being depreciated while held in inventory. Each of the aircraft returned by US Airways, Inc. was recorded as of October 1, 2001, at its carrying amount under the terminated US Airways lease of $7,280,000 as this was less than the estimated fair value. Fair value was estimated based primarily on discounted cash flows assuming the aircraft would be re-leased. For the two aircraft, which had been re-leased, cash flows were based on the rents specified in the new lease plus an anticipated cash receipt from the ultimate sale of the aircraft. Cash flow estimates for the aircraft held for lease were based on estimated rents and residual values including an assumption as to the re-lease period. Other factors considered in estimating fair value were published valuations prepared by independent appraisal sources. Since the events of September 11, 2001, sale and leasing activity for this type of aircraft has been very limited. If the Partnership is unable to lease the aircraft held for lease and is required to sell the aircraft in the near term, the amounts actually realized could differ materially from estimated fair value as calculated using the assumptions described in the preceding paragraph. In reporting periods subsequent to December 31, 2001, these aircraft will be assessed for impairment under FAS 144, when indicators of impairment are identified. A-9 6. LONG-TERM NOTES PAYABLE As of December 31, 2001 and 2000 long-term notes payable included the following: A 7.4% non-recourse loan facility collateralized by the aircraft leased to FedEx, due in semi-annual installments of $451,000 through April 2006. At December 31, 2001 and 2000, $3,389,000 and $4,001,000, were outstanding, respectively. A 9.35% non-recourse loan facility collateralized by the aircraft that was leased to TWA and subsequently, American Airlines. In December 2001 the aircraft was sold and the loan balance of $565,000 was paid off. A $7.5 million three-year revolving loan facility was obtained in February 1998. The facility was collateralized by two aircraft on lease to US Airways, Inc. The facility expired on September 30, 2001. Based upon amounts outstanding at December 31, 2001, the minimum future principal payments on the outstanding fixed-rate long-term note payable are due as follows (in thousands): 2002 $ 659 2003 710 2004 764 2005 822 2006 434 ------ Total Long Term Debt $3,389 ------ 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents carrying amounts and fair values of the partnership's financial instruments at December 31, 2001 and 2000. 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.
2001 2001 2000 2000 (In thousands) Carrying Amount Fair Value Carrying Amount Fair Value --------------- ---------- --------------- ---------- Long-term debt (Note 6) $3,389 $3,543 $7,992 $7,983
The carrying amounts presented in the table are included in the balance sheet under the indicated captions. A-10 Long-term debt is estimated by discounting the future cash flows using rates that are assumed would be charged to the partnership for debt with similar terms and remaining maturities. 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, 2001, 2000, and 1999, were as follows (in thousands): 2001 2000 1999 ---- ---- ---- Management fees $481 $551 $577 Disposition and remarketing fees 503 52 52 Reimbursement of other costs 79 79 79 Reimbursement of interest costs 10 8 7 ------ ---- ---- TOTAL $1,073 $690 $715 ====== ==== ==== The general partner was allocated its 1% share of the partnership net income and cash distributions. Holding and BALCAP, each a limited partner and an affiliate of the general partner, were also allocated their share of income and cash distributions. 9. FEDERAL INCOME TAX STATUS The Partnership is considered a publicly traded partnership ("PTP") under the Revenue Act of 1987. Under that Act, the partnership was not subject to federal income tax as a partnership until 1998. Effective January 1, 1998, PTP's were required to choose to retain PTP status and be subjected to federal income tax as a corporation or to delist their units thereby removing themselves from the scope of the PTP rules. Faced with these alternatives, the Partnership initially recommended that its units be delisted. In August and October 1997, respectively, federal and California tax laws were amended to provide PTP's a third alternative. Under these amended laws, PTP's are allowed to continue to be publicly traded during 1998 and subsequent years without becoming subject to corporate income tax if they elect to pay a 3.5% federal tax and a 1% California tax on their applicable gross income. The board of directors of the General Partner unanimously concluded, after authorization from the unitholders and consideration of a number of factors, including the 1997 tax law changes and the benefits of liquidity, that is was in the best interests of the unitholders for the partnership to remain publicly traded at that time. Accordingly, in January 1998, the partnership made an election to pay the annual gross income tax at the partnership level. A-11 10. RECONCILIATION TO INCOME TAX METHOD OF ACCOUNTING (UNAUDITED) The aircraft on lease to US Airways, Inc. were purchased subject to a tax benefit transfer lease ("TBT") which provided for the transfer of Federal income tax ownership of these 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):
2001 2000 1999 ---- ---- ---- Net income per financial statements: $1,623 $ 4,197 $ 4,708 Increases/(decreases) resulting from: 3.5% Gross Income Tax - non deductible 721 544 544 Gain on sale of equipment 6,487 0 0 Lease rents earned less finance lease income 7,114 8,810 7,934 Operating lease finance book depreciation 1,268 0 0 ------- ------- ------- Depreciation and amortization (628) (1,840) (2,605) ------- ------- ------- Income per income tax method 16,586 11,711 10,581 Allocable to general partner (165) (117) (106) ------- ------- ------- TAXABLE INCOME ALLOCABLE TO LIMITED PARTNERS $16,421 $11,594 $10,475 Taxable income per limited partnership unit after giving effect to taxable income allocable to general partner (amount based on a unit owned from October 10, 1986) $ 3.55 $ 2.51 $ 2.26 Partners' equity per financial statements $40,285 $51,135 $55,347 Gain on sale of equipment 6,487 0 0 Operating lease depreciation 1,268 0 0 Cumulative increases resulting from: Lease rents less earned finance lease income 71,325 64,211 55,401 Deferred underwriting discounts and commissions, and organization costs 5,361 5,361 5,361 Accumulated depreciation and amortization (54,279) (66,125) (64,285) TBT interest income less TBT rental expense (54,030) (54,030) (54,030) ------- ------- ------- PARTNERS' EQUITY PER INCOME TAX METHOD $16,417 $ 552 $(2,206)
A-12 11. SELECTED QUARTERLY FINANCIAL DATA The following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000 (in thousands, except per unit amounts):
2001 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - ---- -------- ------- -------- ------- Total Revenues $1,550 $1,490 $1,428 $1,599 Net Income/(Loss) $ 923 $ 746 $ 735 $(781) Net Income/(Loss) Per Limited Partnership Unit $0.20 $0.16 $0.16 $(0.17) Unit Trading Data: Unit Prices (high-low) on NYSE $13.05-$11.56 $11.89-$8.75 $10.35-$4.266 $8.85-$5.306 Unit Trading Volumes on NYSE 409 630 573 640 2000 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 - ---- -------- ------- -------- ------- Total Revenues $1,771 $1,712 $1,657 $1,596 Net Income $1,097 $1,066 $1,035 $1,002 Net Income Per Limited Partnership Unit $0.23 $0.23 $0.22 $0.21 Unit Trading Data: Unit Prices (high-low) on NYSE $12-$10.63 $12.25-$10.56 13.13-$11.566 $12.50 -$11.56 Unit Trading Volumes on NYSE 227 239 230 291
A-13 INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION 3.5 Amendments to Amended and Restated Partnership Agreement. 10.53 Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 806USAirframe. 10.54 Certificate of Redelivery and Agreement dated as of November 26, 2001, 2001 between First Union National Bank, not in its individual capacity but solely as Owner Trustee, and US Airways, Inc., with respect to one MD-82 Aircraft, U.S. Registration No. 807USAirframe. 10.55 Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N806US (manufacture serial no. 48038). 10.56 Aircraft Lease Agreement dated as of November 21, 2001, between First Union National Bank (formerly Meridian Trust Company), not in its individual capacity but solely as Owner Trustee, and CSI Aviation Services, Inc., Lessee with respect to one (1) MD-82 Aircraft, U.S. Registration No. N807US (manufacture serial no. 48039). A-14 EX-3.5 BY-LAWS, ARTI 3 ex3-5.txt AMENDMENTS TO AMENDED/RESTATED PARTNERSHIP AGRMT EXHIBIT 3.5 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP DATED AS OF OCTOBER-10, 1986 AMENDED DECEMBER 12, 1988 AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP TABLE OF CONTENTS PAGE ARTICLE 1-DEFINITIONS 1 ARTICLE 2-THE LIMITED PARTNERSHIP 8 2.1 Formation of the Partnership 8 2.2 Partnership Name 8 2.3 Business and Purposes of the Partnership 8 2.4 Principal Place of Business 8 2.5 Term of the Partnership 8 2.6 Execution of Documents 8 2.7 Organizational Limited Partner 9 2.8 Agent for Service of Process 9 ARTICLE 3-GENERAL OPERATING PROVISIONS 9 3.1 General 9 3.2 Borrowing Limitations 9 3.3 Reinvestment of Cash Available From Operations and Cash Available From Sale or Refinancing 9 3.4 Joint Ventures 10 3.5 Participation in Aircraft Investment with Affiliates 10 3.6 Partnership Expenses 10 ARTICLE 4-THE GENERAL PARTNER 11 4.1 Management Power 11 4.2 Restrictions on Authority of the General Partner 14 4.3 Compensation Plan 14 4.4 Liability of the General Partner 14 4.5 Similar Activities of the General Partner and Presentation of Opportunities to the Partnership 14 4.6 Activities of Officers and Directors 15 4.7 Indemnification of the General Partner and its Affiliates 15 4.8 Other Matters Concerning the General Partner 16 4.9 Agreements with the General Partner or a Related Person 17 4.10 Subcontracting by General Partner 18 4.11 Conveyances 18 4.12 Election to Be Governed by Successor or Different Limited Partnership Law 18 4.13 Minimum Net Worth of the General Partner 18 ARTICLE 5-COMPENSATION AND REIMBURSEMENT OF EXPENSES TO THE GENERAL PARTNER AND ITS AFFILIATES 18 5.1 Acquisition Fee 18 5.2 Management Fee 19 5.3 Distributions and Allocations 19 5.4 Disposition or Remarketing Fee 19 5.5 Fees Paid to Third Parties 19 5.6 Expenses of the General Partner 19 5.7 Reimbursement for Sums Advanced to the Partnership 19 5.8 Additional Services to the Partnership 20 5.9 Fees Payable on Cessation as the General Partner 20 TABLE OF CONTENTS PAGE ARTICLE 6-THE LIMITED PARTNERS AND ASSIGNEES 20 6.1 Limited Liability 20 6.2 Restrictions on Limited Partners and Assignees 20 6.3 Outside Activities 20 6.4 No Withdrawal of Contributions 20 6.5 Return of Capital 20 6.6 Death, Incompetency, or Bankruptcy of a Limited Partner or Assignee 20 ARTICLE 7-MEETINGS AND VOTING 21 7.1 Meetings 21 7.2 Notice of Meeting 21 7.3 Record Date 21 7.4 Adjournment 21 7.5 Waiver of Notice; Consent to Meeting; Approval of Minutes 22 7.6 Quorum 22 7.7 Conduct of Meeting 22 7.8 Action Without a Meeting 22 7.9 Voting Rights 23 7.10 Voting Rights Conditional 23 ARTICLE 8-CAPITAL CONTRIBUTIONS, TRANSFER TO UNDERWRITERS, AND CAPITAL ACCOUNTS 24 8.1 Capital Contribution of the General Partner 24 8.2 Capital Contribution of the Organizational Limited Partner 24 8.3 Sale of Units to Underwriters 24 8.4 Purchase of Units or Securities by the General Partner or its Affiliates 24 8.5 Purchase of Units by Affiliate of PSA 25 8.6 Units Not Assessable 25 8.7 No Interest on Capital Contribution 25 8.8 Creditors' Interest in the Partnership 25 8.9 Nature of Interests 25 8.10 Sale of Additional Interests 25 8.11 No Preemptive Rights 26 8.12 Capital Accounts 26 8.13 Purchase or Sale of Units 28 8.14 Registration Rights of the General Partner 28 8.15 Changes in Outstanding Units 29 ARTICLE 9-TAX ALLOCATION OF INCOME AND LOSSES 29 9.1 Apportionment of Net Income, Net Loss, and Distributions 29 9.2 Allocations for Capital Account Purposes 29 9.3 Allocations for Tax Purposes 30 9.4 Tax Elections 31 ARTICLE 10-DISTRIBUTIONS 32 10.1 Distributions for 1986 32 10.2 Distributions of Cash Available From Operations 32 10.3 Distributions of Cash Available From Sale or Refinancing 32 10.4 Distributions of Cash From Other Sources 32 10.5 Distributions of Partnership Assets 32 10.6 Liquidating Distributions 33 10.7 Tax Withholding 33 ii TABLE OF CONTENTS PAGE ARTICLE 11-BOOKS, RECORDS, ACCOUNTS, AND REPORTS 33 11.1 Books and Records 33 11.2 Limited Partners' Rights Regarding Books, Records, and Tax Information 34 11.3 Accounting Basis and Fiscal Year 35 34 11.4 Reports 34 11.5 Tax Matters Partner 35 11.6 Bank Accounts 35 11.7 Confidentiality 35 ARTICLE 12-ISSUANCE OF CERTIFICATES 35 12.1 Issuance of Certificates 35 12.2 Lost, Stolen, or Destroyed Certificates 36 12.3 Maintenance of Transfer Records 36 12.4 Record Unit Holder 36 12.5 Withdrawal of Certificates 36 12.6 Legends 37 ARTICLE 13-TRANSFER OF INTERESTS 37 13.1 Transfer in General 37 13.2 Transfer of Interests of the General Partner 37 13.3 Transfer of Units 37 13.4 Transfer of Depositary Units 37 13.5 Depositary Arrangements 39 13.6 Restrictions on Transfer, Non-United States Citizens 39 13.7 General Partner's Right to Purchase Units 40 ARTICLE 14-ADMISSION OF SUBSTITUTED AND ADDITIONAL LIMITED PARTNERS 41 14.1 Admission of Substituted Limited Partners 41 14.2 Admission of Additional Limited Partners 42 14.3 No Action Necessary by Unitholders 42 ARTICLE 15-CHANGES IN THE GENERAL PARTNER 42 15.1 General Partner Ceasing to be the General Partner 42 15.2 Withdrawal or Removal of the General Partner 43 15.4 Rights on Removal or Withdrawal 43 15.5 Liability on Removal or Withdrawal 44 15.6 Successor and Predecessor General Partner 44 15.7 Interest of Departing General Partner and Successor 44 ARTICLE 16-DISSOLUTION, WINDING UP, AND LIQUIDATION 45 16.1 Dissolution 45 16.2 Continuation of the Business of the Partnership 45 16.3 Authority to Wind Up 45 16.4 Accounting 46 16.5 Winding Up and Liquidation 46 16.6 No Recourse Against the General Partner 46 16.7 Claim of Limited Partners and Assignees 46 16.8 General Partner's Obligation to Make Up Negative Capital Account 46 ARTICLE 17-POWER OF ATTORNEY 47 iii TABLE OF CONTENTS PAGE ARTICLE 18-AMENDMENTS TO PARTNERSHIP DOCUMENTS 48 18.1 Amendments by the General Partner 48 18.2 Amendment Procedures 49 18.3 Restricted Amendments 49 18.4 Amendments Needing Consent.of the General Partner 50 18.5 Amendments to Certificate of Limited Partnership 50 18.6 Amendment Regarding New General Partner 50 ARTICLE 19-MISCELLANEOUS PROVISIONS 50 19.1 Notices 50 19.2 Choice of Venue and Law 51 19.3 Article and Section Headings 51 19.4 Sole Agreement 51 19.5 Force Majeure 51 19.6 Remedies Cumulative 51 19.7 Waiver 51 19.8 Waiver of Action for Partition 51 19.9 Assignability 51 19.10 Gender and Number 51 19.11 Further Action 52 19.12 Creditors 52 19.13 Construction 52 19.14 Severability 52 19.15 Survival 52 19.16 Execution in Counterparts 52 Exhibit 1-Certificate for Limited Partnership Units iv AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP This Amended and Restated Agreement of Limited Partnership dated as of October 10, 1986 is made and entered into by and among Airlease Management Services, Inc., a Delaware corporation, as general partner, United States Airlease Holding, Inc., as the Organizational Limited Partner, and all other parties who shall become partners of this limited partnership as provided herein. WHEREAS, the Partners heretofore have entered into an Agreement of Limited Partnership dated July 8, 1986; and WHEREAS, the Partners desire to amend and restate such Agreement of Limited Partnership in its entirety as hereinafter set forth; NOW, THEREFORE, for and in consideration of the foregoing, and of the covenants and agreements hereinafter set forth, it is hereby agreed as follows: ARTICLE 1 DEFINITIONS Unless the context otherwise specifies or requires, the terms defined in this Article 1 shall, for the purposes of this Agreement, have the meanings herein specified. These terms shall supersede and replace any other definitions contained in the California Act. Unless otherwise specified, all references in this Agreement to Articles or Sections are to Articles or Sections of this Agreement. ACQUISITION FEE: The fee paid by or on behalf of the Partnership to the General Partner or its Affiliates as set forth in Section 5.1. ADDITIONAL LIMITED PARTNER: A Person admitted to the Partnership pursuant to Section 14.2 as a Limited Partner. ADJUSTED PROPERTY: Any property the Carrying Value of which has been adjusted pursuant to Section 8.12(D) (i). AFFILIATE: Any Person that directly or indirectly controls, is controlled by, or is under common control with the Person in question. As used in this definition of Affiliate, the term control means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through ownership of voting securities, by contract or otherwise. AGREED VALUE: The fair market value of any Contributed Property as determined by the General Partner using such reasonable method of valuation as may be adopted by the General Partner. The General Partner shall, in its discretion, use such method as it deems reasonable and appropriate to allocate the aggregate Agreed Value of the Contributed Properties transferred to the Partnership in a single or integrated transaction among each separate property. The Agreed Value of any Contributed Property shall reflect any adjustments made pursuant to Sections 8.12 (B) (iii) and 8.12(C). AGREEMENT This Amended and Restated Agreement of Limited Partnership as the same may be amended from time to time. AIRCRAFT: Commercial aircraft, spare or separate engines, and related Rotable Parts. "Aircraft" includes any beneficial interest in an Aircraft. AIRCRAFT COST: The total consideration (which, for purposes of calculating the Acquisition Fee, shall exclude the Acquisition Fee) paid directly or indirectly in connection with the purchase of an Aircraft, whether paid to sellers or other persons, either in cash, by way of Units or promissory notes or by way of assuming or taking subject to any liens or mortgages encumbering such Aircraft. 1 AIRLEASE: United States Airlease, Inc., a California corporation and an Affiliate of the General Partner and any successor to United States Airlease, Inc. by merger or consolidation or by sale or transfer of all or substantially all of the assets of United States Airlease, Inc. AIRLEASE MANAGEMENT SERVICES, INC.: Airlease Management Services, Inc., a Delaware corporation, and any successor to Airlease Management Services, Inc. by merger or consolidation or by sale or transfer of all or substantially all of the assets of Airlease Management Services, Inc. ASSIGNEE: A Person to whom one or more Units or Depositary Units have been transferred, by assignment of a Depositary Receipt or otherwise, in a manner permitted under this Agreement, but who has not been admitted to the Partnership as a Substituted Limited Partner with respect to 'such Units. The rights of any such Person in the Partnership with respect to Units for which such Person has not been admitted to the Partnership as a Substituted Limited Partner shall be (i) limited to the rights and obligations appurtenant to such Units to share in the allocations and distributions of the Partnership, including liquidating distributions of the Partnership, and (ii) except as expressly provided herein, otherwise subject to the limitations under the California Act on the rights of an assignee who has not become a substituted limited partner. BOOK-TAX DISPARITIES: The differences between a Partner's Capital Account balance, as maintained pursuant to Section 8.12, and such balance had the' Capital Account been maintained strictly in accordance with tax accounting principles (such disparities reflecting the differences between the Carrying Value of either Contributed Properties or Adjusted Properties, as adjusted from time to time, and the adjusted basis thereof for Federal income tax purposes). CALIFORNIA ACT: The California Revised Limited Partnership Act, as amended and in effect from time to time, and any successor statute thereto. CAPITAL ACCOUNT: The capital account maintained for each Partner and Assignee pursuant to Section 8.11. CAPITAL CONTRIBUTION: Any cash or Contributed Property which a Partner contributes or is deemed to have contributed to the Partnership pursuant to Article 8. . CAPITAL EXPENDITURES: Expenditures for the acquisition of assets having a useful life to the Partnership of more than one year. CARRYING VALUE: (a) With respect to a Contributed Property, the Agreed Value of such property reduced (but not below zero) by all depreciation and cost recovery deductions charged to the Partners' Capital Accounts pursuant to Section 8.12(A) with respect to such property, and (b) with respect to any OTHER PROPERTY, THE adjusted basis of such property for Federal income tax purposes, as of the time of determination. The Carrying Value of any property shall be adjusted from time to time in accordance with Sections 8.12(C) and 8.12(D), and to reflect changes, additions, or other adjustments to the Carrying Value for dispositions, acquisitions, or improvements of Partnership assets, as deemed necessary, or appropriate by the General Partner. CASH AVAILABLE FROM OPERATIONS: Net Revenues of the Partnership, less (i) principal and interest on Partnership liabilities, (ii) funds used for capital improvements or replacements, (iii) funds and reserves for working capital, debt refinancing, contingencies, and other purposes deemed reasonably necessary by the General Partner, and (iv) Casualty Proceeds used, in the discretion of the General Partner, to acquire additional Aircraft. CASH AVAILABLE FROM SALE OR REFINANCING: The proceeds, including Sales Proceeds, received by the Partnership in connection with a sale, refinancing, or casualty of Aircraft, after (a) the payment of all costs and expenses of any kind or nature incurred by the Partnership in connection with such sale. refinancing, or casualty, (b) the utilization of any such proceeds in connection with the discharge of debts and other obligations of the Partnership deemed by the General Partner to be advisable to be discharged with the proceeds of such sale, refinancing, or casualty, and (c) the retention of such proceeds or a portion thereof in connection with the creation of or addition to any reserves 2 established by the General Partner, in its sole discretion. "Cash Available From Sale or Refinancing" does not include any interest payable on installment obligations received by the Partnership upon such a sale, refinancing, or casualty. CASUALTY PROCEEDS: Recoveries under insurance policies and other net receipts representing a recovery for loss or destruction of Aircraft. CERTIFICATE: A non-negotiable certificate issued by the Partnership evidencing ownership of one or more Units substantially in the form of Exhibit 1. CERTIFICATE OF LIMITED PARTNERSHIP: The certificate of limited partnership for the Partnership filed pursuant to the California Act, as the certificate may be amended from time to time. CLOSING DATE: The date or dates on which the Units in the Initial Offering (including any Units sold pursuant to the Underwriters' over-allotment option) are issued and sold. CODE: The Internal Revenue Code of 1954, as amended and in effect from time to time. References in this Agreement to the Code or to sections of the Code shall include any successor statutes or sections. CONTRIBUTED PROPERTY: Each Contributing Partner's interest in each property or other consideration, but excluding cash and cash equivalents, contributed to the Partnership by such Contributing Partner (or deemed contributed to the Partnership upon termination thereof pursuant to Section 708 of the Code). Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 8.12(D) (i), such property shall no longer constitute a Contributed Property for purposes of Section 9.2(B) but shall be deemed an Adjusted Property for such purposes. CONTRIBUTING PARTNER: Each Partner or Assignee contributing (or deemed to have contributed upon termination of the Partnership pursuant to Section 708 of the Code) Contributed Property to the Partnership. DEPARTING GENERAL PARTNER: A General Partner, as of the effective date of any withdrawal or removal of such General Partner pursuant to Section 15.2, or a General Partner who has otherwise ceased to be a General Partner. DEPOSITARY: Manufacturers Hanover Trust Company, or any successor to it as depositary under the Depositay Agreement or any other Person appointed to serve as depositary. DEPOSITARY AGREEMENT: That agreement so designated, among the Partnership, the Depositary, the General Partner, and the holders of Depositary Receipts as it may be amended or supplemented from time to time. DEPOSITARY RECEIPT: A depositary receipt, executed and delivered by or on behalf of the Depositary in accordance with the Depositary Agreement, evidencing ownership of one or more Depositary Units. DEPOSITARY UNIT: A depositary unit representing a Unit on deposit with the Depositary pursuant to the Depositary Agreement. DISPOSITION OR REMARKETING FEE: A fee payable by the Partnership to the General Partner or an Affiliate thereof on the disposition or remarketing for lease of an Aircraft, payable as set forth in Section 5.4. FAA Federal Aviation Administration. FAA ACT: The Federal Aviation Act of 1958, as amended. FAIR MARKET VALUE: The fair market value of an asset or group of assets as determined by an independent third party appraiser chosen by the General Partner. 3 FINAL DETERMINATION: A final adjudication regarding subject Federal income tax issues or a final administrative determination of such issues agreed to by the General Partner. GENERAL PARTNER: Airlease Management Services, Inc., in its capacity as general partner of the Partnership, and any successor or additional general partner of the Partnership. GENERAL PARTNER CAPITAL ACCOUNT: That Capital Account maintained for the General Partner with respect to the interest of the General Partner as a general partner of the Partnership pursuant to Section 8.11. INITIAL UNIT ISSUE PRICE: That price specified in the Underwriting Agreement as the price at which a Unit WILL be purchased by the Underwriters in the Initial Offering. INITIAL UNIT OFFERING PRICE: That price specified in the Underwriting Agreement as the price at. which a Unit will be offered by the Underwriters to the public in the Initial Offering. INITIAL LIMITED PARTNERS: The Underwriters. INITIAL OFFERING. The initial public offering of the Depositary Units. as more fully described in the Registration Statement, including the sale of any Units pursuant to the exercise of any over-allotment option. . ISSUE PRICE: The price at which a Unit is purchased from the Partnership. LIMITED PARTNER CAPITAL ACCOUNT: That Capital Account maintained for each Limited Partner or Assignee with respect to such Limited Partner's or Assignee's Units pursuant to Section 8.12. LIMITED PARTNERS: The Organizational Limited Partner, the Initial Limited Partners, and the holders of Units who have been admitted to the Partnership as Substituted Limited Partners or as Additional Limited Partners. "Limited Partner" means one of the Limited Partners. MAJORITY INTEREST: The interest of Limited Partners of record who are Limited Partners (rather than Assignees) with respect to more than 50% of the total number of all outstanding Units and Depositary Units held by Limited Partners (as Limited Partners rather than as Assignees), including the General Partner and its Affiliates to the extent they own Units or Depositary Units. MANAGEMENT FEE: The fee paid to the General Partner pursuant to Section 5.2. NASDAQ: The National Association of Securities Dealers Automated Quotations System. NATIONAL SECURITIES EXCHANGE: AN exchange registered with the Securities and Exchange Commission under Section 6(a) of the Securities Exchange Act of 1934. NET AGREED VALUE: (a) In the case of any Contributed Property, the Agreed Value of such property or other consideration reduced by any indebtedness or liabilities either assumed by the Partnership upon such contribution or to which such property is subject when contributed, and (b) in the case of any property currently distributed to a Partner or distributed in liquidation of the Partnership pursuant to Section 16.5, the Partnership's Carrying Value of such property at the time such property is distributed reduced by any indebtedness either assumed by such Partner upon such distribution or to which such property is subject at the time of distribution. NET INCOME and NET LOSS: The net income and net loss, respectively, of the Partnership calculated in accordance with accounting methods followed for Federal income tax purposes. NET REVENUES: The funds provided from Partnership operations (excluding cash from sales or refinancing of Aircraft but including that portion of Casualty Proceeds representing the present value, calculated at the rate used by the Partnership to recognize income in accordance with generally accepted accounting principles, of the remaining rent due under the lease), interest on the Partnership's cash and any short-term investments as well as interest on any carryback financing held in connection with the sale of Partnership assets, without deduction for payment of interest or principal on Partnership liabilities and without deduction for non-cash expenses (such as depreciation or 4 amortization), but after deducting funds used to pay Partnership operating expenses, any Management Fees, and the fee payable to the General Partner or its Affiliates for remarketing for lease an Aircraft as provided in Section 5.4. Net Revenues do not include loan proceeds, Sales Proceeds, or Capital Contributions to the Partnership. NAAF: North American Aircraft Finance Corporation, an Affiliate of PSA. ORGANIZATIONAL LIMITED PARTNER: U.S. Holding. PARTNER: A General Partner or a Limited Partner; and "Partners" means the General Partner and all Limited Partners. PARTNERSHIP: The limited partnership created by this Agreement and any successor partnership continuing the business of the Partnership which is a reformation or reconstitution of a partnership governed by this Agreement. PARTNERSHIP INTEREST: The interest of a Person in the Partnership. PARTNERSHIP ASSET: Any and all assets, real or personal, now or hereafter owned by the Partnership or in or to which the Partnership has any interest, right, or claim. PERSON: An individual, partnership, joint venture, estate, association, corporation, trust company, trust, or other entity. PRESCRIBED ASSET VALUE: As of any date of determination, that amount determined by dividing (a) an amount equal to the product of (i) the total number of outstanding Units (immediately prior to an issuance of Units pursuant to Section 8.10, if such issuance triggered an asset valuation pursuant to Section 8.12(D) (i)) times (ii) (1) in the case of a valuation occasioned by an issuance of Units pursuant to Section 8.10, the Issue Price as of the date of issuance or (2) in the case of a valuation occasioned by a current distribution or a deemed distribution resulting from a constructive termination of the Partnership pursuant to Section 708 of the Code, the Unit Price as of the date of such actual or deemed distribution, by (b) 99%. PSA TRANSACTION: The transaction whereby the Partnership through a trust, has purchased Aircraft from and leased them back to, Pacific Southwest Airlines, a California corporation, as more particularly described in the Registration Statement. PURCHASE AGENT: The purchase agent - designated by the General Partner, or any successor specified by the General Partner. PURCHASE DATE: The date determined by the General Partner as the date for purchase of all outstanding Units (except Units of the General Partner or its Affiliates) -pursuant to Section 13.7, as specified in the notice that is furnished to holders of Units pursuant to Section 13.7(B). PURCHASE FUNDS: An amount in cash equal to the aggregate purchase price (determined in accordance with Section 13.7) of all Units subject to purchase by the General Partner or its Affiliate on the Purchase Date in accordance with Section 13.7. RECAPTURE INCOME: Any income or gain recognized by the Partnership (computed without regard to any adjustment required by Section 734 or Section 743 of the Code) treated as ordinary income for Federal income tax purposes pursuant to any provision of the Code converting capital gain to ordinary income as a result of prior deductions. RECORD DATE: The date established by the General Partner, in its discretion, for determining (a) the identity of Persons entitled to notice of or to vote at any meeting of the Partnership or entitled to vote by ballot or give consent to Partnership action in writing without a meeting or entitled to exercise rights in respect of any other lawful action, or (b) the identity of Persons. entitled to receive any report or distribution from the Partnership as a Partner or Assignee. 5 RECORD UNITHOLDER. As applied to the Limited Partners, the Persons shown as Limited Partners on the records of the Partnership as of the close of business on a particular day; as applied to a Depositary Receipt, the Person in whose name the Depositary Receipt is registered on the books of the Depositary as of the close of business on a particular business day; and as applied to the holder of a Unit not deposited with the Depositary, the record holder of such Units as reflected on the records of the Partnership. REGISTRATION STATEMENT: The Registration Statement on Form S-1 (NO. 33-7985) filed by the Partnership with the Securities and Exchange Commission under the Securities Act of 1933 to register the offering and sale of the Depositary Units in the Initial Offering, as it may be amended from time to time. RELATED ENTITY: U.S. Leasing and any Person (i) as to which U.S. Leasing, directly or indirectly, has the power to exercise in excess of 50`0 of the voting power with respect to acquisitions or dispositions of assets (notwithstanding the fact that any such acquisition or disposition is subject to the approval of more than 50% of the voting power) or owns in excess of SO%o of the equity interest and (II) which is organized and has its principal place of business in the United States. RELATED PERSON: A General Partner, any partner, officer, director, or Affiliate of a General Partner, or any Person in which any of the foregoing has a material financial interest. RESIDENT ALIEN: A "resident alien" as now or hereafter defined in the FAA Act, or any successor statute, or in regulations adopted pursuant to said Act, or pursuant to any successor statute. RESIDUAL GAIN or RESIDUAL LOSS: Any net gain or net loss, as the case may be, of the Partnership recognized for Federal income tax purposes resulting from a sale, exchange, or other disposition of a Contributed Property or Adjusted Property, to the extent such net gain or net loss is not allocated pursuant to Section 9.3(B) to eliminate Book-Tax Disparities. ROTABLE PARTS: An item that can be economically restored to a serviceable condition and in the normal course of operation is repeatedly rehabilitated to its fully serviceable condition over a period approximating the life of the flight equipment to which it is related. SALE OR DISPOSITION: The sale or other disposition of Aircraft. SALES PROCEEDS: The total consideration paid directly or indirectly to the Partnership in connection with the sale of Aircraft, whether paid in cash or by way of assuming or taking subject to any liens or mortgages encumbering such Aircraft; and, as received, principal payments in respect of any carryback financing held in connection with such sale. "Sales Proceeds" shall also include that portion of Casualty Proceeds not representing the present value of prepaid rent. SERVICE: The Internal Revenue Service. SUBSTITUTED LIMITED PARTNER: A Person who is admitted to the Partnership as a Limited Partner pursuant to this Agreement in place of and with all the rights of a Limited Partner pursuant to Section 14.1. TOTAL AIRCRAFT COST: The cost of acquiring all the Aircraft owned by the Partnership at the tire such calculation is made, including commissions, expenses, legal and accounting fees, Acquisition Fees. all other expenses in connection with the acquisitions, and the cost of the Aircraft. TRANSFER AGENT: The Depositary or any bank, trust company, or other Person appointed by the General Partner to act as transfer agent for Depositary Receipts. TRANSFER APPLICATION: An application and agreement for transfer of Depositary Units in the form set forth on the back of the Depositary Receipt or in a form substantially to the same effect in a separate instrument by which an Assignee (or his broker, dealer, or nominee holder acting on his behalf) requests admission to the Partnership as a Substituted Limited Partner, agrees to be bound by the terms and conditions of this Agreement and the Depositary Agreement, grants a power of attorney 6 to the General Partner pursuant to Article 17, and represents and warrants to the Partnership that he is a United States Citizen or Resident Alien. US. HOLDING: United States Airlease Holding, Inc., a California corporation and an Affiliate of the General Partner. US. LEASING: United States Leasing International, Inc., a California corporation and an Affiliate of the General Partner. UNDERWRITERS: Those underwriting firms listed in the Underwriting Agreement or an exhibit or schedule thereto which agree to purchase Units from the Partnership. UNDERWRITING AGREEMENT: The agreement to be entered into prior to the Closing Date among the General Partner, U.S. Leasing, Airlease, the Partnership, and the Underwriters with respect to the purchase of Units by the Underwriters in the Initial Offering. UNITED STATES CITIZEN: A "citizen of the United States" as now or hereafter defined in the FAA Act, or any successor statute, or in regulations adopted pursuant to said Act, or pursuant to any such successor statute. UNITS: Those units of limited partners' interest in the Partnership acquired or issued pursuant to this Agreement. Unitholden Each owner of Units who is either a Limited Partner (including the Organizational Limited Partner) or an Assignee. UNIT PRICE OF A UNIT OR A DEPOSITARY UNIT: As of any date of determination, (a) if such Unit or Depositary Unit is one of a class of Depositary Units listed or admitted to trading on a National Securities Exchange, the average of the last reported sale prices per Depositary Unit regular way or, in case no such reported sale takes place regular way, the average of the arithmetic mean of the last reported bid and asked prices per Depositary Unit, in either case on the principal National Securities Exchange on which such Depositary Units are listed or admitted to trading, for the five trading days immediately preceding the date of determination; (b)' if such Unit or Depositary Unit is not of a class of Depositary Units listed or admitted to trading on a National Securities Exchange but is of a class quoted by NASDAQ, the average of the last reported sale prices per Depositary Unit quoted by NASDAQ or, in case no such reported sale takes place on any such day or in case last reported sale prices are not quoted by NASDAQ, the average of the arithmetic mean of the closing bid and asked prices per Depositary Unit, for the five trading days immediately preceding such date of determination, as furnished by the National Quotation Bureau Incorporated, or such other nationally recognized quotation service as may be selected by the General Partner for such purpose, if said Bureau is not at the time furnishing quotations; or (c) if such Unit or Depositary Unit is not of a class of Depositary Units listed for trading on a National Securities Exchange or quoted by NASDAQ, an amount equal to the fair market value of such Unit as of such date of determination, as determined by the General Partner using any reasonable method of valuation it may select. For purposes of this definition, a Unit WILL be deemed to be one of a class of Depositary Units if the holder of such Unit may obtain a Depositary Unit by depositing such Unit with the Depositary pursuant to the Depositary Agreement. UNREALIZED GAIN: As of any date of determination, the excess, if any, of the fair market value of any Partnership Asset (as determined under Section 8.12(D)) as of such date of determination over the Carrying Value of such asset as of such date of determination (prior to any adjustment to be made pursuant to Section 8.12(D) as of such date). UNREALIZED LOSS: As of any date of determination, the excess, if any, of the Carrying Value of any Partnership Asset as of such date of determination (prior to any adjustment to be made pursuant to Section 8.12(D) as of such date) over the fair market value of such property (as determined under Section 8.12(D)) as of such date of determination. 7 ARTICLE 2 THE LIMITED PARTNERSHIP 2.1 FORMATION OF THE PARTNERSHIP. The General Partner and the Organizational Limited Partner have formed the Partnership as a limited partnership organized under the California Act. 2.2 PARTNERSHIP NAME. The name of the Partnership is "Airlease Ltd., A California Limited Partnership." The Partnership may conduct business under such other name or names as the General Partner may from time to time deem necessary, appropriate, or advisable, including the name of the General Partner. The General Partner in its sole discretion may change the name of the Partnership at any time and from time to time. The General Partner and the Limited Partners hereto shall promptly execute, and the General Partner shall file and record with proper offices in each jurisdiction in which the Partnership does, or elects to do, business, such certificates or other statements or instruments as are required by the limited partnership statute, fictitious name statute, assumed name statute, or any other similar statute in effect in such jurisdiction in order to conduct the Partnership business therein as a partnership in which the limited partners have limited liability. 2.3 BUSINESS AND PURPOSES OF THE PARTNERSHIP. The. primary purpose of the Partnership is to acquire, own, operate, manage, finance, lease, and sell Aircraft and interests therein, either directly or by way of joint ventures or partnerships, 'either in its own name or in the name or names of one or more nominees of the Partnership or one or more trustees of a trust of which the Partnership is a beneficiary. In addition, the Partnership may engage in any other business or do any and all acts and things which may be necessary, incidental, or convenient to carry on the Partnership business and purposes as specified in this paragraph. For purposes of this Agreement, any Aircraft acquired and held by one or more nominees or trustees for the benefit of the Partnership shall be deemed to have been acquired by and to be owned by the Partnership itself. The Partnership shall be empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to, or convenient for the business and purposes described herein and for the protection or benefit of the Partnership. 2.4 PRINCIPAL PLACE OF BUSINESS. The principal place of business of the Partnership shall be at 2988 Campus Drive, San Mateo, California 94403, but the General Partner may substitute or establish such other place or places of business of the Partnership (within or without the State of California) as it may, from time to time, deem necessary or appropriate; provided, however, that the General Partner shall give the Unitholders notice in writing of any change of address of the principal place of business of the Partnership and, in connection therewith, shall amend the Certificate of Limited Partnership in accordance with applicable requirements of law. 2.5 TERM OF THE PARTNERSHIP. The Partnership commenced on June 18, 1986, the date that the Certificate of Limited Partnership was filed in accordance with the provisions of the California Act, and shall continue until December 31, 2036, or until the earlier termination of the Partnership in accordance with Article 16. 2.6 EXECUTION OF DOCUMENTS. The General Partner, on its own behalf and as attorney-in-fact for the other Partners and Assignees pursuant to the power of attorney granted in Article 17, shall execute, acknowledge, and file or deliver all certificates of limited partnership, amended or restated certificates, instruments, or other documents and counterparts thereof and make all filings and recordings and perform all other acts as shall be necessary to comply with the laws of the State of California for the formation, continuation, or reformation of the Partnership, for the continued good standing of the Partnership, and, when appropriate, for the termination of the Partnership. The General Partner shall also execute such certificates, amended or restated certificates, and other documents conforming hereto and do such filing, recording, publishing, and other acts as may be appropriate to comply with the requirements of law for the formation, continuation, reformation, qualification, and/or operation of a limited partnership (or as a partnership in which the limited partners have limited liability) in all jurisdictions where the Partnership may wish to do business, which shall be accomplished prior to 8 doing business in any such jurisdiction if deemed necessary by the General Partner for the maintenance of such limited liability. 2.7 ORGANIZATIONAL LIMITED PARTNER. In order to create the Partnership under the California Act, the Partnership has heretofore accepted a capital contribution in the amount of $10 from the Organizational Limited Partner for an interest as a Limited Partner. Any allocations, interest, or other profit which may have resulted from the investment or other use of such amount paid by the Organizational Limited Partner to the Partnership prior to admittance of the Initial Limited Partners shall be allocated 99% to the General Partner and 1% to the Organizational Limited Partner. The interest acquired by the Organizational Limited Partner pursuant to this Section 2.7 is not transferable except by operation of law. 2.8 AGENT FOR SERVICE OF PROCESS. The General Partner shall select one or more Persons to act as the registered agent for service of process on the Partnership. The initial agent for service of process is Peter Mezey, 615 Battery Street, San Francisco, California 94111. ARTICLE 3 GENERAL OPERATING PROVISIONS 3.1 GENERAL. The Partnership shall adhere to the operating provisions contained in this Article 3, unless otherwise approved by a Majority Interest. 3.2 BORROWING LIMITATIONS. (A) The Partnership shall not borrow funds or assume financing unless one of the following applies: (1) Immediately after giving effect to the borrowing or assumption of financing and the purchase of the related assets, the total Partnership indebtedness as reflected in its accounting records at the date of such proposed borrowing or assumption of financing is less than 50% of the higher of (i) Total Aircraft Cost or (ii) Fair Market Value of the Partnership's Aircraft; however, borrowings and assumption of financings may exceed such 50% limitation for a period of up to 120 days so long as the General Partner uses its best efforts to reduce the indebtedness to comply with said 50% limitation within such 120-day period; or (2) The borrowed funds are necessary to prevent foreclosure on any Partnership Asset. (B) The Partnership may borrow funds from the General Partner or its Affiliates, subject to the limitations contained in Section 4.1(t). 3.3 REINVESTMENT OF CASH AVAILABLE FROM OPERATIONS AND CASH AVAILABLE FROM SALE OR REFINANCING. (A) (1) During the year ended December 31, 1986, Cash Available From Operations in excess of the amount required to be distributed pursuant to Section 10.1 shall be retained by the Partnership and used to establish a fund for the purchase of additional Aircraft or other purposes determined by the General Partner. (2) During the year ended December 31, 1987, Cash Available From Operations in excess of the amount distributed pursuant to Section 10.2(A) shall be retained by the Partnership and used to establish a fund for the purchase of additional Aircraft or other purposes determined by the General Partner. (3) After December 31, 1987, all Cash Available From Operations shall be distributed pursuant to Section 10.2(B). (B) (1) Through December 31, 2004, the Partnership may retain for use in its business, any Cash Available From Sale or Refinancing remaining after making the distribution required by Section 10.3(A). 9 (2) After December 31, 2004, all Cash Available From Sale or Refinancing shall be distributed pursuant to Section 10.3(C) provided that if the General Partner determines that it would be in the Partnership's best interest, Cash Available From Sale or Refinancing may be used to repay indebtedness. 3.4 JOINT VENTURES. The Partnership may invest in partnerships or joint ventures which own or are organized to acquire Aircraft with any Person, including any Person which is an Affiliate of the General Partner, on terms and conditions determined in the sole discretion of the General Partner. 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 S10 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 US. 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 US. 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. 10 (E) For purposes of this Section 35, a 5090 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 59'0 of the lesser Aircraft Cost), all as determined by the General Partner at the time of acquisition. . 3.6 PARTNERSHIP ERPENSES. (A) The General Partner shall be responsible and shall pay for only its expenses incurred (i) in connection with certain services it performs as described in Sections 5.1. 5.2, and 5.4 for which it receives fees described therein, other than reimbursements for which it may be entitled to under said sections, and (ii) for overhead and salary expenses of employees in connection with the Initial Offering. (B) Except as set forth in Section 3.6(A), the Partnership shall be responsible and shall pay for all fees, costs, and expenses arising out of or in connection With (i) the organization of the Partnership (ii) the PSA Transaction; (iii) the qualification of the Partnership to do business in any state determined by the General Partner, (iv) the registration or qualification of the Depositary Units fog sale by the Partnership under applicable Federal and state securities laws in connection with the Initial Offering or future offerings; (v) the offering, sale, and distribution of the Depositary Unit: pursuant to the Initial Offering or any future offerings; (vi) the listing of the Depositary Receipts on a National Securities Exchange; (vii) the planning, preparation, management, and operation of the Partnership, including but not limited to fees, costs, and expenses in connection with the purchase holding, operation, financing, refinancing, and sale of Aircraft or joint venture or partnership interest therein; (viii) fees and reimbursements to which the General Partner and its Affiliates are entitled 10-A under this Agreement; and (ix) any and all other items arising out of or in connection with the business or activities of the Partnership. ARTICLE 4 THE GENERAL PARTNER 4.1 MANAGEMENT POWER. Subject to Sections 7.9 and 18.2, the General Partner shall have full, exclusive and complete discretion, power and authority in the management and control of the business of the Partnership, shall make all decisions affecting the business of the Partnership, and may do or cause to be done any and all acts it deems necessary or appropriate to accomplish the purposes of the Partnership. Any Person dealing with the General Partner shall not be required to determine or inquire into the authority and power of the General Partner to bind the Partnership and to execute, acknowledge, deliver, and perform obligations under any and all documents. By way of illustration, but not by way of limitation, such matters shall include the right, power, and authority of the General Partner, in its sole discretion, without any approval from Unitholders, and at the expense of the Partnership: (a) To cause the Partnership to enter into and perform the PSA Transaction: (b) To cause the Partnership to acquire, own, operate, lease (as lessee or lessor or both), develop, improve, maintain, finance, hold, control, exchange, trade, sell, pledge, convey in trust or otherwise hypothecate or dispose of Aircraft, appurtenances thereof and personal or mixed property connected therewith, upon such terms and for such consideration (including cash, securities, Units, Partnership Interests, and other property) as the General Partner deems necessary or appropriate; (c) Subject to Section 3.2, to borrow money, to obtain credit, or to assume debt in such amounts, on such terms and conditions and at such rates of interest as the General Partner deems appropriate, from banks, other lending institutions, or any other Person, including the Partners and Assignees (subject to Section 4.1(t)), for any purpose of the Partnership, including, without limitation, any loan incurred for the purpose of making one or more distributions to any or all Partners and Assignees, including any distributions which are, in whole or in part, a return of Capital Contributions; and, in connection with such loans to mortgage, pledge, assign, or otherwise encumber or alienate any or all of the Partnership Assets, including any income therefrom, to secure or provide for the repayment thereof. As between any lender and the Partnership, it shall be conclusively presumed that the proceeds of such loans are to be and WILL be used for the purposes authorized herein and that the General Partner has the full power and authority to borrow such money and to obtain such credit; (d) To place record title to, or the right to use, Partnership Assets in the name or names of one or more nominees or trustees for any purpose convenient or beneficial to the Partnership; (e) To cause the Partnership to employ employees, agents, independent contractors,.brokers, attorneys, accountants and other Persons, including the general Partner and its Affiliates, and employees thereof, to perform such services for the Partnership as the General Partner may designate, on such terms and for such compensation as the General Partner shall determine, and to dismiss such persons from employment, provided that compensation of the General Partner and its Affiliates for the services set forth in Article 5 shall be limited to the amounts set forth in said Article 5; , . (f) To prepare or cause to be prepared reports, statements, and other relevant information for distribution to Unitholders; (g) To select the Partnership's accounting year; 11 (h) To determine the appropriate accounting method or methods to be used by the Partnership; (i) To cause the Partnership to offer and sell Units and other Partnership Interests (whether or not senior to the Units) to the public through underwriters or broker-dealers and to employ personnel, agents, and dealers for such purpose; (j) Subject to Article 18, to amend this Agreement; (k) To require in any or all Partnership contracts that the General Partner shall not have any personal liability thereon and that the Person contracting with the Partnership is to look solely to the Partnership or its assets for satisfaction; (1) To execute, acknowledge, and deliver any and all instruments, on behalf of the Partnership or otherwise, which it shall deem necessary or appropriate to effectuate the right, power, and authority of the General Partner, and to take all such action in connection therewith as it shall in its discretion deem necessary or appropriate; (m) Subject to Section 3.3, to cause the Partnership to reinvest or make a commitment to reinvest all or any portion of Cash Available From Operations and Cash Available From Sale or Refinancing in additional Aircraft; (n) To purchase Aircraft and delivery positions in its own name or in the name of a nominee, a trust, or otherwise (and assume loans in connection therewith) and temporarily hold title thereto, for the purpose of facilitating the acquisition of such Aircraft, the borrowing of money, or the obtaining of financing by the. Partnership, or the completion of manufacture of the Aircraft or for any other purpose related to the business of the Partnership; (o) To cause the Partnership to purchase Aircraft from the General Partner or its Affiliates, so long as the price payable by the Partnership to the General Partner or any of its Affiliates for an Aircraft does not exceed the Fair Market Value of the Aircraft, provided that if such purchase occurs within three months of the acquisition of the Aircraft by the General Partner or its Affiliate, the price to the Partnership shall be the price paid by the General Partner or its Affiliates plus any related costs and holding expenses; (p) To cause the Partnership to sell Aircraft to the General Partner or its Affiliates on terms and conditions determined by the General Partner, so long as the price payable for such Aircraft is at least equal to the Fair Market Value of such Aircraft; (q) To prepare, file, and publish any and all instruments or documents necessary to enable the Partnership to transact business or otherwise to exist, operate, and be recognized as a limited partnership in jurisdictions outside California; (r) To cause the Partnership to endeavor to maintain a cash reserve for working capital, debt financing, normal repairs, replacements, contingencies, and other purposes deemed reasonably necessary by the General Partner, (s) To cause the Partnership to invest in partnerships or joint ventures; (t) To make, and to permit its Affiliates to make, loans to the Partnership on terms which do not exceed the points, charges, and interest which would be charged by unrelated lenders on comparable loans for the same purpose in the same locality, provided that, in no event will the Partnership be required to pay interest on any such loan at an annual rate greater than that permitted by law; (u) To apply proceeds of any Sale or Disposition of any Partnership Asset to payment of liabilities of the Partnership and to pay, collect, compromise, arbitrate, or otherwise adjust any and all other claims or demands of or against the Partnership or to hold such proceeds against the payment of contingent liabilities, known or unknown; 12 - (v) To purchase and maintain liability, indemnity, and any other insurance (including, without limitation, errors and omissions insurance and insurance to cover the obligations of the Partnership under Section 4.7), sufficient to protect the Partnership, the General Partner, its officers, directors, employees, agents, and Affiliates from those liabilities and hazards which may be insured against in the conduct of the business and in the management of the business and affairs of the Partnership; (w) To invest funds of the Partnership in interest-bearing accounts and short-term investments including, without limitation, obligations of the Federal, state, and local governments and their agencies, mutual funds (including money market funds), time deposits, commercial paper, and certificates of deposit of commercial banks, savings banks, or savings and loan associations; provided that the General Partner shall use its best efforts not to invest Partnership funds in such a manner that the Partnership will be considered to be holding itself out as being engaged primarily in the business of investing, reinvesting, or trading in securities or be deemed thereby to be an investment company under the Investment Company Act of 1940; (x) To make or revoke any election on behalf of the Partnership as is or may be permitted under the Code (including, but not limited to, elections under Section 754 of the Code and elections relating to tax benefit transfer leases) or under the taxing statute or rule of any state, local, foreign, or other jurisdiction, and to supervise the preparation and filing of all tax and information returns which the Partnership may be required to file; (y) To collect all rents and other charges from lessees of the Partnership Assets in which case the General Partner shall have full power and authority to request, demand, collect, receive, and receipt for all such rents and other charges, to institute legal proceedings in the name of the Partnership for the collection thereof and for the dispossession of any Person from Partnership Assets, to settle or compromise all such legal proceedings and any other disputes with respect to such rents and other charges, and to incur such expenses in connection therewith as the General Partner shall determine to be necessary or appropriate, which expenses may include, but not be limited to, the costs of counsel for any such matter; (z) To cause to be disbursed the amount required to be paid pursuant to any indebtedness of the Partnership; (aa) To pay, extend, renew, modify, adjust, submit to arbitration, prosecute, defend, or compromise, upon such terms as it may determine and upon such evidence as it may deem sufficient, any obligation, suit, liability, cause of action, or claim, including taxes, either in favor of or against the Partnership; (bb) To register, qualify, list, or report, or cause to be registered, qualified, listed, or reported, this Agreement or Units issued hereunder pursuant to the Securities Act of 1933, the Securities Exchange Act of 1934, any other securities laws of the United States, the securities laws of any state of the United States, the laws of any other jurisdiction, with any securities exchange, or pursuant to an automated quotation system of a registered securities association, as the General Partner deems appropriate; (cc) To distribute money or Partnership Assets to Partners and Assignees in accordance with Article 10, regardless of the source of such money or Partnership Assets, including, without limitation, money borrowed by the Partnership or by the General Partner on behalf of the Partnership; (dd) To cause the Partnership to issue Units and other Partnership Interests in exchange for Aircraft or for joint venture or partnership interests; (ee) To form operating partnerships wherein the Partnership is a partner; (ff) To sell any and all Partnership Assets. on terms and conditions determined by the General Partner, unless such sale is of all or substantially all of the Partnership Assets and is made 13 with a view to the dissolution, discontinuation, or material alteration of the business of the Partnership (which sale requires the approval of a Majority Interest pursuant to Section 7.9 (A) (2) ); (gg) To possess and exercise any additional rights and powers of a general partner under the partnership laws of California (including, without limitation, the California Act) and any other applicable laws, to the extent not inconsistent with this Agreement; and (hh) In general, to exercise in full all of the powers of the Partnership and to do any and all acts and conduct all proceedings and execute all rights and privileges, contracts, and agreements of any kind whatsoever, although not specifically mentioned in this Agreement, that the General Partner in its sole and absolute discretion may deem necessary or appropriate to the conduct of the business and affairs of the Partnership or to carry out the purposes of the Partnership. The expression of any power or authority of the General Partner in this Agreement shall not in any way limit or exclude any other power or authority which is not specifically or expressly set forth in this Agreement. 4.2 RESTRICTIONS ON AUTHORITY OF THE GENERAL PARTNER. Anything in this Agreement to the contrary notwithstanding, the General Partner shall have no authority to: (A) Take any action on any matter with respect to which approval of a Majority Interest (or any applicable greater percentage) is specifically required under this Agreement without such approval having occurred; (B) Cause the Partnership to commit those acts prohibited by Article 3; or (C) Cause the Partnership to make loans to the General Partner or its Affiliates. 4.3 COMPENSATION PLAN. The General Partner may establish and carry out pension, profitsharing, bonus, purchase, option, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions for employees of the General Partner or the Partnership, and any director or officer of the General Partner and any such plans, trusts, and provisions which provide for the issuance of Units or any other securities of the Partnership need not require the approval of any Unitholder. The General Partner may, to the fullest extent permitted by law, indemnify and purchase and maintain insurance on behalf of any fiduciary of such plans, trusts, or provisions, including without limitation health insurance, medical and dental reimbursement, life insurance, accident insurance, and disability insurance and, as provided in Section 4.7, liability insurance. Any costs and expenses of plans, trusts, or provisions shall be allocated to the General Partner or the Partnership to the extent of the benefits to employees of the General Partner or the Partnership, respectively. 4.4 LIABILITY OF THE GENERAL PARTNER. The General Partner shall only be liable to the Partnership and the Unitholders for actual fraud, gross negligence, or willful or wanton misconduct, but neither the General Partner, nor its Affiliates, nor any of the directors, offcers, employees, or agents of the General Partner or its Affiliates shall be liable to either the Partnership or any Limited Partner or to Persons who have acquired a Partnership Interest, whether as Assignees or otherwise, for errors in judgment or for any acts or omissions that do not constitute actual fraud, gross negligence, or willful or wanton misconduct. In all transactions for or with the Partnership, the General Partner shall act in good faith and in a manner which the General Partner believes to be in, or not opposed to, the best interests of the Partnership. 