-----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, VRjt2lYKpx+BfTsfGcBbBHdt7eycNHbL21XyBSyWk1OfWQrBnHq4KabLAW6xPK7R MkXnuF+4llzKKdRpwnZGng== 0001016843-01-000268.txt : 20010409 0001016843-01-000268.hdr.sgml : 20010409 ACCESSION NUMBER: 0001016843-01-000268 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN INCOME FUND I-E CENTRAL INDEX KEY: 0000868681 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EQUIPMENT RENTAL & LEASING, NEC [7359] IRS NUMBER: 043127244 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20029 FILM NUMBER: 1591276 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 0001.txt 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, 2000 ----------------------------------------------------- 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 0-20029 -------------------------------------------------------- AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-3127244 - -------------------------------------------- ---------------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 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 --------------------- Title of each class Name of each exchange on which registered - ------------------------ ------------------------------------------------- - ------------------------ ------------------------------------------------- Securities registered pursuant to Section 12(g) of the Act: 883,829.31 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 [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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, 2000 (Part I and II) AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP FORM 10-K TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business....................................................................... 3 Item 2. Properties..................................................................... 6 Item 3. Legal Proceedings.............................................................. 6 Item 4. Submission of Matters to a Vote of Security Holders............................ 6 PART II Item 5. Market for the Partnership's Securities and Related Security Holder Matters.... 7 Item 6. Selected Financial Data........................................................ 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................................................... 9 Item 8. Financial Statements and Supplementary Data.................................... 9 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................................... 9 PART III Item 10. Directors and Executive Officers of the Partnership............................ 10 Item 11. Executive Compensation......................................................... 11 Item 12. Security Ownership of Certain Beneficial Owners and Management................. 12 Item 13. Certain Relationships and Related Transactions................................. 13 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................15-18
2 PART I ITEM 1. BUSINESS. (a) General Development of Business AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership (the "Partnership"), was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on August 29, 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 December 4, 1991, the Partnership concluded an Interim Closing and issued 587,079.96 units of limited partnership interest (the "Units") to 654 investors for a purchase price of $14,569,875. Included in the 587,079.96 units are 4,284.96 bonus units. On January 31, 1992 the Partnership concluded its Final Closing. An additional 296,749.35 units (including 626.35 bonus units) were purchased for an additional purchase price of $7,403,075 and an additional 735 investors became Limited Partners of the Partnership. As of January 31, 1992, an aggregate total of 883,829.31 units (including 4,911.31 bonus units) had been purchased for an aggregate total purchase price of $21,972,950 and an aggregate of 1,089 investors had become Limited Partners of the Partnership. 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 operating industry segment: financial services. Historically, the Partnership has acquired capital equipment and leased 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. In the year ended December 31, 2000, the Partnership also entered into a sales-type lease, described in Note 2 to the financial statements included in Item 14 herein. Industry segment data is not applicable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" incorporated herein by reference to the 2000 Annual Report. In connection with a preliminary settlement agreement for a Class Action Lawsuit described in Note 10 to the financial statements, included in Item 14 herein, the court permitted the Partnership to invest in any new investment, including but not limited to new equipment or other business activities, subject to certain limitations. On March 8, 2000, the Partnership loaned $4,790,000 to a newly formed real estate company, Echelon Residential Holdings LLC ("Echelon Residential Holdings") to finance the acquisition of real estate assets by that company. Echelon Residential Holdings, through a wholly owned subsidiary ("Echelon Residential LLC"), used the loan proceeds, along with the loan proceeds from similar loans by ten affiliated partnerships representing $32 million in the aggregate, to acquire various real estate assets from Echelon International Corporation, an independent Florida-based real estate company. Echelon Residential Holding's interest in Echelon Residential LLC is pledged pursuant to a pledge agreement to the partnerships as collateral for the loans. (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 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 December 4, 1991. Significant operations commenced with the initial purchase of equipment and the associated lease commitments on December 4, 1991. The Partnership concluded its Final Closing on January 31, 1992. 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. The General Partner does not expect that the Partnership will be dissolved until such time that the Class Action Lawsuit is settled or adjudicated. 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 such services as provided for in the Restated Agreement, as amended, described in Item 13 herein, and in Note 7 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, credit quality 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. Another risk is that the credit quality of the lease may deteriorate after a lease is made. In addition, the leasing industry is very competitive. The Partnership is subject to considerable competition when re-leasing or selling equipment at the expiration of its lease terms. The Partnership must compete with lease programs offered directly by manufacturers and other equipment leasing companies, many of which have greater resources, 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. 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. The Partnership holds a note receivable from and common stock in Semele Group Inc. ("Semele"). The note receivable is subject to a number of risks including, Semele's ability to make loan payments which is dependent upon the liquidity of Semele and primarily Semele's ability to sell or refinance its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. The market value of the Partnership's investment in Semele common stock has generally declined since the Partnership's initial investment in 1997. In 1998, the General Partner determined that the decline in market value of the stock was other-than-temporary and wrote down the Partnership's investment. Subsequently, the market value of the Semele common stock has fluctuated. The market value of the stock could decline in the future. Gary D. Engle, President and Chief Executive Officer of EFG the sole shareholder of the General Partner is Chairman and Chief Executive Officer of Semele and James A. Coyne, Executive Vice President of EFG is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. The loan made by the Partnership to Echelon Residential Holdings is, and will continue to be, subject to various risks, including the risk of default by Echelon Residential Holdings, which could require the Partnership to foreclose under the pledge agreement on its interests in Echelon Residential LLC. The ability of Echelon Residential Holdings to make loan payments and the amount the Partnership may realize after a default would be dependent upon the risks generally associated with the real estate lending business including, without limitation, the existence of senior financing or other liens on the properties, general or local economic conditions, property values, the sale of properties, interest rates, real estate taxes, other operating expenses, the supply and demand for properties involved, zoning and environmental laws and regulations, rent control laws and other governmental rules. A default by Echelon Residential Holdings could have a material adverse effect on the future cash flow and operating results of the Partnership. 