-----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, AyzdZwhqtmRni1ye56aEY4C1h68btMPyrj6wf5+9U5JoGAOG7DGAGHn3nPz5O+BB tpoPx+v1kirl48Lv495WNA== 0001047469-99-012797.txt : 19990402 0001047469-99-012797.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012797 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INCOME FUND I-C CENTRAL INDEX KEY: 0000868679 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043077437 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20031 FILM NUMBER: 99581462 BUSINESS ADDRESS: STREET 1: 98 N WASHINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 BUSINESS PHONE: 6178545800 MAIL ADDRESS: STREET 1: 98 N WASHINGTON STREET CITY: BOSTON STATE: MA ZIP: 02114 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-20031 ------------------------ AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-3077437 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 88 BROAD STREET, SIXTH FLOOR, BOSTON, MA 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 854-5800 Securities registered pursuant to Section 12(b) of the Act NONE ------------------------ NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED ---------------------------------------- --------------------------------- Securities registered pursuant to Section 12(g) of the Act: 796,161 UNITS REPRESENTING LIMITED PARTNERSHIP INTEREST (Title of class) (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / State the aggregate market value of the voting stock held by nonaffiliates of the registrant. Not applicable. Securities are nonvoting for this purpose. Refer to Item 12 for further information. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to security holders for the year ended December 31, 1998 (Part I and II) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP FORM 10-K TABLE OF CONTENTS
PAGE --------- PART I Item 1. Business...................................................................................... 3 Item 2. Properties.................................................................................... 5 Item 3. Legal Proceedings............................................................................. 5 Item 4. Submission of Matters to a Vote of Security Holders........................................... 5 PART II Item 5. Market for the Partnership's Securities and Related Security Holder Matters................... 6 Item 6. Selected Financial Data....................................................................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 8 Item 8. Financial Statements and Supplementary Data................................................... 8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 8 PART III Item 10. Directors and Executive Officers of the Partnership........................................... 9 Item 11. Executive Compensation........................................................................ 11 Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 11 Item 13. Certain Relationships and Related Transactions................................................ 12 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 13-14
2 PART I ITEM 1. BUSINESS. (a) General Development of Business AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership, (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on March 1, 1991 for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Partners' capital initially consisted of contributions of $1,000 from the General Partner (AFG Leasing VI Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On May 31, 1991, the Partnership issued 803,454.56 units of limited partnership interest (the "Units") to 909 investors. Included in the 803,454.56 units are 7,293.56 bonus units. The Partnership has one General Partner, AFG Leasing VI Incorporated, a Massachusetts corporation formed in 1990 and an affiliate of Equis Financial Group Limited Partnership (formerly known as American Finance Group), a Massachusetts limited partnership ("EFG" or the "Manager"). The General Partner is not required to make any other capital contributions except as may be required under the Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and Certificate of Limited Partnership (the "Restated Agreement, as amended"). (b) Financial Information About Industry Segments The Partnership is engaged in only one industry segment: the business of acquiring capital equipment and leasing the equipment to creditworthy lessees on a full payout or operating lease basis. Full payout leases are those in which aggregate undiscounted, noncancellable rents equal or exceed the acquisition cost of the leased equipment. Operating leases are those in which the aggregate undiscounted, noncancellable rental payments are less than the acquisition cost of the leased equipment. Industry segment data is not applicable. (c) Narrative Description of Business The Partnership was organized to acquire a diversified portfolio of capital equipment subject to various full payout and operating leases and to lease the equipment to third parties as income-producing investments. More specifically, the Partnership's primary investment objectives were to acquire and lease equipment that would: 1. Generate quarterly cash distributions; 2. Preserve and protect Partnership capital; and 3. Maintain substantial residual value for ultimate sale. The Partnership has the additional objective of providing certain federal income tax benefits. The Closing Date of the Offering of Units of the Partnership was May 31, 1991. Significant operations commenced coincident with the Partnership's initial purchase of equipment and the associated lease commitments on May 31, 1991. The acquisition of the equipment and its associated leases is described in Note 3 to the financial statements included in Item 14, herein. The Restated Agreement, as amended, provides that the Partnership will terminate no later than December 31, 2002. However, the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of which could significantly alter the nature of the Partnership's organization and its future business operations. See Note 8 to the accompanying financial statements. The Partnership has no employees; however, it is managed pursuant to a Management Agreement with EFG or one of its affiliates. The Manager's role, among other things, is to (i) evaluate, select, negotiate, and consummate the acquisition of equipment, (ii) manage the leasing, re-leasing, financing, and refinancing of equipment, and (iii) arrange the resale of equipment. The Manager is compensated for 3 such services as provided for in the Restated Agreement, as amended, described in Item 13 herein, and in Note 5 to the financial statements included in Item 14, herein. The Partnership's investment in equipment is, and will continue to be, subject to various risks, including physical deterioration, technological obsolescence and defaults by lessees. A principal business risk of owning and leasing equipment is the possibility that aggregate lease revenues and equipment sale proceeds will be insufficient to provide an acceptable rate of return on invested capital after payment of all debt service costs and operating expenses. In addition, the leasing industry is very competitive. The Partnership is subject to considerable competition when equipment is re-leased or sold at the expiration of primary lease terms. The Partnership must compete with lease programs offered directly by manufacturers and other equipment leasing companies, including limited partnerships and trusts organized and managed similarly to the Partnership, and including other EFG-sponsored partnerships and trusts, which may seek to re-lease or sell equipment within their own portfolios to the same customers as the Partnership. Many competitors have greater financial resources and more experience than the Partnership, the General Partner and the Manager. In addition, default by a lessee under a lease may cause equipment to be returned to the Partnership at a time when the General Partner or the Manager is unable to arrange for the re-lease or sale of such equipment. This could result in the loss of anticipated revenue. Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1998, 1997 and 1996 is incorporated herein by reference to Note 2 to the financial statements in the 1998 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the Securities and Exchange Commission. EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Manager or Advisor to the Partnership and several other direct-participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President, Chief Executive Officer and sole Director. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle established Equis Corporation and GDE LP in December 1994 for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym to a third party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Partnership and the Other Investment Programs and to continue managing all assets owned by the Partnership and the Other Investment Programs. (d) Financial Information About Foreign and Domestic Operations and Export Sales Not applicable. 4 ITEM 2. PROPERTIES. Incorporated herein by reference to Note 3 to the financial statements in the 1998 Annual Report. ITEM 3. LEGAL PROCEEDINGS. Incorporated herein by reference to Note 8 to the financial statements in the 1998 Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 5 PART II ITEM 5. MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER MATTERS. (a) Market Information There is no public market for the resale of the Units and it is not anticipated that a public market for resale of the Units will develop. (b) Approximate Number of Security Holders At December 31, 1998, there were 863 record holders in the Partnership. (c) Dividend History and Restrictions Pursuant to Article VI of the Restated Agreement, as amended, the amount of cash distributions to be declared and paid to the Partners is determined on a quarterly basis. Each quarter's distribution may vary in amount and is made 95% to the Limited Partners and 5% to the General Partner. Generally, cash distributions are paid within 30 days after the completion of each calendar quarter. Distributions in 1998 and 1997 were as follows:
GENERAL LIMITED TOTAL PARTNER PARTNERS ------------ --------- ------------ Total 1998 distributions................................................... $ 634,306 $ 31,716 $ 602,590 Total 1997 distributions................................................... 792,883 39,644 753,239 ------------ --------- ------------ Total................................................................ $ 1,427,189 $ 71,360 $ 1,355,829 ------------ --------- ------------ ------------ --------- ------------
Distributions payable were $158,577 at both December 31, 1998 and 1997. There are no formal restrictions under the Restated Agreement, as amended, that materially limit the Partnership's ability to pay cash distributions, except that the General Partner may suspend or limit cash distributions to ensure that the Partnership maintains sufficient working capital reserves to cover, among other things, operating costs and potential expenditures, such as refurbishment costs to remarket equipment upon lease expiration. Liquidity is especially important as the Partnership matures and sells equipment, because the remaining equipment base consists of fewer revenue-producing assets that are available to cover prospective cash disbursements. Insufficient liquidity could inhibit the Partnership's ability to sustain its operations or maximize the realization of proceeds from remarketing its remaining assets. In particular, the Partnership must contemplate the potential liquidity risks associated with its investment in commercial jet aircraft. The management and remarketing of aircraft can involve, among other things, significant costs and lengthy remarketing initiatives. Although the Partnership's lessees are required to maintain the aircraft during the period of lease contract, repair, maintenance, and/or refurbishment costs at lease expiration can be substantial. For example, an aircraft that is returned to the Partnership meeting minimum airworthiness standards, such as flight hours or engine cycles, nonetheless may require heavy maintenance in order to bring its engines, airframe and other hardware up to standards that will permit its prospective use in commercial air transportation. Individually, these repairs can cost in excess of $1 million and, collectively, they could require the disbursement of several million dollars, depending upon the extent of refurbishment. In addition, the Partnership's equipment portfolio includes an interest in three Stage 2 aircraft having scheduled lease expiration dates of December 31, 1999. These aircraft are prohibited from operating in the United States after December 31, 1999 unless they are retro-fitted with hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation Administration. The cost to hush-kit an aircraft, such as the Partnership's Boeing 737s, can approach $2 million. Although the Partnership is not required to retro-fit its aircraft with hush-kits, insufficient liquidity could jeopardize the re-marketing of these aircraft and risk their disposal at a depressed value at a time when a better economic return would be realized 6 from refurbishing the aircraft and re-leasing them to another user. Collectively, the aggregation of the Partnership's potential liquidity needs related to aircraft and other working capital requirements could be significant. Accordingly, the General Partner has maintained significant cash reserves within the Partnership in order to minimize the risk of a liquidity shortage, particularly in connection with the Partnership's aircraft interests. Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit described in Note 8 to the accompanying financial statements. A preliminary settlement agreement will allow the Partnership to invest in new equipment or other activities, subject to certain limitations, effective March 22, 1999. To the extent that the Partnership continues to own aircraft investments that could require capital reserves, the General Partner does not anticipate that the Partnership will invest in new assets, regardless of its authority to do so. Until the Class Action Lawsuit is adjudicated, the General Partner does not expect that the level of future quarterly cash distributions paid by the Partnership will be increased above amounts paid in the fourth quarter of 1998. In addition, the proposed settlement, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. See Note 8 to the accompanying financial statements. Cash distributions consist of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings. "Distributable Cash From Operations" means the net cash provided by the Partnership's normal operations after general expenses and current liabilities of the Partnership are paid, reduced by any reserves for working capital and contingent liabilities to be funded from such cash, to the extent deemed reasonable by the General Partner, and increased by any portion of such reserves deemed by the General Partner not to be required for Partnership operations and reduced by all accrued and unpaid Equipment Management Fees and, after Payout, further reduced by all accrued and unpaid Subordinated Remarketing Fees. Distributable Cash From Operations does not include any Distributable Cash From Sales or Refinancings. "Distributable Cash From Sales or Refinancings" means Cash From Sales or Refinancings as reduced by (i)(a) amounts realized from any loss or destruction of equipment which the General Partner determines shall be reinvested in similar equipment for the remainder of the original lease term of the lost or destroyed equipment, or in isolated instances, in other equipment, if the General Partner determines that investment of such proceeds will significantly improve the diversity of the Partnership's equipment portfolio, and subject in either case to satisfaction of all existing indebtedness secured by such equipment to the extent deemed necessary or appropriate by the General Partner, or (b) the proceeds from the sale of an interest in equipment pursuant to any agreement governing a joint venture which the General Partner determines will be invested in additional equipment or interests in equipment and which ultimately are so reinvested and (ii) any accrued and unpaid Equipment Management Fees and, after Payout, any accrued and unpaid Subordinated Remarketing Fees. "Cash From Sales or Refinancings" means cash received by the Partnership from sale or refinancing transactions, as reduced by (i)(a) all debts and liabilities of the Partnership required to be paid as a result of sale or refinancing transactions, whether or not then due and payable (including any liabilities on an item of equipment sold which are not assumed by the buyer and any remarketing fees required to be paid to persons not affiliated with the General Partner, but not including any Subordinated Remarketing Fees whether or not then due and payable) and (b) general expenses and current liabilities of the Partnership (other than any portion of the Equipment Management Fee which is required to be accrued and the Subordinated Remarketing Fee) and (c) any reserves for working capital and contingent liabilities funded from such cash to the extent deemed reasonable by the General Partner and (ii) increased by any portion of such reserves deemed by the General Partner not to be required for Partnership operations. In the event the Partnership accepts a note in connection with any sale or refinancing transaction, all payments subsequently received in cash by the Partnership with respect to such note shall be included in Cash From 7 Sales or Refinancings, regardless of the treatment of such payments by the Partnership for tax or accounting purposes. If the Partnership receives purchase money obligations in payment for equipment sold, which are secured by liens on such equipment, the amount of such obligations shall not be included in Cash From Sales or Refinancings until the obligations are fully satisfied. "Payout" is defined as the first time when the aggregate amount of all distributions to the Limited Partners of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings equals the aggregate amount of the Limited Partners' original capital contributions plus a cumulative annual distribution of 11% (compounded quarterly and calculated beginning with the last day of the month of the Partnership's Closing Date) on their aggregate unreturned capital contributions. For purposes of this definition, capital contributions shall be deemed to have been returned only to the extent that distributions of cash to the Limited Partners exceed the amount required to satisfy the cumulative annual distribution of 11% (compounded quarterly) on the Limited Partners' aggregate unreturned capital contributions, such calculation to be based on the aggregate unreturned capital contributions outstanding on the first day of each fiscal quarter. ITEM 6. SELECTED FINANCIAL DATA. Incorporated herein by reference to the section entitled "Selected Financial Data" in the 1998 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1998 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated herein by reference to the financial statements and supplementary data included in the 1998 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP. (a-b) Identification of Directors and Executive Officers The Partnership has no Directors or Officers. As indicated in Item 1 of this report, AFG Leasing VI Incorporated is the sole General Partner of the Partnership. Under the Restated Agreement, as amended, the General Partner is solely responsible for the operation of the Partnership's properties. The Limited Partners have no right to participate in the control of the Partnership's general operations, but they do have certain voting rights, as described in Item 12 herein. The names, titles and ages of the Directors and Executive Officers of the General Partner as of March 15, 1999 are as follows: DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (SEE ITEM 13)
NAME TITLE AGE TERM - ------------------------------------ --------------------------------------------- --- --------------------- Geoffrey A. MacDonald Chairman and a member of the Executive Until a successor is Committee of EFG and President and a Director duly elected and of the General Partner 50 qualified Gary D. Engle President and Chief Executive Officer and member of the Executive Committee of EFG 50 Gary M. Romano Executive Vice President and Chief Operating Officer of EFG and Clerk of the General Partner 39 James A. Coyne Executive Vice President of EFG 38 Michael J. Butterfield Senior Vice President, Finance and Treasurer of EFG and Treasurer of the General Partner 39 Sandra L. Simonsen Senior Vice President, Information Systems of EFG 48 Gail D. Ofgant Senior Vice President, Lease Operations of EFG 33
(c) Identification of Certain Significant Persons None. (d) Family Relationship No family relationship exists among any of the foregoing Partners, Directors or Executive Officers. (e) Business Experience Mr. MacDonald, age 50, is a co-founder, Chairman and a member of the Executive Committee of EFG and President and a Director of the General Partner. Mr. MacDonald was also a co-founder, Director, and Senior Vice President of EFG's predecessor corporation from 1980 to 1988. Mr. MacDonald is President of American Finance Group Securities Corp. and a limited partner in Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC"). Prior to co-founding 9 EFG's predecessors, Mr. MacDonald held various executive and management positions in the leasing and pharmaceutical industries. Mr. MacDonald holds a M.B.A. from Boston College and a B.A. degree from the University of Massachusetts (Amherst). Mr. Engle, age 50, is President and Chief Executive Officer of EFG and sole shareholder and Director of its general partner, Equis Corporation and a member of the Executive Committee of EFG and President of AFG Realty Corporation. Mr. Engle joined EFG in 1990 as Executive Vice President and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle is Vice President and a Director of certain of EFG's subsidiaries and affiliates, a limited partner in AALP and ONC and controls the general partners of AALP and ONC. Mr. Engle is also Chairman, Chief Executive Officer, and a member of the Board of Directors of Semele Group, Inc. ("Semele"). From 1987 to 1990, Mr. Engle was a principal and co-founder of Cobb Partners Development, Inc., a real estate and mortgage banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and Chief Financial Officer of Arvida Disney Company, a large-scale community development company owned by Walt Disney Company. Prior to 1980, Mr. Engle served in various management consulting and institutional brokerage capacities. Mr. Engle has a MBA from Harvard University and a BS degree from the University of Massachusetts (Amherst). Mr. Romano, age 39, became Executive Vice President and Chief Operating Officer of EFG, and Secretary of Equis Corporation in 1996 and is Secretary or Clerk of several of EFG's subsidiaries and affiliates. Mr. Romano joined EFG in November 1989, became Vice President and Controller in April 1993 and Chief Financial Officer in April 1995. Mr. Romano assumed his current position in April 1996. Mr. Romano is also Vice President and Chief Financial Officer of Semele. Prior to joining EFG, Mr. Romano was Assistant Controller for a privately held real estate development and mortgage origination company that he joined in 1987. Previously, Mr. Romano was an Audit Manager at Ernst & Whinney (now Ernst & Young LLP), where he was employed from 1982 to 1986. Mr. Romano is a Certified Public Accountant and holds a B.S. degree from Boston College. Mr. Coyne, age 38, is Executive Vice President, Capital Markets of EFG and President, Chief Operating Officer and a member of the Board of Directors of Semele. Mr. Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG in November 1994. In September 1997, Mr. Coyne was appointed Executive Vice President of EFG. Mr. Coyne is a limited partner in AALP and ONC. From May 1993 through November 1994, he was employed by the Raymond Company, a private investment firm, where he was responsible for financing corporate and real estate acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real estate investment company and an equipment leasing company. Prior to 1985, he was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He has a BS in Business Administration from John Carroll University, a Masters Degree in Accounting from Case Western Reserve University and is a Certified Public Accountant. Mr. Butterfield, age 39, is Senior Vice President, Finance and Treasurer of EFG and certain of its affiliates and is Treasurer of the General Partner and Semele. Mr. Butterfield joined EFG in June 1992, became Vice President, Finance and Treasurer of EFG and certain of its affiliates in April 1996 and was promoted to Senior Vice President, Finance and Treasurer of EFG and certain of its affiliates in July 1998. Prior to joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was employed in public accounting and industry positions in New Zealand and London (UK) prior to coming to the United States in 1987. Mr. Butterfield attained his Associate Chartered Accountant (A.C.A.) professional qualification in New Zealand and has completed his CPA requirements in the United States. He holds a Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand. Ms. Simonsen, age 48, joined EFG in February 1990 and was promoted to Senior Vice President, Information Systems of EFG in April 1996. Prior to joining EFG, Ms. Simonsen was Vice President, Information Systems with Investors Mortgage Insurance Company, which she joined in 1973. 10 Ms. Simonsen provided systems consulting for a subsidiary of American International Group and authored a software program published by IBM. Ms. Simonsen holds a BA degree from Wilson College. Ms. Ofgant, age 33, is Senior Vice President, Lease Operations of EFG and certain of its affiliates. Ms. Ofgant joined EFG in July 1989, was promoted to Manager Lease Operations in April 1994, and became Vice President of Lease Operations in April 1996. In July 1998, Ms. Ofgant was promoted to Senior Vice President of Lease Operations. Prior to joining EFG, Ms. Ofgant was employed by Security Pacific National Trust Company. Ms. Ofgant holds a BS degree in Finance from Providence College. (f) Involvement in Certain Legal Proceedings None. (g) Promoters and Control Persons See Item 10 (a-b) above. ITEM 11. EXECUTIVE COMPENSATION. (a) Cash Compensation Currently, the Partnership has no employees. However, under the terms of the Restated Agreement, as amended, the Partnership is obligated to pay all costs of personnel employed full or part-time by the Partnership, including officers or employees of the General Partner or its Affiliates. There is no plan at the present time to make any officers or employees of the General Partner or its Affiliates employees of the Partnership. The Partnership has not paid and does not propose to pay any options, warrants or rights to the officers or employees of the General Partner or its Affiliates. (b) Compensation Pursuant to Plans None. (c) Other Compensation Although the Partnership has no employees, as discussed in Item 11(a), pursuant to Section 9.4(c) of the Restated Agreement, as amended, the Partnership incurs a monthly charge for personnel costs of the Manager for persons engaged in providing administrative services to the Partnership. A description of the remuneration paid by the Partnership to the Manager for such services is included in Item 13, herein and in Note 5 to the financial statements included in Item 14, herein. (d) Compensation of Directors None. (e) Termination of Employment and Change of Control Arrangement There exists no remuneration plan or arrangement with the General Partner or its Affiliates which results or may result from their resignation, retirement or any other termination. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. By virtue of its organization as a limited partnership, the Partnership has outstanding no securities possessing traditional voting rights. However, as provided in Section 10.2(a) of the Restated Agreement, as amended (subject to Sections 10.2(b) and 10.3), a majority interest of the Limited Partners has voting rights with respect to: 1. Amendment of the Restated Agreement; 2. Termination of the Partnership; 11 3. Removal of the General Partner; and 4. Approval or disapproval of the sale of all, or substantially all, of the assets of the Partnership (except in the orderly liquidation of the Partnership upon its termination and dissolution). As of March 1, 1999, the following person or group owns beneficially more than 5% of the Partnership's 803,454.56 outstanding Units:
NAME AND AMOUNT PERCENT TITLE ADDRESS OF OF BENEFICIAL OF OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS - ---------------------- ------------------------------------------- ------------------ ----------- Units Representing Old North Capital Limited Partnership Limited Partnership 88 Broad Street 124,065.23 Units 15.44% Interests Boston, MA 02110
Messrs. Engle, MacDonald and Coyne have ownership interests in ONC. The general partner of ONC is controlled by Gary Engle. See Items 10 and 13 of this report. The ownership and organization of EFG is described in Item 1 of this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The General Partner of the Partnership is AFG Leasing VI Incorporated, an affiliate of EFG. (a) Transactions with Management and Others All operating expenses incurred by the Partnership are paid by EFG on behalf of the Partnership and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years ended December 31, 1998, 1997 and 1996, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
1998 1997 1996 ---------- ---------- ---------- Equipment management fees.................................................... $ 113,260 $ 166,417 $ 140,227 Administrative charges....................................................... 68,052 63,870 40,295 Reimbursable operating expenses due to third parties......................... 386,856 136,800 151,051 ---------- ---------- ---------- Total.................................................................. $ 586,168 $ 367,087 $ 331,573 ---------- ---------- ---------- ---------- ---------- ----------
As provided under the terms of the Management Agreement, EFG is compensated for its services to the Partnership. Such services include acquisition and management of equipment. For acquisition services, EFG is compensated by an amount equal to 2.23% of Equipment Base Price paid by the Partnership. For management services, EFG is compensated by an amount equal to 5% of gross operating lease rental revenue and 2% of gross full payout lease rental revenue received by the Partnership. Both acquisition and management fees are subject to certain limitations defined in the Management Agreement. Administrative charges represent amounts owed to EFG, pursuant to Section 9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership which are reimbursed to EFG at actual cost. All equipment was purchased from EFG, one of its affiliates or from third-party sellers. The Partnership's acquisition cost was determined by the method described in Note 2 to the financial statements included in Item 14, herein. During 1997, the Partnership and certain affiliated investment programs sponsored by EFG exchanged their ownership interests in certain vessels for aggregate consideration of $11,565,375. The Partnership's share of such consideration was $1,203,062 consisting of common stock in Semele valued at 12 $313,146, a note receivable from Semele of $459,729 and cash of $430,187. For further discussion, see Note 4, "Investment Securities--Affiliate / Note Receivable--Affiliate to the financial statements included in Item 14 herein and Item 10. All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 1998, the Partnership was owed $50,767 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 1999. During 1996, the Partnership received payment in full from EFG of a note and accrued interest thereon which was beneficially assigned to the Partnership in 1994 by a former affiliate of AFG as partial consideration for the exchange of certain intermodal cargo containers. Certain affiliates of the General Partner own Units in the Partnership as follows:
NUMBER OF PERCENT OF TOTAL AFFILIATE UNITS OWNED OUTSTANDING UNITS - ------------------------------------------------------------- ------------ ------------------- Atlantic Acquisition Limited Partnership..................... 16,536 2.06% Old North Capital Limited Partnership........................ 124,065.23 15.44%
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC") are both Massachusetts Limited Partnerships formed in 1995 and affiliates of EFG. The general partners of AALP and ONC are controlled by Gary Engle. In addition, the limited partnership interests of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and CEO of Semele. (b) Certain Business Relationships None. (c) Indebtedness of Management to the Partnership None. (d) Transactions with Promoters See Item 13(a) above. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: (1) Financial Statements: Report of Independent Auditors................................................. * Statement of Financial Position at December 31, 1998 and 1997.................. * Statement of Operations for the years ended December 31, 1998, 1997 and 1996... * Statement of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996............................................................ * Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996... * Notes to the Financial Statements.............................................. * (2) Financial Statement Schedules: None required. (3) Exhibits: Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601 of Regulation S-K, are not applicable.
EXHIBIT NUMBER - ------------- 4 Amended and Restated Agreement and Certificate of Limited Partnership included as Exhibit A to the Prospectus, which is included in Registration Statement on Form S-1 (No. 33-35148). 13 The 1998 Annual Report to security holders, a copy of which is furnished for the information of the Securities and Exchange Commission. Such Report, except for those portions thereof which are incorporated herein by reference, is not deemed "filed" with the Commission. 23 Consent of Independent Auditors. 99(a) Lease agreement with Gearbulk Shipowning Ltd. was filed in the Registrant's Annual Report on Form10-K for the year ended December 31, 1995 as Exhibit 99 (c) and is incorporated herein by reference. 99(b) Lease agreement with General Motors Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (d) and is incorporated herein by reference. 99(c) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (e) and is incorporated herein by reference.
- ------------------------ * Incorporated herein by reference to the appropriate portion of the 1998 Annual Report to security holders for the year ended December 31, 1998 (see Part II). 14
EXHIBIT NUMBER - ------------- 99(d) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (f) and is incorporated herein by reference. 99(e) Lease agreement with Southwest Airlines, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996 as Exhibit 99 (g) and is incorporated herein by reference. 99(f) Lease agreement with Finnair OY was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as Exhibit 99 (h) and is incorporated herein by reference. 99(g) Lease agreement with Finnair OY was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as Exhibit 99 (i) and is incorporated herein by reference. 99(h) Lease agreement with The Helen Mining Company was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997 as Exhibit 99 (j) and is incorporated herein by reference. 99(i) Lease agreement with Reno Air, Inc. is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and is included herein. 99(j) Lease agreement with Trans Ocean Corporation, Inc. is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and is included herein.
(b) Reports on Form 8-K None. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacity and on the date indicated. AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership By: AFG Leasing VI Incorporated, ----------------------------------------- a Massachusetts corporation and the General Partner of the Registrant.
By: /s/ GEOFFREY A. MACDONALD By: /s/ GARY D. ENGLE ---------------------------------------- ---------------------------------------- Geoffrey A. MacDonald Gary D. Engle CHAIRMAN AND A MEMBER OF THE EXECUTIVE PRESIDENT AND CHIEF EXECUTIVE OFFICER AND COMMITTEE OF EFG AND PRESIDENT AND A A MEMBER OF THE EXECUTIVE COMMITTEE OF DIRECTOR OF THE GENERAL PARTNER EFG (PRINCIPAL EXECUTIVE OFFICER) Date: March 31, 1999 Date: March 31, 1999 By: /s/ GARY M. ROMANO By: /s/ MICHAEL J. BUTTERFIELD ---------------------------------------- ---------------------------------------- Gary M. Romano Michael J. Butterfield EXECUTIVE VICE PRESIDENT AND CHIEF SENIOR VICE PRESIDENT, FINANCE AND OPERATING OFFICER OF EFG AND CLERK OF THE TREASURER OF EFG AND TREASURER OF THE GENERAL PARTNER (PRINCIPAL FINANCIAL GENERAL PARTNER (PRINCIPAL ACCOUNTING OFFICER) OFFICER) Date: March 31, 1999 Date: March 31, 1999
16 EX-13 2 EXHIBIT 13 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP INDEX TO ANNUAL REPORT TO THE PARTNERS
PAGE --------- SELECTED FINANCIAL DATA................................................................................... 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 3-9 FINANCIAL STATEMENTS: Report of Independent Auditors............................................................................ 10 Statement of Financial Position at December 31, 1998 and 1997............................................. 11 Statement of Operations for the years ended December 31, 1998, 1997 and 1996.............................. 12 Statement of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996............ 13 Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................. 14 Notes to the Financial Statements......................................................................... 15-27 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed..................... 28 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings.......................... 29 Schedule of Costs Reimbursed to the General Partner and its Affiliates as Required by Section 9.4 of the Amended and Restated Agreement and Certificate of Limited Partnership................................... 30
1 SELECTED FINANCIAL DATA The following data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements. For each of the five years in the period ended December 31, 1998:
SUMMARY OF OPERATIONS 1998 1997 1996 1995 1994 - ------------------------------------- ------------- ------------- ------------- ------------- ------------- Lease revenue........................ $ 2,463,373 $ 4,068,381 $ 4,130,156 $ 4,648,578 $ 7,199,896 Net income (loss).................... $ 623,010 $ 1,574,944 $ 552,157 $ (779,251) $ (22,729) Per Unit: Net income (loss).................. $ 0.74 $ 1.86 $ 0.65 $ (0.92) $ (0.03) Cash distributions................. $ 0.75 $ 0.94 $ 1.38 $ 2.00 $ 2.88 FINANCIAL POSITION - ------------------------------------- Total assets......................... $ 11,565,735 $ 12,142,868 $ 13,848,889 $ 12,687,300 $ 16,390,469 Total long-term obligations.......... $ 3,459,289 $ 4,401,753 $ 6,547,519 $ 4,574,713 $ 5,323,875 Partners' capital.................... $ 7,592,086 $ 7,488,561 $ 6,821,321 $ 7,432,059 $ 9,902,794
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Certain statements in this annual report of American Income Fund I-C, a Massachusetts Limited Partnership (the "Partnership") that are not historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are subject to a variety of risks and uncertainties. There are a number of important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the outcome of the Class Action Lawsuit described in Note 8 to the accompanying financial statements, the collection of all rents due under the Partnership's lease agreements and the remarketing of the Partnership's equipment. YEAR 2000 ISSUE The Year 2000 Issue generally refers to the capacity of computer programming logic to correctly identify the calendar year. Many companies utilize computer programs or hardware with date sensitive software or embedded chips that could interpret dates ending in "00" as the year 1900 rather than the year 2000. In certain cases, such errors could result in system failures or miscalculations that disrupt the operations of the affected businesses. The Partnership uses information systems provided by EFG and has no information systems of its own. EFG has adopted a plan to address the Year 2000 Issue that consists of four phases: assessment, remediation, testing, and implementation and has elected to utilize principally internal resources to perform all phases. EFG completed substantially all of its Year 2000 project by December 31, 1998 at an aggregate cost of less than $50,000 and at a di minimus cost to the Partnership. Remaining items are expected to be minor and be completed by March 31, 1999. All costs incurred in connection with EFG's Year 2000 project have been expensed as incurred. EFG's primary information software was coded by IBM at the point of original design to use a four digit field to identify calendar year. All of the Partnership's lease billings, cash receipts and equipment remarketing processes are performed using this proprietary software. In addition, EFG has gathered information about the Year 2000 readiness of significant vendors and third party servicers and continues to monitor developments in this area. All of EFG's peripheral computer technologies, such as its network operating system and third-party software applications, including payroll, depreciation processing, and electronic banking, have been evaluated for potential programming changes and have required only minor modifications to function properly with respect to dates in the year 2000 and thereafter. EFG understands that each of its and the Partnership's significant vendors and third-party servicers are in the process, or have completed the process, of making their systems Year 2000 compliant. Substantially all parties queried have indicated that their systems would be Year 2000 compliant by the end of 1998. Presently, EFG is not aware of any outside customer with a Year 2000 Issue that would have a material effect on the Partnership's results of operations, liquidity, or financial position. The Partnership's equipment leases were structured as triple net leases, meaning that the lessees are responsible for, among other things, (i) maintaining and servicing all equipment during the lease term, (ii) ensuring that all equipment functions properly and is returned in good condition, normal wear and tear excepted, and (iii) insuring the assets against casualty and other events of loss. Non-compliance with lease terms on the part of a lessee, including failure to address Year 2000 Issues, could result in lost revenues and impairment of residual values of the Partnership's equipment assets under a worst-case scenario. EFG believes that its Year 2000 compliance plan will be effective in resolving all material Year 2000 risks in a timely manner and that the Year 2000 Issue will not pose significant operational problems with respect to its computer systems or result in a system failure or disruption of its or the Partnership's business operations. However, EFG has no means of ensuring that all customers, vendors and third-party 3 servicers will conform ultimately to Year 2000 standards. The effect of this risk to the Partnership is not determinable. OVERVIEW The Partnership was organized in 1991 as a direct-participation equipment leasing program to acquire a diversified portfolio of capital equipment subject to lease agreements with third parties. The value of the Partnership's equipment portfolio decreases over time due to depreciation resulting from age and usage of the equipment, as well as technological changes and other market factors. In addition, the Partnership does not replace equipment as it is sold; therefore, its aggregate investment value in equipment declines from asset disposals occurring in the normal course of business. Presently, the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of which could significantly alter the nature of the Partnership's organization and its future business operations. See Note 8 to the accompanying financial statements. Pursuant to the Restated Agreement, as amended, the Partnership is scheduled to be dissolved by December 31, 2002. RESULTS OF OPERATIONS For the year ended December 31, 1998, the Partnership recognized lease revenue of $2,463,373 compared to $4,068,381 and $4,130,156 for the years ended December 31, 1997 and 1996, respectively. The decrease in lease revenue from 1996 to 1998 reflects the effects of lease term expirations and the sale or exchange of equipment, including the vessel exchange in 1997 discussed below. In 1997 and 1996, the Partnership had recognized lease revenue from the vessel of $534,796 and $543,909, respectively. Partially offsetting the decrease from 1996 to 1997 was the effects of an aircraft exchange which concluded in March 1996. As a result of the aircraft exchange, the Partnership replaced its ownership interest in a Boeing 747-SP aircraft leased to United Air Lines, Inc. (the "United Aircraft"), having aggregate quarterly lease revenues of $213,302, with interests in six other aircraft (three Boeing 737 aircraft leased by Southwest Airlines, Inc., two McDonnell Douglas MD-82 aircraft leased by Finnair OY and one McDonnell Douglas MD-87 aircraft leased by Reno Air, Inc.), having aggregate quarterly lease revenues of $326,254. The Finnair Aircraft and the Reno Aircraft were exchanged into the partnership on March 25, and March 26, 1996, respectively. Accordingly, 1997 was the first year the Partnership recognized a full year's revenue related to its interest in all six of these aircraft. The Partnership's equipment portfolio includes certain assets in which the Partnership holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by EFG. Proportionate equipment ownership enabled the Partnership to further diversify its equipment portfolio at inception by participating in the ownership of selected assets, thereby reducing the general levels of risk which could have resulted from a concentration in any single equipment type, industry or lessee. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Interest income for the year ended December 31, 1998 was $195,264 compared to $86,836 and $117,337 for the years ended December 31, 1997 and 1996, respectively. Interest income is typically generated from temporary investment of rental receipts and equipment sale proceeds in short-term instruments. Interest income in 1998 and 1997 included $45,973 and $9,067, respectively, earned on a note receivable from Semele Group, Inc. (formerly Banyan Strategic Land Fund II) ("Semele") (see Note 4 to the financial statements herein). During 1996, interest income included $18,531 earned on a note receivable from EFG resulting from the settlement with ICCU Containers, S.p.A. (see Note 5 to the financial statements herein). In 1996, the Partnership also earned interest income of $44,994 on cash held in a special-purpose escrow account in connection with the aircraft exchange transactions. The amount of future interest income is expected to fluctuate in relation to prevailing interest rates, the collection of lease revenue, and the proceeds from equipment sales. During the year ended December 31, 1998, the Partnership sold equipment having a net book value of $15,660 to existing lessees and third parties. These sales resulted in a net gain, for financial statement 4 purposes, of $119,724 compared to a net gain in 1997 of $652,413 on equipment having a net book value of $359,061 and a net gain in 1996 of $356,452 on equipment having a net book value of $336,314. In 1997, the Partnership also exchanged its interest in a vessel with an original cost and net book value of $2,605,381 and $1,180,755, respectively. In connection with this exchange, the Partnership realized proceeds of $802,431, which resulted in a net loss, for financial statement purposes, of $378,324. In addition, as this vessel was disposed of prior to the expiration of the related lease term, the Partnership received prepayment of the remaining contracted rent due under the vessel's lease agreement in the amount of $400,631. See below for further discussion related to the vessel. On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele, a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ (NASDAQ SmallCap Market effective January 5, 1999). At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the vessel exchange transaction and its original 33.85% beneficial ownership interest in Dove Arrow, one of the three Vessels, the Partnership received $430,187 in cash and became the beneficial owner of 208,764 shares of Semele common stock (valued at $313,146 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in the Semele Note of $459,729. The Semele Note bears an annual interest rate of 10% and will be amortized over three years with mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of Rancho Malibu. Cash equal to the amount of the Semele Note was held in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele sought consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially owned by the Partnership. A dividend of $41,752 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. Subsequent to the exchange transaction, Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the Board of Directors and appointed Chief Executive Officer of Semele and James A. 5 Coyne, Executive Vice President of EFG was appointed Semele's President and Chief Operating Officer, and elected to the Board of Directors. It cannot be determined whether future sales of equipment will result in a net gain or a net loss to the Partnership, as such transactions will be dependent upon the condition and type of equipment being sold and its marketability at the time of sale. In addition, the amount of gain or loss reported for financial statement purposes is partly a function of the amount of accumulated depreciation associated with the equipment being sold. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. EFG attempts to monitor these changes in order to identify opportunities which may be advantageous to the Partnership and which will maximize total cash returns for each asset. The total economic value realized upon final disposition of each asset is comprised of all primary lease term revenue generated from that asset, together with its residual value. The latter consists of cash proceeds realized upon the asset's sale in addition to all other cash receipts obtained from renting the asset on a re-lease, renewal or month-to-month basis. The Partnership classifies such residual rental payments as lease revenue. Consequently, the amount of gain or loss reported in the financial statements is not necessarily indicative of the total residual value the Partnership achieved from leasing the equipment. Depreciation expense was $1,083,372, $2,099,722 and $3,163,960 for the years ended December 31, 1998, 1997 and 1996, respectively. For financial reporting purposes, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset at the date of primary lease expiration on a straight-line basis over such term. For the purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that equipment is held beyond its primary lease term, the Partnership continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. Interest expense was $318,530 or 12.9% of lease revenue in 1998, $387,553 or 9.5% of lease revenue in 1997 and $556,255 or 13.5% of lease revenue in 1996. Interest expense in future years is expected to decline in amount and as a percentage of lease revenue as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt Management fees were approximately 4.6% of lease revenue for the year ended December 31, 1998, compared to 4.1% and 3.4% of lease revenue during the years ended December 31, 1997 and 1996, respectively. Management fees are based on 5% of gross lease revenue generated by operating leases and 2% of gross lease revenue generated by full payout leases. Write-down of investment securities-affiliate was $185,281 for the year ended December 31, 1998. The General Partner determined that the decline in market value of the Semele common stock was other-than-temporary at December 31, 1998. As a result, the Partnership wrote down the cost of the Semele common stock from $15 per share to $4.125 per share (the quoted price of Semele stock on NASDAQ at December 31, 1998). Operating expenses were $454,908, $200,670 and $191,346 for the years ended December 31, 1998, 1997 and 1996, respectively. During the year ended December 31, 1998, the Partnership incurred or accrued approximately $298,200 for certain legal and administrative expenses related to the Class Action Lawsuit described in Note 8 to the financial statements. Other operating expenses consist principally of administrative charges, professional service costs, such as audit and other legal fees, as well as printing, distribution and remarketing expenses. In certain cases, equipment storage or repairs and maintenance costs may be incurred in connection with equipment being remarketed. LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS The Partnership by its nature is a limited life entity. As an equipment leasing program, the Partnership's principal operating activities derive from asset rental transactions. Accordingly, the Partnership's 6 principal source of cash from operations is provided by the collection of periodic rents. These cash inflows are used to satisfy debt service obligations associated with leveraged leases, and to pay management fees and operating costs. Operating activities generated net cash inflows of $2,165,077, $3,241,188 and $3,646,728 for the years ended 1998, 1997 and 1996 respectively. Future renewal, re-lease and equipment sale activities will cause a decline in the Partnership's lease revenue and corresponding sources of operating cash. Overall, expenses associated with rental activities, such as management fees, and net cash flow from operating activities will also continue to decline as the Partnership experiences a higher frequency of remarketing events. Cash expended for equipment acquisitions and cash realized from asset disposal transactions are reported under investing activities on the accompanying Statement of Cash Flows. During 1998, the Partnership realized net proceeds of $135,384, compared to $1,041,030 and $692,766 in 1997 and 1996, respectively. Future inflows of cash from asset disposals will vary in timing and amount and will be influenced by many factors including, but not limited to, the frequency and timing of lease expirations, the type of equipment being sold, its condition and age, and future market conditions. In 1996, the Partnership completed the replacement of the United Aircraft with the acquisitions of an 11.87% ownership interest in the Finnair Aircraft and a 21.31% ownership interest in the Reno Aircraft at a total cost to the Partnership of $3,322,913 and $2,894,892, respectively. To acquire the ownership interest in the Finnair Aircraft, the Partnership paid $1,110,980 in cash and obtained financing of $2,211,933 from a third-party lender. To acquire the ownership interest in the Reno Aircraft, the Partnership paid $494,780 in cash and obtained financing of $2,400,112 from a third-party lender. The Partnership utilized $1,562,463 (classified as Contractual Right for Equipment at December 31,1995) which had been deposited into a special-purpose escrow account through a third-party exchange agent pending the completion of the aircraft exchange. The balance of $43,297 was expended from the Partnership's cash reserves. The remaining ownership interests of 88.13% and 78.69% of the Finnair Aircraft and Reno Aircraft, respectively, are held by affiliated equipment leasing programs sponsored by EFG. There were no equipment acquisitions in 1998 or 1997. At December 31, 1998, the Partnership was due aggregate future minimum lease payments of $4,617,590 from contractual lease agreements (see Note 2 to the financial statements), a portion of which will be used to amortize the principal balance of notes payable of $3,459,289 (see Note 6 to the financial statements). At the expiration of the individual primary and renewal lease terms underlying the Partnership's future minimum lease payments, the Partnership will sell the equipment or enter re-lease or renewal agreements when considered advantageous by the General Partner and EFG. Such future remarketing activities will result in the realization of additional cash inflows in the form of equipment sale proceeds or rents from renewals and re-leases, the timing and extent of which cannot be predicted with certainty. This is because the timing and extent of remarketing events often is dependent upon the needs and interests of the existing lessees. Some lessees may choose to renew their lease contracts, while others may elect to return the equipment. In the latter instances, the equipment could be re-leased to another lessee or sold to a third party. Accordingly, as the terms of the currently existing contractual lease agreements expire, the cash flows of the Partnership will become less predictable. In addition, the Partnership will have cash needs to satisfy interest on indebtedness and to pay management fees and operating expenses. The Partnership obtained long-term financing in connection with certain equipment leases. The repayments of principal related to such indebtedness are reported as a component of financing activities. Each note payable is recourse only to the specific equipment financed and to the minimum rental payments contracted to be received during the debt amortization period (which period generally coincides with the lease rental term). As rental payments are collected, a portion or all of the rental payment is used to repay the associated indebtedness. In addition, during 1997 the Partnership utilized a portion of its available cash to repay certain of its debt obligations. In future years, the amount of cash used to repay debt obligations is scheduled to decline as the principal balance of notes payable is reduced through the collection and application of rents. In addition, the Partnership has balloon payment obligations at the expiration of the respective primary lease terms related to aircraft leased to Finnair OY and the Reno Air, Inc. of $1,127,840 and $679,276, respectively. 7 As a result of the vessel exchange transaction (see Results of Operations) the Partnership became the beneficial owner of 208,764 shares of Semele common stock valued at $313,146 ($1.50 per share) at the date of the transaction. This investment was reduced by a dividend of $41,752 received in November 1997 representing a return of equity to the Partnership. The Partnership also received a beneficial interest in the Semele Note of $459,729 in connection with the vessel exchange. On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed by a 30-for-1 forward stock split resulting in a reduction of the number of shares of Semele common stock owned by the Partnership to 20,876 shares. In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. During the year ended December 31, 1998, the Partnership decreased the carrying value of its investment in Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting in an unrealized loss in 1998 of $70,460. In 1997, the Partnership recorded an unrealized loss of $114,821 related to its Semele common stock. These losses were reported as components of comprehensive income, included in partners' capital. At December 31, 1998, the General Partner determined that the decline in market value of the Semele common stock was other-than-temporary. As a result, the Partnership wrote down the cost of the Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) for a total realized loss of $185,281 in 1998. There are no formal restrictions under the Restated Agreement, as amended, that materially limit the Partnership's ability to pay cash distributions, except that the General Partner may suspend or limit cash distributions to ensure that the Partnership maintains sufficient working capital reserves to cover, among other things, operating costs and potential expenditures, such as refurbishment costs to remarket equipment upon lease expiration. Liquidity is especially important as the Partnership matures and sells equipment, because the remaining equipment base consists of fewer revenue-producing assets that are available to cover prospective cash disbursements. Insufficient liquidity could inhibit the Partnership's ability to sustain its operations or maximize the realization of proceeds from remarketing its remaining assets. In particular, the Partnership must contemplate the potential liquidity risks associated with its investment in commercial jet aircraft. The management and remarketing of aircraft can involve, among other things, significant costs and lengthy remarketing initiatives. Although the Partnership's lessees are required to maintain the aircraft during the period of lease contract, repair, maintenance, and/or refurbishment costs at lease expiration can be substantial. For example, an aircraft that is returned to the Partnership meeting minimum airworthiness standards, such as flight hours or engine cycles, nonetheless may require heavy maintenance in order to bring its engines, airframe and other hardware up to standards that will permit its prospective use in commercial air transportation. Individually, these repairs can cost in excess of $1 million and, collectively, they could require the disbursement of several million dollars, depending upon the extent of refurbishment. In addition, the Partnership's equipment portfolio includes an interest in three Stage 2 aircraft having scheduled lease expiration dates of December 31, 1999. These aircraft are prohibited from operating in the United States after December 31, 1999 unless they are retro-fitted with hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation Administration. The cost to hush-kit an aircraft, such as the Partnership's Boeing 737s, can approach $2 million. Although the Partnership is not required to retro-fit its aircraft with hush-kits, insufficient liquidity could jeopardize the re-marketing of these aircraft and risk their disposal at a depressed value at a time when a better economic return would be realized from refurbishing the aircraft and re-leasing them to another user. Collectively, the aggregation of the Partnership's potential liquidity needs related to aircraft and other working capital requirements could be significant. Accordingly, the General Partner has maintained significant cash reserves within the Partnership in order to minimize the risk of a liquidity shortage, particularly in connection with the Partnership's aircraft interests. Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit described in Note 8 to the accompanying financial statements. A preliminary settlement agreement will allow the Partnership to 8 invest in new equipment or other activities, subject to certain limitations, effective March 22, 1999. To the extent that the Partnership continues to own aircraft investments that could require capital reserves, the General Partner does not anticipate that the Partnership will invest in new assets, regardless of its authority to do so. Until the Class Action Lawsuit is adjudicated, the General Partner does not expect that the level of future quarterly cash distributions paid by the Partnership will be increased above amounts paid in the fourth quarter of 1998. In addition, the proposed settlement, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. See Note 8 to the accompanying financial statements. Cash distributions to the General and Limited Partners are declared and generally paid within fifteen days following the end of each calendar quarter. The payment of such distributions is presented as a component of financing activities. For the year ended December 31, 1998, the Partnership declared total cash distributions of $634,306. In accordance with the Restated Agreement, as amended, the Limited Partners were allocated 95% of these distributions, or $602,590, and the General Partner was allocated 5%, or $31,716. The fourth quarter 1998 cash distribution was paid on January 15, 1999. Cash distributions paid to the Limited Partners consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Partnership and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, and the residual value realized for each asset at its disposal date. The Partnership's capital account balances for federal income tax and for financial reporting purposes are different primarily due to differing treatments of income and expense items for income tax purposes in comparison to financial reporting purposes (generally referred to as permanent or timing differences; see Note 7 to the financial statements). For instance, selling commissions, organization and offering costs pertaining to syndication of the Partnership's limited partnership units are not deductible for federal income tax purposes, but are recorded as a reduction of partners' capital for financial reporting purposes. Therefore, such differences are permanent differences between capital accounts for financial reporting and federal income tax purposes. Other differences between the bases of capital accounts for federal income tax and financial reporting purposes occur due to timing differences. Such items consist of the cumulative difference between income or loss for tax purposes and financial statement income or loss, the difference between distributions (declared vs. paid) for income tax and financial reporting purposes, and the treatment of unrealized gains or losses on investment securities, if any, for book and tax purposes. The principal component of the cumulative difference between financial statement income or loss and tax income or loss results from different depreciation policies for book and tax purposes. For financial reporting purposes, the General Partner has accumulated a capital deficit at December 31, 1998. This is the result of aggregate cash distributions to the General Partner being in excess of its capital contribution of $1,000 and its allocation of financial statement net income or loss. Ultimately, the existence of a capital deficit for the General Partner for financial reporting purposes is not indicative of any further capital obligations to the Partnership by the General Partner. The Amended and Restated Agreement and Certificate of Limited Partnership requires that upon the dissolution of the Partnership, the General Partner will be required to contribute to the Partnership an amount equal to any negative balance which may exist in the General Partner's tax capital account. At December 31, 1998, the General Partner had a positive tax capital account balance. The future liquidity of the Partnership will be influenced by, among other factors, prospective market conditions, technological changes, the ability of EFG to manage and remarket the assets, and many other events and circumstances, that could enhance or detract from individual asset yields and the collective performance of the Partnership's equipment portfolio. However, the outcome of the Class Action Lawsuit described in Note 8 to the accompanying financial statements will be the principal factor in determining the future of the Partnership's operations 9 REPORT OF INDEPENDENT AUDITORS To the Partners of American Income Fund I-C, a Massachusetts Limited Partnership: We have audited the accompanying statements of financial position of American Income Fund I-C, a Massachusetts Limited Partnership, as of December 31, 1998 and 1997, and the related statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Income Fund I-C, a Massachusetts Limited Partnership at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Additional Financial Information identified in the Index to Annual Report to the Partners is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ERNST & YOUNG LLP Boston, Massachusetts March 10, 1999 10 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF FINANCIAL POSITION DECEMBER 31, 1998 AND 1997
1998 1997 ------------- ------------- ASSETS Cash and cash equivalents.......................................................... $ 3,243,631 $ 2,519,940 Rents receivable................................................................... 361,283 246,877 Accounts receivable--affiliate..................................................... 50,767 296,505 Note receivable--affiliate......................................................... 459,729 459,729 Investment securities--affiliate................................................... 86,113 156,573 Equipment at cost, net of accumulated depreciation of $8,610,088 and $8,365,735 at December 31, 1998 and 1997, respectively......................................... 7,364,212 8,463,244 ------------- ------------- Total assets................................................................... $ 11,565,735 $ 12,142,868 ------------- ------------- ------------- ------------- LIABILITIES AND PARTNERS' CAPITAL Notes payable...................................................................... $ 3,459,289 $ 4,401,753 Accrued interest................................................................... 26,620 30,468 Accrued liabilities................................................................ 259,500 9,200 Accrued liabilities--affiliate..................................................... 14,751 28,925 Deferred rental income............................................................. 54,912 25,384 Cash distributions payable to partners............................................. 158,577 158,577 ------------- ------------- Total liabilities.............................................................. 3,973,649 4,654,307 ------------- ------------- Partners' capital (deficit): General Partner.................................................................. (502,935) (508,111) Limited Partnership Interests (803,454.56 Units; initial purchase price of $25 each).......................................................................... 8,095,021 7,996,672 ------------- ------------- Total partners' capital........................................................ 7,592,086 7,488,561 ------------- ------------- Total liabilities and partners' capital........................................ $ 11,565,735 $ 12,142,868 ------------- ------------- ------------- -------------
11 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ Income: Lease revenue......................................................... $ 2,463,373 $ 4,068,381 $ 4,130,156 Interest income....................................................... 149,291 77,769 98,806 Interest income--affiliate............................................ 45,973 9,067 18,531 Gain on sale of equipment............................................. 119,724 652,413 356,452 Loss on exchange of equipment......................................... -- (378,324) -- ------------ ------------ ------------ Total income........................................................ 2,778,361 4,429,306 4,603,945 ------------ ------------ ------------ Expenses: Depreciation.......................................................... 1,083,372 2,099,722 3,163,960 Interest expense...................................................... 318,530 387,553 556,255 Equipment management fees--affiliate.................................. 113,260 166,417 140,227 Write-down of investment securities--affiliate........................ 185,281 -- -- Operating expenses--affiliate......................................... 454,908 200,670 191,346 ------------ ------------ ------------ Total expenses...................................................... 2,155,351 2,854,362 4,051,788 ------------ ------------ ------------ Net income.............................................................. $ 623,010 $ 1,574,944 $ 552,157 ------------ ------------ ------------ ------------ ------------ ------------ Net income per limited partnership unit................................. $ 0.74 $ 1.86 $ 0.65 ------------ ------------ ------------ ------------ ------------ ------------ Cash distributions declared per limited partnership unit................ $ 0.75 $ 0.94 $ 1.38 ------------ ------------ ------------ ------------ ------------ ------------
12 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
GENERAL LIMITED PARTNERS PARTNER -------------------------- AMOUNT UNITS AMOUNT TOTAL ----------- ------------ ------------ ------------ Balance at December 31, 1995.............................. $ (510,936) 803,454.56 $ 7,942,995 $ 7,432,059 Net income--1996........................................ 27,608 -- 524,549 552,157 ----------- ------------ ------------ ------------ Comprehensive income...................................... 27,608 -- 524,549 552,157 ----------- ------------ ------------ ------------ Cash distributions declared............................... (58,145) -- (1,104,750) (1,162,895) ----------- ------------ ------------ ------------ Balance at December 31, 1996.............................. (541,473) 803,454.56 7,362,794 6,821,321 Net income--1997........................................ 78,747 -- 1,496,197 1,574,944 Unrealized loss on investment securities................ (5,741) -- (109,080) (114,821) ----------- ------------ ------------ ------------ Comprehensive income...................................... 73,006 -- 1,387,117 1,460,123 ----------- ------------ ------------ ------------ Cash distributions declared............................... (39,644) -- (753,239) (792,883) ----------- ------------ ------------ ------------ Balance at December 31, 1997.............................. (508,111) 803,454.56 7,996,672 7,488,561 Net income--1998........................................ 31,151 -- 591,859 623,010 Unrealized loss on investment securities................ (3,523) -- (66,937) (70,460) Less: reclassification adjustment for write-down of investment securities................................. 9,264 -- 176,017 185,281 ----------- ------------ ------------ ------------ Comprehensive income...................................... 36,892 -- 700,939 737,831 ----------- ------------ ------------ ------------ Cash distributions declared............................... (31,716) -- (602,590) (634,306) ----------- ------------ ------------ ------------ Balance at December 31, 1998.............................. $ (502,935) 803,454.56 $ 8,095,021 $ 7,592,086 ----------- ------------ ------------ ------------ ----------- ------------ ------------ ------------
13 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------- ------------- ------------- Cash flows from (used in) operating activities: Net income........................................................... $ 623,010 $ 1,574,944 $ 552,157 Adjustments to reconcile net income to net cash from operating activities: Depreciation..................................................... 1,083,372 2,099,722 3,163,960 Gain on sale of equipment........................................ (119,724) (652,413) (356,452) Write-down of investment securities--affiliate................... 185,281 -- -- Loss on exchange of equipment.................................... -- 378,324 -- Changes in assets and liabilities: Decrease (increase) in: Rents receivable................................................. (114,406) 222,213 247,567 Accounts receivable--affiliate................................... 245,738 (206,966) (75,887) Note receivable--affiliate....................................... -- -- 210,144 Increase (decrease) in: Accrued interest................................................. (3,848) (49,284) 37,243 Accrued liabilities.............................................. 250,300 (13,550) (134,252) Accrued liabilities--affiliate................................... (14,174) (4,142) 9,723 Deferred rental income........................................... 29,528 (107,660) (7,475) ------------- ------------- ------------- Net cash from operating activities............................. 2,165,077 3,241,188 3,646,728 ------------- ------------- ------------- Cash flows from (used in) investing activities: Dividend received.................................................. -- 41,752 -- Purchase of equipment.............................................. -- -- (43,297) Proceeds from equipment sales...................................... 135,384 1,041,030 692,766 ------------- ------------- ------------- Net cash from investing activities............................. 135,384 1,082,782 649,469 ------------- ------------- ------------- Cash flows used in financing activities: Principal payments--notes payable.................................. (942,464) (2,145,766) (2,639,239) Distributions paid................................................. (634,306) (845,742) (1,268,613) ------------- ------------- ------------- Net cash used in financing activities.......................... (1,576,770) (2,991,508) (3,907,852) ------------- ------------- ------------- Net increase in cash and cash equivalents............................ 723,691 1,332,462 388,345 Cash and cash equivalents at beginning of year....................... 2,519,940 1,187,478 799,133 ------------- ------------- ------------- Cash and cash equivalents at end of year............................. $ 3,243,631 $ 2,519,940 $ 1,187,478 ------------- ------------- ------------- ------------- ------------- ------------- Supplemental disclosure of cash flow information: Cash paid during the year for interest............................... $ 322,378 $ 436,837 $ 519,012 ------------- ------------- ------------- ------------- ------------- -------------
Supplemental disclosure of non-cash investing and financing activities: See Note 4 to the financial statements regarding the reduction of the Partnership's carrying value of its investment securities--affiliate. Also, see Note 3 to the financial statements. 14 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 NOTE 1--ORGANIZATION AND PARTNERSHIP MATTERS American Income Fund I-C, a Massachusetts Limited Partnership (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on March 1, 1991, for the purpose of acquiring and leasing to third parties a diversified portfolio of capital equipment. Partners' capital initially consisted of contributions of $1,000 from the General Partner (AFG Leasing VI Incorporated) and $100 from the Initial Limited Partner (AFG Assignor Corporation). On May 31, 1991, the Partnership issued 803,454.56 units of limited partnership interests (the "Units") to 909 investors. Included in the 803,454.56 units were 7,293.56 bonus units. The Partnership's General Partner, AFG Leasing VI Incorporated, is a Massachusetts corporation formed in 1990 and an affiliate of Equis Financial Group Limited Partnership (formerly known as American Finance Group), a Massachusetts limited partnership ("EFG"). The General Partner is not required to make any other capital contributions except as may be required under the Uniform Act and Section 6.1(b) of the Amended and Restated Agreement and Certificate of Limited Partnership (the "Restated Agreement, as amended"). Significant operations commenced on May 31, 1991 when the Partnership made its initial equipment acquisition. Pursuant to the Restated Agreement, as amended, Distributable Cash From Operations and Distributable Cash From Sales or Refinancings will be allocated 95% to the Limited Partners and 5% to the General Partner. Under the terms of a Management Agreement between the Partnership and EFG, management services are provided by EFG to the Partnership at fees, which the General Partner believes to be competitive, for similar services (see Note 5). EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Manager or Advisor to the Partnership and several other direct-participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President, Chief Executive Officer and sole Director. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Equis Corporation and GDE LP were established in December 1994 by Mr. Engle for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym to a third party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Partnership and the Other Investment Programs and to continue managing all assets owned by the Partnership and the Other Investment Programs. 15 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and the display of comprehensive income and its components; however, the adoption of this statement had no impact on the Partnership's net income or partners' capital. Statement 130 requires unrealized gains or losses on the Partnership's available-for-sale securities, which prior to adoption were reported separately in partners' capital to be included in comprehensive income. At December 31, 1997, the cumulative amount of other comprehensive losses was $114,821. STATEMENT OF CASH FLOWS The Partnership considers liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. From time to time, the Partnership invests excess cash with large institutional banks in federal agency discount notes and reverse repurchase agreements with overnight maturities. Under the terms of the agreements, title to the underlying securities passes to the Partnership. The securities underlying the agreements are book entry securities. At December 31, 1998, the Partnership had $3,133,600 invested in federal agency discount notes and in reverse repurchase agreements secured by U.S. Treasury Bills or interests in U.S. Government securities. REVENUE RECOGNITION Rents are payable to the Partnership monthly, quarterly or semi-annually and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. Future minimum rents of $4,617,590 are due as follows: For the year ending December 31, 1999 ...................................... $1,727,568 2000 ...................................... 1,058,857 2001 ...................................... 824,871 2002 ...................................... 761,356 2003 ...................................... 244,938 ---------- Total ...................................... $4,617,590 ---------- ----------
In December 1998, the Partnership and the other affiliated leasing programs owning interests in two McDonnell Douglas MD-82 aircraft entered into lease extension agreements with Finnair OY. The lease extensions, effective upon the expiration of the existing primary lease terms on April 28, 1999, extended the leases for nine months and two years, respectively. In aggregate, these lease extensions will provide additional lease revenue of approximately $700,000 to the Partnership. 16 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996 ---------- ------------ ------------ Finnair OY................................................................ $ 511,496 $ 511,496 $ -- Southwest Airlines, Inc................................................... $ 413,280 $ 413,280 $ 413,280 Reno Air, Inc............................................................. $ 375,103 $ -- $ -- General Motors Corporation................................................ $ 329,924 $ -- $ 516,616 Trans Ocean Corporation................................................... $ 279,106 $ -- $ -- Gearbulk Shipowning Ltd................................................... $ -- $ 534,796 $ 543,909 The Helen Mining Company.................................................. $ -- $ 430,000 $ --
USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. EQUIPMENT ON LEASE All equipment was acquired from EFG, one of its Affiliates or from third-party sellers. Equipment Cost means the actual cost paid by the Partnership to acquire the equipment, including acquisition fees. Where equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the actual price paid for the equipment by EFG or the Affiliate plus all actual costs incurred by EFG or the Affiliate while carrying the equipment, including all liens and encumbrances, less the amount of all primary term rents earned by EFG or the Affiliate prior to selling the equipment. Where the seller of the equipment was a third party, Equipment Cost reflects the seller's invoice price. DEPRECIATION The Partnership's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is considered to correspond to each asset's primary lease term, which term generally represents the period of greatest revenue potential for each asset. Accordingly, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Partnership continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. Periodically, the General Partner evaluates the net carrying value of equipment to determine whether it exceeds estimated net realizable value. Adjustments to reduce the net carrying value of equipment are recorded in those instances where estimated net realizable value is considered to be less than net carrying value. To the extent that such adjustments have been recorded, they are reflected separately on the accompanying Statement of Operations as Write-Down of Equipment. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, 17 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) technological advances, and many other events can converge to enhance or detract from asset values at any given time. INVESTMENT SECURITIES--AFFILIATE The Partnership's investment in Semele Group, Inc. is considered to be available-for-sale and as such is carried at fair value with unrealized gains and losses reported as a component of comprehensive income (loss) included in Partner's Capital. Other-than-temporary declines in market value are recorded as write down of investment in the Statement of Operations (see Note 4). ACCRUED LIABILITIES--AFFILIATE Unpaid operating expenses paid by EFG on behalf of the Partnership and accrued but unpaid administrative charges and management fees are reported as Accrued Liabilities--Affiliate (see Note 5). ALLOCATION OF PROFITS AND LOSSES For financial statement purposes, net income or loss is allocated to each Partner according to their respective ownership percentages (95% to the Limited Partners and 5% to the General Partner). See Note 7 for allocation of income or loss for income tax purposes. NET INCOME (LOSS) AND CASH DISTRIBUTIONS PER UNIT Net income (loss) and cash distributions per Unit are based on 803,454.56 Units outstanding during each of the three years in the period ended December 31, 1998 and computed after allocation of the General Partner's 5% share of net income (loss) and cash distributions. PROVISION FOR INCOME TAXES No provision or benefit from income taxes is included in the accompanying financial statements. The Partners are responsible for reporting their proportionate shares of the Partnership's taxable income or loss and other tax attributes on their tax returns. NOTE 3--EQUIPMENT The following is a summary of equipment owned by the Partnership at December 31, 1998. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 1998 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. A Remaining Lease Term equal to zero reflects equipment 18 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of EFG, the acquisition cost of the equipment did not exceed its fair market value.
REMAINING LEASE TERM EQUIPMENT EQUIPMENT TYPE (MONTHS) AT COST LOCATION - -------------------------------------------- ------------- ------------- --------------------------------------- Aircraft.................................... 13-48 $ 8,318,862 NV/TX Materials handling.......................... 0-20 3,221,423 CA/CO/GA/IA/IL/MI/MN/MO/NY OH/OR/PA/TX/Foreign Trailers/intermodal containers.............. 48-54 1,977,006 CA/OK Tractors and heavy duty trucks.............. 0 1,210,968 CA/IL/IN/MI/OR Retail store fixtures....................... 3 517,488 FL Construction and mining..................... 0 426,263 IL Motor vehicles.............................. 0 215,603 MI Communications.............................. 0 51,469 TX Manufacturing............................... 0 35,218 MI ------------- Total equipment cost 15,974,300 Accumulated depreciation (8,610,088) ------------- Equipment, net of accumulated depreciation $ 7,364,212 ------------- -------------
In 1996, the Partnership completed the replacement of a Boeing 747-SP aircraft with the acquisitions of an 11.87% ownership interest in the Finnair Aircraft and a 21.31% ownership interest in the Reno Aircraft at a total cost to the Partnership of $3,322,913 and $2,894,892, respectively. To acquire the ownership interest in the Finnair Aircraft, the Partnership paid $1,110,980 in cash and obtained financing of $2,211,933 from a third-party lender. To acquire the ownership interest in the Reno Aircraft, the Partnership paid $494,780 in cash and obtained financing of $2,400,112 from a third-party lender. The Partnership utilized $1,562,463 (classified as Contractual Right for Equipment at December 31,1995) which had been deposited into a special-purpose escrow account through a third-party exchange agent pending the completion of the aircraft exchange. The balance of $43,297 was expended from the Partnership's cash reserves. The remaining ownership interests of 88.13% and 78.69% of the Finnair Aircraft and Reno Aircraft, respectively, are held by affiliated equipment leasing programs sponsored by EFG. In certain cases, the cost of the Partnership's equipment represents a proportionate ownership interest. The remaining interests are owned by EFG or an affiliated equipment leasing program sponsored by EFG. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Proportionate equipment ownership enabled the Partnership to further diversify its equipment portfolio at inception by participating in the ownership of selected assets, thereby reducing the general levels of risk which could have resulted from a concentration in any single equipment type, industry or lessee. At December 31, 1998, the Partnership's equipment portfolio included equipment having a proportionate original cost of $10,813,352, representing approximately 68% of total equipment cost. Certain of the equipment and related lease payment streams were used to secure term loans with third-party lenders. The preceding summary of equipment includes leveraged equipment having an original cost of $8,318,862 and a net book value of $6,419,779 at December 31, 1998 (see Note 6). 19 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) Generally, the costs associated with maintaining, insuring and operating the Partnership's equipment are incurred by the respective lessees pursuant to terms specified in their individual lease agreements with the Partnership. As equipment is sold to third parties, or otherwise disposed of, the Partnership recognizes a gain or loss equal to the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition. The ultimate realization of estimated residual value in the equipment is dependent upon, among other things, EFG's ability to maximize proceeds from selling or re-leasing the equipment upon the expiration of the primary lease terms. The summary above includes equipment held for sale or re-lease with a cost of approximately $70,000, which had been fully depreciated at December 31, 1998. The General Partner is actively seeking the sale or re-lease of all such equipment. In addition, the summary above also includes equipment being leased on a month-to-month basis. NOTE 4--INVESTMENT SECURITIES--AFFILIATE/NOTE RECEIVABLE--AFFILIATE On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele Group, Inc. ("Semele") (formerly Banyan Strategic Land Fund II), a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ (NASDAQ SmallCap Market effective January 5, 1999). At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the exchange transaction and its original 33.85% beneficial ownership interest in Dove Arrow, one of the three Vessels, the Partnership received $430,187 in cash and became the beneficial owner of 208,764 shares of Semele common stock (valued at $313,146 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in the Semele Note of $459,729. The Semele Note bears an annual interest rate of 10% and will be amortized over three years with mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of Rancho Malibu. The Partnership recognized interest income of $45,973 and $9,073 related to the Semele Note during the years 1998 and 1997, respectively. The Partnership's interest in the vessel had an original cost and net book value of $2,605,381 and $1,180,755, respectively. The proceeds realized by the Partnership of $802,431 resulted in a net loss, for financial statement purposes, of $378,324. In addition, as 20 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) this vessel was disposed of prior to the expiration of the related lease term, the Partnership received a prepayment of the remaining contracted rent due under the vessel's lease agreement of $400,631. Cash equal to the amount of the Semele Note was held in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele sought consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially owned by the Partnership. A dividend of $41,752 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. Subsequent to the exchange transaction, Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the Board of Directors and appointed Chief Executive Officer of Semele and James A. Coyne, Executive Vice President of EFG was appointed Semele's President and Chief Operating Officer, and was elected to the Board of Directors. On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed by a 30-for-1 forward stock split resulting in a reduction of the number of shares of Semele common stock owned by the Partnership to 20,876 shares. In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. During the year ended December 31, 1998, the Partnership decreased the carrying value of its investment in Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting in an unrealized loss in 1998 of $70,460. In 1997, the Partnership recorded an unrealized loss of $114,821 related to its Semele common stock. These losses were reported as components of comprehensive income, included in partners' capital. At December 31, 1998, the General Partner determined that the decline in market value of the Semele common stock was other-than-temporary. As a result, the Partnership wrote down the cost of the Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) for a total realized loss of $185,281 in 1998. NOTE 5--RELATED PARTY TRANSACTIONS All operating expenses incurred by the Partnership are paid by EFG on behalf of the Partnership and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years 21 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) ended December 31, 1998, 1997 and 1996, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
1998 1997 1996 ---------- ---------- ---------- Equipment management fees.................................................... $ 113,260 $ 166,417 $ 140,227 Administrative charges....................................................... 68,052 63,870 40,295 Reimbursable operating Expenses due to third parties......................... 386,856 136,800 151,051 ---------- ---------- ---------- Total.................................................................... $ 568,168 $ 367,087 $ 331,573 ---------- ---------- ---------- ---------- ---------- ----------
As provided under the terms of the Management Agreement, EFG is compensated for its services to the Partnership. Such services include acquisition and management of equipment. For acquisition services, EFG is compensated by an amount equal to 2.23% of Equipment Base Price paid by the Partnership. For management services, EFG is compensated by an amount equal to 5% of gross operating lease rental revenue and 2% of gross full payout lease rental revenue received by the Partnership. Both acquisition and management fees are subject to certain limitations defined in the Management Agreement. Administrative charges represent amounts owed to EFG, pursuant to Section 9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership which are reimbursed to EFG at actual cost. All equipment was purchased from EFG, one of its Affiliates or from third-party sellers. The Partnership's Purchase Price is determined by the method described in Note 2. All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 1998, the Partnership was owed $50,767 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 1999. During 1996, the Partnership received payment in full from EFG of a note and accrued interest thereon which was beneficially assigned to the Partnership in 1994 by a former affiliate of AFG as partial consideration for the exchange of certain intermodal cargo containers. Certain affiliates of the General Partner own Units in the Partnership as follows:
NUMBER OF PERCENT OF TOTAL AFFILIATE UNITS OWNED OUTSTANDING UNITS - --------------------------------------------------------------------------------- ------------ ----------------- Atlantic Acquisition Limited Partnership......................................... 16,536 2.06% Old North Capital Limited Partnership............................................ 124,065 15.44%
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC") are both Massachusetts Limited Partnerships formed in 1995 and affiliates of EFG. The general partners of AALP and ONC are controlled by Gary Engle. In addition, the limited partnership interests of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and CEO of Semele. 22 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) NOTE 6--NOTES PAYABLE Notes payable at December 31, 1998 consisted of installment notes of $3,459,289 payable to banks and institutional lenders. The installment notes bear interest rates ranging between 8.65% and 8.89%, except one note which bears a fluctuating interest rate based on LIBOR (5.54% at December 31, 1998) plus a margin. All of the installment notes are non-recourse and are collateralized by the equipment and assignment of the related lease payments. Generally, the installment notes will be fully amortized by noncancellable rents. However, the Partnership has balloon payment obligations at the expiration of the respective primary lease terms related to the Finnair Aircraft and the Reno Aircraft of $1,127,840 and $679,276, respectively. The carrying value of notes payable approximates fair value at December 31, 1998. The annual maturities of the installment notes payable are as follows: For the year ending December 31, 1999 ...................................... $1,894,362 2000 ...................................... 284,916 2001 ...................................... 308,121 2002 ...................................... 292,614 2003 ...................................... 679,276 ---------- Total ...................................... $3,459,289 ---------- ----------