4.5 SIMILAR ACTIVITIES OF THE GENERAL PARTNER ARID PRESENTATION OF OPPORTUNITIES TO THE PARTNERSHIP. (A) Except as provided in Section 3.5, any Affiliate of the General Partner, and any director, officer, employee, and agent of the General Partner and its Affiliates shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Partnership, may engage in the acquisition, ownership, management, operation, development, leasing, and disposition of Aircraft and other equipment and any other business and activities, including business interests and activities in direct competition with the Partnership, for their own account and for the account of 14 others, without having or incurring any obligation to offer any interest in such assets, business or activities to the Partnership, or any Unitholder, and no other provision of this Agreement shall be deemed to prohibit any such Person from conducting such other business and activities. Neither the Partnership nor any of the Unitholders shall have any rights by virtue of this Agreement or the relationship created hereby in any business ventures of any Affiliate of the General Partner or any director, officer, employee, or agent of the General Partner or an Affiliate of the General Partner., (B) So long as Airlease Management Services, Inc. remains the General Partner, it shall not engage in any business activity other than those relating to its interest in or position as General Partner of the Partnership. (C) Except as may be provided in Section 3.5, the General Partner and its Affiliates and the directors, officers, employees, agents, and Affiliates of the General Partner and its Affiliates shall not have any obligation to the Partnership or the Unitholders to make investment opportunities available to the Partnership or to any other parties whether or not such opportunities would be suitable for investment by the Partnership. 4.6 ACTIVITIES OF OFFICERS AND DIRECTORS. Any officers and directors of the General Partner shall have the right to be otherwise employed by an entity or entities other than the Partnership on a part-time or full-time basis, except as determined by the General Partner. Nothing herein shall prevent any officer or director of the General Partner from becoming a Limited Partner or Assignee, whereupon such Person shall be entitled to all rights and shall be subject to all obligations relating to the Units and shall as to such Units be deemed a Limited Partner or Assignee, as applicable. 4.7 INDEMNIFICATION OF THE GENERAL FARMER AND ITS AFFILIATES. (A) The Partnership shall indemnify and hold harmless the General Partner, its Affiliates, and all Officers, directors, employees, and agents of the General Partner and its Affiliates (individually, an "Indemnitee") from and against any and all losses, claims, demands, costs, damages, liabilities, joint and several, expenses of any nature (including attorneys' fees and disbursements), judgments, fines, settlements, and other amounts arising from any and all claims, demands, actions, suits, or proceedings, civil, criminal, administrative or investigative, in which the Indemnitee may be involved, or threatened to be involved, as a party or otherwise, arising out of or incidental to the Initial Offering, any other offering of Units or interests of the Partnership, or the business of the Partnership, including, without limitation, liabilities under the Federal and state securities laws, regardless of whether the Indemnitee continues to be a General Partner, an Affiliate, or an officer, director, employee, or agent of a General Partner or of an Affiliate at the time any such liability or expense is paid or incurred, if (i) the Indemnitee acted in good faith and in a manner he or it believed to be in, or not opposed to, the interests of the Partnership, and, with respect to any criminal proceeding, had no reasonable cause to believe his or its conduct was unlawful, and (ii) the Indemnitee's conduct did not constitute actual fraud, gross negligence, or willful or wanton misconduct. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendre, or its equivalent, shall not, in and of itself, create a presumption or otherwise constitute evidence that the Indemnitee acted in a manner contrary to that specified in (i) or (ii) above. (B) Expenses incurred by an Indemnitee in defending any claim, demand, action, suit, o: proceeding subject to this Section 4.7 shall, from time to time, be advanced by the Partnership prior to the final disposition of such claim, demand, action, suit, or proceeding upon receipt by the Partnership of an undertaking by or on behalf of the Indemnitee to repay such amount if it shall be determined that such Person is not entitled to be indemnified as authorized in this Section 4.7. (C) The indemnification provided by this Section 4.7 shall be in addition to any other rights to which those indemnified may be entitled under any agreement, vote of the Partners, as a matter of law or equity, or otherwise, both as to an action in the Indemnitee's capacity as the General Partner, an Affiliate thereof, or as an officer, director, employee, or agent of the General Partner or an Affiliate thereof, and as to an action in another capacity, and shall continue as to an Indemnitee who has ceased 15 to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns, and administrators of the Indemnitee. (D) The Partnership may purchase and maintain insurance on behalf of the General Partner and such other Persons as the General Partner shall determine against any liability that may be asserted against or expense that may be incurred by such Person in connection with the Initial Offering, any other offering of Units or interests of the Partnership, and the business of the Partnership, regardless of whether the Partnership would have the power to indemnify such Person against such liability under the provisions of this Agreement. (E) For purposes of this Section 4.7, the Partnership shall be deemed to have requested an Indemnitee to serve as fiduciary of an employee benefit plan whenever the performance by it of its duties to the Partnership also imposes duties on, or otherwise involves services by, it to the plan or participants or beneficiaries of the plan; excise taxes assessed on an Indemnitee with respect to an employee benefit plan pursuant to applicable law shall be deemed "fines" within the meaning of paragraph (A) of this Section 4.7; and action taken or omitted by the Indemnitee with respect to an employee benefit plan in the performance of the Indemnitee's duties for a purpose reasonably believed by the Indemnitee to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is in, or not, opposed to, the best interests of the Partnership. (F) Except as set forth in the next sentence below, any indemnification hereunder shall be satisfied solely out of the assets of the Partnership. The Unitholders shall not be subject to personal liability by reason of these indemnification provisions; provided, however, that to the extent that any Unitholder or former Unitholder shall recover from any Indemnitee any amount that is subject to indemnification hereunder, such Unitholder or former Unitholder shall have personal liability to the Partnership and the. Indemnitee under this Section 4.7 for reimbursement to the extent of such amount. (G) An Indemnitee shall not be denied indemnification in whole or in part under this Section 4.7 by reason of the fact that the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement. (H) The provisions of this Section 4.7 are for the benefit of the Indemnitees and shall not be deemed to create any rights for the benefit of other Persons. 4.8 OTHER MATTERS CONCERNING THE GENERAL PARTNER. (A) The General Partner may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties. (B) The General Partner may execute any of its powers or perform any of its duties either directly or by or through agents, including, without limitation, any Related Person. The General Partner may consult with counsel, accountants, appraisers, management consultants, investment bankers, and other consultants and advisers selected by it (who may serve as such for the Partnership or any Related Person) and any opinion of such Person as to matters which the General Partner believes to be within its professional or expert competence (including, without limitation, any opinion of legal counsel that the Partnership would likely prevail with respect to any matter) shall be full and complete authorization and protection in respect to any action taken or suffered or omitted by the General Partner hereunder in good faith and in accordance with that opinion. The General Partner shall not be responsible for the misconduct, negligence, acts, or omissions of any such Person and shall assume no obligations in connection therewith other than the obligation to use due care in the selection of such Persons. (C) Any and all fees, commissions, compensation, and other consideration received by the General Partner or a partner, director, officer, agent, employee, or Affiliate of the General Partner 16 permitted hereunder shall be the exclusive property of the recipient, in which the Partnership shall have no right or claim. 4.9 AGREEMENTS WITH THE GENERAL PARTNER OR A RELATED PERSON. (A) Subject to the provisions of this Section 4.9 and Section 5.8, the General Partner and any Related Person may deal with the Partnership in connection with carrying out the business of the Partnership or otherwise, as an independent contractor or as an agent for others, and may receive from such others or from the Partnership profits, compensation, commissions, or other amounts which the General Partner in good faith believes to be reasonable without having to account to the Partnership therefore. (B) The satisfaction of any one of the following conditions shall be a complete and absolute defense to any claim of invalidity or for damages or other relief with respect to any agreement, act, matter, or transaction between the Partnership and the General Partner or a Related Person based upon the fact that the General Partner or Related Person is a party thereto and shall constitute a determination that the agreement, act, matter, or transaction was fair and reasonable to and in the best interests of the Partnership: (1) The material facts as to the agreement, act, matter, or transaction and as to the, relationship or interest of the General Partner or Related Person are fully disclosed or known to (a) any directors (or Persons in a similar role with respect to an entity other than a corporation) of the General Partner who are not interested in the agreement or transaction (other than by virtue of their ownership of capital stock of an Affiliate of the General Partner), including any directors who are members of a committee organized to evaluate transactions in which any party has an actual or potential conflict of interest (the "Audit Committee") and a majority of such directors of the General Partner affirmatively vote in good faith to authorize, approve, or ratify the agreement, act, matter, or transaction or (b) the Audit Committee and a majority of the directors who are members of the Audit Committee affirmatively vote in good faith to authorize, approve, or ratify the agreement, act, matter, or transaction; or (2) The material facts as to the agreement, act, matter, or transaction and as to the relationship or interest of the General Partner or Related Person are fully disclosed or known to the Limited Partners and such agreement, act, matter, or transaction is specifically authorized, approved, or ratified by a Majority Interest (excluding for purposes of computing the outstanding Units and the Units eligible to vote all Units held by the General Partner or Related Persons); or (3) The agreement, act, matter, or transaction is fair and reasonable to the Partnership at the time it is authorized, approved, or ratified by the General Partner. The Audit Committee will be composed on and after the Closing Date of individuals who are directors but not officers or employees of the General Partner or any Affiliate of the General Partner. (C) The failure of the Partnership to submit any agreement, act, matter, or transaction under Section 4.9 (B) (1) or Section 4.9 (B) (2) shall not create any presumption or inference or otherwise be considered evidence that the agreement, act, matter, or transaction was not fair and reasonable to and in the best interests of the Partnership. (D) Each of the Unitholders by acceptance of the Units hereby approves, ratifies, and confirms the execution, delivery, and performance of all agreements, acts, matters, or transactions described in the prospectus contained in the Registration Statement and authorizes, ratifies, and confirms such execution, delivery, and performance by the General Partner on behalf of the Partnership, without any further act, approval, or vote of the Unitholders or the Partnership. Any action taken by the General Partner pursuant to the terms of any such agreement or with respect to any such matter or transaction shall not constitute a breach by the General Partner of any duty that the General Partner may owe the Partnership or the Unitholders under this Agreement or under applicable law. 17 4.10 SUBCONTRACTING BY GENERAL PARTNER. The General Partner may subcontract to third parties (including Affiliates) a portion or all of the services to be rendered by it with respect to any particular Aircraft or the administration of the Partnership; provided, however, that (i) the General Partner shall at all times remain responsible for the overall management of the Aircraft and the Partnership and (ii) the Partnership shall not be required to pay for duplicative services, except as may be provided in Section 5.5. 4.11 CONVEYANCES. The General Partner has the express authority to convey title to any Partnership Asset by a conveyance executed by the General Partner alone on behalf of the Partnership. 4.12 ELECTION TO BE GOVERNED BY SUCCESSOR OR DIFFERENT LIMITED PARTNERSHIP LAW. The General Partner may, in its sole discretion and without any vote or concurrence of any Persons, elect for the Partnership to be governed by any statutes adopted to succeed or replace the California Act on or after the date any part of such successor or replacement statute takes effect and to procure any permits, orders, or approvals of any governmental authority in connection with such an election. In addition, the General Partner may, in its sole discretion, and without the vote or consent of any Persons, elect for the Partnership to be reorganized as a limited partnership governed by and under the laws of a jurisdiction other than California so long as it has received an opinion of counsel that such transaction will not result in a termination of the Partnership for tax purposes so as to adversely affect Unitholders. 4.13 MINIMUM NET WORTH OF THE GENERAL PARTNER. The General Partner shall use its best efforts to have at all times a net worth at least equal to (a) the amounts sufficient to meet all net worth requirements of (i) the Code and (ii) the Service for issuing advance rulings regarding the status of a partnership as such for Federal income tax purposes, as currently in effect and as hereafter amended to assure that the Partnership will be classified for Federal income tax purposes as a partnership and not as .an association taxable as a corporation or (b) an amount determined by counsel to the General Partner sufficient for such counsel to render an opinion that the Partnership will be taxed as a partnership and not as an association taxable as a corporation for Federal income tax purposes. Such net worth requirement may be satisfied, in whole or in part, by the provision to the General Partner by its parent corporation of non-interest bearing demand notes of such parent corporation. The General Partner will not distribute dividends to its stockholders during any period in which the Partnership is, or is expected to be, in material financial difficulty. The General Partner will hold its interest in the Partnership for its own account, and will not agree to act as a nominee or agent for Limited Partners in a manner that would adversely affect the federal income tax treatment of the Partnership. ARTICLE 5 COMPENSATION AND REIMBURSEMENT OF EXPENSES TO THE GENERAL PARTNER AND ITS AFFILIATES 5.1 ACQUISITION FEE. The Partnership shall pay to the General Partner or an Affiliate thereof an Acquisition Fee for each Aircraft acquired by the Partnership, including but not limited to the Aircraft involved in the PSA Transaction, payable upon its acquisition by the Partnership, as follows: 11h% of the Aircraft Cost for the first $50 million of each transaction, and 1% of the Aircraft Cost for the balance over $50 million. However, in the event the Partnership purchases for cash (but not Units) an Aircraft from the General Partner or its Affiliates, the Acquisition Fee shall be based on the cost of the Aircraft to the General Partner or Affiliate, and not the Aircraft Cost to the Partnership. The Acquisition Fee shall compensate the General Partner for seeking out and evaluating investment opportunities, negotiating the initial lease, and performing functions otherwise necessary to consummate the purchase and initial lease of Aircraft. In addition, the Partnership shall reimburse the General Partner for direct out-of-pocket expenses in connection with such activities. 18 5.2 MANAGEMENT FEE. (A) The Partnership shall pay a Management Fee to the General Partner, payable monthly, equal to '/, of 1% per annum of the Partnership's net worth (total assets less total liabilities calculated in accordance with generally accepted accounting principles) as of the beginning of each month, plus 1% of Net Revenues for such month. Said Management Fee shall be for certain Aircraft management services as follows: lease management; collection of lease income; leasing-related services; payment of operating expenses; periodic physical inspections; servicing indebtedness secured by Aircraft; general supervision of lessees to assure that they are properly utilizing and operating Aircraft; arranging maintenance and related services with respect to Aircraft; and supervising, monitoring; and reviewing services performed by others in respect of Aircraft. In addition, the Partnership shall reimburse the General Partner for direct out-of-pocket expenses in connection with such activities. (B) At the time of each monthly payment of the Management Fee, if in the judgment of the General Partner and assuming that all contracts of the Partnership are fully performed, Cash Available From Operations will not be sufficient during calendar year 1986 or 1987 to make an annualized distribution of $2.16 per Unit, up to an aggregate of $375,000 of the Management Fee for calendar years 1986 and 1987 shall not be payable to the General Partner and shall be deferred until such year as the General Partner believes, assuming that all contracts are fully performed, that there will be sufficient Cash Available From Operations to make a $2.16 per Unit distribution after payment of such deferred Management Fee. If it is later determined during any such year that Cash Available From Operations, assuming that all contracts had been fully performed, would not have been sufficient to make a $2.16 per Unit distribution, the General Partner shall return that portion of the deferred Management Fee which has been paid. The Management Fee for each calendar year after 1987 shall be payable regardless of the amount of Cash Available From Operations. 5.3 DISTRIBUTIONS AND ALLOCATIONS. The General Partner shall be entitled to the distributions and allocations allocated to the General Partner in Articles 9 and 10. 5.4 DISPOSITION OR REMARKETING FEE. The Partnership shall pay a Disposition or Remarketing Fee to the General Partner or an Affiliate thereof as the case may be, of (i) 5% of the Sales Proceeds of the Aircraft payable upon receipt by the Partnership of proceeds of the sale or a casualty loss, (ii) 4% of the rental payments when received of an Aircraft re-leased (except rentals pursuant to fixed-price lease renewals agreed to at the time the original lease is executed), payable upon receipt of each rental payment. The Disposition or Remarketing Fee shall compensate the General Partner for seeking out and evaluating sale or re-lease opportunities, negotiating such sale or re-lease, and performing functions otherwise necessary in connection with the sale or re-lease of Aircraft. In addition, the Partnership will reimburse the General Partner for direct out-of-pocket expenses in connection with such activities. 5.5 FEES PAID TO THIRD PARTIES. The fees payable to the General Partner or its Affiliates pursuant to Sections 5.1 and 5.4 shall not be reduced by any fees or expenses paid by the Partnership to parties not affiliated with the General Partner in connection with the transactions enumerated in such Sections. 5.6 EXPENSES OF THE GENERAL PARTNER. The Partnership shall pay all expenses, disbursements, advances, salaries, general and administrative expenses, and other costs, incurred by the General Partner or its Affiliates and arising out of or in connection with the conduct of Partnership business, other than as set forth in Section 3.6(A), as determined in good faith by the General Partner. The Partnership shall also reimburse the General Partner director fees paid to directors of the General Partner who are not otherwise affiliated with the General Partner or its Affiliates. The General Partner and its Affiliates shall be promptly reimbursed by the Partnership for any such items. 5.7 REIMBURSEMENT FOR SUMS ADVANCED TO THE PARTNERSHIP. To the extent that the General Partner or its Affiliates have advanced funds to the Partnership for direct out-of-pocket expenses in connection with the Partnership's organization and the Initial Offering, the General Partner or its Affiliates shall be 19 entitled to reimbursement of such funds, without interest, payable upon consummation of the Initial Offering. To the extent that the General Partner or its Affiliates otherwise advances or loans money to the Partnership, interest and charges thereon shall be payable pursuant to Section 4.1(t). 5.8 ADDITIONAL SERVICES TO THE PARTNERSHIP. The General Partner and its Affiliates shall have the right to render any other services to the Partnership deemed necessary or appropriate by the General Partner, and to receive payments and fees from the Partnership in connection therewith not to exceed that customarily received by third parties for similar services. 5.9 FEES PAYABLE ON CESSATION AS THE GENERAL PARTNER. If the General Partner ceases to be a general partner of the Partnership, any fee, commission, or reimbursement of expenses payable according to the provisions of this Agreement which is then accrued, but not yet paid, shall be paid by the Partnership to the General Partner or, if appropriate, an Affiliate thereof, in cash, within 60 days after the date of its cessation as the General Partner. ARTICLE 6 THE LIMITED PARTNERS AND ASSIGNEES 6.1 LIMITED LIABILITY. Except to the extent required by California law, the liability of each Unitholder (in the capacity as a Unitholder) for the losses, debts, and obligations of the Partnership shall be limited to the Unitholder's Capital Contribution and the Unitholder's share of any undistributed assets of the Partnership. Any obligation to return distributions and to pay interest shall be the sole obligation of the Unitholders and not of the General Partner. 6.2 RESTRICTIONS ON LIMITED PARTNERS ARID ASSIGNEES. (A) No Unitholder shall participate as such in the management and control of the business of the Partnership or transact any business for the Partnership, unless such Unitholder is also a General Partner or other Person employed or engaged to transact any such business by or on behalf of a General Partner or the Partnership. The transaction of any such business by any such Person employed or engaged to do so by or on behalf of the General Partner or the Partnership shall not affect, impair, or eliminate the limitations on the liability of the Unitholder under this Agreement or applicable law. (B) No Unitholder shall have the power to represent, sign for, or bind the General Partner or the Partnership, unless such Unitholder is also a general partner of the Partnership or other Person given such power in a capacity other than as a Unitholder by the General Partner. 6.3 OUTSIDE ACTIVITIES. A Unitholder shall be entitled to and may have business interests. and engage in business activities in addition to those relating to the Partnership, including business interests and activities in direct competition with the Partnership. Neither the Partnership nor any of the Unitholders shall have any rights by virtue of this Agreement in any independent business ventures of any other Unitholder. 6.4 NO WITHDRAWAL OF CONTRIBUTIONS. No Unitholder shall have the right to withdraw the Unitholder's Capital Contribution to the Partnership. 6.5 RETURN OF CAPITAL. There is no agreement for, nor time set for, return of any contribution of any Unitholder. To the extent funds are available therefore, the General Partner may return said contributions out of Cash Available From Operations or out of Cash Available From Sale or Refinancing, and to the extent of available funds, the General Partner shall return said capital at ' termination of the Partnership, as hereinafter set forth. 6.6 DEATH, INCOMPETENCY, OR BANKRUPTCY OF A LIMITED PARTNER OR ASSIGNEE. The death, adjudication of incompetency, or bankruptcy of a Unitholder shall not dissolve the Partnership. If a Unitholder who is an individual dies or a court of competent jurisdiction adjudges the Unitholder to be incompetent to manage the Unitholder's property, the Unitholder's executor, administrator, guardian, conservator, or other legal representative may exercise all the Unitholder's rights for the purposes of 20 settling the Unitholder's estate or administering the Unitholder's property. The executor, administrator, guardian, conservator, or other legal representative, as applicable, of the deceased, incompetent or bankrupt Unitholder shall nevertheless continue to be liable for all of the Unitholder' s obligations as a Unitholder. ARTICLE 7 MEETINGS AND VOTING 7.1 MEETINGS. Meetings of the Limited Partners may be called by the General Partner or by Limited Partners owning (as Limited Partners and not as Assignees) at least 10% of the Units and Depositary Units. Any Limited Partner calling a meeting shall specify the number of Units and Depositary Units as to which the Limited Partner is exercising the right to call a meeting, and only those specified Units and Depositary Units shall be counted for the purpose of determining whether the required 10% standard of the preceding sentence has been met. Limited Partners may call a meeting only as to matters on which they have the right to vote. Limited Partners shall call a meeting by delivering to the General Partner one or more calls in writing stating that the signing Persons wish to call a meeting and indicating the purposes for which the meeting is to be called. Action at the meeting shall be limited to those matters specified in the call of the meeting. Within 60 days after receipt of such call, or within such a greater time as may be reasonably necessary for the Partnership to comply with any statutes, rules, regulations, listing agreements, or similar requirements governing the holding of a meeting or the solicitation of proxies for use at such a meeting, the General Partner shall send a notice of the meeting to the Limited Partners either directly or indirectly through the Depositary. A meeting shall be held at a time and place determined by the General Partner on the date not less than 10 nor more than 60 days after the mailing of notice of the meeting. Partners may vote either in person or by proxy at any meeting. Each Limited Partner shall have one vote for each Unit or Depositary Unit as to which he has been admitted to the Partnership as a Limited Partner. No matter shall be voted upon by Limited Partners at any meeting of the Limited Partners or consented to by the Limited Partners unless the requirements of Section 7.10 shall be satisfied as to such matter. 7.2 NOTICE OF MEETING. Notice of a meeting called pursuant to Section 7.1 and any report shall be given either personally or by mail or other means of written communication, addressed to the Partner at the address of the Partner appearing on the books of the Partnership or Depositary. The notice or report shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit or certificate of mailing of any notice or report in accordance with the provisions of this Article 7, executed by the General Partner, transfer agent, registrar of Depositary Units, or mailing organization shall be prima facie evidence of the giving of notice. If any notice or report addressed to the Partner at the address of the .Partner appearing on the books of the Partnership is returned to the Partnership by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver it, said notice or report and any subsequent notices or reports shall be deemed to have been duly given without further mailing if they are available for the Partner at the principal executive office of the Partnership for a period of one year from the date of the giving of the notice or report to all other Partners. 7.3 RECORD DATE. For purposes of determining the Limited Partners entitled to notice or to vote at a meeting of the Limited Partners or to give consents without a meeting as provided in Section 7.8, the General Partner may set a Record Date which shall be not less than 10 days nor more than 60 days before the date of the meeting (unless such requirement conflicts with any rule, regulation, guideline, or requirement of any securities exchange or market system on which the Depositary Units are listed for trading, in which case the rule, regulation, guideline, or requirement of such securities exchange. or market system shall govern). 7.4 ADJOURNMENT. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting, and a new Record Date need not be fixed, if the time and place thereof are announced at the meeting at which the adjournment is taken unless such adjournment 21 shall be for more than 45 days. At the adjourned meeting the Partnership may transact any business which might have been permitted to be transacted at the original meeting. If the adjournment is for more than 45 days, or if a new Record Date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in accordance with this Article 7. 7.5 WAIVER OF NOTICE; CONSENT TO MEETING; APPROVAL OF MINUTES. The transactions of any meeting of Limited Partners, however called and noticed, and wherever held, are as valid as though had at a meeting duly held after regular call and notice, if a quorum is present either in person or by proxy, and if, either before or after the meeting, each of the Limited Partners entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All waivers, consents, and approvals shall be filed with the Partnership records or made a part of the minutes of the meeting. Attendance of a Limited Partner at a meeting shall constitute a waiver of notice of the meeting, except when the Limited Partner objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened; and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters required to be included in the notice of the meeting, but not so included, if the objection is expressly made at the meeting. 7.6 QUORUM. A Majority Interest represented in person or by proxy shall constitute a quorum at a meeting of Limited Partners. At any meeting of the limited Partners duly called and held in accordance with this Agreement at which a quorum is present, the act of a Majority. Interest shall be deemed to constitute the act of all Limited Partners unless a higher percentage is required with respect to such action under the provisions of this Agreement. The Limited Partners present at a duly called or held meeting at which a quorum is present may continue to transact business until adjournment notwithstanding the withdrawal of enough Limited Partners to leave less than a quorum, if any action taken (other than adjournment) is approved by the requisite percentage of interests of limited Partners specified in this Agreement. In the absence of a quorum, any meeting of limited Partners may be adjourned from time to time by the vote of a majority of the Units and Depositary Units represented either in person or by proxy, but no other business may be transacted, except as provided in Section 7.1. 7.7 CONDUCT OF MEETING. The General Partner shall have full power and authority concerning the manner of conducting any meeting of limited Partners or the solicitation of written consents, including without limitation the determination of Persons entitled to vote, the existence of a quorum, the satisfaction of the requirements of Section 7.10, the conduct of voting, the validity and effect of any proxies, the appointment of proxies and inspectors of votes, the revocation of written consents and the determination of any controversies, votes, or challenges arising in connection with or during the meeting or written consents. The General Partner shall designate a Person to serve as chairman of the meeting and shall further designate a Person to take the minutes of the meeting, in either case including, without limitation, a partner, director, or officer of a General Partner. All minutes shall be kept with the records of the Partnership maintained by the General Partner. Depositary Units evidenced by Depositary Receipts held in nominee or street name accounts will be voted by the broker (or other nominee) pursuant to instructions from the Limited Partner. 7.8 Action Without a Meeting. Any action that may be taken at a meeting of the Limited Partners may be taken without a meeting if a consent in writing setting forth the action so taken is proposed by the General Partner and signed by Limited Partners owning not less than the minimum percentage of interests that would be necessary to authorize or take such action at a meeting at which all the Limited Partners were present and voted. Prompt notice of the taking of action without a meeting shall be given to the limited Partners who have not consented in writing. The General Partner may specify that any written ballot submitted to limited Partners for the purpose of taking any action without a meeting shall be returned to the Partnership within the time, not less than 20 days. specified by the General Partner. If a ballot returned to the Partnership does not vote all of the Units or Depositary Units held by the Limited Partner, the Partnership shall be deemed to have failed to 22 receive a ballot for the Units or Depositary Units which were not voted. The procedures for action without a meeting set forth in this Section 7.8 shall be in lieu of those contained in the California Act. 7.9 VOTING RIGHTS. (A) Subject to Section 7.10, the Limited Partners shall have the right to take the following actions upon the approval of at least a Majority Interest: (1) Amendment of this Agreement, subject to Article 18; (2) Dissolution, discontinuation, or material alteration of the business, or sale of substantially all of the assets of the Partnership with a view to the foregoing, if elected by the General Partner pursuant to Section 16.1(B); (3) Approval or disapproval of any merger, consolidation, or combination of the business operations of the Partnership with those of any other Person (except any merger, consolidation, or combination affected solely to reorganize the Partnership as a limited partnership governed by and under the laws of a jurisdiction other than California pursuant to the discretion of the General Partner contained in Section 4.12); (4) When the Partnership would otherwise dissolve and its business would not otherwise be continued pursuant to the terms of this Agreement, the election to continue the Partnership or election of a new General Partner to continue the business of the Partnership, unless a unanimous vote is required pursuant to Section 7.9(C); (5) Approval or disapproval of any matter submitted to the Limited Partners pursuant to Section 4.9; (6) Except as provided in Article 15, election of a General Partner; and (7) As expressly provided in Sections 3.1, 8.4(A), 13.2(A), 15.1(C), 16.2 and 16.3. (B) The General Partner may be removed as a general partner of the Partnership upon the approval of Limited Partners holding (as Limited Partners and not as Assignees) 6635% of the outstanding Units and Depositary Units upon the terms set forth in Section 15.2(B). (C) Approval of all Limited Partners shall be required for the admission of a General Partner or the election to continue the business of the Partnership after the General Partner ceases to be a General Partner (other than by removal)-where there is no remaining General Partner. (D) Limited Partners shall have no other voting rights, notwithstanding the provisions of the California Act. (E) The General Partner and its Affiliates shall have the right to vote any Units and Depositary Units held by them with respect to any matter submitted to the Partners. 7.10 VOTING RIGHTS CONDITIONAL. The voting rights set forth in Section 7.9 shall not be exercised unless the Partnership shall have received the favorable written opinion of counsel acceptable to the General Partner to the effect that the exercise of such right and the action proposed to be taken with respect to any particular matter (1) shall not cause the Limited Partners to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to subject the Limited Partners to unlimited liability therefor, (2) will not cause the Partnership to be treated as an association taxable as a corporation for Federal income tax purposes (except upon approval pursuant to Section 18.3(B)), and (3) is otherwise permissible under the California Act. 23 ARTICLE 8 CAPITAL CONTRIBUTIONS, TRANSFER TO UNDERWRITERS, AND CAPITAL ACCOUNTS 8.1 CAPITAL CONTRIBUTION OF THE GENERAL PARTNER. Concurrently with the execution of the original limited partnership agreement of the Partnership, the General Partner made a capital contribution in ,the amount of Nine Hundred and Ninety Dollars ($990) in cash. Upon a closing of the Initial Offering on the Closing Date, the General Partner shall further contribute in cash or cash equivalents a sum so that its total capital contribution equals 1% of all contributions to the Partnership (including contributions as a result of the exercise of the over-allotment option set forth in Section 8.3(B) and contributions by U.S. Holding pursuant to Section 8.4(A)). The General Partner shall not be required to contribute any additional sums to the Partnership, except pursuant to Section 16.8. 8.2 CAPITAL CONTRIBUTION OF THE ORGANIZATIONAL LIMITED PARTNER. Concurrently with the execution of the original limited partnership agreement of the Partnership, the Organizational Limited Partner made a Capital Contribution in the amount of Ten Dollars ($10) in cash and received one Unit. 8.3 SALE OF UNITS TO UNDERWRITERS. (A) INITIAL PUBLIC OFFERING. Pursuant to the Underwriting Agreement, the Underwriters shall purchase Units from the Partnership at the Initial Unit Issue Price in connection with the Initial Offering, as more fully described in the Registration Statement. Concurrently with the closing of the Initial Offering, each Underwriter, as an Initial Limited Partner, shall contribute to the Partnership, in exchange for that number of Units designated in the Underwriting Agreement to be purchased by each such Underwriter, cash in an amount designated in the Underwriting Agreement. (B) OVER-ALLOTMENT OPTION. In the event that the Underwriters exercise the option granted to them in the Underwriting Agreement to acquire certain additional Units, in addition to Units purchased pursuant to Section 8.3(A), to cover over-allotments, the Underwriters shall contribute to the Partnership, in exchange for that number of Units to be purchased by such Underwriters pursuant to the exercise of such option, cash in an amount designated in the Underwriting Agreement pursuant to the exercise of such option. For purposes of this Agreement all Units issued pursuant to this Section 8.3(B) or Section 8.4(A) shall be deemed issued concurrently on the Closing Date irrespective of whether or not the issuance actually occurs on the Closing Date. 8.4 PURCHASE OF UNITS OR SECURITIES BY THE GENERAL PARTNER OR ITS AFFILIATES. (A) Simultaneously with a closing of the Initial Offering, U.S. Holding shall purchase from the Partnership 1,025,000 Units, at an amount per Unit acquired equal to the Initial Unit Issue Price. Without the prior approval of at least a Majority Interest, U.S. Holding may not sell (except to Related Entities) Units representing 20% of the total Units outstanding immediately after completion of the Initial Offering (including the Units sold to NAAF and U.S. Holding) for at least five years, and so long as Airlease Management Services, Inc. or a Related Entity is a general partner of the Partnership, U.S. Holding (or Related Entities) must retain at least 25% of such Units. Notwithstanding the foregoing, the Units may be transferred to Related Entities of the General Partner. (B) The General Partner and any Affiliate of the General Partner may acquire Partnership Interests in addition to those acquired by any of those Persons on the Closing Date, in the Initial Offering or at any time subsequent thereto, and shall be entitled to exercise all rights of a Limited Partner or Assignee, as applicable, relating to such interests. (C) The General Partner or an Affiliate thereof shall be treated the same as all other Limited Partners or Assignees with respect to any Units purchased by them. The Capital Contribution of each Unit purchased pursuant to Section 8.4(A) shall be deemed to be the Initial Unit Issue Price. (D) The General Partner or its Affiliates may contribute property to the Partnership, from time to time, in exchange for Units or Partnership Interests provided the Units or Partnership Interests 24 received in such exchange have a market value not greater than the then Fair Market Value of the contributed property. 8.5 PURCHASE OF UNITS BY AFFILIATE OF PSA. (A) Simultaneously with the first closing of the Initial Offering, NAAF shall contribute to the Partnership, in exchange for 600,000 Units, an amount per Unit acquired equal to the Initial Unit Issue Price. (B) NAAF shall be treated the same as all other Limited Partners or Assignees with respect to Units purchased by it. The Capital Contribution of each Unit purchased pursuant to Section 8.5(A) shall be deemed to be the Initial Unit Issue Price. (C) The other terms of the purchase by NAAF, including but not limited to registration rights granted to NAAF, shall be set forth in an agreement between the Partnership and NAAF, containing such terms, conditions, representations, and warranties as determined in the sole discretion of the General Partner. 8.6 UNITS NOT ASSESSABLE. Units shall not be assessable, and the Unitholders shall not be required to make any additional Capital Contribution. ' 8.7 NO INTEREST ON CAPITAL CONTRIBUTION. Unitholders shall not receive interest on or with respect to all or any part of their Capital Contribution or on the balances in their Capital Accounts. 8.8 CREDITORS' INTEREST IN THE PARTNERSHIP. No creditor who makes a loan to the Partnership shall have or acquire at any time as a result of making the loan any direct or indirect interest in the profits, capital, or property of the Partnership other than as a creditor, unless otherwise specifically provided for in the loan documentation. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Partnership. 8.9 NATURE OF INTERESTS. All property owned by the Partnership, whether real or personal, tangible or intangible, shall be deemed to be owned by the Partnership as an entity, and none of the Unitholders shall have any direct ownership of such property. 8.10 SALE OF ADDITIONAL INTERESTS. (A) In order to raise additional capital, to acquire additional Aircraft or other assets, to redeem or retire Partnership debt, or for any other Partnership purpose, the General Partner is authorized to cause to be issued additional Units or Partnership Interests from time to time to the General Partner, Limited Partners, or to other Persons and to admit such Persons as Additional Limited Partners or security holders in the Partnership. Subject to Section 8.4(D), the General Partner shall have sole and complete discretion in determining the consideration and terms and conditions with respect to any future issuance of Units or any other interests of the Partnership. The General Partner shall have the power, in its sole discretion, without any further consent or approval of any Persons, to amend this Agreement to cause the Partnership to issue Units or Partnership Interests from time to time in one or more classes, or one or more series of such classes for such consideration and on such terms and conditions as the General Partner in good faith determines to be in the best interests of the Partnership, which classes or series shall have such rights, preferences, privileges, and restrictions as shall be fixed by the General Partner in the exercise of its sole discretion, including, without limitation, matters relating to (i) the allocation of items of Partnership income, gain, loss, deduction, and credit to each such class or series of Units or interests; (ii) the right of each such class or series of Units or interests to share in Partnership distributions; (iii) the rights of each such class or series of Units or interests upon dissolution and liquidation of the Partnership; (iv) the price at which and the terms and conditions, if any, upon which each such class or series of Units or interests may be redeemed by the Partnership; (v) the rate at which and the terms and conditions upon which each such class or series of Units or interests may be converted into another class or series of Units or interests of the Partnership, if any such class or series is convertible into other securities of the Partnership; (vi) the terms and conditions upon which each such class or series of Units or interests may be issued, deposited with the 25 Depositary, evidenced by Depositary Receipts, and assigned or transferred; and (vii) the right of each such class or series of Units or interests to vote on Partnership matters, including matters relating to the relative rights, preferences, privileges, and restrictions of each such class or series. The General Partner is also authorized to cause the issuance of any other type of security (including, without limitation, secured and unsecured debt obligations of the Partnership, debt obligations of the Partnership convertible into any class or series of Units or interests that may be issued by the Partnership, or options, rights, warrants, or appreciation rights relating to any class or series of Units or interests, any such debt obligations, or any combination of any of the foregoing) from time to time to Partners or other Persons on terms and conditions established in the sole discretion of the General Partner. (B) The General Partner shall do all things necessary to comply with the California Act, the Code or other applicable law, statute, rule, regulation, or guideline of any Federal, state or other governmental agency or any securities exchange on which the Depositary Units or other securities of the Partnership are listed for trading, and is authorized to do all things it deems necessary or advisable in connection with any such future issuance. 8.11 NO PREEMPTIVE RIGHTS. No Partner or Assignee, except pursuant to any future Units or securities issued by the Partnership pursuant to Section 8.10 that specifically provide therefore, shall have any preemptive, preferential, or other right - including, without limitation, with respect to (i) additional Capital Contributions to the Partnership, (ii) the issuance or sale of Units or other Partnership Interests, (iii) the issuance of any obligation, evidence of indebtedness, or other interest of or in the Partnership convertible into or exchangeable for, or carrying or accompanied by any rights to receive, purchase, or subscribe to, any Units, (iv) the issuance of any right of subscription to, or right to receive, any warrant or option for the purchase of any Units, or (v) the issuance or, sale of any other securities that may be issued or sold by the Partnership. 8.12 CAPITAL ACCOUNTS. (A) The Partnership shall maintain for each Partner a separate Capital Account in accordance with the rules of Treasury Regulation Section 1.704-1(b) (2) (iv). Such Capital Account shall be increased by (i) the cash amount or Net Agreed Value of all Capital Contributions made by such Partner to the Partnership pursuant to this Agreement and (ii) all items of Partnership income and gain (including income and gain exempt from tax) computed in accordance with Section 8.12(B) and allocated to such Partner pursuant to Section 9.2 and decreased by (iii) the cash amount or Net Agreed Value of all actual and deemed distributions of cash or property made to such Partner pursuant to this Agreement and (iv) all items of Partnership deduction and loss computed in accordance with Section 8.12(B) and allocated to such Partner pursuant to Section 9.2. (B) For purposes of computing the amount of any item of income, gain, deduction, or loss to be reflected in the Partners' Capital Accounts, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for Federal income tax purposes (including any method of depreciation, cost recovery, or amortization used for this purpose); provided that: (i) In accordance with the requirements of Section 704(c) of the Code, any deductions for depreciation, cost recovery, or amortization attributable to a Contributed Property shall be determined as if the adjusted basis of such property on the date it was acquired by the Partnership was equal to the Agreed Value of such property. Upon an adjustment pursuant to Section 8.12(D) (i) to the Carrying Value of any Partnership property subject to depreciation, cost recovery, or amortization, any further deductions for such depreciation, cost recovery, or amortization attributable to such property shall be determined as if the adjusted basis of such property was equal to the Carrying Value of such property immediately following such adjustment. 26 (ii) Any income, gain or loss attributable to the taxable disposition of any property shall be determined by the Partnership as if the adjusted basis of such property as of such date of disposition was equal in amount to the Partnership's Carrying Value with respect to such property as of such date. (iii) If the Partnership's adjusted basis in a depreciable or cost recovery property is reduced for Federal income tax purposes pursuant to Section 48 (q) (1) or 48 (q) (3) of the Code, the amount of such reduction shall, solely for purposes hereof, be deemed to be an additional depreciation or cost recovery deduction in the year such property is placed in service and shall be allocated among the Partners pursuant to Section 9.2. Any restoration of such basis pursuant to Section 48 (q) (2) of the Code shall be allocated in the same manner to the Partners to whom such deemed deduction was allocated (or their successors in interest). (iv) All fees and other expenses incurred by the Partnership to promote the sale of (or to sell) a Partnership Interest that can neither be deducted nor amortized under Section 709 of the Code shall, for purposes of Capital Account maintenance, be treated as an item of deduction and shall be allocated among the Partners pursuant to Section 9.2. (v) The computation of all items of income, gain, loss, and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Partnership and, as to those items described in Section 705 (a) (1) (B) or Section 705 (a) (2) (B) of the Code, without regard to the fact that such items are not includable in gross income or are neither currently deductible nor capitalizable for Federal income tax purposes. (C) Generally, a transferee of a Partnership Interest will succeed to the Capital Account relating to the Partnership Interest transferred. However, if the transfer causes a termination of the Partnership under Section 708 (b) (1) (B) of the Code, the Partnership properties shall be deemed to have been distributed in liquidation of the Partnership to the Partners (including the transferee of a Partnership Interest) and deemed recontributed by such Partners and transferees in reconstitution of the Partnership. In such event, the Carrying Values of the Partnership properties shall be adjusted immediately prior to such deemed distribution pursuant to Section 8.12 (D) (ii) (and such adjusted Carrying Values shall constitute the Agreed Values of such properties upon this deemed contribution to the reconstituted Partnership). The Capital Accounts of such reconstituted Partnership shall be maintained in accordance with the principles of this Section 8.12. (D) (i) Consistent with Treasury Regulation Section 1.704-1(b) (2) (iv) (f), upon an issuance of additional Units for cash or Contributed Property pursuant to Section 8.10, the Capital Accounts of all Partners and the Carrying Values of all Partnership properties shall, immediately prior to such issuance, be adjusted (consistent with the provisions hereof) upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to each Partnership property (as if such Unrealized Gain or Unrealized Loss had been recognized upon an actual sale of each such property, immediately prior to such issuance, and had been allocated to the Partners, at such rime, pursuant to Section 9.2). In determining such Unrealized Gain or Unrealized Loss, the aggregate fair market value of Partnership properties as of any date of determination shall be equal to the sum of (1) the Prescribed Asset Value as of such date and (2) the amount of any outstanding Partnership indebtedness, as of such date of determination, as determined in the discretion of the General Partner. The Carrying Values of the respective Partnership properties shall be adjusted according to their relative fair market values as determined by the General Partner using such method as it deems appropriate. (ii) In addition, in accordance with Treasury Regulation Section 1.704-1(b) (2) (iv) (e), immediately prior to the actual or deemed distribution of any Partnership property, the Capital Accounts of all Partners and the Carrying Values of all Partnership properties shall, immediately prior to any such distribution, be adjusted (consistent with the provisions hereof) upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to each Partnership property (as if such Unrealized Gain or Unrealized Loss had been recognized upon an actual sale of each property, immediately prior to such distribution, and had been allocated to the Partners, at such time, pursuant to Section 9.2). In 27 determining such Unrealized Gain or Unrealized Loss, the aggregate fair market value of Partnership properties as of any date of determination shall (1) in the case of a current distribution or a deemed distribution occurring as a result of a termination of the Partnership pursuant to Section 708 of the Code, be determined in the same manner provided in Section 8.12 (D) (i), or (2) in the case of a liquidating distribution pursuant to Section 16.5, be determined by the General Partner using such reasonable methods of valuation as it may adopt. 8.13 PURCHASE OR SALE OF UNITS. The General Partner may, on behalf of and for the account of the Partnership, purchase or otherwise acquire Units or Depositary Units and, following any such purchase or acquisition, may sell or otherwise dispose of such Units and Depositary Units. So long as such Units or Depositary Units shall be held by or on behalf of the Partnership, such Units or Depositary Units shall not be considered outstanding for any purpose. 8.14 REGISTRATION RIGHTS OF THE GENERAL PARTNER. (A) DEMAND RIGHTS. In the event that (i) the General Partner or an Affiliate thereof holds Units or securities of the Partnership which it desires to sell and (ii) Rule 144 of the Securities Act of 1933 (or any successor rule or regulation to Rule 144) is not available to enable such General Partner or Affiliate to dispose of the number of Units or securities it desires to sell at the time and in the manner that it desires to do so, then upon the request of the General Partner or Affiliate at any time between September 30, 1991 and September 30, 1996, the Partnership shall file with the Securities and Exchange Commission as promptly as practicable after receiving such request, and shall use its best efforts to cause to become effective, a registration statement under the Securities Act of 1933 on the appropriate form registering the offering and sale of the number of Units or securities specified by the requesting General Partner or Affiliate. In connection with any such registration pursuant to the preceding sentence, the Partnership promptly shall prepare and file such documents as may be necessary to register or qualify the Units or securities subject to such registration and under the securities laws of such states as the General Partner or Affiliate shall request, and shall do any and all other acts and things that may reasonably be necessary or advisable to enable the General Partner or Affiliate to consummate a public sale of such Units or securities in such states. Notwithstanding the foregoing, in no event shall the Partnership be required to effect a registration relating to the Units or securities pursuant to this Section 8.14 (A) more frequently than twice in any calendar year. Any registration statement filed pursuant hereto shall be continued in effect for a period of not less than 90 days following its effective date. All costs, fees; and expenses of such registration and offering shall be borne by the seller. U.S. Holding or its transferee shall have an additional demand registration right, at any time after October 10, 1987, to cause the Partnership to register and offer an amount of Units equal to (i) the number of Units purchased pursuant to Section 8.4 (A) less (ii) an amount equal to 20% of the total Units outstanding immediately after completion of the Initial Offering (including the Units sold to NAAF and U.S. Holding). All costs, expenses, and fees of such registration and offering shall be borne by the seller. Alternatively, U.S. Holding or its transferee may at any time after October 10, 1987 piggyback the number of Units computed under the preceding sentence on to a registration statement and offering by the Partnership, in which case U.S. Holding or its transferee shall only be liable for its directly incremental portion of the registration fee, blue sky fees, and underwriting discounts and commissions attributable to its Units. (B) PIGGYBACK RIGHTS. If at any time between September 30, 1991 and September 30, 1996 the Partnership shall register any of its securities for sale under the Securities Act of 1933, the Partnership, at the request of the General Partner or its Affiliates, shall include in such registration (and any related qualification under state securities laws) all or any portion of the Units or securities of the Partnership held by the General Partner or its Affiliates. However, if the managing underwriter of the offering reasonably determines that marketing factors require a limitation or exclusion of the number of Units or securities to be sold, the managing underwriter may reasonably limit or exclude the Units or securities of the General Partner or its Affiliates to be included in such registration. All costs, fees, and expenses of such registration and offering shall be borne by the Partnership, except that the seller of the Units shall be liable for its directly allocable incremental portion of the registration fee, blue sky 28 fees, and underwriting discounts and commissions with respect to the Units or securities piggybacked on to the Partnership's registration. (C) INDEMNIFICATION. In the event of any registration under the Securities Act of 1933 of any Units or securities pursuant to this Section 8.14, then, in addition to and not in limitation of the Partnership's obligation under Section 4.7, the Partnership shall indemnify and hold harmless the General Partner and its Affiliates and any underwriter engaged in connection with any registration referred to in this Section 8.14, and each other person, if any, who controls any such underwriter within the meaning of the Securities Act of 1933, against any losses, claims, demands, actions, causes of action, assessments, damages, liabilities (joint or several), costs, and expenses (including, without limitation, interest, penalties, and reasonable attorneys' fees and disbursements), resulting to, imposed upon, or incurred by any indemnified person, directly or indirectly, under the Securities Act of 1933 or otherwise (hereinafter referred to in this Section 8.14(C) as a "claim" and in the plural as "claims"), based upon, arising out of, or resulting from any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which any Units or securities were registered under the Securities Act of 1933 or any state securities laws, in any preliminary prospectus (if used prior to the effective date of such registration statement), or in any summary or final prospectus or in any amendment or supplement thereto (if used during the period the Partnership is required to keep the registration statement in effect), or arising out of, based upon, or resulting from the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements made therein in light of the circumstances under which they were made not misleading; provided, however, that the Partnership shall not be liable to the extent that any such claim arises out of, is based upon, or results from an untrue statement or alleged untrue statement or omission or alleged omission made in such registration statement, such preliminary, summary, or final prospectus, or such amendment or supplement in reliance upon and in conformity with written information with respect to the indemnified Person furnished to the Partnership by or on behalf of such indemnified Person specifically for use in the preparation thereof. (D) SURVIVAL. The rights provided in this Section 8.14 shall survive any cessation of the General Partner as a general partner of the Partnership. (E) TRANSFER. The rights in this Section 8.14 are fully transferable by the General Partner or its Affiliates to any assignee of Units or securities so long as at least 250,000 Units are assigned to such assignee. 8.15 CHANGES IN OUTSTANDING UNITS. The General Partner is authorized to effect any Unit split or recombination or declare and pay pro rata distributions of Units to the Unitholders. ARTICLE 9 TAX ALLOCATION OF INCOME AND LOSSES 9.1 APPORTIONMENT OF NET INCOME, NET LOSS, AND DISTRIBUTIONS. Except as otherwise provided in this Article 9, Net Income, Net Loss, and cash distributions shall be allocated at the close of each month and the portion of Net Income, Net Loss, and cash distributions allocated to Unitholders for such month shall be apportioned among the Unitholders in accordance with their respective Partnership Interests on the first day of such month, without regard to Capital Accounts or the number of days during such month a Person was a Unitholder. 9.2 ALLOCATIONS FOR CAPITAL ACCOUNT PURPOSES. (A) For purposes of maintaining the Capital Accounts and in determining the rights of the Partners among themselves, except as otherwise provided in this Section 9.2, each item of income, gain and loss and deduction (computed in accordance with Section 8.12(B)) shall be allocated 99% to the Unitholders and 1% to the General Partner. 