4 The Restated Agreement, as amended, prohibits the Partnership from making loans to the General Partner or its affiliates. Since the acquisition of the several parcels of real estate from the owner had to occur prior to the admission of certain independent third parties as equity owners, Echelon Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC, were formed in anticipation of their admission. The General Partner agreed to an officer of the Manager serving as the initial equity holder of Echelon Residential Holdings and as an unpaid manager. The officer made a $185,465 equity investment in Echelon Residential Holdings. His return on his equity investment is restricted to the same rate of return as the partnerships realize on their loans. There is a risk that the court may object to the general partner's action in structuring the loan in this way and may require the partnerships to restructure or divest the loan. The Investment Company Act of 1940 (the "Act") places restrictions on the capital structure and business activities of companies registered thereunder. The Partnership has active business operations in the financial services industry, including equipment leasing, the loan to Echelon Residential Holdings and its ownership of securities of Semele. The Partnership does not intend to engage in investment activities in a manner or to an extent that would require the Partnership to register as an investment company under the Act. However, it is possible that the Partnership may unintentionally engage in an activity or activities that may be construed to fall within the scope of the Act. If the Partnership were to be determined to be an investment company, its business would be adversely affected. If necessary, the Partnership intends to avoid being deemed an investment company by disposing of or acquiring certain assets that it might not otherwise dispose of or acquire. Revenue from individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 2000, 1999 and 1998 is incorporated herein by reference to Note 2 to the financial statements included in Item 14, herein. 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. 5 ITEM 2. PROPERTIES. Incorporated herein by reference to Note 3 to the financial statements included in Item 14. ITEM 3. LEGAL PROCEEDINGS. Incorporated herein by reference to Note 10 to the financial statements included in Item 14. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 6 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, 2000, there were 1,034 record holders in the Partnership. (c) Dividend History and Restrictions Historically, the amount of cash distributions paid to the Partners had been determined on a quarterly basis. Each quarter's distribution may have varied in amount and was made 95% to the Limited Partners and 5% to the General Partner. Generally, cash distributions were paid within 15 days after the completion of each calendar quarter. The Partnership is a Nominal Defendant in a Class Action Lawsuit described in Note 10 to the financial statements included in Item 14, herein. The proposed settlement to that lawsuit, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. In addition, commencing with the first quarter of 2000, the General Partner suspended the payment of quarterly cash distributions pending final resolution of the Class Action Lawsuit. Accordingly, future cash distributions are not expected to be paid until the Class Action Lawsuit is settled or adjudicated. In any given year, it is possible that Limited Partners will be allocated taxable income in excess of distributed cash. This discrepancy between tax obligations and cash distributions may or may not continue in the future, and cash may or may not be available for distribution to the Limited Partners adequate to cover any tax obligation. Distributions declared in 2000 and 1999 were as follows:
GENERAL LIMITED TOTAL PARTNER PARTNERS -------- -------- -------- Total 2000 distributions declared ......... $ -- $ -- $ -- Total 1999 distributions declared ......... 941,996 47,100 894,896 -------- -------- -------- Total .............. $941,996 $ 47,100 $894,896 ======== ======== ========
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. In addition to the need for funds in connection with the Class Action Lawsuit, 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 7 engines, airframe and other hardware up to standards that will permit its prospective use in commercial air transportation. At December 31, 2000, the Partnership's equipment portfolio included ownership interests in four commercial jet aircraft, one of which is a Boeing 737 aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is prohibited from operating in the United States unless it is retro-fitted with hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation Administration. During 2000, the aircraft was re-leased to Air Slovakia BWJ, Ltd., through September 2003. The remaining aircraft in the Partnership's portfolio already are Stage 3 compliant. These aircraft have lease terms expiring in April 2001, January 2003, and September 2004, respectively. In October 2000, the Partnership and certain of its affiliates executed a conditional sales agreement with Royal Aviation Inc. for the sale of the Partnership's interest in a Boeing 737-2H4 aircraft. The sale of the aircraft has been recorded by the Partnership as a sales-type lease, with a lease term expiring in January 2002. The title to the aircraft transfers to Royal Aviation Inc. at the expiration of the lease term. 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 excess 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 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 8 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 2000 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 2000 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated herein by reference to the financial statements and supplementary data included in the 2000 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 9 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, 2001 are as follows: DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (SEE ITEM 13)
NAME TITLE AGE TERM - ------------------------------------ --------------------------------------------- ------- --------------- Geoffrey A. MacDonald Chairman of EFG Until a and President and a Director successor of the General Partner 52 is duly elected Gary D. Engle President and Chief Executive and Officer of EFG 52 qualified Michael J. Butterfield Executive Vice President and Chief Operating Officer of EFG and Treasurer of the General Partner 41 Gail D. Ofgant Senior Vice President, Lease Operations of EFG and Senior Vice President of the General Partner 35
(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 52, is Chairman of EFG and has been President of the General Partner since 1990 and a Director of the General Partner since 1990. Mr. McDonald was a co-founder of EFG's predecessor, American Finance Group, which was established in 1980. Mr. MacDonald is a member of the Board of Managers of Echelon Development Holdings LLC and President of American Finance Group Securities Corporation. Prior to co-founding American Finance Group, Mr. MacDonald held various positions in the equipment leasing industry and the ethical pharmaceutical industry with Eli Lilly & Company. Mr. MacDonald holds an M.B.A. from Boston College and a B.A. degree from the University of Massachusetts (Amherst). Mr. Engle, age 52, is President and Chief Executive Officer of EFG, sole shareholder and Director of its general partner, Equis Corporation, and a Vice President and Director of several of EFG's subsidiaries and affiliates. Mr. Engle is President of AFG Realty Corporation. Mr. Engle is also Chairman and Chief Executive Officer of Semele Group Inc. ("Semele") and a member of the Board of Managers of Echelon Development Holdings LLC. Mr. Engle controls the general partners of Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC"). Mr. Engle joined EFG in 1990 as an Executive Vice President and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle co-founded Cobb Partners 10 Development, Inc., a real estate and mortgage banking company, where he was a principal from 1987 to 1989. From 1980 to 1987, Mr. Engle was Senior Vice President and Chief Financial Officer of Arvida Disney Company, a large-scale community development organization owned by Walt Disney