NOTE 7--INCOME TAXES The Partnership is not a taxable entity for federal income tax purposes. Accordingly, no provision for income taxes has been recorded in the accounts of the Partnership. For financial statement purposes, the Partnership allocates net income or loss to each class of partner according to their respective ownership percentages (95% to the Limited Partners and 5% to the General Partner). This convention differs from the income or loss allocation requirements for income tax and Dissolution Event purposes as delineated in the Restated Agreement, as amended. For income tax purposes, the Partnership allocates net income or net loss in accordance with the provisions of such agreement. The Restated Agreement, as amended, requires that upon dissolution of the Partnership, the General Partner will be required to contribute to the Partnership an amount equal to any negative balance which may exist in the General Partner's tax capital account. At December 31, 1998, the General Partner had a positive tax capital account balance. The following is a reconciliation between net income reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ----------- ------------- ------------ Net income.............................................................. $ 623,010 $ 1,574,944 $ 552,157 Financial statement depreciation less than tax depreciation........... (741,889) (244,130) (67,047) Deferred rental income................................................ 29,528 (107,660) (7,475) Other................................................................. 193,981 (445,123) 404,699 ----------- ------------- ------------ Net income for federal income tax reporting purposes.................... $ 104,630 $ 778,031 $ 882,334 ----------- ------------- ------------ ----------- ------------- ------------
23 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) The principal component of "Other" consists of the difference between the tax gain or loss on equipment disposals and the financial statement gain or loss on disposals. The following is a reconciliation between partners' capital reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1998 and 1997:
1998 1997 ------------- ------------- Partners' capital................................................................... $ 7,592,086 $ 7,488,561 Unrealized loss on investment securities.......................................... -- 114,821 Add back selling commissions and organization and offering costs.................. 2,234,203 2,234,203 Financial statement distributions in excess of tax distributions.................. 7,929 7,929 Cumulative difference between federal income tax and financial statement income (loss).......................................................................... (1,872,635) (1,354,255) ------------- ------------- Partners' capital for federal income tax reporting purposes......................... $ 7,961,583 $ 8,491,259 ------------- ------------- ------------- -------------
Unrealized loss on investment securities, financial statement distributions in excess of tax distributions and cumulative difference between federal income tax and financial statement income (loss) represent timing differences. NOTE 8--LEGAL PROCEEDINGS In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court for the Southern District of Florida (the "Court") on behalf of a proposed class of investors in 28 equipment leasing programs sponsored by EFG, including the Partnership (collectively, the "Nominal Defendants"), against EFG and a number of its affiliates, including the General Partner, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the Commonwealth of Massachusetts on behalf of the Nominal Defendants against the Defendants. Both actions are referred to herein collectively as the "Class Action Lawsuit." The Plaintiffs have asserted, among other things, claims against the Defendants on behalf of the Nominal Defendants for violations of the Securities Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary duty, and violations of the partnership or trust agreements that govern each of the Nominal Defendants. The Defendants have denied, and continue to deny, that any of them have committed or threatened to commit any violations of law or breached any fiduciary duties to the Plaintiffs or the Nominal Defendants. On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a Stipulation of Settlement setting forth terms pursuant to which a settlement of the Class Action Lawsuit is intended to be achieved and which, among other things, is expected to reduce the burdens and expenses attendant to continuing litigation. The Stipulation of Settlement was based upon and superseded a Memorandum of Understanding between the parties dated March 9, 1998 which outlined the terms of a possible settlement. The Stipulation of Settlement was filed with the Court on July 23, 1998 and was preliminarily approved by the Court on August 20, 1998 when the Court issued its "Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order"). Prior to issuing a final order, the Court will hold a fairness hearing that 24 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) will be open to all interested parties and permit any party to object to the settlement. The investors of the Partnership and all other plaintiff class members in the Class Action Lawsuit will receive a Notice of Settlement and other information pertinent to the settlement of their claims that will be mailed to them in advance of the fairness hearing. Since first executing the Stipulation of Settlement, the Court has scheduled two fairness hearings, the first on December 11, 1998 and the second on March 19, 1999, each of which was postponed because of delays in finalizing certain information materials that are subject to regulatory review prior to being distributed to investors. On March 15, 1999, counsel for the Plaintiffs and the Defendants entered into an amended stipulation of settlement (the "Amended Stipulation") which was filed with the Court on March 15, 1999. The Amended Stipulation was preliminarily approved by the Court by its "Modified Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999 (the "March 22 Order"). The Amended Stipulation, among other things, divides the Class Action Lawsuit into two separate sub-classes that can be settled individually. This revision is expected to expedite the settlement of one sub-class by the middle of 1999. However, the second sub-class, involving the Partnership and 10 affiliated partnerships (collectively referred to as the "Exchange Partnerships"), is expected to remain pending for a longer period due, in part, to the complexity of the proposed settlement pertaining to this class. Specifically, the settlement of the second sub-class is premised on the consolidation of the Exchange Partnerships' net assets (the "Consolidation"), subject to certain conditions, into a single successor company ("Newco"). Under the proposed Consolidation, the partners of the Exchange Partnerships would receive both common stock in Newco and a cash distribution; and thereupon the Exchange Partnerships would be dissolved. In addition, EFG would contribute certain management contracts, operations personnel, and business opportunities to Newco and cancel its current management contracts with all of the Exchange Partnerships. Newco would operate as a finance company specializing in the acquisition, financing and servicing of equipment leases for its own account and for the account of others on a contract basis. Newco also would use its best efforts to list its shares on the Nasdaq National Market or another national exchange or market as soon after the Consolidation as Newco deems that market conditions and its business operations are suitable for listing its shares and Newco has satisfied all necessary regulatory and listing requirements. The potential benefits and risks of the Consolidation will be presented in a Solicitation Statement that will be mailed to all of the partners of the Exchange Partnerships as soon as the associated regulatory review process is completed and at least 60 days prior to the fairness hearing. A preliminary Solicitation Statement was filed with the Securities and Exchange Commission on August 24, 1998 and remains pending. Class members will be notified of the actual fairness hearing date when it is confirmed. One of the principal objectives of the Consolidation is to create a company that would have the potential to generate more value for the benefit of existing limited partners than other alternatives, including continuing the Partnership's customary business operations until all of its assets are disposed in the ordinary course of business. To facilitate the realization of this objective, the Amended Stipulation provides, among other things, that commencing March 22, 1999, the Exchange Partnerships may collectively invest up to 40% of the total aggregate net asset values of all of the Exchange Partnerships in any investment, including additional equipment and other business activities that the general partners of the Exchange Partnerships and EFG reasonably believe to be consistent with the anticipated business interests and objectives of Newco, subject to certain limitations, including that the Exchange Partnerships retain 25 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) sufficient cash balances to pay their respective shares of the cash distribution referenced above in connection with the proposed Consolidation. In the absence of the Court's authorization to enter into such activities, the Partnership's Restated Agreement, as amended, would not permit new investment activities without the approval of limited partners owning a majority of the Partnership's outstanding Units. Accordingly, to the extent that the Partnership invests in new equipment, the Manager (being EFG) will (i) defer, until the earlier of the effective date of the Consolidation or December 31, 1999, any acquisition fees resulting therefrom and (ii) limit its management fees on all such assets to 2% of rental income. In the event that the Consolidation is consummated, all such acquisition and management fees will be paid to Newco. To the extent that the Partnership invests in other business activities not consisting of equipment acquisitions, the Manager will forego any acquisition fees and management fees related to such investments. In the event that the Partnership has acquired new investments, but the Partnership does not participate in the Consolidation, Newco will acquire such new investments for an amount equal to the Partnership's net equity investment plus an annualized return thereon of 7.5%. Finally, in the event that the Partnership has acquired new investments and the Consolidation is not effected, the General Partner will use its best efforts to divest all such new investments in an orderly and timely fashion and the Manager will cancel or return to the Partnership any acquisition or management fees resulting from such new investments. The Amended Stipulation and previous Stipulation of Settlement prescribe certain conditions necessary to effecting final settlements, including providing the partners of the Exchange Partnerships with the opportunity to object to the participation of their partnership in the Consolidation. Assuming the proposed settlement is effected according to present terms, the Partnership's share of legal fees and expenses related to the Class Action Lawsuit is estimated to be approximately $82,000, all of which was accrued and expensed by the Partnership in 1998. In addition, the Partnership's share of fees and expenses related to the proposed Consolidation is estimated to be approximately $216,200, all of which was accrued and expensed by the Partnership in 1998. While the Court's August 20 Order enjoined certain class members, including all of the partners of the Partnership, from transferring, selling, assigning, giving, pledging, hypothecating, or otherwise disposing of any Units pending the Court's final determination of whether the settlement should be approved, the March 22 Order permits the partners to transfer Units to family members or as a result of the divorce, disability or death of the partner. No other transfers are permitted pending the Court's final determination of whether the settlement should be approved. The provision of the August 20 Order which enjoined the General Partners of the Exchange Partnerships from, among other things, recording any transfers not in accordance with the Court's order remains effective. There can be no assurance that settlement of either sub-class of the Class Action Lawsuit will receive final Court approval and be effected. There also can be no assurance that all or any of the Exchange Partnerships will participate in the Consolidation because if limited partners owning more than one-third of the outstanding Units of a partnership object to the Consolidation, then that partnership will be excluded from the Consolidation. The General Partner and its affiliates, in consultation with counsel, concur that there is a reasonable basis to believe that final settlements of each sub-class will be achieved. However, in the absence of final settlements approved by the Court, the Defendants intend to defend vigorously against the claims asserted in the Class Action Lawsuit. Neither the General Partner nor its affiliates can predict with any degree of certainty the cost of continuing litigation to the Partnership or the ultimate outcome. 26 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 (CONTINUED) In addition to the foregoing, the Partnership is a party to other lawsuits that have arisen out of the conduct of its business, principally involving disputes or disagreements with lessees over lease terms and conditions. The following action had not been finally adjudicated at December 31, 1998: ACTION INVOLVING NATIONAL STEEL CORPORATION EFG, on behalf of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs"), filed an action in the Commonwealth of Massachusetts Superior Court, Department of the Trial Court in and for the County of Suffolk on July 27, 1995, for damages and declaratory relief against a lessee of the Partnership, National Steel Corporation ("National Steel"). The Complaint seeks reimbursement from National Steel of certain sales and/or use taxes paid to the State of Illinois in connection with equipment leased by National Steel from the Plaintiffs and other remedies provided under the Master Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of Removal, which removed the case to United States District Court, District of Massachusetts. On September 7, 1995, National Steel filed its Answer to the Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and sought declaratory relief, alleging breach of contract, implied covenant of good faith and fair dealing, and specific performance. The Plaintiffs filed an Answer to National Steel's Counterclaims on September 29, 1995. The parties discussed settlement with respect to this matter for some time; however, the negotiations were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint alleging further default under the MLA and filed a motion for Summary Judgment on all claims and Counterclaims. The Court held a hearing on the Plaintiff's motion in December 1997 and later entered a decision dismissing certain of National Steel's Counterclaims, finding in favor of the Plaintiffs on certain issues and in favor of National Steel on other issues. In March 1999, the Plaintiffs obtained payment for certain of the disputed items and have resumed settlement discussions to resolve remaining issues. The General Partner does not believe that the resolution of the remaining claims will have a material adverse effect on the Partnership's financial position or results of operations. 27 ADDITIONAL FINANCIAL INFORMATION AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST OF EQUIPMENT DISPOSED FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 The Partnership classifies all rents from leasing equipment as lease revenue. Upon expiration of the primary lease terms, equipment may be sold, rented on a month-to-month basis or re-leased for a defined period under a new or extended lease agreement. The proceeds generated from selling or re-leasing the equipment, in addition to any month-to-month revenue, represent the total residual value realized for each item of equipment. Therefore, the financial statement gain or loss, which reflects the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition may not reflect the aggregate residual proceeds realized by the Partnership for such equipment. The following is a summary of cash excess associated with equipment dispositions occurring in the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996 ------------ ------------ ------------ Rents earned prior to disposal of equipment, net of interest charges.... $ 1,360,555 $ 6,304,322 $ 2,585,344 Sale proceeds realized upon disposition of equipment.................... 135,384 1,041,030 692,766 ------------ ------------ ------------ Total cash generated from rents and equipment sale proceeds............. 1,495,939 7,345,352 3,278,110 Original acquisition cost of equipment disposed......................... 854,679 6,190,551 3,249,160 ------------ ------------ ------------ Excess of total cash generated to cost of equipment disposed............ $ 641,260 $ 1,154,801 $ 28,950 ------------ ------------ ------------ ------------ ------------ ------------
28 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS, SALES AND REFINANCINGS FOR THE YEAR ENDED DECEMBER 31, 1998
SALES AND OPERATIONS REFINANCINGS TOTAL ------------- ------------ ------------- Net income............................................................ $ 503,286 $ 119,724 $ 623,010 Add: Depreciation........................................................ 1,083,372 -- 1,083,372 Management fees..................................................... 113,260 -- 113,260 Write-down of investment securities--affiliate...................... 185,281 -- 185,281 Book value of disposed equipment.................................... -- 15,660 15,660 Less: Principal reduction of notes payable................................ (942,464) -- (942,464) ------------- ------------ ------------- Cash from operations, sales and refinancings........................ 942,735 135,384 1,078,119 Less: Management fees..................................................... (113,260) -- (113,260) ------------- ------------ ------------- Distributable cash from operations, sales and refinancings.......... 829,475 135,384 964,859 Other sources and uses of cash: Cash at beginning of year........................................... 2,324,652 195,288 2,519,940 Net change in receivables and accruals.............................. 393,138 -- 393,138 Less: Cash distributions paid............................................. (303,634) (330,672) (634,306) ------------- ------------ ------------- Cash at end of year................................................... $ 3,243,631 $ -- $ 3,243,631 ------------- ------------ ------------- ------------- ------------ -------------
29 AMERICAN INCOME FUND I-C, A MASSACHUSETTS LIMITED PARTNERSHIP SCHEDULE OF COSTS REIMBURSED TO THE GENERAL PARTNER AND ITS AFFILIATES AS REQUIRED BY SECTION 9.4 OF THE AMENDED AND RESTATED AGREEMENT AND CERTIFICATE OF LIMITED PARTNERSHIP DECEMBER 31, 1998 For the year ended December 31, 1998, the Partnership reimbursed the General Partner and its Affiliates for the following costs: Operating expenses................................................ $ 211,817
30 EX-23 3 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of American Income Fund I-C, a Massachusetts Limited Partnership, of our report dated March 10, 1999, included in the 1998 Annual Report to the Partners of American Income Fund I-C, a Massachusetts Limited Partnership. ERNST & YOUNG LLP Boston, Massachusetts March 10, 1999 EX-99.(I) 4 EXHIBIT 99.(I) Original AIRCRAFT LEASE AGREEMENT [49587] between OLIVIA CORP., LESSOR and RENO AIR, INC., LESSEE dated as of November 16, 1995 AIRCRAFT: McDonnell Douglas MD-87 MANUFACTURER'S SERIAL NO.: 49587 FAA REGISTRATION NO.: N753RA THE SINGLE EXECUTED ORIGINAL OF THIS LEASE, TOGETHER WITH ANY ORIGINAL LEASE SUPPLEMENT DELIVERED PURSUANT HERETO, EACH MARKED "ORIGINAL," SHALL BE THE "ORIGINAL" AND ALL OTHER COUNTERPARTS OF THIS LEASE AND ANY LEASE SUPPLEMENT SHALL BE MARKED "DUPLICATE ORIGINAL." TO THE EXTENT THAT THIS LEASE AND ANY LEASE SUPPLEMENT CONSTITUTES CHATTEL PAPER, AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION, NO SECURITY INTEREST MAY BE CREATED THROUGH TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE "ORIGINAL." TABLE OF CONTENTS SECTION 1 DEFINITIONS ................................................... -1- SECTION 2 LEASE OF AIRCRAFT ............................................ -13- SECTION 3 DELIVERY AND ACCEPTANCE; TERM ................................ -13- SECTION 4 LESSEE'S CONDITIONS PRECEDENT ................................ -15- SECTION 5 RENT, SECURITY DEPOSIT AND MAINTENANCE RESERVES............... -17- SECTION 6 REPRESENTATIONS AND WARRANTIES ............................... -20- SECTION 7 POSSESSION, USE, MAINTENANCE, TITLE AND REGISTRATION ....................................... -24- SECTION 8 REPLACEMENT OF PARTS: ALTERATIONS, MODIFICATIONS AND ADDITIONS .................................. -31- SECTION 9 INSPECTION; FINANCIAL INFORMATION ............................ -35- SECTION 10 COVENANTS OF LESSEE .......................................... -36- SECTION 11 TAXES ........................................................ -38- SECTION 12 EVENT OF LOSS ................................................ -40- SECTION 13 INSURANCE .................................................... -43- SECTION 14 INDEMNIFICATION .............................................. -47- SECTION 15 LIENS ........................................................ -49- SECTION 16 PERFECTION OF TITLE AND FURTHER ASSURANCES ................... -50- SECTION 17 REDELIVERY OF AIRCRAFT AND RECORDS ........................... -51- -i- SECTION 18 EVENTS OF DEFAULT ............................................ -54- SECTION 19 REMEDIES ..................................................... -57- SECTION 20 ALIENATION ................................................... -59- SECTION 21 MISCELLANEOUS ................................................ -60- SECTION 22 SUBLEASE; ASSIGNMENT; CRAF PROGRAM ........................... -63- SECTION 23 RIGHT OF FIRST REFUSAL ....................................... -66- SECTION 24 ENTIRE AGREEMENT ............................................. -66- SECTION 25 CONFIDENTIALITY .............................................. -67- EXHIBIT "A" AIRCRAFT SPECIFICATIONS ...................................... -69- EXHIBIT "B" AIRCRAFT DOCUMENTATION ....................................... -70- EXHIBIT "C" CERTIFICATE OF ACCEPTANCE .................................... -71- EXHIBIT "D" LEASE SUPPLEMENT [49587] NO. 1 ............................... -73- EXHIBIT "E" APPOINTMENT AS ATTORNEY-IN-FACT .............................. -78- EXHIBIT "F" REDELIVERY CERTIFICATE ....................................... -80- EXHIBIT "G" DELIVERY CONDITIONS .......................................... -82- EXHIBIT "H" LEASE IDENTIFICATION ......................................... -84- EXHIBIT "I" REDELIVERY CONDITIONS ........................................ -85- EXHIBIT "J" CREDIT STANDARDS ............................................. -90- EXHIBIT "K" ASSIGNMENT OF LEASE AND CONSENT .............................. -91- -ii- AIRCRAFT LEASE AGREEMENT [49587] THIS AIRCRAFT LEASE AGREEMENT [49587], made as of this 16th day of November, 1995 (the "Lease"), by and between OLIVIA CORP., a corporation formed under the laws of Delaware ("LESSOR"), and RENO AIR, INC., a corporation formed under the laws of Nevada ("LESSEE"). WHEREAS, LESSEE desires to lease the Aircraft (as hereinafter defined) from LESSOR and LESSOR is willing to lease the Aircraft to LESSEE, in accordance with and subject to the terms and conditions of this Lease. NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by the parties hereto, LESSOR and LESSEE agree as follows: SECTION I DEFINITIONS The following terms shall have the following respective meanings for all purposes of this Lease and shall be equally applicable to both the singular and the plural forms of the terms herein defined. Any agreement referred to below shall mean such agreement, as amended, supplemented and modified from time to time: "Act" shall mean Subtitle VII of Title 49 of the United States Code and the rules and regulations promulgated thereunder. "Affiliate" shall mean, with respect to any Person, any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person. "Agreed Value" shall mean Fourteen Million Dollars ($14,000,000.00) with respect to the Aircraft. "Air Authority" shall mean, as applicable, the DOT, the FAA and/or the Administrator of the FAA, or any predecessor or successor thereto. "Aircraft" shall mean the Airframe, together with the two (2) Engines (or any Replacement Engine substituted for either of such Engines hereunder), all as more particularly described on Exhibit "A" hereto, whether or not any of such initial or Replacement Engines may, from time to time, be installed on such Airframe or may be installed on any other airframe or any other aircraft. "Aircraft Documents" shall mean the items identified in Exhibit "B" hereto. "Airframe" means (i) the McDonnell Douglas model MD-87 aircraft (excluding Engines or engines from time to time installed thereon) bearing U.S. registration no. N753RA and manufacturer's serial no. 49587, and (ii) any and all Parts, so long as the same shall be incorporated in such Airframe, and any and all Parts removed from such Airframe, so long as title to such Parts shall remain vested in LESSOR in accordance with the terms of Section 8(A). "Airframe Reserve" shall have the meaning set forth in the Lease Supplement. "Approved Insure " shall mean any reputable insurance company or insurance broker, approved by LESSOR, for the purpose of providing or confirming the existence of any insurance required under this Lease. "APU" means (i) the auxiliary power unit listed in the Lease Supplement, (ii) any and all Parts, so long as such Parts are incorporated in, installed on or attached to such auxiliary power unit or so long as title to such Parts is vested in LESSOR in accordance with the terms of Section 8(A) after removal from such auxiliary power unit, and (iii) insofar as the same belong to LESSOR, all substitutions, replacements or renewals from time to time made in or to such auxiliary power unit or to any of the Parts referred to in clause (ii) above, as required or permitted under this Lease. "Authorized Maintenance Performer" shall mean any FAA authorized repair station or any authorized FAA Part 121 air carrier having the authority to perform maintenance and repairs to aircraft of the same type as the Aircraft. The identity of the Authorized Maintenance Performer and such other information about such party shall be disclosed by LESSEE to LESSOR upon LESSOR's reasonable request. -2- "Basic Rent" shall mean the amount payable for the period commencing on the First Basic Rent Date through the remaining period of the Term in accordance with Section 5(A)(2) hereof and the Lease Supplement. "Business Day" shall mean any day other than a Saturday, Sunday or day on which banks are required or authorized to close in the States of New York or Nevada. "Certificate of Acceptance" shall mean the written certificate of LESSEE, in substantially the form of Exhibit "C" hereto, pursuant to which LESSEE accepts delivery of the Aircraft from LESSOR and confirms that the Aircraft is in the condition required by this Lease. "Code" shall mean the United States Internal Revenue Code of 1986, as amended from time to time. "Compensation" shall have the meaning set forth in Section 12(D) hereof. "Covered Maintenance" shall have the meaning set forth in Section 7(D)(iii) hereof. "CRAF Program" shall mean the Civil Reserve Air Fleet Program authorized under 10 U.S.C. ss. 9511 et seq. "Credit Standards" shall have the meaning set forth on Exhibit "J" hereto. "Cycle" shall mean one takeoff and landing of the Aircraft, Airframe or, with respect to any Engine not installed on the Airframe, of the airframe on which such Engine is installed. "Default" means any event which, upon the giving of notice or the lapse of time would constitute an Event of Default. "Delivery Location" shall mean Will Rogers Airport, Oklahoma City, Oklahoma or such other location in the continental United States as may be mutually agreed to by the parties. "Dollars" or "$" shall mean the legal currency of the United States of America. -3- "DOT" shall mean the United States Department of Transportation or any governmental person, agency or authority succeeding to the functions of such Department of Transportation. "Effective Date" shall mean the date on which LESSEE signs and delivers to LESSOR Lease Supplement No. 1 to this Lease. "Engine" means (i) each of the two (2) Pratt & Whitney model JT8D-217C engines bearing manufacturer's serial numbers and otherwise as described in the Certificate of Acceptance and Lease Supplement No. 1, whether or not from time to time installed on the Airframe or installed on any other airframe or any other aircraft, and (ii) any Replacement Engine, whether or not from time to time installed on the Airframe or any other airframe or any other aircraft, together, in each case, with any and all Parts incorporated in such Engine and any and all Parts removed from such Engine, so long as title to such Parts shall remain vested in LESSOR in accordance with the terms of Section 8(A). At such time as a Replacement Engine shall be substituted hereunder and the Engine for which the substitution is made shall be released, such Replacement Engine shall constitute an Engine hereunder and such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means, as of any date of determination, all Engines leased hereunder. "Engine Manufacture" means United Technologies Corporation, Pratt & Whitney Group, Commercial Products Division, a Delaware corporation, in its capacity as manufacturer of the Engines, and its successors and assigns. "Engine Reserves" shall have the meaning set forth in the Lease Supplement. "Equipment Change" shall have the meaning set forth in Section 8(C) hereof. "Event of Default" shall have the meaning set forth in Section 18 hereof. "Event of Loss" shall mean, with respect to the Aircraft, Airframe or any Engine, any of the following events with respect to such property: (i) loss of such property due to destruction, damage beyond repair or rendition of such property unfit for normal use by LESSEE by any cause whatsoever, or any damage to such property which results in an insurance settlement with respect to such property on the basis of a total loss or a constructive total loss or a compromised total loss; (ii) the disappearance, loss, theft, -4- hijacking, condemnation, confiscation or seizure of, or requisition of use or title of, such property for a period in excess of sixty (60) days, other than a requisition for use by the U.S. Government, provided that such requisition of use does not extend beyond the end of the Term; (iii) any divestiture of title to an Engine treated as an Event of Loss pursuant to Section 12(B) or any other provision hereof; or (iv) the operation or location of such property, while under requisition for use by the U.S. Government, in any area excluded from coverage by any insurance policy in effect with respect thereto required by the terms of Section 13, if LESSEE shall be unable to obtain an indemnity in lieu thereof from the U.S. Government on the terms provided in Section 13. An Event of Loss with respect to the Aircraft shall be deemed to have occurred if an Event of Loss occurs with respect to the Airframe, as set forth in Lease Supplement No. 1. "Expiration Date" shall mean the originally scheduled last day of the Term, as set forth in Lease Supplement No. 1. "FAA" shall mean the Federal Aviation Administration of the DOT or any governmental person, agency or other authority succeeding to the functions of the Federal Aviation Administration. "FAR" shall mean the United States Federal Aviation Regulations currently in effect or as hereafter amended or modified. "First Basic Rent Date" shall mean January 15, 1996. "First Interim Rent Date" shall mean the earlier of (i) the date the Aircraft is placed in revenue service by the Lessee and (ii) fourteen (14) days from the Effective Date. "Flight Hour" shall mean each hour or fraction thereof elapsed from the moment the wheels of the Aircraft leave the ground through the moment the wheels of the Aircraft, Airframe or, with respect to any Engine not installed on the Airframe, of the airframe on which such Engine is installed, touch down upon the ground. "Governmental Entity" shall mean and include: (i) any national government and any political subdivision thereof or local jurisdiction therein; (ii) any board, commission, department, division, organ, instrumentality, court or agency of the foregoing, however constituted; and (iii) any association, organization or institution of which any of the foregoing is a member, or to whose jurisdiction any of the foregoing is subject, or in whose activities any of the foregoing is a participant, but only to the extent -5- that any such association, organization or institution has jurisdiction over the Aircraft or its operations. "Hourly Rent" shall mean Five Hundred ($500.00) Dollars for each Flight Hour or fraction thereof that the Aircraft is operated for any period in which Hourly Rent is required to be calculated hereunder. "Indebtedness" shall mean, with respect to any Person, all obligations of such Person for the payment or repayment of money, whether present or future, actual or contingent. "Indemnitee" means LESSOR, Mortgagee, their respective affiliated entities (and the successors, assigns, directors, officers, shareholders, employees and agents of such affiliated entities), successors and permitted assigns and their respective directors, officers, shareholders, employees and agents. "Interim Period" shall mean the period commencing on the First Interim Rent Date through and including January 14, 1996. "Interim Rent" shall mean the amount payable by LESSEE to LESSOR pursuant to Section 5(A)(1) hereof. "Landing Gear" means (i) each of the three landing gear listed in the Lease Supplement, (ii) any and all Parts, so long as such Parts are incorporated in, installed on, attached to or appurtenant to any such landing gear assemblies or so long as title to such Parts is vested in LESSOR in accordance with the terms of Section 8(A) after removal from any such landing gear, and (iii) all substitutions, replacements or renewals from time to time made in or to any such landing gear or to any of the Parts referred to in clause (ii) above as required or permitted under this Lease. "Landing Gear Reserves" shall have the meaning set forth in the Lease Supplement. "Law" shall mean and include: (i) any statute, decree, constitution, regulation, order or other directive of any Governmental Entity; (ii) any treaty, pact, compact or other agreement to which any Governmental Entity is a signatory or party; (iii) any judicial or administrative interpretation or application of any of the foregoing; and (iv) any amendment or revision of any of the foregoing. -6- "Lease," "this Lease," "this Agreement," "hereby," "herein," "hereof," "hereunder" or other like words shall mean this Aircraft Lease Agreement, as the same may be supplemented or amended, in writing, from time to time. "Lease Assignment" shall mean the Assignment of Lease and Consent between Lessor, Lessee and Mortgagee, substantially in the form of Exhibit "K" hereto. "Lease Documents" shall mean this Lease, each Lease Supplement, the Certificate of Acceptance, the Power of Attorney and the Lease Assignment. "Lease Supplement" means a supplement to this Lease, substantially in the form attached as Exhibit "D" hereto, subjecting the property described therein to this Lease. "LESSEE's Address" shall mean 220 Edison Way, Reno, Nevada 89502, Attention: Paul H. Tate, Vice President Finance, Treasurer and Chief Financial Officer; Telefax No.: +1-702-829-5754. "LESSOR's Address" shall mean c/o Interadvice Anstalt, Landstrasse 25, FL-9490, Vaduz, Liechtenstein, Attention: Georg Kieber; Telefax No.: +41-75-232-0542. "LESSOR's Liens" means the Liens of any Person claiming by, through, against or under LESSOR, which arise as a result of (i) claims by any such Person not related to, or expressly permitted by, the Lease, (ii) any act or omission of any Person claiming by, through, against or under LESSOR which is not expressly permitted by the Lease, (iii) taxes or expenses imposed against any such Person (or the consolidated group of taxpayers of which it is a member) for which LESSEE is not obligated to indemnify pursuant to Section 11, or (iv) claims against any such Person arising out of any transfer by such Person of its interest in the Aircraft, other than a transfer resulting from LESSOR's exercise of remedies, pursuant to Section 19, while an Event of Default has occurred and is continuing. "LIBID" means LIBOR minus 1/4%. "LIBOR" means the rate per annum at which deposits in Dollars are being offered to prime banks in the London interbank market at 11:00 a.m. in London by the British Bankers' Association designated banks which appears on the Telerate page 3750 on the second London Banking Day prior to any Rent Date for the period of one month (or such other page as may replace the Telerate page 3750 on that system for the purpose -7- of displaying London Interbank Offered Rates of leading reference banks). If the LESSOR shall be unable to ascertain LIBOR when LIBOR is required to be calculated hereunder, then LIBOR shall equal the rate per annum equal to Lender's actual cost of funds in Dollars for the time remaining during the Term measured from such Rent Date. "Lien" shall mean any mortgage, pledge, lien, encumbrance, security interest or other claim affecting the title to, or any interest in, property. "Loan Agreement" means the Secured Loan Agreement dated as of November __, 1995 between Lessor and Mortgagee pursuant to which the Mortgagee has provided financing for the Aircraft. "London Banking Day" shall mean any day (excluding a Saturday, a Sunday or a day on which banks are required to close in London, England) on which deposits in Dollars are being offered to prime banks in the London interbank market by the British Bankers' Association designated banks. "Maintenance Program" shall mean LESSEE's McDonnell Douglas MD-80 FAR Part 121 FAA-approved maintenance program encompassing scheduled maintenance, condition-monitored maintenance and on-condition maintenance of airframe, engines and components of the Aircraft, including, but not limited to, servicing, testing, preventive maintenance, repairs, structural inspections, system checks, overhauls, approved modifications, mandatory service bulletins, mandatory engineering orders, airworthiness directives, corrosion control inspections and treatments. "Maintenance Reserve Date" means the 10th day after each Rent Date (other than the First Interim Rent Date) and the date of the Return Occasion. "Manufacturer" shall mean McDonnell Douglas Corporation, a Maryland corporation, in its capacity as manufacturer of the Airframe, and its successors and assigns. "Minimum Basic Rent" shall have the meaning set forth in the Lease Supplement. "Minimum Liability Coverage" shall mean Three Hundred Fifty Million ($350,000,000.00) Dollars per occurrence. -8- "Mortgage" shall mean that certain Aircraft Chattel Mortgage and Security Agreement, dated as of the date of this Lease, made by LESSOR and delivered to Mortgagee. "Mortgagee" shall mean Credit Lyonnais/PK AIRFINANCE, New York Branch ("AIRFINANCE"), a corporation formed under the laws of the Grand Duchy of Luxembourg, or any transferee of AIRFINANCE in accordance with the terms of the Loan Agreement. "Officer's Certificate" shall mean a certificate signed by the chairman, the president, any vice president, the treasurer, any assistant treasurer, the secretary or any assistant secretary of the Person providing such certificate. "Overdue Rate" shall mean the rate of interest announced or published from time to time by Citibank, N.A., New York, New York as its base or prime lending rate plus three percent (3%) per annum. "Parts" means all appliances, parts, instruments, avionics, appurtenances, accessories, furnishings and other equipment or components, of whatever nature (other than complete Engines or Engines and other than removable Parts and any items owned by LESSEE or leased by LESSEE from a third party, other than LESSOR, in accordance with Section 8(C)), which are, from time to time, incorporated in the Airframe or any Engine, or so long as title to such Parts shall remain vested in LESSOR, in accordance with Section 8(A) hereof, after removal from the Airframe or any Engine. "Passenger Convenience Equipment" shall mean components or systems installed on, carried in or affixed to the Aircraft which are used to provide individual air-to-ground telephone communications for hire or electronic entertainment to passengers aboard the Aircraft and which were not originally incorporated or installed in or attached to the Aircraft at the time of delivery under this Lease. "Permitted Liens" shall mean, with respect to the Aircraft, the Airframe or any Engine (a) the respective rights of the parties under this Lease and each Lease Supplement; (b) LESSOR's Liens; (c) (i) liens for taxes, assessments or other governmental charges which are not yet due, or (ii) liens for taxes, assessments or other governmental charges which are due and are being contested in good faith by appropriate proceedings, so long as such proceedings do not involve any material danger of the sale, forfeiture or loss of the Aircraft, the Airframe or any Engine and so long as such liens, assessment or governmental charges do not exceed $500,000.00 in the aggregate; -9- provided, however, that in the event such liens, assessments or governmental charges exceed $500,000.00 in the aggregate, same shall constitute a Permitted Lien, provided that LESSEE posts a bond issued by a reputable surety or bonding company in an amount equal to at least one and one-half (1-1/2) times the amount of the lien, assessment or governmental charge claimed (including all penalties and interest thereon) or, alternatively, provides LESSOR with security in an amount and form reasonably acceptable to LESSOR; (d) (i) materialmen's, mechanic's, worker's, repairer's, employee's or other like liens for amounts the payment of which is not yet delinquent for more than thirty (30) days, or (ii) materialmen's, mechanic's, worker's, repairer's, employee's or other like liens which are being contested in good faith by appropriate proceedings, so long as such proceedings do not involve any material danger of the sale, forfeiture or loss of the Aircraft, the Airframe or any Engine and so long as such liens do not exceed $500,000.00 in the aggregate; provided, however, that in the event such liens exceed $500,000.00 in the aggregate, same shall constitute a Permitted Lien, provided that LESSEE posts a bond issued by a reputable surety or bonding company in an amount equal to at least one and one-half (1-1/2) times the amount of the lien claimed (including all penalties and interest thereon) or, alternatively, provides LESSOR with security in an amount and form reasonably acceptable to LESSOR; (e) liens arising out of any judgment or award, unless the judgment secured shall not, within thirty (30) days after entry thereof, have been discharged or vacated or execution thereof stayed pending appeal or shall not have been discharged, vacated or reversed within thirty (30) days after the execution of such stay, and provided such lien presents no material danger of the sale, forfeiture or loss of the Aircraft, the Airframe or any Engine or of LESSOR's interest therein and so long as such liens do not exceed $500,000.00 in the aggregate; provided, however, that in the event such liens exceed $500,000.00 in the aggregate, same shall constitute a Permitted Lien, provided that LESSEE posts a bond issued by a reputable surety or bonding company in an amount equal to at least one and one-half (1-1/2) times the amount of the lien claimed (including all penalties and interest thereon) or, alternatively, provides LESSOR with security in an amount and form reasonably acceptable to LESSOR; or (f) the Lien, created by the Mortgage and Lease Assignment. "Person" shall mean and include any individual, corporation, partnership, firm, joint venture, trust, unincorporated organization, association, Governmental Entity, or any organization or association of which any of the foregoing is a member or participant. "Power of Attorney" shall mean that certain power of attorney from LESSEE to LESSOR and Mortgagee, to be executed in the form attached hereto as Exhibit "E", pursuant to which LESSEE designates each of LESSOR and Mortgagee as -10- attorney-in-fact, upon the occurrence and continuation of an Event of Default, to do all things which LESSEE could do under this Lease in the event LESSEE fails to fulfill such obligations hereunder, including, but not limited to, executing and delivering such releases or terminations of this Lease upon the occurrence and continuation of an Event of Default or at the Expiration Date, as LESSOR or Mortgagee shall deem necessary or desirable. "Redelivery Certificate" shall mean the written certificate of LESSOR, in substantially the form of Exhibit "F" hereto, pursuant to which LESSOR accepts redelivery of the Aircraft from LESSEE and confirms that the Aircraft is in the condition required by this Lease on the Redelivery Occasion. "Redelivery Location" shall mean Reno/Tahoe International Airport, Reno, Nevada or such other location in the continental United States as may be mutually agreed to by the parties. "Redelivery Occasion" shall have the meaning set forth in Section 17(A) hereof. "Related Aircraft" shall mean any or all of the aircraft leased by LESSOR to LESSEE pursuant to the Related Lease Agreement. "Related Lease Agreement" means the Aircraft Lease Agreement [49641] to be entered into between Boxen Corp. and LESSEE with respect to the leasing by Boxen Corp. to LESSEE of one (1) McDonnell Douglas MD-87 aircraft bearing manufacturer's serial number 49641, as such aircraft is more particularly described in such agreement and as such agreement may, from time to time, be supplemented or amended pursuant to a written agreement entered into between Boxen Corp. and LESSEE. "Related Lease Default" shall mean a "Default," as defined in the Related Lease Agreement. "Related Lease Event of Default" shall mean an "Event of Default," as defined in the Related Lease Agreement, which shall occur and be continuing in accordance with the terms of such Related Lease Agreement. "Related Security Deposit" shall mean the "Security Deposit" payable by LESSEE to Boxen Corp. in the Related Lease Agreement. -11- "Rent" shall mean Interim Rent, Basic Rent and Supplemental Rent. "Rent Adjustment" shall have the meaning set forth on the Lease Supplement. "Rent Date" shall mean each date on which a payment of Interim Rent and Basic Rent, as the case may be, is due. The first Rent Date shall be the First Interim Rent Date. If a Rent Date shall in any month not be a Business Day, then the Rent Date shall be the immediately following Business Day. "Rent Period" means any period commencing on any given Rent Date and ending on the day immediately preceding the next succeeding Rent Date, provided, however, that the last Rent Period shall end on the Expiration Date. "Second Interim Rent Date" shall have the meaning set forth in Section 5(A)(1)(i) hereof. "Security Deposit" shall mean the amount set forth in the Lease Supplement. "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Interim Rent and Basic Rent) which LESSEE assumes or agrees to pay to LESSOR or any other Person hereunder, including, without limitation, all amounts required to be paid by LESSEE under its indemnification pursuant to Section 14 hereof. "Taxes" shall mean any and all sales, withholding, use, excise, personal property, ad valorem, value added, stamp, interest equalization or other taxes levied upon LESSOR's or LESSEE's gross levies, customs or other duties, or other charges of any nature, together with any penalties, fines or interest thereon, imposed, levied or assessed by, or otherwise payable to, U.S. Tax Authorities. "Term" means the period commencing on the Effective Date and expiring on the Expiration Date unless shortened in accordance with the provisions of this Lease. "U.S. Air Carrier" shall mean any air carrier operating under a certificate of convenience and necessity issued by the Air Authority or, in the event such certification is no longer issued to air carriers, an air carrier permitted to engage in air transportation of passengers to, from or within the United States. -12- "U.S. Government" shall mean and include: (i) the Federal Government of the United States of America and any political subdivision thereof or local jurisdiction therein; (ii) any board, commission, department, division, organ, instrumentality, court or agency of the foregoing, however constituted; and (iii) any association, organization or institution of which any of the foregoing is a member, or to whose jurisdiction any of the foregoing is subject, or in whose activities any of the foregoing is a participant, but only to the extent that any such association, organization or institution has jurisdiction over the Aircraft or its operations. "U.S. Tax Authorities" shall mean and include: (i) the Internal Revenue Service and any other taxing authority of the Federal Government of the United States of America; and (ii) any taxing authority of any state, county, city or local municipality of the United States of America. "Wet Lease" shall mean any arrangement whereby LESSEE agrees to furnish the Aircraft, Airframe or any Engine to a third party, pursuant to