29 (B) If any Partner unexpectedly receives any adjustments, allocations, or distributions described in Treasury Regulations Sections 1.704-1(b) (2) (ii) (d) (4), 1.704-1(b) (2) (ii) (d) (5), or 1.7041(b) (2) (ii) (d) (6), items of Partnership income and gain shall be specially allocated to such Partner in an amount and manner sufficient to eliminate a deficit in its Capital Account created by such adjustments, allocations or distributions as quickly as possible. This Section 9.2(B) is intended to constitute a "qualified income offset" within the meaning of Treasury Regulation Section 1.7041(d)(3). (C) If, and to the extent that, any Partner is deemed to recognize income as a result of any transaction between such Partner and the Partnership pursuant to Sections 482, 483, 1272-1274, or 7872 of the Code, or any similar provision now or hereafter in effect, any corresponding resulting loss or deduction of the Partnership shall be allocated to the Partner who was charged with such income. (D) If there is a net decrease in partnership minimum gain during a partnership taxable year, all Partners with a deficit Capital Account balance at the end of such year (determined as provided in Treasury Regulation Section 1.704-1(b) (4) (iv) (e)) will be allocated, before any other allocation under this Section 9.2, items of income and gain for such year in the amount and in the proportions needed to eliminate such deficits as quickly as possible. For purposes of this Section 9.2(D), "partnership minimum gain" has the meaning ascribed . to it in Treasury Regulation Section 1.7041(b) (iv) (c), i.e., the amount of gain (of whatever character), if any, that would be realized by the Partnership if it disposed of (in a taxable transaction) each Partnership asset subject to a nonrecourse liability in full satisfaction thereof. This Section 9.2(D) is intended to comply with Treasury Regulation Section 1.704-1(b) (4) (iv) and is to be interpreted to comply with the requirements of such regulation. (E) To preserve uniformity of Units, the General Partner shall have sole discretion in conjunction with Section 9.3(E) (y) to make special allocations of income or deduction. The General Partner may make such allocations only if they would not have a material adverse effect on the limited Partners and if they are reasonably consistent with, and reasonably supportable under, the Code. 9.3 ALLOCATIONS FOR TAX PURPOSES. (A) For Federal income tax purposes, except as otherwise provided in this Section 9.3, each item of income, gain, loss, deduction, and credit of the Partnership shall be allocated among the Partners in the same manner as such items are allocated for capital account purposes under Section 9.2. (B) In the case of a Contributed Property or an Adjusted Property, items of income, gain, loss, depreciation, and cost recovery deductions attributable thereto shall be allocated for Federal income tax purposes among the Partners as follows: (i) In the case of a Contributed Property, such items shall be allocated among the Partners in a manner that takes into account the variation between the Agreed Value of such property and its adjusted basis at the time of contribution in attempting to eliminate Book-Tax Disparities. Except as otherwise provided in Section 9.2(B) and 9.2(D) above, any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Partners in accordance with Section 9.2(A). (ii) In the case of an Adjusted Property, such items shall (a) first, be allocated among the Partners in a manner consistent with the principles of Section 704(c) of the Code to take into account the Unrealized Gain or Unrealized Loss attributable to such property and the allocations thereof pursuant to Section 8.12(D) (i) in attempting to eliminate Book-Tax Disparities, and (b) second, in the event such property was originally a Contributed Property, be allocated among the Partners in a manner consistent with the first sentence of paragraph (B) (i) above. Except as otherwise provided in Sections 9.2(B) and 9.2(D) above, any items of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Partners in accordance with Section 9.2(A). (C) To the extent of any Recapture Income resulting from the sale or other taxable disposition of a Partnership Asset, the amount of any gain from such disposition allocated to (or recognized by) a 30 Partner (or its successor in interest) for Federal income tax purposes pursuant to the above provisions shall be deemed to be Recapture Income to the extent such Partner has been allocated or has claimed any deduction directly or indirectly giving rise to the treatment of such gain as Recapture Income. (D) All items of income, gain, loss, deduction, credit, and basis allocation recognized by the Partnership for Federal income tax purposes and allocated to the Partners in accordance with the provisions hereof shall be determined without regard to any election under Section 754 of the Code which may be made by the Partnership; provided, however, such allocations, once made, shall be adjusted as necessary or appropriate to take into account those adjustments permitted by Sections 734 and 743 of the Code and, where appropriate, to provide only Partners recognizing gain on Partnership distributions covered by Section 734 of the Code with the Federal income tax benefits attributable to the increased basis in Partnership Assets resulting from any election under Section 754 of the Code. (E) It is intended that the allocations prescribed in Sections 9.3(B) (i) and (ii) constitute. allocations for Federal income tax purposes that are consistent with Section 704 of the Code and comply with any limitations or restrictions therein, to the extent reasonably possible without causing Units to lack uniform characteristics for Federal income tax purposes. To preserve uniformity of Units, the General Partner shall have sole discretion to (x) adopt such conventions as it deems appropriate in determining the amount of depreciation and cost recovery deductions; (y) make special allocations of income or deduction and (z) amend the provisions of this-.Agreement as appropriate (a) to reflect the proposal or promulgation of Treasury Regulations under Section 704(c) of the Code, or (b) otherwise to preserve the uniformity of Units issued or sold from time to time. The General Partner may adopt such conventions, make such allocations and amend this Agreement as provided in this Section 9.3(E) only if they would not have a material adverse effect on the Limited Partners and if such allocations are reasonably consistent with, and reasonably supportable under, the Code. (F) Each item of Partnership income, gain, loss, deduction, and credit attributable to a transferred Partnership Interest shall, for Federal income tax purposes, be determined on a monthly basis (or other basis, as required or permitted by Section 706 of the Code) and shall be allocated to the Partners and Assignees as of the close of business on the day preceding the first day of the month in which the transfer is recognized by the Partnership; provided, however, that gain or loss on a sale or other disposition of all or a substantial portion of the assets of the Partnership shall be allocated to the holder of the Partnership Interest on the date of sale. The General Partner may revise, alter, or otherwise modify such methods of determination and allocation as it determines necessary, to the extent permitted by Section 706 of the Code and regulations or rulings promulgated thereunder. (G) PROVISIONAL ALLOCATION. In the event that any amount claimed by the Partnership to constitute a deductible expense, an amount chargeable to capital or a reduction in an amount realized is treated as a payment made to a Partner in his capacity as a member of the Partnership for income tax purposes, gross income (as defined in Section 61 of the Code) of the Partnership shall first be allocated to such payment and no deductions shall be allocated thereto. 9.4 TAX ELECTIONS. (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. 31 (B) The General Partner, the Underwriters, and any Limited Partner and Assignees. by agreeing to the terms of this Agreement hereby elect to be governed by the provisions of Section 732(d) of the Code upon a termination of the Partnership pursuant to Section 708 of the Code if the General Partner, in its absolute discretion, deems such election to be advisable at any time (it being understood by all such parties that the General Partner has deemed such election to be advisable in the event a termination of the Partnership occurs as a result of the Initial Offering). All such parties hereby further agree to execute and file all documents and to take any other steps necessary to effect such election and appoint the General Partner as their authorized agent to take such steps on their behalf. ARTICLE 10 DISTRIBUTIONS 10.1 DISTRIBUTIONS FOR 1986. On February 15, 1987, the Partnership shall make a distribution, 99% to the Unitholders and 1% to the General Partner, in order that Unitholders shall receive 3.54 (less 3.006 per Unit for each day commencing October 1, 1986 and ending the day prior :to the initial Closing Date, inclusive). Such distribution shall be made to Unitholders of record on December 31, 1986. The distribution shall be made first from Cash Available From Operations for the period from the initial Closing Date through December 31, 1986 and, to the extent Cash Available From Operations is not sufficient to make a distribution, from any other source. 10.2 DISTRIBUTIONS OF CASH AVAILABLE FROM OPERATIONS. (A) During the year ended December 31, 1987, all Cash Available From Operations shall be distributed, 99% to the Unitholders and 1% to the General Partner, up to a maximum of S2.16 per Unit. (B) After December 31,1987, all Cash Available From Operations shall be distributed 99% to the Unitholders and 1% to the General Partner. (C) The Record Date for such distributions shall be the last business day of each calendar quarter, unless otherwise determined by the General Partner. 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 Ceneral 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%o to the Ceneral 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. 10.4 DISTRIBUTIONS OF CASH FROM OTHER SOURCES. In its sole discretion, the General Partner may distribute, 99% to the Unitholders and 1% to the General Partner, cash from any other source. including borrowings and reserves. 10.5 DISTRIBUTIONS OF PARTNERSHIP ASSETS. In its sole discretion, the General Partner may distribute, 99% to the Unitholders and 1% to the General Partner, Partnership property other than cash. 32 combinations of cash and property, and additional Units, Depositary Units, or other securities of the Partnership which have been authorized and issued pursuant to the terms of this Agreement. 10.6 LIQUIDATING DISTRIBUTIONS. NOTWITHSTANDING SECTION 10.3, A DISTRIBUTION THAT IS ALSO A LIQUIDATING DIStribution (after payment of or provision for Partnership liabilities) shall be made first to Partners in accordance with the positive balances in their Capital Accounts and thereafter 99% to the Unitholders and 1% to the General Partner. For this purpose, a distribution (other than a distribution pursuant to Section 10.2) shall be treated as a liquidating distribution if, after such distribution, the Partnership's remaining assets, if sold and the proceeds (after payment of liabilities) were distributed to Partners at that time, would be insufficient to reduce to zero the positive Capital Accounts of all Partners having positive Capital Accounts (taking into account all adjustments under Section 8.11 that would be made as a result of such sale). 10.7 TAX WITHHOLDING. The Partnership may withhold from any distribution the amount so required by applicable Federal or state income tax laws with respect to such distribution (or which the General Partner reasonably determines may in the future be required to be withheld from a constructive distribution arid which is attributable to such actual distribution). Any amount so withheld shall, for purposes of this Agreement, be treated as a distribution from the Partnership to the Person otherwise entitled thereto. Any amount so w ithheld and not at that time treated as held in trust for the benefit, of the United States or a state shall be held in trust for the benefit of the Person otherwise entitled thereto until such time as (i) such amount is paid to the United States or a state pursuant to law or (ii) the General Partner determines that the aggregate of the amounts so withheld are in excess of any present or future withholding tax liability in respect of the Person otherwise entitled to such distribution, in which event the Partnership shall pay such excess to the Person entitled thereto. Any funds so withheld and held in trust (other than for the benefit of the United States or a state) may be invested in interest-bearing accounts with such financial institutions (other than an Affiliate of the General Partner) as may be selected by the General Partner, but in no event shall the Partnership or the General Partner be held responsible for the loss of any funds so deposited or for obtaining a rate of interest lower than that which might have been obtained elsewhere. The General Partner, in its sole and absolute discretion, may make such elections in respect of withholding as are permitted by applicable Federal or state income tax laws. The General Partner may require appropriate documentation with respect to any distribution that the distributee may receive such distribution free of withholding under Federal or state income tax laws. Any amount deposited in respect of a withholding tax requirement in advance of the time such amount would otherwise have been distributed (or which would not otherwise have been distributed) shall be treated as distributed at the time of such' deposit. Nothing in this section shall be construed as in any way limiting the right of the Partnership or the General Partner to obtain reimbursement, whether from a distributee or otherwise, for any taxes the Partnership or the General Partner may be required to pay in respect of any actual or constructive distribution or for any excess distribution resulting from withholding tax requirements. The Units and Depositary Units whose status gives rise to such withholding obligation are pledged as security for such reimbursement. ARTICLE 11 BOOKS, RECORDS, ACCOUNTS, AND REPORTS 11.1 BOOKS AND RECORDS. (A) The Partnership shall continuously maintain an offce in the State of California, at which the following books, and records shall be kept: (1) A current list of the full name and last known business or residence address of each Partner set forth in alphabetical order together with the contribution and the share in profits and losses of each Partner; 33 (2) A copy of the Certificate of Limited Partnership and all certificates of amendments thereto, together with executed copies of any powers of attorney pursuant to which any such certificate has been executed; (3) Copies of the Partnership's Federal, state, and local income tax or information returns and reports, if any, for the six most recent taxable years; (4) Copies of this Agreement and all amendments thereto; (5) Financial statements of the Partnership for the six most recent fiscal years; and (6) The Partnership's books and records for at least the current and past three fiscal years. (B) The Partnership shall also maintain at its principal offce such additional books and records as are necessary for the operation of the Partnership. (C) Any records maintained by the Partnership in the regular course of its business, including the record of the Unitholders, books of account, and records of Partnership proceedings may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics, or any other information storage device, provided that the records so kept can be converted into clearly legible written form within a reasonable period of time. 11.2 LIMITED PARTNERS' RIGHTS REGARDING BOOKS, RECORDS, AND TAX INFORMATION. (A) Subject to Section 11.7, to the extent not previously supplied to a Limited Partner, upon the request of a Limited Partner, the General Partner shall promptly deliver to the limited Partner, at the expense of the Partnership, a copy of the items set forth in Sections 11.1 (A)(1), (2), and (4). (B) Each Limited Partner has the right upon reasonable request: (1) To inspect and copy during normal business hours, at the Limited Partner's expense, any of the Partnership's records required to be kept of the Partnership, subject to Section 11.7. (2) To obtain from the General Partner promptly after becoming available, at the Limited Partner's expense, a copy of the Partnership's Federal, state, and local income tax or information returns for each year. (C) The General Partner shall send to each Partner within 90 days after the end of each taxable year such information as is necessary to complete Federal and state income tax or information returns. (D) The Partner and the Partner's representatives shall not divulge to any other Person any confidential or proprietary data, information or property or any trade secrets of the Partnership discovered in any inspection of the Partnership's books and records. 11.3 ACCOUNTING BASIS AND FISCAL YEAR. The Partnership's books and records (i) shall be kept on a basis chosen by the General Partner in accordance with the accounting methods followed by the Partnership for Federal income tax purposes and according to generally accepted accounting principles, (ii) shall reflect all Partnership transactions, (iii) shall be appropriate and adequate for the Partnership's business and for the carrying out of all provisions of this Agreement, and (iv) shall be closed and balanced at the end of each Partnership fiscal year. The fiscal year of the Partnership shall be the calendar year, unless otherwise determined by the General Partner. 11.4 REPORTS. (A) The General Partner shall cause an audited annual report to be sent to each of the Unitholders no later than 90 days after the close of the fiscal year. That report shall contain a balance sheet as of the end of the fiscal year and an income statement and statements of partners' equity and of changes in financial position for the fiscal year. Such statements shall be prepared in accordance with generally accepted accounting principles and audited and certified by a nationally recognized firm of independent public accountants selected by the General Partner. 34 (B) The General Partner shall cause quarterly unaudited reports of the Partnership's operations to be sent to each of the Unitholders as soon as practical after the end of each quarter, commencing with the fiscal quarter ending March 31, 1987, but in no event more than 60 days after the close of each fiscal quarter, other than the last quarter of the Partnership's fiscal year. (C) The financial statements referred to in Section 11.4(B) shall be accompanied by the report thereon, of the independent accountants engaged by the Partnership or, if there is no such report, the certificate of the General Partner that such financial statements were prepared without audit from the books and records of the Partnership. 11.5 TAX MATTERS PARTNER. The General Partner is hereby designated as the "Tax Matters Partner" of the Partnership in accordance with Section 6231 (a) (7) of the Code and is authorized, at the Partnership's sole cost and expense, to represent the Partnership and each Unitholder in connection with all examinations of the Partnership affairs by tax authorities, including resulting administrative and judicial proceedings, and to expend Partnership funds for professional services and costs connected therewith. Each Unitholder agrees to cooperate with the General Partner and to do or refrain from doing any and all things reasonably required by the General Partner to conduct such proceeding. The General Partner shall have the right to settle any audits without the consent of the Unitholders and to take any and all other action on behalf of the Unitholders or the Partnership in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law and regulations. 11.6 BANK ACCOUNTS. The Partnership shall establish and maintain accounts in financial institutions (including, without limitation, national or state banks, trust companies, or savings and loan institutions) in such amounts as the General Partner may deem necessary from time to time. The funds of the Partnership shall be deposited in such accounts and shall not be commingled with the funds of the General Partner or any Affiliate thereof; provided, however, that nothing shall prohibit the Partnership from investing in joint ventures or partnerships with the General Partner or its Affiliates; and provided further that nothing herein shall preclude any investment of Partnership funds in a mutual fund or similar entity for which a separate account is maintained on behalf of each participant. Checks shall be drawn on and withdrawals of funds shall be made from any such accounts for Partnership purposes and shall be signed by the Person or Persons designated by the General Partner. Temporary surplus funds of the Partnership may be invested pursuant to the power contained in Section 4.1(w). 11.7 CONFIDENTIALITY. The General Partner may keep confidential from the Unitholders for such period of time as the General Partner deems reasonable, any information which the General Partner reasonably believes to be in the nature of trade secrets or other information disclosure of which the General Partner in good faith believes could damage the Partnership or its business or which the Partnership is required by agreements with third parties to keep confidential. ARTICLE 12 ISSUANCE OF CERTIFICATES 12.1 ISSUANCE OF CERTIFICATES. Upon the issuance of Units, the General Partner shall cause the Partnership to issue one or more Certificates substantially in the form of the Certificate attached hereto as Exhibit 1 in the name of each Limited Partner certifying that the Limited Partner named therein is a Limited Partner in the Partnership as provided in the Partnership's books and records, stating the number of Units into which his Partnership Interest is divided, and including as a part thereof a form of assignment, subject to this Article 12, sufficient to convey the partnership interest of a limited partner to an assignee under the California Act. Upon the transfer of a Unit in accordance with the terms of this Agreement, the General Partner shall cause the Partnership to issue replacement Certificates, according to such procedures as the General Partner may establish in its sole and absolute discretion. 35 new Certificate or cause to be issued a new Depositary Receipt in place of any Certificate or Depositary Receipt previously issued if the registered owner of the Certificate or Depositary Receipt: (i) makes proof by affidavit, in form and substance satisfactory to the General Partner and the Depositary, that a previously issued Certificate or Depositary Receipt has been mutilated, lost, destroyed or stolen; (ii) requests the issuance of a new Certificate or Depositary Receipt before the Partnership or the Depositary has notice that the Certificate has been acquired by a purchaser for value in good faith and without notice of an adverse claim; (iii) if requested by the General Partner or the Depositary, delivers to the Partnership and/or the Depositary a bond, in form and substance satisfactory to the General Partner and/or the Depositary, with such surety or sureties and with fixed or open penalty, as the General Partner and/or Depositary may direct, in its or their discretion, to indemnify the Partnership and the Depositary against any claim that may be made on account of the alleged mutilation, loss, destruction, or theft of the Certificate; and (iv) satisfies any other reasonable requirements imposed by the General Partner and/or the Depositary. If a Unitholder fails to notify the Partnership within a reasonable time after he has notice of the mutilation, loss, destruction, or theft of a Certificate or Depositary Receipt, and a transfer of the Units represented by the Certificate or Depositary Receipt is registered before receiving such notification, the Unitholder shall be precluded from making any claim against the Partnership, the Depositary, or any Transfer Agent for such transfer or for a new Certificate or Depositary Receipt. 12.3 MAINTENANCE OF TRANSFER RECORDS. The Partnership's Depositary, registrar, and transfer agent (who may be the same Person) will maintain records reflecting the Depositary Receipts registered in the name of each Unitholder, and any subsequent transfers of Depositary Receipts to Assignees and Substituted Limited Partners. 12.4 RECORD UNITHOLDER. The Partnership shall be entitled to treat the Record Unitholder as the Limited Partner or Assignee in fact of the Units or Depositary Units, as the case may be, represented thereby and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Units or Depositary Units on the part of any other Person, whether or not the Partnership shall have actual or other notice thereof, except as otherwise provided by law or any applicable rule, regulation, guideline, or requirement of any securities exchange on which the Units or Depositary Units are listed for trading. Without limiting the foregoing, when a Person (such as a broker, dealer, bank, trust company, or clearing corporation, or an agent of any of the foregoing) is acting as a nominee, agent, or in some other representative capacity for another Person in acquiring and/or holding Depositary Receipts or Certificates, as between the Partnership on the one hand and such Persons on the other hand, such representative Person (a) shall be the Limited Partner or Assignee (as the case may be) beneficially and of record, (b) must execute and deliver a T: ansfer Application, and (c) will be bound by this Agreement and will have the obligations of a Limited Partner or Assignee (as the case may be) hereunder and as provided for herein. 12.5 WITHDRAWAL OF CERTIFICATEs. A Record Unitholder of Depositary Receipts may not withdraw Depositary Units evidenced thereby from deposit unless he is a Limited Partner. Upon the written request of any limited Partner accompanied by a surrendered Depositary Receipt held by a Limited Partner, the Partnership will cause to be issued to such Limited Partner a Certificate or Certificates in the name of such Limited Partner evidencing the same number of Units. A Limited Partner may redeposit any such Certificate with the Depositary which shall then reissue Depositary Receipts in the name of the Limited Partner thereof upon 60 days' prior written notice. 36 12.6 LEGENDS. The Partnership may cause to be imposed, imprinted, or stamped on any Certificate or Depositary Receipt one or more legends or restrictions on transfer which the General Partner in its sole discretion believes may be necessary or advisable to comply with Federal or state securities laws or other applicable laws, rules, regulations, or agreements. ARTICLE 13 TRANSFER OF INTERESTS 13.1 TRANSFER IN GENERAL. (A) The term "transfer," when used in this Article 13 with respect to a Partnership Interest, Units, or Depositary Units shall include any sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange, or other disposition. (B) No Partnership Interest, Unit, or Depositary Unit shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in Section 8.4, Article 13, and Article 14. Any transfer or purported transfer of any Partnership Interest, Depositary Unit, or Unit not made in accordance with Section 8.4, Article 13, and Article 14, shall be null and void. 13.2 TRANSFER OF INTERESTS OF THE GENERAL PARTNER. (A) Until 10 years after the Closing Date, the General Partner may not transfer all or any part of its General Partner Partnership Interest unless (i) a Majority Interest consents to such transfer and (ii) the Partnership receives an opinion of counsel that such transfer would not result in the loss of limited liability of any Unitholder or cause the Partnership to be treated as an association taxable as a corporation for Federal income tax purposes. The General Partner shall have the absolute and unrestricted right, power, and authority to transfer any or all of its Partnership Interest after the date 10 years from the Closing Date. (B) No provision of this Agreement shall be construed to prevent (and all Partners and Assignees hereby expressly consent to) (i) the transfer by the General Partner of its Partnership Interest to a Related Entity or the transfer by the General Partner of its Partnership Interest upon its merger or consolidation into any other corporation or the transfer by it of all or substantially all of its assets to another corporation, and the assumption of the rights and duties of the General Partner by such Related Entity or the transferee corporation, provided such Related Entity or such corporation furnishes to the Partnership an opinion of counsel that such merger, consolidation, transfer, or assumption will not result in a loss of limited liability of any Unitholder or result in the Partnership being treated as an association taxable as a corporation for Federal income tax purposes, (ii) the transfer by the General Partner of or the mortgage, pledge, hypothecation, or granting a security interest in all or any part of its interest in items of Partnership income, gains, losses, deductions, credits, distributions, or surplus, (iii) the sale or assignment of any Units held by the General Partner or its Affiliates, subject to Section 8.4(A), or (iv) the transfer, mortgage, pledge, hypothecation, or grant of a security interest by the General Partner in any Units owned by the General Partner as collateral for a loan or loans. 13.3 TRANSFER OF UNITS. Units that have never been deposited with the Depositary or that have been withdrawn from the Depositary and not redeposited are not transferable except by bequest, inheritance, or operation of law or upon transfer to the General Partner or the Partnership; provided, however, that the General Partner or its Related Entities may, without restriction, transfer between or among themselves, Units that have never been deposited with the Depositary and Units that have been withdrawn from the Depositary and not redeposited. 13.4 TRANSFER OF DEPOSITARY UNITS. (A) Except as provided in Section 13.3, the Partnership shall not recognize any transfer of Units or interests therein except by a transfer of Depositary Receipts representing Depositary Units. 37 Depositary Units may be transferred only in the manner provided in this Agreement and in the Depositary Agreement. No transfer of Depositary Receipts evidencing Depositary Units will be recorded or otherwise recognized by the Partnership unless and until the transferee has delivered a properly executed Transfer Application to the Depositary. (B) A transferee who has completed and delivered a Transfer Application shall be deemed (i) to have agreed to be bound by the terms and conditions of the Depositary Agreement and the Depositary Receipt, (ii) to have requested admission as a Substituted Limited Partner with respect to the Units transferred, (iii) to have agreed to comply with and be bound by this Agreement, whether or not such transferree is admitted as a Substituted Limited Partner and to execute any document that the General Partner may reasonably require to be executed in connection with the transfer or with the admission of such transferee as a Substituted Limited Partner pursuant to Article 14 with respect to the Depositary Units transferred; (iv) to have represented and warranted that such transferee is a United States Citizen or Resident Alien and has authority to enter into the Depositary Agreement and this Agreement, (v) to have appointed the General Partner his attorney-in-fact to execute any document that the General Partner may deem necessary or appropriate to be executed in connection with the transfer and/or his admission as a Substituted Limited Partner with respect to the Depositary Units transferred, (vi) to have given the power of attorney set forth in Article 17, and (vii) to have given the consents and waivers contained in this Agreement. Unless and until admitted as a Substituted Limited Partner pursuant to Article 14 with respect to Depositary Units transferred pursuant to this Section 13.4, the Record Unitholder of a Depositary Receipt transferred pursuant to this Section 13.4 shall be an Assignee in respect of such Depositary Units, whether or not such Record Unitholder is a Limited Partner with respect to other Depositary Units. Except as specifically provided in this Agreement, an Assignee shall not be treated as or have the rights of a Limited Partner. The General Partner shall vote and exercise other powers attributable to Depositary Units or undeposited Units of Assignees who have not become Substituted Limited Partners, to the extent known by the General Partner. (C) Each distribution in respect of a Depositary Unit (or a Unit withdrawn from the depositary account established with the Depositary) shall be paid by the Partnership, directly or through the Depositary or through any other Person or agent, only to the Record Unitholders thereof as of the Record Date set for the distribution. Such payment shall constitute full payment and satisfaction of the Partnership's liability in respect of such payment, regardless of any claim of any Person who may have an interest in or with respect to such payment by reason of an assignment or otherwise. (D) Notwithstanding anything to the contrary herein, the Partnership shall not be required to recognize for any purpose any purported transfer by a Limited Partner or Assignee of all or any part of a Depositary Unit held by such Limited Partner or Assignee until such transfer has been effected on the books of the Transfer Agent. (E) Any holder of a Unit or a Depositary Receipt (including a transferee thereof) conclusively shall be deemed to have agreed to comply with and be bound by all terms and conditions of this Agreement, with the same effect as if such holder had executed a Transfer Application, whether or not such holder in fact has executed such a Transfer Application. A request by any broker, dealer, bank, trust company, clearing corporation, or nominee holder, to register transfer of a Depositary Receipt, however signed (including by any stamp, mark, or symbol executed or adopted with intent to authenticate the Depositary Receipt), shall be deemed to have executed a Transfer Application by and on behalf of the beneficial owner of such Depositary Receipt. (F) Notwithstanding anything to the contrary herein (but subject to the requirement that a purchaser be a United States Citizen or Resident Alien), a purchaser of a Depositary Receipt from the Underwriters in connection with or pursuant to the Initial Offering shall be required to execute a Transfer Application to be delivered to the Partnership within 30 days of purchase. Each such purchaser, by acquiring such Depositary Receipt in connection with or pursuant to the Initial Offering, shall be deemed to have agreed to comply with and to be bound by all terms and conditions of this Agreement, the Depositary Agreement, and the Depositary Receipt and to have taken the other actions specified in the Transfer Application and this Agreement as if such purchaser had executed the 38 Limited Partners all purchasers of Depositary Receipts (who are United States Citizens or Resident Aliens) from the Underwriters in connection with or pursuant to the Initial Offering, and such admission shall be deemed to have been made on the initial Closing Date. For purposes of this paragraph (F), if fewer than all underwritten Units have been sold by the Underwriters as of the initial Closing Date, only Persons who purchase Units from the Underwriters on or prior to the last day of the calendar month in which the Closing Date occurs shall be treated as having purchased their Units in connection with or pursuant to the Initial Offering. 13.5 DEPOSITARY ARRANGEMENTS. The General Partner shall have full authority to amend, extend, or terminate the Depositary Agreement or the services of a Depositary if, in the sole discretion of the General Partner, it deems it appropriate to do so. If the services of a Depositary are terminated, the General Partner shall make substitute, comparable, or other arrangements to facilitate trading of Units or interests in Units. 13.6 RESTRICTIONS ON TRANSFER; NON-UNITED STATES CITIZENS. (A) Notwithstanding the other provisions of this Article 13, no transfer of any Unit, Depositary Unit, or Partnership Interest of any Unitholder shall be made if such transfer (i) would violate the then applicable Federal and state securities laws or rules and regulations of the Securities and Exchange Commission, state securities commissions, and any other governmental authorities with jurisdiction over such transfer; (ii) would result in the Partnership being treated as an association taxable as a corporation' for Federal income tax purposes; (iii) would affect the Partnership's existence or qualification as a limited partnership under the California Act; or (iv) would, in the judgment of the General Partner, materially adversely affect the business or operation of the Partnership. (B) No Partnership Interest may be acquired by or transferred to a Person who is not, or is determined by the General Partner not to be, or does not represent in writing that he is, a United States Citizen or Resident Alien. (C) In the event a Unitholder or nominee of a Unitholder is not or ceases to be a United States Citizen or Resident Alien for any reason whatsoever, or fails to provide satisfactory evidence to the General Partner of such status within 15 days of a request therefore, his Units and Depositary Units shall be subject to redemption by the Partnership. The Partnership at any time shall have the absolute right, in the discretion of the General Partner, either (i) to redeem such Units and Depositary Units, or (ii) to permit such Unitholder to continue to hold his Units and Depositary Units. The procedures for redemption shall be as follows, unless modified pursuant to Section 13.6(D): (1) The General Partner shall, not later than the 30th day before the date fixed for redemption, give notice of redemption to the Unitholder, at his last address designated on the records of the Partnership or Depositary, by registered or certified mail, postage prepaid. The notice shall be deemed to have been given when so mailed. The notice shall specify the Units or Depositary Units to be redeemed, the date fixed for redemption, the place of payment, that payment of the redemption price will be made upon surrender of the Depositary Receipt or the Certificate evidencing the Units or Depositary Units to be redeemed, and that on and after the date fixed for redemption no further allocations or distributions to which the Unitholder would otherwise be entitled in respect of such Units or Depositary Units will accrue or be made. (2) The redemption price per Unit or Depositary Unit shall be the Unit Price (the date of determination of which shall be the date fixed for redemption) multiplied by the number of Units or Depositary Units to be redeemed. The redemption price shall be paid, in the sole discretion of the General Partner, in cash or by a combination of cash and delivery of a promissory note of the Partnership in the principal amount of the redemption price (less cash paid), bearing interest at the rate of 10% annually, and payable in three equal annual installments of principal, together with accrued interest, commencing one year after the redemption date. (3) Upon surrender by or on behalf of the Unitholder, at the place specified in the notice of redemption, of the Depositary Receipt or the Certificate evidencing the Units or Depositary Units 19 to be redeemed, duly endorsed in blank or accompanied by an assignment duly executed in blank, the former Unitholder or his duly authorized representative shall be entitled to receive the payment therefore. No interest will be paid on amounts of cash deposited with the Depositary or set aside for payments hereunder. (4) After the redemption date, the Units or Depositary Units redeemed shall no longer be deemed issued and outstanding. (5) Nothing in this Section 13.6(C) shall prevent the recipient of a notice of redemption from transferring his Units or Depositary Units before the redemption date if such transfer is otherwise permitted under this Agreement. Upon receipt of notice of such a transfer, the General Partner shall withdraw the notice of redemption, provided the transferee of such Units or Depositary Units certifies in the Transfer Application that he, and, if he is a nominee holding for the account of another Person, that to the best of his knowledge such other Person, is a United States Citizen or Resident Alien. If the transferee fails to make such certification, such redemption shall be effected on the original redemption date. (D) The General Partner, in its sole discretion, may establish such additional or different procedures it deems necessary or advisable to implement the restrictions set forth in this Section 13.6. 13.7 GENERAL PARTNER'S RIGHT TO PURCHASE UNITS. (A) Notwithstanding any other provision of this Agreement, in the event that the number of outstanding Units held by holders other than the General Partner or its Affiliates is less than 10% of the aggregate number of Units sold from time to time to Persons other than the General Partner or its Affiliates, at any time after September 30, 1991, the General Partner or an Affiliate thereof shall then have the right, exercisable in its sole discretion, to call for purchase and purchase all, but not less than all, of the Depositary Units and undeposited Units that remain outstanding and held by Persons other than the General Partner and its Affiliates, at a price per Unit equal to the following percentage of the Unit Price of a Unit as of the date fixed by the General Partner for such purpose (which determination date shall be no more than 90 days prior to the Purchase Date): 130% of the Unit Price from October 1, 1991 to September 30, 1996; 120% of the Unit Price from October 1, 1996 to September 30, 2001; and 110% thereafter. (B) In the event the General Partner or its Affiliate elect to exercise the rights to purchase Depositary Units and undeposited Units pursuant to paragraph (A) above, the General Partner or its Affiliate shall deliver to the Purchase Agent written notice of such election to purchase (hereinafter called the "Notice of Election to Purchase") and shall cause the Purchase Agent to mail a copy of such Notice of Election to Purchase to the Record Unitholders of Depositary Receipts and to the Record Unitholders of undeposited Units (other than the General Partner and its Affiliates) at least 10, but not more than 60, days prior to the Purchase Date. Such Notice of Election to Purchase shall also be published in daily newspapers of general circulation printed in the English language and published in the Borough of Manhattan, New York, New York and in San Francisco, California. The Notice of Election to Purchase shall specify the Purchase Date and the purchase price and state that the General Partner or its Affiliate elects to purchase such Depositary Units and undeposited Units, upon surrender thereof in exchange for payment, at such office or offices of the Purchase Agent as the Purchase Agent may specify, or as may be required by any securities exchange on which the Depositary Units are listed or admitted to trading. Any such Notice of Election to Purchase mailed to a Record Unitholder of Depositary Receipts at his address as reflected in the records of the Depositary or, with respect to undeposited Units, to a Record Unitholder of such Units at his address as reflected in the records of the Partnership, shall be conclusively presumed to have been given whether or not the owner receives such notice. On or prior to the Purchase Date, the General Partner or its Affiliate shall deposit with the Purchase Agent cash in an amount equal to the Purchase Funds. If the Notice of Election to Purchase shall have been duly given as aforesaid at least 10 days prior to the Purchase Date. and if on or prior to 40 the Purchase Date the Purchase Funds shall have been deposited with the Purchase Agent in trust for the benefit of the holders of Depositary Units and undeposited Units subject to purchase as provided herein, then from and after the Purchase Date, notwithstanding that any Depositary Receipts or, with respect to undeposited Units, any Certificate for Units shall not have been surrendered for purchase, all rights of the holders of such Depositary Units and undeposited Units shall thereupon cease, except the right to receive the purchase price therefor, without interest, upon surrender to the Purchase Agent of the Depositary Receipts representing Depositary Units or Certificates representing unde- Units, and such Depositary Units and undeposited Units shall thereupon be deemed to be transferred to the General Partner or its Affiliate on the record books of the Depositary and the Partnership, and the General Partner or its Affiliate, as applicable, shall be deemed to be the owner of all such Depositary Units and undeposited Units from and after the Purchase Date and shall have all rights as the owner of such Depositary Units and undeposited Units (including, without limitation, all rights as owner of such Depositary Units and undeposited Units pursuant to Articles 9, 10, and 16). (C) At any time from and after the Purchase Date, a holder of an outstanding Depositary Unit or undeposited Unit subject to purchase as provided in this Section may surrender his Depositary Receipt evidencing such Depositary Unit or Certificate evidencing such undeposited Unit to the Purchase Agent in exchange for payment of the purchase price specified in Section 13.7(A), without interest thereon. ARTICLE 14 ADMISSION OF SUBSTITUTED AND ADDITIONAL LIMITED PARTNERS 14.1 ADMISSION OF SUBSTITUTED LIMITED PARTNERS. (A) Any person shall have the right to request admission as a Substituted Limited Partner subject to the conditions of and in the manner permitted by the terms of this Agreement. By transfer of a Depositary Receipt, the transferor is deemed to have given the transferee the right to request admission as a Substituted Limited Partner subject to the conditions of and in the manner permitted under this Agreement. A transferee who does not execute a Transfer Application, however, shall have only the right to negotiate such Depositary Receipt *to a purchaser or other transferee, subject to Section 13.6. Each transferee of a Depositary Receipt (including any Person, such as a broker, dealer, bank, trust company, clearing corporation, other nominee holder, or an agent of any of the foregoing; acquiring such Depositary Unit for the account of another Person) shall apply to become a Substituted Limited Partner with respect to Depositary Units transferred to such Person by executing and delivering a Transfer Application at the time of such transfer. Such transferee shall become a Substituted Limited Partner with respect to Depositary Units transferred at such time as the General Partner consents thereto, which consent may be given or withheld in the General Partner's sole discretion. If such consent is withheld, such transferee shall be an Assignee. An Assignee is entitled to an interest in the Partnership equivalent to that of a Limited Partner with respect to the allocations and the right to receive distributions from the Partnership, including liquidating distributions, but will not have the right to vote on Partnership matters and will otherwise be subject to the limitations under the California Act on the rights of an assignee who has not become a limited partner. Unless the Depositary is notified to the contrary, the General I Partner shall be deemed to have given its consent to the admission of a transferee as a Substituted Limited Partner, and such admission shall be effective, at and from the close of business on the last business day of the calendar month in which a properly executed Transfer Application is received by a Transfer Agent. (B) Under the terms of the Depositary Agreement, the Depositary is obligated to prepare, as of the close of business on the last business day of each month, a list or other appropriate evidence setting forth the transfers of Depositary Units registered by all Transfer Agents since the last business day of the preceding month (the "transfer record"), setting forth the business day on which such Substituted Limited Partner was admitted to the Partnership and, as promptly as practicable after the last business day of each month, to submit the transfer record to the General Partner. 41 (C) Any Limited Partner who transfers all of his Units and Depositary Units with respect to which he has been admitted as a Limited Partner shall cease to be a Limited Partner of the Partnership upon a transfer of such Units and Depositary Units in accordance with Article 13 and shall have no further rights as a Partner in or with respect to the Partnership (whether or not the Assignee of such former Limited Partner is admitted to the Partnership as a Substituted Limited Partner). (D) No person shall be entitled to become a Substituted Limited Partner except in accordance with this Section 14.1. (E) The General Partner will vote and exercise other powers attributable to Units and Depositary Units owned by an Assignee that has not been accepted as a Substituted Limited Partner, in the General Partner's sole discretion. 14.2 ADMISSION OF ADDITIONAL LIMITED PARTNERS. A Person who makes a Capital Contribution to the Partnership shall be admitted to the Partnership as an Additional Limited Partner upon furnishing to the General Partner (a) an acceptance, in form satisfactory to the General Partner, of all the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Article 17, and (b) such other documents or instruments as may be required in order to effect his admission as a Limited Partner, and such admission shall become effective on the date that the General Partner determines in its sole discretion and issues to such Additional Limited Partner a certificate evidencing ownership of his Units. 14.3 NO ACTION NECESSARY BY UNITHOLDERS. No action or consent by Unitholders shall be required in connection with the admission of Additional or Substituted Limited Partners to the Partnership for Limited Partners added pursuant to Sections 8.3, 8.4, 8.10, 14.1, 14.2, or otherwise pursuant to this Agreement. Only the consent of the General Partner is necessary for the admission or substitution of any Limited Partners to the Partnership after the filing of the Certificate of Limited Partnership for Limited Partners added pursuant to Sections 8.3, 8.4, 8.10, 14.1, 14.2, or otherwise pursuant to this Agreement. ARTICLE 15 CHANCES IN THE GENERAL PARTNER 15.1 GENERAL PARTNER CEASING TO BE THE GENERAL PARTNER. (A) The General Partner shall cease to be a general partner of the Partnership only upon the occurrence of any one or more of the following events: (1) The General Partner's withdrawal from the Partnership; (2) The General Partner's removal as the General Partner pursuant to Section 15.2(B); (3) Effective as provided in Section 15.1(B) below, an order for relief against the General Partner is entered under Chapter 7 of the Federal Bankruptcy Code, or the General Partner: (a) makes a general assignment for the benefit of creditors; (b) files a voluntary petition under the Federal Bankruptcy Code; (c) files a petition or answer seeking for the General Partner any bankruptcy, reorganization, arrangement, composition, readjustment, liquidation, dissolution, or similar relief under any statute, law, or regulation; (d) files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against the General Partner in any proceeding of this nature; or (e) seeks, consents to, or acquiesces in the appointment of a trustee. receiver, or liquidator of the General Partner or of all or any substantial part of the General Partner's properties; (4) The death of an individual General Partner; (5) The entry by a court of competent jurisdiction of an order adjudicating an individual General Partner incompetent to manage the General Partner's person or property; 42 (6) In the case of a General Partner that is a separate partnership, the dissolution and termination of the separate partnership; or (7) In the case of a General Partner that is a corporation, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter. (B) Any event described in Section 15.1 (A) (3) shall cause the General Partner to cease to be a general partner of the Partnership only as provided in this Section 15.1(B). Immediately upon the later of (1) the entering of the order for relief under Chapter 7 of the Federal Bankruptcy Code or (2) the final disposition of any appeal by the General Partner from the entering of such an order, and immediately upon the occurrence of any of the other events described in Section 15.1 (A)(3), the General Partner shall give notice of the event to the Partners. The General Partner shall cease to be a General Partner 120 days after, such notice is given. (C) If the cessation of the General Partner pursuant to Section 15.1 would result in a dissolution of the Partnership, the Organizational Limited Partner shall automatically become a General Partner so as to prevent the dissolution of the Partnership. The Organizational Limited Partner shall continue to be a General Partner until determined otherwise by a Majority Interest. 15.2 WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER. (A) Airlease Management Services, Inc. covenants and agrees that it shall continue to act as General Partner of the Partnership until the date' which is 10 years after the initial Closing Date, subject to its right to transfer its interest as a General Partner pursuant to Section 13.2 and subject to this Section 15.2(A). At any time after the date which is 10 years from the Closing Date, the General Partner may withdraw from the Partnership without liability, penalty, or cost to it, effective upon at least 90 days advance written notice to the Limited Partners, such withdrawal to take effect on the date specified in such notice. If the General Partner gives a notice of withdrawal, a Majority Interest may, prior to the effective date of such withdrawal, elect a successor General Partner. If no successor General Partner is elected, the Partnership shall be dissolved pursuant to Section 16.1. The General Partner may also withdraw from the Partnership, at any time and without liability, penalty, or cost to it, if its continued status as the general partner of the Partnership would be prohibited by law or would materially adversely affect the Partnership. (B) The General Partner may be removed upon the vote of Limited Partners holding 66 2/3% or more of the outstanding Units. Any such action by the Limited Partners for removal of the General Partner must also provide for the election of a new General Partner. The right of the Limited Partners to remove the General Partner shall not exist or be exercised unless the Partnership has received an opinion of independent counsel that the removal of the General Partner and the selection of a successor General Partner will not result in (i) the loss of limited liability of any Unitholder or (ii) the treatment of the Partnership as an association taxable as a corporation for Federal income tax purposes. (C) Airlease Management Services, Inc. covenants and agrees that it will remain a Related Entity for at least 10 years after the Closing Date and so long thereafter as it is the General Partner; provided that it may cease to be a Related Entity if its continued status as a Related Entity would by prohibited by law or would materially adversely affect the Partnership. 15.3 Admission of Successor General Partner. A successor General Partner selected pursuant to Section 15.2 or the transferee of or successor to the Partnership Interest of the General Partner shall be admitted to the Partnership as the General Partner, effective as of the date determined by the General Partner and the successor General Partner. An amendment or restatement of the Certificate of Limited Partnership shall be filed with the Secretary of State of the State of California effecting such substitution as promptly as practicable. 15.4 Rights on Removal or Withdrawal. A Departing General Partner shall be entitled to all compensation accrued as of the date of cessation as the General Partner and shall have the same rights 43 to inspect and make copies or excerpts of the books and records of the Partnership as is provided to Limited Partners until all amounts due the Departing General Partner as of the date the General Partner ceased to be a General Partner have been paid. The Departing General Partner shall be a creditor of the Partnership as to all such amounts owed to it by the Partnership, and shall not have any portion of its interest as General Partner converted to an interest as a Limited Partner or Assignee except as provided in Section 15.7. As to any Units so held or received, the Departing General Partner shall be entitled to exercise all of the voting rights provided under this Agreement as a Partner. 15.5 LIABILITY ON REMOVAL OR WITHDRAWAL. If, at the time of the Departing General Partner's departure, the Partnership is indebted to the Departing General Partner under this Agreement or any other instrument or agreement for funds advanced, properties sold; services rendered, or costs and expenses incurred by the Departing General Partner, the Partnership shall, within 60 days after the effective date of such Departing General Partner's departure, pay to the Departing General Partner the full amount of such indebtedness. Upon departure, the Departing General Partner shall have no liability for any debts or liabilities of the Partnership incurred after the date of cessation as a General Partner. 15.6 SUCCESSOR AND PREDECESSOR GENERAL PARTNER. Unless the General Partner has been removed as a General Partner pursuant to Section 15.2(B), the General Partner shall have the right to transfer its business, including a transfer by operation of law, as provided in Section 13.2, and any Person continuing the business of the General Partner shall immediately become a General Partner of this Partnership and any successor or reconstituted partnership and shall have the exclusive right to continue the Partnership and shall continue the business of the Partnership pursuant to the terms and provisions of this Agreement without any action or vote of any Person. When any Person ceases to be a General Partner under this Agreement or a partner, director, officer, employee, agent, or Affiliate of a General Partner, that Person shall continue to have the benefit of any provisions of this Agreement providing for indemnity, exculpation or insurance. which protected the Person as the General Partner or a partner, director, officer, employee, agent, or Affiliate of the General Partner, or which limited or defined the liability of the Person with respect to activities in which such Person engaged as the General Partner. 15.7 Interest of Departing General Partner and Successor. (A) A Departing General Partner shall, at the option of its successor exercisable prior to the effective date of the departure of the Departing General Partner, promptly receive from its successor in exchange for its interest as a General Partner, an amount in cash equal to the fair market value of the Departing General Partner's interest as a General Partner, determined as of the effective date of departure. If the option is exercised, the Departing General Partner shall, as of the effective date of departure, cease to share in any allocations or distributions with respect to its interest as a General Partner. For purposes of this Section 15.7, the fair market value of the Departing General Partner's Partnership Interest as a General Partner herein shall be such value as may be agreed by the Departing General Partner and the successor. (B) If the successor to a Departing General Partner does not exercise the option described in paragraph (A) above, the interest of the Departing General Partner as a General Partner of the Partnership shall be converted into Units on a basis agreed by the Partnership and the Departing General Partner. (C) In the absence of an agreement pursuant to (A) or (B) above within 30 days after the effective date of the Departing General Partner's departure, the value of the interests of the Departing General Partner shall be determined by an appraiser selected by the Departing General Partner and its successor, the determination of which shall be conclusive as to the matter. If those parties cannot agree as to such appraiser within 45 days after the effective date of such departure, then such appraiser shall be designated by two appraisers selected by the Departing General Partner and its successor. 44 (D) If the successor to a Departing General Partner does not exercise the option described in paragraph (A) above, the successor shall at the effective date of its admission to the Partnership contribute to the capital of the Partnership cash or property equal to 1% of the Capital Accounts of all Partners and Assignees. In such event, such successor shall be entitled to 1% of all Partnership allocations and distributions. ARTICLE 16 DISSOLUTION, WINDING UP, AND LIQUIDATION 16.1 DISSOLUTION. The Partnership shall be dissolved upon the expiration of its term on December 31, 2036 or upon the first occurrence of one of the following: (A) A General Partner ceases to be a General Partner (other than by removal) unless (1) at the time there is at least one other General Partner or (2) all Partners agree in writing to continue the business of the Partnership and to admit one or more General Partners; (B) An election by the General Partner to dissolve or discontinue the Partnership which is approved by a Majority Interest; (C) The Partnership becomes bankrupt; or (D) The sale or disposition of all or substantially all Partnership Assets (other than a sale or disposition the proceeds of which are reinvested by the General Partner pursuant to Section 3.3), including the cessation of active business, the distribution of all cash, and the termination of reserves for liabilities. 16.2 CONTINUATION OF THE BUSINESS OF THE PARTNERSHIP. Upon the General Partner ceasing to be a General Partner or a dissolution of the Partnership, the business of the Partnership may be continued as follows: (A) If the General Partner ceases to be a general partner of the Partnership, any then remaining General Partner, including the Organizational Limited Partner who becomes a General Partner pursuant to Section 15.1(C) (without the necessity for the consent of the Unitholders), shall have the right to continue and/or reconstitute or reform the Partnership and no dissolution shall have been deemed to occur. (B) Unless a higher vote is required by the California Act, upon an event of dissolution described in Section 16.1(A), the Partnership shall thereafter be liquidated in due course unless a Majority Interest pursuant to Section 7.9(A) (4) elects to continue the Partnership. Unless an election to continue the Partnership is made within 150 days of the event of dissolution, the Partnership shall conduct only activities necessary to wind up its affairs. If such an election to continue the Partnership is made then: (i) within such 150-day period a successor General Partner shall be selected by a Majority Interest; (ii) the Partnership shall continue; and (iii) all necessary steps shall be taken to amend the Agreement, and the successor General Partner may for this purpose exercise the powers of attorney granted pursuant to Article 17. (C) In all other events where a dissolution has occurred, upon the approval of a Majority Interest to continue the business of the Partnership, unless the California Act requires a higher vote. 16.3 AUTHORITY TO WIND UP. If dissolution of the Partnership occurs for any reason, the General Partner (unless such General Partner hasp ceased to be a General Partner pursuant to Section 15.1 (A) (2), (3), (4), (5), (6), or (7) ) shall have the authority (which may be delegated by it to a legal 45 representative) to wind up the business and affairs of the Partnership. If the Partnership is dissolved pursuant to Section 16.1 and not continued pursuant to Section 16.2, and the General Partner does not or can not wind up the business and affairs of the Partnership, any Person designated by a decree of court or designated by approval of a Majority Interest shall wind up the affairs of the Partnership and shall be entitled to compensation therefor as approved by the court or an approval of a Majority Interest. 16.4 ACCOUNTING. Upon dissolution (if the business of the Partnership is not continued), and again upon the termination of the Partnership after the winding up of the affairs of the Partnership is complete, an accounting of the Partnership shall be made and it shall be audited or reviewed by the independent public accountants of the Partnership, and a report thereof as audited or reviewed shall be furnished to the General Partner or its legal representative and to all Unitholders. 16.5 WINDING UP AND LIQUIDATION. Upon dissolution of the Partnership where an election to continue the business of the Partnership has not been made, it shall be wound up and liquidated as rapidly as business circumstances permit. If the liquidator determines that an immediate sale of part or all of the Partnership Assets would be impractical or would cause undue loss to the Unitholders, the liquidator may, in its absolute discretion, distribute to some or all Partners and Assignees, in lieu of cash, as tenants in common undivided interests in such assets as the liquidator deems unsuitable for liquidation. The liquidator may defer liquidation or distribution of assets to the Partners and Assignees in kind if it determines that a sale or such a distribution would be impractical or would cause undue loss to the Unitholders. The liabilities of the Partnership shall be entitled to payment in the following order: (A) Those to creditors, in the order of priority as provided by law, except those to secured creditors the obligations owed to whom will be assumed or otherwise transferred on liquidation of Partnership Assets; (B) Those amounts deemed necessary by the General Partner or the Person(s) winding up the affairs of the Partnership for any contingent liabilities or obligations of the Partnership shall be set aside as a reserve for contingent liabilities to be distributed at such time and in such manner hereunder as the Person(s) winding up the affairs of the Partnership shall determine in his or its sole discretion; and (C) To the Partners as provided in Section 10.6. 16.6 NO RECOURSE AGAINST THE GENERAL PARTNER. The Unitholders shall look solely to the assets of the Partnership for the payment of any income allocated to the Limited Partners or Assignees or the return of Capital Contributions, and if the assets of the Partnership remaining after payment or discharge of the debts and liabilities of the Partnership are insufficient to return the Capital Contributions, they shall have no recourse against the General Partner (subject to Section 16.8), any director, officer, employee, partner, agent, or Affiliate of the General Partner, or any Limited Partner or Assignee for such purpose. 16.7 CLAIM OF LIMITED PARTNERS AND ASSIGNEES. No Limited Partner or Assignee shall have the right or power to demand or receive property other than cash, whether as a return of capital, a distribution, a payment on liquidation, or otherwise. 16.8 GENERAL PARTNER'S OBLIGATION TO MAKE UP NEGATIVE CAPITAL ACCOUNT. If, immediately prior to the dissolution and termination of the Partnership, the General Partner's Capital Account has a deficit balance and the Partnership assets available for distribution upon dissolution and termination are insufficient to provide distributions to Limited Partners equal to their Capital Contributions less distributions previously received from any source, the General Partner shall be obligated to contribute to the Partnership that amount of capital (if any) equal to the lesser of (i) an amount sufficient to restore the General Partner's Capital Account to zero: or (ii) 1.01% of the aggregate Capital Contributions of. the Limited Partners, less any capital previously contributed by the General Partner. 