Company. Prior to 1980, Mr. Engle served in various management consulting and institutional brokerage capacities. Mr. Engle has an M.B.A. degree from Harvard University and a B.S. degree from the University of Massachusetts (Amherst). Mr. Butterfield, age 41, is Executive Vice President and Chief Operating Officer of EFG and has served as Vice President and Treasurer of the General Partner since 1996. Mr. Butterfield also serves as Vice President and Treasurer of subsidiaries and affiliates of EFG. Mr. Butterfield is also Chief Financial Officer of Semele and Vice President, Finance and Clerk of Equis/Echelon Management Corporation, the manager of Echelon Residential LLC. Mr. Butterfield joined EFG in June 1992 and became a Vice President in 1996 and Executive Vice President and Chief Operating Officer in 2000. Prior to joining EFG, Mr. Butterfield was an audit manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was also 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 C.P.A. requirements in the United States. Mr. Butterfield holds a Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand. Ms. Ofgant, age 35, is Senior Vice President, Lease Operations of EFG and has served as Senior Vice President of the General Partner since 1998. Ms. Ofgant also serves as Senior Vice President for certain EFG's affiliates, including the General Partner. Ms. Ofgant is Senior Vice President and Assistant Clerk of Equis/Echelon Management Corporation, the manager of Echelon Residential LLC. Ms. Ofgant joined EFG in July 1989 and held various positions with the company before becoming Senior Vice President in 1998. From 1987 to 1989, Ms. Ofgant was employed by Security Pacific National Trust Company. Ms. Ofgant holds a B.S. degree from Providence College. (f) Involvement in Certain Legal Proceedings None. (g) Promoters and Control Persons Not applicable. 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 7 of the financial statements included in Item 14, herein. 11 (d) Stock Options and Stock Appreciation Rights. Not applicable. (e) Long-Term Incentive Plan Awards Table. Not applicable. (f) Defined Benefit or Actuarial Plan Disclosure. Not applicable. (g) Compensation of Directors None. (h) 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; 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). 12 As of March 15, 2001, the following person or group owns beneficially more than 5% of the Partnership's 883,829.31 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 87,118.15 Units 9.86% Interests Boston, MA 02110
The general partner of Old North Capital Limited Partnership ("ONC") is controlled by Gary D. Engle and the limited partnership interests of ONC are owned by Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele. James A. Coyne, Executive Vice President of EFG, is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. 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, 2000, 1999 and 1998, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
2000 1999 1998 -------- -------- -------- Equipment management fees ................... $ 60,456 $ 99,353 $110,415 Administrative charges....................... 118,142 115,923 66,924 Reimbursable operating expenses due to third parties ..................... 481,665 362,549 474,818 -------- -------- -------- Total ......... $660,263 $577,825 $652,157 ======== ======== ========
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 was 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 revenues 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. As a result of an exchange in 1997, the Partnership is the beneficial owner of 42,574 shares of Semele common stock and holds a beneficial interest in a note from Semele (the "Semele Note") of $938,718. The Semele Note matures in April 2003 and bears an annual interest rate of 10% with mandatory principal reductions 13 prior to maturity, if and to the extent that net proceeds are received by Semele from the sale or refinancing of its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. For further discussion, see Note 6, "Investment Securities - Affiliate and 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, 2000, the Partnership was owed $85,244 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 2001. 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 23,472 2.66% ------------------------------------------------ -------------------------- --------------------------- Old North Capital Limited Partnership 87,118.15 9.86% ------------------------------------------------ -------------------------- ---------------------------
Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC") are both Massachusetts limited partnerships formed in 1995. The general partners of AALP and ONC are controlled by Gary D. Engle. EFG owns limited partnership interests, representing substantially all of the economic benefit, of AALP and the limited partnership interests in ONC are owned by Semele. Gary D. Engle is Chairman and Chief Executive Officer of Semele and President and Chief Executive Officer of EFG and sole shareholder and Director of EFG's general partner. James A. Coyne, Executive Vice President of EFG, is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. (b) Certain Business Relationships None. (c) Indebtedness of Management to the Partnership None. (d) Transactions with Promoters Not applicable. 14 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, 2000 and 1999...................................* Statement of Operations for the years ended December 31, 2000, 1999 and 1998............* Statement of Changes in Partners' Capital for the years ended December 31, 2000, 1999 and 1998............* Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998............* 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. A list of exhibits filed or incorporated by reference is as follows: EXHIBIT NUMBER - ------- 2.1 Plaintiffs' and Defendants' Joint Motion to Modify Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement was filed in the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1998 as Exhibit 2.1 and is incorporated herein by reference. 2.2 Plaintiffs' and Defendants' Joint Memorandum in Support of Joint Motion to Modify Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement was filed in the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1998 as Exhibit 2.2 and is incorporated herein by reference. * Incorporated herein by reference to the appropriate portion of the 2000 Annual Report to security holders for the year ended December 31, 2000 (see Part II). 15 EXHIBIT NUMBER - ------- 2.3 Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement (August 20, 1998) was filed in the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1998 as Exhibit 2.3 and is incorporated herein by reference. 2.4 Modified Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement (March 22, 1999) was filed in the Registrant's Annual Report on Form 10-K/A for the year ended December 31, 1998 as Exhibit 2.4 and is incorporated herein by reference. 2.5 Plaintiffs' and Defendants' Joint Memorandum in Support of Joint Motion to Further Modify Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 2.5 and is incorporated herein by reference. 2.6 Second Modified Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement (March 5, 2000) was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 2.6 and is incorporated herein by reference. 2.7 Proposed Order Granting Joint Motion to Continue Final Approval Settlement Hearing (March 13, 2001) is filed in the Registrant's Annual Report for the year ended December 31, 2000 and is included herein. 4 Amended and Restated Agreement and Certificate of Limited Partnership included as Exhibit A to the Prospectus, which was included in Registration Statement on Form S-1 (No. 33-35148). 10.1 Promissory Note in the principal amount of $4,790,000 dated March 8, 2000 between the Registrant, as lender, and Echelon Residential Holdings LLC, as borrower, was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 10.1 and is incorporated herein by reference. 10.2 Pledge Agreement dated March 8, 2000 between Echelon Residential Holdings LLC (Pledgor) and American Income Partners V-A Limited Partnership, as Agent for itself and the Registrant, was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1999 as Exhibit 10.2 and is incorporated herein by reference. 10.3 Promissory Note from Semele Group Inc. (formerly known as Banyan Strategic Land Fund II), dated May 31, 1997 is filed as in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 and is included herein. 10.4 The First Allonge to Promissory Note from Semele Group Inc. (formerly known as Banyan Strategic Land Fund II), dated March 21, 2000 is filed as in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 and is included herein. 