which such Aircraft, Airframe or Engine (i) shall remain in the exclusive possession and operational control of LESSEE's personnel, and (ii) shall be maintained exclusively by LESSEE or an Authorized Maintenance Performer in accordance with the maintenance provisions of this Lease. SECTION 2 LEASE OF AIRCRAFT LESSOR hereby agrees to lease the Aircraft to LESSEE, and LESSEE hereby agrees to lease the Aircraft from LESSOR, pursuant to the provisions of this Lease. SECTION 3 DELIVERY AND ACCEPTANCE; TERM (A) Date of Delivery. Subject to the Aircraft conforming to the conditions set forth in Exhibit "G", LESSEE shall take delivery of the Aircraft and Aircraft Documents on the Effective Date. Lessor shall deliver the Aircraft to Lessee on no later than November 20, 1995. In the event LESSOR is unable to deliver the Aircraft -13- to LESSEE on or before November 20, 1995, and no other provision of this Lease applies which would either excuse the delay or which would provide LESSOR with any additional time to cause delivery of the Aircraft, then, in such event, LESSEE may terminate this Lease without any liability or obligation to the other hereunder. (B) Place of Delivery and Acceptance. The Aircraft and Aircraft Documents shall be delivered to and accepted by LESSEE at the Delivery Location, unless LESSOR and LESSEE otherwise agree in writing upon another location subsequent to the execution of this Lease. The parties agree that the Delivery Location will be selected to minimize the possibility of taxes to be assessed against LESSEE and/or LESSOR. (C) Casualty to Aircraft Preceding Delivery. (i) In the event that any Event of Loss occurs with respect to the Aircraft prior to the Effective Date hereof, this Lease shall terminate and neither the LESSOR nor LESSEE shall have any liability or obligation to the other hereunder. (ii) In the event that on the proposed Effective Date the Aircraft fails to conform to the conditions set forth in Exhibit "G", LESSOR shall, within thirty (30) days from the date of the proposed Effective Date, take such reasonable action as shall be necessary to repair the Aircraft so that it conforms to the conditions set forth in Exhibit "G". If at the end of such thirty (30) day period of time the Aircraft fails to conform to the conditions set forth in Exhibit "G", notwithstanding LESSOR's reasonable actions pursuant to the foregoing sentence, either LESSOR or LESSEE shall have the right to terminate this Lease without any liability or obligation to the other hereunder. (D) Acceptance of Aircraft. The Aircraft to be leased hereunder shall be delivered to LESSEE in its "AS IS," "WHERE IS" condition, SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND REPRESENTATION AS SET FORTH IN SUBSECTION 6(A) HEREOF, except that the Aircraft shall comply with the conditions set forth on Exhibit "G". LESSEE shall indicate and confirm its acceptance of the Aircraft by delivery to LESSOR of a (i) Lease Supplement, and (ii) Certificate of Acceptance, dated on such Effective Date. -14- (E) Term of Lease. The term of this Lease, as to the Aircraft, shall be for the Term. (F) No LESSOR Liability. LESSOR will not be liable for any loss or expense, or any loss of profit, arising from any delay or failure in delivery to LESSEE unless such delay or failure arises as a direct consequence of the willful misconduct of LESSOR, and in no event will LESSOR be liable for any delay or failure which is caused by any breach or delay on the part of Manufacturer. SECTION 4 LESSEE'S CONDITIONS PRECEDENT LESSOR's obligation to lease the Aircraft hereunder to LESSEE shall be subject to the receipt by LESSOR, on or before the Effective Date (or such other date as provided for herein), of the following from LESSEE, all of which shall be satisfactory in form and substance to LESSOR: (1) Certified copy of a resolution of LESSEE's Board of Directors, authorizing the entering into and performance of this Lease together with an incumbency certificate as to the person or persons authorized to execute and deliver this Lease and the other Lease Documents on behalf of LESSEE; (2) LESSEE's articles or certificate of incorporation and by-laws certified by an officer of LESSEE; (3) A favorable opinion of counsel of LESSEE, addressed to LESSOR, dated the Effective Date, as to the matters set forth in clauses (1) through (5) and (7) of Subsection 6(D) hereof, provided however, the opinion shall be to the best of such counsel's knowledge as to primarily factual matters; (4) A favorable opinion of Daugherty, Fowler & Peregrin, special FAA counsel, addressed to LESSOR, opining on such matters as LESSOR shall reasonably require, including, but not limited to, that under the Act: (i) the Aircraft is eligible for registration in the name of LESSOR; (ii) that this Lease and the Lease Assignment are eligible for recording; and (iii) that this Lease and the Lease Assignment have been filed for recording; -15- (5) An Officer's Certificate of LESSEE, dated as of the Effective Date, stating that to the best of such officer's knowledge after due inquiry and investigation: (a) The representations and warranties contained in Subsection 6(D) hereof are true and accurate on and as of such date as though made on and at such time (except to the extent that such representations and warranties relate solely to an earlier date); and (b) No event has occurred and is continuing, or would result from the leasing of the Aircraft, which constitutes an Event of Default or would constitute an Event of Default with the giving of notice or the passage of time or both; (6) Not less than three (3) Business Days prior to the Effective Date, certificates signed by an Approved Insurer(s) as to due compliance with the insurance provisions of Section 13 hereof with respect to the Aircraft; (7) The Power of Attorney, fully signed, notarized and dated on the Effective Date, together with an original certified copy of the resolutions of LESSEE's Board of Directors (which resolutions shall be delivered on or before December 31, 1995), pursuant to which the entering into of the Power of Attorney by the holder thereof was authorized. LESSEE shall, on those dates which shall be the second, fourth, sixth and seventh anniversary dates of the Effective Date, deliver to LESSOR a currently dated replacement Power of Attorney and original certified copy of resolutions of LESSEE's Board of Directors, in form and substance satisfactory to LESSOR, whereupon LESSOR shall return to LESSEE any Powers of Attorney previously delivered by LESSEE to LESSOR; (8) Such UCC-1 financing statements as LESSOR shall reasonably request; (9) The Lease Assignment, as executed by LESSEE; and (10) Such other documents which LESSOR or its counsel may reasonably require. -16- SECTION 5 RENT, SECURITY DEPOSIT AND MAINTENANCE RESERVES (A) Rent. LESSEE covenants and agrees to pay to LESSOR, or to any of LESSOR's assigns designated to LESSEE in writing by LESSOR, the Rent. Time is of the essence with respect to each payment of Rent to be paid by LESSEE to LESSOR hereunder. (1) Interim Rent. (i) Interim Rent shall equal the Hourly Rent for each Rent Period during the Interim Period. Notwithstanding the foregoing, in no event shall the Interim Rent be less than the Minimum Basic Rent other than as set forth in paragraph (ii) of this Section. (ii) Minimum Basic Rent shall be paid by LESSEE to LESSOR in respect of the Aircraft, in advance, on the First Interim Rent Date. Thereafter, on the corresponding date in the immediately following month (the "Second Interim Rent Date"), LESSEE shall pay to LESSOR a pro rata portion of the Minimum Basic Rent based on the number of days remaining in the period from the Second Interim Rent Date through (but not including) the First Basic Rent Date. (iii) In addition to Minimum Basic Rent, LESSEE shall pay to LESSOR the following: (a) no later than five days after the Second Interim Rent Date, an amount equal to the difference, if positive, between (x) the Minimum Basic Rent and (y) Hourly Rent calculated for the period from the First Interim Rent Date through (but excluding) the Second Interim Rent Date; and (b) no later than five days after the First Basic Rent Date, an amount equal to the positive difference, if any, between: (x) the pro rated Minimum Basic Rent paid for the previous Rent Period and (y) Hourly Rent calculated for the period from the Second Interim Rent Date through (but excluding) the First Basic Rent Date. -17- (2) Basic Rent; Rent Adjustment. (i) Basic Rent shall be paid by LESSEE to LESSOR in respect of the Aircraft, in advance, commencing on the First Basic Rent Date and continuing on the corresponding date in each consecutive month during the remainder of the Term. Basic Rent shall be payable in the amount set forth on the Lease Supplement, subject to the Rent Adjustment as set forth therein. (3) Supplemental Rent. LESSEE agrees to pay to LESSOR, or to whomsoever shall be entitled thereto, any and all Supplemental Rent promptly as the same shall become due and owing, and in the event of any failure on the part of LESSEE to pay any Supplemental Rent, LESSOR shall have all rights, powers and remedies provided for in this Lease or by Law or equity or otherwise in the case of nonpayment of Interim Rent or Basic Rent. LESSEE will also pay to LESSOR, on demand, as Supplemental Rent, to the extent permitted by applicable Law, interest at the Overdue Rate on any part of any installment of Interim Rent or Basic Rent not paid within five Business Days when due for the period from and including the Rent Date to and including the date of actual payment in full, and on any Supplemental Rent not paid when due or demanded by LESSOR for any period for which the same shall be overdue. (B) Security Deposit. LESSEE shall deliver to LESSOR the Security Deposit, on the Effective Date, to secure LESSEE's obligations under the Lease. Upon the occurrence and continuation of an Event of Default hereunder or a Related Lease Event of Default, LESSOR may use all or any part of the Security Deposit, in addition to the Related Security Deposit, together with all interest accrued thereon, in the manner provided for in this Lease. (C) Form of Payment. Payment of Rent, the Security Deposit and any other payments due under this Lease, shall be made in Dollars by wire transfer of immediately available funds to LESSOR or its assignee at such address and account as LESSOR may specify in writing, provided that such address shall be an address in the continental United States. Payment shall be made on the Rent Date, or the Business Day thereafter if the Rent Date is not a Business Day, so as to reach LESSOR or its designated depository not later than 1:00 p.m. local time, New York, New York, on the Rent Date or the Business Day thereafter, as the case may be. (D) Rent Not Reduced by Taxes. LESSEE agrees that each payment of Rent pursuant to this Lease shall be free of all Taxes and, in the event that any such Taxes -18- are imposed, levied, assessed by, or otherwise payable with respect to or arising out of the leasing or operation of the Aircraft by LESSEE, LESSEE shall pay such amounts as are necessary to enable LESSOR and each assignee of LESSOR to whom payments of Rent are to be made by LESSEE, to receive each payment of Rent hereunder, under any circumstances and in any event, in the full amounts required hereunder on an after-tax basis, without any reduction whatsoever; provided, however, that this Section 5(D) shall not apply to Taxes not indemnified against pursuant to Section 11(B) hereof. (E) Maintenance Reserve. LESSEE shall pay to LESSOR, on each Maintenance Reserve Date, the Airframe Reserves, the Engine Reserves and the Landing Gear Reserves for the previous Rent Period (each a "Reserve" and collectively, the "Reserves"). Commencing on the first anniversary of the Effective Date and continuing on the anniversary of the Effective Date in each consecutive year during the Term, the per Cycle amount payable by LESSEE to LESSOR with respect to Engine Reserves shall be increased by three and one-half (3.5%) percent from the per Cycle amount of Engine Reserves payable in the preceding year. All Reserves paid by LESSEE to LESSOR will be held by LESSOR in separate accounts for each of the Airframe Reserves, Engine Reserves and Landing Gear Reserves, respectively, and shall be disbursed by LESSOR only to pay for Covered Maintenance pursuant to Section 7(D) hereof. Interest shall accrue on the Reserves at a rate equal to LIBID minus one-quarter percent per annum (the "Reserve Interest"). The Reserve Interest shall form a part of the Airframe Reserves, Engine Reserves and Landing Gear Reserves, respectively. Notwithstanding anything set forth herein to the contrary, if on any Maintenance Reserve Date (i)(a) the Flight Hours for the Airframe, (b) the aggregate Cycles with respect to the Engines, and (c) the aggregate Cycles for the Landing Gear, in each case, respectively, remaining to the next scheduled overhaul (assuming no change in intervals between checks under the Maintenance Program not approved by LESSOR, such approval not to be unreasonably withheld) are more than on the Effective Date, and (ii) LESSEE meets the Credit Standards, then LESSEE shall not be required to pay any Reserves for such Rent Period with respect to such category of Reserves. Time is of the essence with respect to the payment by LESSEE to LESSOR of Reserves. Upon the termination of the Lease with respect to the Aircraft, provided LESSEE has complied with Section 17 hereof and no Default or Related Lease Default has occurred and is continuing, all Reserves held by LESSOR and not used to reimburse LESSEE for Covered Maintenance shall become the property of LESSEE. (F) Net Lease, LESSEE's Obligations; No Set off or Counterclaim. This is a net lease. It is the intent of the parties hereto that this Lease be a "true lease" and an agreement treated as a "lease" under the provisions of the Code. Except as otherwise -19- provided herein (including, without limitation, in Section 5(C)), and without limiting LESSEE's rights in the event of a breach of Section 21(G), LESSEE's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any Set off, counterclaim, recoupment, defense or other right which LESSEE may have against LESSOR; (ii) any defect in the title, airworthiness, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, the Aircraft, Airframe or any Engine, or any interruption or cessation in the use or possession thereof by LESSEE for any reason whatsoever; (iii) any insolvency, bankruptcy, reorganization or similar proceedings by or against LESSEE; or (iv) any restriction, prevention or curtailment of, or interference with, any use of the Aircraft, Airframe or any Engine. SECTION 6 REPRESENTATIONS AND WARRANTIES (A) Disclaimer of Warranties. EXCEPT FOR THE EXPRESS REPRESENTATIONS OF LESSOR SET FORTH IN SECTION 6(B), NEITHER LESSOR NOR ANY OF ITS DIRECTORS, OFFICERS, EMPLOYEES OR REPRESENTATIVES HAS MADE OR WILL BE DEEMED TO HAVE MADE ANY TERM, CONDITION, REPRESENTATION, WARRANTY OR COVENANT EXPRESS OR IMPLIED (WHETHER STATUTORY OR OTHERWISE) AS TO (I) THE CAPACITY, AGE, AIRWORTHINESS, VALUE, QUALITY, DURABILITY, CONFORMITY TO THE PROVISIONS OF THIS LEASE, DESCRIPTION, CONDITION (WHETHER OF THE AIRCRAFT, ANY ENGINE, ANY PART THEREOF OR THE AIRCRAFT DOCUMENTATION), DESIGN, WORKMANSHIP, MATERIALS, MANUFACTURE, CONSTRUCTION, OPERATION, DESCRIPTION, STATE, MERCHANTABILITY, PERFORMANCE, FITNESS FOR ANY PARTICULAR USE OR PURPOSE (INCLUDING THE ABILITY TO OPERATE OR REGISTER THE AIRCRAFT OR USE THE AIRCRAFT DOCUMENTATION IN ANY OR ALL JURISDICTIONS) OR SUITABILITY OF THE AIRCRAFT OR ANY PART THEREOF, AS TO THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, KNOWN OR UNKNOWN, APPARENT OR CONCEALED, EXTERIOR OR INTERIOR, (II) THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK, COPYRIGHT OR OTHER INTELLECTUAL PROPERTY RIGHTS, (III) ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE OR (IV) ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR -20- IMPLIED, WITH RESPECT TO THE AIRCRAFT OR ANY PART THEREOF, ALL OF WHICH ARE HEREBY EXPRESSLY EXCLUDED AND EXTINGUISHED. (B) LESSOR's Representations. As an exception to the foregoing, LESSOR represents, warrants and covenants as follows: (1) LESSOR has the lawful right to lease the Aircraft to LESSEE in accordance with the terms of this Lease; (2) LESSOR is a corporation duly organized and existing in good standing under the laws of Delaware and has the corporate power and authority to carry on its business as presently conducted and to execute, deliver and perform its obligations under this Lease and all other Lease Documents to which LESSOR is a party; (3) This Lease and all other Lease Documents to which LESSOR is a party have been duly authorized by all necessary corporate action on the part of LESSOR, do not require any approval of the stockholder of LESSOR (or if such approval is required, such approval has been obtained), and neither the execution and delivery hereof nor the consummation of the transactions contemplated hereby nor compliance by LESSOR with any of the terms and provisions hereof will contravene any Law applicable to LESSOR or result in any breach of, or constitute any default under, or result in the creation of any Lien other than to the Mortgagee upon any property of LESSOR under, any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement, corporate charter or by-law, or other agreement or instrument to which LESSOR is a party or by which LESSOR or its properties or assets may be bound or affected; (4) This Lease and all other Lease Documents to which LESSOR is a party have been duly entered into and delivered by LESSOR and constitute the valid, legal and binding obligations of LESSOR, enforceable in accordance with their terms, except as such enforceability may be limited by bankruptcy, moratorium, reorganization and similar Laws and by general principles of equity, whether considered in a proceeding at Law or in equity; and (5) LESSOR has good title to the Aircraft. -21- THE REPRESENTATIONS, WARRANTIES AND COVENANTS SET FORTH IN THIS SECTION 6(B) CONSTITUTE THE SOLE EXCEPTION TO SUBSECTION 6(A) AND ARE EXCLUSIVE AND IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES OF LESSOR EXPRESS OR IMPLIED. (C) Manufacturer's Warranties. So long as LESSEE is not in default under this Lease, LESSOR agrees to assign or otherwise make available to LESSEE such rights as LESSOR may have under any warranty, express or implied, with respect to the Aircraft made by the Manufacturer, Engine Manufacturer, any subcontractor or supplier thereof, to the extent that the same may be assigned or otherwise made available to LESSEE and, to the extent that the same may not be assigned or otherwise made available to LESSEE, LESSOR agrees, upon the written request of LESSEE, to exert its efforts, at LESSEE's sole cost and expense, to enforce such rights as LESSOR may have with respect thereto for the benefit of LESSEE; provided, however, that upon an Event of Default all such rights shall, without further action or notice, immediately revert to LESSOR, including all claims thereunder, whether or not perfected. On the date of the Redelivery Occasion, the benefit of any warranty assigned by LESSOR to LESSEE pursuant hereto will be reassigned automatically to LESSOR or its designee. LESSEE's rights under such warranties (including LESSEE's claims and rights to payment thereunder) will revert to LESSOR during any period in which an Event of Default is continuing upon the provision of notice by LESSOR to LESSEE. LESSEE at its own cost and expense will do all such things and execute such documents as may be required for this purpose. LESSEE will diligently and promptly pursue any valid claims it may have against Manufacturer and others under such warranties with respect to the Aircraft and will provide notice of the same to LESSOR. (D) LESSEE's Representations and Warranties. LESSEE represents and warrants, as of the Effective Date, and all such representations and warranties being continuing, that: (1) LESSEE is a corporation duly organized and existing in good standing under the Laws of Nevada and has the corporate power and authority to carry on its business as presently conducted and to perform its obligations under this Lease; (2) This Lease and all other Lease Documents to which LESSEE is a party have been duly authorized by all necessary corporate action on the part of LESSEE, does not require any approval of the stockholders of LESSEE (or if such approval is required, such approval has been obtained), and neither the execution and -22- delivery hereof nor the consummation of the transactions contemplated hereby nor compliance by LESSEE with any of the terms and provisions hereof will contravene any Law applicable to LESSEE or result in any breach of, or constitute any default under, or result in the creation of, any lien, charge or encumbrance upon any property of LESSEE under any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement, corporate charter or by-law, or other agreement or instrument to which LESSEE is a party or by which LESSEE or its properties or assets may be bound or affected; (3) LESSEE has received or has complied with every required consent, approval, order, or authorization of, or registration with, or the giving of prior notice to, any Governmental Entity having jurisdiction with respect to the execution and delivery of this Lease and all other Lease Documents to which LESSEE is a party or the validity and enforceability hereof and thereof; (4) This Lease and all other Lease Documents to which LESSEE is a party have been duly entered into and delivered by LESSEE and constitutes a valid, legal and binding obligation of LESSEE, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, reorganization, moratorium or other similar Laws and by general principles of equity, whether considered in a proceeding at Law or in equity; (5) There are no suits or proceedings pending, or to the knowledge of LESSEE, threatened against or affecting LESSEE, which are reasonably expected to have a material adverse effect on the financial condition or business of LESSEE or upon LESSEE's ability to perform its obligations hereunder; (6) LESSEE has filed or caused to be filed all material tax returns which are required to be filed by LESSEE and has paid or caused to be paid all Taxes shown to be due or payable on said returns or on any assessment received by LESSEE, except those the validity of which is contested by LESSEE in good faith by appropriate proceedings duly instituted and diligently prosecuted; (7) LESSEE is an "air carrier operating under a certificate of convenience and necessity," as such quoted language is used and defined under 11 U.S.C. ss. 1110 ("Section 1110"), and this Lease constitutes a "lease" under Section 1110 and LESSEE is a Certificated Air Carrier pursuant to chapter 447 of Title 49 of the United States Code; -23- (8) The obligations of LESSEE under the Lease Documents constitute direct, general and unconditional obligations of the LESSEE; and (9) No event has occurred which constitutes, or with the giving of notice or passage of time or both would constitute, an Event of Default under this Lease. (E) Notification. During the Term of this Lease, LESSEE shall notify LESSOR in writing of any condition that materially changes the content of the representations and warranties made as of the Effective Date under Section 6(D) hereof, within five (5) days of LESSEE's knowledge thereof. SECTION 7 POSSESSION, USE, MAINTENANCE, TITLE AND REGISTRATION (A) Possession. Except as expressly provided in Subsection 8(B) and Section 22, LESSEE shall not transfer possession of the Aircraft or any Engine or part thereof to any Person without the prior written consent of LESSOR, which consent shall not be unreasonably withheld, provided that, so long as no Default shall have occurred and be continuing and so long as LESSEE shall comply with the provisions of Section 13 hereof, LESSEE may, so long as the action to be taken shall not deprive LESSOR of its title to and interest in the Aircraft, the Airframe or any Engine and shall not adversely affect the registration of the Aircraft under the Laws of the U.S. Government, without the prior written consent of LESSOR, deliver possession of the Aircraft, the Airframe or any Engine or other Part thereof to the Manufacturer, the Engine Manufacturer or Authorized Maintenance Performer, as appropriate, for testing, service, repair, maintenance or overhaul work on the Aircraft, the Airframe, any Engine or Part, or for alterations, modifications, or additions thereto, to the extent required or permitted by the terms of Subsection 7(D) hereof. (B) Use. LESSEE shall use the Aircraft solely in commercial passenger carrying operations and normal training, maintenance, ferry and other such related operations in accordance with all Laws applicable to it and shall not use or permit the Aircraft to be used for any purpose for which the Aircraft is not designed or reasonably suited. (C) Lawful Insured Operations. LESSEE shall not permit the Aircraft to be maintained, used, or operated in violation of any Law of any Governmental Entity -24- having jurisdiction, or contrary to the Manufacturer's or Engine Manufacturer's operating manuals and instructions, or in violation of any airworthiness certificate, license, or registration relating to the Aircraft issued by the U.S. Government, unless the validity thereof is being contested in good faith and by appropriate proceedings duly instituted and diligently prosecuted, but only so long as such proceedings will not result in the sale, forfeiture, loss of valid insurance coverage upon, or loss of, the Aircraft, the Airframe, any Engine or any Part. LESSEE shall comply with the foregoing at its sole cost and expense and shall maintain the Aircraft in proper condition for operation under such Laws. LESSEE agrees not to operate the Aircraft, or to permit or suffer the Aircraft to be operated, within or into any geographic area: (1) unless the Aircraft is at all such times covered by insurance as required by the provisions of Section 13 hereof or the indemnity given by the United States Government pursuant to Section 22(F) hereof; (2) contrary to the terms of such insurance, as required by the provisions of Section 13 hereof or the indemnity given by the United States Government pursuant to Section 22(F) hereof; and (3) in violation of any Law, rule, order or regulation of any Governmental Entity. LESSEE shall deliver to LESSOR such documents and assurances as LESSOR may request under the provisions of Section 16 hereof to evidence compliance with the foregoing. (D) Maintenance. (i) LESSEE, at its own cost and expense shall: (a) service, repair, maintain, overhaul, test, or cause the same to be done to the Aircraft so as to keep the Aircraft in as good operating condition as when delivered to LESSEE hereunder, ordinary wear and tear excepted, in accordance with Manufacturer's type design and in such operating condition as required by the Maintenance Program and as may be necessary to enable the United States airworthiness certification of the Aircraft to be maintained in good standing at all times under FAR Part 121 standards and the applicable Laws of the U.S. Government; -25- (b) perform all routine and non-routine services, checks, inspections, including any structural inspections requirements (SSID's) and "A", "B", "C," "15,000 Hour" or "30,000 Hour" checks (or the equivalent thereof) required by the Maintenance Program or the FAA; (c) maintain all records, logs and other materials required by applicable Laws of any Governmental Entity and the FAA to be maintained in respect of the Aircraft, including, but not limited to, serviceable component tags required by the FAA; (d) throughout the Term of this Lease, provide LESSOR with not less than two weeks prior written notice of the scheduled commencement date of each "C", "15,000 Hour" or "30,000 Hour" check (or their equivalent) to be performed on the Aircraft and the location where such checks will be performed; (e) designate representatives to coordinate with LESSOR or LESSOR's representatives on maintenance and warranty matters; (f) incorporate in the Aircraft prior to the terminating or compliance date all applicable airworthiness directives or equivalent (referenced to in this Lease as "Airworthiness Directives") of the FAA, all alert service bulletins of the Manufacturer, Engine manufacturer and other vendors or manufacturers of Parts incorporated on the Aircraft and any service bulletins which must be performed in order to maintain the warranties on the Aircraft, Engines and Parts; (g) incorporate in the Aircraft all other service bulletins of the Manufacturer, the Engine manufacturer and other vendors which LESSEE schedules to adopt within the Term for the rest of its MD87 aircraft fleet. It is the intent of the parties that the Aircraft will not be discriminated from the rest of LESSEE's fleet in service bulletin compliance (including method of compliance) or other maintenance matters. LESSEE will not discriminate against the Engines with respect to overhaul build standards and life limited part replacements; (h) incorporate in the Maintenance Program for the Aircraft a corrosion prevention and control program as recommended by Manufacturer and approved by the FAA, and correct any discrepancies in -26- accordance with the recommendations of Manufacturer and the Structural Repair Manual. In addition, all inspected areas will be properly treated with corrosion inhibitor as recommended by Manufacturer; (i) provide LESSOR will written summaries of all sampling programs involving or affecting the Aircraft; (j) properly document all repairs, modifications and alterations and the addition, removal or replacement of equipment, systems or components in accordance with the rules and regulations of the FAA and reflecting such items in the Aircraft Documentation. In addition, all repairs to the Aircraft will be accomplished in accordance with Manufacturer's Structural Repair Manual (or FAA-approved data supported by FAA Form 8110-3 or equivalent). All modifications and alterations will also be accomplished in accordance with FAA-approved data supported by FAA Form 8110-3 or equivalent. (ii) All maintenance of the Aircraft and Engines shall be performed by an Authorized Maintenance Performer. (iii) (A) "Covered Maintenance" means, at any time, (1) the structural inspection portion (including CPCP) of the 15,000 Hour and 30,000 Hour (or their equivalent) maintenance checks under the Maintenance Program, (2) the performance restoration or replacement of life limited parts or permanent repair of on-condition parts in the bare Engine during completed shop visits and (3) the full refurbishment of the landing gear (excluding maintenance in respect of compliance with airworthiness directives and elective parts replacement), respectively, pursuant to the Maintenance Program including, in each case, without limitation, associated inspections, breakdown and assembly occurring during such overhauls. The cost of Covered Maintenance shall be limited to the actual cost of replacement parts plus the cost of the associated labor at LESSEE's in-house labor rates if the work is performed by LESSEE, excluding any LESSEE charges for handling, packaging and shipping, or at third-party cost charged to LESSEE if the work is performed by third parties, and shall in no event include late charges, interest or other similar amounts as a result of late payment. -27- (B) Unless a Default or a Related Lease Default shall have occurred and be continuing, the LESSOR shall pay to the LESSEE, within five Business Days after receipt of: (a) an invoice stating that Covered Maintenance has been performed on the Airframe, an Engine or a Landing Gear, respectively, and the cost thereof; and (b) appropriate documentation with respect to such work or payments, an amount equal to the actual cost of such work up to the then current balance of the Airframe Reserves for such Covered Maintenance on the Airframe, up to the then current balance of the Engine Reserves for such Covered Maintenance on any Engine and up to the then current balance of the Landing Gear Reserves for such Covered Maintenance on a Landing Gear; provided, however, that at no time shall the amount of any Reserve to be made available by LESSOR for Covered Maintenance exceed the amount remaining in such Reserve. (f) LESSEE agrees that it will not discriminate against the Aircraft (as compared to other aircraft of the same type owned or operated by LESSEE) in the performance of maintenance, including, but not limited to, in contemplation of the expiration or termination of this Lease with respect to the maintenance of the Aircraft. (E) Airworthiness Directives: Service Bulletins. If the FAA, the Manufacturer or the Engine Manufacturer, or the manufacturer of any Parts, publishes an airworthiness directive or mandatory service bulletin after the Effective Date of this Lease, which has a useful life beyond the Term, requiring completion or termination during the Term (a "Post-Effective Mandatory Modification"), LESSEE shall as required in Section 7(D)(i) above take all such action as is necessary to comply with such Post-Effective Mandatory Modification prior to the return of the Aircraft by LESSEE to LESSOR. To the extent the cost of completing or terminating any such Post-Effective Mandatory Modification exceeds $50,000.00, LESSOR shall pay to LESSEE a portion of such excess equal to the following: (LESSEE's Cost - $50,000) x A/240 Where: -28- A = 240 minus the number of months (rounded upward or downward, as the case may be, to the nearest month) from the date the relevant Post-Effective Mandatory Modification was completed or terminated by LESSEE to the Expiration Date. Any amounts payable by LESSOR to LESSEE pursuant to this Section 7(E) shall not be payable to the LESSEE until the later of (i) the Expiration Date, or (ii) the date on which the LESSEE has complied with all the terms of this Lease. (F) Title, Registration and Insignia. LESSEE acknowledges and agrees that title to the Aircraft shall remain vested in LESSOR during the Term in accordance with the terms of this Lease. The Aircraft shall, at all times during the Term, be registered in the United States in the name of LESSOR or such Person as LESSOR may designate, in accordance with the Laws of the U.S. Government. LESSEE agrees that it shall take no action which shall cause the Aircraft to cease to be so registered in the name of LESSOR with the FAA under the Act. Unless otherwise requested, within fifteen (15) days of the Effective Date, LESSEE shall fasten or cause to be fastened in the cockpit, in a location reasonably adjacent to and not less prominent than the airworthiness certificate for such Aircraft and on each Engine, an insignia plate supplied by LESSOR and in the form set forth in Exhibit "H" hereto or in any other form subsequently designated by LESSOR. LESSEE will not allow the name of any Person to be placed on the Aircraft or an Engine as a designation that might be interpreted as a claim of ownership; provided, however, that LESSEE may cause the Aircraft to be lettered in an appropriate manner for convenience of identification of the interest of LESSEE therein, including but not limited to, the customary livery of LESSEE. (G) Maintenance Reports and Records. (a) During the Term, LESSEE shall provide maintenance information and reporting requirements to LESSOR and any other party so designated by LESSOR including but not limited to: (i) written notification within thirty (30) days after issuance of any airworthiness directive or legal requirement affecting the Aircraft, Airframe, Engines or Parts; (ii) annual and quarterly written projections of scheduled Airframe, landing gear and Engine heavy maintenance; (iii) prompt written notification of damage to the Aircraft, Airframe, Engines or Parts where the estimated cost of repair is in excess of $250,000 (iv) prompt written notification of Engine removals, -29- exchanges or foreign object damage (said report to include details of circumstances and plan of action to repair); (v) reports of Flight Hours and Cycles on a monthly basis; (vi) reporting of all service bulletins completed; and (vii) copies of all material reports sent to the FAA or Air Authority concerning the Aircraft. (b) LESSEE will, during the Term, maintain all records, logs and other materials required to be maintained with respect to the Aircraft by Persons in operational control of the Aircraft under any applicable rules, Laws or regulations and shall supply all such records, logs and other materials to LESSOR or third parties as reasonably requested by LESSOR and as shall be necessary in order to implement the Maintenance Program and any and all warranties and guarantees that apply to the Aircraft. LESSEE will provide LESSOR with copies of all records of maintenance performed during the Term as requested by LESSOR. All such records shall be kept as required under FAR Part 121 and in English. (H) Passenger Convenience Equipment. Notwithstanding any other provision herein to the contrary, LESSEE may install or remove or permit to be installed or removed aboard the Aircraft, without the prior written consent of LESSOR, Passenger Convenience Equipment so long as the installation, use and removal of such Passenger Convenience Equipment does not impair the value, utility or airworthiness the Aircraft would have had at any time had the installation, use or removal not occurred. Without further action of LESSEE or LESSOR, title to such Passenger Convenience Equipment, upon installation, shall vest in LESSOR and shall become subject to this Lease, free of all liens, charges and encumbrances, provided, however, that so long as an Event of Default shall not have occurred and be continuing during the Term, LESSEE may, at any time prior to return of the Aircraft, remove such Passenger Convenience Equipment or component thereof, at which time title thereto shall, without further act, vest in LESSEE, and such Passenger Convenience Equipment or component thereof shall no longer be deemed part of the Aircraft from which it was removed. Notwithstanding the foregoing paragraph, if the Passenger Convenience Equipment is (i) owned by any third party and leased to LESSEE, (ii) sold to LESSEE subject to a conditional sales contract or other security interest, (iii) leased to LESSEE pursuant to a lease which is subject to a security interest in favor of any third party, or (iv) installed aboard the Aircraft subject to a license granted by LESSEE to a -30- Immediately upon any replacement Parts becoming incorporated or installed in or attached to the Aircraft as above provided, and without further act: (1) title to the removed Part shall vest in LESSEE, free and clear of all rights of LESSOR; (2) title to the replacement Parts shall vest in LESSOR, free and clear of all rights of third parties, including, but not limited to, LESSEE; and (3) such replacement Parts shall become subject to this Lease and shall be deemed part of the Aircraft into which such Parts were incorporated or with respect to which such Parts were required, for all purposes hereof to the same extent as the Parts originally incorporated or installed in, or attached or related to such Aircraft. (B) Pooling; Etc. (i) LESSEE may subject any Engine or APU to normal interchange agreements customary in the United States domestic commercial airline industry entered into by the LESSEE in the ordinary course of its business, and may subject any Engine to pooling arrangements customary in the United States domestic commercial airline industry and entered into by the LESSEE in the ordinary course of its business. (ii) LESSEE may install an Engine or APU on an airframe owned by the LESSEE provided such airframe is free and clear of all liens and encumbrances, except (a) Liens of the type or equivalent to those set forth in the definition of "Permitted Liens"; and (b) the rights of air carriers under normal interchange arrangements which are customary in the United States domestic commercial airline industry and which do not contemplate, permit or require the transfer of title to the airframe or Engines installed thereon. -32- (iii) LESSEE may install an Engine or APU on an airframe leased to, or purchased by the LESSEE, subject to a lease, conditional sale, trust indenture or other security agreement, but only if (a) such airframe is clear of all liens and encumbrances, except Permitted Liens or Liens of the type or equivalent to those set forth in the definition of "Permitted Liens" and the rights of the parties to the lease, conditional sale, trust indenture or other security agreement covering such airframe; and (b) LESSOR shall have received from the lessor, conditional seller, indenture trustee, or secured party of such airframe, a written agreement (which may be the lease, conditional sale, trust indenture or other security agreement covering such airframe), whereby such lessor, conditional seller, indenture trustee or secured party expressly agrees that neither it nor its successors or assigns will acquire or claim any right, title or interest in any Engine or APU by reason of such Engine or APU being incorporated in such airframe at any time while such Engine or APU is subject to this Lease. (iv) No permitted interchange or pooling agreement, transfer or other relinquishment of possession permitted hereunder shall affect the title to, or registration of or effect any transfer of the Aircraft, Airframe, Engines or APU or shall constitute consent to any action not permitted to the LESSEE in this Lease. (v) LESSOR hereby agrees for the benefit of LESSEE and any lessor, conditional vendor or secured party of any engine leased to LESSEE, purchased by LESSEE pursuant to a conditional sale agreement or owned by LESSEE subject to a security agreement that neither LESSOR nor its assignees will acquire or claim, as against LESSEE, such lessor, conditional vendor or secured party or any of their respective assignees any right, title or interest in any engine owned by such lessor under such lease, sold by such conditional vendor under such conditional sale agreement or subject to a security interest in favor of such secured party under such security agreement as a result of such engine being installed on the Airframe. -33- (C) Equipment Changes. LESSEE, at its own expense, shall make such alterations and modifications in and additions to ("Equipment Changes") the Aircraft as may be required from time to time to meet the standards of the FAA and the Air Authority and of the Governmental Entity in the jurisdiction of which LESSEE elects to fly the Aircraft and whose approval or consent is required to permit LESSEE to fly over and/or into any geographical area with respect to which the Governmental Entity exercises authority. In addition, the term "Equipment Changes" shall mean modifications to or additions to the Aircraft that LESSEE, at its own expense, may from time to time deem desirable in the proper conduct of its business, provided that no such Equipment Change diminishes the value, utility, condition or airworthiness of the Aircraft below the value, utility, condition and airworthiness thereof immediately prior to such Equipment Change, assuming the Aircraft was then in the condition required to be maintained by the terms of this Lease, and provided further that LESSEE shall not change the configuration of the Aircraft during the Term (except the passenger seating configuration) unless such configuration is approved by the LESSOR and the Air Authority. Any Equipment Change other than the Equipment Changes relating to the installation of TCAS, Windshear detection system and the upgrade of the Engines from model JT8D-217C to JT8D-219 with an estimated cost in excess of Two Hundred Fifty Thousand ($250,000.00) Dollars must be approved in advance by LESSOR, which approval will not be unreasonably withheld. Title to all Parts incorporated, installed in, attached or added to the Aircraft as the result of any such Equipment Change shall, without further act, vest in LESSOR; provided, however, that during the Term, LESSEE may remove any such Part if: (1) such Part is in addition to any Part originally incorporated or installed in or attached to such Aircraft at the time of delivery thereof hereunder; and (2) such Part is not required to be incorporated, installed in, attached or added to the Aircraft; and (3) such Part can be removed from the Aircraft or can be replaced with a part of equal value to the Part installed upon delivery without diminishing or impairing the value, utility or airworthiness which the Aircraft would have had at such time, had such Equipment Change not occurred. Upon the removal by LESSEE of any Part as above provided, title thereto shall, without further act, vest in LESSEE and such Part shall no longer be deemed part of the Aircraft from which it was removed. Any Part not removed from the Aircraft by LESSEE as provided above prior to a Redelivery Occasion shall remain the property of LESSOR. LESSOR shall bear no liability in respect of, or cost for, any Equipment Change, grounding of the Aircraft, suspension of certification thereof, or loss of revenue therefrom. -34- SECTION 9 INSPECTION; FINANCIAL INFORMATION (A) During the Term, LESSEE shall furnish to LESSOR and Mortgagee such information concerning the location, condition, use and operation of the Aircraft as LESSOR or Mortgagee may reasonably request. LESSEE shall also furnish to LESSOR and Mortgagee copies of its reports on Forms 10-K and 10-Q promptly upon same becoming available for public distribution. (B) The right of LESSOR and Mortgagee, or their designated representatives, at LESSOR's expense, to inspect the Aircraft during any "C", "15,000 Hour" or "30,000 Hour" check or equivalent (as defined in the Maintenance Program), performed by or on behalf of LESSEE during the Term shall be absolute. LESSEE shall also provide LESSOR and Mortgagee with maintenance schedules relating to the Aircraft upon the delivery of the Aircraft to LESSEE, and from time to time as such maintenance schedules are adjusted or updated. LESSEE further agrees to notify LESSOR and Mortgagee of any change in the date of scheduled "C," "15,000 Hour" and "30,000 Hour" checks, which notice shall be given within a reasonable time, to enable LESSOR and Mortgagee to inspect the Aircraft at the time and place such checks occur. During such checks, LESSEE agrees to allow LESSOR and Mortgagee, or their authorized representative, to inspect any area of the Aircraft which LESSOR or Mortgagee requests to inspect which would normally require inspection during such major checks. LESSEE also shall permit any Person designated by LESSOR or Mortgagee in writing to: (1) visit and inspect the Aircraft, its condition, use and operation, and the records maintained in connection therewith; (2) visit and inspect the properties of LESSEE; (3) discuss, to the extent reasonable, the finances and accounts of LESSEE with the principal officers of LESSEE, (4) obtain such other financial information as LESSOR or Mortgagee may reasonably request; in this regard, during the Term, LESSEE shall deliver to LESSOR and Mortgagee annual financial statements prepared in accordance with generally accepted accounting principles consistently applied and audited by recognized, independent -35- certified public accountants reasonably satisfactory to LESSOR and Mortgagee as soon as practicable and in any event within 120 days after the end of LESSEE's fiscal year, as well as quarterly unaudited financial statements, within 60 days following the close of each of LESSEE's fiscal quarters; and (5) inspect LESSEE's Maintenance Program for the Aircraft. all at such times and frequencies as LESSOR and Mortgagee, or the assignee of LESSOR or Mortgagee, may reasonably request without interfering with LESSEE's normal business operations; neither LESSOR nor Mortgagee shall have any duty to make any such inspection and neither LESSOR nor Mortgagee shall incur any liability or obligation by reason of not making any such inspection. LESSOR hereby agrees that if LESSOR or Mortgagee exercises any of the rights listed in clauses (1) through (5) above, it shall do so at LESSOR's sole cost and expense and in such a manner so as not to unreasonably interfere with the business and operations of LESSEE. Notwithstanding the foregoing, LESSOR and Mortgagee shall incur no liability nor be deemed to have waived any of their rights under this Lease by reason of LESSOR's or Mortgagee's failure to exercise any of its rights under this Section 9(B). (C) LESSEE shall also furnish any other information or records on the Aircraft that LESSOR or Mortgagee may reasonably request. SECTION 10 COVENANTS OF LESSEE LESSEE represents, warrants, covenants and agrees that: (A) Maintenance of Corporate Existence. LESSEE shall preserve and maintain its existence, valid legal status, and all of its rights, privileges, and franchises under the Laws of the U.S. Government necessary to the conduct of its business. (B) Payment of Taxes. LESSEE shall: -36- (1) Pay or cause to be paid all taxes upon LESSEE or its income or profits, or upon any property or assets belonging to or used by it, prior to the date on which penalties attach thereto; (2) Pay or otherwise discharge all lawful claims, which, if not paid, might become a Lien or charge upon the property of LESSEE (provided, however, that LESSEE shall not be required to pay any such Taxes or claims, the payment of which is being contested in good faith and by appropriate proceedings, except that LESSEE will pay or cause to be paid all such Taxes or claims forthwith in the event LESSEE is unable to stay or suspend enforcement or execution of a warrant of restraint or foreclosure