46 ARTICLE 17 POWER OF ATTORNEY Each Limited Partner (including any Additional or Substituted Limited Partner), each Person who executes a Transfer Application, and each Assignee who accepts Depositary Units is deemed to irrevocably constitute, appoint, and empower the General Partner (and any successor by merger, transfer, election, or otherwise), and each of the General Partner's authorized officers and attorneysin-fact, with full power of substitution, as the true and lawful agent and attorney-in-fact of such Unitholder, with full power and authority in such Unitholder's name, place, and stead and for such Unitholder's use or benefit: (A) to make, execute, verify, consent to, swear to, acknowledge, make oath as to, publish, deliver, file, and/or record in the appropriate public offices (i) all certificates and other instruments, including, at the option of the General Partner, this Agreement and the Certificate of Limited Partnership and all amendments and restatements thereof, that the General Partner deems appropriate or necessary to qualify, or continue the qualification of, the Partnership as a limited partnership (or a partnership in which the Limited Partners have limited liability) in the State of California and all jurisdictions in which the Partnership may or may intend to conduct business or own assets; (ii) all other certificates, instruments, and documents as may be requested by, or may be appropriate or necessary under the laws of any state or other jurisdiction in which the Partnership may or may intend to conduct business or own assets; (iii) all instruments that the General Partner deems appropriate or necessary to reflect any amendment, change, or modification of this Agreement in accordance with the terms hereof (iv) all conveyances and other instruments or documents that the General Partner deems appropriate or necessary to effectuate or reflect the dissolution, termination, and liquidation of the Partnership pursuant to the terms of this Agreement; (v) any and all financing statements, continuation statements, mortgages, or other documents necessary to grant to or perfect for secured creditors of the Partnership, including the General Partner and its Affiliates, a security interest, mortgage, pledge or lien on all or any of the Partnership Assets; (vi) all instruments or papers required to continue the business of the Partnership pursuant to this Agreement; (vii) all instruments (including this Agreement and the Certificate of Limited Partnership and amendments and restatements thereof) relating to the admission of any Partner pursuant to this Agreement; (viii) all artifacts, affidavits, instruments and documents as may be necessary or desirable in connection with documentation and registration of Aircraft with the FAA and any other governmental authority having jurisdiction over the Partnership or the Partnership's Aircraft, and (ix) all other instruments as the attorneys-in-fact or any one of them may deem necessary or advisable to carry out fully the provisions of this Agreement in accordance with its terms; and (B) to enter into the Depositary Agreement and deposit all Units of such Unitholder in the depositary account established by the Depositary pursuant to the Depositary Agreement. The execution and delivery by any of said attorneys-in-fact of any such agreements, amendments, consents, certificates, or other instruments shall be conclusive evidence that such execution and delivery was authorized hereby. Nothing herein contained shall be construed as authorizing any Person acting as attorney-in-fact pursuant to this Article 17 to take action as an attorney-in-fact for any Unitholder to increase in any way the liability of such Unitholder beyond the liability expressly set forth in this Agreement, or to amend this Agreement except in accordance with Article 18. The appointment by each Unitholder of the Persons designated in this Article 17 as attorneys-in- shall be deemed to be a power of attorney coupled with an interest in recognition of the fact that each of the Unitholders under this Agreement will be relying upon the power and authority of such Persons to act pursuant to this power of attorney for the orderly administration of the affairs of the Partnership. The foregoing power of attorney is hereby declared to be irrevocable, and it shall survive. and shall be not affected by, the subsequent death, incompetency, dissolution, disability, incapacity, bankruptcy, or termination of any Unitholder and it shall extend to such Unitholder's heirs, successors. and assigns. Each Unitholder hereby agrees to be bound by any representations made by any Person 47 acting as attorney-in-fact pursuant to this power of attorney in accordance with this Agreement. Each Unitholder hereby waives any and all defenses that may be available to contest, negate, or disarm the action of any Person taken as attorney-in-fact under this power of attorney in accordance with this Agreement. Each Unitholder shall execute and deliver to the General Partner, within 15 days after receipt of the General Partner's request therefor, all such further designations, powers of attorney, and other instruments as the General Partner deems necessary to effectuate this Agreement and the purposes of the Partnership, and if not so executed and delivered, shall be deemed to be given within such 15-day period to the same extent as if so executed and delivered to the General Partner. ARTICLE 18 AMENDMENTS TO PARTNERSHIP DOCUMENTS 18.1 AMENDMENTS BY THE GENERAL PARTNER. The General Partner may without prior notice or consent of any Unitholder amend any provision of this Agreement (1) to elect for the Partnership to be bound by any successor statute governing limited partnerships and, if in the General Partner's opinion, the amendment does not have a material adverse effect on the Unitholder' s (other than those who consent thereto) or to elect for the Partnership to be reorganized as a limited partnership governed by and under the laws of a jurisdiction other than California, pursuant to the power granted in Section 4.12, (2) to conform this Agreement tochanges in the California Act or the FAA Act or interpretations thereof which, in the sole discretion of the General Partner, it believes appropriate, necessary or desirable, p rovided that in its reasonable opinion such amendment does not have a materially adverse effect upon the Unitholders or the Partnership, (3) if the amendment is necessary, in the opinion of counsel to the General Partner, to prevent the Partnership or the General Partner or the directors or officers of the General Partner from being in any manner subject to the provisions of the Investment Company Act of 1940, the Investment Advisers Act of 1940, or "plan asset" regulations adopted under the Employee Retirement Income Security Act of 1974, whether or not substantially similar to plan asset regulations currently applied or proposed by the Department of Labor, provided that such amendment does not have a materially adverse effect upon the Unitholders or the Partnership, (4) to reflect the exercise of any power granted to the General Partner under this Agreement, (5) to make any change which, in the sole discretion of the General Partner, is advisable to qualify or to continue the qualification of the Partnership as a limited partnership or a partnership in which the Limited Partners have limited liability under the laws of any state or that is necessary or advisable, in the sole discretion of the General Partner, to ensure that the Partnership will not be treated as an association taxable as a corporation for Federal income tax purposes, (6) to make any change that is necessary or advisable, in the sole discretion of the General Partner, to satisfy any requirements, conditions or guidelines contained in any opinion, directive, order, ruling or regulation of any Federal or state agency or contained in any Federal or state statute or that is necessary or desirable to facilitate the trading of the Depositary Units or comply with any rule, regulation, guideline, or requirement of any securities exchange or market system on which the Depositary Units are or will be listed for trading, (7) to amend the provisions of Articles 8 or 9 or both if the Partnership is advised at any time by legal counsel that the allocations provided in Article 9 are unlikely to be respected for Federal income tax purposes, in which case the General Partner is empowered to amend such provisions to the minimum extent necessary in accordance with the advice of counsel to effect the plans of allocations and distributions provided in this Agreement (new allocations made by the General Partner in reliance upon the advice of counsel described above shall be deemed to be made pursuant to a fiduciary obligation of the General Partner to the Partnership and the Unitholders, and no such new allocation shall give rise to any claim or cause of action by any Unitholder), in addition to the right given to the General Partner in Section 9.2(E) and 9.3(E), (8) to correct a mistake, clerical or technical error, ambiguity, or omission in this Agreement, (9) as necessary to reflect the respective allocations, distributions, voting, liquidation, and other rights, preferences, privileges, and restrictions with respect to new Units or interests issued by the Partnership, or (10) to effect any other amendment that does not have a 48 materially adverse effect on the Unitholders (other than to Unitholders who consent to the amendment); provided, however, that the General Partner shall not make any of the foregoing amendments unless the Partnership shall have received the favorable written opinion of counsel to the effect that such amendment (i) shall not cause the Limited Partners to be deemed to be taking part in the management and control of the business and affairs of the Partnership so as to subject the Limited Partners to unlimited liability thereof, (ii) will not cause the Partnership to be treated as an association taxable as a corporation for Federal income tax purposes, and (iii) is otherwise permissible under the California Act. The amendment shall promptly thereafter be disclosed to the Unitholders. In the event an amendment shall have been approved pursuant to this Article 18, the General Partner shall execute such amendment, certificate, and other documents as may be reasonably required for the purpose of effectuating the same; provided, however, that nothing in this Article 18 shall be construed to limit the authority of the General Partner to admit Additional Limited Partners or Substituted Limited Partners. 18.2 AMENDMENT PROCEDURES. Except as provided in Sections 18.1 and 18.3, all amendments to this Agreement shall be made solely in accordance with the following procedures: (A) Any amendments of this Agreement must be proposed either: (1) By the General Partner, by submitting the text of the proposed amendment to all Limited Partners in writing; or (2) By Limited Partners owning (as Limited Partners and not as Assignees) at least 25% of the total Units and Depositary Units owned by Limited Partners (as Limited Partners and not as Assignees), by submitting their proposed amendment in writing to the General Partner. The General Partner shall, within 60 days after the receipt of any such proposed amendment, or as soon thereafter as is reasonably practicable, submit the text of the proposed amendment to all Limited Partners. The General Partner may include in such submission its recommendation as to the proposed amendment. (B) If an amendment is proposed pursuant to this Section 18.2, the General Partner shall seek the written consent of the Limited Partners to such amendment or shall call a meeting of the Limited Partners to consider and vote on the proposed amendment, unless, in the opinion of counsel to the General Partner, such proposal would be illegal under applicable law, if adopted, in which case the General Partner shall not be required to take any further action with respect thereto. (C) A proposed amendment, other than those set forth in Section 18.1, shall be effective only if approved by the General Partner and a Majority Interest, unless a greater percentage of the Limited Partners is required by any other provision of this Agreement. 18.3 RESTRICTED AMENDMENTS. (A) Except with the affirmative vote of the General Partner and Limited Partners owning 95% of the outstanding Units for which the Partnership has valid current addresses, no amendment shall be adopted which would (i) result in the loss of limited liability of any Unitholder who does not consent thereto, or (ii) change the form of the Partnership to a general partnership. (B) Upon the approval of a Majority Interest, the form of the Partnership may be changed to a corporation if the General Partner has determined that such change is advisable as a result of amendments to the Code that result in the Partnership being taxed as a corporation. (C) Notwithstanding the provisions of Section 18.1, no provision of this Agreement which establishes a percentage of votes required of the Partners to take any action shall be amended, altered, changed, or rescinded in any respect which would have the effect of reducing the voting requirement, unless such action is approved by Limited Partners holding outstanding Units whose aggregate percentage interests in such Units constitute not less than the voting requirements sought to be 49 reduced. This Section 18.3(C) shall only be amended with the approval by the General Partner and Limited Partners owning 95% of the outstanding Units for which the Partnership has valid current addresses. 18.4 AMENDMENTS NEEDING CONSENT OF THE GENERAL PARTNER. Notwithstanding any other provision of this Agreement, without the consent of the General Partner (and any Departing General Partner that would be affected thereby), this Agreement may not be amended to modify the compensation, distributions, or rights of reimbursement to which the General Partner or Departing General Partner is entitled or affect the duties of the General Partner or the indemnification or the protection from liability which the General Partner or Departing General Partner and their officers, directors, agents, employees, Affiliates, and assigns are entitled. 18.5 AMENDMENTS TO CERTIFICATE OF LIMITED PARTNERSHIP. (A) The General Partner shall cause to be filed with the California Secretary of State, within 30 days after the happening of any of the following events, an amendment to the Certificate of Limited Partnership reflecting the occurrence of any of the following events: (1) A change in the name of the Partnership; (2) A change in either of the following: (i) The street address of the Partnership's principal executive office; (ii) If the principal executive office is not in California, the street address of an office in California; (3) A change in the address or withdrawal of the General Partner, or a change in the address of the agent for service of process, unless a corporate agent is designated, or appointment of a new agent for service of process; (4) The admission of a General Partner and that Partner's address; or (5) The discovery by the General Partner of any false or erroneous material statement contained in the Certificate of Limited Partnership. (B) Any certificate of limited partnership filed or recorded in jurisdictions other than California shall be amended as required by applicable law. (C) The Certificate of Limited Partnership may also be amended at any time in any other manner deemed appropriate by the General Partner. 18.6 AMENDMENT REGARDING NEW GENERAL PARTNER. In connection with the admission to the Partnership of any successor General Partner, the General Partner shall take all steps necessary and appropriate to prepare and record or file any amendment or restatement to this Agreement and the Certificate of Limited Partnership that may be required with respect to such admission and may for this purpose exercise the power of attorney granted pursuant to Article 17. ARTICLE 19 MISCELLANEOUS PROVISIONS 19.1 NOTICES. All notices or other communications required or permitted to be given pursuant to this Agreement shall, in the case of notices or communications required or permitted to be given to Unitholders, be in writing and shall be considered as properly given or made if personally delivered or if mailed by United States first class mail, postage prepaid, or if sent by prepaid telegram, and addressed to such Unitholder's address for notices as it appears on the records of the Partnership, and, in the case of notices or communications required or permitted to be given to the General Partner, shall be in writing and shall be considered as properly given or made if personally delivered, or if sent by prepaid telegram, or if mailed by United States certified or registered mail return receipt requested, 50 postage prepaid, and addressed to the General Partner at 2988 Campus Drive, San Mateo, California 94403. Any Unitholder may change the address for notices, by giving notice of such change to the Partnership, and the General Partner may change its address for notices by giving notice of such change to all Unitholders. Commencing on the 10th day after the giving of such notice, such newly designated address shall be such Person's address for the purpose of all notices or other communications required or permitted to be given pursuant to this Agreement. Any notice or other communication shall be deemed to have been given as of the date on which it is personally delivered or, if mailed or telegraphed, the date on which it is deposited in the United States mails or transmitted, in each case in compliance with the terms of this Section 19.1, except that any notice or other communication mailed or telegraphed to the General Partner which is not received by the General Partner within 10 days after the date of its mailing or transmission shall be deemed to have been given as of the date actually received by the General Partner. 19.2 CHOICE OF VENUE AND LAW. Action to enforce any provision of this Agreement or in any action brought by the Partners or Assignees against the General Partner or the Partnership shall be brought in San Francisco, California. This Agreement shall be governed by and construed under the laws of the State of California. 19.3 ARTICLE AND SECTION-HEADINGS. The headings in this Agreement are inserted for convenience and identification only and are in no way intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. 19.4 SOLE AGREEMENT. This Agreement and the exhibits hereto constitute the entire understanding of the parties hereto with respect to the subject matter hereof and supersede all prior or contemporaneous agreements and understandings pertaining thereto. 19.5 FORCE MAJEURE. If the General Partner is rendered unable, wholly or in part, by "force majeure" (as herein defined) to carry out any of its obligations under this Agreement, other than the obligation hereunder to make money payments, the obligations of the General Partner, insofar as it is affected by such force majeure, shall be suspended during, but no longer than, the continuance of such force majeure. The term "force majeure" as used herein shall mean an act. of God, strike, lockout or other industrial disturbance, act of public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, governmental restraint, unavailability of equipment, and any other cause, whether of the kind specifically enumerated above or otherwise, which is not within the control of the General Partner. 19.6 REMEDIES CUMULATIVE. The remedies of the parties under this Agreement are cumulative and shall not exclude any other remedies to which any Person may be lawfully entitled. 19.7 WAIVER. No failure by any party to insist upon the strict performance of any covenant, duty, agreement, or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute a waiver of any such breach or any other covenant, duty, agreement, or condition. 19.8 WAIVER OF ACTION FOR PARTITION. Each of the parties hereto irrevocably waives during the cerm of the Partnership any right that he may have to maintain any action for partition with respect to Partnership Assets. 19.9 ASSIGNABILITY. Subject to the restrictions on transferability contained herein, each and all of the covenants, terms, provisions, and agreements herein contained shall be binding upon and inure to the benefit of the successors, heirs, devisees, executors, administrators, legal representatives, and assigns of the respective parties hereto. 19.10 GENDER AND NUMBER. Whenever the context requires, the gender of all words used hereby shall include the masculine, feminine, and neuter, the singular of all words shall include the singular and plural, and the plural of all words shall include the singular and plural. 51 19.11 FURTHER ACTION. The Unitholders shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement. 19.12 CREDITORS. None of the provisions of this Agreement shall be for the benefit of or enforceable by any creditors of the Partnership. 19.13 CONSTRUCTION. If any language is stricken or deleted from this Agreement, such language shall be deemed never to have appeared herein and no other implication shall be drawn therefrom. The language in all parts of this Agreement shall be in all cases construed according to its fair meaning and not strictly for or against the General Partner or the Unitholders. 19.14 SEVERABILITY. If any provision of this Agreement, or the application thereof, shall, for any reason and to any extent, be invalid or unenforceable, the remainder of this Agreement and the application of such provision to other Persons or circumstances shall not be affected thereby, but rather shall be enforced to the maximum extent permissible under applicable law. 19.15 SURVIVAL. It is the express intention and agreement of all parties to this Agreement that all covenants, agreements, statements, representations, warranties, and indemnities made in this Agreement shall survive the execution and delivery of this Agreement. 19.16 EXECUTION IN COUNTERPARTS. To facilitate execution, this Agreement may be executed in as many counterparts as may be required; and it shall not be necessary that the signatures of, or on behalf of, each party, or that the signatures of all persons required to bind any party, appear on each counterpart; but it shall be sufficient that the signature of, or on behalf of, each party, or that the signatures of the persons required to bind any party, appear on one or more of the counterparts. All counterparts shall collectively constitute a single agreement. It shall not be necessary in making proof of this Agreement to produce or account for more than a number of counterparts containing the respective signatures of, or on behalf of, all the parties hereto. 52 IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the day and year first written above. GENERAL PARTNER: AIRLEASE MANGEMENT SERVICES, INC. By:____________________________________ Title: President _________________________________ ORGANIZATIONAL LIMITED PARTNER: UNITED STATES AIRLEASE HOLDING, INC. By:____________________________________ Title: President _________________________________ LIMITED PARTNERS: NORTH AMERICAN AIRCRAFT FINANCE CORPORATION By:____________________________________ Title: Executive Vice President _________________________________ OTHER LIMITED PARTNERS (pursuant to powers-of-attorney to the General Partner) For the purposes of Section 3.5 only: UNTIED STABS AIRLEASE. INC. By:______________________________________ Title: President ___________________________________ 53 EXHIBIT I TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP CERTIFICATE FOR LIMITED PARTNERSHIP UNITS OF AIRLEASE LTD., A CALIFORNIA LIMITED PARTNERSHIP No.__________ __________ Units Airlease Management Services, Inc., as the General Partner of Airlease Ltd., A California Limited Partnership, hereby certifies that is the registered owner of units of limited partnership interest in the Partnership ("Units"). The rights, preferences, privileges, and restrictions of the Units are set forth in the Amended and Restated Agreement of Limited Partnership under which the Partnership was formed and is existing, and in the Certificate of Limited Partnership filed for record in the Office of the Secretary of State of the State of California, copies of which are on file at the General Partner's office at 2988 Campus Drive, San Mateo, California 94403. THIS CERTIFICATE IS NON-NEGOTIABLE AND IS NOT TRANSFERABLE EXCEPT UPON DEATH OR BY OPERATION OF LAW OR TO THE GENERAL PARTNER OR THE PARTNERSHIP. Airlease, Ltd., A California Limited Partnership By Airlease Management Services, Inc., General Partner Dated:_________________ By:____________________________________ Title:_________________________________ BY ACCEPTANCE OF THIS CERTIFICATE FOR LIMITED PARTNERSHIP UNITS, AND AS A CONDITION TO BEING ENTITLED TO ANY RIGHTS IN OR BENEFITS WITH RESPECT TO THE UNITS EVIDENCED HEREBY, A HOLDER HEREOF (INCLUDING ANY TRANSFEREE HEREOF) IS DEEMED TO HAVE AGREED, WHETHER OR NOT SUCH HOLDER IS ADMITTED TO THE PARTNERSHIP AS A SUBSTITUTED LIMITED PARTNER WITH RESPECT TO THE UNITS EVIDENCED HEREBY, TO COMPLY WITH AND BE BOUND BY ALL TERMS AND CONDITIONS OF THE AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP UNDER WHICH THE PARTNERSHIP WAS FORMED AND IS EXISTING (INCLUDING, WITHOUT LIMITATION, PROVISIONS THEREOF RELATING TO CONFLICTS OF INTEREST, LIMITATIONS ON LIABILITY, REDEMPTION, AND INDEMNIFICATION OF THE GENERAL PARTNER THEREOF), A COPY OF WHICH HAS BEEN AVAILABLE FOR INSPECTION AND MAY BE OBTAINED UPON REQUEST FROM THE PARTNERSHIP. A PERSON WHO I$ NOT A UNITED STATES CITIZEN OR RESIDENT ALIEN IN THE UNITED STATES MAY NOT HOLD ANY INTEREST IN THE PARTNERSHIP, AND ACQUISITIONS BY OR TRANSFERS TO SUCH PERSON ARE NULL AND VOID. EX-10.53 MATERIAL CO 4 ex10-53.txt CERTIFICATE OF REDELIVERY AND AGREEMENT-REG. #806 EXHIBIT 10.53 CERTIFICATE OF REDELIVERY AND AGREEMENT This Certificate of Redelivery and agreement is delivered on and as of the date set forth below by FIRST UNION NATIONAL BANK (as successor to MERIDIAN TRUST, hereinafter referred to as "Lessor"), not in its individual capacity, but solely as Owner Trustee on behalf of Owner Participant AIRLEASE LTD., to US AIRWAYS, INC. (as successor by merger to P.S.A., INC., hereinafter referred to as "Lessee"), pursuant to that certain Lease Agreement dated as of _______________(as amended, supplemented and assigned, hereinafter referred to as the "Lease Agreement"): 1. DETAILS OF ACCEPTANCE: In accordance with and subject to the provisions of the Lease Agreement, Lessee has hereby redelivered to Lessor and Lessor has hereby accepted from Lessee the following described aircraft at__________hours this _________ day of ______________2001 at__________________________________________________________: a. Aircraft Model: McDonnell Douglas model DC9-81 b. U.S. Registration: 806USAirframe c. Manufacturer's Serial Number. Serial Number: 48038 d. Engine Number 1: Serial Number. 708117 e. Engine Number 2: Serial Number: 708136 2. CONFIRMATION OF UNDERTAKINGS: The terms used in this Certificate shall have the meanings given to such terms in the Lease Agreement. Lessor accepts redelivery of the Aircraft under the Lease Agreement and waives any discrepancy between the physical condition of the Aircraft and that required by the Lease Agreement, subject to satisfaction by Lessor and Lessee of the items listed in Schedule 1, attached hereto. Lessee confirms that its indemnification obligations under the Lease Agreement shall survive the return of the Aircraft. Lessee will perform its obligations and agreements set forth in Schedule 1. Upon payment of all amounts due and performance of all obligations contained in Schedule 1, attached hereto, Lessor and Lessee agree that all of Lessee's obligations (except for those indemnification obligations which survive the lease of return of the Aircraft pursuant to the terms of the Lease) pursuant to the Lease Agreement have been fulfilled. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Certificate of Redelivery N806US IN WITNESS WHEREOF, Lessor and Lessee have caused this Certificate of Redelivery and Agreement to be executed in their names, by their duly authorized officers or representatives, pursuant to due corporate authority, all as of the date written in Paragraph 1 above. Lessor: FIRST UNION NATIONAL BANK, not in its individual capacity, but solely as Owner Trustee By: ____________________________________ VICE PRESIDENT Title: ____________________________________ Lessee: US AIRWAYS, INC. By: ____________________________________ Title: ____________________________________ Schedule I C-Check Labor(1) $182,500 Non-routine Maintenance $ 63,875 Open & Deferred Items(2) $ 24,612 KCN Upgrade Labor(3) $ 18,800 Rent October l- November 14 $291,878 ______________________________________________________________ Total $579,665 Payment payable by Lessee to Lessor at Redelivery ($289,833) ______________________________________________________________ Principal Amount of Note Payable by Lessee to Lessor at redelivery(4 &5) $289,833 1. Lessee to be first choice provider to all required materials/notables during C-Cheek. If lessee is unable to provide materials/notables in a timely fashion so as not to delay completion of the C-Check cost to be added to outstanding note payment. Invoice to be provided by 3rd party maintenance provider. 2. Lessee to be first choice provider for all required materials/notables during C-Check. If lessee is unable to provide materials/notables, cost to be added to outstanding note payment. Invoice to be provided by 3rd party maintenance provider. 3. Lessee will transfer KCN equipment to lessor upon delivery from Boeing. Lessee to pay for KCN equipment and transfer promptly to TIMCO. 4. Engines to be video borescoped per Prate & Whitney approved FOD inspection (Reference PW MM 72-00-00, p. 639 & p.646) at 3rd party location. Copy of the video borescope to be provided to lessee. Any subsequent FOD discovered as a result of the Pratt & Whitney Approved FOD Inspection, lessee is responsible for the associated cost of the specific FOD repair. Other non-FOD findings as a result of the inspection are net covered by this agreement. 5. Payment to begin 12 months from execution of this Certificate of Redelivery and Agreement and payable in equal monthly payments for 12 months. Interest on the Note will not accrue for 12 months & at the end of the 12th month interest accrual will begin at 7% per annum on the outstanding balance. Principal amount of the note payable will be increased by amounts payable to lessor under items 1-4 above. Lessee will at the request of lessor execute amendments to the Notes confirming such additions to the principal amount. (REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] EX-10.54 MATERIAL CO 5 ex10-54.txt CERTIFICATE OF REDELIVERY AND AGREEMENT-REG. #807 EXHIBIT 10.54 CERTIFICATE OF REDELIVERY AND AGREEMENT This Certificate of Redelivery is delivered on and as of the date set forth below by FIRST UNION NATIONAL BANK (as successor to MERIDIAN TRUST, hereinafter referred to ass "Lessor"), not in its individual capacity, but solely as Owner Trustee on behalf of Owner Participant AIRLEASE LTD., to US AIRWAYS, INC. (as successor by merger to P.S.A., INC., hereinafter referred to as "Lessee"), pursuant to that certain Lease Agreement dated as of _____________, (as amended, supplemented and assigned, hereinafter referred to as the "Lease Agreement"): 1. DETAILS OF ACCEPTANCE: In accordance with and subject to the provisions of the Lease Agreement, Lessee has hereby redelivered to Lessor and Lessor has hereby accepted from Lessee the following described aircraft at _____ hours this _____ day of _________________ 2001 at _____________________________: a. Aircraft Model: McDonnell Douglas model DC9-81 b. U.S. Registration: 807USAirframe c. Manufacturer's Serial Number: Serial Number: 48039 d. Engine Number 1: Serial Number: 708113 e. Engine Number 2: Serial Number: 708118 2. CONFIRMATION OF UNDERTAKINGS: The terms used in this Certificate shall have the meanings given to such terms in the Lease Agreement. Lessor accepts redelivery of the Aircraft under the Lease Agreement and waives any discrepancy between the physical condition of the Aircraft and that required by the Lease Agreement, subject to satisfaction by Lessor and Lessee of the items listed in Schedule 1, attached hereto. Lessee confirms that its indemnification obligations under the Lease Agreement shall survive the return of the Aircraft. Lessee will perform its obligations and agreements set forth in Schedule 1. Upon payment of all amounts due and performance of all obligations contained in Schedule 1, attached hereto, Lessor and Lessee agree that all of Lessee's obligations (except for those indemnification obligations which survive the lease of return of the Aircraft pursuant to the terms of the Lease) pursuant to the Lease Agreement have been fulfilled. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] Certificate of Redelivery N807US IN WITNESS WHEREOF, Lessor and Lessee have caused this Certificate of Redelivery and Agreement to be executed in their names, by their duly authorized officers or representatives, pursuant to due corporate authority, all as of the date written in Paragraph 1 above. Lessor: FIRST UNION NATIONAL BANK, Not in its individual capacity, but Solely as Owner Trustee By: ____________________________________ VICE PRESIDENT Title: ____________________________________ Lessee: US AIRWAYS, INC. By: ____________________________________ Title: ____________________________________ Schedule 1 C-Check Labor(1) $182,500 Non-routine Maintenance $ 63,875 Open & Deferred Items(2) $ 77,742 KCN Upgrade Labor(3) $ 16,800 Rent October l- November 14 $281,878 ______________________________________________________________ Total $632,795 Payment payable by Lessee to Lessor at Redelivery ($318,398) ______________________________________________________________ Principal Amount of Note Payable by Lessee to Lessor at redelivery(4 &5) $316,398 1. Lessee to be flrst choice provider for all required materials/notables during C-Check. . If lessee is unable to provide materials/notables in a timely fashion so as not to delay completion of the C-Check cost to be added to outstanding note payment. Invoice to be provided by 3rd party maintenance provider. 2. Lessee to be first choice provider for all required materials/notables, during C-Check. If lessee is unable to provide materials/notables, cost to be added to outstanding note payment. Invoice to be provided by 3rd party maintenance provider. 3. Lessee will transfer KCN equipment to lessor upon delivery from Boeing. Lessee to pay for KCN equipment and transfer promptly to TIMCO. 4. Engines to be video borescoped per Pratt & Whitney approved FOD inspection (Reference PW MM 72-00-00, p. 638 & p.645) at 3rd party location. Copy of the video borescope to be provided to lessee. Any subsequent FOD discovered as a result of the Pratt & Whitney Approved FOD Inspection. Lesses is responsible for the associated cost of the specific FOD repair, Other non-FOD findings as a result of the inspection are not covered by this agreement. 5. Payment to begin 12 months from execution of this Certificate of Redelivery and Agreement and payable in equal monthly payments for 12 months. Interest on the Note will not accrue for 12 months & at the end of the 12th month Interest accrual will begin at 7% per annum on the outstanding balance. Principal amount of the note payable will be increased by amounts payable to lessor under items 1-4 above. Lessee will at the request Of lessor execute amendments to the Notes confirming such additions to the principal amount. [REMAINDER OP PAGE INTENTIONALLY LEFT BLANK] EX-10.55 MATERIAL CO 6 ex10-55.txt AIRCRAFT LEASE AGREEMENT EXHIBIT 10.55 AIRCRAFT LEASE AGREEMENT Dated as of November 21, 2001 between FIRST UNION NATIONAL BANK not in its individual capacity but solely as Trustee Lessor and CSI AVIATION SERVICES, INC. Lessee and AIRLEASE LTD. Owner Participant McDonnell Douglas DC-9-Series 82 Aircraft Aircraft Reg. No. N806US Manufacturer's Serial No. 48038 AIRCRAFT LEASE AGREEMENT, dated as of November 21, 2001, between FIRST UNION NATIONAL BANK (successor to Meridian Trust Company), a national banking association organized and existing under the laws of the United States of America, not in its individual capacity but solely as Trustee under the Trust Agreement defined in Section 1 below ("Lessor"), CSI AVIATION SERVICES, INC., a New Mexico corporation ("Lessee"), and AIRLEASE LTD., a California limited partnership ("Airlease")], W I T N E S S E T H: - - - - - - - - - - WHEREAS, Lessee desires to lease from Lessor and Lessor is willing to lease to Lessee the aircraft described herein upon and subject to the terms and conditions of this Lease. NOW THEREFORE, in consideration of the mutual promises herein, Lessor and Lessee agree as follows: Section 1. DEFINITIONS. ----------- Unless the context otherwise requires, the following terms shall have the following meanings for all purposes of this Lease and shall be equally applicable to both the singular and the plural forms of the terms herein defined. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time. "Act" means the Federal Aviation Act of 1958, as amended from time to time. "Aircraft" means the Airframe, together with the two Engines initially installed on such Airframe when delivered and leased hereunder and all applicable current manuals and records relating thereto (or any Replacement Engine substituted for any of such Engines hereunder), whether or not any of such initial or Replacement Engines may from time to time thereafter be installed on such Airframe or may be installed on any other airframe or on any other aircraft. "Airframe" means (i) the McDonnell Douglas DC-9-Series 82 aircraft (excluding Engines or engines from time to time installed thereon) manufactured by Manufacturer in 1981 and currently bearing United States registration number N806US and manufacturer's serial number 48038 leased hereunder by Lessor to Lessee and (ii) any and all Parts so long as the same shall be incorporated in such aircraft and any and all parts removed from such aircraft so long as title thereto shall remain vested in Lessor in accordance with the terms hereof. "Airframe Payment Amount" has the meaning provided in Schedule 2. "Airframe Payments" has the meaning provided in Section 3.5. "APU Payment Amount" has the meaning provided in Schedule 2. "APU Payments" has the meaning provided in Section 3.5. "Basic Rent" means the rent identified as Basic Rent in and payable pursuant to Section 3.2. "Basic Rent Amount" has the meaning provided in Schedule 2. "Business Day" means any day other than a Saturday, Sunday or other day on which banking institutions in San Francisco, California or Wilmington, Delaware are authorized or required by law to be closed. "Cycle" means one take-off and landing of the Aircraft or, in respect of any Engine or Part temporarily installed on another aircraft, of that other aircraft. "Delivery Date" means the date of the Lease Supplement relating to the Aircraft, which date shall be the date on which the Aircraft is leased to Lessee hereunder. "Delivery Flight" is defined in Section 2.5. "Delivery Location" means Lake City, Florida, or other location in the United States agreed by Lessor and Lessee. "DOT" means the United States Department of Transportation or any governmental person, agency or authority succeeding to the functions of such Department of Transportation. "Engine" means (i) each of the two Pratt & Whitney JT8D-217 engines identified by manufacturer's serial number on the Lease Supplement subjecting the Aircraft to this Lease and originally installed on the Airframe on delivery thereof pursuant to this Lease, whether or not from time to time thereafter installed on such Airframe or installed on any other airframe, and (ii) any Replacement Engine, whether or not from time to time thereafter installed on the Airframe or any other airframe, together in each case with any and all Parts incorporated in such Engine and any and all Parts removed from such Engine so long as title thereto shall remain vested in Lessor in accordance with the terms hereof. At such time as a Replacement Engine shall be substituted hereunder and the Engine for which the substitution is made shall be released, such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means as of any date of determination, all Engines then leased hereunder. "Engine Payment Amount" has the meaning provided in Schedule 2. "Engine Payments" has the meaning provided in Section 3.5. "Event of Loss" means, in relation to the Aircraft, the Airframe or any Engine: (a) its actual, constructive, compromised, arranged or agreed total loss (including any damage thereto or requisition for use or hire which results in an insurance settlement on the basis of a total loss); or (b) its destruction or damage beyond repair or being rendered permanently unfit for normal use for any reason whatsoever; or (c) its requisition (other than a requisition for hire by the Government not extending beyond the earlier of the last day of the Term and the 180th day after the commencement of such requisition), confiscation, sequestration, detention, forfeiture, compulsory acquisition or seizure; or (d) its hijacking, theft or disappearance resulting in loss of possession by Lessee for a period of 30 consecutive days or longer or extending beyond the last day of the Term. -2- "Expiry Date" means October 31, 2006. "FAA" means the United States Federal Aviation Administration or any governmental person, agency or other authority succeeding to the functions of the Federal Aviation Administration. "FAR" means the regulations promulgated by the FAA pursuant to the Act. "Flight Hour" means the number of hours including fractions thereof between the moment the Aircraft (or other aircraft in the case of Parts or Engines temporarily installed on such other aircraft) first leaves the ground for the purpose of flight until the moment the Aircraft (or such other aircraft) touches ground after such flight. "Gear Payment Amount" has the meaning provided in Schedule 2. "Gear Payments" has the meaning provided in Section 3.5. "Government" means the federal government of the United States of America or any instrumentality or agency thereof. "Indemnitee" means Lessor, in its individual and trust capacities, Owner Participant, Airlease, the Lenders and each of their respective successors, assigns, transferees, directors, partners, officers, employees and agents. "Lease", "this Lease", "this Agreement", "hereby", "herein", "hereof", "hereunder", or other like words mean this Aircraft Lease Agreement, as amended or supplemented in accordance with the terms hereof, including by way of one or more Lease Supplements. "Lease Default" means any event or condition which, with notice or lapse of time, or both, would constitute a Lease Event of Default. "Lease Event of Default" is defined in Section 14. "Lease Supplement" means a supplement to this Lease substantially in the form attached as Exhibit A hereto, subjecting an Aircraft, Engine or other property to this Lease. "Lender" means one or more banks or financial institutions or other persons notified in writing to Lessee that may from time to time provide financing to Lessor in relation to acquisition or continuing ownership of the Aircraft and shall include any person acting as agent or security agent or trustee for one or more Lenders; provided that any requirement in this Agreement to give notices to or receive consents from the Lender shall be disregarded until such time as the Lender has been granted a security interest in or mortgage over the Aircraft and Lessee is so notified. "Lessee" means CSI Aviation Services, Inc., a New Mexico corporation, and its permitted successors and assigns hereunder. -3- "Lessee Documents" means this Lease, the Lease Supplement, the USMS Agreement, the Maintenance Agreement, any acknowledgment of the Security Documents, the Other Lease Documents and all notices, consents, certificates, confirmations and other documents from time to time issued or entered into by Lessee pursuant to or in connection with any thereof. "Lessor" means First Union National Bank (successor to Meridian Trust Company), not in its individual capacity but solely as Trustee under the Trust Agreement, and its permitted successors and assigns thereunder and hereunder. "Lessor Liens" means Liens of any Person claiming by, through or under Lessor or any prior owner or user of the Aircraft, which arise as a result of (i) claims not related to the transactions contemplated by this Lease, (ii) any act or omission of Lessor or any prior owner or user of the Aircraft which is not related to the transactions contemplated by this Lease, or any act of Lessor which is in violation of any of the express terms of this Lease, or (iii) claims arising out of any transfer by Lessor of the Aircraft in violation of the express terms of this Lease. "Lien" means any mortgage, pledge, lien, encumbrance, security interest or claim of rights affecting title to or any possessory or ownership interest in property. "Life Limited Part" means a Part having an accepted or recommended Manufacturer or FAA limitation on the use of such Part. "Loan Agreement" means any agreement from time to time entered into between Lessor and one or more Lenders providing financing to Lessor in relation to the acquisition or continuing ownership of the Aircraft. "Maintenance Agreement" means the agreement between Lessee and Spirit dated as of November 21, 2001 regarding the maintenance of the Aircraft and any replacement maintenance and operation agreement entered into by Lessee and a Maintenance Provider which agreement is approved in writing by Lessor. "Maintenance Provider" means a solvent IAR Part 121 certified air carrier approved in writing by Lessor, or Spirit. "Maintenance Document" means the Manufacturer's recommended maintenance program. "Maintenance Program" is defined in Section 8.1. "Manufacturer" means (i) with respect to the Airframe, The Boeing Company, a Delaware corporation, and (ii) with respect to the Engines, United Technologies Corporation, a Delaware corporation, Pratt & Whitney Aircraft Commercial Engine Business, and their respective successors and assigns. "Officer's Certificate" means a certificate signed by the Chairman, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Person providing such certificate. -4- "Other Lease" means that certain Aircraft Lease Agreement entered into, or to be entered into, between Lessor and Lessee in respect of that certain McDonnell Douglas DC-9-Series 82 Aircraft bearing manufacturer's serial number 48039. "Other Lease Documents" means the Lessee Documents as defined in the Other Lease. "Overdue Interest Rate" means a rate of interest per annum equal to the rate Bank of America, N.A. announces to be in effect from time to time as its prime rate plus three percent calculated on the basis of a 365/366 day, as appropriate, year and actual number of days elapsed. "Overhaul Payment Date" means the tenth day of each calendar month during the Term commencing in the calendar month after the calendar month in which the Delivery Date occurs and the Termination Date. "Overhaul Payments" shall have the meaning provided in Section 3.5. "Owner Participant" means Airlease and its successors and permitted assigns under the Trust Agreement. "Parts" means all appliances, parts, components, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature (other than complete Engines or engines) (i) which may from time to time be incorporated in the Airframe or any Engine (other than a replaced Part to which title has vested in Lessee pursuant to Section 8.2 hereof) or (ii) so long as title thereto shall remain vested in Lessor in accordance with Section 8.2 hereof after removal therefrom, (and "Part" means any of the foregoing) . "Permitted Lien" means any Lessor Lien and the Security Documents. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Redelivery Location" shall have the meaning provided in Section 5.1. "Rent" means Basic Rent and Supplemental Rent. "Rent Payment Date" means the Delivery Date, the tenth day of each calendar month during the Term and the last day of the Term. "Replacement Engine" means an engine which shall have been substituted for an Engine leased hereunder pursuant to Section 10.2 and shall be of the same make and model (or an improved model engine suitable for installation and use on the Airframe). "Security" shall have the meaning provided in Section 3.6(a). "Security Documents" means any and all assignments by way of security or mortgage entered into by Lessor of any or all of Lessor's right, title and interest in and to the -5- Aircraft, this Agreement and/or the other Lessee Documents from time to time granted by Lessor in favor of any Lender. "Stipulated Loss Value" with respect to the Aircraft means an amount equal to Nine Million U.S. Dollars ($9,000,000). "Spirit" means Spirit Airlines, a Delaware corporation. "Supplemental Rent" means all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees to pay to Lessor or any other Person hereunder, including, without limitation, Stipulated Loss Value. "Tax Indemnitee" means the Indemnitees (other than the Lenders) and each of their respective successors, assigns, transferees, directors, officers, employees and agents. "Taxes" means all present and future taxes, levies, imposts, duties, withholdings, fees or charges of any nature whatsoever, and wheresoever imposed, including, without limitation, value added tax, consumption tax or any other tax in respect of added value or any income (including, without limitation, gross income, minimum, alternative minimum, capital gains income, gross receipts and net receipts), franchise, transfer, sales, use, business, occupation, excise, personal property, real property, stamp or other tax imposed by a taxing authority of any country, or governmental subdivision thereof or therein or by any international authority, together with any penalties, additions to tax, fines or interest with respect to any of the foregoing; and "tax" and "taxation" shall be construed accordingly. "Term" means the period commencing on the Delivery Date and expiring on the Termination Date. "Termination Date" means the Expiry Date, or, if earlier, (i) the date when Lessor receives the Stipulated Loss Value together with any other amounts then due and unpaid under the Lessee Documents following a Total Loss of the Aircraft, (ii) the date when Lessor terminates the leasing of the Aircraft to Lessee pursuant to the terms hereof, or (iii) the date on which the leasing of the Aircraft is terminated pursuant to Clause 3.1(b) or (c). "Trust Agreement" means the Trust Agreement dated as of July 10, 1986, between the Owner Participant, Trust Company and Airlease Management Services, Inc., as such Agreement has been amended or supplemented in accordance with its terms. "Trust Company" means First Union National Bank (successor to Meridian Trust Company), in its individual capacity. "USMS" means the United States Marshals Service. "USMS Agreement" means the Award/Contract dated October 2, 2001 between USMS and Lessee relating to the Aircraft. Section 2. DELIVERY AND ACCEPTANCE. ----------------------- -6- 2.1. DELIVERY AND LEASE OF AIRCRAFT. Subject to the conditions and pursuant to the terms of this Lease, Lessor hereby agrees to deliver the Aircraft on the Delivery Date and simultaneously to lease to Lessee hereunder, and Lessee hereby agrees to lease and accept from Lessor hereunder, the Aircraft. The Aircraft shall be delivered on or before November 24, 2001. Delivery and acceptance of the Aircraft shall occur at the Delivery Location. Lessor shall not be responsible for any loss or expense or any loss of profit arising from any delay in the delivery of, or failure to deliver, the Aircraft to Lessee under this Lease. 2.2. CONFIRMATION; ACCEPTANCE BY LESSEE. By execution and delivery of the Lease Supplement in respect of the Aircraft after the Delivery Flight, Lessee will confirm to Lessor that Lessee has accepted the Aircraft for all purposes hereof as being in good working order and repair and without defect in condition, design, operation, merchantability or fitness for use, whether or not discoverable by Lessee as of the date thereof, subject to any discrepancies set forth on the list of mutually agreed discrepancies referred to in Section 2.5 hereof. 2.3. LESSOR'S CONDITIONS TO LEASE. Lessor's obligation to lease the Aircraft to Lessee shall be subject to the receipt by Lessor of the following documents or other items on or before the Delivery Date for the Aircraft, all of which shall be reasonably satisfactory in form and substance to Lessor: (a) a Lease Supplement in the form of Exhibit "A" hereto, duly authorized, executed and delivered by Lessee and effective as of the Delivery Date; (b) copies of all documents evidencing corporate action taken by the Lessee with respect to this Lease, the Lease Supplement and the other Lessee Documents, and each other document required to be executed and delivered by the Lessee in accordance with the provisions hereof and thereof, and a copy of the resolutions of the board of directors of the Lessee, certified by the Secretary or Assistant Secretary thereof, evidencing the due authorization of the execution, delivery and performance of each such document, together with an incumbency certificate as to the person or persons authorized to execute and deliver such documents and the signature or signatures of such persons; (c) an Officer's Certificate of Lessee stating that: (i) the representations and warranties contained in Section 4.4 hereof and in the other Lessee Documents are true and correct on and as of such date as though made on and as of such time (except to the extent that such representations and warranties relate solely to an earlier date); and (ii) no event has occurred and is continuing, or would result from the lease of the Aircraft, which constitutes a Lease Default or Lease Event of Default; (d) an opinion or letter signed by an independent insurance broker or by an insurer acceptable to Lessor as to the due compliance with the insurance provisions of Section 11 hereof with respect to the Aircraft, together with certificates evidencing the insurance as required by Section 11 hereof; -7- (e) an opinion of Crowe & Dunlevy or other counsel experienced in federal aviation matters, as to the due filing for recordation of the Lease and the Lease Supplement and as to such other matters as Lessor may reasonably request, addressed to Lessor; (f) Basic Rent due on the Delivery Date; (g) the USMS Agreement,duly authorized, executed and delivered by all parties thereto and effective as of the Delivery Date; (h) the Maintenance Agreement shall have been duly authorized, executed and delivered by all parties thereto and effective as of the Delivery Date; and (i) such other documents, opinions and certificates incident to the foregoing as Lessor may reasonably request. 2.4. LESSEE'S CONDITION TO LEASE. Lessee's obligation to lease the Aircraft from Lessor shall be subject to the following: (a) the Aircraft shall have been tendered for delivery on the Delivery Date pursuant to Section 2.1, shall be registered in the United States and shall be in a condition to be put on an FAA Part 121 operators certificate; (b) the Aircraft shall have undergone immediately prior to the ferry flight contemplated by Section 2.5, the current phase of C-Check as defined in the Maintenance Document; (c) the Delivery Flight shall have been completed as described in Section 2.5. (d) the Aircraft shall have no deferred maintenance items and shall be in compliance (without regard to permitted in compliance extensions) with all regulations, mandatory maintenance directives, airworthiness directives and Federal Air Regulations or other instructions of the FAA or other United States Governmental Authorities having jurisdiction in each case that are required with respect to the Aircraft; (e) the Aircraft shall be free and clear of all Lessor Liens, other than the Lien of the Trust Agreement; (f) the Aircraft shall be equipped as provided in Schedule 1, Part A, and the Aircraft shall be in serviceable condition with all Parts fully functional; (g) Lessee shall be reasonably satisfied with any correction of discrepancies found during the Delivery Flight or if such discrepancies do not affect airworthiness and are not corrected prior to delivery, a list of such discrepancies shall be attached to the Receipt for Lease Aircraft which is attached hereto as Exhibit B; -8- (h) Lessor shall have tendered for delivery to Lessee all logs, manuals, drawings, and data and inspection, modification and overhaul records in respect of the Aircraft specified in Schedule 1, Part B; and (i) the USMS Agreement shall have been duly authorized, executed and delivered by all parties thereto and effective as of the Delivery Date. 2.5. INSPECTION; DELIVERY FLIGHT. Prior to the Delivery Flight, Lessor shall make the Aircraft, records and logbooks available to Lessee at the Delivery Location, so that Lessee may conduct, at Lessee's expense, a ground inspection which shall include a technical inspection of the Aircraft, records and logbooks. Promptly following the Ground Inspection, Lessor shall conduct, at Lessor's cost and expense, a delivery check flight (the "Delivery Flight") pursuant to standard test flight procedures, or other such procedures as the parties agree. Lessee shall be permitted three representatives on the Delivery Flight which shall not exceed two hours in length. The Delivery Flight may be performed in conjunction with the ferry flight from the Delivery Location to Alexandria, Louisiana. At the conclusion of the Delivery Flight, Lessor and Lessee shall prepare a list of mutually-agreed discrepancies, if any, arising during the Delivery Flight. Lessor shall either promptly correct such discrepancies or if the discrepancies do not affect the airworthiness of the Aircraft a list of such discrepancies may be attached to the Receipt For Lease Aircraft which is attached hereto as Exhibit B. Upon completion of the Delivery Flight and satisfaction or waiver of the conditions precedent set forth in Sections 2.3 and 2.4, Lessee shall execute and deliver the Receipt for Lease Aircraft and Lessee and Lessor shall execute the Lease Supplement, evidencing Lessee's acceptance of the Aircraft hereunder. If the Delivery Flight reveals any discrepancies or damage, and the cost of correcting any single discrepancy or item of damage would exceed $10,000 or the cost of correcting all discrepancies and damage would exceed $50,000, Lessor may, at its option, elect to terminate this Lease. If Lessor elects to terminate the Lease pursuant to the preceding sentence it shall reimburse Lessee for its reasonable expenses incurred in connection herewith. Section 3. TERM AND RENT; OVERHAUL PAYMENTS. 3.1. TERM. (a) The Aircraft shall be leased hereunder for the Term. (b) Lessee shall have the right to terminate the leasing of the Aircraft under this Lease on stated termination date of the USMS Agreement (as such termination dates shall be extended from time to time) by delivering to Lessor not later than 30 days before either such termination date a written notice specifying such termination date and stating that it is exercising its right to terminate the leasing of the Aircraft pursuant to this Section 3.1(b). (c) Lessor shall have the right to terminate the leasing of the Aircraft under this Lease on any date on which the USMS Agreement terminates by delivering to Lessee a written notice stating that it is exercising its right to terminate the leasing of the Aircraft pursuant to this Section 3.1(c). -9- (d) Any notice delivered pursuant to Section 3.1(b) or (c) shall be irrevocable, and shall be effective to terminate the leasing of the Aircraft pursuant to the terms hereof. (e) Lessee shall use all commercially reasonable efforts to extend the term of the USMS Agreement through the Expiry Date; it being understood that Lessee shall not be obligated to extend the term of the USMS Agreement (i) if the expected revenues under the USMS Agreement during the extended term thereof are not reasonably expected to be sufficient to cover the reasonably expected costs of maintaining and insuring the Aircraft, to pay the Basic Rent (or such lesser amount determined by Lessor in its sole discretion) and Supplemental Rent (without duplication of the cost of maintaining the Aircraft) and to provide a reasonable return to Lessee during such extended term. If Lessee elects to terminate the leasing of the Aircraft under Section 3.1(b), for a period of one year after completion of the Term, Lessee will not bid to directly or indirectly supply aircraft to USMS unless Lessee shall make a good faith effort to lease an aircraft of the type or size acceptable to USMS from Owner Participant on terms substantially similar to the terms of this Agreement and at a fair market value for such aircraft prior to entering into lease negotiations with any other Person. 3.2. BASIC RENT. Lessee hereby agrees to pay to Lessor Basic Rent in advance by paying to Lessor on each Rent Payment Date the Basic Rent Amount; provided that (i) the Basic Rent due on the Delivery Date shall be an amount equal to the product of the Basic Rent Amount and a fraction, the numerator of which is the number of days from and including the Delivery Date to but excluding the next Rent Payment Date and the denominator of which is 30 and (ii) the Basic Rent due on the Termination Date shall be an amount equal to the product of the Basic Rent Amount and a fraction, the numerator of which is the number of days from and including the last Rent Payment Date before the Termination Date to but excluding the Termination Date and the denominator of which is 30. 3.3. SUPPLEMENTAL RENT. Lessee also agrees to pay to Lessor, or to whomsoever shall be entitled thereto, any and all Supplemental Rent when and as the same shall become due and owing. Lessee shall also pay to Lessor, or to whomsoever shall be entitled thereto, as Supplemental Rent, to the extent permitted by applicable law, interest at the Overdue Interest Rate on any part of any installment of Basic Rent not paid when due for any period from the date on which the same was due to but excluding the date of payment in full and on any payment of Supplemental Rent not paid when due to Lessor, or to whosoever shall be entitled thereto, as the case may be, for the period from and including the date on which the same was due to but excluding the date of payment. The expiration or other termination of Lessee's obligation to pay Basic Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. 3.4. PAYMENTS. Payments of Rent, Overhaul Payments and any and all other amounts payable to Lessor hereunder shall be paid by wire transfer prior to 1:00 p.m., New York time, on the due date therefor, in immediately available funds of the United States of America, to Bank of -10- America, NT&SA, ABA No. 121000358, Account No.: 12331-34432, Account of: Airlease Ltd. Regarding: CSI Lease Payment, or as otherwise directed by Lessor in writing. Except as otherwise expressly provided herein, whenever any payment of Rent or other payment to be made hereunder shall be due on a day which is not a Business Day, such payment shall be made on the next preceding day which is a Business Day. 3.5. OVERHAUL PAYMENTS. On or before each Overhaul Payment Date, Lessee shall pay to Lessor as Supplemental Rent the following amounts (such amounts, the "Overhaul Payments"): (i) the Airframe Payment Amount for each Flight Hour the Airframe is operated during the last calendar month before that Overhaul Payment Date ("Airframe Payments"); (ii) the APU Payment Amount for each Flight Hour the Airframe is operated during the last calendar month before that Overhaul Payment Date ("APU Payments"); (iii) the Engine Payment Amount for each Flight Hour for each Engine during the last calendar month before that Overhaul Payment Date (each, an "Engine Payment"); and (iv) the Gear Payment Amount in respect of the ship set of landing gear for each Flight Hour during the last calendar month before that Overhaul Payment Date ("Gear Payments"); provided that the Overhaul Payments due on the Termination Date shall also include Overhaul Payments for operations carried by Lessee during the period commencing at the end of the calendar month preceding the Termination Date through to the Termination Date. Upon receipt of the Overhaul Payments, Lessor shall transfer the same by wire transfer of immediately available funds of the United States of America not later than 1:00 p.m., New York time on the due date thereof to the account of Airlease at Bank of America, NT&SA, ABA No. 121000358, Account No.: 12331-34432, Account of: Airlease Ltd., Reference: CSI Aviation or as otherwise directed by Airlease in writing. At the time Lessee pays the monthly Overhaul Payments to Lessor, Lessee shall concurrently deliver to Lessor and Lessor an operating report in the form attached as Exhibit D hereto. 3.6. SECURITY. (a) INITIAL DELIVERY. On or before the Delivery Date, Lessee shall provide to Lessor an irrevocable letter of credit satisfying the requirements of clause (c) of this Section, (such letter of credit -11- together with all other and further payments made to Lessor under this Section, the "Security"). No interest will accrue or be paid to Lessee in respect of the Security. (b) APPLICATION. If Lessee fails to comply with any of its obligations under any of the Lessee Documents or is otherwise in default thereunder and, in either case, any applicable grace periods referred to in Section 14 have expired, Lessor may apply all or any portion of the Security in or towards satisfaction of any sums due to Lessor by Lessee or to compensate Lessor for any sums that it may in its discretion advance or expend as a result of any such failure or default by Lessee. If Lessor applies all or any portion of the Security, it shall not be deemed a cure or waiver of any such failure or default, and Lessee shall immediately, upon written demand therefor, pay to Lessor as Supplemental Rent an amount equal to the amount so applied. (c) LETTER OF CREDIT. The letter of credit provided as Security shall (i) be in a stated amount equal to $250,000.00 aggregate for security under this Agreement and under the Other Lease, (ii) permit multiple drawings thereunder in an aggregate amount not to exceed such stated amount for application as provided in this Section, (iii) have a term of not less than twelve months and (iv) otherwise be substantially in the form of Exhibit E. Any such letter of credit shall be issued by, or if confirmed, confirmed by, a financial institution whose long-term unsecured debt is rated "A" or better by Moody's Investors Service or Standard & Poors and must be presentable for drawing in New York. Not later than fourteen days before the expiration date of any letter of credit held as Security, Lessee shall either (i) pay to Lessor Supplemental Rent equal to $250,000.00 or (ii) provide to Lessor a replacement letter of credit satisfying the requirements of this clause (c) or an amendment to such letter of credit in form and substance acceptable to Lessor extending the term thereof for not less than twelve months. If either Moody's Investor's Service or Standard & Poor's withdraw or suspend the ratings on the long-term unsecured debt of the financial institution issuing the letter of credit or downgrade such debt to any rating category below "A", not later than fourteen days after any such suspension, withdrawal or downgrading, Lessee shall either pay to Lessor $250,000.00 or provide to Lessor a replacement letter of credit satisfying the terms of this clause (c), and upon receipt thereof, Lessor shall return the original letter of credit to Lessee. 