10.5 The Second Allonge to Promissory Note from Semele Group Inc. (formerly known as Banyan Strategic Land Fund II), dated March 12, 2001 is filed as in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 and is included herein. 16 EXHIBIT NUMBER - ------- 13 The 2000 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 General Motors Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1991 as Exhibit 28 (b) and is incorporated herein by reference. 99(b) Lease agreement with Reno Air Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99 (d) and is incorporated herein by reference. 99(c) Lease agreement with Finnair OY was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99 (e) and is incorporated herein by reference. 99(d) Lease agreement with Finnair OY was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99 (f) and is incorporated herein by reference. 99(e) Lease agreement with Southwest Airlines was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99 (g) and is incorporated herein by reference. 99(f) Lease agreement with Southwest Airlines was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99 (h) and is incorporated herein by reference. 99(g) Lease agreement with Southwest Airlines was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99 (i) and is incorporated herein by reference. 99(h) Lease agreement with Trans Ocean Container Corporation, Inc. was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 as Exhibit 99 (j) and is incorporated herein by reference. 99(i) Lease agreement with Union Pacific Railroad Company is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 and is included herein. 99(j) Lease agreement with Air Slovakia BWJ, Ltd. is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 and is included herein. 99(k) Lease agreement with Aerovias de Mexico, S.A. de C.V. is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 and is included herein. 99(l) Aircraft Conditional Sale agreement with Royal Aviation Inc. is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 and is included herein. 17 (b) Reports on Form 8-K None. (c) Other Exhibits None. (d) Financial Statement Schedules: Consolidated Financial Statements for Echelon Residential Holdings LLC as of December 31, 2000 and for the Period March 8, 2000 (Date of Inception) through December 31, 2000 and Independent Auditors' Report. 18 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-E, 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 of EFG and President and Chief Executive President and Director Officer of EFG, the sole stockholder of the General Partner of the General Partner (Principal Executive Officer) Date: MARCH 31, 2001 Date: MARCH 31, 2001 ------------------------------ ----------------------------- By: /s/ MICHAEL J. BUTTERFIELD --------------------------------- Michael J. Butterfield Executive Vice President and Chief Operating Officer of EFG and Treasurer of the General Partner (Principal Financial and Accounting Officer) Date: MARCH 31, 2001 ------------------------------ 19 SCHEDULE 14(d) ECHELON RESIDENTIAL HOLDINGS LLC CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 AND FOR THE PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000 AND INDEPENDENT AUDITORS' REPORT INDEPENDENT AUDITORS' REPORT To the Members of Echelon Residential Holdings LLC: We have audited the accompanying consolidated balance sheet of Echelon Residential Holdings LLC, a Delaware limited liability company ("the Company") as of December 31, 2000 and the related consolidated statement of operations, members' equity (deficiency) and cash flows for the period March 8, 2000 (date of inception) through December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2000, and the results of its operations and its cash flows for the period March 8, 2000 (date of inception) through December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Tampa, Florida March 23, 2001 ECHELON RESIDENTIAL HOLDINGS LLC CONSOLIDATED BALANCE SHEET DECEMBER 31, 2000 - ------------------------------------------------------------------------------- ASSETS REAL ESTATE - Net (Notes 1 and 2) $ 61,092,202 CASH AND CASH EQUIVALENTS (Note 1) 3,789,198 RESTRICTED CASH (Note 1) 8,703 RESTRICTED INVESTMENTS (Note 1) 2,155,160 ACCOUNTS RECEIVABLE - Affiliates (Note 7) 115,521 PREPAID EXPENSES AND OTHER LONG-TERM ASSETS 69,417 CORPORATE EQUIPMENT - Net of accumulated depreciation of $57,733 286,784 INVESTMENT IN UNCONSOLIDATED JOINT VENTURE (Note 3) 1,063,906 ------------ TOTAL ASSETS $ 68,580,891 ============ LIABILITIES AND MEMBERS' EQUITY LIABILITIES: Accounts payable $ 10,984 Contractor payable 1,752,830 Accounts payable - Affiliates (Note 7) 114,180 Accrued expenses 797,832 Retainage payable 1,125,865 Security deposits 8,625 Interest payable 4,385,805 Construction loans (Note 4) 26,837,740 Other long-term liabilities 109,411 Notes payable (Note 5) 35,039,890 ------------ Total liabilities 70,183,162 COMMITMENTS & CONTINGENCIES (Notes 4 and 9) MINORITY INTEREST (Note 6) 2,257,367 MEMBERS' EQUITY (DEFICIENCY) (Note 1) (3,859,638) ------------ TOTAL LIABILITIES AND MEMBERS' EQUITY $ 68,580,891 ============ See notes to consolidated financial statements - 2 - ECHELON RESIDENTIAL HOLDINGS LLC CONSOLIDATED STATEMENT OF OPERATIONS PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000 - -------------------------------------------------------------------------------- SALES AND REVENUES: Real estate operations: Rental revenues $ 230,834 Management fees 695,162 Developer fees 985,141 Sale of development property 3,104,532 Investment income 191,543 Other income 23,000 ------------ Total sales and revenues 5,230,212 ------------ EXPENSES: Rental and other operations 558,561 Cost of development property sold 3,317,880 Write-down of land held for development or sale 635,437 Depreciation expense 148,861 Interest expense on long-term debt - net of amounts capitalized of $606,990 4,460,345 General and administrative expenses 2,937,514 ------------ Total expenses 12,058,598 ------------ EQUITY IN LOSS OF UNCONSOLIDATED JOINT VENTURE (148,023) MINORITY INTEREST 270,383 ------------ NET LOSS $ (6,706,026) ============ See notes to consolidated financial statements. - 3 - ECHELON RESIDENTIAL HOLDINGS LLC CONSOLIDATED STATEMENT OF CASH FLOWS PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000 - -------------------------------------------------------------------------------- CASH FLOW PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net loss $ (6,706,026) Adjustment to reconcile net loss to cash provided by (used in) operating activities: Depreciation 148,861 Loss on sale of development property 213,348 Minority interest (270,383) Equity in loss of unconsolidated joint venture 148,023 Write-down of land held for development or sale 635,437 Changes in working capital: Accounts payable, accrued expenses and other liabilities (4,343,190) Interest payable 4,385,805 Other working capital changes 311,588 ------------ Net cash used in operating activities (5,476,537) ------------ CASH FLOW PROVIDED BY (USED IN) INVESTING ACTIVITIES: Increase in restricted cash and restricted investments (2,163,863) Net proceeds from sale of development property 3,104,532 Payments related to construction in progress (29,601,108) ------------ Net cash used in investing activities (28,660,439) ------------ CASH FLOW PROVIDED BY (USED IN) FINANCING ACTIVITIES: Issuance of notes payable 6,244,000 Repayment of notes payable (5,474,000) Proceeds from construction loans 26,585,765 Members' capital contributions 2,651,162 ------------ Net cash provided by financing activities 30,006,927 ------------ NET DECREASE IN CASH AND CASH EQUIVALENTS (4,130,049) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,919,247 ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,789,198 ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 681,530 ============
See notes to consolidated financial statements. - 4 - ECHELON RESIDENTIAL HOLDINGS LLC CONSOLIDATED STATEMENT OF MEMBERS' EQUITY (DEFICIENCY) PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000 - --------------------------------------------------------------------------------
INITIAL PARTICIPATING MEMBERS MEMBERS TOTAL ----------- ------------- ----------- BALANCE AT MARCH 8, 2000 $ 195,226 $ -- $ 195,226 Members' capital contributions -- 2,651,162 2,651,162 Net loss (5,600,020) (1,106,006) (6,706,026) ----------- ----------- ----------- BALANCE AT DECEMBER 31, 2000 $(5,404,794) $ 1,545,156 $(3,859,638) =========== =========== ===========