of any Liens which attach as security therefor). (C) Sale of Assets, Merger, etc. Without the prior written consent of LESSOR, which consent shall not be unreasonably or arbitrarily withheld, LESSEE will not sell, lease, assign, transfer or otherwise dispose of substantially all of its assets, whether now owned or hereafter acquired, except in the ordinary course of its business as presently conducted and for a full and adequate consideration, and will not merge or consolidate with or into, or acquire substantially all of the assets and assume substantially all of the liabilities of, any corporation or other entity unless the surviving entity, as a result of such sale, purchase, merger or consolidation, is the LESSEE or the surviving entity (i) assumes this Lease; (ii) is a U.S. Air Carrier; and (iii) has and will have, immediately following any such sale, purchase, merger or consolidation, a tangible net worth (as determined in accordance with United States generally accepted accounting practices) equal to or greater than that which the LESSEE had immediately prior to such sale, merger or consolidation. (D) U.S. Air Carrier. Throughout the Term, LESSEE shall, at all times, be a U.S. Air Carrier. (E) Communications. (i) LESSEE shall promptly deliver to LESSOR any communications received by LESSEE from the Air Authority which materially affects the Aircraft and which are not applicable to all aircraft of the same make and model as the Aircraft; and (ii) LESSOR shall promptly deliver to LESSEE any communications received by LESSOR from the Manufacturer which -37- materially affects the maintenance, operation or airworthiness of the Aircraft and which are not applicable to all aircraft of the same make and model as the Aircraft. (F) No Security Interests. LESSEE will not create or agree or permit to arise any Lien (other than Permitted Liens) on or with respect to the Aircraft, title thereto or any interest therein. LESSEE will forthwith, at its own expense, take all action as may be necessary to discharge or remove any such Lien if it exists at any time. LESSEE will promptly, but in no event later than seventy-two (72) hours after becoming aware of the existence of any such Lien give written notice thereof to LESSOR. SECTION 11 TAXES (A) LESSEE agrees to pay and to indemnify and hold harmless the Indemnitees from all Taxes assessed against or upon any Indemnitee, LESSEE, the Aircraft, or any part thereof during the Term and arising out of this Lease, or upon the leasing, possession, use, operation, repair, maintenance, overhaul, settlement of any insurance claim, or return thereof, or upon any Rent, receipts or earnings arising from the operation thereof, or upon or with respect to this Lease unless, and to the extent only that, any such Tax is being contested by LESSEE in good faith and by appropriate proceedings duly instituted and diligently prosecuted and only so long as such proceedings do not involve any danger of the sale, forfeiture or loss of the Aircraft. Notwithstanding the foregoing, Lessee shall not be liable to pay (1) any Taxes based solely on or measured by the net income of any Indemnitee, (2) any Taxes imposed by any taxing authority other than the United States of America or any political subdivision thereof unless such Taxes would not have been imposed but for (a) the operation or presence in such jurisdiction of the Aircraft, (b) the presence in such jurisdiction of a permanent establishment or fixed place of business of Lessee or any user or Person in possession of the Aircraft, or (c) the payment from such jurisdiction of any amount due under this Lease. In case any report or return is required to be made with respect to any obligation of LESSEE under or arising out of this Section 11, LESSEE shall either make such report or return in such manner as will show the ownership of the Aircraft in LESSOR and send a copy of such report or return to LESSOR, or shall notify LESSOR of such requirement and make such report or return in such manner as shall be satisfactory to LESSOR. If claim is made against LESSOR for any Taxes arising during the term of this Lease, LESSOR shall promptly notify LESSEE. LESSOR shall, at LESSEE's expense, take such action as LESSEE may -38- reasonably request in writing with respect to such asserted liability, and if reasonably requested by LESSEE and upon the prior payment to LESSOR by LESSEE of an amount equal to such Tax, any payment by LESSOR of such Tax shall be made under protest. If payment is made, LESSOR shall, at LESSEE's expense, take such action as LESSEE may reasonably request to recover such payment and shall, if requested, permit LESSEE in LESSOR's name to file a claim or prosecute an action to recover such payment. All of the obligations of LESSEE in this Section 11 with respect to Taxes imposed or accrued before the expiration or other termination of this Lease shall continue in full force and effect notwithstanding such expiration or other termination, and are expressly made for the benefit of, and shall be enforceable by, LESSOR. LESSEE further agrees that, with respect to any payment or indemnity hereunder, such payment or indemnity shall include any amount necessary to hold the recipient of the payment or indemnity harmless on an after-tax basis from all Taxes required to be paid by such recipient with respect to such payment or indemnity under the Laws of any Governmental Entity. (B) In the event the LESSEE determines there is a substantial risk of a change in the Code, or the Regulations issued pursuant thereto, which clearly results in a Tax of the LESSOR indemnified against pursuant to this Section 11 being imposed against an Indemnitee (a "Change"), the LESSEE shall have the right to terminate this Lease and return the Aircraft to the LESSOR pursuant to the provisions of Section 17. LESSEE shall notify LESSOR of any Change and its intent to terminate the Lease in writing 270 days prior to the date that the Lease is to be terminated and the Aircraft returned to LESSOR. If LESSOR elects to waive any indemnification pursuant to this Section 11 in respect of any Taxes which are attributable to such Change within 30 days of such notice (a "LESSOR Waiver"), the Lease shall not be terminated but LESSEE shall have no obligation under this Section 11 in respect of such Taxes arising due to such Change. However, at any time subsequent to such LESSOR Waiver, LESSOR may, on 270 days' prior notice to LESSEE, elect to terminate this Lease and require the LESSEE to return the Aircraft to the LESSOR pursuant to the provisions of Section 17, in which event LESSEE may elect to irrevocably reinstate its indemnification pursuant to this Section 11 in respect of any Taxes which are attributable to such Change, within 30 days of such notice from LESSOR. (C) LESSOR will act in good faith to minimize the obligations of the LESSEE under this Section 11. -39- SECTION 12 EVENT OF LOSS (A) Event of Loss Regarding the Aircraft. In the event that an Event of Loss occurs with respect to the Aircraft (other than a requisition of use by the U.S. Government while the United States pays to LESSOR or LESSEE compensation for such requisition in an amount equal to or in excess of the Rent payable with respect to such Aircraft), LESSEE shall forthwith (and, in any event, not later than five (5) days after the occurrence of the Event of Loss) give LESSOR written notice of such Event of Loss and, not later than the earlier of: (a) the ninetieth (90th) day following the occurrence of such Event of Loss; or (b) the day of receipt of insurance proceeds in respect of such Event of Loss; pay to LESSOR or its assignees, in funds of the type specified in Subsection 5(B) hereof, the sum of all unpaid Rent and all other amounts due hereunder with respect to such Aircraft and which have accrued through and including the date of payment of the Agreed Value, plus an amount equal to the Agreed Value. In the event of payment in full of such Agreed Value, together with all such amounts due or accrued hereunder on or prior to the date of such payment, the obligation of LESSEE to pay Rent with respect to the Aircraft as to which such payments have been made shall terminate. LESSEE agrees that it shall promptly file all necessary claim forms or other documents required by any insurer in connection with any claim arising from an Event of Loss and shall diligently pursue such claim. Upon payment of all Rent due and the Agreed Value, LESSOR shall transfer to LESSEE (subject to the rights of the Insurers) all of LESSOR's right, title, and interest in and to: (i) the Aircraft which sustained such Event of Loss, as well as all of LESSOR's right, title, and interest in and to any Engines constituting part of such Aircraft; and (ii) all claims for damages to such Aircraft and/or Engines, if any, against third Persons arising from such Event of Loss (unless any insurance carrier requires that such claims be assigned to it), without any representation, warranty, or recourse of any kind whatsoever, express or implied, except a warranty that such Aircraft is free and clear of any LESSOR Liens. In the event of an Event of Loss involving the Aircraft wherein one or more of the Engines are not attached to the Airframe, the Aircraft, for purposes of this Section 12(A), shall be deemed to include all Engines on lease hereunder and LESSOR shall cooperate in transferring title to such non-attached Engines, free and clear of all LESSOR Liens, to the owner of the engine attached to the Airframe at the time of the Event of Loss. -40- (B) Event of Loss With Respect to an Engine. Upon any Event of Loss with respect to an Engine not then installed on the Aircraft, or an Event of Loss with respect to only an Engine installed on the Aircraft not involving an Event of Loss to the Aircraft, LESSEE shall give LESSOR prompt written notice thereof and LESSEE shall replace such Engine as soon as reasonably possible after such Event of Loss by duly conveying to LESSOR, as a replacement for such Engine, title to another engine owned by LESSEE of the same or an improved make and model, which engine shall be free and clear of all Liens and shall have a value and utility at least equal to, be in as good operating condition as (including time in service, hours and cycles since new and hours and cycles available to the next overhaul or scheduled removal), and be in equivalent or better service bulletin and modification status than the Engine which sustained such Event of Loss (assuming the Engine which sustained such Event of Loss was maintained in the condition in which LESSEE was required to maintain such Engine pursuant to this Lease). Such replacement engine, after approval and acceptance by LESSOR, shall be deemed an "Engine" as defined herein. If the replacement engine is in substantially better condition than the Engine which sustained such Event of Loss, Lessor will consider an appropriate adjustment to the Engine Reserves. LESSEE agrees to take such action as LESSOR may reasonably request in order that any such replacement engine shall be duly and properly leased hereunder to the same extent as the Engine subject to the Event of Loss and shall be titled in LESSOR. LESSEE's obligation to pay Rent hereunder shall continue in full force and effect regardless of the occurrence of an Event of Loss with respect to an Engine, but LESSEE shall be entitled to be reimbursed by LESSOR the amount of insurance or condemnation proceeds, if any, received by LESSOR with respect to such Engine. Upon receipt of title by LESSOR to the replacement engine as hereinabove provided, LESSOR shall convey to LESSEE, free and clear of all LESSOR Liens, title to the Engine which sustained such Event of Loss. (C) Damage or Requisition Not Constituting an Event of Loss. In the event of material damage or requisition of the Aircraft or any Engine not constituting an Event of Loss, LESSEE shall promptly notify LESSOR in writing of such damage or requisition and shall remain obligated to make all payments of Rent in respect to such Aircraft or Engine which may become due hereunder in the same manner as if such damage or requisition had not occurred. All payments at any time received by LESSEE, or by LESSOR from any Person other than LESSEE, with respect to any such damage or requisition shall be paid over to, or retained by, LESSOR, and shall be paid to LESSEE upon repair of the Aircraft or Engine. (D) Receipt and Application of Compensation. Following an Event of Loss with respect to which payments, including insurance proceeds, are made by or are -41- due from any Person (any such payments or proceeds being hereinafter referred to as "Compensation"), LESSOR shall be entitled to receive, and shall receive, and LESSEE hereby assigns to LESSOR any right or interest which LESSEE may have or may hereafter acquire, in such Compensation, in trust, to be applied as follows: (1) If such Compensation is received with respect to the Aircraft under the circumstances described in Subsection 12(A), so much thereof as shall not exceed the Agreed Value and other amounts due under Subsection 12(A) shall be retained by LESSOR, in reduction of LESSEE's obligation to pay such Agreed Value and other amounts due as was not theretofore paid by LESSEE, or, if such Agreed Value and other amounts have already been paid to LESSOR, such Compensation shall be applied to reimburse LESSEE for its payment of such Agreed Value, and may be paid to LESSEE. (2) If such Compensation is received with respect to an Engine under the circumstances described in Subsection 12(B), such Compensation shall be held in an account established for LESSOR with a bank or trust company as depository, as designated by LESSOR, such sums to be held, invested and distributed as provided below. All of LESSEE's interest in all monies and investments standing to the credit of such account are hereby pledged to LESSOR, and LESSOR is hereby granted a general lien upon and security interest in all of LESSEE's interest in all such monies and investments as security for the performance in full of all of LESSEE's covenants contained in this Lease. The bank or trust company holding such Compensation shall be deemed to be LESSOR's agent for the purpose of perfecting LESSOR's security interest in such sums. If LESSEE shall replace such Engine in accordance with the provisions of Subsection 12(B), LESSOR shall, so long as no Event of Default or Default shall have occurred and be continuing, return all monies and investments then held in such account to LESSEE. (E) Payments During Existence of an Event of Default. Any payment referred to in Subsection 12(A), (B), (C) or (D) hereof which is payable to LESSEE hereunder shall not be paid to LESSEE, or, if previously paid directly to LESSEE, shall not be retained by LESSEE, if at the time of such payment a Default or a Related Lease Default shall have occurred and be continuing, but shall be paid to and retained by LESSOR as security for the obligations of LESSEE under this Lease until such time as -42- such a Default or a Related Lease Default shall have been remedied, whereupon such payment shall be made to LESSEE. SECTION 13 INSURANCE (A) Public Liability and Property Damage Insurance. LESSEE will carry and maintain in effect, at its own expense, with Approved Insurers, public liability insurance (including, without limitation, contractual liability, and passenger legal liability), and property damage insurance with respect to the Aircraft, in amounts per occurrence of not less than the Minimum Liability Coverage, or such greater amounts as LESSEE may carry from time to time on other similar aircraft in its fleet. LESSEE shall not discriminate against the Aircraft in providing such insurance. Each and any policy of insurance carried in accordance with this Subsection (A), and each and any policy obtained in substitution or replacement for any of such policies, (i) shall designate each Indemnitee as additional insureds as their interests may appear (but without imposing upon any obligation imposed upon the insured, including, without limitation, the liability to pay any premiums for any such policies, but the Indemnitees shall have the right to pay such premiums if it shall so elect), and (ii) shall expressly provide that, in respect of the interests of the Indemnitees in such policies, the insurance shall not be invalidated by any action or inaction of the LESSEE or any other Person (other than the Indemnitees, each for their respective interests), and shall insure, regardless of any breach or violation by LESSEE or any other Person (other than the Indemnitees, each for their respective interests) of any warranty, declaration or condition contained in such policies, (iii) shall provide that if such insurance is canceled for any reason whatsoever, or is adversely changed in any way with respect to the interests of the Indemnitees, or if such insurance is allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to the Indemnitees for thirty (30) days (seven (7) days in the case of any war risks and allied perils coverage or such lesser time which may be standard in the insurance industry and ten (10) days in the event of nonpayment of premium), in each instance, after receipt by each of the Indemnitees of written notice by such insurer or insurers sent to the Indemnitees of such prospective cancellation, change or lapse, (iv) shall include coverage for any country in which the Aircraft is located, (v) shall provide that, as against the Indemnitees, the insurer shall waive any rights of set-off, counterclaim or any other deduction, whether by attachment or otherwise, and waives any rights it may have to be subrogated to any right of any insured against the Indemnitees, with respect to the Aircraft, (vi) shall provide war risk and allied perils coverage pursuant -43- to the AVN52 extended coverage endorsement or its equivalent, and (vii) shall insure (to the extent of the risks covered by the policies) the indemnity provisions of Section 14. Each liability policy shall be primary without right of contribution from any other insurance which may be carried by any Indemnitee, and shall expressly provide that all of the provisions thereof (except the limits of liability) shall operate in the same manner as if there were a separate policy covering each insured. No liability policy shall permit any deductible or self-insurance provision except for baggage as is customary in the industry and such other deductibles only with the consent of the LESSOR, which consent shall not be unreasonably withheld or delayed, which from time to time LESSEE can demonstrate are standard in comprehensive liability insurance and, in particular, public liability risks (including, inter alia, contractual liability and passenger liability coverage) for U.S. Air Carriers in the then current United States insurance market. (B) Aircraft Hull War Risks and Allied Perils Insurance. LESSEE will carry and maintain in effect with Approved Insurers, at its own expense, all risks hull war risks and allied perils insurance on the Aircraft (which shall include, but not be limited to, coverage for hijacking, declared or undeclared war, insurrections, strikes, riots, commotions or labor disturbances, malicious acts or acts of sabotage and unlawful seizure or wrongful exercise of control of the Aircraft in flight by a person on board such Aircraft acting without the consent of LESSEE) in an amount not less than the Agreed Value or such greater amounts as LESSOR or Mortgagee may reasonably request from time to time (and for which LESSOR shall reimburse LESSEE for its cost of increased premium, if any, for such greater amounts of insurance) and covering those perils which, from time to time, are customarily covered by similar insurance maintained by similar carriers in the U.S. airline industry operating aircraft on international routes. (C) All Risks Hull Insurance. LESSEE, at its own expense, will maintain in effect with Approved Insurers all risks ground and flight aircraft hull insurance covering the Aircraft, and fire, transit, extended coverage, spares and all risks war and allied perils insurance with respect to Engines and Parts while not installed on such Aircraft or an aircraft, which in each case is of the type maintained by U.S. Air Carriers similarly situated to LESSEE and operating similar aircraft and engines which comprise LESSEE's fleet. At all times while the Aircraft is subject to this Lease, such insurance shall be for an amount not less than the Agreed Value or such greater amounts as LESSOR may reasonably request from time to time (and for which LESSOR shall reimburse LESSEE at its own cost of increased premium, if any, for such greater amounts of insurance). -44- Notwithstanding anything above, each and any policy of insurance obtained and maintained pursuant to Subsection (B) and this Subsection (C), and each and any policy obtained in substitution or replacement for any such policies, (i) shall designate LESSOR as owner of the Aircraft covered thereby, and shall designate each Indemnitee as additional insureds and Mortgagee as sole loss payee, as their respective interests may appear (but without imposing upon any Indemnitee any obligation imposed upon the insured, including, without limitation, the liability to pay any premiums for any such policies, but any Indemnitee shall have the right to pay such premiums if they shall so elect), (ii) shall expressly provide that, in respect of the interests of any Indemnitee in such policies, the insurance shall not be invalidated by any action or inaction of LESSEE or any other Person (other than any Indemnitee, each for their respective interests) and shall insure the Indemnitees, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by LESSEE or any other Person (other than the Indemnitees, each for their respective interests), (iii) shall provide that if such insurance is cancelled for any reason whatsoever, or is adversely changed in any way with respect to the interest of any Indemnitee, or if such insurance is allowed to lapse for nonpayment of premium, such cancellation change or lapse shall not be effective as to the Indemnitees, for thirty (30) days (seven (7) days in the case of any war risks or allied perils coverage or such lesser time which may be standard in the insurance industry and ten (10) days in the event of nonpayment of premium) after receipt by the Indemnitees of written notice by such insurer or insurers to the Indemnitees; as the case may be, of such prospective cancellation, change or lapse, (iv) shall include coverage for the territorial limits or any country in which such Aircraft may at any time be located, (v) shall provide that, as against the Indemnitees, the insurer shall waive any rights of set-off, counterclaim or any other deduction, whether by attachment or otherwise, and waives any rights it may have to be subrogated to any right of any insured against the Indemnitees, with respect to such Aircraft, (vi) shall provide that in the event of any damage or loss which is an Event of Loss hereunder and which results in a payment, such payment shall be payable solely and directly to Mortgagee for the account of all interests, (vii) shall provide that in the event of any damage or loss which is not an Event of Loss hereunder and which results in a payment for any one occurrence in excess of $500,000.00, such payment shall be payable solely and directly to Mortgagee for the account of all interests, (viii) shall provide that payments for any one occurrence not in excess of $500,000.00 shall be payable directly to LESSEE provided there exists no Event of Default or Related Lease Event of Default by LESSEE, and (ix) shall provide for a standard 50/50 clause between the all risks hull and war risks underwriters. Each such policy shall be primary without right of contribution from any other insurance which may be carried by the Indemnitees. -45- LESSEE shall have the right to carry insurance in excess of the amounts required hereunder and the proceeds of such excess insurance shall be payable to LESSEE. Similarly, LESSOR shall have the right to carry additional and separate insurance for its own benefit at its own expense, without, however, thereby limiting LESSEE's obligations under this Section 13. LESSEE shall at all times maintain a deductible amount in its all risks hull insurance policies which is no more than Seven Hundred Fifty Thousand ($750,000.00) Dollars. There shall be no deductible under LESSEE's war risks insurance policies. (D) Application of Insurance Proceeds Not In Excess of $500,000.00. LESSEE shall be entitled to receive any hull insurance proceeds not in excess of Five Hundred Thousand ($500,000.00) Dollars as soon as such funds are paid by the insurance company and shall promptly receive such additional insurance proceeds, if any, upon presentation to Mortgagee of a vendor's invoice, provided that such repair work is complete. All insurance proceeds received by LESSEE pursuant to this Subsection 13(D) shall be used by the LESSEE for the repair of any damage to the Aircraft or Engines on account of which the insurance proceeds were paid. Any amount referred to in this Subsection 13(D) which is payable to LESSEE shall not be paid to LESSEE if at the time of such payment any Default or Related Lease Default shall have occurred and be continuing, but shall be held by Mortgagee as security for the obligations of LESSEE under this Lease and such amount shall be paid to LESSEE at such time as there shall not be continuing any such Default or Related Lease Default. (E) Application in Default. Any insurance proceeds referred to in this Lease which are otherwise payable to LESSEE, or, if it has been previously paid to LESSEE, and not yet applied by LESSEE as permitted or required hereunder, shall be delivered from LESSEE to Mortgagee, if at the time of such payment, a Default or Related Lease Default shall have occurred and be continuing. In such case, all such amounts shall be paid to and held by Mortgagee as security for the obligations of LESSEE hereunder. (F) Certificates. Not less than three (3) Business Days prior to the Effective Date, and thereafter on each renewal by the LESSEE of the insurance required hereby, LESSEE will furnish to the Indemnitees a certificate and a broker's letter of undertaking executed and delivered by the Approved Insurer, appointed by LESSEE, describing in reasonable detail, and in accordance with customary practice, insurance carried on the Aircraft and certifying that the insurance then maintained on the Aircraft -46- complies with the terms of this Lease. LESSEE will cause such Approved Insurer to agree to hold all insurance contracts and slips for the benefit of the Indemnitees and to advise the Indemnitees in writing at least thirty (30) days (seven (7) days in the case of any war risk and allied perils coverage and ten (10) days in the event of nonpayment of premium) prior to the non-renewal, termination, or cancellation for any reason (including, without limitation, failure to pay premiums therefor) of any such insurance. In the event LESSEE shall fail to maintain insurance as herein provided, LESSOR may at its option provide such insurance and, in such event, LESSEE shall, upon demand, reimburse LESSOR, as Supplemental Rent for the cost thereof. (G) Changes in Industry Practice. If there shall be a fundamental change in generally accepted industry-wide practice with respect to the insurance of aircraft (whether relating to all or any of the types of insurance required to be effected pursuant to the terms of this Section 13) and, as a consequence thereof, LESSOR shall be of the reasonable opinion that the insurance required pursuant to the provisions of this Section 13 shall be insufficient to protect the interests of LESSOR, the insurance requirements set forth in this Section 13 shall be varied as may be mutually agreed so as to include such additional or varied requirements to be effected pursuant to the terms of this Section 13, and as so varied, shall provide substantially the same protection to LESSOR as it would have done had such change in generally accepted industry-wide practice not occurred. If any such change in generally accepted industry-wide practice would enable LESSEE, but for the requirements in this Section 13, to reduce its expenditures in relation to all or any of the types of insurance required to be effected pursuant to the terms of this Section 13 without, in the reasonable opinion of LESSOR, prejudicing the interest of LESSOR, the insurance requirements in this Section 13 shall be amended to take account of such change in generally accepted industry-wide practice to the extent required to enable LESSEE to reduce such expenditures, provided, however, that in no event shall such public liability insurance coverage set forth in Section 13 be less than $350,000,000.00. SECTION 14 INDEMNIFICATION (A) LESSEE agrees to indemnify, reimburse, and hold harmless the Indemnitees from and against any and all claims, damages, losses, liabilities, demands, suits, judgments, causes of action, legal proceedings, whether civil or criminal, penalties, fines, other sanctions, and any reasonable costs and expenses in connection herewith, -47- including attorney's fees and expenses (any and all of which are hereafter referred to as "Claims") which in any way may result from, pertain to, or arise in any manner out of, or are in any manner related to the Aircraft or this Lease, arising out of events occurring on or subsequent to the Effective Date, or the breach of any representation, warranty or covenant made by LESSEE hereunder, including, but not limited to, (i) the condition, manufacture, delivery, lease, acceptance, rejection, possession, return, disposition, use, or operation of the Aircraft (including, but not limited to, latent and other defects whether or not discoverable by LESSEE or LESSOR) either in the air or on the ground; or (ii) any defect in the Aircraft arising from the material or any articles used therein or from the design, testing, or use thereof or from any maintenance, service, repair, overhaul, or testing of such Aircraft, regardless of when such defect shall be discovered, whether or not such Aircraft is at the time in the possession of LESSEE, and regardless of where such Aircraft may then be located; or (iii) this Lease or any other transaction, approval, or document contemplated hereby or given or entered into in connection herewith; provided, however, that LESSEE shall be subrogated to all rights and remedies which LESSOR may have against the Manufacturer or Engine Manufacturer. LESSEE hereby waives and releases any claim now or hereafter existing against any Indemnitee, on account of any Claims for or on account of or arising or in any way connected with injury to or death of personnel of LESSEE or loss or damage to property of LESSEE or the loss of use of any property which may result from or arise in any manner out of or in relation to the leasing, condition, use, or operation of the Aircraft, either in the air or on the ground during the Term, or which may be caused during the Term by any defect in such Aircraft from any material or any article used therein or from the design or testing thereof, or use thereof or from any maintenance, service, repair, overhaul, or testing of such Aircraft regardless of when such defect may be discovered, whether or not such Aircraft is at the time in the possession of LESSEE, and regardless of the location of such Aircraft at any such time. Without limitation upon LESSEE's liability under this Section 14, LESSEE hereby agrees to indemnify, reimburse, and hold each Indemnitee harmless from any Claims in any manner imposed upon or accruing against each Indemnitee because of the manufacture, use, or operation of the Aircraft, any design, article, or material therein or relating thereto, because of infringement of patent or any other right. LESSEE hereby agrees, and shall have the right, to assume and conduct promptly and diligently at its sole cost and expense, the entire defense of any Indemnitee against any such claim, and any claim, suit, or action for which any Indemnitee is required to assume liability and to settle such claims and pay any amounts in connection with such agreed upon settlement. -48- LESSOR agrees to give LESSEE prompt notice of any claims hereunder following LESSOR's actual knowledge of such Claims, but the failure of LESSOR to give the notice required by this Section 14 shall not constitute a release by LESSOR or the Indemnitees of any obligations of LESSEE to any Indemnitees in respect of any such Claim, unless LESSEE is materially adversely affected solely by such failure of LESSOR to give such notice. Without the prior consent of LESSEE, LESSOR shall not settle or compromise any Claims that LESSEE, within a reasonable time after notice from LESSOR, has either (i) confirmed to LESSOR are subject to indemnification pursuant to this Clause 14, or (ii) agreed to assume, and to conduct promptly and diligently at its sole cost and expense, the entire defense thereof. The indemnifications contained in this Section 14 shall continue in full force and effect notwithstanding any expiration or other termination of this Lease and are expressly made for the benefit of and shall be enforceable by each Indemnitee. (B) Exceptions. In no event shall the indemnity provided for in Section 14(A) extend to any Claim or disbursement of any Indemnitee resulting from, pertaining to or arising in any manner out of, or in any manner relating to the willful misconduct of any Indemnitee; or to the extent accruing either before the Effective Date or after the Aircraft has been returned to or repossessed by LESSOR; or which is a cost or expense required to be paid by LESSOR hereunder; or which would not have been incurred by LESSOR if LESSOR had not been in breach of its representations, warranties and covenants in this Lease; or which results from LESSOR's Liens or Taxes (without prejudice to LESSEE's obligations set forth in this Lease concerning Taxes). SECTION 15 LIENS LESSEE shall not directly or indirectly create, incur, assume, or suffer to exist any Lien on or with respect to the Aircraft, title thereto, or any interest therein, except Permitted Liens. LESSEE shall promptly, at its own expense, take such action as may be necessary to duly discharge any Lien (except for Permitted Liens) directly or indirectly created, incurred, assumed or suffered to exist by LESSEE if the same shall arise at any time with respect to the Aircraft, title thereto or any interest therein. -49- SECTION 16 PERFECTION OF TITLE AND FURTHER ASSURANCES (A) Except through the action or inaction of LESSOR, if, at any time, any filing or recording is reasonably necessary to protect the interest of Mortgagee or LESSOR, LESSEE shall, at its own cost and expense, cause this Lease, the Lease Assignment financing statements with respect hereto, and any and all additional instruments which shall be executed pursuant to the terms hereof, so far as permitted by applicable Law, to be kept, filed and recorded and to be re-executed, re-filed and re-recorded at all times in the appropriate office pursuant or in relation to any Laws of any Governmental Entity, as LESSOR or Mortgagee may request, to perfect, protect, and/or preserve the rights and interests of LESSOR or Mortgagee hereunder and in the Aircraft, and LESSEE shall furnish to LESSOR evidence satisfactory to LESSOR and Mortgagee of each such filing, re-filing, recordation and re-recordation. (B) Without limiting the foregoing, LESSEE shall do or cause to be done, at LESSEE's cost and expense, any and all acts and things which may be required under the terms of the Convention on the International Recognition of Rights in Aircraft ("Mortgage Convention") to perfect and preserve the title of LESSOR to the Aircraft within the jurisdiction of any signatory which has ratified the Mortgage Convention, as LESSOR may reasonably request. LESSEE shall also do or cause to be done, at its own expense, any and all acts and things which may be required under the terms of any other Law involving any jurisdictions in which LESSEE will operate, or any and all acts and things which LESSOR may reasonably request to perfect and preserve LESSOR's ownership rights regarding the Aircraft within any such jurisdiction and Mortgagee's first priority lien and security interest in and to the Aircraft and Lease as evidenced by the Mortgage and Lease Assignment. (C) LESSEE will not suffer any matter or thing whatsoever whereby the LESSOR's title in and to the Aircraft may be impaired on account of LESSEE's or any transferee's lease or operation of the Aircraft. -50- SECTION 17 REDELIVERY OF AIRCRAFT AND RECORDS (A) Redelivery. Upon termination of the Lease with respect to the Aircraft, or pursuant to Section 19 hereof (such event being hereinafter referred to as a "Redelivery Occasion"), LESSEE, at its own expense prior to the Redelivery Occasion, shall return such Aircraft to LESSOR at the Redelivery Location or such other location as may be mutually agreed upon by LESSOR and LESSEE, fully equipped as delivered or modified as provided hereunder with all required Engines installed thereon. (B) Records. Upon a Redelivery Occasion applicable to the Aircraft, LESSEE, at its own expense, shall deliver to LESSOR all Aircraft Documents listed in Exhibit "B", as updated, amended or supplemented along with such other records and documents in such form as are necessary to qualify the Aircraft for the issuance of a Certificate of Airworthiness by the FAA and to be eligible to operate under FAR Part 121 specifications issued by the FAA. Such records and manuals shall be current and shall constitute an accurate representation of the condition of the Aircraft. (C) Condition of Aircraft. Upon a Redelivery Occasion applicable to the Aircraft, LESSEE shall return the Aircraft to LESSOR in such condition that the Aircraft shall: (1) comply with each and every return condition requirement set forth in Exhibit "I" hereto; (2) have a valid certificate of airworthiness or, at LESSOR's request, a valid certificate of airworthiness for export to a jurisdiction designated by LESSOR; and (3) shall be free and clear of all Liens, except LESSOR's Liens. (D) Final Inspection. Upon or next preceding a Redelivery Occasion with respect to the Aircraft hereunder, LESSEE shall make such Aircraft available to LESSOR and Mortgagee not more than five (5) days or less than three (3) days prior to the date of the Redelivery Occasion for detailed inspection in order to verify that the condition of such Aircraft complies with the requirements set forth above (such inspection being hereinafter referred to as the "Final Inspection"). Such Final Inspection may be scheduled at an appropriate maintenance facility of the Authorized Maintenance Performer then performing maintenance of such Aircraft, pursuant to Subsection 7(D) hereof, and LESSEE shall give LESSOR and Mortgagee not less than ten (10) days' prior written notice of the location and commencement date of such Final Inspection. The last "C" Check (or the equivalent thereof under the Maintenance Program) and the period allowed for the Final Inspection shall have such duration as to permit LESSOR to inspect the Aircraft and the Aircraft Documents in accordance with this Section 17 and Exhibit "I". -51- (E) No more than three (3) of LESSOR's and Mortgagee's representatives shall be permitted to attend each phase of activity required to be conducted during the last "C" Check and the Final Inspection. The Final Inspection shall commence on the dates designated pursuant to Sections 17(D) and 17(G) with respect to the Aircraft and Aircraft Documents, respectively, and shall continue on consecutive days until all activity required above to be performed during the Final Inspection has been concluded. During the maintenance checks performed immediately prior to the Redelivery Occasion and at the actual return of the Aircraft, LESSOR, Mortgagee and/or their representatives will have an opportunity to conduct a complete inspection of the Aircraft's physical condition including a full operational inspection of the Aircraft systems, including the opening, in order to verify any aspect, of the condition of any area of the Aircraft which would normally be accessible during the maintenance check being performed, or at LESSOR's request and expense any other area, provided that the Final Inspection, excluding time to correct deficiencies, does not extend for more than seventy-two (72) hours beyond the Final Inspection. In addition, a maintenance record review may also be performed to evaluate the extent to which the Aircraft has been maintained in an airworthy condition in accordance with requirements of this Lease. Any deficiencies from the Aircraft return condition requirements set forth in this Section 17 and in Exhibit "I" will be corrected by LESSEE at its cost prior to the Acceptance Flight as hereinafter defined. Immediately prior to the proposed redelivery of the Aircraft, LESSEE will carry out for LESSOR, Mortgagee and/or LESSOR's representatives an Aircraft acceptance flight (the "Acceptance Flight") (which may be the ferry flight to the Return Location) in accordance with LESSEE's comprehensive test flights procedures or, if agreed to in writing by LESSOR, in accordance with an airline acceptance flight procedure, either of which will be for the duration necessary to perform such check flight procedures but in any event not more than one and one-half (1 1/2) hours. Flight costs and fuel will be furnished by and at the expense of LESSEE. Any deficiencies from the Aircraft return condition requirements set forth in this Section 17 and Exhibit "I" will be corrected by LESSEE at its cost prior to return of the Aircraft. (F) To the extent that any portion of the Final Inspection extends beyond the date of a Redelivery Occasion, the Term shall be deemed to be automatically extended, and the LESSEE shall be obligated to continue to insure the Aircraft, in accordance with the provisions of this Lease, and to pay Rent hereunder, on a daily basis, calculated at a daily rate equal to 100% of the per diem Basic Rent for the first five days and at a daily rate equal to 150% of the per diem Basic Rent thereafter until the Final Inspection shall have been concluded. All storage expenses attributable to any extension of the Term pursuant to the preceding sentence shall be payable by LESSEE. Notwithstanding the foregoing, in the event that the Final Inspection evidencing that the -52- Aircraft and Aircraft Documents are in conformity with the provisions of this Lease has not been or, in LESSOR's reasonable judgment, will not be concluded by the tenth (10th) day from the scheduled end of the Term, then, in such event, LESSOR shall have the right to elect to take possession of the Aircraft and Aircraft Documents and perform, or cause to be performed, such repairs as are necessary to bring the Aircraft and Aircraft Documents into conformity with the provisions of this Lease with respect to redelivery of the Aircraft and Aircraft Documents on a Redelivery Occasion. In the event LESSOR makes the election set forth in the immediately preceding sentence, then, in such event, (i) the Term shall be deemed extended until the Aircraft and Aircraft Documents are in conformity with the provisions of this Lease with respect to redelivery but the obligation of LESSEE to pay Rent hereunder shall terminate, except that LESSEE shall pay Supplemental Rent in an amount equal to the costs reasonably incurred by LESSOR to bring the Aircraft and Aircraft Documents into conformity with the provisions of this Lease; and (ii) the amount of Supplemental Rent payable by LESSEE to LESSOR may, at the election of LESSOR, be deducted from the Security Deposit or Related Security Deposit then held by LESSOR and, to the extent that such Security Deposit or Related Security Deposit is insufficient to pay such Supplemental Rent (or if LESSOR has not elected to apply such Security Deposit or Related Security Deposit as provided for herein), LESSEE shall, upon demand made by LESSOR, pay to LESSOR such additional amounts as shall be necessary to fully pay the Supplemental Rent. (G) Aircraft Documentation. In order to enable LESSOR to prepare for its Final Inspection of the Aircraft, (i) upon LESSOR's request, LESSEE will make copies available of (a) drawings of the interior configuration of the Aircraft both as it presently exists and as it will exist at return, (b) airworthiness directive status list, (c) service bulletin incorporation list, (d) rotable controlled, hard time and life limited component listings, (e) interior material burn certificates, (f) complete workscope for the checks, inspections and other work to be performed prior to return, and (g) current Engine disk sheets, and (ii) LESSEE agrees to make available at LESSEE's maintenance base to LESSOR, not later than ten (10) days prior to the commencement of such Final Inspection, the Aircraft Documents listed in Exhibit "B" hereto, together with such other documentation regarding the condition, use, maintenance, operation and history of the Aircraft as LESSOR may request. (H) LESSEE's Correction and Subsequent Corrections. To the extent that the Aircraft, any Engine or any of the Aircraft Documents fails upon a Redelivery Occasion to conform to any requirement imposed by Section 17 hereof, LESSOR may, at its option: -53- (1) continue the Lease in effect in the manner provided for in Subsection 17(F) above with regard to automatic extension with respect to such Aircraft until such time as the nonconforming items are corrected; or (2) request LESSEE to pay, and LESSEE shall pay to LESSOR, an amount equal to the amount required (labor and materials) by the then current Authorized Maintenance Performer or any other Person, as the case may be, agreed upon by LESSOR and LESSEE on the date of such Redelivery Occasion, to correct such nonconforming items. Any such amount payable by LESSEE to LESSOR for such correction shall become Supplemental Rent, payable by LESSEE within five (5) days following the submission of a written statement by LESSOR to LESSEE identifying the items corrected or to be corrected and setting forth the expense of such correction. LESSEE's obligation to pay such Supplemental Rent shall survive the passage of the early termination of the Term or other termination of this Lease. In addition to the preceding, and under the same payment terms, LESSEE, with regard to any time-limited component installed on such Aircraft which does not satisfy the return condition requirements of this Section 17 upon a Redelivery Occasion, LESSEE shall pay LESSOR, at the time of a Redelivery Occasion, an amount equal to the amount which would be required to be paid to the Person selected by the then current Authorized Maintenance Performer or any other person, as the case may be, agreed upon by Lessor and Lessee on the date of such Redelivery occasion, for putting such item in such condition. (I) Dispute as to Compliance with Return Conditions. Should there be any dispute as to whether the Aircraft meets the return conditions, the matter shall be resolved by an independent knowledgeable aviation maintenance expert reasonably acceptable to both parties. The standard to be applied in ascertaining compliance with the redelivery conditions set out in this Section 17 shall be that applied after taking into account the levels of tolerance set out in the Maintenance Program. SECTION 18 EVENTS OF DEFAULT Each of the following events shall constitute an Event of Default: -54- (A) LESSEE shall fail to make any payment of Rent when due under this Lease and such payment shall be overdue for a period of three (3) Business Days after written notice by Lessor to Lessee; (B) LESSEE shall fail to carry and maintain insurance on or with respect to the Aircraft and this Lease in accordance with the provisions of Section 13 hereof or shall operate the Aircraft or permit the Aircraft to be operated in violation of any insurance policy required to be provided pursuant to Section 13 hereof; (C) Except as otherwise expressly provided in this Section 18 and Subsection 18(B) above for which no notice is required, LESSEE shall fail to perform or observe any covenant, condition or agreement to be performed or observed by LESSEE under the Lease or any other Lease Document to which LESSEE is a party and such failure shall continue for a period of thirty (30) days after written notice thereof from LESSOR to LESSEE, provided that such right of remedy shall only exist in respect of not more than three (3) cumulative failures (not including any breach or default by the LESSEE of performance of its obligations under Subsection 18(L) after the date hereof); (D) Any representation or warranty made by LESSEE herein, or in any notice, certificate or other document furnished by or on behalf of LESSEE herein to LESSOR or its assigns, shall prove to have been incorrect in any material respect when made; (E) LESSEE shall consent to the appointment of a receiver, trustee or liquidator for itself or for a substantial part of its property, or LESSEE shall admit in writing its inability to pay its debts generally as they become due, or shall make a general assignment for the benefit of creditors, or LESSEE shall file a voluntary petition in bankruptcy or a voluntary petition or answer seeking reorganization in a proceeding under any Laws dealing with bankruptcy, insolvency, moratorium or creditors' rights generally (any or all of which are hereinafter referred to as "Bankruptcy Laws"), or an answer admitting the material allegations of a petition filed against LESSEE in any such proceeding, or LESSEE shall by voluntary petition, answer or consent to or seek relief under the provisions of any Bankruptcy Laws; (F) An order, judgment or decree shall be entered