3.7. SET-OFF. At any time after the occurrence of a Lease Event of Default and as long as the same is continuing, Lessor may set off any matured obligation owed by Lessee under this Agreement or the other Lessee Documents against any obligation (whether or not matured) owed by Lessor to Lessee, regardless of the place of payment or currency. If the obligations are in different currencies, Lessor may convert either obligation at the market rate of exchange available in New York or at its option London for the purpose of the set-off. If an obligation is unascertained or unliquidated, Lessor may in good faith estimate that obligation and set off in respect of the estimated amount, in which case when the obligation is ascertained or liquidated Lessor or Lessee may make a payment to the other (as appropriate) in respect of any amount by which the ascertained or liquidated amount differs from the estimated amount. Lessor will not be obliged to pay any amounts to Lessee under this Agreement so long as any sums which are then -12- due from Lessee to Lessor under this Agreement or other Lessee's Documents remain unpaid or any Lease Event of Default or Lease Default is continuing, and any such amounts which would otherwise be due will fall due only if and when Lessee has paid all such sums and cured to Lessor's satisfaction all such Lease Events of Default or Lease Defaults, except to the extent that Lessor otherwise agrees or sets off such amounts against such payment pursuant to the foregoing provisions. Section 4. LESSOR'S WARRANTIES AND COVENANTS; DISCLAIMER; LESSEE REPRESENTATIONS AND WARRANTIES. 4.1. WARRANTIES OF LESSOR. Lessor warrants that: (a) Trust Company is a national banking association duly organized and validly existing under the laws of the United States of America, and this Lease has been executed by an officer of Trust Company who is duly authorized to do so in accordance with the terms of the Trust Agreement. (b) The Trust Agreement is in full force and effect and Lessor is duly and properly authorized to execute and deliver this Lease under the Trust Agreement. (c) Lessor has received and has complied with every necessary consent, approval, order, or authorization of, or registration with, and has given any prior notice to, any federal, state or foreign governmental authority having jurisdiction to the extent required for the Lessor to execute and deliver this Lease and the Lease Supplement to be executed and delivered on the Delivery Date and to lease the Aircraft hereunder and thereunder. (d) This Lease has been, and upon execution and delivery of the Lease Supplement to be executed and delivered on the Delivery Date such Lease Supplement will be, duly executed and delivered by Lessor and constitutes or will constitute the legal, valid, and binding obligations of Lessor, enforceable in accordance with their respective terms. (e) There are no suits or proceedings pending or, to the knowledge of Lessor, threatened in any court or before any regulatory commission, board or other administrative governmental agency against or affecting Lessor, which, if adversely determined, will have a materially adverse effect on the ability of Lessor to lease the Aircraft. 4.2. LESSOR COVENANTS. (a) QUIET ENJOYMENT. So long as Lessee shall not be in default under the terms and provisions of this Lease, Lessor will not disturb, and will not permit anyone claiming by, through or under Lessor to disturb, the Lessee's quiet, peaceful use and enjoyment of the Aircraft. (b) LESSOR OBLIGATIONS FOLLOWING TERMINATION DATE. Within five Business Days after (i) redelivery of the Aircraft to Lessor in accordance with and in the condition required by this Lease, or (ii) payment to Lessor of the Stipulated Loss Value following an Event of Loss, or in each case such later time as Lessor is satisfied that Lessee has irrevocably paid all amounts which may then be outstanding or become payable under this Lease and the other Lessee -13- Documents, Lessor will return the Security paid or delivered to Lessor less amounts applied pursuant to Section 3.6(b). (c) LESSOR OVERHAUL CONTRIBUTIONS. Lessor shall pay to Lessee: (i) in respect of a Q-Check performed in accordance with the Maintenance Program during the Term, the lesser of (x) the actual cost of performing such Q-Check and (y) the amount, if any, by which the total Airframe Payments received by Lessor prior to the performance of such Q-Check exceed the total amount, if any, previously paid to Lessee under this clause (i); (ii) in respect of a full performance restoring shop visit of an Engine and, the scheduled replacement of life-limited Parts for an Engine, in each case performed in accordance with the Maintenance Program during the Term, the lesser of (x) the actual cost of performing such shop visit and life-limited Part replacement and (y) the amount, if any, by which the total Engine Payments in respect of that Engine received by Lessor prior to the performance of such shop visit and/or replacement exceeds the total amount, if any, previously paid to Lessee in respect of that Engine pursuant to this clause (ii) provided that any such payment in respect of life-limited Parts shall be reduced pro-rata to reflect the value of the remaining life of the replaced Parts; (iii) in respect of a full performance restoring shop visit for the APU performed in accordance with the Maintenance Program during the Term, the lesser of (x) the actual cost of performing such shop visit and (y) the amount, if any, by which the total APU Payments received by Lessor prior to such shop visit exceed the total amount, if any, previously paid to Lessee pursuant to this clause (iii); and (iv) in respect of the scheduled overhaul of the landing gear performed in accordance with the Maintenance Program during the Term, the lesser of (x) the actual cost of performing such scheduled overhaul and (y) the amount, if any, by which the total Gear Payments received by Lessor prior to such scheduled overhaul exceed the total amount, if any, previously paid to Lessee pursuant to this clause (iv). Lessor's obligation to make any payments under this Clause 4.2(c) shall be conditioned upon receipt by Lessor within two months after the Termination Date of invoices and proper documentation, satisfactory in form and substance to Lessor, in support of the invoices and verifying that the work was completed in accordance with the Maintenance Program. No payment shall be made under this Clause 4.2(c) in respect of (i) work, repairs or replacements caused by ingestion, faulty maintenance or installation, improper operations, misuse, neglect or accidental cause, (ii) any cost which is recoverable under insurance (deductibles being for the account of Lessee), manufacturer's or servicer's warranties, guarantees, concessions or credits or from any third parties after due diligence in affecting recovery or (iii) removal, installation, maintenance and repair of QEC (Quick Engine Change). Lessor has appointed Owner Participant as agent for the purpose of administering the Lessor's overhaul contributions. Owner Participant shall maintain records reflecting receipt of Airframe Payments, the Engine Payments for each Engine, the APU Payments and the Gear -14- Payments and amounts paid under this clause (c). Owner Participant's records shall be deemed correct absent manifest error. 4.3. DISCLAIMER. (a) GENERAL. THE AIRCRAFT, WHEN DELIVERED AND LEASED BY LESSOR TO LESSEE HEREUNDER, WILL BE LEASED "AS IS" AND "WHERE IS." NEITHER LESSOR NOR OWNER PARTICIPANT HAS MADE AND SHALL NOT BE DEEMED TO HAVE MADE, BY VIRTUE OF HAVING LEASED THE AIRCRAFT UNDER THIS LEASE OR HAVING DONE OR FAILED TO DO ANY ACT OR ACQUIRED OR FAILED TO ACQUIRE ANY STATUS UNDER OR IN RELATION TO THIS LEASE, AND LESSOR AND OWNER PARTICIPANT HEREBY SPECIFICALLY DISCLAIM, ANY GUARANTY, REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE (EXCEPT AS HEREINBELOW PROVIDED), AIRWORTHINESS, VALUE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY, OR FITNESS FOR USE FOR A PARTICULAR OR ANY PURPOSE OF THE AIRCRAFT, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE AIRCRAFT, THE ABSENCE THEREFROM OF LATENT OR OTHER DEFECTS WHETHER OR NOT DISCOVERABLE, THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT OR AS TO ANY OTHER GUARANTY, REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT, INCLUDING WITHOUT LIMITATION ANY LIABILITY IN TORT, OBLIGATION OR LIABILITY ARISING FROM NEGLIGENCE, STRICT LIABILITY, ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE OR DEALING OR USAGE OR TRADE, OR LOSS OR INTERRUPTION OF USE, PROFIT, OR BUSINESS, OR OTHER CONSEQUENTIAL DAMAGES; AND LESSEE HEREBY WAIVES, RELEASES, RENOUNCES AND DISCLAIMS EXPECTATION OF OR RELIANCE UPON ANY SUCH GUARANTY, REPRESENTATION OR WARRANTIES. NONE OF LESSOR, OWNER PARTICIPANT AND ANY OTHER INDEMNITEE SHALL HAVE ANY RESPONSIBILITY OR LIABILITY TO LESSEE OR ANY OTHER PERSON, REGARDLESS OF ANY NEGLIGENCE (OTHER THAN ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT WHICH IS NOT ATTRIBUTABLE TO ITS INTEREST IN THE AIRCRAFT) OF LESSOR, OWNER PARTICIPANT OR ANY OTHER INDEMNITEE, AND LESSEE HEREBY WAIVES, RELEASES, RENOUNCES AND DISCLAIMS ANY RIGHTS OR REMEDIES, WITH RESPECT TO (i) ANY LIABILITY, LOSS OR DAMAGE CAUSED OR ALLEGED TO BE CAUSED DIRECTLY OR INDIRECTLY BY THE AIRCRAFT OR BY ANY INADEQUACY THEREOF OR DEFICIENCY OR DEFECT THEREIN OR BY ANY OTHER CIRCUMSTANCE IN CONNECTION THEREWITH, (ii) THE USE, OPERATION OR PERFORMANCE OF THE AIRCRAFT OR ANY RISKS RELATING THERETO, (iii) ANY INTERRUPTION OF SERVICE, LOSS OF BUSINESS OR ANTICIPATED PROFITS OR DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR (iv) THE DELIVERY, OPERATION, SERVICING, MAINTENANCE, REPAIR, IMPROVEMENT OR REPLACEMENT OF THE AIRCRAFT. WITHOUT LIMITING THE FOREGOING, THE WARRANTIES AND REPRESENTATIONS EXPRESSLY SET FORTH BELOW IN THIS SECTION 4.3 ARE EXCLUSIVE AND IN LIEU OF ALL OTHER REPRESENTATIONS OR WARRANTIES WHATSOEVER WITH RESPECT TO THE AIRCRAFT, EXPRESS OR IMPLIED, AND LESSOR SHALL NOT BE DEEMED TO HAVE MADE ANY OTHER IMPLIED WARRANTIES, OR GUARANTEES, INCLUDING BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY, ANY IMPLIED WARRANTY ARISING -15- FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, OR ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR OR ANY USE, EXCEPT THAT: Lessor represents and warrants that, on the Delivery Date, Lessor shall have the right to lease the Aircraft hereunder. (b) DEFICIENCIES AND DELAYS. Lessee agrees that, from and after the Delivery Date, Lessor shall not be liable for any liability, claim, proceeding, loss, damage, fee, cost or expense of any kind caused directly or indirectly by, or associated with, the Aircraft or any part thereof, any inadequacy of the Aircraft for any purpose or any deficiency or defect therein, the use or performance of the Aircraft, any maintenance, repairs, replacement or modification to the Aircraft, any interruption or loss of service or use of the Aircraft or any loss of business or other consequential damage or any damage whatsoever, howsoever caused. (c) REPAIRS AND REPLACEMENT. If the Aircraft or any part thereof is lost, confiscated, damaged, destroyed or otherwise rendered unfit or unavailable for use on or after the Delivery Date, Lessor shall not be liable to repair the same or to supply any equipment in substitution therefor. 4.4. LESSEE'S REPRESENTATIONS AND WARRANTIES. Lessee hereby makes the following representations and warranties: (a) Lessee is a corporation duly organized and validly existing in good standing under the laws of the State of New Mexico and has the corporate power and authority to carry on its business as presently conducted and to perform its obligations under the Lease, the Lease Supplement and the other Lessee Documents to be executed and delivered on or before the Delivery Date and is duly qualified to do business as a foreign corporation in each jurisdiction in which the nature of its business makes such qualification necessary; (b) this Lease, the Lease Supplement and the other Lessee Documents have been duly authorized by all necessary corporate action on the part of Lessee, do not require any approval of the stockholders of Lessee or any trustee or any holder of any indebtedness of Lessee, and neither the execution and delivery hereof or thereof nor the consummation of the transactions contemplated hereby or thereby nor compliance by Lessee with any of the terms and provisions hereof or thereof will contravene its organizational documents or any law or governmental rule or regulation applicable to Lessee or result in any breach of, or constitute any default under, or result in the creation of any Lien upon any property of Lessee under any indenture, mortgage, credit agreement or other agreement or instrument to which Lessee is a party or by which Lessee or its properties or assets may be bound; (c) Lessee has received and has complied with every necessary consent, approval, order, or authorization of, or registration with, and has given any prior notice to, any federal, state or foreign governmental authority having jurisdiction to the extent required for the Lessee to execute and deliver this Lease, the Lease Supplement and the other Lessee Documents to be executed and delivered on or before the Delivery Date and to perform its obligations hereunder and thereunder; -16- (d) this Lease has been, and upon execution and delivery of the Lease Supplement and the other Lessee Documents to be executed and delivered on or before the Delivery Date such Lease Supplement and other Lessee Documents will be, duly executed and delivered by Lessee and constitutes or will constitute the legal, valid, and binding obligations of Lessee, enforceable in accordance with their respective terms; (e) there are no suits or proceedings pending or, to the knowledge of Lessee, threatened in any court or before any regulatory commission, board or other administrative governmental agency against or affecting Lessee, which, could be reasonably expected to have a materially adverse effect on the current business or financial condition of Lessee or an adverse effect on the ability of Lessee to perform its obligations under the Lessee Documents; (f) Lessee has filed or caused to be filed all tax returns which are required to be filed by it, and has paid, caused to be paid or provided for all taxes shown to be due or payable on said returns or on any assessment received by Lessee, to the extent that such taxes have become due and payable unless protected by appropriate legal proceedings; (g) no action, including any filing or recording of any document or taking possession thereof, is or will be necessary or advisable in order to establish and perfect Lessor's title to and interest in the Aircraft in any applicable jurisdiction within the United States of America; (h) the chief executive office of Lessee is located at 3700 Rio Grande NW, Suite 1, Albuquerque, New Mexico 87107, and Lessee will give Lessor 30 days' prior written notice of any change in such office; (i) none of the documents furnished by Lessee to Lessor or Owner Participant in connection with the transactions contemplated by this Lease contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein, as of the date made, not misleading. There is no fact known by Lessee which Lessee has not disclosed to Lessor or Owner Participant in writing which materially adversely affects or, as far as Lessee can now reasonably foresee, can reasonably be expected to materially adversely affect, the ability of Lessee to carry on its business and perform its obligations under the Lessee Documents; (j) Lessee is not in breach of any agreement to which Lessee is now a party which breach can reasonably be expected to have a material adverse effect on the business or financial condition of Lessee or an adverse effect on the ability of Lessee to perform its obligations under this Lease; and (k) no Lease Event of Default or Lease Default has occurred and is continuing. Section 5. RETURN OF AIRCRAFT. 5.1. GENERAL CONDITION UPON RETURN. Unless an Event of Loss with respect to the Airframe shall have occurred, in which case Section 10.1 hereof shall apply, at the end of the Term, Lessee will return the Aircraft to Lessor by delivering the same to Kansas City or such -17- other site as shall be mutually agreed between Lessee and Lessor (the "Redelivery Location"). All costs and expenses associated with the return of the Aircraft and compliance with this Section 5 shall be for the account of Lessee, except as otherwise expressly provided herein. At the time of such return, the Aircraft: (a) shall be in compliance with the terms of this Lease in such condition as qualifies it, without necessity of any repair, modification or maintenance for (i) immediate issuance of a current and valid certificate of airworthiness by, and registration with, the FAA, and (ii) immediate operation in the United States in full compliance with United States Federal Aviation Regulations Part 121; (b) shall have undergone, immediately prior to redelivery, the current phase of a C-Check as defined in the Maintenance Document in accordance with Maintenance Program and all inspections required under the Maintenance Document shall have been accomplished, and any deficiencies, including, without limitation, routine items, non-routine items and all corrosion, known prior to or revealed during such inspection will be corrected in accordance with manufacturer's limits, guidelines and specifications; (c) shall be free and clear of all Liens (except Lessor Liens); (d) shall be in the interior configuration providing seating for 140 passengers and in condition suitable for operation in and compatible with scheduled commercial airline passenger service in the United States, shall be clean by United States commercial airline standards with all Parts, systems and components operable and shall be in as good operating condition as when delivered to Lessee hereunder, ordinary wear and tear excepted, and the seats shall recline and the tray tables and ashtrays shall be installed; (e) shall have installed thereon all Engines and each such Engine has not less than 2,500 Flight Hours, 2,500 Cycles or one year (whichever is less) remaining to the next expected removal for a shop visit, and no Engine or module thereon shall be "on watch", subject to special or reduced inspection internals or exhibit any adverse trends or indicate a rate of acceleration in performance deterioration that is higher than normal based on Lessee's maintenance experience; (f) shall have had accomplished the ongoing corrosion prevention procedures set forth in the Maintenance Program; (g) shall be equipped with a full complement of Parts, accessories and equipment as delivered, and (i) each and every hour/cycle limited component or Part (including Life Limited Parts) shall have at least 2,500 Flight Hours or 2,500 Cycles remaining until the next expected shop visit or scheduled renewal under Maintenance Program, whichever is the more limiting factor, (ii) each and every calendar-limited component or Part shall have one year or one hundred percent of its total approved life remaining, whichever is less; and (iii) "on-condition" and "conditioned monitored" components shall be serviceable. (h) shall at the time of such return have no deferred maintenance items and shall be in compliance (without regard to permitted compliance extensions) with all regulations, mandatory maintenance directives, service bulletins, airworthiness directives and Federal Air -18- Regulations or other instructions of the FAA or other United States governmental authorities having jurisdiction in each case that have an effective date for compliance prior to the Termination Date or falling due within twelve months (or the equivalent number of Flight Hours or Cycles based on Lessee's utilization for the prior twelve months) thereafter, and, in the event that any such directives, service bulletins, regulations or instructions require terminating action as the only option of compliance, Lessee shall have completed such termination action; and (i) shall have any markings of Lessee or any sublessee painted over in a workmanlike manner and the exterior shall be cleaned to U.S. commercial airline standards. 5.2. MANUALS, ETC. 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, referred to in Schedule 1, Part B, any records required to be maintained hereunder and under applicable rules and regulations of the FAA and any other records maintained by Lessee. Such logs, manuals, drawings, data and records shall be sufficient to permit (i) immediate issuance of a current and valid certificate of airworthiness by, and registration with the FAA and (ii) immediate operation in the United States in full compliance with FAR Part 121. 5.3. FAILURE TO RETURN AIRCRAFT OR ENGINES. If Lessee shall, for any reason whatsoever, fail to return the Aircraft or any Engine at the time specified herein, the obligations of Lessee as provided in this Lease shall continue in effect with respect to the Aircraft or such Engine until such Aircraft and such Engine is redelivered and accepted by Lessor in the condition required by Section 5, except that Basic Rent shall be payable on demand for each day on and after the time specified herein for return in an amount equal to the Basic Rent Amount plus fifty percent divided by thirty. This Section 5.3 shall not be construed as permitting Lessee to fail to meet its obligations to return the Aircraft or such Engine in accordance with the requirements of this Lease or constitute a waiver of a Lease Default or Lease Event of Default. 5.4. INSPECTION FLIGHT. Prior to return of the Aircraft to Lessor, Lessee shall make the Aircraft, records and log books available to Lessor at the location where the redelivery C-Check is performed, and Lessor shall be entitled to conduct, at Lessor's expense, a ground inspection of the Aircraft and, at Lessor's expense, a borescope inspection of each of the Engines. In the event that such borescope inspection reveals any damage to any Engine, the Lessee shall, at Lessee's expense, promptly correct or have corrected any such damage. Lessee shall also conduct, at its expense, a test flight of the Aircraft, which flight shall not exceed two hours in length, which at Lessee's sole discretion may be the positioning flight to the Redelivery Location or a storage location. Lessor shall be permitted to have three of its representatives present on such flight. The test flight shall be flown using the standard flight test procedures referred to in Section 2.5 (or such other procedures as the parties shall agree) for checking the operation of aircraft and engines of such types and their systems. If such flight test reveals any discrepancies from the condition required by this Section 5 (other than such discrepancies which were waived by Lessee on the Delivery Date and indicated on the Receipt for Lease Aircraft signed on the Delivery Date), Lessee shall, at its expense, promptly correct or have corrected any such discrepancies which are specified in writing by Lessor. -19- 5.5. STORAGE. At the end of the Term, at the written request of Lessor, Lessee will assist Lessor in arranging storage facilities for the Aircraft. Lessor will bear all costs of storage. Section 6. LIENS. Lessee will not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Aircraft, the Airframe or any Engine, title thereto or any interest therein or in this Lease or any interest of Lessor in any Rent or other amounts payable by Lessee hereunder except Permitted Liens. Lessee will promptly take (or cause to be taken) such action as may be necessary duly to discharge any such Lien not excepted above if the same shall arise at any time. Section 7. REGISTRATION, OPERATION, POSSESSION, SUB- LEASING AND RECORDS. 7.1. REGISTRATION AND OPERATION. (a) REGISTRATION. Lessee shall insure that at all times during the Term the Aircraft will remain duly registered in the name of Lessor with the FAA; PROVIDED, that the Lessee shall have no obligation under this Section 7.1(a) to the extent such failure to remain so registered is attributable to the Lessor's failure to be a "citizen of the United States" within the meaning of Section 101(16) of the Act. Lessor agrees that it will not reregister the Aircraft in another jurisdiction during the Term and that it will not sell, assign or transfer any of its rights hereunder in or to any Person if, as a result of such sale, assignment or transfer, the Aircraft would no longer be owned by a "citizen of the United States" within the meaning of Section 101(16) of the Act. (b) NAMEPLATE. Lessor agrees to affix and Lessee agrees to maintain in the cockpit of the Aircraft and on each Engine in a clearly visible location, a nameplate bearing the following legend: "Owned by First Union National Bank, not in its individual capacity but solely as Trustee, Owner and Lessor," or such other legend as may be required by Lessor. (c) COMPLIANCE WITH LAWS. Lessee agrees that it will not use or operate, or permit the use or operation of, the Aircraft, Airframe or any Engine in violation of any law or any rule, regulation or order of the FAA or any federal, state or foreign governmental authority having jurisdiction or in violation of any airworthiness certificate, license or registration relating to the Aircraft, Airframe or any Engine issued by any such authority. (d) OPERATION; INSURANCE REQUIREMENTS. Lessee agrees to operate, use and locate the Aircraft, or permit the aircraft to be operated, used and located, only in charter operations in those areas not precluded by aviation or United Nations Sanctions or prohibited by United States laws and further agrees not to operate, use or locate the Aircraft, Airframe or any Engine, or suffer the Aircraft, Airframe or any Engine to be operated, used or located, (i) in any area excluded from coverage by the insurance required by the terms of Section 11, or (ii) in any recognized or threatened area of hostilities unless fully covered by war-risk insurance satisfying the terms of Section 11, or (iii) in any country with which the United States does not maintain normal diplomatic relations, unless it shall have received the prior written consent of Lessor. -20- 7.2. POSSESSION. i) EXCEPT AS PROVIDED IN THE USMS AGREEMENT OR THE MAINTENANCE AGREEMENT, LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, SUBLEASE OR OTHERWISE IN ANY MANNER DELIVER, TRANSFER OR RELINQUISH POSSESSION OF THE AIRCRAFT, AIRFRAME OR ANY ENGINE OR INSTALL ANY ENGINE, OR PERMIT ANY ENGINE TO BE INSTALLED, ON ANY AIRFRAME OTHER THAN THE AIRFRAME; provided, however, that, so long as no Lease Default or Lease Event of Default shall have occurred and be continuing, Lessee may, without such prior written consent: (i) TESTING AND SERVICE. Deliver possession of any Aircraft, Airframe or Engine, or Part thereof, to the Manufacturer for testing or other similar purposes, to any organization for service, or for alterations or modifications in or additions to the Aircraft, Airframe or any Engine, provided that all maintenance, repair, overhaul, alteration and modification work shall be performed by FAA - approved organizations using FAA - approved source material; (ii) INSTALLATION OF ENGINES. Install or permit to be installed an Engine on an airframe owned by Lessee free and clear of all Liens, except Permitted Liens 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); (iii) INSTALLATION OF ENGINES ON OTHER AIRFRAMES. Install or permit to be installed an Engine on an airframe leased to, or purchased by, Lessee subject to a lease, conditional sale, trust indenture or other security agreement, but only if (A) such airframe is free and clear of all Liens, except the rights of the parties to the lease, conditional sale, trust indenture or other security agreement covering such airframe and Permitted Liens and (B) Lessor shall have received from the lessor, conditional seller, indenture trustee or secured party of such airframe an agreement (which may be the lease, conditional sale, trust indenture or other security agreement covering such airframe) whereby such lessor, conditional seller, indenture trustee or secured party expressly agrees that neither it nor its successors or assigns will acquire or claim any right, title or interest in any Engine by reason of such Engine being installed on such airframe at any time while such Engine is subject to this Lease or is owned by Lessor; (iv) TRANSFER TO THE UNITED STATES GOVERNMENT. Transfer possession of the Airframe or any Engine to the United States or any instrumentality or agency thereof in accordance with the Civil Reserve Air Fleet Program authorized under 10 U.S.C. Sec. 9511 ET SEQ.; and PROVIDED FURTHER WITH RESPECT TO THIS SECTION 7.2 (OTHER THAN A TRANSFER PURSUANT TO CLAUSE (IV) ABOVE) THAT: (1) the rights of any transferee who receives possession by reason of a transfer permitted by this Section 7.2 shall be subject and subordinate to all the terms of this Lease and to Lessor's rights, powers and remedies under this Lease, including the rights to repossession pursuant to Section 15 hereof; -21- (2) Lessee shall remain primarily liable hereunder for the performance of all the terms of this Lease to the same extent as if such transfer had not occurred; (3) no permitted transfer or other relinquishment of possession permitted hereunder shall affect the registration of the Aircraft or shall permit any action not permitted under this Lease; and (4) all necessary action shall be taken which is required to continue the perfection of Lessor's title and interest in and to such Aircraft, Airframe and Engines, and Lessor's rights under this Lease. Lessor hereby agrees for the benefit of any lessor, conditional seller, indenture trustee or secured party of any engine leased to or purchased by Lessee which may be installed on an Airframe 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 (other than an Engine) as the result of such engine 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. Lessee agrees that it will give the Lessor prior written notice of its intent to (A) remove any Engine from the Airframe or (B) install any engine on the Airframe. (b) Except to the extent inconsistent with the rules and regulations applicable to the Civil Reserve Air Fleet Program, Lessee will cause the USMS Agreement and any sublease or other agreement relating to the operation or use of the Aircraft to which Lessor has consented pursuant to Section 7.2(b) to contain a clause substantially to the effect of the following: "Anything in this agreement to the contrary notwithstanding, the sublessee's rights hereunder to the possession, use and enjoyment of the Aircraft shall be subject and subordinate to the Aircraft Lease Agreement dated as of November 21, 2001 (the "Primary Lease") among First Union National Bank, as Trustee (in this Section __ called the "Primary Lessor"), Airlease Ltd. and the sublessor hereunder, in respect of the Aircraft, and the sublessee confirms and agrees that this agreement is in all respects subject and junior to the Primary Lease. Upon notice to the sublessee hereunder by the Primary Lessor that a Lease Event of Default (as defined in the Primary Lease) has occurred and is continuing, the Primary Lessor may terminate this agreement and require prompt delivery by the sublessee of the Aircraft to the Primary Lessor, in accordance with the provisions of Section 5 of the Primary Lease. Unless the sublessee shall have received any such written notice from the Primary Lessor terminating this sublease, the sublessee shall be and remain fully obligated hereunder notwithstanding the continuance of any Lease Event of Default under the Primary Lease." 7.3. RECORDS AND REPORTS. Lessee shall: (a) RECORDS. Maintain or cause to be maintained in English all records, logs and other materials generally required by the FAA and any other governmental authority having jurisdiction to be maintained in respect of the Aircraft, the Airframe and each Engine; and -22- (b) INFORMATION AND REPORTS. Promptly furnish or cause to be furnished to Lessor such information as may be required to enable Lessor to file any reports, including tax returns, required to be filed by Lessor with any governmental authority because of Lessor's ownership of the Aircraft, Airframe or any Engine or because of receipt of Rent. Section 8. MAINTENANCE; REPLACEMENT AND POOLING OF PARTS; ALTERATIONS, MODIFICATIONS AND ADDITIONS. 8.1. MAINTENANCE. Lessee shall maintain, service, repair, overhaul, alter, modify, add to and test or cause to be maintained, serviced, repaired, overhauled, altered, modified, added to and tested the Aircraft, the Airframe and each Engine, and each other engine installed from time to time on the Airframe, in accordance with a maintenance program for the Aircraft, Airframe and Engines which shall comply with the Maintenance Document (the "Maintenance Program"), so as to keep the Aircraft, the Airframe and each Engine in as good operating condition as when delivered to Lessee hereunder, ordinary wear and tear excepted, in the same manner as used by Lessee with other aircraft owned or operated by Lessee and so as to keep the Aircraft in such operating condition as may be necessary to enable the airworthiness certificate for the Aircraft to be maintained in good standing at all times under the applicable rules and regulations of the FAA and any other applicable law. Lessee will procure compliance with all service, inspection, maintenance, repair and overhaul regulations, directions and instruments which are made mandatory by the FAA or any other governmental authority upon operation of McDonnell Douglas DC-9-Series 82 aircraft and/or Pratt & Whitney JT8D-217 engines. Lessee further agrees that the Aircraft, Airframe and Engines will be maintained in compliance with all laws, rules, regulations and orders of each government or governmental authority having jurisdiction over the maintenance of the Aircraft and in compliance with each applicable airworthiness certificate, license and registration relating to the Aircraft, Airframe or any Engine issued by any such authority. In addition, Lessee will procure that the Aircraft is maintained such that it would qualify for immediate operation in the United States under FAR Part 121. 8.2. REPLACEMENT OF PARTS. Lessee, at its sole cost and expense, will promptly replace or cause the replacement of all Parts which may from time to time be incorporated in the Aircraft, Airframe or any Engine and 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. In addition, Lessee may remove in the ordinary course of maintenance, service, repair, overhaul or testing any Parts as permitted by Section 8.1, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use; provided, however, Lessee, at its own cost and expense, will replace such Parts as promptly as possible. All replacement Parts shall be free and clear of all Liens (except for Permitted Liens) and shall be in good operating condition and 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. All Parts at any time removed from the Aircraft, Airframe or any Engine shall remain the property of Lessor no matter where located, until such time as such Parts shall be replaced by Parts which have been incorporated in the Aircraft, Airframe or such Engine and which meet the requirements for replacement Parts specified above. Immediately upon any replacement Part which satisfies the requirements for replacement Parts -23- specified above becoming incorporated in the Aircraft, Airframe or such Engine as above provided, without further act, (i) title to the replaced Part shall thereupon vest in Lessee free and clear of all rights of Lessor and the replaced Part shall no longer be deemed a Part hereunder, (ii) title to such replacement Part shall thereupon vest in Lessor (subject only to Permitted Liens), and (iii) such replacement Part shall become subject to this Lease and be deemed part of an Aircraft, Airframe or such Engine for all purposes hereof to the same extent as the Parts originally incorporated in such Aircraft, Airframe or Engine. 8.3. POOLING OF PARTS. Any Part removed from the Aircraft, Airframe or any Engine as provided in Section 8.2 may be subjected by Lessee to a normal pooling arrangement customary in the U.S. commercial airline industry entered into in the ordinary course of business of Lessee, so long as a Part replacing such removed Part shall be incorporated in such Aircraft, Airframe or Engine in accordance with Section 8.2 as promptly as possible after the removal of such removed Part. In addition, any replacement Part when incorporated in such Aircraft, Airframe or such Engine in accordance with Section 8.2 may be owned by any air carrier subject to such a normal pooling arrangement, so long as Lessee, as promptly thereafter as reasonably possible, either (i) causes title to such replacement Part to vest in Lessor in accordance with Section 8.2 by Lessee acquiring title thereto for the benefit of, and transferring such title to, Lessor free and clear of all Liens (except Permitted Liens), or (ii) replaces such replacement Part by incorporating in the Aircraft, Airframe or such Engine a further replacement Part owned by Lessee free and clear of all Liens (except Permitted Liens) and by causing title to such further replacement Part to vest in Lessor in accordance with Section 8.2. 8.4. ALTERATIONS, MODIFICATIONS AND ADDITIONS. Lessee shall make or cause to be made, at its own expense, such alterations and modifications in and additions to each Aircraft, Airframe and Engine as may be required from time to time to meet the standards of the FAA or other governmental authority (domestic or foreign) having jurisdiction and to enable the airworthiness certificate for the Aircraft to be maintained in good standing at all times under the applicable rules and regulations of the FAA and any other governmental authority having jurisdiction. In addition, upon written consent of Lessor, Lessee, at it own cost and expense, may, from time to time make such alterations and modifications in and additions to the Aircraft, 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 Aircraft, Airframe or such Engine; provided, however, that no such alteration, modification or addition shall diminish the value, remaining useful life, or utility of the Aircraft, Airframe or such Engine, or impair the airworthiness thereof, below the value, remaining useful life, utility, and airworthiness thereof immediately prior to such alteration, modification or addition assuming the Aircraft, Airframe or such Engine was then of the value or utility and in the condition required to be maintained by the terms of this Lease. Title to all Parts on the Aircraft, Airframe or Engine as the result of such alteration, modification or addition shall, without further act, vest in Lessor. Notwithstanding the foregoing sentence of this Section 8.4, so long as no Lease Default or Lease Event of Default shall have occurred and be continuing, Lessee may, at any time during the Term, remove any Part if (i) such Part is in addition to, and not in replacement of or substitution for, any Part originally incorporated in any Aircraft, Airframe or Engine at the time of delivery thereof hereunder or any Part in replacement of or substitution for any such Part, (ii) such Part is not required to be incorporated in such Aircraft, Airframe or Engine pursuant to the terms of this Section 8, and (iii) such Part can be -24- removed from such Aircraft, Airframe or Engine without diminishing or impairing the value or airworthiness required to be maintained by the terms of this Lease which the Aircraft, Airframe or such Engine would have had at such time had such alteration, modification or addition not occurred. Upon the removal by Lessee of any Part as above provided, title thereto shall, without further act, vest in Lessee and such Part shall no longer be deemed part of such Aircraft, Airframe or Engine from which it was removed. Any Part not removed by Lessee as above provided prior to the return of such Aircraft, Airframe or Engine to Lessor hereunder shall remain the property of Lessor. Section 9. INDEMNIFICATION. 9.1. GENERAL INDEMNITY. (a) Lessee agrees to indemnify, reimburse, and hold harmless each Indemnitee from and against any and all claims, damages, losses, liabilities (including, without limitation, any claim or liability for strict liability in tort or otherwise imposed), obligations, demands, suits, judgments, causes of action, legal proceedings, whether civil, criminal or administrative, penalties, fines, other sanctions, and all costs and expenses of any nature whatsoever, including attorney's fees and expenses (any and all of which are hereafter referred to as "Losses") which in any way at any time may result from, pertain to, or arise out of, the Aircraft, this Lease or any other Lessee Document, the lease of the Aircraft by Lessor to Lessee under the Lease, the breach of any representation, warranty or covenant made by Lessee hereunder or the condition, ownership, manufacture, purchase, delivery, non-delivery, acceptance, rejection, possession, return, disposition, subleasing, use or operation, maintenance, service, repair, overhaul, construction, design (including, without limitation, latent and other defects whether or not discovered or discoverable by the Indemnitee, and, with respect to any Part installed on the Aircraft by Lessee, any claim for patent, trademark or copyright infringement), or acceptance (in each and every case) of the Aircraft or Airframe, any Engine or Part either in the air or on the ground, or any defect in the Aircraft arising from the material or any articles used therein or from the design, testing or use thereof or from any maintenance, service, repair, overhaul or testing of the Aircraft or any Airframe, Engine or Part regardless of when such defect shall be discovered, whether or not such Aircraft or any Airframe, Engine or Part is at the time in the possession of Lessee and whether it is in the United States of America or any other country. The indemnities contained in this Section 9.1 shall continue in full force and effect notwithstanding the expiration or other termination of the Lease and are expressly made for the benefit of and shall be enforceable by each Indemnitee. (b) The indemnity set forth above shall not extend to any Loss with respect to any Indemnitee (A) to the extent that such Loss is caused by acts or events which occur after the end of the Term provided that Lessee has fully complied with all the terms of the Lease and such Loss is unrelated to acts, omissions, events, incidents or circumstances occurring or existing before the end of the Term, (B) which is a Tax, whether or not Lessee is required to indemnify therefor pursuant to Section 9.2, (C) to the extent such Loss is attributable to any Lessor Lien or the gross negligence or wilful misconduct of an Indemnitee (other than any negligence imputed to such Indemnitee as a result of its interest in the Aircraft or the acts or omissions of any person other -25- than such Indemnitee) or from any misrepresentation or breach of or failure to comply with or perform any obligations of such Indemnitee contained in this Lease, (E) resulting from any disposition by an Indemnitee of any of its interest in the Aircraft, the Airframe, any Engine or the Lease other than a disposition resulting from the exercise of remedies under the Lease by Lessor while a Lease Event of Default has occurred and is continuing, or (F) to the extent such a Loss actually occurred prior to the commencement of the Term and is unrelated to acts, omissions, events, incidents or circumstances occurring or existing after commencement of the Term and before Aircraft ceases to be subject to the Lease. (c) The Lessee further agrees that, notwithstanding the exceptions in paragraph (b) above, any indemnity under Section 9.1 shall include any amount necessary to hold the Indemnitee harmless from all Taxes required to be paid by such Indemnitee with respect to the receipt or accrual of such indemnity. (d) If any Indemnitee entitled to indemnity hereunder has knowledge of any liability hereby indemnified against, it shall give prompt written notice thereof to Lessee, but the failure to give such notice shall not affect the obligations of Lessee hereunder (except to the extent that Lessee is materially prejudiced in the exercise of its right to contest and prevail in the contest of such claim as a result of such failure). If Lessee has actual knowledge of any liability hereby indemnified against, it shall give prompt written notice thereof to the party entitled to be indemnified, but the failure to give such notice shall not affect the obligations of Lessee hereunder. Lessee shall be entitled, at its sole cost and expense, acting through counsel reasonably acceptable to the respective Indemnitee, to assume responsibility for and control of such judicial or administrative proceeding. Notwithstanding the foregoing, Lessee shall not be entitled to assume responsibility for and control of any such judicial or administrative proceedings, but shall nonetheless be responsible for the costs thereof, (w) while a Lease Event of Default under the Lease shall have occurred and be continuing, (x) if such proceedings will involve any material danger of the sale, forfeiture or loss of the Aircraft or any part thereof, (y) if in the written opinion of counsel to such Indemnitee an actual or potential material conflict of interest exists where it is advisable for such Indemnitee to be represented by separate counsel or (z) if such Indemnitee has been indicted or otherwise charged in a criminal complaint and such Indemnitee desires to be represented by separate counsel. The Indemnitee may participate at its own expense and with its own counsel in any judicial proceeding controlled by the Lessee pursuant to the preceding provisions. (e) Upon payment of indemnification of any amount pursuant to this Section 9.1, Lessee shall be subrogated to any claims the Indemnitee may have relating thereto. The Indemnitee agrees to cooperate with Lessee to permit Lessee to pursue such claims. (f) In the event that Lessee shall have paid an amount to an Indemnitee pursuant to this Section 9.1, and such Indemnitee subsequently shall be reimbursed in respect of such amount from any other Person, such Indemnitee shall promptly pay to Lessee an amount equal to the amount of such reimbursement net of all expenses incurred in obtaining the same (but in no event shall this amount paid by an Indemnitee be in excess of the payment by Lessee pursuant to this Section 9.1). 9.2. GENERAL TAX INDEMNITY. -26- (a) Lessee agrees that each payment of Rent shall be free of any withholdings whatsoever, and in the event that any withholding is required, Lessee shall pay an additional amount of Rent such that after the deduction of all amounts required to be withheld, the net amount of Rent actually received by each Tax Indemnitee shall equal, on an after tax basis, the amount of Rent that would be due absent such withholding. Lessee further agrees on written demand to pay, and to indemnify and hold each Tax Indemnitee harmless from, all Taxes (and all costs and expenses incurred in connection with the payment or contest of Taxes) which are imposed by any Federal, state or local government or taxing authority in the United States of America or by any foreign government or any taxing authority or governmental subdivision of a foreign country or of a territory or possession of the United States or any international authority upon Lessor, Lessee or the Aircraft with respect to, based upon or measured by (i) the cost or value of the Aircraft or any Part thereof, or interest therein, (ii) the manufacture, purchase, ownership, delivery, leasing, possession, use, operation, sale, subleasing, rental, retirement, abandonment, registration, preparation, installation, modification, repair, maintenance, replacement, transportation, storage, transfer of title, return or other disposition of the Aircraft, the Airframe, any Engine, or any Part thereof or interest therein, (iii) the rentals, receipts or earnings arising from the Lease or (iv) otherwise in connection with this Lease and the transactions contemplated hereby. Notwithstanding the preceding sentence, Lessee shall have no liability to a Tax Indemnitee pursuant to this Section 9.2 with respect to: (A) Taxes based on or measured by the net income of such Tax Indemnitee; provided, however, that, notwithstanding the foregoing exclusion, there shall not be excluded any Taxes imposed by any jurisdiction (other than the United States Federal Government unless due to the replacement, repair or pooling of any part of the Aircraft) which are imposed directly as a result of the activities in or payments being made from such jurisdiction of Lessee or any operator, sublessee or other user of the Aircraft, the presence of the Aircraft in such jurisdiction, or the Lessee's incorporation or tax residence or domicile in such jurisdiction, or (B) any Taxes imposed as a result of a disposition by such Tax Indemnitee of the Aircraft, any Engine, or any Part, or any interest in any of the foregoing, or any interest in the Rent, unless such disposition shall have occurred at any time while a Lease Default or a Lease Event of Default shall have occurred and be continuing or results from any exercise of any of the remedies as provided in or permitted by this Lease or applicable law or results from a replacement of the Airframe or Engines or any Part pursuant to this Lease. (b) The Lessee further agrees that, notwithstanding the exceptions in paragraph (a) above, any indemnity under Section 9.1 or this Section 9.2 shall include any amount necessary to hold the Tax Indemnitee harmless from all Taxes required to be paid by such Tax Indemnitee with respect to the receipt or accrual of such indemnity. (c) In case any report or return is required to be made with respect to any obligation of Lessee under this Section 9.2, Lessee either shall make such report or return in such manner as will show the interest of the Lessor in the Aircraft, or shall promptly notify the Lessor of such requirement and shall make such report or return in such manner as shall be directed by the Lessor. All costs and expenses (including legal and accountants' fees) of preparing any such return or report shall be borne by Lessee. Lessee further agrees to promptly provide each Tax -27- Indemnitee with any information reasonably requested by such Tax Indemnitee in connection with preparation of such Tax Indemnitee's tax returns. (d) Contest. (1) NOTICE OF CLAIM. If a written claim is made against a Tax Indemnitee for Taxes with respect to which the Lessee is or may be liable for payment or indemnity hereunder (a "Claim"), such Tax Indemnitee shall give the Lessee prompt written notice of such Claim after its receipt and shall furnish the Lessee with any requests for information it receives with respect to such Claim. Without prejudice to any other rights the Lessee may have in connection therewith, the failure of a Tax Indemnitee to provide such notice shall not affect the Lessee's obligations hereunder except to the extent that such failure prevents the Tax Indemnitee or the Lessee from contesting such Claim. (2) MANNER OF CONTEST. If the Lessee within thirty (30) days after notification requests in writing, the Tax Indemnitee shall in good faith, with due diligence and at Lessee's expense, contest in the name of the Tax Indemnitee, or if permitted by law and so requested by the Lessee, permit the Lessee to contest in the name of the Lessee but only if (i) the tax is not (x) reflected in a return with other taxes of the Tax Indemnitee unrelated to the transactions contemplated by the Operative Documents or (y) an income tax, (ii) the contest may be brought solely in the Lessee's name, (iii) no tax return of such Tax Indemnitee will be held open as a result of such contest, and (iv) such contest does not involve any material risk of the sale, forfeiture or loss of the Aircraft, the validity, applicability or amount of such Claim by: (a) resisting payment thereof, if practical; (b) not paying the same, except under protest; (c) if payment is to be made, using diligent efforts to obtain a refund thereof in appropriate administrative or judicial proceedings; or (d) taking such other actions as are reasonably requested from time to time by Lessee; provided, however, that no Tax Indemnitee will be required to contest any Claim unless (w) it has received a written acknowledgment from Lessee of Lessee's Liability for such Taxes; (x) it has received a written opinion of its tax counsel (who shall be reasonably acceptable to Lessee) that a realistic possibility of success (as set forth in ABA Formal Opinion 85-352) exists for contesting such Claim (or in the case of an appeal of an adverse judicial decision, that it is more likely than not that such decision will be reversed or substantially modified); (y) the Claim would require the Lessee to make an indemnity payment to such Tax Indemnitee in excess of $25,000; and (z) such contest does not involve any material risk of the sale, forfeiture or loss of the Aircraft. In no event will a Tax Indemnitee appeal or defend any appeal of any adverse judicial decision with respect to a Claim to the United States Supreme Court. (e) TAX BENEFIT. If Lessor determines in its sole discretion that it has actually realized a tax benefit or refund as a result of any Taxes paid by Lessee or against which Lessor has been indemnified by Lessee under this Section 9.2, Lessor shall (to the extent in its sole discretion that it can do so without prejudicing the retention of the amount of such benefit or refund and without prejudice to the right to any other relief or allowance which may be available -28- to it) pay to Lessee, promptly after actual realization of such tax benefit or refund or receipt of such other compensation, an amount that is equal to the amount of such benefit or refund or other compensation; provided, however, that no such payment exceed (x) the amount of all prior payments by Lessee to Lessor under this Section 9.2 minus (y) the amount of all prior payments by Lessor pursuant to this clause (e). If Lessor shall have paid Lessee any amounts under this clause (e) and it is subsequently determined that Lessor was not entitled to a tax benefit or refund, such determination shall be treated as the imposition of a Tax for which Lessee is obligated to indemnify Lessor pursuant to the provisions of Section 9.2 without regard to the exclusions set forth in Section 9.2(a). 9.3. PAYMENTS. Any payments made pursuant to this Section 9 shall be made in U.S. dollars directly to the Person entitled thereto or to Lessee, as the case may be, in immediately available funds at such bank or to such account as specified by the payee in written directions to the payor, or, if no such direction shall have been given, by check of the payor payable to the order of the payee and mailed to the payee by certified mail, postage prepaid at its address as set forth in this Agreement. Any amount payable to any Indemnitee or Tax Indemnitee pursuant to Section 9.1 or Section 9.2 is to be paid to such party on the later of (i) the tenth day after receipt of a written demand therefor from such party and (ii) the date on which such Indemnitee or Tax Indemnitee is required to pay such amount to a third party, or, in the case of Section 9.2, on the date of payment of the indemnified Taxes by the Tax Indemnitee to the appropriate taxing authority, if earlier. 9.4. SURVIVAL. All indemnities, obligations, adjustments and payments provided for in this Section 9 shall survive, and remain in full force and effect, notwithstanding the expiration or other termination of this Lease. Section 10. LOSS, DESTRUCTION, REQUISITION, ETC. 10.1. EVENT OF LOSS WITH RESPECT TO AIRFRAME. Upon the occurrence of an Event of Loss with respect to the Aircraft, Lessee shall give Lessor prompt written notice thereof and within five (5) Business Days following the date of the occurrence of such Event of Loss. On or before the Business Day next preceding the earlier of (i) the 61st 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, Lessee shall pay to Lessor (A) the Stipulated Loss Value for the Aircraft and (B) any other Rent which is due and payable through and including such date. In the event of payment in full of the Stipulated Loss Value for such Aircraft pursuant to this Section 10.1 and all other Rent and amounts then due and payable hereunder by Lessee, the obligation of Lessee to pay Basic Rent hereunder with respect to such Aircraft for any period commencing after the date of such payment of Stipulated Loss Value shall terminate (but Lessee shall remain liable for all payments of Rent, including Basic Rent for such Aircraft, due or accrued through and including the date of such payment of Stipulated Loss Value), the Term for such Aircraft shall end, and Lessor will transfer the Aircraft to Lessee on an "as-is, where-is" basis, free and clear of Lessor Liens, but otherwise without recourse, representation or warranty, express or implied. 10.2. EVENT OF LOSS WITH RESPECT TO AN ENGINE. -29- (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 an Airframe, Lessee shall give Lessor prompt written notice (and in any event within three days after such occurrence) 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 as replacement for the Engine with respect to which such Event of Loss occurred, all legal and beneficial title to a Replacement Engine free and clear of all Liens, other than Permitted Liens, and having a value, remaining useful life and utility at least equal to 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. (b) CONDITIONS; LESSEE'S OBLIGATIONS. Prior to or at the time of any such conveyance, Lessee will promptly (all writings referred to below to be reasonably satisfactory in form and substance to Lessor): (i) furnish Lessor with a full warranty bill of sale duly conveying to Lessor each Replacement Engine together with such evidence of title as Lessor may reasonably request; (ii) cause a Lease Supplement subjecting each such Replacement Engine to this Lease, duly executed by Lessee, to be delivered to Lessor for execution and, upon such execution, to be filed for recordation; (iii) furnish Lessor with such evidence of compliance with the insurance provisions of Section 11 with respect to each such Replacement Engine as may be reasonably requested; (iv) furnish Lessor with a certificate or certification of a qualified independent aircraft appraiser reasonably satisfactory to Lessor certifying that each such Replacement Engine has a value and utility at least equal to, and is in at least as good operating condition as, the Engine so replaced (assuming each such Engine was in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of Loss); (v) furnish Lessor with an Officer's Certificate of Lessee certifying that, upon consummation of such replacement, no Lease Event of Default will exist hereunder; and (vi) furnish such other certificates or documents to effect such replacement as Lessor may reasonably request. (c) RECORDATION AND OPINIONS. In the case of any Replacement Engine conveyed under this Section 10.2, promptly upon the recordation of the Lease Supplement covering such Replacement Engine pursuant to the Act, Lessee will cause to be delivered to Lessor an opinion of counsel experienced in federal aviation matters and satisfactory to Lessor as to the due recordation of such Lease Supplement as Lessor may require. -30- (d) CONVEYANCE; REPLACEMENT ENGINE. Upon full compliance by Lessee with the terms of this Section 10.2, Lessor will transfer the Engine with respect to which such Event of Loss occurred to Lessee on an "as-is, where-is" basis, free and clear of Lessor Liens, but otherwise without recourse, representation or warranty, express or implied. (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 10.2 shall result in any reduction of Basic Rent. 10.3. APPLICATION OF PAYMENTS FROM GOVERNMENTAL AUTHORITIES FOR REQUISITION OF TITLE. Any payments received at any time by Lessor or Lessee 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: (a) REPLACEMENT OF ENGINE. If such payments are received with respect to an Engine that has been or is being replaced by Lessee pursuant to Section 10.2, so much of such payments remaining after reimbursement of Lessor for reasonable out-of-pocket costs and expenses shall be paid over to, or retained by, Lessee, provided Lessee shall have fully performed or, concurrently therewith, is fully performing the terms of Section 10.2 with respect to the Event of Loss for which such payments are made. (b) NONREPLACEMENT. If such payments are received with respect to an Airframe and any Engines installed thereon so much of such payments remaining after reimbursement of Lessor for reasonable costs and expenses shall be applied in reduction of Lessee's obligation to pay the Stipulated Loss Value and other amounts required to be paid by Lessee hereunder, if not already paid by Lessee, or, if already paid by Lessee, shall be applied to reimburse Lessee for its payment of such Stipulated Loss Value and other amounts. The balance, if any, of such payment remaining thereafter shall be paid to Lessee. 10.4. APPLICATION OF PAYMENTS DURING EXISTENCE OF DEFAULT. Any amount referred to in this Section 10 which is payable or creditable to or retainable by Lessee shall not be paid or credited to or retained by Lessee if, at the time of such payment, credit or retention, a Lease Default or Lease Event of Default shall have occurred and be continuing hereunder but shall be paid to and held by Lessor as security for the obligations of Lessee under this Lease and, if Lessor declares this Lease to be in default pursuant to Section 15 or it shall otherwise become in default in accordance with its terms, applied against Lessee's obligations hereunder as and when due and at such time as there shall not be continuing any such Lease Default or Lease Event of Default, such amount shall be paid to Lessee to the extent not previously applied in accordance with the preceding sentence. Section 11. INSURANCE. 11.1. PUBLIC LIABILITY AND PROPERTY DAMAGE INSURANCE. Lessee shall at all times maintain or cause to be maintained, at its expense, public liability insurance as follows: (a) TYPE, FORM AND AMOUNT. Such insurance shall be of a type and form reasonably satisfactory to Lessor, maintained in effect with insurers of recognized responsibility -31- satisfactory to Lessor and carried in an amount not less than U.S. $100,000,000, combined single limit per occurrence. (b) COVERAGE. Such insurance shall include, but not be limited to, public liability insurance, passenger liability insurance and property damage liability insurance, and War and Allied Risks are also to be covered under such insurance to the fullest extent available from the leading international insurance markets or under government insurance or indemnity programs. Lessee shall not be permitted to self-insure with respect to this coverage. (c) ADDITIONAL PROVISIONS. Any policies of insurance carried in accordance with this Section 11.1 shall (A) name each Indemnitee as an additional insured, (B) provide that in respect of the interest of each Indemnitee in such policies the insurance shall not be invalidated by any action or inaction of Lessee and shall insure each Indemnitee, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by Lessee or any other Person, (C) provide that if such insurance is to be cancelled for any reason whatever, or any material change is to be made in the coverage which materially adversely affects the interest of any Indemnitee or if such insurance may be allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to any such Indemnitee for thirty (30) days (seven (7) days or such shorter period as may be generally available in case of any war risk and allied perils coverage) after written notice is received by Lessor from such insurers of such cancellation, change or lapse, (D) be effective with respect to both domestic and international operation, (E) provide that the insurers shall waive any right to any setoff, recoupment or counterclaim or any other deduction, by attachment or otherwise, (F) provide that all of the insurance under such policy shall operate in the same manner as if there were a separate policy covering each insured, (G) provide that no Indemnitee shall be liable for any insurance premium, (H) be primary and without right of contribution from other insurance which may provide coverage to any Indemnitee and (I) expressly provide that the insurers shall waive any rights of subrogation against any Indemnitee. 