See notes to consolidated financial statements. - 5 - ECHELON RESIDENTIAL HOLDINGS LLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PERIOD MARCH 8, 2000 (DATE OF INCEPTION) THROUGH DECEMBER 31, 2000 - -------------------------------------------------------------------------------- 1. SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BACKGROUND - On March 7, 2000, EIN Acquisition Corporation ("EIN Acquisition") closed on a Tender Offer ("Tender Offer") for all of the outstanding shares of Echelon International Corporation ("Echelon") for a cash price of $34.00 per share. Immediately after the close of the Tender Offer, EIN Acquisition merged into Echelon (the "Merger"), with Echelon being the surviving entity. In conjunction with the Tender Offer, Echelon had entered into various contracts to sell or convey various real estate assets and investments in two real estate joint ventures to third parties. Subsequent to the Merger on March 8, 2000, Echelon closed on existing contracts to sell or convey its real estate assets and investments in two real estate joint ventures. Specific real estate assets and investments in two real estate joint ventures were sold to Echelon Residential LLC ("Echelon Residential"), a wholly owned limited liability subsidiary of Echelon Residential Holdings LLC ("Echelon Residential Holdings" or the "Company"). Echelon Residential will own, manage, and develop or sell these purchased multi-family residential properties. The acquisition of the assets by Echelon Residential was accounted for as an asset purchase under Accounting Principles Board Opinion No. 16 ("APB No. 16"). In accordance with APB No. 16, Echelon Residential allocated the total purchase price to the assets acquired and liabilities assumed based on the estimated fair market values at the date of acquisition. Since the purchase price of the business was less than the fair market value of the net assets acquired, the credit excess was allocated on a pro-rata basis to the real estate, corporate equipment and the investment in an unconsolidated joint venture. There are no contingencies or other matters that could materially affect the allocation of the purchase cost. The results of operations of the acquired real estate assets and investments in two real estate joint ventures are included in the consolidated results of Echelon Residential Holdings from the acquisition date. The Company's summarized consolidated balance sheet, reflecting the above acquisition of assets, as of March 8, 2000 is as follows: ASSETS: Real estate $34,164,672 Cash and cash equivalents 7,919,247 Investment in unconsolidated joint venture 1,211,929 Other assets 832,417 ----------- Total assets $44,128,265 =========== LIABILITIES AND MEMBERS' EQUITY: Accounts payable and other liabilities $ 6,883,424 Construction loans 251,975 Notes payable 34,269,890 ----------- Total liabilities 41,405,289 Minority interest 2,527,750 Members' equity 195,226 ----------- Total liabilities and members' equity $44,128,265 =========== The Company's fiscal year end is December 31. - 6 - DESCRIPTION OF BUSINESS - Echelon Residential Holdings was formed on February 29, 2000, under the laws of the state of Delaware and operates in one industry segment: owning, leasing, developing, and managing real estate. There were no activities of Echelon Residential Holdings from February 29, 2000 through March 8, 2000. The Company is governed by its Amended and Restated Limited Liability Company Agreement ("the Agreement") dated June 23, 2000. At March 8, 2000, members' equity included capital contributions from the initial members of the Company, James A. Coyne and Charles E. Cobb, Jr. ("Initial Members"), who made collective capital contributions of $195,226. On June 23, 2000, the participating members, Darryl A. LeClair and Susan G. Johnson ("Participating Members") made capital contributions totaling $2,651,162. The collective Participating Members' capital contributions are comprised of Participating A Capital of $2,591,093, Participating B Capital of $45,052 and additional capital contributions of $15,017. Subsequent to the initial capital contributions above, the Agreement was executed and includes a provision whereby the members have no further obligation to contribute additional amounts of capital to the Company. If the Company requires additional funds, the Board of Managers is to notify the members. Each member has the right to contribute a pro rata share of such additional funds, based on the relative equity contributions made by each member. In addition, the liability of the members of the Company is limited to the members' total capital contributions. In accordance with the Agreement, the Participating Members earn a cumulative compounding annual return on their unreturned capital (as defined), at a per annum rate equal to 14% for Participating A capital and 15% for Participating B capital, commencing on June 23, 2000. Preferred returns will be paid to the Participating Members in accordance with the terms of the Agreement. Payout of preferred returns (if any) is contingent upon the cumulative performance of the Company. See Note 9 - COMMITMENTS AND CONTINGENCIES. Per the Agreement, the Company is to distribute its cash flow (if any) periodically, but not less frequently than quarterly. The losses and profits of the Company are generally allocated to the members as follows: a) losses are generally allocable 77.9% to members other than Participating Members and 22.1% to Participating Members, and b) profits are generally allocated the same way except for a priority income allocation to the Participating Members to cover priority cash distributions made on their Participating Capital. PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the accounts of Echelon Residential Holdings, its wholly owned subsidiary and a 60% interest in a joint venture. All intercompany balances have been eliminated. Investments for which the Company has a 20% to 50% ownership interest are accounted for using the equity method. The Company has recorded a minority interest in the Company's consolidated financial statements to reflect the ownership of its partner in the joint venture. ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates include the recoverability of real estate held for sale. CASH AND CASH EQUIVALENTS - Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with original maturities of three months or less. - 7 - RESTRICTED CASH - Restricted cash represents security deposits at multi-family residential communities held in separate noninterest-bearing depository accounts. RESTRICTED INVESTMENTS - Restricted investments represent certificates of deposit with maturities greater than three months. These investments are held by financial institutions that require such deposits in support of standby letters of credit. REAL ESTATE - Real estate additions are recorded at cost. Interest and real estate taxes incurred during construction periods are capitalized and depreciated on the same basis as the related assets. Costs directly related to the acquisition, development or improvement of real estate, and certain indirect development costs have also been capitalized. Depreciation is calculated on a straight-line basis over the estimated lives of the assets as follows: ESTIMATED USEFUL LIVES Buildings 35 years Furniture, fixtures, and equipment 3-10 years IMPAIRMENT OF LONG-LIVED ASSETS - The carrying value of long-lived assets, including property and equipment, will be reviewed for impairment whenever events or changes in circumstances indicate that the recorded value cannot be recovered from undiscounted future cash flows. REVENUE RECOGNITION - The Company recognizes revenue on the sale of real estate properties when title has passed to the buyer and all contingencies have been removed. Rental revenues, management fees and developer fees are recognized when earned. INCOME TAXES - Under the provisions of the Internal Revenue Code and applicable state laws, the Company is not directly subject to income taxes; the results of its operations are included in the tax returns of its members. NEW ACCOUNTING PRONOUNCEMENTS - SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, is effective for all fiscal years beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments and hedging activities. Under SFAS No. 133, certain contracts that were not formerly considered derivatives may now meet the definition of a derivative. The Company adopted SFAS No. 133 effective January 1, 2001. There was no impact on the Company's financial position, results of operations or liquidity resulting from the adoption of SFAS No. 133. Effective March 8, 2000 (date of inception), the Company adopted the provisions of Securities Exchange Commission Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 provides guidance for the recognition, presentation and disclosure of revenue in financial statements. The adoption of SAB No. 101 had no impact on the Company's financial statements. - 8 - RECLASSIFICATIONS - Certain amounts previously reported in the March 8, 2000 consolidated balance sheet have been reclassified to conform to the December 31, 2000 presentation. 