by any court of competent jurisdiction appointing, without the consent of LESSEE, a receiver, trustee or liquidator for LESSEE or any substantial part of its property, or any substantial part of the property of LESSEE shall be sequestered, and any such order, judgment, decree or -55- appointment, or sequestration, shall remain in force undismissed, unstayed or unvacated for a period of sixty (60) days after the date of entry thereof; (G) A petition against LESSEE in a proceeding under the Bankruptcy Laws of any Governmental Entity shall be filed and shall not be withdrawn or dismissed within sixty (60) days thereafter, or if, under the provisions of any Bankruptcy Laws which may apply to LESSEE, any court of competent jurisdiction shall assume jurisdiction, custody or control of LESSEE or of any substantial part of its property, and such jurisdiction, custody or control shall remain in force unrelinquished, unstayed or unterminated for a period of ninety (90) days; (H) LESSEE shall be dissolved or liquidated, shall terminate its existence or suspend its operations, shall lose any right, privilege or franchise necessary to maintain its corporate existence, or shall dispose of all or substantially all of its properties to any Person (in each case, except as otherwise permitted hereunder); (I) LESSEE shall make or permit any assignment or transfer of this Lease or of possession of the Aircraft other than as permitted hereunder; (J) Any license, permit, authorization, consent, approval, notification, registration or filing now or hereafter necessary to enable LESSEE to perform or comply with its obligations under the Lease shall fail to be timely issued, granted or made, or shall expire or lapse and shall not be forthwith renewed or extended or shall be revoked, withdrawn, withheld or adversely modified, or shall cease to be in full force and effect; (K) All or a substantial part of the properties of LESSEE shall be condemned, seized or otherwise appropriated for custody or control, or such property shall be assumed by any Governmental Entity or any court or other Person purporting to act under the authority of any Governmental Entity, or LESSEE shall be prevented from exercising normal control over all or a substantial part of its properties, if such events as set forth in this Subsection 18(K) are not remedied within sixty (60) days after they occur; (L) The LESSEE fails to pay any Indebtedness exceeding $500,000.00 individually or in the aggregate when due (giving affect to all applicable grace periods) or any Indebtedness exceeding $500,000.00 individually or in the aggregate of the LESSEE becomes or is declared to be due and is accelerated, unless LESSEE is contesting its liability in respect of such Indebtedness by proceedings being contested in good faith and diligently prosecuted and for which appropriate reserves have been made by the LESSEE, -56- all as evidenced to the reasonable satisfaction of the LESSOR, and the LESSOR is reasonably of the view that its interest in the Aircraft is not adversely prejudiced thereby; (M) This Lease or any Lease Document is or becomes wholly or partly invalid, ineffective or unenforceable and the LESSOR determines that such invalidity, ineffectiveness or unenforceability will or may have a material adverse effect upon the rights of the LESSOR or the ability of the LESSEE to perform its obligations under this Lease or such Lease Document and alternative arrangements satisfactory to the LESSOR are not entered into by the LESSEE; or (N) If any Related Lease Event of Default shall occur and be continuing. SECTION 19 REMEDIES Upon the occurrence of any Event of Default, and at any time thereafter so long as the same shall be continuing, LESSOR may, at its option, declare this Lease to be in default, and at any time thereafter, so long as LESSEE shall not have remedied any outstanding Event of Default, LESSOR may exercise one or more of the following remedies with respect to the Aircraft as LESSOR in its sole discretion shall elect, to the extent available and permitted by, and subject to compliance with, any mandatory requirements of applicable Law then in effect; provided, however, that upon the occurrence of any Event of Default specified in paragraphs (F), (G) or (H) of Section 18, LESSOR shall be entitled automatically, as of the day prior to such occurrence, to exercise any of the following remedies without declaring this Lease to be in default or making demand or giving notice or the taking of any other action: (A) Demand that LESSEE, and LESSEE shall, upon the written demand of LESSOR, at LESSEE's expense, return the Aircraft and Aircraft Documents promptly to LESSOR in the manner and condition required by, and otherwise in accordance with all of the provisions of, Section 17 hereof; or LESSOR, at its option and to the extent permitted by applicable Law, may enter upon the premises where all or any part of the Aircraft and Aircraft Documents are located and take immediate possession of and remove the same, by summary proceedings or otherwise, all without liability accruing to LESSOR for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise; -57- (B) Sell the Aircraft at public or private sale, as LESSOR may determine, or otherwise dispose of, hold, use, operate, lease to others, or keep idle the Aircraft, as LESSOR in its sole discretion may determine, all free and clear of any rights of LESSEE and without any duty to account to LESSEE with respect to such action or inaction, or for any proceeds with respect thereto; (C) Demand (whether or not LESSOR, pursuant to Subsection 19(B) hereof, may have sold the Aircraft) that LESSEE pay LESSOR, and LESSEE shall upon such demand pay to LESSOR, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Rent for such Aircraft due after such payment occurs), any accrued and unpaid Rent for such Aircraft due up to the time LESSOR demands such payment, plus the amount by which the Agreed Value of such Aircraft exceeds the net cash proceeds of any sale of such Aircraft, together with interest at the Overdue Rate on such Agreed Value or portion thereof and such unpaid Rent from the date of LESSOR's demand to the date such payment is made; (D) Proceed by appropriate court action or actions, either at Law or in equity, to enforce performance by LESSEE of the applicable covenants of this Lease (including, but not limited to, LESSEE's obligation to pay Rent for the Term) and to recover damages for the breach thereof, or to rescind this Lease as to the Aircraft (which rescission shall not release LESSEE from its financial obligations hereunder); (E) Terminate this Lease or any of LESSEE's rights hereunder by written notice, and repossess the Aircraft and Aircraft Documents, provided such termination shall not release LESSEE from its financial obligations hereunder; (F) Use and apply the Security Deposit or the Related Security Deposit to satisfy any of the obligations of LESSEE set forth in this Lease or in the Related Lease Agreement; (G) Should the LESSEE fail to return the Aircraft and Aircraft Documents upon termination of the Lease for any reason whatsoever except due to an Event of Loss and as set forth in Subsection 17(D)(3) without prejudice to LESSOR's rights hereunder to demand return of the Aircraft in the condition required by this Section, LESSEE shall continue to pay Rent to LESSOR for each day the Aircraft remains in LESSEE's possession at the rate of 1/ 15 of the monthly Basic Rent then in effect. -58- In addition, LESSEE shall be liable for any and all unpaid Rent due hereunder before or during the exercise of any of the foregoing remedies and for the time remaining in the Term without giving effect to any early termination of this Lease, together with interest thereon at the Overdue Rate from the date such Rent was due, and for all reasonable attorneys' fees, legal expenses and other costs and expenses incurred by reason of the occurrence of any Event of Default or the exercise of LESSOR's remedies with respect thereto, including all costs and expenses incurred in connection with the return of the Aircraft, in accordance with the terms of Section 17 hereof, or with placing such Aircraft in such condition. Except as otherwise expressly provided above, no remedy referred to in this Section 19 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to LESSOR under any applicable Law, and the exercise or commencement of exercising by LESSOR of any one or more of such remedies shall not preclude the simultaneous or later exercise by LESSOR of any or all such other remedies. No express or implied waiver by LESSOR of any Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. LESSEE hereby agrees that, except as provided in this Section 19, any financing profit or savings accruing to LESSOR by virtue of LESSEE's default and LESSOR's subsequent sale, re-letting, or award shall in no way reduce, offset or mitigate the damages for which LESSEE is liable hereunder. If the Lease is terminated in accordance with Subsection 19(E), LESSEE hereby appoints LESSOR as LESSEE's irrevocable agent and attorney-in-fact, as set forth in Exhibit "E", to execute all documents deemed necessary to release, terminate and void LESSEE's interest in the Aircraft leased hereunder, and to file said documents for recordation with the Air Authority and the appropriate Governmental Entity following the occurrence of an Event of Default, where LESSOR, at its sole discretion, may deem use of such agency necessary to effect any remedy which LESSOR chooses to exercise. SECTION 20 ALIENATION (A) There shall be no restriction upon LESSOR's right to assign, sell, transfer, pledge, hypothecate or encumber any interest of LESSOR (hereinafter referred to generally as "Alienation") to the Mortgagee in the Aircraft, this Lease, and or the -59- proceeds thereof and hereof, subject to rights of the LESSEE under the provisions of the Lease Assignment. Any other assignment by LESSOR hereunder shall be subject to the prior written consent of LESSEE which consent shall not be unreasonably withheld or delayed. To effect or facilitate any such assignment, sale, transfer, pledge, hypothecation or encumbrance, LESSEE agrees to provide LESSOR or LESSOR's designee or assignee with such agreements, consents, conveyances or documents as may be reasonably requested by LESSOR. The agreements, covenants, obligation and liabilities contained herein, including, but not limited to, all obligations to pay Rent and indemnify LESSOR, are made for the benefit of LESSOR, Mortgagee and their respective successors and assigns, notwithstanding the possibility that any such Person was not originally a party to this Lease or may, at the time such enforcement is sought, not be a party to this Lease. (B) In the case of any Alienation or assignment by LESSOR pursuant to the provisions of Section 20, LESSEE shall execute and deliver to LESSOR promptly (at LESSOR's cost except that LESSEE shall pay the cost of its attorney), upon request of LESSOR, any consents or agreements required for the perfection of such assignment provided that such consent or other documents does not affect LESSEE's rights under Subsection 21(G) below. SECTION 21 MISCELLANEOUS (A) Severability. Amendment and Construction. Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. No term or provision of this Lease may be changed, waived, discharged, or terminated orally, but only by an instrument in writing expressed to be a supplement to this Lease, signed by an officer of the party against which the enforcement of the change, waiver, discharge or termination is sought. This Lease shall constitute an agreement of lease for the Term of the Lease, and nothing herein shall be construed as conveying to LESSEE any right, title or interest in the Aircraft, the Airframe, any Engine or Part except as a LESSEE only, for such Term. The headings in this Lease are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Unless the context otherwise requires, all references in this instrument to designated Sections or other subdivisions hereof are to such designated Sections or subdivisions; and the words -60- "herein", "hereof', "hereto", "hereunder", and other words of similar import refer to this instrument as a whole and not to any particular Section or subdivision. In construing any provision of this Lease, no account shall be taken as to the party who drafted same and no presumption shall arise or result therefrom. (B) Governing Law. This Lease shall in all respects be governed by and construed in accordance with the Laws of the State of New York applicable to contracts entered into in such State by residents thereof and to be performed entirely within such State. (C) Waiver of Jury Trial. LESSEE AND LESSOR HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED UNDER APPLICABLE LAW, ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT BY EITHER PARTY HERETO WITH RESPECT TO THE CONSTRUCTION OR ENFORCEMENT OF THIS LEASE OR OF ANY PROVISION HEREOF. (D) Notice. Except as otherwise specified herein, notice, requests, demands, consents or other communications to, upon or by the respective parties hereto shall be in the English language and in writing, sent by express courier or telefax, and shall be deemed to have been duly given or made when received by the party if sent by telefax or when received by the party, if sent by express courier, addressed to the party to which such notice, request, demand or other communication is required or permitted to be given or made hereunder, at the LESSEE'S Address or LESSOR'S Address, as the case may be, or at such other address of which such Person shall have notified in writing the party giving such notice. Copies of all notices to the LESSOR shall also be sent to the Mortgagee pursuant to the Lease Assignment and to Feltman, Karesh, Major & Farbman, 152 West 57th Street, New York, New York 10019, Attn.: Loren M. Dollet, Esq., Telefax No.: (212) 586-0951. (E) LESSOR's Right to Perform for LESSEE. If LESSEE fails to make any payment of Supplemental Rent or fails to perform or comply with any covenant, agreement or obligation contained herein, LESSOR shall have the right, but not the obligation, to make such payment or perform or comply with such agreement, covenant or obligation, and the amount of such payment and the amount of the reasonable expenses of LESSOR incurred in connection with such payment or the performance thereof or compliance therewith, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by LESSEE upon demand. The taking of any such action by LESSOR pursuant to this Subsection 21(E) shall not constitute a waiver or release of any -61- obligation of LESSEE under the Lease, nor a waiver of any Event of Default which may arise out of LESSEE's nonperformance of such obligation, nor an election or waiver by LESSOR of any remedy or right available to LESSOR under or in relation to this Lease. (F) Counterparts. This Lease may be executed simultaneously in one or more counterparts, all of which together shall constitute one and the same Lease. To the extent that this Lease constitutes chattel paper in any jurisdiction, no security interest herein may be created through the transfer of possession of any counterpart other than the counterpart marked "Original." Other than the counterpart of this Lease marked "Original," all other original executed counterparts of this Lease shall be marked "Duplicate Original." (G) Quiet Enjoyment and Lessor Covenant. LESSOR covenants that if, and as long as, LESSEE keeps and performs each and every covenant and agreement to be performed or observed by it hereunder and/or no Event of Default has occurred and is continuing, LESSEE shall quietly enjoy the Aircraft without interference by LESSOR or by any Person claiming by, through or against LESSOR, including, but not limited to, Mortgagee and any other security assignee of LESSOR, and none of the LESSOR or any Person claiming by, through or against LESSOR, including, but not limited to, any assignee of LESSOR, will, as long as LESSEE keeps and performs each and every covenant to be performed or observed by it hereunder, take any action which adversely affect the registration of the Aircraft. LESSOR further covenants that it will maintain all legal right, power and authority, and all licenses and authorizations, necessary to lease the Aircraft for the Term. (H) Brokers. LESSOR and LESSEE each agree that there has been no third party as broker or finder involved in this Lease and each party hereby indemnifies the other party from liability for fees, commissions or other claims made upon such other party due to such claims arising through it. (I) Jurisdiction. Service of Process. The parties hereto hereby expressly submit to the non-exclusive jurisdiction of the United States District Court for the Southern District of New York or the Supreme Court of the State of New York in the Borough of Manhattan, City of New York with respect to any action arising out of or relating to this Lease. The parties hereto, to the fullest extent available under applicable Law, waive any claim that venue or jurisdiction is improper in such courts or that such courts constitute an inconvenient forum. Service of summons, complaint and other legal process on LESSOR or LESSEE with respect to any action arising out of or relating to this Lease may be made by mailing (registered mail, return receipt requested) a copy of -62- any summons or other legal process to said Party at the LESSEE's address or LESSOR's address, as the case may be, or by any other procedure permitted under the Laws of the United States of America. The mailing, as herein provided, of such summons or other legal process shall be deemed personal service and accepted by LESSEE or LESSOR as such, and shall be legal, effective and binding upon LESSEE or LESSOR for all the purposes of the suit. Nothing in this Subsection 21(I) shall in any way be deemed to limit the ability of LESSOR or LESSEE to serve any such summonses or legal process in any other manner permitted by applicable Law or to obtain jurisdiction over the other party in such other jurisdictions, and in such manner, as may be permitted by applicable Law. SECTION 22 SUBLEASE; ASSIGNMENT; CRAF PROGRAM (A) LESSEE shall not sublease the Aircraft or assign its rights in this Lease to any other party without the prior written consent of LESSOR which consent shall not be unreasonably withheld or delayed. LESSEE agrees that it will be reasonable for LESSOR to withhold its consent if such sublease or assignment will impair or adversely affect Mortgagee's security interest in the Aircraft. (B) Any sublease or assignment consented to by LESSOR shall contain, among other things, the following terms and conditions: (1) That such sublease or assignment is subject to and subordinate to this Lease; (2) The sublease or assignment shall not relieve the LESSEE of its obligations under this Lease and the LESSEE shall continue to be primarily liable hereunder; and (3) The rights of the LESSOR in any sublease shall be assigned to LESSOR as security for the performance of the obligations of LESSEE under this Lease and further assigned by LESSOR to Mortgagee. -63- (C) In connection with any request by LESSEE to LESSOR to sublease the Aircraft or assign its rights in this Lease to any other party, LESSEE agrees to pay on demand to LESSOR all reasonable costs and expenses incurred by LESSOR in connection with such request, including, but not limited to, legal fees and expenses of counsel to LESSOR (such legal fees for which LESSEE shall be responsible shall include, but not be limited to, the cost of counsel reviewing all documents which LESSEE proposes to enter into in connection with such sublease or assignment). (D) All of LESSEE's obligations hereunder may be performed by any approved sublessee or assignee, provided however that the LESSEE shall not be released from its obligations hereunder. (E) LESSEE may subject the Aircraft to a Wet Lease without LESSOR's prior written consent. (F) So long as no Default or Event of Default shall have occurred and be continuing under this Lease, LESSEE may transfer possession of the Aircraft to the U.S. Government pursuant to the CRAF Program. In the event of (i) a requisition for use by the U.S. Government of the Aircraft during the Term for the purpose of an Air Mobility Command Solicitation pursuant to the CRAF Program (a "CRAF Requisition") or (ii) notice to the LESSEE from the Government to the effect that the Aircraft may be subject to a CRAF Requisition (a "CRAF Activation"), LESSEE shall promptly notify LESSOR and Mortgagee and, except as otherwise specified herein, all of LESSEE's obligations under this Lease shall continue to the same extent as if such CRAF Requisition or CRAF Activation had not occurred. LESSEE agrees that no CRAF Requisition or CRAF Activation shall continue beyond the end of the Term and that, if the Airframe or any Engine is not returned by the U.S. Government prior to the end of the Term, then: (1) such failure shall constitute an Event of Loss, and LESSEE and LESSOR shall comply with the provisions of Section 12; and (2) the Term (including LESSEE's obligation to pay Basic Rent) shall be deemed extended to, and shall not expire until, the date LESSEE performs fully its obligations pursuant to Section 12. (G) Notwithstanding any provision in this Lease to the contrary, LESSOR and LESSEE hereby expressly acknowledge and agree that during any CRAF Requisition or CRAF Activation: -64- (1) the Aircraft shall be registered in the United States; (2) LESSEE may transfer possession of the Aircraft to the U.S. Government, provided that the rights of any transferee of the Aircraft shall be subject and subordinate to all of the terms of this Lease and the Mortgage, including the right of LESSOR and Mortgagee to terminate this Lease and immediately repossess the Aircraft following an Event of Default; (3) LESSEE shall have exclusive control of the Aircraft and shall remain primarily liable for the performance of all of the terms of this Lease to the same extent as if such CRAF Requisition or CRAF Activation had not occurred; (4) there shall be no limitation on the geographic area in which the Aircraft may be operated; and (5) LESSEE shall provide LESSOR and Mortgagee with the name and address of the Contracting Office Representative for the Military Airlift Command of the United States Air Force to whom notice must be given in connection with the enforcement of remedies under this Lease, and LESSOR shall give such representative prior written notice of its enforcement of any remedies under this Lease. (H) LESSOR shall accept U.S. Government indemnification in lieu of insurance during a CRAF Requisition or CRAF Activation, and LESSEE's failure to maintain insurance in accordance with Section 13 hereof during a CRAF Requisition or CRAF Activation shall not constitute an Event of Default, provided, however, that in the event that LESSEE is able to maintain existing insurance coverage on the Aircraft during a CRAF Requisition or CRAF Activation, as the case may be, and the maintenance of such existing insurance during a CRAF Requisition or CRAF Activation will not result in any additional cost to Lessee which is materially in excess of the cost for the existing insurance coverage on the Aircraft immediately prior to the CRAF Requisition or CRAF Activation, as the case may be, Lessee shall not take any action or inaction which results in the termination or cancellation of such insurance. LESSEE shall promptly notify LESSOR and Mortgagee as to the existence of such indemnification and promptly furnish to LESSOR and Mortgagee a copy of such indemnification agreement and a certificate of its independent aircraft insurance brokers certifying that such indemnification and other insurance maintained by LESSEE is in full compliance with all the requirements of -65- Section 13. All payments received by LESSOR or LESSEE from the U.S. Government for the use of the Aircraft during or after the Term shall be paid over to or retained by LESSEE unless (i) an Event of Default has occurred and is continuing hereunder, or (ii) a deemed Event of Loss has occurred hereunder and LESSEE has not complied with all of its obligations set forth in Section 12 hereof, in either of which cases such payments shall be paid over to or retained by LESSOR to be applied in satisfaction of LESSEE's obligations hereunder. SECTION 23 RIGHT OF FIRST REFUSAL If LESSOR proposes to sell the Aircraft, which LESSOR may choose to do or not to do in LESSOR's sole discretion, and LESSOR agrees on the terms of such sale with an unaffiliated third party, then LESSOR shall send LESSEE a written notice (the "LESSOR Notice") specifying the proposed terms of such sale. LESSEE shall have the option to purchase the Aircraft on the same terms as specified in the LESSOR Notice by exercising such option in a written notice to be delivered to LESSOR within fifteen (15) Business Days of receipt of the LESSOR Notice by LESSEE, including to post within such 15 days period any deposits for performance. If the LESSEE fails to accept the offer in accordance with this Section 23 within the 15 days period, the LESSEE shall conclusively be deemed to have rejected such offer and the LESSOR may, at any time within three months thereafter, sell the Aircraft on the terms of the offer. If the LESSEE accepts the offer, LESSOR and LESSEE shall negotiate in good faith to sell the Aircraft by not later than 30 days after the LESSEE's acceptance. SECTION 24 ENTIRE AGREEMENT This Lease (including all Exhibits hereto) embodies the entire agreement and understanding between LESSOR and LESSEE relating to the subject matter hereof and supersedes all prior agreements and understandings relating hereto and neither of the parties hereto shall be bound by or charged with any oral or written agreements, representations, warranties, statements, promises or understandings not specifically set forth herein. This Lease may not be changed and no right granted or obligation imposed -66- hereunder may be waived orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. SECTION 25 CONFIDENTIALITY LESSOR and LESSEE agree to keep this Lease and all Lease Documents and any and all documents of a financial or proprietary nature received pursuant to the provisions of this Lease confidential, and shall not disclose the existence or any portion of this Lease and any Lease Document and any and all documents of a financial or proprietary nature received pursuant to the provisions of this Lease to any person or entity, except in accordance with the terms hereof. LESSOR and LESSEE may disclose this Lease and any Lease Document on a need to know basis to: (i) its counsel, accountants, banks, financial institutions, maintenance providers, independent insurance advisors or other advisors or agents who are under a duty to or agree to hold such information confidential, (ii) if the document or information was filed as a matter of public record with a Governmental Entity or was generally available to the public at the time of disclosure (other than as a result of a disclosure by such person or entity), or (iii) as may be required by any statute, court or administrative order or decree or governmental rule or regulation or by any regulatory or supervisory governmental authority or agency or by generally accepted accounting principles. [signature page follows] -67- IN WITNESS WHEREOF, LESSOR and LESSEE, each pursuant to due corporate authority, have caused this Aircraft Lease Agreement [49587] to be executed by their duly authorized officers as of the day and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR, INC. By: /s/ Aaron Mendelsohn By: ------------------------- ---------------------------- Name: Aaron Mendelsohn Name: Title: President Title: -68- IN WITNESS WHEREOF, LESSOR and LESSEE, each pursuant to due corporate authority, have caused this Aircraft Lease Agreement [49587] to be executed by their duly authorized officers as of the day and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR, INC. By: By: /s/ Robert M. Rowen ------------------------- ---------------------------- Name: Name: Robert M. Rowen Title: Title: Vice President and General Counsel -68- EXHIBIT "A" AIRCRAFT SPECIFICATIONS Manufacturer: McDonnell Douglas Model MD-87 Serial No. 49587 Line No. N/A Reg. No. N753RA Date of Mfgr. 1988 AIRFRAME STATUS Time as of 11/16/95 Total Hours 14129 Total Cycles 7448 Time Since Last C Ck 13321 hours Time to Next Overhaul N/A hours/ ENGINE STATUS Model # Serial # REMAINING Limiter ------- -------- --------- ------- #1. Pratt & Whitney 708147 3155 cyc LPT Shaft JT8D-217C #2. Pratt & Whitney 708177 5704 cyc LPT Shaft JT8D-217C LANDING GEAR STATUS Hrs. Remaining Cycles Remaining -------------- ---------------- Nose N/A N/A Main N/A N/A -69- EXHIBIT "B" AIRCRAFT DOCUMENTATION Delivery of Manuals/Documents o AD Status o Present Certificate of Airworthiness o Copy of Original Certificate of Airworthiness or Export ex USA o Copy of Noise Certificate o Copy of Radio Lisence o Packing Sheet from MDC o Engine Records and Modification Status o Status Engine S.B., ASB, AD o Test Cell Run Sheets o Inventory of Loose Equipment at Date of Delivery o Weight and Balance Records (Status at Delivery) o Weight and Balance Manual o S.B., AOL, I.A. - Status o Time controlled Component Inventory List (PA 061 INVORT) o Historical records: o Log Books o OTI'S, OTA'S, EO's and AD's o None Routine Job Cards o Briefing Cards o HIL-Lists/Line Maintenance/Heavy Maintenance o FAA/FAO approved Flight Manual o Wiring Diagram Manual (Microfilm) o IPC (Microfilm) o MAI (Microfilm) o Last X-Ray Pictures o APU Log Book/Shop Findings ex UTA o AOM (Operational Manual) o Certificate of Airworthiness for Export issued by Swiss Federal Air Office -70- EXHIBIT "C" CERTIFICATE OF ACCEPTANCE This Certificate of Acceptance is delivered on and as of the date set forth below by RENO AIR, INC. (hereinafter referred to as "LESSEE") to OLIVIA CORP. (hereinafter referred to as "LESSOR") pursuant to that Aircraft Lease Agreement [49587] dated as of November _, 1995 between LESSOR and LESSEE (hereinafter referred to as the "Agreement"): A. Details of Acceptance LESSEE hereby indicates and confirms to LESSOR, its successors and assigns, that the LESSEE has at ______ o'clock _.M., at this __ day of November, 1995, at Zurich International Airport, Zurich, Switzerland, accepted the following in accordance with the provisions of the Agreement: 1. (a) McDonnell Douglas Model: NM-87 (b) Manufacturer's Serial No.: 49587 (c) U.S. FAA Registration Number: N753RA Manufacturer Engine Model Number Total Total Hours Cycles No. Serial Number Hours Cycles Remaining Remaining --- ------------- ----- ------ --------- --------- (1) Pratt & Whitney JT8D-217C 708147 (2) Pratt & Whitney JT8D-217C 708177 -71- Each of the above-described Engines having 750 or more rated take-off horsepower or the equivalent thereof. Airframe Total Time: ____ hrs. Total Cycles: ____ Cycles Fuel ____ lbs. B. Confirmation of Undertakings LESSEE confirms that the above described Aircraft and Engines have been examined by its duly appointed and authorized representative(s), that such Aircraft and Engines conform to the information set forth above, that there have been fixed to the Aircraft the markings required by the Agreement (or that such markings shall be affixed to the Aircraft within fifteen (15) days of the date hereof). LESSEE confirms and acknowledges that the date set forth above constitutes the Effective Date, as such term is defined in the Agreement, and that LESSEE's execution and delivery of this Certificate represents LESSEE's acceptance of the above described Aircraft and Engines for all purposes of the Agreement. IN WITNESS WHEREOF, LESSEE has caused this Certificate of Acceptance to be executed in its name, by its duly authorized officer(s) or representative(s), pursuant to due corporate authority, all as of the date written in Section A above. LESSEE: RENO AIR, INC. By:_________________________ Title:______________________ Date:_______________________ -72- EXHIBIT "D" LEASE SUPPLEMENT [49587] NO. 1 LEASE SUPPLEMENT [49587] NO. 1, dated November _, 1995, between OLIVIA CORP. ("LESSOR") and RENO AIR, INC. ("LESSEE"). LESSOR and LESSEE have heretofore entered into that certain Aircraft Lease Agreement [49587], dated as of November _, 1995, relating to one (1) McDonnell Douglas MD-87 Aircraft (herein called the "Lease" and the defined terms therein being hereinafter used with the same meanings). The Lease provides for the execution and delivery of a Lease Supplement for the purpose of subjecting the Aircraft and other property described in such Lease Supplement (collectively, the "Equipment"), as and when delivered by LESSOR to LESSEE, to the terms of the Lease. The Lease relates to the Equipment described below and a counterpart of the Lease is attached hereto and made a part hereof, and this Lease Supplement, together with such attachment, is being filed for recordation on the date hereof with the FAA as one document. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, LESSOR and LESSEE hereby agree as follows: 1. LESSOR hereby delivers and leases to LESSEE under the Lease, and LESSEE hereby accepts delivery of and leases from LESSOR under the Lease, the following described Equipment, which Equipment, as of the date hereof, is acknowledged and accepted by LESSEE: (i) Airframe: one (1) McDonnell Douglas MD-87 airframe, bearing FAA Registration No. N753RA and Manufacturer's Serial No. 49587; (ii) Engines: two (2) Pratt & Whitney Model JT8D-217C aircraft engines, each of which has 750 or more rated takeoff horsepower and bearing Manufacturer's Serial Nos. 708147 and 708177, respectively; and -73- (iii) The Aircraft Documents. 2. The Effective Date for the Equipment is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. The Term is from the date of this Lease Supplement through and including January 15, 2003. 4. LESSEE hereby confirms it has paid the Security Deposit to LESSOR in the amount set forth on Schedule "1" attached hereto and forming a part hereof. 5. LESSEE hereby confirms its agreement to pay LESSOR Interim Rent and Basic Rent, as applicable, for the Equipment throughout the Term, in the installments and in the amounts provided for on Schedule "1", on each Rent Date. 6. LESSEE hereby confirms its agreement to pay LESSOR Reserves on each Maintenance Reserve Date, subject to the provisions of 5(E) and in the amounts provided for on Schedule "1". 7. LESSEE hereby confirms to LESSOR that LESSEE has accepted the Equipment for all purposes hereof and of the Lease. 8. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 9. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute but one and the same instrument. -74- IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement [49587] No. 1 to be duly executed and delivered as of the date and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR, INC. By:_____________________________ By:_____________________________ Name: Name: Title: Title: -75- Schedule "1" 1. Security Deposit. The Security Deposit shall equal $300,000. 2. Interim Rent. Interim Rent shall be payable by LESSEE to LESSOR in the amount set forth in Section 5(A) of the Lease. The Minimum Basic Rent shall equal $40,000. 3. Basic Rent. (i) Basic Rent shall be paid by LESSEE to LESSOR, in advance, as set forth in Section 5(A)(ii) of the Lease. (ii) The monthly Basic Rent for each Rent Period during the periods set forth below shall equal the amounts set forth next to such periods assuming that LIBOR for such Rent Period is 5.8% per annum: January 15, 1996 - July 14, 1996 - $87,500 July 15, 1996 - Expiration Date - $150,000 To the extent LIBOR on any given Rent Date (provided, however, if such Rent Date is not a London Banking Day, then on the immediately following London Banking Day), on which Basic Rent is to be paid is less than or greater than 5.8% per annum, the Basic Rent payable by LESSEE to LESSOR on the next Rent Date shall be adjusted upward (in the event that LIBOR is greater than 5.8% per annum) or downward (in the event that LIBOR is less than 5.8% per annum) in accordance with the following formula (the "Rent Adjustment"): ((L-5.8) x A) + B L = the actual 30-day LIBOR rate for the preceding Rent Date, however, L shall never be greater than 8.0 nor less than 3.6 B = the Basic Rent A = an adjustment factor equal to the amount set forth below corresponding to the relevant Rent Period: -76- Rent Period A ----------- - Jan-15-1996 to Jan-14-1997 7,450 Jan-15-1997 to Jan-14-1998 6,700 Jan-15-1998 to Jan-14-1999 5,800 Jan-15-1999 to Jan-14-2000 4,900 Jan-15-2000 to Jan-14-2001 3,850 Jan-15-2001 to Jan-14-2002 2,750 Jan-15-2002 to Jan-15-2003 1,550 Notwithstanding anything set forth herein to the contrary, with respect to the Basic Rent payable for the last Rent Period, the Rent Adjustment shall be made on the Expiration Date. To the extent the Basic Rent is adjusted upward for such Rent Period, LESSEE shall pay the Rent Adjustment to LESSOR on the Expiration Date. To the extent the Basic Rent is adjusted downward for such period and provided no Default or Related Lease Default has occurred and is continuing, LESSOR shall pay LESSEE the Rent Adjustment on the later of the Expiration Date or the date on which LESSEE has complied with all provisions hereof. 4. Reserves. (i) The Airframe Reserves shall be payable in an amount equal to thirty ($30.00) Dollars for each Flight Hour incurred on the Airframe for the previous Rent Period; (ii) The Engine Reserves shall be payable in an amount equal to seventy ($70.00) Dollars per each Cycle incurred on each Engine for the previous Rent Period; and (iii) the Landing Gear Reserves shall be ten ($10.00) Dollars per each Cycle incurred on the Landing Gear for the previous Rent Period. -77- EXHIBIT "E" APPOINTMENT AS ATTORNEY-IN-FACT Pursuant to the terms of Subsection 19 of the Lease (as hereinafter defined), RENO AIR, INC. ("Reno") hereby irrevocably appoints OLIVIA CORP. ("LESSOR"), or its representatives, agents or assigns, as its true and lawful attorney-in-fact, to act in all respects, do such acts and take such actions as Reno could do or authorize itself under the Lease with respect to the use, operations, maintenance and possession of the McDonnell Douglas MD-87 Aircraft, Serial Number 49587, U.S. Registration No. N753RA (the "Aircraft"), which LESSOR has leased to Reno by Aircraft Lease Agreement [49587] dated as of November _, 1995 (the "Lease"). The appointment is made as part of and in consideration of the leasing of the Aircraft to Reno by LESSOR and shall remain in full force and effect until all obligations of Reno under the Lease shall be fully discharged or satisfied. The power given to LESSOR herein may only be exercised upon the occurrence and continuation of an Event of Default under the Lease but LESSOR shall not be required to deliver any evidence to any party as to the existence of such Event of Default in connection with the exercise of the power hereunder. Executed this ___ day of November, 1995. RENO AIR, INC. By:_______________________ Name: Title: Attested by: __________________________ (PLACE CORPORATE Secretary SEAL HERE) -78- STATE OF ) ) ss.: COUNTY OF ) On the __ day of _________, 199_, before me personally came __________________, to me known, who, being by me duly sworn, did depose and say that he resides at _____________________; that he is the ________ of _______________, the corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. ______________________________ Notary Public [Seal] -79- EXHIBIT "F" REDELIVERY CERTIFICATE This Redelivery Certificate is delivered on and as of the date set forth below by Olivia Corp. (hereinafter referred to as "LESSOR"), to Reno Air, Inc. (hereinafter referred to as "LESSEE") pursuant to the Aircraft Lease Agreement [49587], dated as of November __, 1995, between LESSOR and LESSEE (hereinafter referred to as the "Agreement"): A. Details of Redelivery. LESSOR hereby indicates and confirms to LESSEE, its successors and assigns, that the LESSOR has, at ____ o'clock _.M., on this __ day of _________, 199_, at ____________, accepted the following in accordance with the provisions of the Agreement: 1. (a) McDonnell Douglas Model: MD-87; (b) Manufacturer's Serial No.: 49587; and (c) U.S. FAA Registration No.: N753RA. Manufacturer Engine Model Number Total Total Hours Cycles No. Serial Number Hours Cycles Remaining Remaining --- ------------- ----- ------ --------- --------- (1) Pratt & Whitney JT8D-219 [_____] (2) Pratt & Whitney JT8D-219 [_____] Each of the above-described Engines having 750 or more rated take-off horsepower or the equivalent thereof. -80- Airframe Total Time: ____ hrs. Total Cycles: ____ Cycles Fuel _____ lbs. B. Confirmation of Acceptance. LESSOR confirms that the above-described Aircraft and Engines have been examined by its duly appointed and authorized representative(s) and that such Aircraft and Engines conform to the information set forth above. LESSOR's execution and delivery of this Redelivery Certificate represents LESSOR's acceptance of the above-described Aircraft and Engines for all purposes of this Agreement. IN WITNESS WHEREOF, LESSOR has caused this Redelivery Certificate to be executed in its name, by its duly authorized officer(s) or representative(s), pursuant to due corporate authority, all as of the date written in Section A above. LESSOR: OLIVIA CORP. By:___________________________ Name: Title: -81- EXHIBIT "G" DELIVERY CONDITIONS Upon delivery of the Aircraft to the LESSEE, the Aircraft shall comply with the following (except to the extent any such items are to be accomplished during the "C" check to be performed by LESSEE immediately following the delivery of the Aircraft): 1. The Aircraft shall be delivered in an airworthy condition and have a valid Swiss Aviation Authority certificate of airworthiness for export. 2. There shall be no deferred maintenance items on the Airframe or Engines. 3. All AD notes and mandatory service bulletins modifications due for compliance as of the Effective Date shall have been performed. 4. Immediately prior to delivery, LESSOR shall, at its cost, perform a test flight of the Aircraft, not to exceed one and one-half (1 1/2) hours in duration, for the purpose of demonstrating the serviceability of the Aircraft and its systems. To the extent that any of the systems of the Aircraft which affect the airworthiness thereof are not functioning in accordance with the standards of the Manufacturer, LESSOR shall, at its sole cost and expense, repair, or cause to be repaired, such systems. 5. As of the Effective Date, each Engine will have not less than 3,000 Cycles remaining until the next scheduled removal in accordance with Swissair's standard engine maintenance program and no discrepancies noted in a borescope inspection. In computing the time remaining with respect to the Engines, at any time when same is required to be calculated under the provisions of this Lease, the most time limited component shall be used as the measure. 6. All life limited components, other than Engine components, installed on the Aircraft shall have not less than 12 months or 2,000 Cycles remaining, as determined under the Swissair maintenance program. 7. All technical records and manuals will be up to date and complete and in English with no deferred maintenance items. -82- 8. Any modifications necessary to integrate the Aircraft into LESSEE's fleet shall be performed by LESSEE and LESSEE shall be solely responsible for all such costs. 9. All documents listed on Exhibit "B" hereof shall have been delivered to Lessee and any other documents necessary to obtain a United States Certificate of Airworthiness and to be operable in compliance with Part 121. 10. Lessee shall pay Lessor for all fuel on board the Aircraft at delivery of the Aircraft on the Effective Date. -83- EXHIBIT "H" LEASE IDENTIFICATION OWNER: Olivia Corp. LESSEE: Reno Air, Inc. MORTGAGEE: Credit Lyonnais/PK AIRFINANCE, New York Branch -84- LEASE SUPPLEMENT [49587] NO. 1 LEASE SUPPLEMENT [49587] NO. 1, dated November 16, 1995, between OLIVIA CORP. ("LESSOR") and RENO AIR, INC. ("LESSEE"). LESSOR and LESSEE have heretofore entered into that certain Aircraft Lease Agreement [49587], dated as of November 16, 1995, relating to one (1) McDonnell Douglas MD-87 Aircraft (herein called the "Lease" and the defined terms therein being hereinafter used with the same meanings). The Lease provides for the execution and delivery of a Lease Supplement for the purpose of subjecting the Aircraft and other property described in such Lease Supplement (collectively, the "Equipment"), as and when delivered by LESSOR to LESSEE, to the terms of the Lease. The Lease relates to the Equipment described below and a counterpart of the Lease is attached hereto and made a part hereof, and this Lease Supplement, together with such attachment, is being filed for recordation on the date hereof with the FAA as one document. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, LESSOR and LESSEE hereby agree as follows: 1. LESSOR hereby delivers and leases to LESSEE under the Lease, and LESSEE hereby accepts delivery of and leases from LESSOR under the Lease, the following described Equipment, which Equipment, as of the date hereof, is acknowledged and accepted by LESSEE: (i) Airframe: one (1) McDonnell Douglas MD-87 airframe, bearing FAA Registration No. N753RA and Manufacturer's Serial No. 49587; (ii) Engines: two (2) Pratt & Whitney Model JT8D-217C aircraft engines, each of which has 750 or more rated takeoff horsepower and bearing Manufacturer's Serial Nos. 708147 and 708177, respectively; and (iii) The Aircraft Documents. 2. The Effective Date for the Equipment is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. The Term is from the date of this Lease Supplement through and including January 15, 2003. 4. LESSEE hereby confirms it has paid the Security Deposit to LESSOR in the amount set forth on Schedule "1" attached hereto and forming a part hereof. 5. LESSEE hereby confirms its agreement to pay LESSOR Interim Rent and Basic Rent, as applicable, for the Equipment throughout the Term, in the installments and in the amounts provided for on Schedule "1", on each Rent Date. 6. LESSEE hereby confirms its agreement to pay LESSOR Reserves on each Maintenance Reserve Date, subject to the provisions of 5(E) and in the amounts provided for on Schedule "1". 7. LESSEE hereby confirms to LESSOR that LESSEE has accepted the Equipment for all purposes hereof and of the Lease. 8. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 9. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute but one and the same instrument. 2 IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement [49587] No. 1 to be duly executed and delivered as of the date and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR INC. By: /s/ Aaron Mendelsohn By: --------------------------- --------------------------- Name: Aaron Mendelsohn Name: Title: President Title: 3 IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement [49587] No. 1 to be duly executed and delivered as of the date and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR INC. By: By: /s/ Robert M. Rowen --------------------------- --------------------------- Name: Name: Robert M. Rowen Title: Title: Vice President and General Counsel 3 Schedule "1" 1. Security Deposit. The Security Deposit shall equal $300,000. 2. Interim Rent. Interim Rent shall be payable by LESSEE to LESSOR in the amount set forth in Section 5(A) of the Lease. The Minimum Basic Rent shall equal $40,000. 3. Basic Rent. (i) Basic Rent shall be paid by LESSEE to LESSOR, in advance, as set forth in Section 5(A)(ii) of the Lease. (ii) The monthly Basic Rent for each Rent Period during the periods set forth below shall equal the amounts set forth next to such periods assuming that LIBOR for such Rent Period is 5.8% per annum: January 15, 1996 - July 14, 1996 - $87,500 July 15, 1996 - Expiration Date - $150,000 To the extent LIBOR on any given Rent Date (provided, however, if such Rent Date is not a London Banking Day, then on the immediately following London Banking Day), on which Basic Rent is to be paid is less than or greater than 5.8% per annum, the Basic Rent payable by LESSEE to LESSOR on the next Rent Date shall be adjusted upward (in the event that LIBOR is greater than 5.8% per annum) or downward (in the event that LIBOR is less than 5.8% per annum) in accordance with the following formula (the "Rent Adjustment"): ((L-5.8) x A) + B L = the actual 30-day LIBOR rate for the preceding Rent Date, however, L shall never be greater than 8.0 nor less than 3.6 B = the Basic Rent A = an adjustment factor equal to the amount set forth below corresponding to the relevant Rent Period: 4 Rent Period A ----------- - Jan-15-1996 to Jan-14-1997 7,450 Jan-15-1997 to Jan-14-1998 6,700 Jan-15-1998 to Jan-14-1999 5,800 Jan-15-1999 to Jan-14-2000 4,900 Jan-15-2000 to Jan-14-2001 3,850 Jan-15-2001 to Jan-14-2002 2,750 Jan-15-2002 to Jan-15-2003 1,550 Notwithstanding anything set forth herein to the contrary, with respect to the Basic Rent payable for the last Rent Period, the Rent Adjustment shall be made on the Expiration Date. To the extent the Basic Rent is adjusted upward for such Rent Period, LESSEE shall pay the Rent Adjustment to LESSOR on the Expiration Date. To the extent the Basic Rent is adjusted downward for such period and provided no Default or Related Lease Default has occurred and is continuing, LESSOR shall pay LESSEE the Rent Adjustment on the later of the Expiration Date or the date on which LESSEE has complied with all provisions hereof. 