11.2. INSURANCE AGAINST LOSS OF OR DAMAGE TO AIRCRAFT AND ENGINES. Lessee shall at all times maintain or cause to be maintained at its own expense insurance against loss of or damage to the Aircraft, Airframe and Engines as follows: (a) TYPE, FORM AND AMOUNT. "All-risk" insurance on the Aircraft and "all-risk" coverage on each Engine and on Parts while removed from the Aircraft or Engines, "foreign object damage" engine insurance on each Engine, and "war-risk" insurance, maintained in effect with insurers of recognized responsibility satisfactory to Lessor, which is of the type and form maintained by major air carriers operating on the routes on which the Aircraft is operated by Lessee and, in any case, carried by Lessee on similar equipment owned or leased by Lessee. Such insurance shall at all times be maintained on an "agreed value basis" for an amount not less than the Stipulated Loss Value. (b) CERTAIN REQUIREMENTS. The insurance policies required by this Section 11.2 shall (A) provide that Lessor, Owner Participant and the Lenders are additional insureds thereunder and that such Persons are named as loss payees thereunder as their interests may appear, provided that the Lenders shall be the sole loss payees from such time that Lessor notifies the insurers that the Security Documents are in effect until such time as the Lenders notify -32- the insurers that the Lien of the Security Documents has been discharged; (B) provide that all payments shall be payable directly to Lessor (or Lenders during any period during which they are the sole loss payee); provided that unless Lessor or a Lender shall provide notice to such insurers that a Lease Default or Lease Event of Default has occurred and is continuing, any payment not in excess of $100,000 may be paid directly to Lessee; (C) provide that if such insurance is to be cancelled for any reason whatever, or any material change is to be made in the coverage which adversely affects the interest of Lessor, Owner Participant or any Lender or, if such insurance may be allowed to lapse for non-payment of premium, such cancellation, change or lapse shall not be effective as to such Person for thirty (30) days (seven (7) days or such shorter period as may be generally available in case of any war risk and allied perils coverage) after written notice is received by such Person from such insurers of such cancellation, change or lapse; (D) provide that in respect of the interest of Lessor, the Owner Participant and the Lenders in such policies the insurance shall not be invalidated by any action or inaction of Lessee or any other Person and shall insure Lessor, the Owner Participant and the Lenders regardless of any breach or violation by Lessee or any other Person of any warranty, declaration or condition contained in such policies; (E) provide that the insurers shall waive any rights of subrogation against Lessor, the Owner Participant and the Lenders; (F) provide that the insurers shall waive any right to any set-off, recoupment or counterclaim or any other deduction, by attachment or otherwise; (G) provide that all the provisions thereof, except the agreed values and limits of the liability of the insurer under such policy, shall operate in the same manner as if there were a separate policy covering each insured; (H) provide that none of Lessor, Owner Participant and any Lender shall be liable for any insurance premium; (I) be effective with respect to both domestic and international operation; and (J) be primary and without right of contribution from other insurance which may provide coverage to Lessor, Owner Participant and any Lender. (c) DEDUCTIBLES. The insurance required by this Section 11.2 may provide in respect of damage not constituting an Event of Loss for deductibles which are reasonably acceptable to Lessor, but in any event not in excess of US$100,000 per occurrence. 11.3. APPLICATION OF INSURANCE PROCEEDS. As between Lessor and Lessee, any insurance proceeds received under policies pertaining to the Aircraft required to be caused to be maintained by Lessee pursuant to Section 11.2 as a result of the occurrence of an Event of Loss with respect to any Aircraft, Airframe or Engine will be applied in accordance with Section 10.3(a) or 10.3(b), as the case may be. All insurance proceeds in respect of any property damage loss not constituting an Event of Loss with respect to any Airframe or Engine will be applied in payment for repairs or for replacement property in accordance with the terms of Section 8, if not already paid for by Lessee, and any balance remaining after compliance with such Section with respect to such loss shall be paid to Lessor. The provisions of Section 10.4 shall apply to amounts referred to in this Section 11.3. If Lessor shall have received insurance proceeds in excess of $100,000 pursuant to Section 11.2(b)(B) hereof and Lessee shall have performed repairs in accordance with Section 8, upon five (5) Business Days of Lessor's receipt of written notice thereof, Lessor shall make such insurance proceeds available to Lessee. 11.4. CERTIFICATES; REPORTS, ETC. With respect to any insurance policy required hereunder, Lessee shall cause to be furnished to Lessor on or prior to the Delivery Date and on or prior to expiration of such policy, certificates of the insurer or insurers (or their authorized representatives) providing insurance pursuant to the requirements of this Section 11 confirming -33- the existence and effectiveness of the insurance provided hereunder. On or before the Delivery Date of the Aircraft, Lessee shall cause to be furnished to Lessor a report signed by a firm of independent aircraft insurance brokers, appointed by Lessee and reasonably satisfactory to Lessor stating the opinion of such firm that the insurance then carried and maintained on the Aircraft complies with the terms hereof. Lessee agrees that it will cause such firm to advise Lessor in writing promptly of any default in the payment of any premium or any other act or omission on the part of Lessee of which they have knowledge and which might invalidate or render unenforceable, in whole or in part, the insurance on the Aircraft. Lessee further agrees to cause such firm to advise Lessor in writing as soon as such firm has knowledge that any insurance carried and maintained on the Aircraft pursuant to this Section 11 will not be renewed by the applicable underwriters. 11.5. LESSOR'S RIGHT TO MAINTAIN INSURANCE. In the event that Lessee shall fail to cause to be maintained insurance as herein provided, Lessor may at its option (but shall not be obligated to) provide such insurance and in such event, Lessee shall, upon demand, reimburse such Person, as Supplemental Rent, for the cost thereof. No such payment, performance or compliance shall be deemed to cure any Lease Event of Default hereunder or otherwise relieve Lessee of its obligations with respect thereto. 11.6. INSURANCE FOR OWN ACCOUNT. Nothing in Section 11 shall limit or prohibit Lessor, Owner Participant or any Lender from obtaining insurance for its own account, and any proceeds payable thereunder shall be payable as provided in the insurance policy relating thereto. 11.7. GOVERNMENT INDEMNITY. In the case of a contract with the Government in respect of the Aircraft or Engines, a valid agreement by the Government to indemnify Lessee and each Indemnitee against the same risks which are required hereunder to be insured against in an amount at least equal to the amounts required hereunder from time to time, shall be considered adequate insurance with respect to any Aircraft, Airframe and Engine subject to such contract to the extent of the risks and in the amounts that are the subject of any such agreement to indemnify. Section 12. INSPECTION. At all reasonable times during the Term, on three days' prior written notice, or earlier if events occur adversely affecting Lessor's rights, Lessor and each Owner Participant, or their respective authorized representatives, may inspect the Aircraft and the books and records of Lessee or any operator relative thereto. No such Person shall have any duty to make any such inspection or incur any liability or obligation by reason of not making any such inspection. Any costs or expenses relating to such inspection shall be borne by the Person making such inspection, unless an Event of Default shall have occurred and be continuing, in which case such costs and expenses shall be borne by Lessee. Section 13. ASSIGNMENT. LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, ASSIGN ANY OF ITS RIGHTS UNDER THIS LEASE. LESSOR MAY ASSIGN OR CONVEY ANY OF ITS RIGHT, TITLE AND INTEREST IN AND TO THIS LEASE OR THE AIRCRAFT. THE TERMS AND PROVISIONS OF THE LEASE SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF LESSOR AND LESSEE AND THEIR RESPECTIVE PERMITTED SUCCESSORS AND ASSIGNS. -34- Section 14. EVENTS OF DEFAULT. The following events shall constitute Lease Events of Default (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgement, decree or order of any court or any order, rule or regulation of any administrative or governmental body): 14.1. FAILURE TO PAY RENT. Lessee shall fail to make any payment of Rent within two days after the same shall have become due; or 14.2. INSURANCE. Lessee shall fail to cause to be carried and maintained insurance on or with respect to any Aircraft obtained or required to be obtained in accordance with the provisions of Section 11; or 14.3. GENERAL DEFAULT. Lessee shall fail to perform or observe any covenant, condition, obligation or agreement to be performed or observed by it hereunder (other than the obligations referred to in 14.1, 14.2 and 14.8) or under any other Lessee Document and such failure shall continue unremedied for a period of 30 days after written notice thereof by Lessor; or 14.4. MISREPRESENTATION AND BREACH OF WARRANTY. Any representation or warranty made by Lessee herein or in any other Lessee Document shall prove to have been incorrect in any material respect at the time made, and such incorrectness shall continue to be material and unremedied for a period of 30 days after written notice thereof by Lessor; or 14.5. LESSEE BANKRUPTCY, ETC. Lessee shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official or agency in a involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall take any corporate action to authorize any of the foregoing; or an involuntary case or other proceeding shall be commenced against Lessee seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official or agency of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or 14.6. OTHER LEASE. A Lease Event of Default, as defined in the Other Lease, shall have occurred; or 14.7. MAINTENANCE AGREEMENT. Lessee or any Person acting by or on behalf of Lessee shall deny or disaffirm Lessee's obligations under the Maintenance Agreement, or Lessee shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed thereunder; or -35- 14.8. USMS AGREEMENT. The USMS Agreement shall terminate or be terminated as a result of Lessee defaulting in the due performance or observance of any term, covenant or agreement on its part to be performed or observed hereunder or thereunder; or 14.9. MAINTENANCE PROVIDER BANKRUPTCY, ETC. The Maintenance Provider shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official or agency in a involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall take any corporate action to authorize any of the foregoing; or an involuntary case or other proceeding shall be commenced against the Maintenance Provider seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official or agency of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days, PROVIDED THAT if Lessee shall have entered into a Maintenance Agreement with a replacement Maintenance Provider, and Lessor shall have received a properly perfected security interest in such agreement within 30 days of the occurrence of any of the events listed in this Section 14.9, such event shall not be considered an Event of Default under this Section 14.9; or 14.10. OPINION OF LESSEE'S COUNSEL. Lessor and Owner Participant shall not have received an opinion of special counsel to the Lessee in the form attached hereto as Exhibit F within 10 Business Days after the Delivery Date; or 14.11. SECURITY. Lessor shall not have received the Security within 10 Business Days after the Delivery Date. Section 15. REMEDIES. 15.1. DEFAULT; REMEDIES. Upon the occurrence of a Lease Event of Default and at any time thereafter so long as the same shall be continuing, Lessor may, at its option, declare this Lease to be in default; provided that this Lease shall be deemed to be in default automatically without the necessity of such a written declaration upon the occurrence of a Lease Event of Default described in Section 14.5; and thereafter may exercise one or more of the following remedies as Lessor in its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, applicable law then in effect: (a) RETURN; REPOSSESSION. Lessor may cause Lessee, upon written demand by Lessor and at Lessee's expense, to return promptly, and Lessee shall return promptly, all or any part of the Aircraft, Airframe or Engines as Lessor may so demand to Lessor or its order in the manner and condition required by, and otherwise in accordance with all the provisions of, Section 5 as if the Aircraft, Airframe or Engines were being returned at the end of the Term; or Lessor, at its option, may enter upon the premises where the Aircraft, Airframe or Engines, or part thereof, is located and take immediate possession of and remove the same by summary proceedings or otherwise, all without liability accruing to Lessor for or by reason of such entry -36- or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise; or (b) SALE; USE; ETC. Lessor may sell the Aircraft, Airframe or any Engine, or part thereof, at public or private sale, at such times and places, to such Persons as Lessor may determine, or otherwise dispose of, hold, use, operate, lease to others or keep idle the Aircraft, Airframe or any Engine, or part thereof, as Lessor, in its sole discretion, may determine, all free and clear of any rights of Lessee and without any duty to account to Lessee with respect to such action or inaction or for any proceeds with respect thereto; or (c) LIQUIDATED DAMAGES--FAIR MARKET RENTAL VALUE. Whether or not Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under Section 15.1(a) or 15.1(b) with respect to the Aircraft, Airframe or Engine, or part thereof, Lessor, by written notice to Lessee specifying a payment date not earlier than ten days from the date of such notice, may cause Lessee to pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty, any accrued but unpaid Rent for the Aircraft due to and including the payment date specified in such notice, plus an amount equal to the excess, if any, of the discounted value of the unpaid Rent for the Aircraft that would otherwise have accrued over the remainder of the Term but for the Event of Default, over the discounted value of the fair market monthly rental for the Aircraft (computed as provided in Section 15.2) for a period commencing six months after the payment date and extending to the end of the Expiry Date, in each case discounted monthly to present value as of the payment date specified in such notice at 4%. The amounts specified in such notice shall continue to earn interest from the payment date until payment is made; or (d) TERMINATION AND OTHER REMEDIES. Lessor may terminate the leasing of the Aircraft, Airframe and Engines, or Part thereof under this Lease, or may exercise any other right or remedy which may be available to it under the Uniform Commercial Code in any applicable jurisdiction or other applicable statute or law whether or not in effect in the jurisdiction in which enforcement is sought or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof, including without limitation Lessee's agreement to lease the Aircraft for the Term and to pay Rent. In addition to the foregoing remedies, Lessee shall be liable for any and all unpaid Rent due hereunder before, during or after the exercise of any of the foregoing remedies and for all legal fees and other costs and expenses of Lessor, including without limitation interest on overdue Rent at the rate as herein provided, and the fees and expenses of all appraisers required by this Section 15, incurred by reason of the occurrence of any Lease Event of Default or the exercise of Lessor's remedies with respect thereto, including all insurance and storage costs and all costs and expenses incurred in connection with the return of the Aircraft, Airframe or any Engine, or part thereof, in accordance with the terms of Section 5 or in placing the Aircraft, Airframe or any Engine, or part thereof, in the condition and airworthiness required by Section 5. 15.2. DETERMINATION OF FAIR MARKET RENTAL VALUE. -37- For the purpose of this Section 15, the "fair market rental value" of the Aircraft shall be determined on the assumption that the Aircraft was maintained or returned, as the case may be, in the condition required by this Lease, by a recognized independent appraiser chosen by Lessor. 15.3. NO WAIVER, ETC. No remedy referred to in this Section 15 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity; and the exercise or beginning of exercise by Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Lessor of any or all of such other remedies. No express or implied waiver by Lessor of any Lease Event of Default shall in any way be, or be construed to be, a waiver of any earlier or subsequent Lease Event of Default. To the extent permitted by applicable law, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use any Aircraft, Airframe or Engine, or Part thereof, in mitigation of Lessor's damages as set forth in this Section 15 or which may otherwise limit or modify any of Lessor's rights or remedies under this Section 15. Section 16. NOTICES. All notices required under the terms and provisions hereof shall be in writing and shall be given by registered mail, facsimile, telex, teletype or any other customary means of written communication, addressed: If to Lessee, at P.O. Box 25604, Albuquerque, New Mexico 87125, Attention: Suzanne Verardo, or at such other address as Lessee shall from time to time designate in writing; If to Lessor, at One Rodney Square, 920 King Street, 1st Floor, Wilmington, DE 19801, fax: 302-888-7544, Attention: Corporate Trust Administration, with copies to Airlease Ltd., 555 California Street, 4th Floor, San Francisco, CA 94104, Fax: 415-765-1817, Attention: Jad Mansour, or at such other address as Lessor or such other Person shall from time to time designate in writing. If to Airlease, at the address set forth in the foregoing paragraph, or to such other Person as Airlease shall from time to time designate in writing. The effective date of any such notice shall be, if sent by mail, five days after mailing or, if sent by telex, facsimile or teletype, the date when such notice is sent or dispatched, and otherwise the date on which it is received by the addressee. Section 17. NET LEASE; LESSEE'S OBLIGATIONS; NO SET-OFF, COUNTERCLAIM, ETC. This is a net lease. Lessee's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including without limitation: (a) any setoff, counterclaim, recoupment, defense or other right which Lessee may have against Lessor; (b) airworthiness, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, the Aircraft, Airframe or any Engine, or any interruption or cessation in the use or possession thereof by Lessee for any reason whatsoever; (c) any insolvency, bankruptcy, reorganization or similar proceedings by or against Lessee or any other -38- Person; (d) any change, waiver, extension, indulgence or other action or omission in respect of any obligation or liability of Lessee or Lessor; (e) any claim that Lessee has or might have against any Person; or (f) any invalidity or unenforceability or disaffirmance of this Lease or any provision hereof. All Rent payable by Lessee shall be paid without notice or demand (except as otherwise expressly provided) and without abatement, suspension, deferment, deduction, diminution or proration by reason of any circumstance or occurrence whatsoever. Lessee hereby waives, to the extent permitted by applicable law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease or any part hereof, or to any abatement, suppression, deferment, diminution, reduction or proration of Rent except in accordance with the express terms hereof. Each payment of Rent made by Lessee shall be final as to Lessor and Lessee. Lessee will not seek to recover all or any part of any such payment of Rent for any reason whatsoever. Nothing in this Section 17 will be construed to extinguish or otherwise limit Lessee's right to institute legal proceedings against Lessor in the event of Lessor's breach of this Agreement. Section 18. COVENANTS OF LESSEE. (a) CERTAIN ASSURANCES. Lessee shall do, execute, acknowledge and deliver or cause to be done, executed, acknowledged and delivered all such further acts, conveyances and assurances as Lessor shall reasonably request for accomplishing the purposes of this Lease. Lessee shall also do or cause to be done, at its own expense, any and all acts and things which may be required under the terms of any law, rule, regulation, agreement, treaty, convention, pact or by any practice, custom, or understanding recognized as having wide application or control involving any jurisdiction in which the Aircraft is being operated, or any and all other acts and things which Lessor may reasonably request and which are necessary or advisable to perfect and preserve the rights of Lessor in and to the Aircraft within any such jurisdiction. (b) FILING AND RECORDATION. Lessee will cause this Lease in respect of the Aircraft to be duly and timely filed and recorded, or filed for recordation, to the extent permitted under the Act or required under any applicable law. (c) FINANCIAL AND OTHER INFORMATION. Lessee shall deliver or cause to be delivered to Lessor promptly after the same are available (and in any event within 90 days) after the end of each of its financial years ending after the date hereof, a copy of its audited financial statements for such financial year, which (i) shall be prepared by independent, certified public accountants in accordance with generally accepted accounting principles and practices in the consistently applied, (ii) shall fairly and accurately present the financial position of Lessee as at the date as of which they were prepared and the results of the operations of Lessee for the period to which they relate and (iii) shall disclose all significant liabilities, actual or contingent, of Lessee. Lessee shall promptly provide Lessor with such financial, operational and other information concerning Lessee and its affairs and the Aircraft as Lessor may from time to time -39- reasonably request in the context of Lessee Documents and the transactions contemplated thereby. (d) EXISTENCE. Lessee will preserve and maintain its corporate existence and much of its rights, privileges, licenses and franchises where failure to maintain such rights and privileges or obtain such licensing or qualification would have a material adverse effect upon Lessee. (e) LEASE TERMINATION AGREEMENT. Upon the expiration or earlier termination of this Lease, Lessee and Lessor will duly execute and deliver a Lease Termination Agreement in the form attached hereto as Exhibit "C". (f) EXPENSES. Each party shall be responsible for its own fees and expenses in connection with the execution, delivery and preparation of this Lease including, without limitation, the fees and expenses of its legal counsel. Section 19. RIGHT TO PERFORM FOR LESSEE. If Lessee fails to make any payment required to be made by it hereunder or fails to perform or comply with any of its agreements contained herein, Lessor may (but shall not be obligated to) make such payment or perform or comply with such agreement, and the amount of such payment and the amount of the expenses of Lessor incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Overdue Interest Rate, shall be deemed Supplemental Rent, payable by Lessee upon demand. No such payment, performance or compliance shall be deemed to cure any default of Lessee hereunder or otherwise relieve Lessee of its obligations with respect thereto. Section 20. MISCELLANEOUS. 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. The prevailing party in any action to enforce its rights hereunder shall be entitled to recover from the nonprevailing party reasonable attorneys fees and costs. No term or provision of this Lease may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. The Lessee irrevocably agrees, by execution and delivery of this Lease, that any legal action or proceeding brought against the Lessee with respect to this Lease or any Lessee Document may be brought and determined in the Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York, and the Lessee hereby irrevocably accepts with regard to any such action or proceeding, for itself and in respect of its properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts. The Lessee further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by -40- registered airmail, postage prepaid, to the Lessee at its address set forth in Section 16 hereof. Nothing herein shall affect the right of Lessor to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Lessee in any other jurisdiction in which the Lessee may be subject to suit. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORECE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. THIS LEASE SHALL CONSTITUTE AN AGREEMENT OF LEASE, AND NOTHING HEREIN SHALL BE CONSTRUED AS CONVEYING TO LESSEE ANY RIGHT, TITLE OR INTEREST IN OR TO THE AIRCRAFT, AIRFRAME OR ANY ENGINE EXCEPT AS A LESSEE ONLY. THE SECTION AND PARAGRAPH HEADINGS IN THIS LEASE AND THE TABLE OF CONTENTS ARE FOR CONVENIENCE OF REFERENCE ONLY AND SHALL NOT MODIFY, DEFINE, EXPAND OR LIMIT ANY OF THE TERMS OR PROVISIONS HEREOF AND ALL REFERENCES HEREIN TO NUMBERED SECTIONS, UNLESS OTHERWISE INDICATED, ARE TO SECTIONS OF THIS LEASE. THIS LEASE HAS BEEN, AND EACH LEASE SUPPLEMENT AND AMENDMENT HERETO IS INTENDED TO BE, DELIVERED IN THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE IN SUCH STATE BY RESIDENTS THEREOF AND AS IF PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. THIS LEASE AND EACH LEASE SUPPLEMENT AND AMENDMENT HERETO 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. Section 21. LESSOR DEFAULT ETC. Without prejudice to Lessee's rights under applicable law other than Uniform Commercial Code Article 2-A to bring suit or claim for monetary damages or to enforce the terms of this Agreement, Lessee acknowledges and agrees that any statutory default of Lessor or remedy (excluding any right to bring suit or claim for monetary damages) granted to Lessee by reason of Uniform Commercial Code Article 2-A (including any right to revoke acceptance under Section 2-A-517) is not a part of this Lease. Section 22. TRUTH IN LEASING. -41- DURING THE TWELVE MONTHS PRECEDING THE EXECUTION OF THIS LEASE, THE AIRCRAFT WAS MAINTAINED, INSPECTED AND OPERATED PURSUANT TO THE REQUIREMENTS OF THE FEDERAL AVIATION REGULATION PART 121 UPON THE REGISTRATION OF THE AIRCRAFT WITH THE FEDERAL AVIATION ADMINISTRATION. THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER FEDERAL AVIATION REGULATION PART 121 FOR OPERATIONS TO BE CONDUCTED BY THE LESSEE UNDER THIS LEASE EXCEPT AT SUCH TIMES AS THE AIRCRAFT IS SUBLEASED TO A SUBLESSEE HOLDING AN AIR CARRIER OPERATOR CERTIFICATE. NOTWITHSTANDING THE FOREGOING FOR SO LONG AS THE USMS AGREEMENT REMAINS IN EFFECT, THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED BY THE LESSEE UNDER THIS LEASE AND WILL BE UNDER THE OPERATIONAL CONTROL OF THE USMS. AN EXPLANATION OF THE FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE. (This remainder of this page left blank intentionally). -42- IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be duly executed and delivered as of the day and year first above written. FIRST UNION NATIONAL BANK, not in its individual capacity, but solely as Trustee, Lessor By: ---------------------------------------------- Name: Title: CSI AVIATION SERVICES, INC., Lessee By: ---------------------------------------------- Name: Title: AIRLEASE LTD. By: ---------------------------------------------- Name: Title: -Signature Page- [Aircraft Lease Agreement] SCHEDULE 1 AIRCRAFT DESCRIPTION PART A Aircraft Manufacturer, Model and Series: McDonnell Douglas DC-9-Series 82 Manufacturer's Serial Number: 48038 FAA Registration Number: N806US Engine Manufacturer and Model: Pratt & Whitney JT8D-217 Engine Serial Numbers: P708517 and P708136 Auxiliary Power Unit: Model 85-98DHF s/n 179BCA Date of Manufacture: 1981 Seating Configuration: 140 passengers WEIGHTS & CAPACITY POUNDS Maximum Ramp Weight 148,000 Maximum Take Off Weight 147,000 Maximum Landing Weight 128,000 Maximum Zero Fuel Weight 118,000 Operating Empty Weight [_____] Fuel Capacity 39, 128 LANDING GEAR NOSE RIGHT MAIN LEFT MAIN Manufacturer 5910447-5041 5930593-5504 5930593-5503 Serial Number C92766 C90126 C90339 Wheels 9550267-6 (12 ply) 5006040-1 (26 ply) 5006040-1 (26 ply) GALLEY EQUIPMENT: MANUFACTURER QTY. Ovens TIA 1 each Trolleys 2 Coffee Makers Nords K09 4
AVIONICS: DESCRIPTION QTY. MANUFACTURER MODEL Cabin Press 2 Airesearch 211718-1 Stall Warning Computor 2 Sunstroud 965-0449-002 ADC 2 Honeywell HG-280D80 P.A. Amp. 1 Collins 346D-2 NAV. Comparator 1 Dynamic Controls 11170-2 DFGC 2 Honeywell 4034241-971 NAV. SW. Unit 1 Butler Natl. 001122-101 Compass Rack 2 Sperry 614937-10 Marker Beacon 1 Bendix 2087821-2811 ADF 1 Collins 5147 Central Aural Warning 1 MDC H05A0035-4 VOR/ILS NAV. 2 Collins 51RV-4 VHF Tranceivers 3 Collins 618 M-3 TCAS Processor 1 Bendix 066-50000-0108 Transponder 2 Bendix TRA-67A Controller 1 Teledyne R6357-501A Prox SW. Electronics Unit 1 ELDEC 8-336-04 Management Control Unit 1 Hamilton 773167-1 Flite Data Acq. Unit 1 Hamilton EV742951-9 Anti-Skid Control 1 Hytrol 42-607-21 -2- DME 2 Collins 860E5 Windshield 1 Honeywell 4059845-911 Instr. SW. Unit 1 Butler Natl. 001048-101 Grd. Prox 1 Collins FPC-75
PART B The following Maintenance Publications, Maintenance Records, Documents and Certificates shall be delivered to Lessee on or to prior to the Delivery Date. ITEM - Flight operations manual - Airframe maintenance manual - Engine maintenance manual - IPC - Wiring diagrams - Aircraft flight manual - various component overhaul manuals - Weight and Balance manual - MEL - FMS operation manual - Pilots Handbook -3- SCHEDULE 2 "Airframe Payment Amount" means $150.00 per Flight Hour. "APU Payment Amount" means $7.00 per Flight Hour. "Basic Rent Amount" means $125,000.00 per month for the first year of the Agreement, and $120,000.00 per month in the event the Agreement is extended beyond 30 September 2002. "Engine Payment Amount" means $75.00 per Flight Hour. "Gear Payment Amount" means $10.00 per Flight Hour. EXHIBIT A LEASE SUPPLEMENT THIS LEASE SUPPLEMENT, dated November __, 2001, between FIRST UNION NATIONAL BANK, not in its individual capacity but solely as Trustee ("Lessor"), and CSI AVIATION SERVICES, INC. ("Lessee"). Lessor and Lessee have heretofore entered into that certain Aircraft Lease Agreement, dated as of November 21, 2001 (as at any time amended, modified or supplemented, herein called the "Lease" and the terms defined therein being herein used with the same meanings), which Lease provides in Section 2 for the execution of a Lease Supplement substantially in the form hereof for the purpose of leasing the Aircraft under the Lease after the Delivery Flight in accordance with the terms thereof. The Lease relates, among other matters, to the Airframe and Engines described below, and this Lease Supplement is attached to a counterpart of the Lease for purposes of filing and recordation. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, and pursuant to Section 2 of the Lease, Lessor and Lessee hereby agree as follows: 1. Lessor hereby delivers and leases to Lessee, and Lessee hereby accepts and leases from Lessor, under the Lease, as herein supplemented, the following described McDonnell Douglas DC-9-Series 82 aircraft (the "Delivered Aircraft") which Delivered Aircraft as of the date hereof consists of the following: Airframe: FAA Registration Number N806US, Manufacturer's Serial No. 48038 and manufactured in 1981; and Engines: Two Pratt & Whitney JT8D-217 engines installed thereon bearing Engine Manufacturer's Serial Numbers 708517 and 708136. Each of the Engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 2. The Delivery Date of the Delivered Aircraft and Engines is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. Lessee hereby confirms to Lessor that Lessee has accepted the Delivered Aircraft and Engines for all purposes hereof and of the Lease, including its being airworthy, in accordance with specifications, in good working order and repair and without defect in condition, design, operation or fitness for use, whether or not discoverable by Lessee as of the date hereof. 4. All the provisions of the Lease are hereby incorporated by reference in this Lease Supplement, on and as of the date of this Lease Supplement, to the same extent as if fully set forth herein. 5. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. 6. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. -2- IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed and delivered as of the date and year first above written. FIRST UNION NATIONAL BANK, not in its individual capacity, but solely as Trustee, Lessor By: _________________________ Name: Title: CSI AVIATION SERVICES, INC. Lessee By: _________________________ Name: Title: -Signature Page- [Lease Supplement] EXHIBIT B RECEIPT FOR LEASE AIRCRAFT Date: November __, 2001 Time: ________________________ Place: _______________________ Received from _____________________________________________, pursuant to the Lease Agreement, dated as of November 21, 2001 (the "Lease Agreement") among CSI AVIATION SERVICES, INC. ("Lessee"), FIRST UNION NATIONAL BANK, not in its individual capacity but solely as Trustee, and AIRLEASE LTD. the following: One (1) McDonnell Douglas DC-9-Series 82 Aircraft (140) seats Federal Aviation Administration Registry No. N806US Manufacturer's Serial No. 48038 Remaining to Next Overhaul ("Q Check") Hours MSG 3 mx program schedule Cycles: 4467 Engine Serial (#1) P708517 Total Hours: 41,603 Total Cycles: 36,172 Cycles remaining to next LLP: 3245 Hours since Last Shop Visit: 861 (#2) P708136 Total Hours: 45,945 Total Cycles: 39,376 Cycles remaining to next LLP: 7053 Hours since Last Shop Visit: 1188 Total Aircraft Hours at Delivery: 54,413 Total Aircraft Cycles at Delivery: 47,659 Pounds of Fuel on Board: [_____] [The list of mutually agreed discrepancies referred to in Section 2.5 of the Lease Agreement is attached hereto.] The undersigned is authorized by Lessee to accept delivery of the above designated aircraft pursuant to the aforesaid Agreement. CSI AVIATION SERVICES, INC. By: _________________________ Title: -2- EXHIBIT C LEASE TERMINATION AGREEMENT CSI AVIATION SERVICES, INC. ("Lessee") does hereby terminate the Lease of one (1) McDonnell Douglas DC-9-Series 82 Aircraft, manufacturer's serial number 48038, such termination having been made at ________ at _______ (AM/PM) on the ____ day of __________, 20__, in accordance with the Aircraft Lease Agreement among First Union National Bank, not in its individual capacity but solely as Trustee, Airlease Ltd. and Lessee, dated as of November 21, 2001. Concurrently with the return of the Aircraft in the condition specified in Section 5 of the Lease Agreement, Lessor shall execute and deliver to Lessee a Receipt for Lease Aircraft substantially in the form of Exhibit B to the Lease Agreement. Lessor's execution and delivery of this Agreement and the aforesaid Receipt for Lease Aircraft shall constitute Lessor's agreement that the Aircraft and related records and manuals are in compliance with the Lease Agreement, including without limitation, the provisions of Section 5 thereof, except as specified in such Exhibit B. Nothing herein is intended to affect any indemnification rights or obligations arising under the Lease Agreement. CSI AVIATION SERVICES, INC. By: _________________________ Title: Date: FIRST UNION NATIONAL BANK, not in its individual capacity but solely as Trustee By: _________________________ Title: Date: AIRLEASE LTD. By: _________________________ Title: Date: EXHIBIT D
MONTHLY OPERATING REPORT CSI AVIATION SERVICES, INC. ======================================================================= ========================= ================== ITEM Comments - ----------------------------------------------------------------------- ------------------------- ------------------ GENERAL / Reserve Period Begin and End Date [AIRCRAFT TYPE] ------------- / Effective Date for Below Information / Model [MSN] / Delivery Year / Manufacturer's Serial Number / Manufacturer's Line Number - ----------------------------------------------------------------------- ------------------------- ------------------ AIRFRAME / Airframe Total Time / Airframe Flight Hours during prior Reserve Period / Airframe Flight Cycles during prior Reserve Period / Airframe Total Cycles / Approx. Date of Next C-Check or equivalent / Approx. Date of Next Q-Check or equivalent - ----------------------------------------------------------------------- ------------------------- ------------------ LANDING GEAR / Overhaul Interval (All Gears) / Nose Date of Next Overhaul / Port Main Gear Date of Next Overhaul / Starboard Main Gear Date of Next Overhaul - ----------------------------------------------------------------------- ------------------------- ------------------ AUXILIARY POWER UNIT / Total Time / Hours to next expected shop visit - ----------------------------------------------------------------------- ------------------------- ------------------ WEIGHT / Max Take-Off Weight / Max Landing Weight / Max Zero Fuel Weight / Empty Weight (OWE) / Fuel Capacity (Max Usable) - ----------------------------------------------------------------------- ------------------------- ------------------ ENGINES / Type [ENGINE TYPE] / Serial Numbers [_______] Pos. 1 [_____] Pos. 2 / Total Time Pos. 1 Pos. 2 / Total Cycles Pos. 1 Pos. 2 / Remaining Time (Dkc) in Cycles Pos. 1 Pos. 2 / Current Location Pos. 1 / Time Since Last Overhaul Pos. 1 / EGT Margin Pos. 1 Pos. 2 / Flight Hours during prior Determination Period Pos. 1 Pos. 2 / Cycles during prior Determination Period Pos. 1 Pos. 2 - ----------------------------------------------------------------------- ------------------------- ------------------ INCIDENTS OF DAMAGE OR LOSS - ----------------------------------------------------------------------- ------------------------- ------------------ Comment Date ======================================================================= ========================= ==================
-2- EXHIBIT E FORM OF IRREVOCABLE LETTER OF CREDIT - -------------------------------------------------------------------------------- IRREVOCABLE STANDBY LETTER OF CREDIT NO. PLACE AND DATE OF ISSUE: ___________ - -------------------------------------------------------------------------------- BENEFICIARY: APPLICANT: [LESSOR] CSI Aviation Services [address] - -------------------------------------------------------------------------------- EXPIRY DATE/PLACE: AVAILABLE AT/BY: Expires on the second anniversary of the date Our office only by presentation of issue ofthis credit. For presentation at of document(s) required and your our office. draft(s) drawn at sight. - -------------------------------------------------------------------------------- AMOUNT OF CREDIT: Not to exceed, in the aggregate US dollars 250,000 (two hundred fifty thousand US dollars) - -------------------------------------------------------------------------------- RE: ONE MCDONNELL DOUGLAS DC-9-SERIES 82 AIRCRAFT MANUFACTURER'S SERIAL NUMBER 48038 - -------------------------------------------------------------------------------- Gentlemen, At the request and for the account of the above named applicant we hereby establish our irrevocable letter of credit in your favour which is available as indicated above against presentation of your draft(s) drawn on [INSERT NAME OF BANK] when accompanied by the following documents: DOCUMENTS REQUIRED A dated statement bearing an original signature purporting to be an authorised signor for [Lessor] (indicating the name and title/capacity of the signor), reading as follows: "[We hereby certify that the amount of US$_________ drawn under [INSERT NAME OF BANK] Letter of Credit No. _________, as evidenced by our draft accompanying this statement, is payable to us because an event of default under and as defined in a certain aircraft lease agreement dated as of November 21, 2001 among CSI Aviation Services, Airlease Ltd. and ourselves relating to one McDonnell Douglas DC-9-Series 82 Aircraft manufacturers serial number 48038 has occurred and is continuing.] OR [We hereby certify that the amount of US$________ drawn under [INSERT NAME OF BANK] Letter of Credit No. _________, as evidenced by our draft accompanying this statement, is payable to us because said Letter of Credit has not been replaced or extended in accordance with the terms of a certain aircraft lease agreement dated as of November 21, 2001 between CSI Aviation Services, Airlease Ltd. and ourselves relating to one McDonnell Douglas DC-9-Series 82 Aircraft manufacturers serial number 48038.]" OTHER CONDITIONS Partial drawings are permitted. Any dispute(s) whatsoever that may arise between the above named applicant and yourselves shall be settled as a matter completely separate from and outside of this irrevocable standby Letter of Credit. We shall honour your claim if presented to [INSERT NAME AND ADDRESS OF BANK] (the "Drawing Office") by latest on the second anniversary of the date of issue of this credit which is the expiry date of this instrument. The original of this Letter of Credit must be returned to us with any drawing(s) hereunder for our endorsement of any payment effected. We undertake to return said original Letter of Credit to you (unless fully utilised or expired) together with our advice of settlement. This Letter of Credit sets forth in full our undertaking, and such undertaking shall not in any way be modified, amended, amplified or limited by reference to any document, instrument or agreement referred to herein except only the certificate and sight drafts referred to herein and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement except such certificates and sight drafts. Each draft drawn hereunder must be marked: "Drawn under [INSERT NAME OF BANK] Letter of Credit No. (specify L/C No.)". Unless otherwise expressly stated herein, this Letter of Credit is subject to the uniform customs and practice for documentary credits, 1998 revision, ICC publication No. 500 and the laws of the State of New York. ENGAGEMENT We hereby agree with you that drafts drawn under and in compliance with the terms of this credit will be duly honoured upon presentation and delivery of the documents as specified herein within three (3) business days of such presentation and delivery if presented to the Drawing Office on or before the expiry date indicated above. This credit is transferable to your successors and assigns by (i) giving us written notice stating this credit has been transferred and (ii) delivering the original credit to such successor or assign. Very truly yours, - ----------------------- ----------------------- Authorised Signature Authorised Signature -2- EXHIBIT F FORM OF OPINION November [ ], 2001 Airlease Ltd. First Union National Bank Re: ONE MCDONNELL DOUGLAS DC-9-SERIES 82, MSN 48038 ----------------------------------------------- Gentlemen: We have acted as counsel for CSI Aviation Services, Inc., a corporation organized and existing under the laws of New Mexico (the "Lessee"), in connection with the execution and delivery of the following documents (collectively, the "Documents") together with all exhibits and schedules thereto: (a) the Aircraft Lease Agreement, dated as of November 21, 2001 (the "Agreement") among First Union National Bank (the "Lessor"), the Lessee and Airlease Ltd. ("Airlease"); and (b) the Lease Supplement dated November [ ], 2001, between Lessor and Lessee; and (c) the USMS Agreement, dated as of October 2, 2001, between the Lessee and The United States Marshall Service ("USMS"); and (d) the Maintenance Agreement dated November 21, 2001, between Lessee and Spirit Airlines. This Opinion is delivered to you pursuant to Section 2.3 of the Agreement. Terms used herein which are defined in the Agreement shall have the respective meanings set forth in the Agreement, unless otherwise defined herein. In connection with this opinion, we have examined the originals, or certified, conformed or reproduction copies, of all records, agreements, instruments and documents as we have deemed relevant or necessary as the basis for the opinions hereinafter expressed. In stating our opinion, we have assumed the genuineness of all signatures on original or certified copies, the authenticity of documents submitted to us as originals and the conformity to original or certified copies of all copies submitted to us as certified or reproduction copies. We have also assumed, for purposes of the opinions expressed herein, that the parties to the Documents other than the Lessee have the corporate power and authority to enter into and perform each of the Documents and that each of the Documents has been duly authorized, executed and delivered by each such other party. Based upon the foregoing, and subject to the limitations set forth herein, we are of the opinion that: 1. The Lessee (i) is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its incorporation, (ii) has the power and authority to own its property and assets and to transact the business in which it is engaged and (iii) is duly qualified as a foreign corporation and in good standing in each jurisdiction where the ownership, leasing or operation of property or the conduct of its business requires such qualification. 2. The Lessee has the corporate power to execute, deliver and perform the terms and provisions of each of the Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of each of such Documents. The Lessee has duly executed and delivered each of the Documents to which it is a party, and each of such Documents constitutes its legal, valid and binding obligation enforceable in accordance with its terms except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether the issue of enforceability is considered in proceeding in equity or at law). 3. Neither the execution, delivery or performance by the Lessee of the Documents to which it is a party, nor compliance by it with the terms and provisions thereof, (i) will contravene any provision of any law, statute, rule or regulation or, to the best of our knowledge after due inquiry, any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Lessee pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement, loan agreement or any other agreement, contract or instrument or which we are aware to which the Lessee is a party or by which it or any of its property of assets is bound or to which it may be subject or (iii) will violate any provision of the Certificate of Incorporation or By-Laws of Lessee. 4. To the best of our knowledge after due inquiry, there are no actions, suits, or proceedings pending or threatened (i) with respect to any Document or (ii) that are reasonably likely to materially and adversely affect the operations, business, property, assets, condition (financial or otherwise) or prospects of the Lessee. 5. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except as have been obtained or made prior to the Delivery Date), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (i) the -2- execution, delivery and performance of any Document to which the Lessee is a party or (ii) the legality, validity, binding effect or enforceability of any such Document. 6. The choice of New York law as the governing law of the Agreement is a valid choice of law. 7. The consent by the Lessee in Section 20 of the Agreement to the jurisdiction of courts sitting in the State of New York is a valid consent to the jurisdiction of such courts. 8. It is not necessary under the laws of the jurisdiction of incorporation of the Lessee, (i) in order to enable the Lessor and Airlease or either of them to enforce their respective rights under the Documents or (ii) by reason of the execution, delivery or performance of the Documents, that either of them should be licensed, qualified or entitled to carry on business in any such jurisdiction. 9. Neither the Lessor nor Airlease is or will be resident, domiciled, carrying on business or subject to taxation in the jurisdiction of incorporation of the Lessee by reason only of the execution, delivery, performance or enforcement of the Documents. The opinions concerning the enforceability of the Documents means that the Documents constitute an effective contract under applicable law, that the Documents are not invalid in their entirety because of a specific statutory prohibition or public policy and are not subject in their entirety to a contractual defense and, subject to the last sentence of this paragraph, some remedy is available if the Lessee is in material default under the Documents. This opinion does not mean that any particular remedy is available upon a material default, or every provision of the Documents will be upheld or enforced in any or each circumstance by a court. Furthermore, the validity, binding effect and enforceability of the Documents may be limited or otherwise affected by a bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar statutes, rules, regulations or other laws affecting the enforcement of creditors' rights and remedies generally and the unavailability of, or limitation on the availability of, a particular right or remedy (whether in a proceeding in equity or at law) because of an equitable principle or requirement as to commercial reasonableness, conscionability or good faith. We do not purport to be experts on, and do not purport to be generally familiar with or qualified to express legal opinions based on, any law other than the laws of the State of New Mexico and accordingly express no opinion herein based upon any law other than the laws of the State of New Mexico or the federal laws of the United States of America. We note that the Agreement provides that is shall be governed by the laws of the State of New York. We have assumed with your permission for purposes of this opinion letter that the laws of the State of New York are the same as the laws of the State of New Mexico. The opinions expressed herein are solely for your benefit and may not be relied upon in any manner or for any purpose by any other person. Very truly yours, -3- TABLE OF CONTENTS PAGE ERROR! NO TABLE OF CONTENTS ENTRIES FOUND. SCHEDULE 1 AIRCRAFT DESCRIPTION SCHEDULE 2 EXHIBIT A Lease Supplement EXHIBIT B Form of Receipt for Lease Aircraft EXHIBIT C Lease Termination Agreement EXHIBIT D Form of Operating Report EXHIBIT E Form of Letter of Credit EXHIBIT F Form of Opinion EX-10.56 MATERIAL CO 7 ex10-56.txt AIRCRAFT LEASE AGREEMENT EXHIBIT 10.56 AIRCRAFT LEASE AGREEMENT Dated as of November 21, 2001 between FIRST UNION NATIONAL BANK not in its individual capacity but solely as Trustee Lessor and CSI AVIATION SERVICES, INC. Lessee and AIRLEASE LTD. Owner Participant McDonnell Douglas DC-9-Series 82 Aircraft Aircraft Reg. No. N807US Manufacturer's Serial No. 48039 AIRCRAFT LEASE AGREEMENT, dated as of November 21, 2001, between FIRST UNION NATIONAL BANK (successor to Meridian Trust Company), a national banking association organized and existing under the laws of the United States of America, not in its individual capacity but solely as Trustee under the Trust Agreement defined in Section 1 below ("Lessor"), CSI AVIATION SERVICES, INC., a New Mexico corporation ("Lessee"), and AIRLEASE LTD., a California limited partnership ("Airlease")], W I T N E S S E T H: - - - - - - - - - - WHEREAS, Lessee desires to lease from Lessor and Lessor is willing to lease to Lessee the aircraft described herein upon and subject to the terms and conditions of this Lease. NOW THEREFORE, in consideration of the mutual promises herein, Lessor and Lessee agree as follows: Section 1. DEFINITIONS. ----------- Unless the context otherwise requires, the following terms shall have the following meanings for all purposes of this Lease and shall be equally applicable to both the singular and the plural forms of the terms herein defined. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time. "Act" means the Federal Aviation Act of 1958, as amended from time to time. "Aircraft" means the Airframe, together with the two Engines initially installed on such Airframe when delivered and leased hereunder and all applicable current manuals and records relating thereto (or any Replacement Engine substituted for any of such Engines hereunder), whether or not any of such initial or Replacement Engines may from time to time thereafter be installed on such Airframe or may be installed on any other airframe or on any other aircraft. "Airframe" means (i) the McDonnell Douglas DC-9-Series 82 aircraft (excluding Engines or engines from time to time installed thereon) manufactured by Manufacturer in 1981 and currently bearing United States registration number N807US and manufacturer's serial number 48039 leased hereunder by Lessor to Lessee and (ii) any and all Parts so long as the same shall be incorporated in such aircraft and any and all parts removed from such aircraft so long as title thereto shall remain vested in Lessor in accordance with the terms hereof. "Airframe Payment Amount" has the meaning provided in Schedule 2. "Airframe Payments" has the meaning provided in Section 3.5. "APU Payment Amount" has the meaning provided in Schedule 2. "APU Payments" has the meaning provided in Section 3.5. "Basic Rent" means the rent identified as Basic Rent in and payable pursuant to Section 3.2. "Basic Rent Amount" has the meaning provided in Schedule 2. "Business Day" means any day other than a Saturday, Sunday or other day on which banking institutions in San Francisco, California or Wilmington, Delaware are authorized or required by law to be closed. "Cycle" means one take-off and landing of the Aircraft or, in respect of any Engine or Part temporarily installed on another aircraft, of that other aircraft. "Delivery Date" means the date of the Lease Supplement relating to the Aircraft, which date shall be the date on which the Aircraft is leased to Lessee hereunder. "Delivery Flight" is defined in Section 2.5. "Delivery Location" means Lake City, Florida, or other location in the United States agreed by Lessor and Lessee. "DOT" means the United States Department of Transportation or any governmental person, agency or authority succeeding to the functions of such Department of Transportation. "Engine" means (i) each of the two Pratt & Whitney JT8D-217 engines identified by manufacturer's serial number on the Lease Supplement subjecting the Aircraft to this Lease and originally installed on the Airframe on delivery thereof pursuant to this Lease, whether or not from time to time thereafter installed on such Airframe or installed on any other airframe, and (ii) any Replacement Engine, whether or not from time to time thereafter installed on the Airframe or any other airframe, together in each case with any and all Parts incorporated in such Engine and any and all Parts removed from such Engine so long as title thereto shall remain vested in Lessor in accordance with the terms hereof. At such time as a Replacement Engine shall be substituted hereunder and the Engine for which the substitution is made shall be released, such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means as of any date of determination, all Engines then leased hereunder. "Engine Payment Amount" has the meaning provided in Schedule 2. "Engine Payments" has the meaning provided in Section 3.5. "Event of Loss" means, in relation to the Aircraft, the Airframe or any Engine: (a) its actual, constructive, compromised, arranged or agreed total loss (including any damage thereto or requisition for use or hire which results in an insurance settlement on the basis of a total loss); or (b) its destruction or damage beyond repair or being rendered permanently unfit for normal use for any reason whatsoever; or (c) its requisition (other than a requisition for hire by the Government not extending beyond the earlier of the last day of the Term and the 180th day after the commencement of such requisition), confiscation, sequestration, detention, forfeiture, compulsory acquisition or seizure; or (d) its hijacking, theft or disappearance resulting in loss of possession by Lessee for a period of 30 consecutive days or longer or extending beyond the last day of the Term. "Expiry Date" means October 31, 2006. 2 "FAA" means the United States Federal Aviation Administration or any governmental person, agency or other authority succeeding to the functions of the Federal Aviation Administration. "FAR" means the regulations promulgated by the FAA pursuant to the Act. "Flight Hour" means the number of hours including fractions thereof between the moment the Aircraft (or other aircraft in the case of Parts or Engines temporarily installed on such other aircraft) first leaves the ground for the purpose of flight until the moment the Aircraft (or such other aircraft) touches ground after such flight. "Gear Payment Amount" has the meaning provided in Schedule 2. "Gear Payments" has the meaning provided in Section 3.5. "Government" means the federal government of the United States of America or any instrumentality or agency thereof. "Indemnitee" means Lessor, in its individual and trust capacities, Owner Participant, Airlease, the Lenders and each of their respective successors, assigns, transferees, directors, partners, officers, employees and agents. "Lease", "this Lease", "this Agreement", "hereby", "herein", "hereof", "hereunder", or other like words mean this Aircraft Lease Agreement, as amended or supplemented in accordance with the terms hereof, including by way of one or more Lease Supplements. "Lease Default" means any event or condition which, with notice or lapse of time, or both, would constitute a Lease Event of Default. "Lease Event of Default" is defined in Section 14. "Lease Supplement" means a supplement to this Lease substantially in the form attached as Exhibit A hereto, subjecting an Aircraft, Engine or other property to this Lease. "Lender" means one or more banks or financial institutions or other persons notified in writing to Lessee that may from time to time provide financing to Lessor in relation to acquisition or continuing ownership of the Aircraft and shall include any person acting as agent or security agent or trustee for one or more Lenders; provided that any requirement in this Agreement to give notices to or receive consents from the Lender shall be disregarded until such time as the Lender has been granted a security interest in or mortgage over the Aircraft and Lessee is so notified. "Lessee" means CSI Aviation Services, Inc., a New Mexico corporation, and its permitted successors and assigns hereunder. "Lessee Documents" means this Lease, the Lease Supplement, the USMS Agreement, the Maintenance Agreement, any acknowledgment of the Security Documents, the Other Lease 3 Documents and all notices, consents, certificates, confirmations and other documents from time to time issued or entered into by Lessee pursuant to or in connection with any thereof. "Lessor" means First Union National Bank (successor to Meridian Trust Company), not in its individual capacity but solely as Trustee under the Trust Agreement, and its permitted successors and assigns thereunder and hereunder. "Lessor Liens" means Liens of any Person claiming by, through or under Lessor or any prior owner or user of the Aircraft, which arise as a result of (i) claims not related to the transactions contemplated by this Lease, (ii) any act or omission of Lessor or any prior owner or user of the Aircraft which is not related to the transactions contemplated by this Lease, or any act of Lessor which is in violation of any of the express terms of this Lease, or (iii) claims arising out of any transfer by Lessor of the Aircraft in violation of the express terms of this Lease. "Lien" means any mortgage, pledge, lien, encumbrance, security interest or claim of rights affecting title to or any possessory or ownership interest in property. "Life Limited Part" means a Part having an accepted or recommended Manufacturer or FAA limitation on the use of such Part. "Loan Agreement" means any agreement from time to time entered into between Lessor and one or more Lenders providing financing to Lessor in relation to the acquisition or continuing ownership of the Aircraft. "Maintenance Agreement" means the agreement between Lessee and Spirit dated as of November 21, 2001 regarding the maintenance of the Aircraft and any replacement maintenance and operation agreement entered into by Lessee and a Maintenance Provider which agreement is approved in writing by Lessor. "Maintenance Provider" means a solvent IAR Part 121 certified air carrier approved in writing by Lessor, or Spirit. "Maintenance Document" means the Manufacturer's recommended maintenance program. "Maintenance Program" is defined in Section 8.1. "Manufacturer" means (i) with respect to the Airframe, The Boeing Company, a Delaware corporation, and (ii) with respect to the Engines, United Technologies Corporation, a Delaware corporation, Pratt & Whitney Aircraft Commercial Engine Business, and their respective successors and assigns. "Officer's Certificate" means a certificate signed by the Chairman, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any Assistant Secretary of the Person providing such certificate. 4 "Other Lease" means that certain Aircraft Lease Agreement entered into, or to be entered into, between Lessor and Lessee in respect of that certain McDonnell Douglas DC-9-Series 82 Aircraft bearing manufacturer's serial number 48038. "Other Lease Documents" means the Lessee Documents as defined in the Other Lease. "Overdue Interest Rate" means a rate of interest per annum equal to the rate Bank of America, N.A. announces to be in effect from time to time as its prime rate plus three percent calculated on the basis of a 365/366 day, as appropriate, year and actual number of days elapsed. "Overhaul Payment Date" means the tenth day of each calendar month during the Term commencing in the calendar month after the calendar month in which the Delivery Date occurs and the Termination Date. "Overhaul Payments" shall have the meaning provided in Section 3.5. "Owner Participant" means Airlease and its successors and permitted assigns under the Trust Agreement. "Parts" means all appliances, parts, components, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature (other than complete Engines or engines) (i) which may from time to time be incorporated in the Airframe or any Engine (other than a replaced Part to which title has vested in Lessee pursuant to Section 8.2 hereof) or (ii) so long as title thereto shall remain vested in Lessor in accordance with Section 8.2 hereof after removal therefrom, (and "Part" means any of the foregoing) . "Permitted Lien" means any Lessor Lien and the Security Documents. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Redelivery Location" shall have the meaning provided in Section 5.1. "Rent" means Basic Rent and Supplemental Rent. "Rent Payment Date" means the Delivery Date, the tenth day of each calendar month during the Term and the last day of the Term. "Replacement Engine" means an engine which shall have been substituted for an Engine leased hereunder pursuant to Section 10.2 and shall be of the same make and model (or an improved model engine suitable for installation and use on the Airframe). "Security" shall have the meaning provided in Section 3.6(a). "Security Documents" means any and all assignments by way of security or mortgage entered into by Lessor of any or all of Lessor's right, title and interest in and to the Aircraft, this 5 Agreement and/or the other Lessee Documents from time to time granted by Lessor in favor of any Lender. "Stipulated Loss Value" with respect to the Aircraft means an amount equal to Nine Million U.S. Dollars ($9,000,000). "Spirit" means Spirit Airlines, a Delaware corporation. "Supplemental Rent" means all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees to pay to Lessor or any other Person hereunder, including, without limitation, Stipulated Loss Value. "Tax Indemnitee" means the Indemnitees (other than the Lenders) and each of their respective successors, assigns, transferees, directors, officers, employees and agents. "Taxes" means all present and future taxes, levies, imposts, duties, withholdings, fees or charges of any nature whatsoever, and wheresoever imposed, including, without limitation, value added tax, consumption tax or any other tax in respect of added value or any income (including, without limitation, gross income, minimum, alternative minimum, capital gains income, gross receipts and net receipts), franchise, transfer, sales, use, business, occupation, excise, personal property, real property, stamp or other tax imposed by a taxing authority of any country, or governmental subdivision thereof or therein or by any international authority, together with any penalties, additions to tax, fines or interest with respect to any of the foregoing; and "tax" and "taxation" shall be construed accordingly. "Term" means the period commencing on the Delivery Date and expiring on the Termination Date. "Termination Date" means the Expiry Date, or, if earlier, (i) the date when Lessor receives the Stipulated Loss Value together with any other amounts then due and unpaid under the Lessee Documents following a Total Loss of the Aircraft, (ii) the date when Lessor terminates the leasing of the Aircraft to Lessee pursuant to the terms hereof, or (iii) the date on which the leasing of the Aircraft is terminated pursuant to Clause 3.1(b) or (c). "Trust Agreement" means the Trust Agreement dated as of July 10, 1986, between the Owner Participant, Trust Company and Airlease Management Services, Inc., as such Agreement has been amended or supplemented in accordance with its terms. "Trust Company" means First Union National Bank (successor to Meridian Trust Company), in its individual capacity. "USMS" means the United States Marshals Service. "USMS Agreement" means the Award/Contract dated October 2, 2001 between USMS and Lessee relating to the Aircraft. Section 2. DELIVERY AND ACCEPTANCE. 