2. REAL ESTATE - NET As of December 31, 2000, real estate consists of the following: Land and land improvements held for development or sale $ 15,676,581 ------------ Real estate under development: Land and land improvements 8,302,770 Construction in progress 14,694,874 ------------ 22,997,644 ------------ Income producing real estate: Land and land improvements 2,303,890 Buildings and improvements 19,720,463 Equipment and other 484,752 Accumulated depreciation (91,128) ------------ 22,417,977 ------------ $ 61,092,202 ============ For the period March 8, 2000 (date of inception) through December 31, 2000, the Company recorded a write-down of land held for development or sale of $635,437 in the consolidated statement of operations. Land held for development or sale was determined to have been impaired because the estimated cash flows are less than the carrying value of the two parcels of land. The estimated fair value of these two parcels of land was based on letters of intent from third-party purchasers, dated October 2000 and December 2000, to purchase the two parcels of land. As of December 31, 2000, the Company's land and land improvements held for development or sale includes five parcels of improved and unimproved land for the development of multi-family residential communities. The land is located in urban areas in Memphis, Tennessee; Dallas, Texas; Denver, Colorado and Colorado Springs, Colorado. As of December 31, 2000, real estate under development includes the following three multi-family residential communities:
CONSTRUCTION ACTUAL/ESTIMATED RENTABLE LAND COMMENCEMENT DATE FIRST UNITS PROJECT NAME LOCATION UNITS ACREAGE DATE AVAILABLE ------------ ----------- -------- ------- ------------ ---------------- ECHELON AT THE BALLPARK Memphis, TN 385 5 Q1 2000 Q1 2001 ECHELON AT LAKESIDE Plano, TX 181 12 Q3 1999 Q3 2000 ECHELON AT UPTOWN Orlando, FL 244 3 Q2 2001 Q2 2002
As discussed in Note 6, INVESTMENT IN CONSOLIDATED JOINT VENTURE PARTNERSHIP, ECHELON AT LAKESIDE commenced operations during the period March 8, 2000 (date of inception) through December 31, 2000 and portions of the project remained under construction as of December 31, 2000. As of December 31, 2000, real estate includes $606,990 of interest capitalized during the period March 8, 2000 (date of inception) through December 31, 2000. - 9 - 3. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE In July 1999, Fannie Mae's American Communities Fund agreed to invest with a wholly owned subsidiary of Echelon in the development of ECHELON AT CHENEY PLACE, a 303-unit multi-family residential community currently under construction in downtown Orlando, Florida. Echelon's 20% interest in the joint venture was purchased by Echelon Residential, in conjunction with the real estate assets purchased as discussed in Note 1, SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES. The Company accounts for its investment in the joint venture under the equity method. Concurrent with the execution of the joint venture agreement with Fannie Mae's American Communities Fund, the joint venture executed an agreement with Wachovia Bank, N.A. for a $21,500,000 loan to fund the construction of ECHELON AT CHENEY PLACE. The loan is guaranteed by Echelon Residential. Construction of ECHELON AT CHENEY PLACE began in late July 1999 and construction continued on portions of the project through December 31, 2000. For the period March 8, 2000 (date of inception) through December 31, 2000, the Company recorded its share of losses for ECHELON AT CHENEY PLACE, from the initial operations of the project, as a reduction of the investment in unconsolidated joint venture. As of December 31, 2000, total capital expenditures and construction loan draws for the project were $24,834,193 and $18,408,921, respectively. Through December 31, 2000, the Company's capital contributions to the joint venture totaled $1,386,000. The total of net losses and purchase price adjustment allocated to the investment in unconsolidated joint venture is $322,094. 4. CONSTRUCTION LOANS As of December 31, 2000, the Company's construction loans outstanding are as follows: Bank of America $ 17,614,845 First Union National Bank of Florida 9,222,895 ------------ $ 26,837,740 ============ The Company has a $20,000,000 construction loan with Bank of America to fund the construction of ECHELON AT LAKESIDE. The loan is guaranteed by Echelon Residential. The interest rate is LIBOR plus 1.85% (8.4875% as of December 31, 2000), and the loan matures in September 2002. As of December 31, 2000, the Company has made $17,614,845 of construction draws on this loan. See further discussion of the development of ECHELON AT LAKESIDE included in Note 6, INVESTMENT IN CONSOLIDATED JOINT VENTURE PARTNERSHIP. Accrued interest on the Bank of America construction loan is $125,685 as of December 31, 2000. The Company has a $26,075,000 construction loan with First Union National Bank of Florida to fund the construction of ECHELON AT THE BALLPARK, a 385-unit multi-family residential community currently under construction in downtown Memphis, Tennessee. The loan is guaranteed by Echelon Residential. The interest rate is LIBOR plus 1.65% (8.2125% as of December 31, 2000) with monthly interest payments required through the term of the loan, which expires on June 2002. As of December 31, 2000, the Company has made construction draws of $9,222,895. Accrued interest on the First Union National Bank construction loan is $8,258 as of December 31, 2000. The Company's significant financial covenants include minimum net worth and liquidity requirements. As of December 31, 2000, the Company was in compliance with all financial covenants contained in its debt agreements. In the opinion of management, the carrying value of the Company's construction loans approximates their fair value based on management's estimates for similar issues, giving consideration to quality, - 10 - interest rates, maturity and other significant characteristics. Although management is not aware of any factors that would significantly affect the estimated fair value of the construction loans, the amounts have not been comprehensively revalued for purposes of these consolidated financial statements since December 31, 2000 and current estimates of fair value may differ significantly. See Note 10, SUBSEQUENT EVENT, for discussion of a construction loan executed for the construction of ECHELON AT UPTOWN, in February 2001. 5. NOTES PAYABLE As of December 31, 2000, notes payable outstanding are as follows: American Income Partners V-A Limited Partnership $ 2,160,000 American Income Partners V-B Limited Partnership 5,700,000 American Income Partners V-C Limited Partnership 2,390,000 American Income Partners V-D Limited Partnership 2,730,000 American Income Fund I-A, a Massachusetts Limited Partnership 1,650,000 American Income Fund I-B, a Massachusetts Limited Partnership 1,310,000 American Income Fund I-C, a Massachusetts Limited Partnership 2,780,000 American Income Fund I-D, a Massachusetts Limited Partnership 3,050,000 American Income Fund I-E, a Massachusetts Limited Partnership 4,790,000 AIRFUND International Limited Partnership 1,800,000 AIRFUND II International Limited Partnership 3,640,000 ----------- Subtotal 32,000,000 Series A Note 1,684,211 Series B Notes 585,679 Note payable - Echelon Development Holdings LLC 770,000 ----------- $35,039,890 ===========