4. Reserves. (i) The Airframe Reserves shall be payable in an amount equal to thirty ($30.00) Dollars for each Flight Hour incurred on the Airframe for the previous Rent Period; (ii) The Engine Reserves shall be payable in an amount equal to seventy ($70.00) Dollars per each Cycle incurred on each Engine for the previous Rent Period; and (iii) the Landing Gear Reserves shall be ten ($10.00) Dollars per each Cycle incurred on the Landing Gear for the previous Rent Period. 5 EXHIBIT "I" REDELIVERY CONDITIONS A. The Aircraft will be redelivered in accordance with Section 17 of the Lease and in accordance with the following provisions: 1) The Aircraft shall have a valid U.S. Certificate of Airworthiness or, at LESSOR's request, a valid U.S. Certificate of Airworthiness for Export to a jurisdiction designated by Lessor. If the Aircraft is to be registered in a country other than in the United States after return from LESSEE, LESSOR may in it's discretion require that LESSEE at its expense (to the extent such expense is no greater than that LESSEE would have incurred in connection with this subparagraph A(l), with any additional expense for LESSOR's account) put the Aircraft in a condition to meet the requirements for issuance of a certificate of airworthiness of the aviation authority of the next country of register, provided, however, in the event that the foregoing causes a delay in the redelivery of the Aircraft to Lessor, Lessee shall not be liable for any costs associated with the delay in redelivery. 2) The Aircraft shall be in good operating condition and airworthy in accordance with the Maintenance Program applicable to the Aircraft and the Manufacturer's structural repair manual. All of the Aircraft equipment, components, and systems shall be functioning in accordance with the Maintenance Program. 3) The Aircraft shall be in passenger cabin configuration with 12F and 105Y seats. 4) The Aircraft shall be clean by international commercial airline standards. 5) No special or unique Manufacturer, Engine manufacturer or FAA inspection or check requirements which are specific to the Aircraft or Engines (as opposed to all aircraft or engines of their types) will exist with respect to the Airframe, Engines and Aircraft equipment, components and systems unless there is no terminating action rectification available from any source. -85- 6) All Airworthiness Directives and other instructions of the FAA applicable to the Aircraft which are issued prior to the date of return of the Aircraft and require compliance (either by means of repetitive inspections, modifications or terminating action) prior to return of the Aircraft to LESSOR will have been complied with on the Aircraft on a terminating action basis. Airworthiness Directives and instructions which do not have a terminating action will be accomplished at the level of inspection or modification required to clear the Aircraft for the lesser of the longest available interval between inspections or one (1) year after the Expiration Date. If, after using best efforts, LESSEE is unable to acquire the material, parts or components necessary to accomplish such Airworthiness Directive, LESSEE will pay to LESSOR upon return of the Aircraft the estimated cost of terminating such Airworthiness Directive. If the estimated cost cannot be mutually agreed upon by LESSEE and LESSOR, LESSEE and LESSOR will each obtain a reasonable estimate from reputable FAA approved maintenance facility and the estimated cost will be the average of the two estimates. 7) The Aircraft will be in compliance with Manufacturer's Corrosion Prevention and Control Program (CPCP) specified for the model type by Manufacturer. 8) All no-charge vendor and Manufacturer's service bulletin kits received by LESSEE for the Aircraft but not installed thereon will be on board the Aircraft as cargo. At LESSOR's request, any other service bulletin kit which LESSEE paid for will also be delivered to LESSOR on board of the Aircraft, but LESSOR will reimburse LESSEE for its actual out-of-pocket costs for such kit. 9) The Aircraft will be free of any system-related leaks and any damage resulting therefrom. All repairs will have been performed on a permanent basis in accordance with the applicable manufacturer's instructions. 10) If any waivers, alternate means of compliance (unless there exists no permanent terminating action repair and such alternate means of compliance is transferrable to other operators of the Aircraft), dispensations, extensions or carry-overs with respect to Airworthiness Directives or operating or maintenance requirements are granted by the FAA or permitted by the Maintenance Program, LESSEE at its sole cost and expense will nonetheless perform such Airworthiness Directives and other operating or maintenance requirements on a terminating action basis as if such waivers, alternate means of compliance, dispensations or extensions did not exist, provided, however, if such waivers, alternative means of compliance, dispensations or extensions are generally available to operators of MD-87 aircraft, Lessee shall not be required to terminate such Airworthiness Directives and/or other operating or maintenance requirements but shall be -86- required to perform such maintenance and inspections as it is performing on its MD-87 fleet on a non-discriminatory basis. 11) At LESSOR's request, LESSEE will provide LESSOR with a written summary of all sampling programs involving or affecting the Aircraft. 12) Lessee's livery shall be removed and the Aircraft shall be painted over white. 13) At the time of redelivery of the Aircraft, the Aircraft shall: (a) have installed the full complement of Engines, which Engines shall be Pratt & Whitney JT8D-219 Engines, and Parts and other equipment, accessories and loose equipment as would remain installed in such Aircraft and shall be in a condition suitable for operation in commercial service; (b) have performed, within the last 500 Flight Hours, by an FAA-approved repair station, a full and complete zonal, systems and structural check ("C" or its equivalent), the corresponding lower checks ("A" and "B" or equivalent) and any other maintenance and inspections tasks, all in accordance with the Maintenance Program. LESSEE will also weigh the Aircraft. Any discrepancies revealed during such inspection will be corrected in accordance with Manufacturer's maintenance and repair manuals or FAA-approved data. LESSEE agrees to perform during such check any other work reasonably required by LESSOR (and not otherwise required under this Lease) and LESSOR will reimburse LESSEE for such work at LESSEE's preferred customer rates. LESSEE shall pay LESSOR $25.00 per Flight Hour incurred on the Aircraft since the last "C" check. (c) have had performed on it when required an internal and external corrosion inspection in accordance with the CPCP and correct any discrepancies in accordance with the recommendations of Manufacturer and the Structural Repair Manual. In addition, all inspected areas will be properly treated with corrosion inhibitor as recommended by Manufacturer; and (d) comply with the Manufacturer's and Engine Manufacturer's original specifications therefor and/or supported by relevant documentation approved by the Manufacturer and Engine Manufacturer, as the case may be. -87- 14) The Aircraft shall, on the Redelivery Occasion, meet the requirements of FAR Part 36, Appendix C, Stage 3 noise regulations without the need to obtain a waiver or exemption therefrom. 15) LESSEE shall, at its sole cost and expense, immediately prior to return of the Aircraft, perform a borescope inspection of the Engines (hot and cold sections). All items beyond the applicable Engine Manufacturer's maintenance manual limits will be rectified at LESSEE's sole cost and expense. No Engine will be "on watch" for any reason requiring special or out of sequence inspection. 16) In accordance with the applicable maintenance manual, accomplish a maximum power assurance run and condition, acceleration and bleed valve scheduling checks on the Engines. LESSEE will record and evaluate the Engine performance, with LESSOR and/or its representative entitled to be present. The performance and all operating parameters of each Engine will be within the limits specified in the Manufacturer's maintenance manual. 17) Each APU shall be delivered in a serviceable condition having completed a hot section inspection not earlier than during the last "C" check. 18) Each of the Engines shall have the same number of Cycles remaining until the next scheduled removal as when the Engines were delivered to LESSEE. The Aircraft shall be returned with the same Engines as installed at delivery (except as otherwise permitted by the Lease). To the extent that the number of Cycles remaining until the next scheduled removal of the Engines are either fewer than or greater than the amount of Cycles remaining on such Engines as existed on the Effective Date for same, a financial adjustment of $70.00 per Cycle difference will be made by the party receiving the benefit to the other party hereunder. Notwithstanding the foregoing, LESSOR shall not be obligated to pay compensation for more than 500 Cycles. In computing the time remaining with respect to the Engines, at any time when same is required to be calculated under the provisions of this Lease, the most time limited component shall be used as the measure. 19) Each Landing Gear will have not less than 6 months or 2,000 Cycles remaining to operate pursuant to the Maintenance Program. To the extent that the number of Cycles remaining to operate the Landing Gear are either fewer than or greater than the amount of Cycles remaining on the Landing Gear as existed on the Effective Date for same, a financial adjustment of $10.00 per Cycle difference will be made by the party receiving the benefit to the other party hereunder. -88- 20) Each component or Part of the Aircraft which has a hard time limit to overhaul and each life-limited component or Part will have not less than the lesser of (a) twelve (12) months or 2,000 Cycles remaining to operate pursuant to the Maintenance Program, or (b) 100% of its total approved life remaining to operate as of the "C" Check immediately preceding the Return Occasion. 21) Each component or Part which has a calendar limit will have remaining to operate as of the "C" check immediately preceding redelivery at least (i) one year from the date of return of the Aircraft to LESSOR or (ii) 100% of its total approved life, whichever is less, pursuant to the Maintenance Program, except that emergency equipment will have remaining to operate at least six (6) months from the date of return of the Aircraft or 100% of its total approved life as of the "C" check immediately preceding redelivery, whichever is less. 22) To the extent, on the Redelivery Occasion, the number of Flight Hours on the Aircraft until the next "15,000 Hour" and "30,000 Hour" (or their equivalent) heavy maintenance checks is either less than or greater than the number of Flight Hours on the Aircraft on the Effective Date until the next "15,000 Hour" and "30,000 Hour" heavy maintenance checks (assuming no change after the Effective Date in the intervals between such checks not approved by LESSOR), a financial adjustment of (i) $20.00 per Flight Hour difference with respect to the next "30,000 Hour" check, and (ii) $10.00 per Flight Hour difference with respect to the next "15,000 Hour" check, will be made by the party receiving the benefit to the other party hereunder. 23) The Aircraft fluid reservoirs (including oil, oxygen, hydraulic and water) will be serviced to full and the waste tank serviced in accordance with Manufacturer's instructions. Each fuel tank will be at least as full as at Delivery. Lessor will compensate Lessee for the fuel on board the Aircraft on the Redelivery Occasion. 24) All technical records and manuals shall be up to date, in English and with no deferred maintenance items outstanding unless normally deferred until the next heavy maintenance visit under the Maintenance Program. 25) The Aircraft shall be equipped with TCAS and windshear alert systems. -89- EXHIBIT "J" CREDIT STANDARDS LESSEE shall be deemed to have satisfied the Credit Standards provided LESSEE maintains (1) a Fixed Charge Coverage Ratio equal to not less than 1.05. The "Fixed Charge Coverage Ratio" shall be the ratio of net income (excluding any extraordinary or one-time items) before interest, taxes, depreciation, amortization and operating lease rentals divided by the sum of interest expense, operating lease rentals and mandatory principal payments on debt classified as long term, all determined in accordance with Generally Accepted Accounting Principles consistently applied and on a rolling twelve month basis, and (2) a minimum tangible net worth of $4,000,000 at the end of each month in the rolling twelve month period. -90- EXHIBIT "K" ASSIGNMENT OF LEASE AND CONSENT -91- ASSIGNMENT OF LEASE AND CONSENT This ASSIGNMENT OF LEASE AND CONSENT dated as of November 16, 1995 (this "Agreement") among OLIVIA CORP., a Delaware corporation (hereinafter "Lessor"), CREDIT LYONNAIS/PK AIRFINANCE, New York Branch, a Luxembourg corporation (hereinafter the "Lender"), and RENO AIR, INC., a Nevada corporation (hereinafter "Lessee"). RECITALS: (1) Pursuant to that certain Aircraft Lease Agreement [49587] dated as of November 16, 1995 between Lessor and Lessee (the "Lease"), which Lease is being filed with the Aircraft Registry of the Federal Aviation Administration simultaneously herewith, Lessor has agreed to lease to Lessee, among other things, the following: Airframe: One (1) McDonnell Douglas Model MD-87 Aircraft; Registration No.: N753RA Manufacturer's Serial No.: 49587; and Engines: Two (2) Pratt & Whitney JT8D-217C engines; Manufacturer's Serial Nos.: 708147 and 708177; (collectively, the "Aircraft"); and (2) Lessor has obtained financing from the Lender in connection with the Aircraft which is the subject of the Lease; and (3) In order to secure the performance by Lessor of its obligations under, among other things, that certain Secured Loan Agreement dated as of November 16, 1995 between the Lessor, as borrower, and the Lender, as lender (the "Loan Agreement") and the Promissory Note (the "Note") made by Lessor and delivered to the Lender in connection with the making of the loan pursuant to the Loan Agreement, the Lender has required Lessor to, among other things, assign to the Lender all of Lessor's right, title and interest in and to the Lease (but none of its obligations) including, but not limited to, all amounts payable by Lessee to Lessor under the Lease. Transaction No. RNO51 1 NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agree as follows: 1. Capitalized terms used but not defined in this Agreement shall have the meaning ascribed to such terms in the Lease. 2. To secure the payment of the principal of, all interest and other sums payable under the Loan Agreement, as from time to time amended or supplemented, the Note and that certain Aircraft Chattel Mortgage and Security Agreement dated as of November 16, 1995, between the Lender, as mortgagee, and Lessor, as mortgagor, as from time to time amended or supplemented (the "Mortgage"), and all other documents executed in connection therewith or contemplated thereby, and the performance of, and compliance with, all of the terms of the Loan Agreement and the Mortgage, Lessor hereby assigns, transfers, conveys and sets over to the Lender, all of the Lessor's right, title and interest in, to and under the Lease (but except as expressly set forth in Sections 6 and 7 below none of its obligations thereunder) except for Lessor's right, title and interest in Excluded Amounts (as defined in the Mortgage), including, without limitation, the right to collect all rental payments, Reserves, the Security Deposit, income, proceeds (including, but not limited to insurance proceeds), awards, revenues and other sums payable by Lessee to Lessor pursuant to the Lease and all of the Lessor's rights under Section 1110 of the U.S. Bankruptcy Code 11 U.S.C. ss.ss. et seq. or any subsequently enacted statute of similar import and, after an Event of Default (as defined in the Mortgage) has occurred and is continuing, to enforce all of Lessor's rights and remedies under the Lease. 3. The Lessee hereby acknowledges and consents, in accordance with the terms hereof, to the assignment as herein provided of Lessor's rights under the Lease to the Lender. 4. Lessor hereby directs Lessee and Lessee hereby agrees to pay directly to the Lender, until such time as the Lender otherwise directs in writing, to the account listed below all sums which are due and subsequently will become due and payable by the Lessee to Lessor in accordance with the terms of the Lease. All such payments shall be made by wire transfer in good, immediately available funds to: Credit Lyonnais, New York Federal Routing No.: 026008073 Account No.: 01-22403-0001-00 In Favor Of: CL/PK AIRFINANCE UID No.: 357771 Reference: RNO51 2 5. Lessee hereby represents, warrants and agrees as follows: (a) The Lease and the other Lease Documents (as defined in the Lease) constitute the entire agreement of lease with respect to the Aircraft and the Lease has not been amended, modified or supplemented; (b) the Lease is in full force and effect; (c) there is no Default or Event of Default under the Lease; (d) there has been no prepayment of any Rent (as defined in the Lease) payable under the Lease and the Rent is payable in the amounts set forth in the Lease; (e) Lessee will not permit any written amendments or waivers to the Lease or permit any material provisions thereof to be amended or waived without the prior, written consent of Lender, which will not be unreasonably withheld or delayed; (f) Lessee will promptly send to Lender all notices or demands which Lessee shall be permitted or required to send to Lessor under the provisions of the Lease or which Lessee receives from Lessor; (g) Lessee acknowledges that the Lender has not made any representations or warranties of any kind, nature or description in respect of the Aircraft and that the Lender has not assumed any of the Lessor's duties or obligations under the Lease and the Lessee shall continue to look solely to Lessor for the performance and fulfillment of the terms, covenants and conditions on Lessor's part to be performed under the Lease; (h) Lessee will make all of the payments required to be paid under the Lease in accordance with the terms of the Lease to the Lender as required in paragraph 4 hereof; (i) the Lender shall be entitled to the benefit of all representations, warranties, covenants, indemnities and obligations to be made or performed by Lessee pursuant to the Lease to the same extent as if the Lender was originally named as "Lessor" in the Lease; and (j) This Agreement has been duly authorized by all necessary action and constitutes a valid, legal and binding obligation of the Lessee enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, reorganization, 3 moratorium or other similar laws and by general principles of equity, whether considered in a proceeding at law or in equity. 6. Lender and Lessee agree as follows: (a) wherever in the Lease rights are granted to the Lender, whether as "Lender" or "Mortgagee" under the Lease, the Lender hereby shall be entitled directly to exercise such rights in accordance with the terms of the Lease and without relying on its rights as a third party beneficiary; and (b) wherever in the Lease the consent of the Lessor is required but is provided not to be unreasonably withheld by the Lessor, if the Lessor requires the consent of the Lender in such matter under the Loan Agreement, the Mortgage or any other document, such consent of the Lender shall not be unreasonably withheld. 7. The Lender confirms to and agrees with the Lessee that the Lender's rights and remedies as respects the Aircraft are subject in all respects to the rights of the Lessee under the Lease and that so long as no Event of Default (as defined in the Lease) has occurred and is continuing, neither the Lender nor any person claiming by, through or under the Lender will disturb Lessee in the quiet use, possession and enjoyment of the Aircraft in accordance with the Lease. The Lender agrees that the terms and conditions of the Lease shall apply to, and be binding upon, the Lender to the same extent as Lessor. The Lender shall not be deemed to have assumed any obligations of Lessor under the Lease and Lender's right to exercise any rights under the Lease shall not be adversely affected by any failure of Lessor to have fulfilled its obligations thereunder; provided, however, that in order for the Lender to exercise any right under the Lease, the Lender shall be required to comply with all of the terms of the Lease pertaining to the exercise of such right which would otherwise be binding on Lessor. 8. In the event that Lessor shall pay and discharge all of its obligations under the Loan Agreement, Note and Mortgage, then at the request of Lessor, Lender hereby agrees to send written notice to Lessee directing Lessee to make all payments due and payable under the Lease to Lessor or such other party as Lessor shall advise Lessee of in writing. 9. In the event that the Lender sends any notice to Lessor required to be sent in accordance with the terms of the Loan Agreement in connection with a Default or an Event of Default thereunder, Lender shall send a copy of any such notice to Lessee. 10. (a) Every notice or demand under this Agreement shall be in writing and may be given or made by telefax or by internationally recognized overnight courier service. (b) Every notice or demand under this Agreement or to the Lender under the Lease shall be sent, in the case of overnight courier, to the Lender, Lessor or Lessee, 4 at their respective addresses and in the case of telefax, to their respective telefax numbers, as follows: To Lender: Credit Lyonnais/PK AIRFINANCE, New York Branch 152 West 57th Street New York, NY 10019 Attention: Mr. Anders Hebrand Vice President Contracts Telephone No.: 212-245-2575 Telefax No.: 212-397-9393 To Lessor or Lessee: to their address, telephone number and telefax number as set forth in Section 21(D) of the Lease. (c) Every notice or demand shall, except so far as otherwise expressly provided by this Agreement, be deemed to have been received, in the case of a telefax, at the time of actual receipt thereof, and in the case of an internationally recognized overnight courier service, upon acknowledgment of receipt or as of the date on which receipt of such notice delivered by overnight courier is refused or such courier advises that such letter is not deliverable at the address set out in paragraph 9(b). (d) Lessor, Lessee or Lender may change its address by giving notice in accordance with this paragraph 9. A copy of every notice sent to Lender shall be sent to: Credit Lyonnais/PK AIRFINANCE 10 rue de la Greve L-1643 Luxembourg Attention: Vice President Contracts Telephone No.: 011-352-402-1721 Telefax No.: 011-352-482-544 Feltman, Karesh, Major & Farbman 152 West 57th Street New York, New York 10019 Attention: Loren M. Dollet, Esq. Telephone No.: 212-586-3800 Telefax No.: 212-586-0951 5 (e) Lessor and Lessee agree that where the Lease permits actions to be taken or notices to be given by the "Mortgagee", the Lessee shall be entitled to rely that any such action or notice taken or given by the "Mortgagee" is taken or given in accordance with the Loan Documents (as defined in the Loan Agreement) and may be treated by the Lessee as the action or notice of the Lessor. 11. This Agreement may be executed in one or more counterparts, each of which shall constitute an original and all of such counterparts shall constitute one and the same Agreement. 12. LENDER, LESSOR AND LESSEE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF OR IN CONNECTION WITH THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT OR THE ACTIONS OF ANY OF THE PARTIES HERETO. 13. This Agreement and the rights and obligations evidenced hereby shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. Neither the Lessor nor Lessee may assign any of their rights or obligations hereunder without the express prior written consent of the Lender. 14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS ENTERED INTO IN AND BY RESIDENTS OF THE STATE OF NEW YORK AND TO BE PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK. The Lessor, Lessee and Lender consent to the jurisdiction and venue of the New York State Supreme Court for the Borough of Manhattan, New York County, New York and the United States District Court for the Southern District of New York, in any action arising out of or connected in any way with this Agreement, and the parties hereto further agree that the service of process or of any other papers upon them or any of them by certified or registered mail, return receipt requested, at their respective addresses set forth herein shall be deemed good, proper and effective service upon them. The parties hereto expressly consent to the jurisdiction of and venue in each of the aforementioned courts and expressly waive any claim to lack of jurisdiction thereof or that either such court is an inconvenient forum or that venue therein is improper. 6 IN WITNESS WHEREOF, Lessor, Lessee and Lender have caused this Assignment Of Lease and Consent to be duly executed by their duly authorized officers as of the day and year first above written. CREDIT LYONNAIS/PK AIRFINANCE OLIVIA CORP. NEW YORK BRANCH By:__________________________ By:_______________________ Title:_______________________ Title:____________________ RENO AIR, INC. By:_______________________ Title:____________________ 7 LEASE SUPPLEMENT [49587] NO. 1 LEASE SUPPLEMENT [49587] NO. 1, dated November 16,1995, between OLIVIA CORP. ("LESSOR") and RENO AIR, INC. ("LESSEE"). LESSOR and LESSEE have heretofore entered into that certain Aircraft Lease Agreement [49587], dated as of November 16, 1995, relating to one (1) McDonnell Douglas MD-87 Aircraft (herein called the "Lease" and the defined terms therein being hereinafter used with the same meanings). The Lease provides for the execution and delivery of a Lease Supplement for the purpose of subjecting the Aircraft and other property described in such Lease Supplement (collectively, the "Equipment"), as and when delivered by LESSOR to LESSEE, to the terms of the Lease. The Lease relates to the Equipment described below and a counterpart of the Lease is attached hereto and made a part hereof, and this Lease Supplement, together with such attachment, is being filed for recordation on the date hereof with the FAA as one document. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, LESSOR and LESSEE hereby agree as follows: 1. LESSOR hereby delivers and leases to LESSEE under the Lease, and LESSEE hereby accepts delivery of and leases from LESSOR under the Lease, the following described Equipment, which Equipment, as of the date hereof, is acknowledged and accepted by LESSEE: (i) Airframe: one (1) McDonnell Douglas MD-87 airframe, bearing FAA Registration No. N753RA and Manufacturer's Serial No. 49587; (ii) Engines: two (2) Pratt & Whitney Model JT8D-217C aircraft engines, each of which has 750 or more rated takeoff horsepower and bearing Manufacturer's Serial Nos. 708147 and 708177, respectively; and (iii) The Aircraft Documents. 2. The Effective Date for the Equipment is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. The Term is from the date of this Lease Supplement through and including January 15, 2003. 4. LESSEE hereby confirms it has paid the Security Deposit to LESSOR in the amount set forth on Schedule "1" attached hereto and forming a part hereof. 5. LESSEE hereby confirms its agreement to pay LESSOR Interim Rent and Basic Rent, as applicable, for the Equipment throughout the Term, in the installments and in the amounts provided for on Schedule "1", on each Rent Date. 6. LESSEE hereby confirms its agreement to pay LESSOR Reserves on each Maintenance Reserve Date, subject to the provisions of 5(E) and in the amounts provided for on Schedule "1". 7. LESSEE hereby confirms to LESSOR that LESSEE has accepted the Equipment for all purposes hereof and of the Lease. 8. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 9. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute but one and the same instrument. 2 IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement [49587] No. 1 to be duly executed and delivered as of the date and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR INC. By: /s/ Aaron Mendelsohn By: --------------------------- --------------------------- Name: Aaron Mendelsohn Name: Title: President Title: 3 IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement [49587] No. 1 to be duly executed and delivered as of the date and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR INC. By: By: /s/ Robert M. Rowen --------------------------- --------------------------- Name: Name: Robert M. Rowen Title: Title: Vice President and General Counsel 3 Schedule "1" 1. Security Deposit. The Security Deposit shall equal $300,000. 2. Interim Rent. Interim Rent shall be payable by LESSEE to LESSOR in the amount set forth in Section 5(A) of the Lease. The Minimum Basic Rent shall equal $40,000. 3. Basic Rent. (i) Basic Rent shall be paid by LESSEE to LESSOR, in advance, as set forth in Section 5(A)(ii) of the Lease. (ii) The monthly Basic Rent for each Rent Period during the periods set forth below shall equal the amounts set forth next to such periods assuming that LIBOR for such Rent Period is 5.8% per annum: January 15, 1996 - July 14, 1996 - $87,500 July 15, 1996 - Expiration Date - $150,000 To the extent LIBOR on any given Rent Date (provided, however, if such Rent Date is not a London Banking Day, then on the immediately following London Banking Day), on which Basic Rent is to be paid is less than or greater than 5.8% per annum, the Basic Rent payable by LESSEE to LESSOR on the next Rent Date shall be adjusted upward (in the event that LIBOR is greater than 5.8% per annum) or downward (in the event that LIBOR is less than 5.8% per annum) in accordance with the following formula (the "Rent Adjustment"): ((L-5.8) x A) + B L = the actual 30-day LIBOR rate for the preceding Rent Date, however, L shall never be greater than 8.0 nor less than 3.6 B = the Basic Rent A = an adjustment factor equal to the amount set forth below corresponding to the relevant Rent Period: 4 Rent Period A ----------- - Jan-15-1996 to Jan-14-1997 7,450 Jan-15-1997 to Jan-14-1998 6,700 Jan-15-1998 to Jan-14-1999 5,800 Jan-15-1999 to Jan-14-2000 4,900 Jan-15-2000 to Jan-14-2001 3,850 Jan-15-2001 to Jan-14-2002 2,750 Jan-15-2002 to Jan-15-2003 1,550 Notwithstanding anything set forth herein to the contrary, with respect to the Basic Rent payable for the last Rent Period, the Rent Adjustment shall be made on the Expiration Date. To the extent the Basic Rent is adjusted upward for such Rent Period, LESSEE shall pay the Rent Adjustment to LESSOR on the Expiration Date. To the extent the Basic Rent is adjusted downward for such period and provided no Default or Related Lease Default has occurred and is continuing, LESSOR shall pay LESSEE the Rent Adjustment on the later of the Expiration Date or the date on which LESSEE has complied with all provisions hereof 4. Reserves. (i) The Airframe Reserves shall be payable in an amount equal to thirty ($30.00) Dollars for each Flight Hour incurred on the Airframe for the previous Rent Period; (ii) The Engine Reserves shall be payable in an amount equal to seventy ($70.00) Dollars per each Cycle incurred on each Engine for the previous Rent Period; and (iii) the Landing Gear Reserves shall be ten ($10.00) Dollars per each Cycle incurred on the Landing Gear for the previous Rent Period. 5 EX-99.(J) 5 EXHIBIT 99.(J) EXHIBIT 99.J THIS IS COUNTERPART NO. TWO (DUPLICATE) OF TWO COUNTERPARTS. TO THE EXTENT THIS AGREEMENT CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE IN EFFECT IN ANY APPLICABLE JURISDICTION), NO SECURITY INTEREST HEREIN MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN COUNTERPART NO. ONE. MARINE SHIPPING CONTAINER VARIABLE LEASE (COMBINED CONTAINER SET IV) THIS MARINE SHIPPING CONTAINER VARIABLE LEASE (the "AGREEMENT") made as of the 17th day of April, 1995 by and between TRANS OCEAN CONTAINER CORPORATION, a Delaware corporation, whose head office is located at 851 Traeger Avenue, San Bruno, CA 94066 (hereinafter called the "Lessee") and Investors Asset Holding Corp., a Massachusetts corporation, not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust," having a principal place of business c/o American Finance Group, Exchange Place, Boston, MA 02109 (hereinafter called the "Lessor"). W I T N E S S E T H: WHEREAS, the Lessor has agreed to purchase from the Lessee approximately 2500 TEU's (as defined below) of maritime shipping containers, including dry cargo, open top, and collapsible flat rack containers, which containers shall be more fully described in Bills of Sale issued pursuant to that certain Purchase and Sale Agreement of even date herewith (the "Purchase and Sale Agreement") between the parties (said containers are hereafter called the "Containers"); WHEREAS, the Lessee is engaged in the business of leasing and operating containers; and WHEREAS, the Lessor desires to lease the Containers to the Lessee and the Lessee is willing to lease the Containers from the Lessor, all on the terms and conditions set forth herein. NOW, THEREFORE, the parties hereby agree as follows: 1. Lessor-Lessee Relationship (a) The Lessor hereby leases the Containers to the Lessee, and the Lessee hereby leases the Containers from the Lessor, in accordance with the terms and conditions set forth below. (b) In order to further evidence the relationship of lessor 1 (1) the Lessor has and shall retain exclusive legal and beneficial ownership of the Containers, and the Lessee shall not have any right, title or interest in the Containers, except as provided in this Agreement; (2) in the conduct of its business, the Lessee will not hold itself out as an owner of the Containers or take any action that would be inconsistent with the ownership of the Containers by the Lessor or that would otherwise be inconsistent with, or outside the scope of, the lease created under this Agreement; and (3) Lessor and Lessee agree to treat the transactions provided for in this Agreement as a lease of the Containers by the Lessor to the Lessee for United States federal income tax purposes and to take positions consistent with such treatment in filing the respective United States federal income tax returns, if any, required to be filed thereby. (c) The Lessee and the Lessor expressly recognize and acknowledge that this Agreement does not create a partnership, joint venture or other entity among or between the Lessor, the Lessee, and/or any other person, and is intended only to set forth the terms and conditions of the lessor/lessee relationship between the Lessor and the Lessee with respect to the matters specifically contained herein. (d) The Lessee acknowledges and agrees that: (i) LESSOR IS NOT A MANUFACTURER OF THE CONTAINERS OR A MERCHANT OR DEALER IN PROPERTY OF SUCH KIND; (ii) ON OR BEFORE THE PURCHASE DATE OF EACH CONTAINER, THE LESSEE WILL HAVE ACCEPTED THE CONTAINER INTO ITS FLEET OF MANAGED, OWNED AND LEASED INTERMODAL MARINE CONTAINERS; AND (iii) LESSOR HAS NOT MADE, AND DOES NOT HEREBY MAKE, ANY REPRESENTATION, WARRANTY, OR COVENANT, EXPRESS OR IMPLIED, WITH RESPECT TO THE MERCHANTABILITY, CONDITION, QUALITY, DURABILITY, DESIGN, OPERATION, FITNESS FOR USE, OR SUITABILITY OF THE CONTAINERS OR ANY COMPONENT THEREOF IN ANY RESPECT WHATSOEVER OR IN CONNECTION WITH OR FOR THE PURPOSES AND USES OF THE LESSEE, AND THE LESSOR HAS NOT MADE AND DOES NOT HEREBY MAKE ANY OTHER REPRESENTATIONS, WARRANTIES, OR COVENANTS OF ANY KIND AND CHARACTER, EXPRESS OR IMPLIED WITH RESPECT THERETO, AND SHALL NOT BE LIABLE FOR ANY ACTUAL, INCIDENTAL, CONSEQUENTIAL, OR OTHER DAMAGES OF OR TO ANY PERSON WHATSOEVER, WITH RESPECT THERETO, AND THE LESSEE IS LEASING THE CONTAINERS "AS IS AND WITH ALL FAULTS." (e) Lessee represents, warrants and certifies to the Lessor as of the date of execution and delivery of this Agreement: (i) Lessee is duly organized, validly existing and in 2 good standing under the laws of the state of its incorporation, with full power to enter into and to pay and perform its obligations under this Agreement, and is duly qualified and in good standing in all other jurisdictions in the United States in which the nature of its business or the ownership of its properties, or both, make such qualification necessary and where failure to so qualify would materially adversely affect its financial condition or the conduct of its business or the performance of its obligations under or the enforceability of this Agreement. (ii) This Agreement and all related documents have been duly authorized, executed and delivered by Lessee, are valid, legal and binding obligations of Lessee, are enforceable against Lessee in accordance with their terms and do not and will not contravene any provisions of or constitute a default under Lessee's organizational documents or its by-laws, any agreement to which it is a party or by which it or its property is bound, or any law, regulation or order of any governmental authority; (iii) Lessor's right, title and interest in and to this Agreement and the Containers and the rentals therefrom will vest in Lessor on the Purchase Date for such Containers and will not be affected or impaired by the terms of any agreement or instrument by which Lessee or its property is bound except for Lessee's rights under this Agreement and the rights of the sublessees under the applicable subleases of such Containers; (iv) no approval of, or filing with, any governmental authority or other person is required in connection with Lessee's entering into, or the payment or performance of its obligations under, this Agreement except for the filing of UCC-l financing statements as contemplated by Section 4 of the Purchase and Sale Agreement; (v) there are no suits or proceedings pending or, to the knowledge of Lessee, threatened, before any court or governmental agency against Lessee which, if decided adversely to Lessee, would materially adversely affect Lessee's business or financial condition or its ability to perform any of its obligations under this Agreement; (vi) there has been no material adverse change to the Lessee's financial condition or results from its operations since the date of its most recent audited financial statements delivered to Lessor; and (vii) the address stated in the preamble to this Agreement as Lessee's head office is the principal place of business and chief executive office of Lessee; and Lessee does not conduct business under a trade, assumed or fictitious name except as follows: Trans Ocean, Trans Ocean Leasing, and TOL. 3 2. The Lessee's Duties In consideration of the right to use and operate the Containers as lessee pursuant to this Agreement, the Lessee agrees that it will, during the term hereof, perform the following duties, using a level or standard of care no less than the Lessee would use with respect to containers it owns, leases or operates for others: (a) accept delivery of the Containers; (b) place such marks upon the Containers, register the Containers in accordance with such tariffs as required for their operation in marine shipping service, paint the Containers any appropriate color, and place on the Containers such markings or legends as the Lessee deems required or appropriate; (c) take all reasonable and customary steps as may be required to provide for the sublease of the Containers under short, medium and long term leases on such terms and conditions as it may deem satisfactory, in its sole discretion (except as otherwise specifically provided for in this Agreement); (d) pay to the Lessor the Fixed Rent or the Variable Rent (as defined in Section 6(c)(6)), as the case may be, on the last day of each calendar quarter immediately following the calendar quarter for which such Fixed Rent or Variable Rent is payable; (e) pay all Operating Expenses (as defined below) and file all applicable tax returns and other reports with respect to ad valorem, gross receipts and property taxes attributable to the Set Containers (as defined below); (f) on behalf of Lessor, sell or otherwise dispose of Containers that become subject to Casualty Occurrences or Ordinary Disposal Occurrences, as described in Section 4(b) below (for this purpose, a Casualty Occurrence shall include a "Casualty Occurrence" (as defined below) that occurs prior to the Purchase Date but that becomes known to Lessee after the Purchase Date); (g) perform all administrative and related functions necessary for the operation and subleasing of the Containers, including but not limited to: (i) maintaining and servicing (or causing the sublessees to maintain and service) the Containers in a condition that meets the then current general interchange standards of the International Institute of Container Lessors, Guide for Container Equipment Inspection, and in such condition as may be required by any applicable law or the rules or regulations of any governmental body having jurisdiction over the Containers and as maybe necessary or appropriate to make the Containers suitable for rental in international commerce; 4 (ii) supervising all maintenance and repair of each Container, whether performed by the Lessee, an employee of a depot operator, or other third party, to ensure such maintenance satisfies the highest of the following standards: (A) any standard required or set forth for the Containers or equipment of a similar class under any applicable industry convention or governmental law or regulation; (B) any standard set by any insurance policy under which the Containers shall from time to time be insured; and (C) good commercial practice; (iii) performing periodic inspections and surveys of the Containers in the possession of depot operators to ensure maintenance of the Containers in a seaworthy and safe operating condition; (iv) maintaining records with respect to the rental of the Containers, locations of the Containers when off-hire, repair and maintenance history and repair and maintenance activity; and (v) monitoring the location of the Containers while off-lease. In performing such administrative and related functions hereunder, the Lessee shall not knowingly discriminate against or in favor of the Containers in seeking subleases; and (h) defend, indemnify and hold the Lessor and any party or parties from whom Lessor obtained financing for the Containers (the "Lenders") harmless from and against any claims asserted against them arising out of the possession or operation of the Containers (including, but not limited to, injury to persons or loss of or damage to lading or other property), provided that the costs of such defense, indemnification and holding harmless shall be an Operating Expense for purposes of Section 6 (excluding, however, those costs or expenses that result from the gross negligence or willful misconduct of the Lessee). 3. Covenant of Quiet Enjoyment The Lessor shall not disturb the Lessee's quiet enjoyment of the Containers provided Lessor is not entitled to terminate this Agreement pursuant to Section 4(c). 4. Duration (a) Initial Term; Extension Options. Except as provided below, the term of this Agreement as to each of the Containers shall 5 commence on the date such Container is included in the Container Set (as defined below) as determined under Section 6(b)(4), and shall remain in full force and effect until June 30, 2003 (the "Stated Term"), provided that the Lessor is hereby granted an option to extend the Stated Term of this Agreement on the same terms and conditions for up to four one-year renewal periods. The Lessor must provide written notice to Lessee of its election to exercise this renewal option not less than ninety (90) days prior to the expiration of the Stated Term of this Agreement or each subsequent renewal period. (b) Termination due to a Casualty Occurrence or an Ordinary Disposal Occurrence. Notwithstanding Section 4(a), this Agreement shall terminate as to any Container upon the total loss or destruction of that Container (a "Casualty Occurrence") or upon an Ordinary Disposal Occurrence (as defined below) (an "Ordinary Disposal Occurrence"), unless within ninety (90) days after the Lessee receives notice of the Casualty Occurrence or within ninety (90) days after the Ordinary Disposal Occurrence, the Lessee shall, in accordance with Section 9(b) below, replace that Container with one of like size, type, age, and condition and shall notify the Lessor of the replacement. The replacement container shall be deemed to be a "Container" for all purposes of this Agreement from and after the date of the Casualty Occurrence or the Ordinary Disposal Occurrence, as applicable. Unless Lessee replaces a Container subject to a Casualty Occurrence or an Ordinary Disposal Occurrence in accordance with Section 9(b) below, Lessee will sell, lease or otherwise dispose of such Container, and will distribute the net proceeds from such sale, lease or other disposition, in accordance with said section. For purposes hereof, an "Ordinary Disposal Occurrence" means the determination by Lessee to dispose of a Container in the ordinary course of business for one or both of the following reasons: (i) the Container is no longer marketable, for example, due to technological obsolescence; or (ii) the Container has suffered such damage that it is not economic to repair and re-lease the Container as described in the remainder of this section. When a Container is returned to the Lessee in damaged condition, the Lessee compares the net cash value of repairing that Container to the net proceeds that would be received if that Container were instead sold. If the net cash value is less than the net proceeds, the Lessee will dispose of the Container as an Ordinary Disposal Occurrence. The net cash value is obtained by subtracting the cost of restoring that Container to a leasable condition from the estimated present value of the future cash streams from leasing that Container over its remaining useful life. (c) Termination by the Lessor. Notwithstanding Section 4(a), but subject to Section 4(d), the Lessor may terminate this Agreement as to any Container by written notice effective upon delivery of the notice to Lessee (except that this Agreement shall 6 automatically terminate without notice in the event of the occurrence under Section 4(c)(5) below), which notice may be given only in the event that: (1) the Lessee shall fail to pay to the Lessor the Fixed Rent or the Variable Rent required by Section 2(d) and such failure shall continue for a period of ten (10) days after notice thereof by the Lessor to the Lessee; (2) the Lessee shall assign or transfer any of its rights hereunder without the prior written consent of the Lessor; (3) the Lessee shall default in the performance or observance of any other covenant, condition, agreement, or duty to be performed or observed by the Lessee under this Agreement and such default shall continue unremedied for a period of thirty (30) days after notice thereof by the Lessor to the Lessee; (4) any representation or warranty made by the Lessee in Section 1(e) hereof, Section 5 of the Purchase and Sale Agreement, or in any Bill of Sale (as defined in the Purchase and Sale Agreement) shall prove to have been false in any material respect at the time made; (5) the Lessee shall have (i) ceased doing business as a going concern, (ii) made an assignment for the benefit of creditors, admitted in writing its inability to pay its debts as they mature or generally failed to pay its debts as they become due, (iii) initiated any voluntary bankruptcy or insolvency proceeding, (iv) failed to obtain the discharge of any bankruptcy or insolvency proceeding initiated against it by others within 60 days of the date such proceedings were initiated, or (v) requested or consented to the appointment of a trustee or receiver with respect to itself or for a substantial part of its property; or (6) the Lessee shall make two (2) or more Variable Rent payments in amounts that, together with all other Variable Rent payments theretofore made, fail to aggregate a cumulative annual return to the Lessor of fourteen percent (14%) or more of the aggregate Container Cost of the Containers then under lease hereunder. The events described in Sections 4(c)(l), (2), (3), (4) and (5) above are hereinafter collectively referred to as "Events of Default." (d) Containers Subject to Sublease. Notwithstanding Sections 4(a) or 4(c), if a Container is subject to sublease at a time when this Agreement would otherwise terminate as to the Container, this Agreement shall remain in full force and effect as to the Container until the last day of the calendar quarter in which the Container comes off the sublease unless (x) such termination was as a 7 consequence of the Event of Default specified in Section 4(c) (5), or (y) such termination was as a consequence of any other Event of Default and Lessor gives the notice described in Section 5(c)(A); provided that, unless termination as to the Container was pursuant to Section 4(c), the Lessee shall be entitled to continue this Agreement as to a Container after the last day of the calendar quarter in which the Container comes off the sublease if in its reasonable judgment it is economically feasible to restore the Container to a leasable condition and to re-lease the Container to an end-user, in which case this Agreement shall continue as to that Container until the last day of the calendar quarter in which the Container comes off a sublease or the last day of the calendar quarter in which the Lessee determines that it is not economically feasible to restore the Container to a leasable condition and to re-lease the Container to an end-user. Notwithstanding the foregoing, unless Lessor exercises its renewal option pursuant to Section 4(a), the Lessee shall not be entitled pursuant to the foregoing proviso to continue this Agreement as to any Container after the last day of the calendar quarter in which the Container comes off the sublease without the prior written consent of the Lessor. (e) Termination by the Lessee. Notwithstanding Section 4(d), the Lessee may terminate this Agreement as to any Container of a particular size and type at the end of the Stated Term thereof and at any time thereafter, upon the election of the Lessee, at the Lessee's sole and absolute discretion, if Variable Rent specifically allocable to the Set Containers of that size and type, calculated in a manner analogous to Section 6(c), for the most recent calendar quarter that can be reasonably calculated by the Lessee, is less than fourteen percent (14%) of the aggregate Container Cost of Containers of that size and type then under lease hereunder multiplied by a fraction the numerator of which is the number of days in that quarter and the denominator of which is 365. (f) Treatment of Non-Terminated Containers. Notwithstanding the foregoing, the termination of this Agreement with respect to any individual Container shall not relieve the Lessee from performing its obligations hereunder as to any Containers not subject to such termination. 