6 2.1. DELIVERY AND LEASE OF AIRCRAFT. Subject to the conditions and pursuant to the terms of this Lease, Lessor hereby agrees to deliver the Aircraft on the Delivery Date and simultaneously to lease to Lessee hereunder, and Lessee hereby agrees to lease and accept from Lessor hereunder, the Aircraft. The Aircraft shall be delivered on or before November 24, 2001. Delivery and acceptance of the Aircraft shall occur at the Delivery Location. Lessor shall not be responsible for any loss or expense or any loss of profit arising from any delay in the delivery of, or failure to deliver, the Aircraft to Lessee under this Lease. 2.2. CONFIRMATION; ACCEPTANCE BY LESSEE. By execution and delivery of the Lease Supplement in respect of the Aircraft after the Delivery Flight, Lessee will confirm to Lessor that Lessee has accepted the Aircraft for all purposes hereof as being in good working order and repair and without defect in condition, design, operation, merchantability or fitness for use, whether or not discoverable by Lessee as of the date thereof, subject to any discrepancies set forth on the list of mutually agreed discrepancies referred to in Section 2.5 hereof. 2.3. LESSOR'S CONDITIONS TO LEASE. Lessor's obligation to lease the Aircraft to Lessee shall be subject to the receipt by Lessor of the following documents or other items on or before the Delivery Date for the Aircraft, all of which shall be reasonably satisfactory in form and substance to Lessor: (a) a Lease Supplement in the form of Exhibit "A" hereto, duly authorized, executed and delivered by Lessee and effective as of the Delivery Date; (b) copies of all documents evidencing corporate action taken by the Lessee with respect to this Lease, the Lease Supplement and the other Lessee Documents, and each other document required to be executed and delivered by the Lessee in accordance with the provisions hereof and thereof, and a copy of the resolutions of the board of directors of the Lessee, certified by the Secretary or Assistant Secretary thereof, evidencing the due authorization of the execution, delivery and performance of each such document, together with an incumbency certificate as to the person or persons authorized to execute and deliver such documents and the signature or signatures of such persons; (c) an Officer's Certificate of Lessee stating that: (i) the representations and warranties contained in Section 4.4 hereof and in the other Lessee Documents are true and correct on and as of such date as though made on and as of such time (except to the extent that such representations and warranties relate solely to an earlier date); and (ii) no event has occurred and is continuing, or would result from the lease of the Aircraft, which constitutes a Lease Default or Lease Event of Default; (d) an opinion or letter signed by an independent insurance broker or by an insurer acceptable to Lessor as to the due compliance with the insurance provisions of Section 11 hereof with respect to the Aircraft, together with certificates evidencing the insurance as required by Section 11 hereof; 7 (e) an opinion of Crowe & Dunlevy or other counsel experienced in federal aviation matters, as to the due filing for recordation of the Lease and the Lease Supplement and as to such other matters as Lessor may reasonably request, addressed to Lessor; (f) Basic Rent due on the Delivery Date; (g) the USMS Agreement, duly authorized, executed and delivered by all parties thereto and effective as of the Delivery Date; (h) the Maintenance Agreement shall have been duly authorized, executed and delivered by all parties thereto and effective as of the Delivery Date; and (i) such other documents, opinions and certificates incident to the foregoing as Lessor may reasonably request. 2.4. LESSEE'S CONDITION TO LEASE. Lessee's obligation to lease the Aircraft from Lessor shall be subject to the following: (a) the Aircraft shall have been tendered for delivery on the Delivery Date pursuant to Section 2.1, shall be registered in the United States and shall be in a condition to be put on an FAA Part 121 operators certificate; (b) the Aircraft shall have undergone immediately prior to the ferry flight contemplated by Section 2.5, the current phase of C-Check as defined in the Maintenance Document; (c) the Delivery Flight shall have been completed as described in Section 2.5. (d) the Aircraft shall have no deferred maintenance items and shall be in compliance (without regard to permitted in compliance extensions) with all regulations, mandatory maintenance directives, airworthiness directives and Federal Air Regulations or other instructions of the FAA or other United States Governmental Authorities having jurisdiction in each case that are required with respect to the Aircraft; (e) the Aircraft shall be free and clear of all Lessor Liens, other than the Lien of the Trust Agreement; (f) the Aircraft shall be equipped as provided in Schedule 1, Part A, and the Aircraft shall be in serviceable condition with all Parts fully functional; (g) Lessee shall be reasonably satisfied with any correction of discrepancies found during the Delivery Flight or if such discrepancies do not affect airworthiness and are not corrected prior to delivery, a list of such discrepancies shall be attached to the Receipt for Lease Aircraft which is attached hereto as Exhibit B; 8 (h) Lessor shall have tendered for delivery to Lessee all logs, manuals, drawings, and data and inspection, modification and overhaul records in respect of the Aircraft specified in Schedule 1, Part B; and (i) the USMS Agreement shall have been duly authorized, executed and delivered by all parties thereto and effective as of the Delivery Date. 2.5. INSPECTION; DELIVERY FLIGHT. Prior to the Delivery Flight, Lessor shall make the Aircraft, records and logbooks available to Lessee at the Delivery Location, so that Lessee may conduct, at Lessee's expense, a ground inspection which shall include a technical inspection of the Aircraft, records and logbooks. Promptly following the Ground Inspection, Lessor shall conduct, at Lessor's cost and expense, a delivery check flight (the "Delivery Flight") pursuant to standard test flight procedures, or other such procedures as the parties agree. Lessee shall be permitted three representatives on the Delivery Flight which shall not exceed two hours in length. The Delivery Flight may be performed in conjunction with the ferry flight from the Delivery Location to Phoenix, Arizona. At the conclusion of the Delivery Flight, Lessor and Lessee shall prepare a list of mutually-agreed discrepancies, if any, arising during the Delivery Flight. Lessor shall either promptly correct such discrepancies or if the discrepancies do not affect the airworthiness of the Aircraft a list of such discrepancies may be attached to the Receipt For Lease Aircraft which is attached hereto as Exhibit B. Upon completion of the Delivery Flight and satisfaction or waiver of the conditions precedent set forth in Sections 2.3 and 2.4, Lessee shall execute and deliver the Receipt for Lease Aircraft and Lessee and Lessor shall execute the Lease Supplement, evidencing Lessee's acceptance of the Aircraft hereunder. If the Delivery Flight reveals any discrepancies or damage, and the cost of correcting any single discrepancy or item of damage would exceed $10,000 or the cost of correcting all discrepancies and damage would exceed $50,000, Lessor may, at its option, elect to terminate this Lease. If Lessor elects to terminate the Lease pursuant to the preceding sentence it shall reimburse Lessee for its reasonable expenses incurred in connection herewith. Section 3. TERM AND RENT; OVERHAUL PAYMENTS. 3.1. TERM. (a) The Aircraft shall be leased hereunder for the Term. (b) Lessee shall have the right to terminate the leasing of the Aircraft under this Lease on stated termination date of the USMS Agreement (as such termination dates shall be extended from time to time) by delivering to Lessor not later than 30 days before either such termination date a written notice specifying such termination date and stating that it is exercising its right to terminate the leasing of the Aircraft pursuant to this Section 3.1(b). (c) Lessor shall have the right to terminate the leasing of the Aircraft under this Lease on any date on which the USMS Agreement terminates by delivering to Lessee a written notice stating that it is exercising its right to terminate the leasing of the Aircraft pursuant to this Section 3.1(c). 9 (d) Any notice delivered pursuant to Section 3.1(b) or (c) shall be irrevocable, and shall be effective to terminate the leasing of the Aircraft pursuant to the terms hereof. (e) Lessee shall use all commercially reasonable efforts to extend the term of the USMS Agreement through the Expiry Date; it being understood that Lessee shall not be obligated to extend the term of the USMS Agreement (i) if the expected revenues under the USMS Agreement during the extended term thereof are not reasonably expected to be sufficient to cover the reasonably expected costs of maintaining and insuring the Aircraft, to pay the Basic Rent (or such lesser amount determined by Lessor in its sole discretion) and Supplemental Rent (without duplication of the cost of maintaining the Aircraft) and to provide a reasonable return to Lessee during such extended term. If Lessee elects to terminate the leasing of the Aircraft under Section 3.1(b), for a period of one year after completion of the Term, Lessee will not bid to directly or indirectly supply aircraft to USMS unless Lessee shall make a good faith effort to lease an aircraft of the type or size acceptable to USMS from Owner Participant on terms substantially similar to the terms of this Agreement and at a fair market value for such aircraft prior to entering into lease negotiations with any other Person. 3.2. BASIC RENT. Lessee hereby agrees to pay to Lessor Basic Rent in advance by paying to Lessor on each Rent Payment Date the Basic Rent Amount; provided that (i) the Basic Rent due on the Delivery Date shall be an amount equal to the product of the Basic Rent Amount and a fraction, the numerator of which is the number of days from and including the Delivery Date to but excluding the next Rent Payment Date and the denominator of which is 30 and (ii) the Basic Rent due on the Termination Date shall be an amount equal to the product of the Basic Rent Amount and a fraction, the numerator of which is the number of days from and including the last Rent Payment Date before the Termination Date to but excluding the Termination Date and the denominator of which is 30. 3.3. SUPPLEMENTAL RENT. Lessee also agrees to pay to Lessor, or to whomsoever shall be entitled thereto, any and all Supplemental Rent when and as the same shall become due and owing. Lessee shall also pay to Lessor, or to whomsoever shall be entitled thereto, as Supplemental Rent, to the extent permitted by applicable law, interest at the Overdue Interest Rate on any part of any installment of Basic Rent not paid when due for any period from the date on which the same was due to but excluding the date of payment in full and on any payment of Supplemental Rent not paid when due to Lessor, or to whosoever shall be entitled thereto, as the case may be, for the period from and including the date on which the same was due to but excluding the date of payment. The expiration or other termination of Lessee's obligation to pay Basic Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. 3.4. PAYMENTS. Payments of Rent, Overhaul Payments and any and all other amounts payable to Lessor hereunder shall be paid by wire transfer prior to 1:00 p.m., New York time, on the due date therefor, in immediately available funds of the United States of America, to Bank of America, 10 NT&SA, ABA No. 121000358, Account No.: 12331-34432, Account of: Airlease Ltd. Regarding: CSI Lease Payment, or as otherwise directed by Lessor in writing. Except as otherwise expressly provided herein, whenever any payment of Rent or other payment to be made hereunder shall be due on a day which is not a Business Day, such payment shall be made on the next preceding day which is a Business Day. 3.5. OVERHAUL PAYMENTS. On or before each Overhaul Payment Date, Lessee shall pay to Lessor as Supplemental Rent the following amounts (such amounts, the "Overhaul Payments"): (i) the Airframe Payment Amount for each Flight Hour the Airframe is operated during the last calendar month before that Overhaul Payment Date ("Airframe Payments"); (ii) the APU Payment Amount for each Flight Hour the Airframe is operated during the last calendar month before that Overhaul Payment Date ("APU Payments"); (iii) the Engine Payment Amount for each Flight Hour for each Engine during the last calendar month before that Overhaul Payment Date (each, an "Engine Payment"); and (iv) the Gear Payment Amount in respect of the ship set of landing gear for each Flight Hour during the last calendar month before that Overhaul Payment Date ("Gear Payments"); provided that the Overhaul Payments due on the Termination Date shall also include Overhaul Payments for operations carried by Lessee during the period commencing at the end of the calendar month preceding the Termination Date through to the Termination Date. Upon receipt of the Overhaul Payments, Lessor shall transfer the same by wire transfer of immediately available funds of the United States of America not later than 1:00 p.m., New York time on the due date thereof to the account of Airlease at Bank of America, NT&SA, ABA No. 121000358, Account No.: 12331-34432, Account of: Airlease Ltd., Reference: CSI Aviation or as otherwise directed by Airlease in writing. At the time Lessee pays the monthly Overhaul Payments to Lessor, Lessee shall concurrently deliver to Lessor and Lessor an operating report in the form attached as Exhibit D hereto. 3.6. SECURITY. (a) INITIAL DELIVERY. On or before the Delivery Date, Lessee shall provide to Lessor an irrevocable letter of credit satisfying the requirements of clause (c) of this Section, (such letter of credit together with all other and further payments made to Lessor under this Section, the "Security"). No interest will accrue or be paid to Lessee in respect of the Security. 11 (b) APPLICATION. If Lessee fails to comply with any of its obligations under any of the Lessee Documents or is otherwise in default thereunder and, in either case, any applicable grace periods referred to in Section 14 have expired, Lessor may apply all or any portion of the Security in or towards satisfaction of any sums due to Lessor by Lessee or to compensate Lessor for any sums that it may in its discretion advance or expend as a result of any such failure or default by Lessee. If Lessor applies all or any portion of the Security, it shall not be deemed a cure or waiver of any such failure or default, and Lessee shall immediately, upon written demand therefor, pay to Lessor as Supplemental Rent an amount equal to the amount so applied. (c) LETTER OF CREDIT. The letter of credit provided as Security shall (i) be in a stated amount equal to $250,000.00 aggregate for security under this Agreement and under the Other Lease, (ii) permit multiple drawings thereunder in an aggregate amount not to exceed such stated amount for application as provided in this Section, (iii) have a term of not less than twelve months and (iv) otherwise be substantially in the form of Exhibit E. Any such letter of credit shall be issued by, or if confirmed, confirmed by, a financial institution whose long-term unsecured debt is rated "A" or better by Moody's Investors Service or Standard & Poors and must be presentable for drawing in New York. Not later than fourteen days before the expiration date of any letter of credit held as Security, Lessee shall either (i) pay to Lessor Supplemental Rent equal to $250,000.00 or (ii) provide to Lessor a replacement letter of credit satisfying the requirements of this clause (c) or an amendment to such letter of credit in form and substance acceptable to Lessor extending the term thereof for not less than twelve months. If either Moody's Investor's Service or Standard & Poor's withdraw or suspend the ratings on the long-term unsecured debt of the financial institution issuing the letter of credit or downgrade such debt to any rating category below "A", not later than fourteen days after any such suspension, withdrawal or downgrading, Lessee shall either pay to Lessor $250,000.00 or provide to Lessor a replacement letter of credit satisfying the terms of this clause (c), and upon receipt thereof, Lessor shall return the original letter of credit to Lessee. 3.7. SET-OFF. At any time after the occurrence of a Lease Event of Default and as long as the same is continuing, Lessor may set off any matured obligation owed by Lessee under this Agreement or the other Lessee Documents against any obligation (whether or not matured) owed by Lessor to Lessee, regardless of the place of payment or currency. If the obligations are in different currencies, Lessor may convert either obligation at the market rate of exchange available in New York or at its option London for the purpose of the set-off. If an obligation is unascertained or unliquidated, Lessor may in good faith estimate that obligation and set off in respect of the estimated amount, in which case when the obligation is ascertained or liquidated Lessor or Lessee may make a payment to the other (as appropriate) in respect of any amount by which the ascertained or liquidated amount differs from the estimated amount. Lessor will not be obliged to pay any amounts to Lessee under this Agreement so long as any sums which are then due from Lessee to Lessor under this Agreement or other Lessee's Documents remain unpaid or any Lease Event of Default or Lease Default is continuing, and any such amounts which would otherwise be due will fall due only if and when Lessee has paid all such sums and cured to Lessor's satisfaction all such Lease Events of Default or Lease Defaults, except to the extent that Lessor 12 otherwise agrees or sets off such amounts against such payment pursuant to the foregoing provisions. Section 4. LESSOR'S WARRANTIES AND COVENANTS; DISCLAIMER; LESSEE REPRESENTATIONS AND WARRANTIES. 4.1. WARRANTIES OF LESSOR. Lessor warrants that: (a) Trust Company is a national banking association duly organized and validly existing under the laws of the United States of America, and this Lease has been executed by an officer of Trust Company who is duly authorized to do so in accordance with the terms of the Trust Agreement. (b) The Trust Agreement is in full force and effect and Lessor is duly and properly authorized to execute and deliver this Lease under the Trust Agreement. (c) Lessor has received and has complied with every necessary consent, approval, order, or authorization of, or registration with, and has given any prior notice to, any federal, state or foreign governmental authority having jurisdiction to the extent required for the Lessor to execute and deliver this Lease and the Lease Supplement to be executed and delivered on the Delivery Date and to lease the Aircraft hereunder and thereunder. (d) This Lease has been, and upon execution and delivery of the Lease Supplement to be executed and delivered on the Delivery Date such Lease Supplement will be, duly executed and delivered by Lessor and constitutes or will constitute the legal, valid, and binding obligations of Lessor, enforceable in accordance with their respective terms. (e) There are no suits or proceedings pending or, to the knowledge of Lessor, threatened in any court or before any regulatory commission, board or other administrative governmental agency against or affecting Lessor, which, if adversely determined, will have a materially adverse effect on the ability of Lessor to lease the Aircraft. 4.2. LESSOR COVENANTS. (a) QUIET ENJOYMENT. So long as Lessee shall not be in default under the terms and provisions of this Lease, Lessor will not disturb, and will not permit anyone claiming by, through or under Lessor to disturb, the Lessee's quiet, peaceful use and enjoyment of the Aircraft. (b) LESSOR OBLIGATIONS FOLLOWING TERMINATION DATE. Within five Business Days after (i) redelivery of the Aircraft to Lessor in accordance with and in the condition required by this Lease, or (ii) payment to Lessor of the Stipulated Loss Value following an Event of Loss, or in each case such later time as Lessor is satisfied that Lessee has irrevocably paid all amounts which may then be outstanding or become payable under this Lease and the other Lessee Documents, Lessor will return the Security paid or delivered to Lessor less amounts applied pursuant to Section 3.6(b). (c) LESSOR OVERHAUL CONTRIBUTIONS. Lessor shall pay to Lessee: 13 (i) in respect of a Q-Check performed in accordance with the Maintenance Program during the Term, the lesser of (x) the actual cost of performing such Q-Check and (y) the amount, if any, by which the total Airframe Payments received by Lessor prior to the performance of such Q-Check exceed the total amount, if any, previously paid to Lessee under this clause (i); (ii) in respect of a full performance restoring shop visit of an Engine and, the scheduled replacement of life-limited Parts for an Engine, in each case performed in accordance with the Maintenance Program during the Term, the lesser of (x) the actual cost of performing such shop visit and life-limited Part replacement and (y) the amount, if any, by which the total Engine Payments in respect of that Engine received by Lessor prior to the performance of such shop visit and/or replacement exceeds the total amount, if any, previously paid to Lessee in respect of that Engine pursuant to this clause (ii) provided that any such payment in respect of life-limited Parts shall be reduced pro-rata to reflect the value of the remaining life of the replaced Parts; (iii) in respect of a full performance restoring shop visit for the APU performed in accordance with the Maintenance Program during the Term, the lesser of (x) the actual cost of performing such shop visit and (y) the amount, if any, by which the total APU Payments received by Lessor prior to such shop visit exceed the total amount, if any, previously paid to Lessee pursuant to this clause (iii); and (iv) in respect of the scheduled overhaul of the landing gear performed in accordance with the Maintenance Program during the Term, the lesser of (x) the actual cost of performing such scheduled overhaul and (y) the amount, if any, by which the total Gear Payments received by Lessor prior to such scheduled overhaul exceed the total amount, if any, previously paid to Lessee pursuant to this clause (iv). Lessor's obligation to make any payments under this Clause 4.2(c) shall be conditioned upon receipt by Lessor within two months after the Termination Date of invoices and proper documentation, satisfactory in form and substance to Lessor, in support of the invoices and verifying that the work was completed in accordance with the Maintenance Program. No payment shall be made under this Clause 4.2(c) in respect of (i) work, repairs or replacements caused by ingestion, faulty maintenance or installation, improper operations, misuse, neglect or accidental cause, (ii) any cost which is recoverable under insurance (deductibles being for the account of Lessee), manufacturer's or servicer's warranties, guarantees, concessions or credits or from any third parties after due diligence in affecting recovery or (iii) removal, installation, maintenance and repair of QEC (Quick Engine Change). Lessor has appointed Owner Participant as agent for the purpose of administering the Lessor's overhaul contributions. Owner Participant shall maintain records reflecting receipt of Airframe Payments, the Engine Payments for each Engine, the APU Payments and the Gear Payments and amounts paid under this clause (c). Owner Participant's records shall be deemed correct absent manifest error. 4.3. DISCLAIMER. (a) GENERAL. THE AIRCRAFT, WHEN DELIVERED AND LEASED BY LESSOR TO LESSEE HEREUNDER, WILL BE LEASED "AS IS" AND 14 "WHERE IS." NEITHER LESSOR NOR OWNER PARTICIPANT HAS MADE AND SHALL NOT BE DEEMED TO HAVE MADE, BY VIRTUE OF HAVING LEASED THE AIRCRAFT UNDER THIS LEASE OR HAVING DONE OR FAILED TO DO ANY ACT OR ACQUIRED OR FAILED TO ACQUIRE ANY STATUS UNDER OR IN RELATION TO THIS LEASE, AND LESSOR AND OWNER PARTICIPANT HEREBY SPECIFICALLY DISCLAIM, ANY GUARANTY, REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE (EXCEPT AS HEREINBELOW PROVIDED), AIRWORTHINESS, VALUE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY, OR FITNESS FOR USE FOR A PARTICULAR OR ANY PURPOSE OF THE AIRCRAFT, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE AIRCRAFT, THE ABSENCE THEREFROM OF LATENT OR OTHER DEFECTS WHETHER OR NOT DISCOVERABLE, THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT OR AS TO ANY OTHER GUARANTY, REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT, INCLUDING WITHOUT LIMITATION ANY LIABILITY IN TORT, OBLIGATION OR LIABILITY ARISING FROM NEGLIGENCE, STRICT LIABILITY, ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE OR DEALING OR USAGE OR TRADE, OR LOSS OR INTERRUPTION OF USE, PROFIT, OR BUSINESS, OR OTHER CONSEQUENTIAL DAMAGES; AND LESSEE HEREBY WAIVES, RELEASES, RENOUNCES AND DISCLAIMS EXPECTATION OF OR RELIANCE UPON ANY SUCH GUARANTY, REPRESENTATION OR WARRANTIES. NONE OF LESSOR, OWNER PARTICIPANT AND ANY OTHER INDEMNITEE SHALL HAVE ANY RESPONSIBILITY OR LIABILITY TO LESSEE OR ANY OTHER PERSON, REGARDLESS OF ANY NEGLIGENCE (OTHER THAN ITS OWN GROSS NEGLIGENCE OR WILLFUL MISCONDUCT WHICH IS NOT ATTRIBUTABLE TO ITS INTEREST IN THE AIRCRAFT) OF LESSOR, OWNER PARTICIPANT OR ANY OTHER INDEMNITEE, AND LESSEE HEREBY WAIVES, RELEASES, RENOUNCES AND DISCLAIMS ANY RIGHTS OR REMEDIES, WITH RESPECT TO (i) ANY LIABILITY, LOSS OR DAMAGE CAUSED OR ALLEGED TO BE CAUSED DIRECTLY OR INDIRECTLY BY THE AIRCRAFT OR BY ANY INADEQUACY THEREOF OR DEFICIENCY OR DEFECT THEREIN OR BY ANY OTHER CIRCUMSTANCE IN CONNECTION THEREWITH, (ii) THE USE, OPERATION OR PERFORMANCE OF THE AIRCRAFT OR ANY RISKS RELATING THERETO, (iii) ANY INTERRUPTION OF SERVICE, LOSS OF BUSINESS OR ANTICIPATED PROFITS OR DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR (iv) THE DELIVERY, OPERATION, SERVICING, MAINTENANCE, REPAIR, IMPROVEMENT OR REPLACEMENT OF THE AIRCRAFT. WITHOUT LIMITING THE FOREGOING, THE WARRANTIES AND REPRESENTATIONS EXPRESSLY SET FORTH BELOW IN THIS SECTION 4.3 ARE EXCLUSIVE AND IN LIEU OF ALL OTHER REPRESENTATIONS OR WARRANTIES WHATSOEVER WITH RESPECT TO THE AIRCRAFT, EXPRESS OR IMPLIED, AND LESSOR SHALL NOT BE DEEMED TO HAVE MADE ANY OTHER IMPLIED WARRANTIES, OR GUARANTEES, INCLUDING BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY, ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, OR ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR OR ANY USE, EXCEPT THAT: Lessor represents and warrants that, on the Delivery Date, Lessor shall have the right to lease the Aircraft hereunder. 15 (b) DEFICIENCIES AND DELAYS. Lessee agrees that, from and after the Delivery Date, Lessor shall not be liable for any liability, claim, proceeding, loss, damage, fee, cost or expense of any kind caused directly or indirectly by, or associated with, the Aircraft or any part thereof, any inadequacy of the Aircraft for any purpose or any deficiency or defect therein, the use or performance of the Aircraft, any maintenance, repairs, replacement or modification to the Aircraft, any interruption or loss of service or use of the Aircraft or any loss of business or other consequential damage or any damage whatsoever, howsoever caused. (c) REPAIRS AND REPLACEMENT. If the Aircraft or any part thereof is lost, confiscated, damaged, destroyed or otherwise rendered unfit or unavailable for use on or after the Delivery Date, Lessor shall not be liable to repair the same or to supply any equipment in substitution therefor. 4.4. LESSEE'S REPRESENTATIONS AND WARRANTIES. Lessee hereby makes the following representations and warranties: (a) Lessee is a corporation duly organized and validly existing in good standing under the laws of the State of New Mexico and has the corporate power and authority to carry on its business as presently conducted and to perform its obligations under the Lease, the Lease Supplement and the other Lessee Documents to be executed and delivered on or before the Delivery Date and is duly qualified to do business as a foreign corporation in each jurisdiction in which the nature of its business makes such qualification necessary; (b) this Lease, the Lease Supplement and the other Lessee Documents have been duly authorized by all necessary corporate action on the part of Lessee, do not require any approval of the stockholders of Lessee or any trustee or any holder of any indebtedness of Lessee, and neither the execution and delivery hereof or thereof nor the consummation of the transactions contemplated hereby or thereby nor compliance by Lessee with any of the terms and provisions hereof or thereof will contravene its organizational documents or any law or governmental rule or regulation applicable to Lessee or result in any breach of, or constitute any default under, or result in the creation of any Lien upon any property of Lessee under any indenture, mortgage, credit agreement or other agreement or instrument to which Lessee is a party or by which Lessee or its properties or assets may be bound; (c) Lessee has received and has complied with every necessary consent, approval, order, or authorization of, or registration with, and has given any prior notice to, any federal, state or foreign governmental authority having jurisdiction to the extent required for the Lessee to execute and deliver this Lease, the Lease Supplement and the other Lessee Documents to be executed and delivered on or before the Delivery Date and to perform its obligations hereunder and thereunder; (d) this Lease has been, and upon execution and delivery of the Lease Supplement and the other Lessee Documents to be executed and delivered on or before the Delivery Date such Lease Supplement and other Lessee Documents will be, duly executed and delivered by Lessee and constitutes or will constitute the legal, valid, and binding obligations of Lessee, enforceable in accordance with their respective terms; 16 (e) there are no suits or proceedings pending or, to the knowledge of Lessee, threatened in any court or before any regulatory commission, board or other administrative governmental agency against or affecting Lessee, which, could be reasonably expected to have a materially adverse effect on the current business or financial condition of Lessee or an adverse effect on the ability of Lessee to perform its obligations under the Lessee Documents; (f) Lessee has filed or caused to be filed all tax returns which are required to be filed by it, and has paid, caused to be paid or provided for all taxes shown to be due or payable on said returns or on any assessment received by Lessee, to the extent that such taxes have become due and payable unless protected by appropriate legal proceedings; (g) no action, including any filing or recording of any document or taking possession thereof, is or will be necessary or advisable in order to establish and perfect Lessor's title to and interest in the Aircraft in any applicable jurisdiction within the United States of America; (h) the chief executive office of Lessee is located at 3700 Rio Grande NW, Suite 1, Albuquerque, New Mexico 87107, and Lessee will give Lessor 30 days' prior written notice of any change in such office; (i) none of the documents furnished by Lessee to Lessor or Owner Participant in connection with the transactions contemplated by this Lease contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements contained therein, as of the date made, not misleading. There is no fact known by Lessee which Lessee has not disclosed to Lessor or Owner Participant in writing which materially adversely affects or, as far as Lessee can now reasonably foresee, can reasonably be expected to materially adversely affect, the ability of Lessee to carry on its business and perform its obligations under the Lessee Documents; (j) Lessee is not in breach of any agreement to which Lessee is now a party which breach can reasonably be expected to have a material adverse effect on the business or financial condition of Lessee or an adverse effect on the ability of Lessee to perform its obligations under this Lease; and (k) no Lease Event of Default or Lease Default has occurred and is continuing. Section 5. RETURN OF AIRCRAFT. 5.1. GENERAL CONDITION UPON RETURN. Unless an Event of Loss with respect to the Airframe shall have occurred, in which case Section 10.1 hereof shall apply, at the end of the Term, Lessee will return the Aircraft to Lessor by delivering the same to Kansas City or such other site as shall be mutually agreed between Lessee and Lessor (the "Redelivery Location"). All costs and expenses associated with the return of the Aircraft and compliance with this Section 5 shall be for the account of Lessee, except as otherwise expressly provided herein. At the time of such return, the Aircraft: (a) shall be in compliance with the terms of this Lease in such condition as qualifies it, without necessity of any repair, modification or maintenance for (i) immediate issuance of a current and valid certificate of airworthiness by, and registration with, the FAA, and (ii) 17 immediate operation in the United States in full compliance with United States Federal Aviation Regulations Part 121; (b) shall have undergone, immediately prior to redelivery, the current phase of a C-Check as defined in the Maintenance Document in accordance with Maintenance Program and all inspections required under the Maintenance Document shall have been accomplished, and any deficiencies, including, without limitation, routine items, non-routine items and all corrosion, known prior to or revealed during such inspection will be corrected in accordance with manufacturer's limits, guidelines and specifications; (c) shall be free and clear of all Liens (except Lessor Liens); (d) shall be in the interior configuration providing seating for 140 passengers and in condition suitable for operation in and compatible with scheduled commercial airline passenger service in the United States, shall be clean by United States commercial airline standards with all Parts, systems and components operable and shall be in as good operating condition as when delivered to Lessee hereunder, ordinary wear and tear excepted, and the seats shall recline and the tray tables and ashtrays shall be installed; (e) shall have installed thereon all Engines and each such Engine has not less than 2,500 Flight Hours, 2,500 Cycles or one year (whichever is less) remaining to the next expected removal for a shop visit, and no Engine or module thereon shall be "on watch", subject to special or reduced inspection internals or exhibit any adverse trends or indicate a rate of acceleration in performance deterioration that is higher than normal based on Lessee's maintenance experience; (f) shall have had accomplished the ongoing corrosion prevention procedures set forth in the Maintenance Program; (g) shall be equipped with a full complement of Parts, accessories and equipment as delivered, and (i) each and every hour/cycle limited component or Part (including Life Limited Parts) shall have at least 2,500 Flight Hours or 2,500 Cycles remaining until the next expected shop visit or scheduled renewal under Maintenance Program, whichever is the more limiting factor, (ii) each and every calendar-limited component or Part shall have one year or one hundred percent of its total approved life remaining, whichever is less; and (iii) "on-condition" and "conditioned monitored" components shall be serviceable. (h) shall at the time of such return have no deferred maintenance items and shall be in compliance (without regard to permitted compliance extensions) with all regulations, mandatory maintenance directives, service bulletins, airworthiness directives and Federal Air Regulations or other instructions of the FAA or other United States governmental authorities having jurisdiction in each case that have an effective date for compliance prior to the Termination Date or falling due within twelve months (or the equivalent number of Flight Hours or Cycles based on Lessee's utilization for the prior twelve months) thereafter, and, in the event that any such directives, service bulletins, regulations or instructions require terminating action as the only option of compliance, Lessee shall have completed such termination action; and (i) shall have any markings of Lessee or any sublessee painted over in a workmanlike manner and the exterior shall be cleaned to U.S. commercial airline standards. 18 5.2. MANUALS, ETC. 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, referred to in Schedule 1, Part B, any records required to be maintained hereunder and under applicable rules and regulations of the FAA and any other records maintained by Lessee. Such logs, manuals, drawings, data and records shall be sufficient to permit (i) immediate issuance of a current and valid certificate of airworthiness by, and registration with the FAA and (ii) immediate operation in the United States in full compliance with FAR Part 121. 5.3. FAILURE TO RETURN AIRCRAFT OR ENGINES. If Lessee shall,for any reason whatsoever, fail to return the Aircraft or any Engine at the time specified herein, the obligations of Lessee as provided in this Lease shall continue in effect with respect to the Aircraft or such Engine until such Aircraft and such Engine is redelivered and accepted by Lessor in the condition required by Section 5, except that Basic Rent shall be payable on demand for each day on and after the time specified herein for return in an amount equal to the Basic Rent Amount plus fifty percent divided by thirty. This Section 5.3 shall not be construed as permitting Lessee to fail to meet its obligations to return the Aircraft or such Engine in accordance with the requirements of this Lease or constitute a waiver of a Lease Default or Lease Event of Default. 5.4. INSPECTION FLIGHT. Prior to return of the Aircraft to Lessor, Lessee shall make the Aircraft, records and log books available to Lessor at the location where the redelivery C-Check is performed, and Lessor shall be entitled to conduct, at Lessor's expense, a ground inspection of the Aircraft and, at Lessor's expense, a borescope inspection of each of the Engines. In the event that such borescope inspection reveals any damage to any Engine, the Lessee shall, at Lessee's expense, promptly correct or have corrected any such damage. Lessee shall also conduct, at its expense, a test flight of the Aircraft, which flight shall not exceed two hours in length, which at Lessee's sole discretion may be the positioning flight to the Redelivery Location or a storage location. Lessor shall be permitted to have three of its representatives present on such flight. The test flight shall be flown using the standard flight test procedures referred to in Section 2.5 (or such other procedures as the parties shall agree) for checking the operation of aircraft and engines of such types and their systems. If such flight test reveals any discrepancies from the condition required by this Section 5 (other than such discrepancies which were waived by Lessee on the Delivery Date and indicated on the Receipt for Lease Aircraft signed on the Delivery Date), Lessee shall, at its expense, promptly correct or have corrected any such discrepancies which are specified in writing by Lessor. 5.5. STORAGE. At the end of the Term, at the written request of Lessor, Lessee will assist Lessor in arranging storage facilities for the Aircraft. Lessor will bear all costs of storage. Section 6. LIENS. Lessee will not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Aircraft, the Airframe or any Engine, title thereto or any interest therein or in this Lease or any interest of Lessor in any Rent or other amounts payable by Lessee hereunder except Permitted Liens. Lessee will promptly take (or cause to be taken) such action as may be necessary duly to discharge any such Lien not excepted above if the same shall arise at any time. 19 Section 7. REGISTRATION, OPERATION, POSSESSION, SUB-LEASING AND RECORDS. 7.1. REGISTRATION AND OPERATION. (a) REGISTRATION. Lessee shall insure that at all times during the Term the Aircraft will remain duly registered in the name of Lessor with the FAA; PROVIDED, that the Lessee shall have no obligation under this Section 7.1(a) to the extent such failure to remain so registered is attributable to the Lessor's failure to be a "citizen of the United States" within the meaning of Section 101(16) of the Act. Lessor agrees that it will not reregister the Aircraft in another jurisdiction during the Term and that it will not sell, assign or transfer any of its rights hereunder in or to any Person if, as a result of such sale, assignment or transfer, the Aircraft would no longer be owned by a "citizen of the United States" within the meaning of Section 101(16) of the Act. (b) NAMEPLATE. Lessor agrees to affix and Lessee agrees to maintain in the cockpit of the Aircraft and on each Engine in a clearly visible location, a nameplate bearing the following legend: "Owned by First Union National Bank, not in its individual capacity but solely as Trustee, Owner and Lessor," or such other legend as may be required by Lessor. (c) COMPLIANCE WITH LAWS. Lessee agrees that it will not use or operate, or permit the use or operation of, the Aircraft, Airframe or any Engine in violation of any law or any rule, regulation or order of the FAA or any federal, state or foreign governmental authority having jurisdiction or in violation of any airworthiness certificate, license or registration relating to the Aircraft, Airframe or any Engine issued by any such authority. (d) OPERATION; INSURANCE REQUIREMENTS. Lessee agrees to operate, use and locate the Aircraft, or permit the aircraft to be operated, used and located, only in charter operations in those areas not precluded by aviation or United Nations Sanctions or prohibited by United States laws and further agrees not to operate, use or locate the Aircraft, Airframe or any Engine, or suffer the Aircraft, Airframe or any Engine to be operated, used or located, (i) in any area excluded from coverage by the insurance required by the terms of Section 11, or (ii) in any recognized or threatened area of hostilities unless fully covered by war-risk insurance satisfying the terms of Section 11, or (iii) in any country with which the United States does not maintain normal diplomatic relations, unless it shall have received the prior written consent of Lessor. 7.2. POSSESSION. i) EXCEPT AS PROVIDED IN THE USMS AGREEMENT OR THE MAINTENANCE AGREEMENT, LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, SUBLEASE OR OTHERWISE IN ANY MANNER DELIVER, TRANSFER OR RELINQUISH POSSESSION OF THE AIRCRAFT, AIRFRAME OR ANY ENGINE OR INSTALL ANY ENGINE, OR PERMIT ANY ENGINE TO BE INSTALLED, ON ANY AIRFRAME OTHER THAN THE AIRFRAME; provided, however, that, so long as no Lease Default or Lease Event of Default shall have occurred and be continuing, Lessee may, without such prior written consent: (i) TESTING AND SERVICE. Deliver possession of any Aircraft, Airframe or Engine, or Part thereof, to the Manufacturer for testing or other similar purposes, to any organization for service, or for alterations or modifications in or additions to the Aircraft, Airframe or any 20 Engine, provided that all maintenance, repair, overhaul, alteration and modification work shall be performed by FAA - approved organizations using FAA - approved source material; (ii) INSTALLATION OF ENGINES. Install or permit to be installed an Engine on an airframe owned by Lessee free and clear of all Liens, except Permitted Liens 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); (iii) INSTALLATION OF ENGINES ON OTHER AIRFRAMES. Install or permit to be installed an Engine on an airframe leased to, or purchased by, Lessee subject to a lease, conditional sale, trust indenture or other security agreement, but only if (A) such airframe is free and clear of all Liens, except the rights of the parties to the lease, conditional sale, trust indenture or other security agreement covering such airframe and Permitted Liens and (B) Lessor shall have received from the lessor, conditional seller, indenture trustee or secured party of such airframe an agreement (which may be the lease, conditional sale, trust indenture or other security agreement covering such airframe) whereby such lessor, conditional seller, indenture trustee or secured party expressly agrees that neither it nor its successors or assigns will acquire or claim any right, title or interest in any Engine by reason of such Engine being installed on such airframe at any time while such Engine is subject to this Lease or is owned by Lessor; (iv) TRANSFER TO THE UNITED STATES GOVERNMENT. Transfer possession of the Airframe or any Engine to the United States or any instrumentality or agency thereof in accordance with the Civil Reserve Air Fleet Program authorized under 10 U.S.C. Sec. 9511 ET SEQ.; and PROVIDED FURTHER WITH RESPECT TO THIS SECTION 7.2 (OTHER THAN A TRANSFER PURSUANT TO CLAUSE (IV) ABOVE) THAT: (1) the rights of any transferee who receives possession by reason of a transfer permitted by this Section 7.2 shall be subject and subordinate to all the terms of this Lease and to Lessor's rights, powers and remedies under this Lease, including the rights to repossession pursuant to Section 15 hereof; (2) Lessee shall remain primarily liable hereunder for the performance of all the terms of this Lease to the same extent as if such transfer had not occurred; (3) no permitted transfer or other relinquishment of possession permitted hereunder shall affect the registration of the Aircraft or shall permit any action not permitted under this Lease; and (4) all necessary action shall be taken which is required to continue the perfection of Lessor's title and interest in and to such Aircraft, Airframe and Engines, and Lessor's rights under this Lease. Lessor hereby agrees for the benefit of any lessor, conditional seller, indenture trustee or secured party of any engine leased to or purchased by Lessee which may be installed on an Airframe that Lessor will not acquire or claim, as against such lessor, conditional seller, indenture trustee or 21 secured party, any right, title or interest in any engine (other than an Engine) as the result of such engine 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. Lessee agrees that it will give the Lessor prior written notice of its intent to (A) remove any Engine from the Airframe or (B) install any engine on the Airframe. (b) Except to the extent inconsistent with the rules and regulations applicable to the Civil Reserve Air Fleet Program, Lessee will cause the USMS Agreement and any sublease or other agreement relating to the operation or use of the Aircraft to which Lessor has consented pursuant to Section 7.2(b) to contain a clause substantially to the effect of the following: "Anything in this agreement to the contrary notwithstanding, the sublessee's rights hereunder to the possession, use and enjoyment of the Aircraft shall be subject and subordinate to the Aircraft Lease Agreement dated as of November 21, 2001 (the "Primary Lease") among First Union National Bank, as Trustee (in this Section __ called the "Primary Lessor"), Airlease Ltd. and the sublessor hereunder, in respect of the Aircraft, and the sublessee confirms and agrees that this agreement is in all respects subject and junior to the Primary Lease. Upon notice to the sublessee hereunder by the Primary Lessor that a Lease Event of Default (as defined in the Primary Lease) has occurred and is continuing, the Primary Lessor may terminate this agreement and require prompt delivery by the sublessee of the Aircraft to the Primary Lessor, in accordance with the provisions of Section 5 of the Primary Lease. Unless the sublessee shall have received any such written notice from the Primary Lessor terminating this sublease, the sublessee shall be and remain fully obligated hereunder notwithstanding the continuance of any Lease Event of Default under the Primary Lease." 7.3. RECORDS AND REPORTS. Lessee shall: (a) RECORDS. Maintain or cause to be maintained in English all records, logs and other materials generally required by the FAA and any other governmental authority having jurisdiction to be maintained in respect of the Aircraft, the Airframe and each Engine; and (b) INFORMATION AND REPORTS. Promptly furnish or cause to be furnished to Lessor such information as may be required to enable Lessor to file any reports, including tax returns, required to be filed by Lessor with any governmental authority because of Lessor's ownership of the Aircraft, Airframe or any Engine or because of receipt of Rent. Section 8. MAINTENANCE; REPLACEMENT AND POOLING OF PARTS; ALTERATIONS, MODIFICATIONS AND ADDITIONS. 8.1. MAINTENANCE. Lessee shall maintain, service, repair, overhaul, alter, modify, add to and test or cause to be maintained, serviced, repaired, overhauled, altered, modified, added to and tested the Aircraft, the Airframe and each Engine, and each other engine installed from time to time on the Airframe, in accordance with a maintenance program for the Aircraft, Airframe and Engines which shall comply with the Maintenance Document (the "Maintenance Program"), so as to keep the Aircraft, the Airframe and each Engine in as good operating condition as when delivered to 22 Lessee hereunder, ordinary wear and tear excepted, in the same manner as used by Lessee with other aircraft owned or operated by Lessee and so as to keep the Aircraft in such operating condition as may be necessary to enable the airworthiness certificate for the Aircraft to be maintained in good standing at all times under the applicable rules and regulations of the FAA and any other applicable law. Lessee will procure compliance with all service, inspection, maintenance, repair and overhaul regulations, directions and instruments which are made mandatory by the FAA or any other governmental authority upon operation of McDonnell Douglas DC-9-Series 82 aircraft and/or Pratt & Whitney JT8D-217 engines. Lessee further agrees that the Aircraft, Airframe and Engines will be maintained in compliance with all laws, rules, regulations and orders of each government or governmental authority having jurisdiction over the maintenance of the Aircraft and in compliance with each applicable airworthiness certificate, license and registration relating to the Aircraft, Airframe or any Engine issued by any such authority. In addition, Lessee will procure that the Aircraft is maintained such that it would qualify for immediate operation in the United States under FAR Part 121. 8.2. REPLACEMENT OF PARTS. Lessee, at its sole cost and expense, will promptly replace or cause the replacement of all Parts which may from time to time be incorporated in the Aircraft, Airframe or any Engine and 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. In addition, Lessee may remove in the ordinary course of maintenance, service, repair, overhaul or testing any Parts as permitted by Section 8.1, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use; provided, however, Lessee, at its own cost and expense, will replace such Parts as promptly as possible. All replacement Parts shall be free and clear of all Liens (except for Permitted Liens) and shall be in good operating condition and 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. All Parts at any time removed from the Aircraft, Airframe or any Engine shall remain the property of Lessor no matter where located, until such time as such Parts shall be replaced by Parts which have been incorporated in the Aircraft, Airframe or such Engine and which meet the requirements for replacement Parts specified above. Immediately upon any replacement Part which satisfies the requirements for replacement Parts specified above becoming incorporated in the Aircraft, Airframe or such Engine as above provided, without further act, (i) title to the replaced Part shall thereupon vest in Lessee free and clear of all rights of Lessor and the replaced Part shall no longer be deemed a Part hereunder, (ii) title to such replacement Part shall thereupon vest in Lessor (subject only to Permitted Liens), and (iii) such replacement Part shall become subject to this Lease and be deemed part of an Aircraft, Airframe or such Engine for all purposes hereof to the same extent as the Parts originally incorporated in such Aircraft, Airframe or Engine. 8.3. POOLING OF PARTS. Any Part removed from the Aircraft, Airframe or any Engine as provided in Section 8.2 may be subjected by Lessee to a normal pooling arrangement customary in the U.S. commercial airline industry entered into in the ordinary course of business of Lessee, so long as a Part replacing such removed Part shall be incorporated in such Aircraft, Airframe or Engine in accordance with Section 8.2 as promptly as possible after the removal of such removed Part. In addition, any replacement Part when incorporated in such Aircraft, Airframe or such Engine in accordance with Section 8.2 may be owned by any air carrier subject to such a normal pooling arrangement, so long as Lessee, as promptly thereafter as reasonably possible, either (i) 23 causes title to such replacement Part to vest in Lessor in accordance with Section 8.2 by Lessee acquiring title thereto for the benefit of, and transferring such title to, Lessor free and clear of all Liens (except Permitted Liens), or (ii) replaces such replacement Part by incorporating in the Aircraft, Airframe or such Engine a further replacement Part owned by Lessee free and clear of all Liens (except Permitted Liens) and by causing title to such further replacement Part to vest in Lessor in accordance with Section 8.2. 8.4. ALTERATIONS, MODIFICATIONS AND ADDITIONS. Lessee shall make or cause to be made, at its own expense, such alterations and modifications in and additions to each Aircraft, Airframe and Engine as may be required from time to time to meet the standards of the FAA or other governmental authority (domestic or foreign) having jurisdiction and to enable the airworthiness certificate for the Aircraft to be maintained in good standing at all times under the applicable rules and regulations of the FAA and any other governmental authority having jurisdiction. In addition, upon written consent of Lessor, Lessee, at it own cost and expense, may, from time to time make such alterations and modifications in and additions to the Aircraft, 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 Aircraft, Airframe or such Engine; provided, however, that no such alteration, modification or addition shall diminish the value, remaining useful life, or utility of the Aircraft, Airframe or such Engine, or impair the airworthiness thereof, below the value, remaining useful life, utility, and airworthiness thereof immediately prior to such alteration, modification or addition assuming the Aircraft, Airframe or such Engine was then of the value or utility and in the condition required to be maintained by the terms of this Lease. Title to all Parts on the Aircraft, Airframe or Engine as the result of such alteration, modification or addition shall, without further act, vest in Lessor. Notwithstanding the foregoing sentence of this Section 8.4, so long as no Lease Default or Lease Event of Default shall have occurred and be continuing, Lessee may, at any time during the Term, remove any Part if (i) such Part is in addition to, and not in replacement of or substitution for, any Part originally incorporated in any Aircraft, Airframe or Engine at the time of delivery thereof hereunder or any Part in replacement of or substitution for any such Part, (ii) such Part is not required to be incorporated in such Aircraft, Airframe or Engine pursuant to the terms of this Section 8, and (iii) such Part can be removed from such Aircraft, Airframe or Engine without diminishing or impairing the value or airworthiness required to be maintained by the terms of this Lease which the Aircraft, Airframe or such Engine would have had at such time had such alteration, modification or addition not occurred. Upon the removal by Lessee of any Part as above provided, title thereto shall, without further act, vest in Lessee and such Part shall no longer be deemed part of such Aircraft, Airframe or Engine from which it was removed. Any Part not removed by Lessee as above provided prior to the return of such Aircraft, Airframe or Engine to Lessor hereunder shall remain the property of Lessor. Section 9. INDEMNIFICATION. 9.1. GENERAL INDEMNITY. (a) Lessee agrees to indemnify, reimburse, and hold harmless each Indemnitee from and against any and all claims, damages, losses, liabilities (including, without limitation, any claim or liability for strict liability in tort or otherwise imposed), obligations, demands, suits, 24 judgments, causes of action, legal proceedings, whether civil, criminal or administrative, penalties, fines, other sanctions, and all costs and expenses of any nature whatsoever, including attorney's fees and expenses (any and all of which are hereafter referred to as "Losses") which in any way at any time may result from, pertain to, or arise out of, the Aircraft, this Lease or any other Lessee Document, the lease of the Aircraft by Lessor to Lessee under the Lease, the breach of any representation, warranty or covenant made by Lessee hereunder or the condition, ownership, manufacture, purchase, delivery, non-delivery, acceptance, rejection, possession, return, disposition, subleasing, use or operation, maintenance, service, repair, overhaul, construction, design (including, without limitation, latent and other defects whether or not discovered or discoverable by the Indemnitee, and, with respect to any Part installed on the Aircraft by Lessee, any claim for patent, trademark or copyright infringement), or acceptance (in each and every case) of the Aircraft or Airframe, any Engine or Part either in the air or on the ground, or any defect in the Aircraft arising from the material or any articles used therein or from the design, testing or use thereof or from any maintenance, service, repair, overhaul or testing of the Aircraft or any Airframe, Engine or Part regardless of when such defect shall be discovered, whether or not such Aircraft or any Airframe, Engine or Part is at the time in the possession of Lessee and whether it is in the United States of America or any other country. The indemnities contained in this Section 9.1 shall continue in full force and effect notwithstanding the expiration or other termination of the Lease and are expressly made for the benefit of and shall be enforceable by each Indemnitee. (b) The indemnity set forth above shall not extend to any Loss with respect to any Indemnitee (A) to the extent that such Loss is caused by acts or events which occur after the end of the Term provided that Lessee has fully complied with all the terms of the Lease and such Loss is unrelated to acts, omissions, events, incidents or circumstances occurring or existing before the end of the Term, (B) which is a Tax, whether or not Lessee is required to indemnify therefor pursuant to Section 9.2, (C) to the extent such Loss is attributable to any Lessor Lien or the gross negligence or wilful misconduct of an Indemnitee (other than any negligence imputed to such Indemnitee as a result of its interest in the Aircraft or the acts or omissions of any person other than such Indemnitee) or from any misrepresentation or breach of or failure to comply with or perform any obligations of such Indemnitee contained in this Lease, (E) resulting from any disposition by an Indemnitee of any of its interest in the Aircraft, the Airframe, any Engine or the Lease other than a disposition resulting from the exercise of remedies under the Lease by Lessor while a Lease Event of Default has occurred and is continuing, or (F) to the extent such a Loss actually occurred prior to the commencement of the Term and is unrelated to acts, omissions, events, incidents or circumstances occurring or existing after commencement of the Term and before Aircraft ceases to be subject to the Lease. (c) The Lessee further agrees that, notwithstanding the exceptions in paragraph (b) above, any indemnity under Section 9.1 shall include any amount necessary to hold the Indemnitee harmless from all Taxes required to be paid by such Indemnitee with respect to the receipt or accrual of such indemnity. (d) If any Indemnitee entitled to indemnity hereunder has knowledge of any liability hereby indemnified against, it shall give prompt written notice thereof to Lessee, but the failure to give such notice shall not affect the obligations of Lessee hereunder (except to the extent that 25 Lessee is materially prejudiced in the exercise of its right to contest and prevail in the contest of such claim as a result of such failure). If Lessee has actual knowledge of any liability hereby indemnified against, it shall give prompt written notice thereof to the party entitled to be indemnified, but the failure to give such notice shall not affect the obligations of Lessee hereunder. Lessee shall be entitled, at its sole cost and expense, acting through counsel reasonably acceptable to the respective Indemnitee, to assume responsibility for and control of such judicial or administrative proceeding. Notwithstanding the foregoing, Lessee shall not be entitled to assume responsibility for and control of any such judicial or administrative proceedings, but shall nonetheless be responsible for the costs thereof, (w) while a Lease Event of Default under the Lease shall have occurred and be continuing, (x) if such proceedings will involve any material danger of the sale, forfeiture or loss of the Aircraft or any part thereof, (y) if in the written opinion of counsel to such Indemnitee an actual or potential material conflict of interest exists where it is advisable for such Indemnitee to be represented by separate counsel or (z) if such Indemnitee has been indicted or otherwise charged in a criminal complaint and such Indemnitee desires to be represented by separate counsel. The Indemnitee may participate at its own expense and with its own counsel in any judicial proceeding controlled by the Lessee pursuant to the preceding provisions. (e) Upon payment of indemnification of any amount pursuant to this Section 9.1, Lessee shall be subrogated to any claims the Indemnitee may have relating thereto. The Indemnitee agrees to cooperate with Lessee to permit Lessee to pursue such claims. (f) In the event that Lessee shall have paid an amount to an Indemnitee pursuant to this Section 9.1, and such Indemnitee subsequently shall be reimbursed in respect of such amount from any other Person, such Indemnitee shall promptly pay to Lessee an amount equal to the amount of such reimbursement net of all expenses incurred in obtaining the same (but in no event shall this amount paid by an Indemnitee be in excess of the payment by Lessee pursuant to this Section 9.1). 9.2. GENERAL TAX INDEMNITY. (a) Lessee agrees that each payment of Rent shall be free of any withholdings whatsoever, and in the event that any withholding is required, Lessee shall pay an additional amount of Rent such that after the deduction of all amounts required to be withheld, the net amount of Rent actually received by each Tax Indemnitee shall equal, on an after tax basis, the amount of Rent that would be due absent such withholding. Lessee further agrees on written demand to pay, and to indemnify and hold each Tax Indemnitee harmless from, all Taxes (and all costs and expenses incurred in connection with the payment or contest of Taxes) which are imposed by any Federal, state or local government or taxing authority in the United States of America or by any foreign government or any taxing authority or governmental subdivision of a foreign country or of a territory or possession of the United States or any international authority upon Lessor, Lessee or the Aircraft with respect to, based upon or measured by (i) the cost or value of the Aircraft or any Part thereof, or interest therein, (ii) the manufacture, purchase, ownership, delivery, leasing, possession, use, operation, sale, subleasing, rental, retirement, abandonment, registration, preparation, installation, modification, repair, maintenance, replacement, transportation, storage, transfer of title, return or other disposition of the Aircraft, the Airframe, any Engine, or any Part thereof or interest therein, (iii) the rentals, receipts or 26 earnings arising from the Lease or (iv) otherwise in connection with this Lease and the transactions contemplated hereby. Notwithstanding the preceding sentence, Lessee shall have no liability to a Tax Indemnitee pursuant to this Section 9.2 with respect to: (A) Taxes based on or measured by the net income of such Tax Indemnitee; provided, however, that, notwithstanding the foregoing exclusion, there shall not be excluded any Taxes imposed by any jurisdiction (other than the United States Federal Government unless due to the replacement, repair or pooling of any part of the Aircraft) which are imposed directly as a result of the activities in or payments being made from such jurisdiction of Lessee or any operator, sublessee or other user of the Aircraft, the presence of the Aircraft in such jurisdiction, or the Lessee's incorporation or tax residence or domicile in such jurisdiction, or (B) any Taxes imposed as a result of a disposition by such Tax Indemnitee of the Aircraft, any Engine, or any Part, or any interest in any of the foregoing, or any interest in the Rent, unless such disposition shall have occurred at any time while a Lease Default or a Lease Event of Default shall have occurred and be continuing or results from any exercise of any of the remedies as provided in or permitted by this Lease or applicable law or results from a replacement of the Airframe or Engines or any Part pursuant to this Lease. (b) The Lessee further agrees that, notwithstanding the exceptions in paragraph (a) above, any indemnity under Section 9.1 or this Section 9.2 shall include any amount necessary to hold the Tax Indemnitee harmless from all Taxes required to be paid by such Tax Indemnitee with respect to the receipt or accrual of such indemnity. (c) In case any report or return is required to be made with respect to any obligation of Lessee under this Section 9.2, Lessee either shall make such report or return in such manner as will show the interest of the Lessor in the Aircraft, or shall promptly notify the Lessor of such requirement and shall make such report or return in such manner as shall be directed by the Lessor. All costs and expenses (including legal and accountants' fees) of preparing any such return or report shall be borne by Lessee. Lessee further agrees to promptly provide each Tax Indemnitee with any information reasonably requested by such Tax Indemnitee in connection with preparation of such Tax Indemnitee's tax returns. (d) Contest. (1) NOTICE OF CLAIM. If a written claim is made against a Tax Indemnitee for Taxes with respect to which the Lessee is or may be liable for payment or indemnity hereunder (a "Claim"), such Tax Indemnitee shall give the Lessee prompt written notice of such Claim after its receipt and shall furnish the Lessee with any requests for information it receives with respect to such Claim. Without prejudice to any other rights the Lessee may have in connection therewith, the failure of a Tax Indemnitee to provide such notice shall not affect the Lessee's obligations hereunder except to the extent that such failure prevents the Tax Indemnitee or the Lessee from contesting such Claim. (2) MANNER OF CONTEST. If the Lessee within thirty (30) days after notification requests in writing, the Tax Indemnitee shall in good faith, with due diligence and at Lessee's 27 expense, contest in the name of the Tax Indemnitee, or if permitted by law and so requested by the Lessee, permit the Lessee to contest in the name of the Lessee but only if (i) the tax is not (x) reflected in a return with other taxes of the Tax Indemnitee unrelated to the transactions contemplated by the Operative Documents or (y) an income tax, (ii) the contest may be brought solely in the Lessee's name, (iii) no tax return of such Tax Indemnitee will be held open as a result of such contest, and (iv) such contest does not involve any material risk of the sale, forfeiture or loss of the Aircraft, the validity, applicability or amount of such Claim by: (a) resisting payment thereof, if practical; (b) not paying the same, except under protest; (c) if payment is to be made, using diligent efforts to obtain a refund thereof in appropriate administrative or judicial proceedings; or (d) taking such other actions as are reasonably requested from time to time by Lessee; provided, however, that no Tax Indemnitee will be required to contest any Claim unless (w) it has received a written acknowledgment from Lessee of Lessee's Liability for such Taxes; (x) it has received a written opinion of its tax counsel (who shall be reasonably acceptable to Lessee) that a realistic possibility of success (as set forth in ABA Formal Opinion 85-352) exists for contesting such Claim (or in the case of an appeal of an adverse judicial decision, that it is more likely than not that such decision will be reversed or substantially modified); (y) the Claim would require the Lessee to make an indemnity payment to such Tax Indemnitee in excess of $25,000; and (z) such contest does not involve any material risk of the sale, forfeiture or loss of the Aircraft. In no event will a Tax Indemnitee appeal or defend any appeal of any adverse judicial decision with respect to a Claim to the United States Supreme Court. (e) TAX BENEFIT. If Lessor determines in its sole discretion that it has actually realized a tax benefit or refund as a result of any Taxes paid by Lessee or against which Lessor has been indemnified by Lessee under this Section 9.2, Lessor shall (to the extent in its sole discretion that it can do so without prejudicing the retention of the amount of such benefit or refund and without prejudice to the right to any other relief or allowance which may be available to it) pay to Lessee, promptly after actual realization of such tax benefit or refund or receipt of such other compensation, an amount that is equal to the amount of such benefit or refund or other compensation; provided, however, that no such payment exceed (x) the amount of all prior payments by Lessee to Lessor under this Section 9.2 minus (y) the amount of all prior payments by Lessor pursuant to this clause (e). If Lessor shall have paid Lessee any amounts under this clause (e) and it is subsequently determined that Lessor was not entitled to a tax benefit or refund, such determination shall be treated as the imposition of a Tax for which Lessee is obligated to indemnify Lessor pursuant to the provisions of Section 9.2 without regard to the exclusions set forth in Section 9.2(a). 9.3. PAYMENTS. Any payments made pursuant to this Section 9 shall be made in U.S. dollars directly to the Person entitled thereto or to Lessee, as the case may be, in immediately available funds at such bank or to such account as specified by the payee in written directions to the payor, or, if no such direction shall have been given, by check of the payor payable to the order of the payee and mailed to the payee by certified mail, postage prepaid at 28 its address as set forth in this Agreement. Any amount payable to any Indemnitee or Tax Indemnitee pursuant to Section 9.1 or Section 9.2 is to be paid to such party on the later of (i) the tenth day after receipt of a written demand therefor from such party and (ii) the date on which such Indemnitee or Tax Indemnitee is required to pay such amount to a third party, or, in the case of Section 9.2, on the date of payment of the indemnified Taxes by the Tax Indemnitee to the appropriate taxing authority, if earlier. 9.4. SURVIVAL. All indemnities, obligations, adjustments and payments provided for in this Section 9 shall survive, and remain in full force and effect, notwithstanding the expiration or other termination of this Lease. Section 10. LOSS, DESTRUCTION, REQUISITION, ETC. 10.1. EVENT OF LOSS WITH RESPECT TO AIRFRAME. Upon the occurrence of an Event of Loss with respect to the Aircraft, Lessee shall give Lessor prompt written notice thereof and within five (5) Business Days following the date of the occurrence of such Event of Loss. On or before the Business Day next preceding the earlier of (i) the 61st 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, Lessee shall pay to Lessor (A) the Stipulated Loss Value for the Aircraft and (B) any other Rent which is due and payable through and including such date. In the event of payment in full of the Stipulated Loss Value for such Aircraft pursuant to this Section 10.1 and all other Rent and amounts then due and payable hereunder by Lessee, the obligation of Lessee to pay Basic Rent hereunder with respect to such Aircraft for any period commencing after the date of such payment of Stipulated Loss Value shall terminate (but Lessee shall remain liable for all payments of Rent, including Basic Rent for such Aircraft, due or accrued through and including the date of such payment of Stipulated Loss Value), the Term for such Aircraft shall end, and Lessor will transfer the Aircraft to Lessee on an "as-is, where-is" basis, free and clear of Lessor Liens, but otherwise without recourse, representation or warranty, express or implied. 10.2. EVENT OF LOSS WITH RESPECT TO AN ENGINE. (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 an Airframe, Lessee shall give Lessor prompt written notice (and in any event within three days after such occurrence) 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 as replacement for the Engine with respect to which such Event of Loss occurred, all legal and beneficial title to a Replacement Engine free and clear of all Liens, other than Permitted Liens, and having a value, remaining useful life and utility at least equal to 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. (b) CONDITIONS; LESSEE'S OBLIGATIONS. Prior to or at the time of any such conveyance, Lessee will promptly (all writings referred to below to be reasonably satisfactory in form and substance to Lessor): 29 (i) furnish Lessor with a full warranty bill of sale duly conveying to Lessor each Replacement Engine together with such evidence of title as Lessor may reasonably request; (ii) cause a Lease Supplement subjecting each such Replacement Engine to this Lease, duly executed by Lessee, to be delivered to Lessor for execution and, upon such execution, to be filed for recordation; (iii) furnish Lessor with such evidence of compliance with the insurance provisions of Section 11 with respect to each such Replacement Engine as may be reasonably requested; (iv) furnish Lessor with a certificate or certification of a qualified independent aircraft appraiser reasonably satisfactory to Lessor certifying that each such Replacement Engine has a value and utility at least equal to, and is in at least as good operating condition as, the Engine so replaced (assuming each such Engine was in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of Loss); (v) furnish Lessor with an Officer's Certificate of Lessee certifying that, upon consummation of such replacement, no Lease Event of Default will exist hereunder; and (vi) furnish such other certificates or documents to effect such replacement as Lessor may reasonably request. (c) RECORDATION AND OPINIONS. In the case of any Replacement Engine conveyed under this Section 10.2, promptly upon the recordation of the Lease Supplement covering such Replacement Engine pursuant to the Act, Lessee will cause to be delivered to Lessor an opinion of counsel experienced in federal aviation matters and satisfactory to Lessor as to the due recordation of such Lease Supplement as Lessor may require. (d) CONVEYANCE; REPLACEMENT ENGINE. Upon full compliance by Lessee with the terms of this Section 10.2, Lessor will transfer the Engine with respect to which such Event of Loss occurred to Lessee on an "as-is, where-is" basis, free and clear of Lessor Liens, but otherwise without recourse, representation or warranty, express or implied. (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 10.2 shall result in any reduction of Basic Rent. 10.3. APPLICATION OF PAYMENTS FROM GOVERNMENTAL AUTHORITIES FOR REQUISITION OF TITLE. Any payments received at any time by Lessor or Lessee 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: (a) REPLACEMENT OF ENGINE. If such payments are received with respect to an Engine that has been or is being replaced by Lessee pursuant to Section 10.2, so much of such payments 30 remaining after reimbursement of Lessor for reasonable out-of-pocket costs and expenses shall be paid over to, or retained by, Lessee, provided Lessee shall have fully performed or, concurrently therewith, is fully performing the terms of Section 10.2 with respect to the Event of Loss for which such payments are made. (b) NONREPLACEMENT. If such payments are received with respect to an Airframe and any Engines installed thereon so much of such payments remaining after reimbursement of Lessor for reasonable costs and expenses shall be applied in reduction of Lessee's obligation to pay the Stipulated Loss Value and other amounts required to be paid by Lessee hereunder, if not already paid by Lessee, or, if already paid by Lessee, shall be applied to reimburse Lessee for its payment of such Stipulated Loss Value and other amounts. The balance, if any, of such payment remaining thereafter shall be paid to Lessee. 10.4. APPLICATION OF PAYMENTS DURING EXISTENCE OF DEFAULT. Any amount referred to in this Section 10 which is payable or creditable to or retainable by Lessee shall not be paid or credited to or retained by Lessee if, at the time of such payment, credit or retention, a Lease Default or Lease Event of Default shall have occurred and be continuing hereunder but shall be paid to and held by Lessor as security for the obligations of Lessee under this Lease and, if Lessor declares this Lease to be in default pursuant to Section 15 or it shall otherwise become in default in accordance with its terms, applied against Lessee's obligations hereunder as and when due and at such time as there shall not be continuing any such Lease Default or Lease Event of Default, such amount shall be paid to Lessee to the extent not previously applied in accordance with the preceding sentence. Section 11. INSURANCE. 11.1. PUBLIC LIABILITY AND PROPERTY DAMAGE INSURANCE. Lessee shall at all times maintain or cause to be maintained, at its expense, public liability insurance as follows: (a) TYPE, FORM AND AMOUNT. Such insurance shall be of a type and form reasonably satisfactory to Lessor, maintained in effect with insurers of recognized responsibility satisfactory to Lessor and carried in an amount not less than U.S. $100,000,000, combined single limit per occurrence. (b) COVERAGE. Such insurance shall include, but not be limited to, public liability insurance, passenger liability insurance and property damage liability insurance, and War and Allied Risks are also to be covered under such insurance to the fullest extent available from the leading international insurance markets or under government insurance or indemnity programs. Lessee shall not be permitted to self-insure with respect to this coverage. (c) ADDITIONAL PROVISIONS. Any policies of insurance carried in accordance with this Section 11.1 shall (A) name each Indemnitee as an additional insured, (B) provide that in respect of the interest of each Indemnitee in such policies the insurance shall not be invalidated by any action or inaction of Lessee and shall insure each Indemnitee, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by Lessee or any other Person, (C) provide that if such insurance is to be cancelled for any reason whatever, or any material change is to be made in the coverage which materially adversely affects the interest 31 of any Indemnitee or if such insurance may be allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to any such Indemnitee for thirty (30) days (seven (7) days or such shorter period as may be generally available in case of any war risk and allied perils coverage) after written notice is received by Lessor from such insurers of such cancellation, change or lapse, (D) be effective with respect to both domestic and international operation, (E) provide that the insurers shall waive any right to any setoff, recoupment or counterclaim or any other deduction, by attachment or otherwise, (F) provide that all of the insurance under such policy shall operate in the same manner as if there were a separate policy covering each insured, (G) provide that no Indemnitee shall be liable for any insurance premium, (H) be primary and without right of contribution from other insurance which may provide coverage to any Indemnitee and (I) expressly provide that the insurers shall waive any rights of subrogation against any Indemnitee. 11.2. INSURANCE AGAINST LOSS OF OR DAMAGE TO AIRCRAFT AND ENGINES. Lessee shall at all times maintain or cause to be maintained at its own expense insurance against loss of or damage to the Aircraft, Airframe and Engines as follows: (a) TYPE, FORM AND AMOUNT. "All-risk" insurance on the Aircraft and "all-risk" coverage on each Engine and on Parts while removed from the Aircraft or Engines, "foreign object damage" engine insurance on each Engine, and "war-risk" insurance, maintained in effect with insurers of recognized responsibility satisfactory to Lessor, which is of the type and form maintained by major air carriers operating on the routes on which the Aircraft is operated by Lessee and, in any case, carried by Lessee on similar equipment owned or leased by Lessee. Such insurance shall at all times be maintained on an "agreed value basis" for an amount not less than the Stipulated Loss Value. (b) CERTAIN REQUIREMENTS. The insurance policies required by this Section 11.2 shall (A) provide that Lessor, Owner Participant and the Lenders are additional insureds thereunder and that such Persons are named as loss payees thereunder as their interests may appear, provided that the Lenders shall be the sole loss payees from such time that Lessor notifies the insurers that the Security Documents are in effect until such time as the Lenders notify the insurers that the Lien of the Security Documents has been discharged; (B) provide that all payments shall be payable directly to Lessor (or Lenders during any period during which they are the sole loss payee); provided that unless Lessor or a Lender shall provide notice to such insurers that a Lease Default or Lease Event of Default has occurred and is continuing, any payment not in excess of $100,000 may be paid directly to Lessee; (C) provide that if such insurance is to be cancelled for any reason whatever, or any material change is to be made in the coverage which adversely affects the interest of Lessor, Owner Participant or any Lender or, if such insurance may be allowed to lapse for non-payment of premium, such cancellation, change or lapse shall not be effective as to such Person for thirty (30) days (seven (7) days or such shorter period as may be generally available in case of any war risk and allied perils coverage) after written notice is received by such Person from such insurers of such cancellation, change or lapse; (D) provide that in respect of the interest of Lessor, the Owner Participant and the Lenders in such policies the insurance shall not be invalidated by any action or inaction of Lessee or any other Person and shall insure Lessor, the Owner Participant and the Lenders regardless of any breach or violation by Lessee or any other Person of any warranty, declaration or condition contained in such policies; (E) provide that the insurers shall waive any rights of subrogation 32 against Lessor, the Owner Participant and the Lenders; (F) provide that the insurers shall waive any right to any set-off, recoupment or counterclaim or any other deduction, by attachment or otherwise; (G) provide that all the provisions thereof, except the agreed values and limits of the liability of the insurer under such policy, shall operate in the same manner as if there were a separate policy covering each insured; (H) provide that none of Lessor, Owner Participant and any Lender shall be liable for any insurance premium; (I) be effective with respect to both domestic and international operation; and (J) be primary and without right of contribution from other insurance which may provide coverage to Lessor, Owner Participant and any Lender. (c) DEDUCTIBLES. The insurance required by this Section 11.2 may provide in respect of damage not constituting an Event of Loss for deductibles which are reasonably acceptable to Lessor, but in any event not in excess of US$100,000 per occurrence. 11.3. APPLICATION OF INSURANCE PROCEEDS. As between Lessor and Lessee, any insurance proceeds received under policies pertaining to the Aircraft required to be caused to be maintained by Lessee pursuant to Section 11.2 as a result of the occurrence of an Event of Loss with respect to any Aircraft, Airframe or Engine will be applied in accordance with Section 10.3(a) or 10.3(b), as the case may be. All insurance proceeds in respect of any property damage loss not constituting an Event of Loss with respect to any Airframe or Engine will be applied in payment for repairs or for replacement property in accordance with the terms of Section 8, if not already paid for by Lessee, and any balance remaining after compliance with such Section with respect to such loss shall be paid to Lessor. The provisions of Section 10.4 shall apply to amounts referred to in this Section 11.3. If Lessor shall have received insurance proceeds in excess of $100,000 pursuant to Section 11.2(b)(B) hereof and Lessee shall have performed repairs in accordance with Section 8, upon five (5) Business Days of Lessor's receipt of written notice thereof, Lessor shall make such insurance proceeds available to Lessee. 11.4. CERTIFICATES; REPORTS, ETC. With respect to any insurance policy required hereunder, Lessee shall cause to be furnished to Lessor on or prior to the Delivery Date and on or prior to expiration of such policy, certificates of the insurer or insurers (or their authorized representatives) providing insurance pursuant to the requirements of this Section 11 confirming the existence and effectiveness of the insurance provided hereunder. On or before the Delivery Date of the Aircraft, Lessee shall cause to be furnished to Lessor a report signed by a firm of independent aircraft insurance brokers, appointed by Lessee and reasonably satisfactory to Lessor stating the opinion of such firm that the insurance then carried and maintained on the Aircraft complies with the terms hereof. Lessee agrees that it will cause such firm to advise Lessor in writing promptly of any default in the payment of any premium or any other act or omission on the part of Lessee of which they have knowledge and which might invalidate or render unenforceable, in whole or in part, the insurance on the Aircraft. Lessee further agrees to cause such firm to advise Lessor in writing as soon as such firm has knowledge that any insurance carried and maintained on the Aircraft pursuant to this Section 11 will not be renewed by the applicable underwriters. 11.5. LESSOR'S RIGHT TO MAINTAIN INSURANCE. In the event that Lessee shall fail to cause to be maintained insurance as herein provided, Lessor may at its option (but shall not be obligated to) provide such insurance and in such event, Lessee shall, upon demand, reimburse such Person, as Supplemental Rent, for the cost thereof. No such payment, performance or 33 compliance shall be deemed to cure any Lease Event of Default hereunder or otherwise relieve Lessee of its obligations with respect thereto. 11.6. INSURANCE FOR OWN ACCOUNT. Nothing in Section 11 shall limit or prohibit Lessor, Owner Participant or any Lender from obtaining insurance for its own account, and any proceeds payable thereunder shall be payable as provided in the insurance policy relating thereto. 11.7. GOVERNMENT INDEMNITY. In the case of a contract with the Government in respect of the Aircraft or Engines, a valid agreement by the Government to indemnify Lessee and each Indemnitee against the same risks which are required hereunder to be insured against in an amount at least equal to the amounts required hereunder from time to time, shall be considered adequate insurance with respect to any Aircraft, Airframe and Engine subject to such contract to the extent of the risks and in the amounts that are the subject of any such agreement to indemnify. Section 12. INSPECTION. At all reasonable times during the Term, on three days' prior written notice, or earlier if events occur adversely affecting Lessor's rights, Lessor and each Owner Participant, or their respective authorized representatives, may inspect the Aircraft and the books and records of Lessee or any operator relative thereto. No such Person shall have any duty to make any such inspection or incur any liability or obligation by reason of not making any such inspection. Any costs or expenses relating to such inspection shall be borne by the Person making such inspection, unless an Event of Default shall have occurred and be continuing, in which case such costs and expenses shall be borne by Lessee. Section 13. ASSIGNMENT. LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR, ASSIGN ANY OF ITS RIGHTS UNDER THIS LEASE. LESSOR MAY ASSIGN OR CONVEY ANY OF ITS RIGHT, TITLE AND INTEREST IN AND TO THIS LEASE OR THE AIRCRAFT. THE TERMS AND PROVISIONS OF THE LEASE SHALL BE BINDING UPON AND INURE TO THE BENEFIT OF LESSOR AND LESSEE AND THEIR RESPECTIVE PERMITTED SUCCESSORS AND ASSIGNS. Section 14. EVENTS OF DEFAULT. The following events shall constitute Lease Events of Default (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgement, decree or order of any court or any order, rule or regulation of any administrative or governmental body): 14.1. FAILURE TO PAY RENT. Lessee shall fail to make any payment of Rent within two days after the same shall have become due; or 14.2. INSURANCE. Lessee shall fail to cause to be carried and maintained insurance on or with respect to any Aircraft obtained or required to be obtained in accordance with the provisions of Section 11; or 14.3. GENERAL DEFAULT. Lessee shall fail to perform or observe any covenant, condition, obligation or agreement to be performed or observed by it hereunder (other than the obligations referred to in 14.1, 14.2 and 14.8) or under any other Lessee Document and such failure shall continue unremedied for a period of 30 days after written notice thereof by Lessor; or 34 14.4. MISREPRESENTATION AND BREACH OF WARRANTY. Any representation or warranty made by Lessee herein or in any other Lessee Document shall prove to have been incorrect in any material respect at the time made, and such incorrectness shall continue to be material and unremedied for a period of 30 days after written notice thereof by Lessor; or 14.5. LESSEE BANKRUPTCY, ETC. Lessee shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official or agency in a involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall take any corporate action to authorize any of the foregoing; or an involuntary case or other proceeding shall be commenced against Lessee seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official or agency of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or 14.6. OTHER LEASE. A Lease Event of Default, as defined in the Other Lease, shall have occurred; or 14.7. MAINTENANCE AGREEMENT. Lessee or any Person acting by or on behalf of Lessee shall deny or disaffirm Lessee's obligations under the Maintenance Agreement, or Lessee shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed thereunder; or 14.8. USMS AGREEMENT. The USMS Agreement shall terminate or be terminated as a result of Lessee defaulting in the due performance or observance of any term, covenant or agreement on its part to be performed or observed hereunder or thereunder; or 14.9. MAINTENANCE PROVIDER BANKRUPTCY, ETC. The Maintenance Provider shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official or agency in a involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall take any corporate action to authorize any of the foregoing; or an involuntary case or other proceeding shall be commenced against the Maintenance Provider seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official or agency of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days, PROVIDED THAT if Lessee shall have entered into a Maintenance Agreement with a replacement Maintenance Provider, and Lessor shall have received a properly perfected security interest in such agreement within 30 days of the 35 occurrence of any of the events listed in this Section 14.9, such event shall not be considered an Event of Default under this Section 14.9; or 14.10. OPINION OF LESSEE'S COUNSEL. Lessor and Owner Participant shall not have received an opinion of special counsel to the Lessee in the form attached hereto as Exhibit F within 10 Business Days after the Delivery Date; or 14.11. SECURITY. Lessor shall not have received the Security within 10 Business Days after the Delivery Date. Section 15. REMEDIES. 15.1. DEFAULT; REMEDIES. Upon the occurrence of a Lease Event of Default and at any time thereafter so long as the same shall be continuing, Lessor may, at its option, declare this Lease to be in default; provided that this Lease shall be deemed to be in default automatically without the necessity of such a written declaration upon the occurrence of a Lease Event of Default described in Section 14.5; and thereafter may exercise one or more of the following remedies as Lessor in its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, applicable law then in effect: (a) RETURN; REPOSSESSION. Lessor may cause Lessee, upon written demand by Lessor and at Lessee's expense, to return promptly, and Lessee shall return promptly, all or any part of the Aircraft, Airframe or Engines as Lessor may so demand to Lessor or its order in the manner and condition required by, and otherwise in accordance with all the provisions of, Section 5 as if the Aircraft, Airframe or Engines were being returned at the end of the Term; or Lessor, at its option, may enter upon the premises where the Aircraft, Airframe or Engines, or part thereof, is located and take immediate possession of and remove the same by summary proceedings or otherwise, all without liability accruing to Lessor for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise; or (b) SALE; USE; ETC. Lessor may sell the Aircraft, Airframe or any Engine, or part thereof, at public or private sale, at such times and places, to such Persons as Lessor may determine, or otherwise dispose of, hold, use, operate, lease to others or keep idle the Aircraft, Airframe or any Engine, or part thereof, as Lessor, in its sole discretion, may determine, all free and clear of any rights of Lessee and without any duty to account to Lessee with respect to such action or inaction or for any proceeds with respect thereto; or (c) LIQUIDATED DAMAGES--FAIR MARKET RENTAL VALUE. Whether or not Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under Section 15.1(a) or 15.1(b) with respect to the Aircraft, Airframe or Engine, or part thereof, Lessor, by written notice to Lessee specifying a payment date not earlier than ten days from the date of such notice, may cause Lessee to pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty, any accrued but unpaid Rent for the Aircraft due to and including the 36 payment date specified in such notice, plus an amount equal to the excess, if any, of the discounted value of the unpaid Rent for the Aircraft that would otherwise have accrued over the remainder of the Term but for the Event of Default, over the discounted value of the fair market monthly rental for the Aircraft (computed as provided in Section 15.2) for a period commencing six months after the payment date and extending to the end of the Expiry Date, in each case discounted monthly to present value as of the payment date specified in such notice at 4%. The amounts specified in such notice shall continue to earn interest from the payment date until payment is made; or (d) TERMINATION AND OTHER REMEDIES. Lessor may terminate the leasing of the Aircraft, Airframe and Engines, or Part thereof under this Lease, or may exercise any other right or remedy which may be available to it under the Uniform Commercial Code in any applicable jurisdiction or other applicable statute or law whether or not in effect in the jurisdiction in which enforcement is sought or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof, including without limitation Lessee's agreement to lease the Aircraft for the Term and to pay Rent. In addition to the foregoing remedies, Lessee shall be liable for any and all unpaid Rent due hereunder before, during or after the exercise of any of the foregoing remedies and for all legal fees and other costs and expenses of Lessor, including without limitation interest on overdue Rent at the rate as herein provided, and the fees and expenses of all appraisers required by this Section 15, incurred by reason of the occurrence of any Lease Event of Default or the exercise of Lessor's remedies with respect thereto, including all insurance and storage costs and all costs and expenses incurred in connection with the return of the Aircraft, Airframe or any Engine, or part thereof, in accordance with the terms of Section 5 or in placing the Aircraft, Airframe or any Engine, or part thereof, in the condition and airworthiness required by Section 5. 15.2. DETERMINATION OF FAIR MARKET RENTAL VALUE. For the purpose of this Section 15, the "fair market rental value" of the Aircraft shall be determined on the assumption that the Aircraft was maintained or returned, as the case may be, in the condition required by this Lease, by a recognized independent appraiser chosen by Lessor. 15.3. NO WAIVER, ETC. No remedy referred to in this Section 15 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity; and the exercise or beginning of exercise by Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Lessor of any or all of such other remedies. No express or implied waiver by Lessor of any Lease Event of Default shall in any way be, or be construed to be, a waiver of any earlier or subsequent Lease Event of Default. To the extent permitted by applicable law, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use any Aircraft, Airframe or Engine, or Part thereof, in mitigation of Lessor's damages as set forth in this Section 15 or which may otherwise limit or modify any of Lessor's rights or remedies under this Section 15. Section 16. NOTICES. 37 All notices required under the terms and provisions hereof shall be in writing and shall be given by registered mail, facsimile, telex, teletype or any other customary means of written communication, addressed: If to Lessee, at P.O. Box 25604, Albuquerque, New Mexico 87125, Attention: Suzanne Verardo, or at such other address as Lessee shall from time to time designate in writing; If to Lessor, at One Rodney Square, 920 King Street, 1st Floor, Wilmington, DE 19801, fax: 302-888-7544, Attention: Corporate Trust Administration, with copies to Airlease Ltd., 555 California Street, 4th Floor, San Francisco, CA 94104, Fax: 415-765-1817, Attention: Jad Mansour, or at such other address as Lessor or such other Person shall from time to time designate in writing. If to Airlease, at the address set forth in the foregoing paragraph, or to such other Person as Airlease shall from time to time designate in writing. The effective date of any such notice shall be, if sent by mail, five days after mailing or, if sent by telex, facsimile or teletype, the date when such notice is sent or dispatched, and otherwise the date on which it is received by the addressee. Section 17. NET LEASE; LESSEE'S OBLIGATIONS; NO SET-OFF, COUNTERCLAIM, ETC. This is a net lease. Lessee's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including without limitation: (a) any setoff, counterclaim, recoupment, defense or other right which Lessee may have against Lessor; (b) airworthiness, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, the Aircraft, Airframe or any Engine, or any interruption or cessation in the use or possession thereof by Lessee for any reason whatsoever; (c) any insolvency, bankruptcy, reorganization or similar proceedings by or against Lessee or any other Person; (d) any change, waiver, extension, indulgence or other action or omission in respect of any obligation or liability of Lessee or Lessor; (e) any claim that Lessee has or might have against any Person; or (f) any invalidity or unenforceability or disaffirmance of this Lease or any provision hereof. All Rent payable by Lessee shall be paid without notice or demand (except as otherwise expressly provided) and without abatement, suspension, deferment, deduction, diminution or proration by reason of any circumstance or occurrence whatsoever. Lessee hereby waives, to the extent permitted by applicable law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease or any part hereof, or to any abatement, suppression, deferment, diminution, reduction or proration of Rent except in accordance with the express terms hereof. Each payment of Rent made by Lessee shall be final as to Lessor and Lessee. Lessee will not seek to recover all or any part of any such payment of Rent for any reason whatsoever. Nothing in this Section 17 will be construed to extinguish or otherwise limit Lessee's right to institute legal proceedings against Lessor in the event of Lessor's breach of this Agreement. Section 18. COVENANTS OF LESSEE. 38 (a) CERTAIN ASSURANCES. Lessee shall do, execute, acknowledge and deliver or cause to be done, executed, acknowledged and delivered all such further acts, conveyances and assurances as Lessor shall reasonably request for accomplishing the purposes of this Lease. Lessee shall also do or cause to be done, at its own expense, any and all acts and things which may be required under the terms of any law, rule, regulation, agreement, treaty, convention, pact or by any practice, custom, or understanding recognized as having wide application or control involving any jurisdiction in which the Aircraft is being operated, or any and all other acts and things which Lessor may reasonably request and which are necessary or advisable to perfect and preserve the rights of Lessor in and to the Aircraft within any such jurisdiction. (b) FILING AND RECORDATION. Lessee will cause this Lease in respect of the Aircraft to be duly and timely filed and recorded, or filed for recordation, to the extent permitted under the Act or required under any applicable law. (c) FINANCIAL AND OTHER INFORMATION. Lessee shall deliver or cause to be delivered to Lessor promptly after the same are available (and in any event within 90 days) after the end of each of its financial years ending after the date hereof, a copy of its audited financial statements for such financial year, which (i) shall be prepared by independent, certified public accountants in accordance with generally accepted accounting principles and practices in the consistently applied, (ii) shall fairly and accurately present the financial position of Lessee as at the date as of which they were prepared and the results of the operations of Lessee for the period to which they relate and (iii) shall disclose all significant liabilities, actual or contingent, of Lessee. Lessee shall promptly provide Lessor with such financial, operational and other information concerning Lessee and its affairs and the Aircraft as Lessor may from time to time reasonably request in the context of Lessee Documents and the transactions contemplated thereby. (d) EXISTENCE. Lessee will preserve and maintain its corporate existence and much of its rights, privileges, licenses and franchises where failure to maintain such rights and privileges or obtain such licensing or qualification would have a material adverse effect upon Lessee. (e) LEASE TERMINATION AGREEMENT. Upon the expiration or earlier termination of this Lease, Lessee and Lessor will duly execute and deliver a Lease Termination Agreement in the form attached hereto as Exhibit "C". (f) EXPENSES. Each party shall be responsible for its own fees and expenses in connection with the execution, delivery and preparation of this Lease including, without limitation, the fees and expenses of its legal counsel. Section 19. RIGHT TO PERFORM FOR LESSEE. If Lessee fails to make any payment required to be made by it hereunder or fails to perform or comply with any of its agreements contained herein, Lessor may (but shall not be obligated to) make such payment or perform or comply with such agreement, and the amount of such payment and the amount of the expenses of Lessor incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Overdue Interest Rate, shall be deemed Supplemental Rent, payable 39 by Lessee upon demand. No such payment, performance or compliance shall be deemed to cure any default of Lessee hereunder or otherwise relieve Lessee of its obligations with respect thereto. Section 20. MISCELLANEOUS. 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. The prevailing party in any action to enforce its rights hereunder shall be entitled to recover from the nonprevailing party reasonable attorneys fees and costs. No term or provision of this Lease may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. The Lessee irrevocably agrees, by execution and delivery of this Lease, that any legal action or proceeding brought against the Lessee with respect to this Lease or any Lessee Document may be brought and determined in the Supreme Court of the State of New York, New York County, or in the United States District Court for the Southern District of New York, and the Lessee hereby irrevocably accepts with regard to any such action or proceeding, for itself and in respect of its properties, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts. The Lessee further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered airmail, postage prepaid, to the Lessee at its address set forth in Section 16 hereof. Nothing herein shall affect the right of Lessor to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Lessee in any other jurisdiction in which the Lessee may be subject to suit. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORECE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. THIS LEASE SHALL CONSTITUTE AN AGREEMENT OF LEASE, AND NOTHING HEREIN SHALL BE CONSTRUED AS CONVEYING TO LESSEE ANY RIGHT, TITLE OR INTEREST IN OR TO THE AIRCRAFT, AIRFRAME OR ANY ENGINE EXCEPT AS A LESSEE ONLY. THE SECTION AND PARAGRAPH HEADINGS IN THIS LEASE AND THE TABLE OF CONTENTS ARE FOR CONVENIENCE OF REFERENCE ONLY AND SHALL NOT MODIFY, DEFINE, EXPAND OR LIMIT ANY OF THE TERMS 40 OR PROVISIONS HEREOF AND ALL REFERENCES HEREIN TO NUMBERED SECTIONS, UNLESS OTHERWISE INDICATED, ARE TO SECTIONS OF THIS LEASE. THIS LEASE HAS BEEN, AND EACH LEASE SUPPLEMENT AND AMENDMENT HERETO IS INTENDED TO BE, DELIVERED IN THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE IN SUCH STATE BY RESIDENTS THEREOF AND AS IF PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. THIS LEASE AND EACH LEASE SUPPLEMENT AND AMENDMENT HERETO 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. Section 21. LESSOR DEFAULT ETC. Without prejudice to Lessee's rights under applicable law other than Uniform Commercial Code Article 2-A to bring suit or claim for monetary damages or to enforce the terms of this Agreement, Lessee acknowledges and agrees that any statutory default of Lessor or remedy (excluding any right to bring suit or claim for monetary damages) granted to Lessee by reason of Uniform Commercial Code Article 2-A (including any right to revoke acceptance under Section 2-A-517) is not a part of this Lease. Section 22. TRUTH IN LEASING. DURING THE TWELVE MONTHS PRECEDING THE EXECUTION OF THIS LEASE, THE AIRCRAFT WAS MAINTAINED, INSPECTED AND OPERATED PURSUANT TO THE REQUIREMENTS OF THE FEDERAL AVIATION REGULATION PART 121 UPON THE REGISTRATION OF THE AIRCRAFT WITH THE FEDERAL AVIATION ADMINISTRATION. THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER FEDERAL AVIATION REGULATION PART 121 FOR OPERATIONS TO BE CONDUCTED BY THE LESSEE UNDER THIS LEASE EXCEPT AT SUCH TIMES AS THE AIRCRAFT IS SUBLEASED TO A SUBLESSEE HOLDING AN AIR CARRIER OPERATOR CERTIFICATE. NOTWITHSTANDING THE FOREGOING FOR SO LONG AS THE USMS AGREEMENT REMAINS IN EFFECT, THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED BY THE LESSEE UNDER THIS LEASE AND WILL BE UNDER THE OPERATIONAL CONTROL OF THE USMS. AN EXPLANATION OF THE FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE. (This remainder of this page left blank intentionally). 41 LOSANGELES 64752 (2K) IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be duly executed and delivered as of the day and year first above written. FIRST UNION NATIONAL BANK, not in its individual capacity, but solely as Trustee, Lessor By: ---------------------------------------------------- Name: Title: CSI AVIATION SERVICES, INC., Lessee By: ---------------------------------------------------- Name: Title: AIRLEASE LTD. By: ---------------------------------------------------- Name: Title: -Signature Page- [Aircraft Lease Agreement] SCHEDULE 1 AIRCRAFT DESCRIPTION PART A Aircraft Manufacturer, Model and Series: McDonnell Douglas DC-9-Series 82 Manufacturer's Serial Number: 48039 FAA Registration Number: N807US Engine Manufacturer and Model: Pratt & Whitney JT8D-217 Engine Serial Numbers: 708113 and 696370 Auxiliary Power Unit: Model 85-98DCB s/n P117BC Date of Manufacture: 1981 Seating Configuration: 140 passengers WEIGHTS & CAPACITY POUNDS Maximum Ramp Weight 148,000 Maximum Take Off Weight 147,000 Maximum Landing Weight 128,000 Maximum Zero Fuel Weight 118,000 Operating Empty Weight 79,022.6 Fuel Capacity 39, 128 LANDING GEAR NOSE RIGHT MAIN LEFT MAIN Manufacturer 5910447-5047 5930593-5502 5935354-501 Serial Number XC91717 C90340 C89824 Wheels 9550267-6 (12 ply) 5006040-1 (26 ply) 5006040-1 (26 ply) GALLEY EQUIPMENT: MANUFACTURER QTY. Ovens TIA 1 Trolleys N/A 2 Coffee Makers NORDS K09 4 AVIONICS: DESCRIPTION QTY. MANUFACTURER MODEL Stall Warning Computor 2 Sunstrand 965-0449-002 ADC 2 Honeywell HG 280D80 P.A. 1 Collins 346D-2 NAV Companator 1 Dynamic Controls 11170-2 DFGC 2 Honeywell 4034241-971 NAV. SW. Unit 1 Butler National 001122-101 Compass Rock 2 Sperry 614937-10 Walker Beacon 1 Collins 522-2996-011 ADF 1 Collins 5/Y7 Central Aural Warning 1 MDC H05A0035-4 VOR/ILS NAV 2 Collins 5/RV-4 VHF Transceivers 2 Bendix 2070945-4301 VHF Transceiver 1 Collins 618 M-3 TCAS Processor 1 Bendix 066-50000-0108 Transponders 2 Bendix TRA-67A Controller 1 Teledyne R6357-501A Prox Sw. Electronics Unit 1 Eldec 8-336-04 Management Control Unit 1 Hamilton 167-1 Flite Data Acq Unit 1 Hamilton EO742961-9 Anti-Skid Control 1 Hytrol 422-607-1 -2- DME 2 Collins 860E5 Windshear 1 Honeywell 4059845-911 INST Sw. Unit 1 Butler Natl 001048-101 Grd Prox 1 Collins FPC-75 PART B The following Maintenance Publications, Maintenance Records, Documents and Certificates shall be delivered to Lessee on or to prior to the Delivery Date. ITEM - Flight operations manual - Airframe maintenance manual - Engine maintenance manual - IPC - Wiring diagrams - Aircraft flight manual - various component overhaul manuals - Weight and Balance manual - MEL - FMS operation manual - Pilots Handbook -3- SCHEDULE 2 "Airframe Payment Amount" means $150.00 per Flight Hour. "APU Payment Amount" means $7.00 per Flight Hour. "Basic Rent Amount" means $125,000.00 per month for the first year of the Agreement, and $120,000.00 per month in the event the Agreement is extended beyond 30 September 2002. "Engine Payment Amount" means $75.00 per Flight Hour. "Gear Payment Amount" means $10.00 per Flight Hour. EXHIBIT A LEASE SUPPLEMENT THIS LEASE SUPPLEMENT, dated November __, 2001, between FIRST UNION NATIONAL BANK, not in its individual capacity but solely as Trustee ("Lessor"), and CSI AVIATION SERVICES, INC. ("Lessee"). Lessor and Lessee have heretofore entered into that certain Aircraft Lease Agreement, dated as of November 21, 2001 (as at any time amended, modified or supplemented, herein called the "Lease" and the terms defined therein being herein used with the same meanings), which Lease provides in Section 2 for the execution of a Lease Supplement substantially in the form hereof for the purpose of leasing the Aircraft under the Lease after the Delivery Flight in accordance with the terms thereof. The Lease relates, among other matters, to the Airframe and Engines described below, and this Lease Supplement is attached to a counterpart of the Lease for purposes of filing and recordation. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, and pursuant to Section 2 of the Lease, Lessor and Lessee hereby agree as follows: 1. Lessor hereby delivers and leases to Lessee, and Lessee hereby accepts and leases from Lessor, under the Lease, as herein supplemented, the following described McDonnell Douglas DC-9-Series 82 aircraft (the "Delivered Aircraft") which Delivered Aircraft as of the date hereof consists of the following: Airframe: FAA Registration Number N807US, Manufacturer's Serial No. 48039 and manufactured in 1981; and Engines: Two Pratt & Whitney JT8D-217 engines installed thereon bearing Engine Manufacturer's Serial Numbers 708113 and 696370. Each of the Engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 2. The Delivery Date of the Delivered Aircraft and Engines is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. Lessee hereby confirms to Lessor that Lessee has accepted the Delivered Aircraft and Engines for all purposes hereof and of the Lease, including its being airworthy, in accordance with specifications, in good working order and repair and without defect in condition, design, operation or fitness for use, whether or not discoverable by Lessee as of the date hereof. 4. All the provisions of the Lease are hereby incorporated by reference in this Lease Supplement, on and as of the date of this Lease Supplement, to the same extent as if fully set forth herein. 5. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. 6. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. -2- IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed and delivered as of the date and year first above written. FIRST UNION NATIONAL BANK, not in its individual capacity, but solely as Trustee, Lessor By: _________________________ Name: Title: CSI AVIATION SERVICES, INC. Lessee By: _________________________ Name: Title: -Signature Page- [Lease Supplement] K) EXHIBIT B RECEIPT FOR LEASE AIRCRAFT Date: November __, 2001 Time: ________________________ Place: _______________________ Received from _____________________________________________, pursuant to the Lease Agreement, dated as of November 21, 2001 (the "Lease Agreement") among CSI AVIATION SERVICES, INC. ("Lessee"), FIRST UNION NATIONAL BANK, not in its individual capacity but solely as Trustee, and AIRLEASE LTD. the following: One (1) McDonnell Douglas DC-9-Series 82 Aircraft (140) seats Federal Aviation Administration Registry No. N807US Manufacturer's Serial No. 48039 Remaining to Next Overhaul ("Q Check") Hours MSG 3 mx program schedule Cycles 5071 Engine Serial (#1) P708113 Total Hours: 48,810 Total Cycles: 43,258 Cycles remaining to next LLP: 3543 Hours since Last Shop Visit: 6531 (#2) P696370 Total Hours: 44,772 Total Cycles: 39,885 Cycles remaining to next LLP: 19,859 Hours since Last Shop Visit: 188 Total Aircraft Hours at Delivery: [_____] Total Aircraft Cycles at Delivery: [_____] Pounds of Fuel on Board: [_____] [The list of mutually agreed discrepancies referred to in Section 2.5 of the Lease Agreement is attached hereto.] The undersigned is authorized by Lessee to accept delivery of the above designated aircraft pursuant to the aforesaid Agreement. CSI AVIATION SERVICES, INC. By: _________________________ Title: -2- EXHIBIT C LEASE TERMINATION AGREEMENT CSI AVIATION SERVICES, INC. ("Lessee") does hereby terminate the Lease of one (1) McDonnell Douglas DC-9-Series 82 Aircraft, manufacturer's serial number 48039, such termination having been made at ________ at _______ (AM/PM) on the ____ day of __________, 20__, in accordance with the Aircraft Lease Agreement among First Union National Bank, not in its individual capacity but solely as Trustee, Airlease Ltd. and Lessee, dated as of November 21, 2001. Concurrently with the return of the Aircraft in the condition specified in Section 5 of the Lease Agreement, Lessor shall execute and deliver to Lessee a Receipt for Lease Aircraft substantially in the form of Exhibit B to the Lease Agreement. Lessor's execution and delivery of this Agreement and the aforesaid Receipt for Lease Aircraft shall constitute Lessor's agreement that the Aircraft and related records and manuals are in compliance with the Lease Agreement, including without limitation, the provisions of Section 5 thereof, except as specified in such Exhibit B. Nothing herein is intended to affect any indemnification rights or obligations arising under the Lease Agreement. CSI AVIATION SERVICES, INC. By: _________________________ Title: Date: FIRST UNION NATIONAL BANK, not in its individual capacity but solely as Trustee By: _________________________ Title: Date: AIRLEASE LTD. By: _________________________ Title: Date: EXHIBIT D
MONTHLY OPERATING REPORT CSI AVIATION SERVICES, INC. ======================================================================= ========================= ================== ITEM Comments - ----------------------------------------------------------------------- ------------------------- ------------------ GENERAL / Reserve Period Begin and End Date [AIRCRAFT TYPE] ------------- / Effective Date for Below Information / Model [MSN] / Delivery Year / Manufacturer's Serial Number / Manufacturer's Line Number - ----------------------------------------------------------------------- ------------------------- ------------------ AIRFRAME / Airframe Total Time / Airframe Flight Hours during prior Reserve Period / Airframe Flight Cycles during prior Reserve Period / Airframe Total Cycles / Approx. Date of Next C-Check or equivalent / Approx. Date of Next Q-Check or equivalent - ----------------------------------------------------------------------- ------------------------- ------------------ LANDING GEAR / Overhaul Interval (All Gears) / Nose Date of Next Overhaul / Port Main Gear Date of Next Overhaul / Starboard Main Gear Date of Next Overhaul - ----------------------------------------------------------------------- ------------------------- ------------------ AUXILIARY POWER UNIT / Total Time / Hours to next expected shop visit - ----------------------------------------------------------------------- ------------------------- ------------------ WEIGHT / Max Take-Off Weight / Max Landing Weight / Max Zero Fuel Weight / Empty Weight (OWE) / Fuel Capacity (Max Usable) - ----------------------------------------------------------------------- ------------------------- ------------------ ENGINES / Type [ENGINE TYPE] / Serial Numbers [_______] Pos. 1 [_____] Pos. 2 / Total Time Pos. 1 Pos. 2 / Total Cycles Pos. 1 Pos. 2 / Remaining Time (Dkc) in Cycles Pos. 1 Pos. 2 / Current Location Pos. 1 / Time Since Last Overhaul Pos. 1 / EGT Margin Pos. 1 Pos. 2 / Flight Hours during prior Determination Period Pos. 1 Pos. 2 / Cycles during prior Determination Period Pos. 1 Pos. 2 - ----------------------------------------------------------------------- ------------------------- ------------------ INCIDENTS OF DAMAGE OR LOSS - ----------------------------------------------------------------------- ------------------------- ------------------ Comment Date ======================================================================= ========================= ==================
-2- EXHIBIT E FORM OF IRREVOCABLE LETTER OF CREDIT - -------------------------------------------------------------------------------- IRREVOCABLE STANDBY LETTER OF CREDIT NO. PLACE AND DATE OF ISSUE: ___________ - -------------------------------------------------------------------------------- BENEFICIARY: APPLICANT: [LESSOR] CSI Aviation Services [address] - -------------------------------------------------------------------------------- EXPIRY DATE/PLACE: AVAILABLE AT/BY: Expires on the second anniversary of the date Our office only by presentation of issue ofthis credit. For presentation at of document(s) required and your our office. draft(s) drawn at sight. - -------------------------------------------------------------------------------- AMOUNT OF CREDIT: Not to exceed, in the aggregate US dollars 250,000 (two hundred fifty thousand US dollars) - -------------------------------------------------------------------------------- RE: ONE MCDONNELL DOUGLAS DC-9-SERIES 82 AIRCRAFT MANUFACTURER'S SERIAL NUMBER 48039 - -------------------------------------------------------------------------------- Gentlemen, At the request and for the account of the above named applicant we hereby establish our irrevocable letter of credit in your favour which is available as indicated above against presentation of your draft(s) drawn on [INSERT NAME OF BANK] when accompanied by the following documents: DOCUMENTS REQUIRED A dated statement bearing an original signature purporting to be an authorised signor for [Lessor] (indicating the name and title/capacity of the signor), reading as follows: "[We hereby certify that the amount of US$_________ drawn under [INSERT NAME OF BANK] Letter of Credit No. _________, as evidenced by our draft accompanying this statement, is payable to us because an event of default under and as defined in a certain aircraft lease agreement dated as of November 21, 2001 among CSI Aviation Services, Airlease Ltd. and ourselves relating to one McDonnell Douglas DC-9-Series 82 Aircraft manufacturers serial number 48039 has occurred and is continuing.] OR [We hereby certify that the amount of US$________ drawn under [INSERT NAME OF BANK] Letter of Credit No. _________, as evidenced by our draft accompanying this statement, is payable to us because said Letter of Credit has not been replaced or extended in accordance with the terms of a certain aircraft lease agreement dated as of November 21, 2001 between CSI Aviation Services, Airlease Ltd. and ourselves relating to one McDonnell Douglas DC-9-Series 82 Aircraft manufacturers serial number 48039.]" OTHER CONDITIONS Partial drawings are permitted. Any dispute(s) whatsoever that may arise between the above named applicant and yourselves shall be settled as a matter completely separate from and outside of this irrevocable standby Letter of Credit. We shall honour your claim if presented to [INSERT NAME AND ADDRESS OF BANK] (the "Drawing Office") by latest on the second anniversary of the date of issue of this credit which is the expiry date of this instrument. The original of this Letter of Credit must be returned to us with any drawing(s) hereunder for our endorsement of any payment effected. We undertake to return said original Letter of Credit to you (unless fully utilised or expired) together with our advice of settlement. This Letter of Credit sets forth in full our undertaking, and such undertaking shall not in any way be modified, amended, amplified or limited by reference to any document, instrument or agreement referred to herein except only the certificate and sight drafts referred to herein and any such reference shall not be deemed to incorporate herein by reference any document, instrument or agreement except such certificates and sight drafts. Each draft drawn hereunder must be marked: "Drawn under [INSERT NAME OF BANK] Letter of Credit No. (specify L/C No.)". Unless otherwise expressly stated herein, this Letter of Credit is subject to the uniform customs and practice for documentary credits, 1998 revision, ICC publication No. 500 and the laws of the State of New York. ENGAGEMENT We hereby agree with you that drafts drawn under and in compliance with the terms of this credit will be duly honoured upon presentation and delivery of the documents as specified herein within three (3) business days of such presentation and delivery if presented to the Drawing Office on or before the expiry date indicated above. This credit is transferable to your successors and assigns by (i) giving us written notice stating this credit has been transferred and (ii) delivering the original credit to such successor or assign. Very truly yours, - ----------------------- ----------------------- Authorised Signature Authorised Signature -2- EXHIBIT F FORM OF OPINION November [ ], 2001 Airlease Ltd. First Union National Bank Re: ONE MCDONNELL DOUGLAS DC-9-SERIES 82, MSN 48039 ----------------------------------------------- Gentlemen: We have acted as counsel for CSI Aviation Services, Inc., a corporation organized and existing under the laws of New Mexico (the "Lessee"), in connection with the execution and delivery of the following documents (collectively, the "Documents") together with all exhibits and schedules thereto: (a) the Aircraft Lease Agreement, dated as of November 21, 2001 (the "Agreement") among First Union National Bank (the "Lessor"), the Lessee and Airlease Ltd. ("Airlease"); and (b) the Lease Supplement dated November [ ], 2001, between Lessor and Lessee; and (c) the USMS Agreement, dated as of October 2, 2001, between the Lessee and The United States Marshall Service ("USMS"); and (d) the Maintenance Agreement dated November 21, 2001, between Lessee and Spirit Airlines. This Opinion is delivered to you pursuant to Section 2.3 of the Agreement. Terms used herein which are defined in the Agreement shall have the respective meanings set forth in the Agreement, unless otherwise defined herein. In connection with this opinion, we have examined the originals, or certified, conformed or reproduction copies, of all records, agreements, instruments and documents as we have deemed relevant or necessary as the basis for the opinions hereinafter expressed. In stating our opinion, we have assumed the genuineness of all signatures on original or certified copies, the authenticity of documents submitted to us as originals and the conformity to original or certified copies of all copies submitted to us as certified or reproduction copies. We have also assumed, for purposes of the opinions expressed herein, that the parties to the Documents other than the Lessee have the corporate power and authority to enter into and perform each of the Documents and that each of the Documents has been duly authorized, executed and delivered by each such other party. Based upon the foregoing, and subject to the limitations set forth herein, we are of the opinion that: 1. The Lessee (i) is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its incorporation, (ii) has the power and authority to own its property and assets and to transact the business in which it is engaged and (iii) is duly qualified as a foreign corporation and in good standing in each jurisdiction where the ownership, leasing or operation of property or the conduct of its business requires such qualification. 2. The Lessee has the corporate power to execute, deliver and perform the terms and provisions of each of the Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of each of such Documents. The Lessee has duly executed and delivered each of the Documents to which it is a party, and each of such Documents constitutes its legal, valid and binding obligation enforceable in accordance with its terms except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and by general equitable principles (regardless of whether the issue of enforceability is considered in proceeding in equity or at law). 3. Neither the execution, delivery or performance by the Lessee of the Documents to which it is a party, nor compliance by it with the terms and provisions thereof, (i) will contravene any provision of any law, statute, rule or regulation or, to the best of our knowledge after due inquiry, any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of the Lessee pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement, loan agreement or any other agreement, contract or instrument or which we are aware to which the Lessee is a party or by which it or any of its property of assets is bound or to which it may be subject or (iii) will violate any provision of the Certificate of Incorporation or By-Laws of Lessee. 4. To the best of our knowledge after due inquiry, there are no actions, suits, or proceedings pending or threatened (i) with respect to any Document or (ii) that are reasonably likely to materially and adversely affect the operations, business, property, assets, condition (financial or otherwise) or prospects of the Lessee. 5. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except as have been obtained or made prior to the Delivery Date), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (i) the -2- execution, delivery and performance of any Document to which the Lessee is a party or (ii) the legality, validity, binding effect or enforceability of any such Document. 6. The choice of New York law as the governing law of the Agreement is a valid choice of law. 7. The consent by the Lessee in Section 20 of the Agreement to the jurisdiction of courts sitting in the State of New York is a valid consent to the jurisdiction of such courts. 8. It is not necessary under the laws of the jurisdiction of incorporation of the Lessee, (i) in order to enable the Lessor and Airlease or either of them to enforce their respective rights under the Documents or (ii) by reason of the execution, delivery or performance of the Documents, that either of them should be licensed, qualified or entitled to carry on business in any such jurisdiction. 9. Neither the Lessor nor Airlease is or will be resident, domiciled, carrying on business or subject to taxation in the jurisdiction of incorporation of the Lessee by reason only of the execution, delivery, performance or enforcement of the Documents. The opinions concerning the enforceability of the Documents means that the Documents constitute an effective contract under applicable law, that the Documents are not invalid in their entirety because of a specific statutory prohibition or public policy and are not subject in their entirety to a contractual defense and, subject to the last sentence of this paragraph, some remedy is available if the Lessee is in material default under the Documents. This opinion does not mean that any particular remedy is available upon a material default, or every provision of the Documents will be upheld or enforced in any or each circumstance by a court. Furthermore, the validity, binding effect and enforceability of the Documents may be limited or otherwise affected by a bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar statutes, rules, regulations or other laws affecting the enforcement of creditors' rights and remedies generally and the unavailability of, or limitation on the availability of, a particular right or remedy (whether in a proceeding in equity or at law) because of an equitable principle or requirement as to commercial reasonableness, conscionability or good faith. We do not purport to be experts on, and do not purport to be generally familiar with or qualified to express legal opinions based on, any law other than the laws of the State of New Mexico and accordingly express no opinion herein based upon any law other than the laws of the State of New Mexico or the federal laws of the United States of America. We note that the Agreement provides that is shall be governed by the laws of the State of New York. We have assumed with your permission for purposes of this opinion letter that the laws of the State of New York are the same as the laws of the State of New Mexico. The opinions expressed herein are solely for your benefit and may not be relied upon in any manner or for any purpose by any other person. Very truly yours, -3- TABLE OF CONTENTS PAGE ERROR! NO TABLE OF CONTENTS ENTRIES FOUND. SCHEDULE 1 AIRCRAFT DESCRIPTION SCHEDULE 2 EXHIBIT A Lease Supplement EXHIBIT B Form of Receipt for Lease Aircraft EXHIBIT C Lease Termination Agreement EXHIBIT D Form of Operating Report EXHIBIT E Form of Letter of Credit EXHIBIT F Form of Opinion -----END PRIVACY-ENHANCED MESSAGE-----