5. Termination. (a) Settlement of the Variable Rent. Upon any termination of this Agreement as to any Container, the Lessee shall make a complete and final settlement of the Fixed Rent and the Variable Rent for the Container as determined in Section 6 no later than the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to the Container. (b) Remarketing of the Containers. Upon termination of this Agreement as to any Container, other than as a consequence of one 8 of the events specified in Section 4(b) or 4(c), the Lessor hereby authorizes the Lessee to remarket the Containers on behalf of the Lessor, and the Lessee shall, pursuant to such authorization: (1) sell, lease or otherwise dispose of the Container, at the sole and absolute discretion of the Lessee; provided that if the Lessee elects to acquire the Container from the Lessor, the price to be paid for the Container will be negotiated in an arm's length transaction and if the parties are unable to agree on a price, Lessee will not be entitled to acquire the Container from the Lessor. Lessee shall use its best efforts to maximize the net proceeds received on account of any sale, lease or other disposition of a Container pursuant to this Section 5(b) using a level or standard of care no less than the Lessee would use with respect to containers it owns, leases or operates for others. The net proceeds of the sale, lease or other disposition shall be allocated between the Lessee and the Lessor as follows: (A) the Lessor shall first receive an amount equal to the lesser of (i) the amount of the net proceeds, or (ii) the value of the Container pursuant to Exhibit A hereto; and (B) any net proceeds remaining after the allocation to the Lessor in subpart (A) shall be paid 50% to the Lessor and 5O% to the Lessee as incentive compensation for handling the sale, lease or other disposition; and (2) make payment of any share of the net proceeds to be paid the Lessor pursuant to Section 5(b)(1) coincident with the final Variable Rent payment for the Container, but in any event, not later than the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to the Container. For purposes of this Agreement, "net proceeds" means all proceeds received by the Lessee as a result of the sale, lease or other disposition of a Container (including without limitation damage recoveries and insurance proceeds), less all costs of the sale, lease or other disposition (including without limitation the cost of repairing and/or rehabilitating the Container to prepare it for sale, sales commissions paid to vendors, and repositioning costs). If pursuant to this Section 5(b) the Lessee fails to sell, lease or otherwise dispose of a Container on or prior to the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to that Container, the Lessee shall, from and after such day, no longer be entitled to sell, lease or otherwise dispose of that Container pursuant to this Section 5(b) and the Lessee shall thereupon return that Container to the Lessor's possession and control "AS IS, WHERE IS." The Lessor shall thereupon retake possession and control of that 9 Container and shall thereafter sell, lease or otherwise dispose of that Container free from any right or interest of the Lessee but subject to the matters set forth in the next succeeding paragraph. On or before the last day of each calendar quarter, commencing with the calendar quarter in which Lessee returns a Container to the Lessor's possession and control pursuant to the preceding paragraph, provided no Event of Default has occurred and is continuing since the commencement of the remarketing period contained in this Section 5(b), the Lessor and the Lessee shall make a complete and final settlement of the net proceeds received with respect to any Container during such quarter. The net proceeds of the sale, lease or other disposition shall be allocated between the Lessee and the Lessor as follows: (A) the Lessor shall first receive an amount equal to the lesser of (i) the amount of the net proceeds, or (ii) the value of the Container pursuant to Exhibit A hereto; and (B) any net proceeds remaining after the allocation to the Lessor in subpart (A) shall be paid 50% to the Lessor and 50% to the Lessee. (c) Return of the Containers (Event of Default). (A) Upon termination of this Agreement as a consequence of an Event of Default, the Lessor may, upon written notice to Lessee (except that no notice is required with respect to the Event of Default specified in Section 4(c)(5)), pursuant to the security interest granted under Section 10 below, direct any or all sublessees of on-lease Containers to make payment directly to the Lessor and to return the Containers to Lessor at the termination of the subleases and otherwise exercise all rights and remedies of a secured creditor under the Uniform Commercial Code in effect in the applicable jurisdiction. (B) In the alternative, upon termination of this Agreement as a consequence of an Event of Default (other than the Event of Default specified in Section 4(c)(5)), if Lessor does not give the notice described in Section 5(c)(A), this Agreement will continue as to any Container subject to sublease at the time when this Agreement would otherwise terminate as to that Container until the last day of the calendar quarter in which the Container comes off the sublease. (C) In addition, upon termination of this Agreement as a consequence of an Event of Default, the Lessee shall effect an orderly transition of any Container that is off-lease at the time of termination, and of any Container that is redelivered to Lessee by a sublessee (if this Agreement continues pursuant to Section 5(c)(B)) to the Lessor for its own use or as lessor to a container operator, all in accordance with the Lessor's directions. In the 10 event that the Lessor chooses to continue operation of any such Container for its own use or as lessor to a container operator, the Lessee shall redeliver possession of such Container to the Lessor in sound operating condition, normal wear and tear excepted, and arrange for the transport of such Container to any of the depot location(s) described on Schedule I attached hereto (or such other depot locations as may be mutually acceptable to Lessor and Lessee) (any location described on said Schedule I or as so agreed by Lessor and Lessee being hereinafter referred to as a "Schedule I Location"), it being understood that the costs, if any, of transport of such Container to a Schedule I Location shall be at the expense of the Lessee. Notwithstanding the foregoing, Lessee may redeliver replacement containers of like size, type, age and condition if the original Containers were re-delivered by Lessee's sublessees to non-Schedule I Locations. The Lessee shall not arrange for the transport of more than 400 TEU's of Containers (or replacement containers) to any of the following Schedule I Locations: Bremen, Milan, Leghorn, Genoa, Marseille, Chicago or New Orleans, except as agreed by the Lessor. (d) Return of the Containers (Performance). Upon termination of this Agreement as a consequence of the event specified in Section 4(c)(6), this Agreement will continue as to any Container subject to sublease at the time when this Agreement would otherwise terminate as to that Container until the last day of the calendar quarter in which the Container comes off the sublease. The Lessee shall thereupon effect an orderly transition of such Container, and of any Container that is off-lease at the time of termination of this Agreement, to the Lessor for its own use or as lessor to a container operator, all in accordance with the Lessor's directions. In the event that the Lessor chooses to continue operation of any such Container for its own use or as lessor to a container operator, the Lessee shall redeliver possession of such Container to the Lessor "AS IS, WHERE IS." 6. Fixed Rent; Variable Rent (a) Payment. During the term of this Agreement, the Lessee shall pay to the Lessor at a place designated by the Lessor in United States Dollars (1) the Fixed Rent; and (2) the Variable Rent payment based on the Lessee's use of the Containers. Because of the difficulty and complexity for the Lessee to account for the use of each Container separately, the Lessor agrees that the Variable Rent shall be based on the average use of a set of similar containers (the "Container Set") and shall be calculated in accordance with the provisions of this Section. All rentals and any other amounts to be remitted to the Lessor under this Agreement shall be paid by wire transfer of funds in accordance with payment instructions confirmed by the Lessor. All remittances due the Lessor under this Agreement shall be paid without notice or demand, and without abatement, set-off or deduction of any amounts whatsoever except as specifically set forth in this Agreement. All 11 remittances that become past due will bear interest at a floating rate per annum equal to the lesser of (i) the "prime" rate of NatWest Bank N.A. as announced from time to time at its head office in New York, New York, plus two percent (2%) per annum (with each change in such prime rate to cause an equal and corresponding change in the rate of interest payable hereunder) or (ii) the highest rate allowed by California law, from the due date until paid. (b) General. (1) Container Set. The Container Set shall be denominated "Combined Container Set IV" and shall consist of the Containers and such other containers as are designated by the Lessee as included in the Container Set. The containers in the Container Set (including the Containers) shall be referred to as "Set Containers." (2) Set Container Requirements. Each Set Container must satisfy the following criteria: (A) each Set Container must be a standard dry cargo or special container (other than a refrigerated or tank container) or other container-related equipment of similar classification and type; (B) each Set Container must either be (i) owned by the Lessee or an affiliate of the Lessee or a partnership of which the Lessee is a general partner; (ii) leased by the Lessee from third parties, such as the Lessor; or (iii) managed by the Lessee for the account of third parties; and (C) each Set Container must either be acquired by the Lessee or an affiliate of the Lessee or a partnership of which the Lessee is a general partner or committed to the Container Set between January 1, 1992 and December 31, 1994. (3) Notification to Lessor. The Lessee shall, after all the Set Containers to be included in the Container Set have been identified, provide the Lessor with a summary description, in writing, of the Set Containers included in the Container Set. (4) Inclusion in the Container Set. A Container shall be considered to be included in the Container Set on the date that payment for such Container is received in accordance with the Purchase and Sale Agreement (the "Purchase Date"). (5) Container Cost. The Container Cost of each Container shall equal US $2,350 per TEU or as otherwise mutually agreed to by the parties. (6) Exchange Rate. If the Container Cost is not paid in 12 United States dollars, the amount in such dollars shall be calculated based on the exchange rate prevailing on the date of payment. (7) TEUs. Each Set Container shall equal the following number of twenty (20) foot equivalent units ("TEUs"): (i) Each twenty (20)-foot dry cargo container shall equal one (l) TEU; (ii) Each forty (40)-foot dry cargo container shall equal one and one-half (1.50) TEUs; (iii) Each twenty (20)-foot open top container shall equal one and fifty-four hundredths (1.54) TEUs; (iv) Each forty (40)-foot open top container shall equal two and forty-eight hundredths (2.48) TEUs; (v) Each forty (40)-foot collapsible end flat rack container shall equal two and seventy-six hundredths (2.76) TEUs; and (vi) Each forty (40)-foot jumbo high cube container shall equal one and sixty-eight hundredths (l.68) TEUs. (c) Fixed Rent; Determination of Variable Rent. (1) Adjusted Gross Revenues of the Container Set. Adjusted gross revenues of the Container Set ("Adjusted Gross Revenues of the Container Set") for any particular calendar quarter shall equal (x) the Gross Revenues of the Container Set for that quarter less (y) the Operating Expenses of the Container Set for that quarter. (i) Gross revenues of the Container Set ("Gross Revenues") for any particular quarter shall equal all revenues of the Lessee relating to the Container Set accrued during that quarter from leasing or subleasing all Set Containers, including but not limited to ancillary and all other related charges, such as pickup and drop off charges, special handling fees, and late payment fees, less uncollectible accounts receivable with respect to the Set Containers for the same quarter, as recorded on the books of account of the Lessee in accordance with generally accepted accounting principles. (ii) Operating expenses of the Container Set ("Operating Expenses") for any particular quarter shall equal all operating costs and expenses incurred in connection with the operation and leasing of the Set Containers during that quarter, including but not limited to, costs and expenses related to the following: maintaining, repairing, or refurbishing the Set 13 Containers; inspection, handling and storage; transporting the Set Containers other than to the point of origin of the initial leases or subleases; legal fees incurred in enforcing lease obligations; insurance; third-party claims arising out of the possession or operation of the Set Containers (including, but not limited to, injury to persons and loss of or damage to lading or other property), including legal fees incurred in defending against such third-party claims; charges, assessments or levies of any kind against the Set Containers; and ad valorem, gross receipts and property taxes attributable to the Set Containers. Notwithstanding the foregoing, the Operating Expenses shall not include: (w) those costs and expenses that would be considered costs or expenses associated with ownership of containers (as opposed to those associated with operation and maintenance of containers), such as costs and expenses incurred by the Lessee or Lessor in connection with the purchase and sale of the Set Containers; (x) any taxes incurred by the Lessor in respect of the Lessor's acquisition of the Containers or any income, capital or franchise taxes imposed on the Lessor which are based on or measured by its net income, gross receipts (other than gross receipts attributable to the Set Containers), or net worth (all of which taxes shall be paid by the Lessor individually); (y) any income, capital or franchise taxes imposed on the Lessee which are based on or measured by its net income, gross receipts (other than gross receipts attributable to the Set Containers), or net worth (all of which taxes shall be paid by the Lessee individually); or (z) costs and expenses incurred by the Lessee in connection with the leasing, management, and administration of the Set Containers as would generally be considered to be a part of the Lessee's own marketing, general and administrative expenses, including but not limited to, salaries, travel and entertainment expenses of the Lessee's personnel; rent; and bookkeeping and accounting charges. (2) Container Set TEU-Days. For all Set Containers in the Container Set for any particular calendar quarter, the number of Container Set TEU-days ("Container Set TEU-Days") shall equal the sum of the Monthly Container Set TEU-Days for each of the months of that quarter. The Monthly Container Set TEU-Days for any particular month shall equal (x) the number of TEU's of Set Containers on the first day of the month and the number of TEU's of Set Containers on the last day of the month, divided by two; multiplied by (y) the number of days in that month. (3) Container Set Daily Adjusted Gross Revenues. The "Container Set Daily Adjusted Gross Revenues" for any particular calendar quarter shall equal the Adjusted Gross Revenues of the Container Set for that quarter divided by the number of Container Set TEU-Days for the same quarter. (4) Lessor Container TEU-Days. For all Containers in the Container Set for any particular calendar quarter, the number of Lessor Container TEU-days ("Lessor Container TEU-Days") shall equal 14 the sum of the Individual Container TEU-Days for each Container for that quarter. The Individual Container TEU-Days for any particular Container, for any particular quarter shall equal (x) the applicable TEU factor for a Container of that size and type (as set forth in Section 6(b)(7) above) multiplied by (y) the actual number of days during the quarter that the Container was included in the Container Set; provided that, if in any quarter a Container is subject to a Casualty Occurrence or an Ordinary Disposal Occurrence (and the Lessee does not replace that Container pursuant to Section 9(b)), that Container shall be deemed to be removed from the Container Set at the midpoint of that quarter. (5) Lessor Adjusted Gross Revenues. The "Lessor Adjusted Gross Revenues" for any particular calendar quarter shall equal the Container Set Daily Adjusted Gross Revenues for that quarter multiplied by the number of Lessor Container TEU-Days for the same quarter. (6) Fixed Rent and Variable Rent. (i) Lessee shall pay Lessor "Fixed Rent" with respect to the Containers included in the Container Set for the period commencing on the Purchase Date therefor and ending on March 31, 1996 (the "Fixed Rent Period"). Fixed Rent for any particular calendar quarter shall equal the product obtained by multiplying (x) the number of Lessor Container TEU-Days for that quarter, divided by the number of days in that quarter, by (y) $98.81. (ii) Lessee shall pay Lessor "Variable Rent" with respect to the Containers included in the Container Set for the period commencing on April 1, 1996 and ending on the day this Agreement terminates in accordance with Section 4 above (the "Variable Rent Period"). Subject to subparts (iii) and (iv) below, the Variable Rent for any particular calendar quarter shall equal seventy-five percent (75.0%) of the Lessor Adjusted Gross Revenues for that quarter. (iii) If the Variable Rent otherwise payable pursuant to subpart (ii) for any calendar quarter during the first year of the Variable Rent Period is less than the product obtained by multiplying (x) the number of Lessor Container TEU-Days for that quarter, divided by the number of days in that quarter, by (y) $98.81 (the "first Year Threshold Amount"), the Variable Rent for that quarter shall be increased by an amount equal to the lesser of: (x) fifteen percent (15%) times the Lessor Adjusted Gross Revenues for that quarter; or (y) the amount by which the First Year Threshold Amount exceeds the Variable Rent otherwise payable pursuant to subpart (ii) for that quarter without the adjustment provided by this subpart (iii). If the Variable Rent otherwise payable pursuant to subpart (ii) for any calendar quarter during the second year of the Variable Rent Period is less than the product obtained by multiplying (x) the number of Lessor Container 15 TEU-Days for that, quarter, divided by the number of days in that quarter, by (y) $91.69 (the "Second Year Threshold Amount"), the Variable Rent payable with respect to such Container shall be increased by an amount equal to the lesser of: (x) fifteen percent (15%) times the Lessor Adjusted Gross Revenues for that quarter; or (y) the amount by which the Second Year Threshold Amount exceeds the Variable Rent otherwise payable pursuant to subpart (ii) for that quarter without the adjustment provided by this subpart (iii). The amount by which Variable Rent is increased pursuant to this subpart (iii) shall hereinafter be referred to as "Additional Variable Rent." (iv) Commencing with the third year of the Variable Rent Period, the Variable Rent otherwise payable pursuant to subpart (ii) for any calendar quarter shall be decreased by an amount equal to the lesser of: (x) one-twelfth of the aggregate Additional Variable Rent; or (y) the amount by which the Variable Rent otherwise payable pursuant to subpart (ii) for that quarter without the adjustment provided by this subpart (iv) exceeds the product obtained by multiplying (A) the number of Lessor Container TEU-Days for that quarter, divided by the number of days in that quarter, by (B) $80. Notwithstanding the foregoing, the aggregate deductions from Variable Rent made pursuant to this subpart (iv) shall in no event exceed the aggregate Additional Variable Rent. (7) Carry-Forward of Operating Deficit. If Variable Rent for any particular calendar quarter is less than zero, the amount by which Variable Rent is less than zero (the "Operating Deficit") shall be carried forward and offset against and to the extent of Lessor's positive Variable Rent in subsequent calendar quarters, without interest, until the Operating Deficit is fully offset; provided that, no offset pursuant to this Section shall be made for any quarter for which Additional Variable Rent is payable. In no event shall the Lessor be obligated to make any direct payment to the Lessee to reimburse the Lessee for any Operating Deficit. 7. Withholding Taxes; Arthur Andersen Review; Reports. (a) Withholding Taxes. (i) If at any time during the term of this Agreement, the Lessee is required by law to make any deduction or withholding on account of any tax, assessment or other governmental charge, which is currently in force or may in the future come into force as a result of the action of any tax authority, with respect to the Containers, the Fixed Rent, the Variable Rent, or any other amount payable by the Lessee to the Lessor hereunder, other than any taxes imposed on the Lessee which are based on or measured by its net income, gross receipts (other than gross receipts attributable to the Set Containers), or net worth, the Lessee shall, thereupon be 16 entitled to deduct or withhold, or to offset against the Fixed Rent, the Variable Rent, or any other amount otherwise payable by the Lessee to the Lessor hereunder, the amount of such tax, assessment or other governmental charge (together with interest, additions to tax, penalties or other liabilities related thereto), irrespective of whether such tax, assessment or other governmental charge is imposed with respect to the then current or a previous taxable period, and any amount so deducted, withheld, or offset by the Lessee and paid by the Lessee to the applicable taxing authority pursuant to and in accordance with the deduction or withholding requirement shall be deemed to have been paid by the Lessee to Lessor in satisfaction of the requirements of this Agreement (ii) The Lessee agrees to execute and deliver all such documents and instruments, and to take all such action, as the Lessor shall reasonably request to minimize amounts to be deducted or withheld pursuant to the tax deduction or withholding requirement or to obtain an exemption from the deduction or withholding requirement and to effect any necessary compliance therewith. (iii) If the Lessor is organized under the laws of a jurisdiction outside the United States, then, on or prior to the date it becomes entitled to the receipt of any payment hereunder and from time to time thereafter if requested in writing by the Lessee, the Lessor shall, if and for so long as the Lessor is lawfully able to do so, provide the Lessee with (i) an accurate, complete and duly executed Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that the Lessor is entitled to benefits under an income tax treaty to which the United States is a party that reduces the rate of withholding tax on payments under this Agreement or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States; or (ii) in the event that, by virtue of a change in law or regulations, such forms are no longer valid, such other evidence of the Lessor's exemption from withholding (if and for so long as the Lessor is legally able to provide such evidence) as is reasonably requested by the Lessee. (iv) If the Lessee makes any deduction or pays any withholding tax pursuant to this Section, the Lessee shall promptly give the Lessor written evidence of payment of such tax. (b) Arthur Andersen Review. Arthur Andersen & Company or such other independent public accounting firm as may be satisfactory to the Lessor will review the calculations of the Adjusted Gross Revenues of the Container Set for each calendar quarter during the Variable Rent Period in the course of performing the annual audit of the Lessee's financial statements and will confirm by a written report to the Lessor to accompany the Variable Rent payment to be paid on or about June 30th of each year during the Variable Rent 17 Period that the calculations made by the Lessee during the preceding year were made in accordance with this Agreement. The Lessee will bear the cost of the review. Any adjustments in the Variable Rent resulting from the review shall be reflected in the payment that accompanies the written report. (c) Reports, Inspection. (i) Concurrently with payment of the Variable Rent for each calendar quarter, Lessee shall provide to Lessor a report substantially in the form of Schedule II hereto showing the calculation of the Lessor Adjusted Gross Revenues for that quarter. (ii) During the term of this Agreement and for a period of one year following termination of this Agreement for any reason whatsoever, for the purpose of verifying the amount of Variable Rent due under this Agreement for any one or more calendar quarters, Lessor shall have the right on five business days notice, at Lessor's expense, to examine during the Lessee's. normal business hours the business records relating to the Containers. 8. Utilization and Other Matters. (a) The Lessee agrees to use the Containers in accordance with the standards accepted in the container leasing industry. The Lessor retains the right to have the Containers inspected at any time, so long as any inspection does not interfere with normal utilization of the Containers. (b) The Lessee agrees not to grant or suffer to exist a lien of any kind on the Containers, or to permit any sublessee to grant or suffer to exist a lien of any kind on the Containers, except for the following liens or encumbrances ("Permitted Liens"): (i) liens or encumbrances that result from acts or omissions of the Lessor; (ii) liens or charges for current taxes, assessments or other governmental charges which are either not yet due or are being contested in good faith and by appropriate proceedings so long, as such proceedings do not involve any danger of the sale, forfeiture or loss of any Container or any interest therein; (iii) materialmen's, mechanics', workmen's, repairmen's, employees' and other like liens arising in the ordinary course of business which are either inchoate and relate to an obligation which is not yet due or which are being contested in good faith and by appropriate proceedings so long as such proceedings do not involve any danger of the sale, forfeiture or loss of any Container or any interest therein; and (iv) the rights of the sublessees of the Containers under 18 their respective subleases with the Lessee. Lessor may enter into a financing arrangement with one or more Lenders; provided that such Lenders acknowledge in writing that they take subject to this Agreement. (c) The Lessee will not permit any sublessee to sell or otherwise transfer title to any Container to any third party. (d) The Lessee agrees to give the Lessor, within one hundred and eighty (180) days of the end of each calendar year, an inventory of the Containers as of year end. This inventory will specify the name of the lessee of each Container then on lease. 9. Insurance; Total Loss or Destruction. (a) The Lessee agrees during the term of this Agreement to insure the Containers against all risks of physical loss and to maintain comprehensive general liability insurance covering the Containers against bodily injury or property damage, in each case subject to normal terms and conditions of a comprehensive insurance policy, the cost of which insurance shall be an Operating Expense of the Container Set for purposes of Section 6. The Lessee will provide the Lessor with a Certificate of Insurance evidencing the insurance for all Containers covered by this Agreement and naming Lessor and Lenders as an additional insured and loss payee as their interests may appear. If the Lessee, through its own negligence, does not maintain the insurance in effect, any loss or expense due to the failure to maintain the insurance in effect shall be the responsibility of the Lessee and, notwithstanding the provisions of Section 6, shall not be an Operating Expense of the Container Set for purposes of Section 6. (b) (i) In the case of a Casualty Occurrence or an Ordinary Disposal Occurrence as to a Container, the Lessee agrees to replace the Container within ninety (90) days after Lessee receives notice of the Casualty Occurrence or within ninety (90) days after the Ordinary Disposal Occurrence with one of like size, type, age, and condition and to deliver to the Lessor with respect thereto concurrently with the replacement of such Container a Certificate of Replacement in the form of Exhibit B attached hereto, a Bill of Sale in substantially the form attached to the Purchase and Sale Agreement, and an amendment to the Uniform Commercial Code financing statements originally filed with respect to this transaction. (ii) In the alternative, until the last day of the calendar quarter following the calendar quarter in which there occurs a Casualty Occurrence or an Ordinary Disposal Occurrence, Lessee may, on behalf of the Lessor, and Lessor hereby authorizes Lessee to, sell, lease or otherwise dispose of a Container subject to a Casualty Occurrence or an Ordinary Disposal Occurrence, at the 19 sole and absolute discretion of the Lessee; provided that, if (x) a Container is subject to a Casualty Occurrence or an Ordinary Disposal Occurrence during the period commencing on the Purchase Date and ending on June 30, 1999; and (y) the total number of Containers included in the Container Set on the Purchase Date and theretofore sold, leased or otherwise disposed of pursuant to this Section (calculated on a TEU basis as of the last day of the most recent calendar quarter during such period) exceeds five percent (5%) of the total number of Containers (calculated on a TEU basis as of the Purchase Date), Lessee shall replace such Container in accordance. with the preceding Section and shall not be entitled to sell, lease or otherwise dispose of such Container pursuant to this Section. The net proceeds of the sale, lease or other disposition shall be allocated between the Lessor and the Lessee as follows: (1) the Lessor shall first receive an amount equal to the lesser of: (A) the amount of the net proceeds; or (B) the value of the Container according to Exhibit A attached hereto; and (2) any net proceeds remaining after the allocation to the Lessor in subpart (1) shall be paid 50% to the Lessor and 50% to the Lessee as incentive compensation for handling the sale, lease or other disposition. (iii) The cost of the replacement or the payment shall not be an Operating Expense of the Container Set for purposes of Section 6. (iv) If the Lessee elects to replace the Container, it shall be entitled to retain the net proceeds of the Casualty Occurrence or Ordinary Disposal Occurrence for its own account, and the Lessor shall transfer all of its right, title and interest in and to the original Container to the Lessee. Lessor agrees to execute or to cause to be executed all necessary documents, including a bill of sale and a Uniform Commercial Code release, to evidence such transfer to Lessee. (v) If the Lessee elects to pay the Lessor the amount described in Section 9(b) (ii) above, the Lessor shall be entitled to Fixed Rent or Variable Rent on account of the Container subject to the Casualty Occurrence or Ordinary Disposal Occurrence in accordance with Section 6 and shall be entitled to receive such amount on or prior to the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to such Container. 10. Security Interest. To secure the prompt and full payment and performance of any and all of Lessee's obligations hereunder, 20 Lessee hereby assigns, transfers, sets over, and grants to Lessor a security interest in all of Lessee's right, title and interest in and to any and all present or future subleases, leases, chattel paper, agreements for use, or other similar agreements relating to the Containers, all accounts, rents, payments and other rights to receive moneys relating thereto, all other general intangibles thereunder, all books and records and other documents relating thereto, and all proceeds of the foregoing (in each case to the extent the same relates to the Containers) (collectively, the "Collateral"). Upon the occurrence and during the continuance of an Event of Default (provided that the Lessor shall have delivered to the Lessee written notice of termination of this Agreement pursuant to Section 4(c) and the written notice described in Section 5 (c) (A), except that no notices are required with respect to the Event of Default specified in Section 4(c) (5)), Lessee agrees that Lessor shall have the right from and after the effective date of termination to receive and collect all rent and other sums payable to or receivable by Lessee under any such subleases, and the right to make all waivers and agreements, to give all notices, consents and releases and to do any and all other things whatsoever which the Lessee is or may become entitled to do under any sublease (in each case to the extent such sublease relates to the Containers). Anything herein to the contrary notwithstanding, nothing contained in this Section 10 may be interpreted as permitting the Lessor or any Lender, and no right or remedy may be exercised by the Lessor or any Lender, which would result in the derogation of any covenant of quiet enjoyment made to any sublessee under any sublease of a Container. 11. Sale or Transfer by Lessor. The Lessor may at any time sell or transfer any Container or any interest therein subject to this Agreement, provided that: (a) the party to whom the Container is sold or transferred acknowledges in writing that the sale or transfer is subject to this Agreement; (b) the Lessor shall not be entitled to offer or sell any Container or any interest therein or assign or transfer this Agreement or any interest therein to any resident, domiciliary or citizen of the United States unless the offer, sale, assignment or transfer is made in compliance with all applicable United States and state securities laws; and (c) the Lessor shall not be entitled to sell or transfer any Container or any interest therein during the term of this Agreement to any person engaged in the business of operating and leasing ocean-going marine shipping containers to end-users, or any affiliates thereof (other than PLM International, Inc. and its affiliates). 21 With respect to paragraph (b) above, the Lessor agrees that it will not authorize discussions concerning the sale or transfer of any Container or any interest therein, or the assignment or transfer of this Agreement or any interest therein, within the United States. If an agency or court of the United States or any State thereof makes a legitimate request for information to evidence compliance with the matters stated in this Section 11, the Lessor shall, upon notice from the Lessee that such request has been made, disclose such information or the evidence verifying such information so as to comply with such request. 12. Assignment or Transfer by Lessee. No assignment hereof by Lessee or transfer of any of the rights of Lessee hereunder shall be valid or effective as against the Lessor unless in conformity with the prior written consent of the Lessor (which consent shall not be unreasonably withheld). 13. Governing Law. This Agreement is to be interpreted and enforced in accordance with the laws of the State of California. 14. Securities Laws Representation. For the purpose of the United States and state securities laws, Lessor represents and warrants to the Lessee that the following are true and correct on the date the Lessor executes this Agreement: (a) The Lessor has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in containers and of protecting its own interests in connection with such investment. (b) The Lessor is entering into this Agreement and acquiring the Containers or an interest therein for its own account and not with a view to or for sale in connection with any distribution of a security. Lessor acknowledges that this transaction has not been registered under the Securities Act of 1933, as amended (the "Act"), or any state securities law. Therefore, if this transaction is deemed a security under federal or state securities laws, an interest in this Agreement or in the Containers may not be resold unless it is registered under the Act and all applicable state securities laws or an exemption from such registration is available. 15. Amendment. No modification or amendment of this Agreement shall be valid unless in writing and executed by the parties hereto. 16. Integration. This Agreement represents the entire agreement and understand- 22 ing between the parties hereto and supersedes all prior or contemporaneous agreements, whether written or oral, with respect to the subject matter hereof. 17. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 18. Title and Headings; Sections. Title and headings of the sections and subsections of this Agreement are for convenience of reference only and do not form a part of this Agreement and shall not in any way affect the interpretation thereof. References to sections and subsections without further attribution mean sections and subsections of this Agreement. 19. Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of each party hereto. 20. Further Assurances. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents and take such further action as may be reasonably required effectively to carry out the transactions contemplated herein. 21. Waiver of Jury Trial. LESSEE AND LESSOR EACH IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER LITIGATION OR PROCEEDING UPON, ARISING OUT OF, OR RELATED TO THIS AGREEMENT. 22. Chattel Paper. Only one counterpart of this Agreement shall be marked "Counterpart No. One" ("Counterpart No. One"), and all other counterparts hereof shall be marked as, and shall be duplicates. To the extent this Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code in effect in any applicable jurisdiction), no security interest herein may be created through the transfer or possession of any counterpart other than Counterpart No. One. 23 23. Effectiveness. This Agreement shall be effective, only when it has been executed and delivered by each of the parties hereto. EXECUTED as of the 17th day of April, 1995. TRANS OCEAN CONTAINER CORPORATION, the Lessee 851 Traeger Avenue San Bruno, CA. 94066 Telecopy No. (415) 873-6764 By: /s/ [ILLEGIBLE] ------------------------------------ Its: TREASURER ----------------------------------- INVESTORS ASSET HOLDING CORP., not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust," the Lessor Exchange Place Boston, MA 02109 Telecopy No. (617) 523-1410 By: ------------------------------------ Its: ----------------------------------- 24 23. Effectiveness. This Agreement shall be effective, only when it has been executed and delivered by each of the parties hereto. EXECUTED as of the 17th day of April, 1995. TRANS OCEAN CONTAINER CORPORATION, the Lessee 851 Traeger Avenue San Bruno, CA. 94066 Telecopy No. (415) 873-6764 By: ------------------------------------ Its: ----------------------------------- INVESTORS ASSET HOLDING CORP., not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust," the Lessor Exchange Place Boston, MA 02109 Telecopy No. (617) 523-1410 By: /s/ [ILLEGIBLE] ------------------------------------ Its: Vice-President ----------------------------------- 24 EXHIBIT A VALUE IN THE EVENT OF A CASUALTY OCCURRENCE OR AN ORDINARY DISPOSAL OCCURRENCE (As % of Container Cost) After After Quarter* Value Quarter* Value -------- ----- -------- ----- 0 103.75% 31 64.77% 1 103.00% 32 62.76% 2 102.23% 33 60.68% 3 101.43% 34 58.53% 4 100.61% 35 56.31% 5 99.76% 36 54.02% 6 98.89% 37 51.66% 7 97.98% 38 49.22% 8 97.05% 39 46.70% 9 96.08% 40 44.10% 10 95.08% 41 41.41% 11 94.05% 42 38.64% 12 92.99% 43 35.77% 13 91.90% 44 32.82% 14 90.76% 45 29.77% 15 89.59% 46 26.61% 16 88.39% 47 23.36% 17 87.14% 48 20.00% 18 85.85% 49 18.61% 19 84.52% 50 17.18% 20 83.15% 51 15.70% 21 81.73% 52 14.17% 22 80.27% 53 12.59% 23 78.76% 54 10.96% 24 77.20% 55 9.28% 25 75.59% 56 7.54% 26 73.93% 57 5.74% 27 72.21% 58 3.89% 28 70.44% 59 1.98% 29 68.61% 60 0.00% 30 66.72% - ---------- * Quarters begin to be counted as of the beginning of the first calendar quarter after the calendar quarter in which the Container is included in the Container Set. 26 EXHIBIT B SAMPLE Certificate of Replacement Number ______ A. Description of the Container(s) Trans Ocean Container Corporation (the "Lessee") certifies that the Container(s) listed below in Column 1 (the "Affected Container(s)") that heretofore were subject to the Marine Shipping Container Variable Lease dated as of April _____, 1995 (the "Agreement") with Investors Asset Holding Corp., a Massachusetts corporation, not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust" (the "Lessor") have been subject to a Casualty Occurrence or an Ordinary Disposal Occurrence (as such terms are defined in the Agreement). Therefore, in accordance with Section 9(b) of the Agreement, the Lessee elects to provide replacement container(s) therefor and certifies that: (i) the container(s) listed below in Column 2 (the "Replacement Container (s)") are of like size, type, age and condition as the Affected Container(s), and (ii) effective on the date indicated below, the Replacement Container(s) shall, for purposes of the Agreement, replace the Affected Container(s), and (iii) the Replacement Container(s) are, as of such date, "Containers" for purposes of the Agreement. COLUMN 1 COLUMN 2 -------- -------- 1. Designation of Containers 1. Designation of Containers 2. Type: 2. Type: 3. Quantity: 3. Quantity: 4. Container 4. Container Numbers: Numbers: B. Date Replacement Container(s) Are Effective Under The Agreement: C. Lease of the Replacement Containers(s) The Lessee shall lease the above-designated Replacement Container(s) in accordance with the terms and conditions of the Agreement. D. Restriction on Transfer of the Replacement Container(s) The Lessor may not sell or transfer the above designated Replacement Container(s) or any interest therein except in accordance with the Agreement. TRANS OCEAN CONTAINER CORPORATION By: ------------------------------- Title: ---------------------------- 27 SCHEDULE I Specified Depot Locations for Redelivery of the Containers Pusan New York Hong Kong London Kaohsiung Le Havre Kobe Antwerp Nagoya Rotterdam Yokohama Bremen Seattle Hamburg San Francisco/Oakland Marseille Los Angeles/Long Beach Genoa Houston Leghorn New Orleans Milan Chicago 28 SCHEDULE II TRANS OCEAN LTD CALCULATION OF DAILY ADJUSTED GROSS REVENUE COMBINED CONTAINER SET IV ? QUARTER 199? I. CONTAINER SET RESULTS
DRY CARGO DRY CARGO HIGH CUBE OPEN TOP OPEN TOP COLLAPSIBLE 20' 40' DRY 40' 20' 40' FLAT 40' TOTAL --------- --------- --------- -------- -------- ----------- ----- GROSS REVENUE $5 $5 $5 $5 $5 $5 $30 BAD DEBT WRITE-OFFS ($1) ($1) ($1) ($1) ($1) ($1) ($6) --------- --------- --------- -------- -------- ----------- ----- TOTAL GROSS REVENUE $4 $4 $4 $4 $4 $4 $24 REPAIR AND MAINTENANCE EXPENSE $1 $1 $1 $1 $1 $1 $6 OTHER OPERATING EXPENSES $1 $1 $1 $1 $1 $1 $6 --------- --------- --------- -------- -------- ----------- ----- TOTAL EXPENSES $2 $2 $2 $2 $2 $2 $12 --------- --------- --------- -------- -------- ----------- ----- ADJUSTED GROSS REVENUE $2 $2 $2 $2 $2 $2 $12 ========= ========= ========= ======== ======== =========== =====
II. CONTAINER SET TEU DAYS BEGINNING ENDING AVERAGE DAYS IN CONTAINER SET MONTH TEUS TEUS TEUS MONTH TEU DAYS - ---------- --------- ------ ------- ------- ------------- Month 1 6.00 6.00 6.00 31 186.00 Month 2 6.00 6.00 6.00 30 180.00 Month 3 6.00 6.00 6.00 31 186.00 ------------- TOTAL CONTAINER SET TEU DAYS 552.00 ============= III. DAILY ADJUSTED GROSS REVENUE PER TEU
DRY CARGO DRY CARGO HIGH CUBE OPEN TOP OPEN TOP COLLAPSIBLE 20' 40' DRY 40' 20' 40' FLAT 40' TOTAL --------- --------- --------- -------- -------- ----------- ------ AVERAGE # OF CONTAINER TEU DAYS 92.00 138.00 154.56 92.00 33.44 42.00 552.00 GROSS REVENUE $0.05 $0.04 $0.03 $0.05 $0.15 $0.12 $0.05 BAD DEBT WRITE-OFFS ($0.01) ($0.01) ($0.01) ($0.01) ($0.03) ($0.02) ($0.01) --------- --------- --------- -------- -------- ----------- ------ TOTAL GROSS REVENUE $0.04 $0.03 $0.03 $0.04 $0.12 $0.10 $0.04 REPAIR AND MAINTENANCE EXPENSE $0.01 $0.01 $0.01 $0.01 $0.03 $0.02 $0.01 OTHER OPERATING EXPENSES $0.01 $0.01 $0.01 $0.01 $0.03 $0.02 $0.01 --------- --------- --------- -------- -------- ----------- ------ TOTAL EXPENSES $0.02 $0.01 $0.01 $0.02 $0.06 $0.05 $0.02 --------- --------- --------- -------- -------- ----------- ------ ADJUSTED GROSS REVENUE $0.02 $0.01 $0.01 $0.02 $0.06 $0.05 $0.02 ========= ========= ========= ======== ======== =========== ======
TRANS OCEAN LTD CALCULATION OF LESSOR'S VARIABLE RENT COMBINED CONTAINER SET IV ? QUARTER 199? LESSOR: ? I. LESSOR'S CONTAINER TEU DAYS 40' HIGH 40' DRY CUBE CARGO DRY CARGO TOTAL ------- --------- ------ NUMBER OF CONTAINER DAYS IN THE CONTAINER SET: 92 92 TEU FACTOR: 1.50 1.68 ------- --------- LESSOR'S CONTAINER TEU DAYS: 138.00 154.56 292.56 ------- --------- ====== II LESSOR'S ADJUSTED GROSS REVENUE DAILY ADJUSTED GROSS REVENUE PER TEU: $0.02 LESSOR'S CONTAINER TEU DAYS: 292.56 -------- LESSOR'S ADJUSTED GROSS REVENUE $5.85 -------- VARIABLE RENT PERCENTAGE: 75.00% -------- VARIABLE RENT DUE TO LESSOR: $4.39 ======== CONTAINER TEU DAYS CALCULATION ? QUARTER 199? LESSOR TOTAL UNIT TOTAL CONTAINER ACTIVITY NUMBER DAYS IN TEU TEU TYPE DATE OF UNITS QUARTER FACTOR DAYS - ------------ -------- -------- ------- ------ ------- C40 Month 1 1 92 1.50 138.00 -------- ------- ------- 1 92 138.00 J40 Month 1 1 92 1.68 154.56 -------- ------- ------- 1 92 154.56 LLR00D LOAN AMORTIZATION SCHEDULE 9/29/97 10:34:50 PAGE 1 EQUITY OWNER: 8801 AFG TRUST 88-1 PERCENT OWNED: 100.000000% LESSEE: AMOCO RENTAL SCHEDULE: B-O-9 LENDER NAME: KANSALLIS FINANCE LTD LOAN CODE: KFNL052
PRINCIPAL PRINCIPAL PAYMENT PMT BALANCE TOTAL INTEREST PRINCIPAL BALANCE DATE # BEFORE PMT PAYMENT PAYMENT PAYMENT AFTER PMT - ------------------------------------------------------------------------------------------------- 2/01/1989 1 119,033.61 9,808.71 3,228.79 6,579.92 112,453.69 8/01/1989 2 112,453.69 9,808.71 5,903.82 3,904.89 108,548.80 2/01/1990 3 108,548.80 9,808.71 5,698.81 4,109.90 104,438.90 8/01/1990 4 104,438.90 9,808.71 5,483.04 4,325.67 100,113.23 2/01/1991 5 100,113.23 9,808.71 5,255.94 4,552.77 95,560.46 8/01/1991 6 95,560.46 9,808.71 5,016.92 4,791.79 90,768.67 2/01/1992 7 90,768.67 9,808.71 4,765.36 5,043.35 85,725.32 8/01/1992 8 85,725.32 9,808.71 4,500.58 5,308.13 80,417.19 2/01/1993 9 80,417.19 9,808.71 4,221.90 5,586.81 74,830.38 8/01/1993 10 74,830.38 9,808.71 3,928.60 5,880.11 68,950.27 2/01/1994 11 68,950.27 9,808.71 3,619.89 6,188.82 62,761.45 8/01/1994 12 62,761.45 9,808.71 3,294.98 6,513.73 56,247.72 8/01/1994 56,247.72 17,975.55 .00 17,975.55 38,272.17 2/01/1995 13 38,272.17 6,674.24 2,009.29 4,664.95 33,607.22 8/01/1995 14 33,607.22 6,674.24 1,764.38 4,909.86 28,697.36 2/01/1996 15 28,697.36 6,674.24 1,506.61 5,167.63 23,529.73 8/01/1996 16 23,529.73 6,674.24 1,235.31 5,438.93 18,090.80 2/01/1997 17 18,090.80 6,674.24 949.77 5,724.47 12,366.33 8/01/1997 18 12,366.33 6,674.24 649.23 6,025.01 6,341.32 8/02/1997 6,341.32 6,341.32 .00 6,341.32 .00 2/01/1998 19 .00 .00 .00 .00 .00 182,066.83 63,033.22 119,033.61
YEARLY RATE OF RETURN: 10.50000% ** END OF REPORT ** Exhibit A - Value in the Event of a Casualty Occurrence or an Ordinary Disposal Occurrence Exhibit B - Certificate of Replacement Schedule I - Specified Depot Locations Schedule II - Form of Report re: Lessor Adjusted Gross Revenues EX-27 6 EXHIBIT 27
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 3,243,631 86,113 871,779 0 0 4,201,523 15,974,300 8,610,088 11,565,735 514,360 3,459,289 0 0 0 7,592,086 11,565,735 0 2,778,361 0 0 1,836,821 0 318,530 623,010 0 623,010 0 0 0 623,010 0 0
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