On March 8, 2000, the Company executed $32,000,000 in notes payable with 11 partnerships. The Company contributed the proceeds from the notes payable to Echelon Residential to acquire various real estate assets from Echelon, as discussed in Note 1, SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES. These partnerships are managed by their general partners who have engaged Equis Financial Group ("EFG") as the partnerships' manager. Mr. James A. Coyne is Executive Vice President of EFG and is an equity investor in the Company. Mr. Coyne, in his individual capacity, is the only equity investor in the Company related to EFG. These notes payable have a term of 30 months, maturing on September 8, 2002, and an annual interest rate of 14% for the first 24 months and 18% for the final six months. No principal payments are required prior to the scheduled maturity. Interest accrues and compounds monthly and is payable at maturity. Accrued interest on these notes is $3,907,798 as of December 31, 2000. The Company has assigned and pledged a security interest in all of its rights, title, and interest in its membership interests in Echelon Residential to the 11 partnerships as collateral. On March 8, 2000, the Company executed a Series A Note with Cobb Partners Limited. The Series A Note has a term of 30 months, maturing on September 8, 2002, and an annual interest rate of 14% for the first 24 months and 18% for the final six months. No principal payments are required prior to the scheduled maturity. Accrued interest on the Series A Note is $205,674 as of December 31, 2000. Interest accrues and compounds monthly and is payable at maturity. The Company also executed - 11 - Series B Notes with several individuals, who are employees or investors of EFG. The Series B Notes have an annual interest rate of 15% and mature on June 30, 2004. No principal payments are required prior to the scheduled maturity. Interest accrues and compounds monthly and is payable at maturity. The Series B Notes are subordinated to the $32,000,000 notes payable and the Series A Note. Accrued interest on the Series B Notes is $76,920 as of December 31, 2000. On December 29, 2000, the Company executed a $770,000 note payable to Echelon Development Holdings LLC ("Echelon Development Holdings"). The note payable has a term of 24 months, maturing on December 29, 2002, and an annual interest rate of 10%. Interest accrues and compounds daily and is payable on December 31st of each year the note payable is outstanding. The Company repaid the note, plus interest of $6,751, on January 30, 2001. In the opinion of management, the carrying value of the Company's notes payable approximates the fair value based on management's estimates for similar issues, giving consideration to quality, interest rates, maturity and other significant characteristics. 6. INVESTMENT IN CONSOLIDATED JOINT VENTURE PARTNERSHIP In September 1999, a wholly owned subsidiary of Echelon entered into a joint venture agreement with Turner Heritage Investments, Ltd. ("Turner") for the development of ECHELON AT LAKESIDE, a 181-unit multi-family residential community currently under construction in Plano, Texas, which is near Dallas. Echelon's 60% interest in the joint venture was purchased by Echelon Residential, in conjunction with the transaction discussed in Note 1, SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES. Construction of ECHELON AT LAKESIDE began in October 1999 and continued on portions of the project through December 31, 2000. As of December 31, 2000, total capital expenditures for the project were $23,927,413. Through December 31, 2000, the Company's capital contributions totaled $2,592,000 and Turner contributed land valued at $2,592,000 to the joint venture. The Company's interest represents a controlling interest, and accordingly, for financial reporting purposes, the assets, liabilities, retained deficit, and current period results of operations of the joint venture for the period March 8, 2000 (date of inception) through December 31, 2000, are included in the Company's consolidated financial statements, and Turner's partnership interest in the joint venture has been recorded as a minority interest. See further discussion of debt financing for ECHELON AT LAKESIDE included in Note 4, CONSTRUCTION LOANS. 7. RELATED PARTY TRANSACTIONS In conjunction with the purchase of Echelon's interest in the joint venture formed for the development of ECHELON AT LAKESIDE, Echelon Residential also assumed the development agreement, an asset management agreement and a property management and leasing agreement with Lakeside Baywater Enterprises Limited Partnership, the joint venture partnership. In accordance with the development agreement, Echelon Residential has been engaged as the developer for ECHELON AT LAKESIDE and receives a development fee, payable in arrears, in monthly installments of $44,371. In accordance with the asset management agreement, Echelon Residential receives a monthly asset management fee, computed in arrears, equal to 1% of the ECHELON AT LAKESIDE monthly gross income. Under the terms of the property management and leasing agreement, Echelon Residential also receives a monthly management fee, computed in arrears, equal to 4% of the ECHELON AT LAKESIDE monthly gross income. - 12 - For the period March 8, 2000 (date of inception) through December 31, 2000, Echelon Residential recognized $388,212 in development, asset management, and property management revenues from ECHELON AT LAKESIDE. In conjunction with the purchase of Echelon's interest in the joint venture formed for the development of ECHELON AT CHENEY PLACE, Echelon Residential also assumed agreements which include the payment of a development fee, a property management and leasing agreement and an incentive management fee with Cheney Place LLC, the joint venture partnership. In accordance with these agreements, Echelon Residential has been engaged as the developer for ECHELON AT CHENEY PLACE and receives a monthly development fee equal to 5% of the hard construction costs incurred during the month. Echelon Residential is also the property manager and leasing agent for the property and will receive a monthly management fee, computed in arrears, equal to $7,500 per month for two months prior to the opening of the clubhouse. For the next nine months thereafter, Echelon Residential will receive the greater of a) 3% of the effective monthly gross income or b) 3% of the effective monthly gross income that would be collected if 75% of ECHELON AT CHENEY PLACE were occupied at rents equaling the average pro forma base rent. Thereafter, the monthly management fee will be calculated as 3% of the effective monthly gross income of ECHELON AT CHENEY PLACE. The incentive management fee is equal to 2% of ECHELON AT CHENEY PLACE'S effective gross income, as defined. For the period March 8, 2000 (date of inception) through December 31, 2000, Echelon Residential recognized $392,695 in development, property management and incentive management fee revenues from ECHELON AT CHENEY PLACE. Echelon Property Management LLC, a wholly owned subsidiary of Echelon Residential, has contracted to manage several operating multi-family residential communities currently leased by Echelon Commercial LLC ("Echelon Commercial"), a wholly owned limited liability subsidiary of Echelon Development LLC. Echelon Development LLC is a wholly owned limited liability subsidiary of Echelon Development Holdings LLC. Several of the equity investors in Echelon Residential Holdings are also equity investors in Echelon Development Holdings LLC. For the period March 8, 2000 (date of inception) through December 31, 2000, Echelon Residential recognized $587,908 in property management revenues from the management of multi-family properties leased by Echelon Commercial. As of December 31, 2000, the Company had accounts receivable balances of $51,880 due from Echelon Commercial LLC, $19,455 due from ECHELON AT CHENEY PLACE and $44,186 from other related parties. These amounts were repaid by the end of February 2001. 8. RETIREMENT PLAN Echelon Residential is the sponsor of the Echelon 401(k) Savings Plan ("Savings Plan") under Section 401(k) of the Internal Revenue Service Code (the "Code"), to which participants may contribute a percentage of their pay up to limits established by the Code. The Company may make discretionary contributions to the Savings Plan. The Company did not contribute to the Savings Plan during the period March 8, 2000 (date of inception) through December 31, 2000. As of January 1, 2001, the Company initiated an option in the Savings Plan to include a mandatory matching contribution from the Company. 9. COMMITMENTS AND CONTINGENCIES As of December 31, 2000, two multi-family residential communities were under construction and had remaining commitments of $12,985,656 with construction contractors. On December 29, 2000, the Company executed a $5,000,000 revolving promissory note with Echelon Development Holdings. The revolving promissory note has a term of 24 months, maturing on December 29, 2002, and an annual interest rate of 10%. Interest accrues and compounds daily and is - 13 - payable on December 31st of each year the note is outstanding. As of December 31, 2000, there were no amounts outstanding on the revolving promissory note. As discussed in Note 1, SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES, the Company maintains preferred return accounts for the Participating Members. As of December 31, 2000, the preferred return balances for Participating A and B Capital were $198,597 and $3,709, respectively. These amounts have not been paid and therefore, have not been reflected as a reduction of Participating A and B Capital in the December 31, 2000 consolidated financial statements. The joint venture formed for the development of ECHELON AT LAKESIDE maintains preferred return accounts for the limited partners, Echelon LP, a wholly owned limited liability subsidiary of Echelon Residential, and Turner. The payment of any preferred returns to Echelon LP would be eliminated upon consolidation. As of December 31, 2000, the preferred return balance for Turner was $312,669. This amount has not been paid and therefore, has not been reflected as a reduction of member's equity in the December 31, 2000 consolidated financial statements. 10. SUBSEQUENT EVENT In February 2001, the Company closed on a $18,600,000 loan from SouthTrust Bank for the construction financing of ECHELON AT UPTOWN, a 244-unit multi-family residential community to be developed in downtown Orlando, Florida. The interest rate is LIBOR plus 1.75% with monthly interest payments required over the 36-month initial term of the loan. The loan is guaranteed by Echelon Residential and construction is expected to commence in the second quarter of 2001. 11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the period March 8, 2000 (date of inception) through December 31, 2000:
PERIOD THREE MONTHS ENDED MARCH 8 - ---------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL ---------- ------------ ------------- ------------- ------------ Total revenues............ $ 147,078 $ 758,673 $ 659,867 $ 3,664,594 $ 5,230,212 Net loss.................. $(328,623) $(1,359,326) $(1,855,757) $(3,162,320) $(6,706,026)
****** - 14 - EXHIBIT INDEX 2000 Form 10-K EXHIBIT PAGE - ------- ---- 2.7 Proposed Order Granting Joint Motion to Continue Final Approval Settlement Hearing (March 13, 2001). 10.3 Promissory Note from Semele Group Inc. (formerly known as Banyan Strategic Land Fund II) dated May 31, 1997. 10.4 First Allonge to Promissory Note from Semele Group Inc. (formerly known as Banyan Strategic Land Fund II) dated March 21, 2000 . 10.5 Second Allonge to Promissory Note from Semele Group Inc. (formerly known as Banyan Strategic Land Fund II) dated March 12, 2001 . 13 Annual Report to the Partners dated December 31, 2000 23 Consent of Independent Auditors. 99(i) Lease agreement with Union Pacific Railroad Company. 99(j) Lease agreement with Air Slovakia BWJ, Ltd. 99(k) Lease agreement with Aerovias de Mexico, S.A. de C.V. 99(l) Aircraft Conditional Sale agreement with Royal Aviation Inc. EX-2.7 2 0002.txt EXHIBIT 2.7 IN THE UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA CASE NO. 98-8030-CIV-HURLEY - ------------------------------ LEONARD ROSENBLUM, J/B INVESTMENT PARTNERS, SMALL AND REBECCA BARMACK, PARTNERS, BARBARA HALL, HENRY R. GRAHAM, ANNE R. GRAHAM, MARGO CORTELL, PATRICK M. RHODES, BERNICE M. HUELS, GARRETT N. VOIGHT, CLAIRE E. FULCHER, MARCELLA LEVY, RICHARD HODGSON, CITY PARTNERSHIPS, HELMAN PARSONS AND CLEVA PARSONS, on behalf of themselves and all others similarly situated and derivatively on behalf of the Nominal Defendants, Plaintiffs, vs. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, a Massachusetts, Limited Partnership, EQUIS CORPORATION, a Massachusetts Corporation, GDE ACQUISITION LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AFG LEASING INCORPORATED, a Massachusetts Corporation, AFG LEASING IV INCORPORATED, a Massachusetts Corporation, AFG LEASING VI INCORPORATED, a Massachusetts Corporation, AFG AIRCRAFT MANAGEMENT CORPORATION, a Massachusetts Corporation, AFG ASIT CORPORATION, a Massachusetts Corporation, AF/AIP PROGRAMS LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, GARY D. ENGLE and GEOFFREY A. MACDONALD, Defendants, AIRFUND I INTERNATIONAL LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AIRFUND II INTERNATIONAL LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME 4 LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME 5 LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME 6 LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME 7 LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME 8 LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS III-A LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS III B LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS III-C LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS III-D LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS IV-A LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS IV-B-LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS IV-C LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS IV-D LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS V-A LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS V-B LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS V-C LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME PARTNERS V-D LIMITED PARTNERSHIP, a Massachusetts Limited Partnership, AMERICAN INCOME FUND I-B, a Massachusetts Limited Partnership, AMERICAN INCOME FUND I-C, a Massachusetts Limited Partnership, AFG INVESTMENT TRUST, a Delaware business trust, AFG INVESTMENT TRUST B, a Delaware business trust, AFG INVESTMENT TRUST C, a Delaware business trust, and AFG INVESTMENT TRUST D, a Delaware business trust, Nominal Defendants. - ------------------------------ PROPOSED ORDER GRANTING JOINT MOTION TO CONTINUE FINAL APPROVAL SETTLEMENT HEARING THIS CAUSE came before the Court upon the Parties' Joint Motion to Continue Final Approval Settlement Hearing and to Schedule Rule 16 Status Conference. The Court, having reviewed the Motion, conducted a hearing and being otherwise fully advised of the premises, does thereupon: ORDER AND ADJUDGE THAT: 1. By no later than May 15, 2001, the parties shall advise the Court (a) whether the United States Securities and Exchange Commission ("SEC") has completed its review of certain filings submitted thereto in connection with the proposed settlement of the captioned action, and (b) whether the parties request the Court to schedule a hearing for final approval of the proposed settlement or are withdrawing the proposed settlement from judicial consideration and resuming the litigation of plaintiffs' claims. 2. The parties are directed to use their best efforts to assist the SEC so that its regulatory review may be completed on or before May 15, 2001. 3. The Final Approval Settlement Hearing is continued and will be scheduled for a date in July 2001 that will be determined by the Court following its receipt of the request to schedule a hearing that is described in paragraph 1 above. 1 DONE AND ORDERED, in Chambers, at West Palm Beach County, Florida, this 12th day of March, 2001. /s/ DANIEL T.K. HURLEY --------------------------- United States District Judge Daniel T.K. Hurley Copies furnished. To All Parties Listed on Attached Service List 2 SERVICE LIST LOCAL COUNSEL FOR PLAINTIFFS: LEAD COUNSEL FOR PLAINTIFFS: LAW OFFICES OF ALLAN M. LERNER WECHSLER HARWOOD Allan M. Lerner, Esquire HALEBIAN & FEFFER LLP 2888 East Oakland Park Blvd Andrew D. Friedman, Esq. Ft. Lauderdale, FL 33306 488 Madison Avenue, 8th Floor (954) 563-8111 New York, NY 10022 (954) 563-8522 (212) 935-7400 (212) 753-3630 FAX ATTORNEYS FOR VARIOUS PLAINTIFFS: LASKY & RIFKIND, LTD. THOMAS A. HOADLEY, P.A. Leigh Lasky, Esq. Thomas A. Hoadley, Esq. 11 South LaSalle Street 310 Australian Avenue Chicago, IL 60603 Palm Beach, FL 33480 (312) 634-0057 (561) 792-9006 (312) 634-0059 FAX (561) 835-9527 FAX LAW OFFICES OF LIONEL Z. GLANCY GILMAN AND PASTOR, L.L.P. Lionel Z. Glancy, Esq. Peter A. Lagorio, Esq. 1801 Avenue of the Stars Stonehill Corporate Center Suite 30B 999 Broadway, Suite 500 Los Angeles, CA 90067 Saugus, MA 01906 (310) 201-9150 (781) 231-7850 (310) 201-9160 FAX GOODKIND LABATON RUDOFF HAROLD B. OBSTFELD, P.C. & SUCHAROW LLP Harold B. Obstfeld, Esq. 260 Madison Avenue Lynda J. Grant, Esq. New York, NY 10116 100 Park Avenue (212) 696-0057 New York, NY 10017 (212) 679-8998 FAX (212) 907-0700 (212) 818-0477 FAX LAW OFFICES OF JAMES V. BASHIAN James V. Bashian, Esq. 500 Fifth Avenue, Suite 2730 New York, NY 10110 (212) 921-4110 (212) 921-4249 FAX 3 ATTORNEYS FOR PLAINTIFFS J/B INVESTMENT PARTNERS AND SMALL AND REBECCA BARMACK PARTNERS: LAW OFFICES OF VINCENT T. GRESHAM Vincent T. Gresham, Esq. 6065 Roswell Road, Suite 1445 Atlanta, GA 30328 (770) 552-5270 (770) 552-5279 FAX HAWKINS & PARNELL Albert H. Parnell, Esq. 4000 Suntrust Plaza 202 Peachtree Street, N.W. Atlanta, GA 30308 (404) 614-7400 (404) 614-7500 FAX BENJAMIN S. SCHWARTZ, CHARTERED Benjamin S. Schwartz, Esq. 4600 Olympic Way Evergreen, CO 80439 (303) 670-5941 (303) 670-3871 FAX ATTORNEYS FOR DEFENDANTS: RICHMAD, GREER, WEIL, BRUMBAUGH, MIRABITO & CHRISTENSEN, P.A. Gerald F. Richman, Esq. One Clearlake Centre 250 Australian Avenue South Suite 1504 W. Palm Beach, FL 33401 (561) 803-3500 (561) 820-1608 FAX NIXON PEABODY LLP Deborah L. Thaxter, P.C. 101 Federal Street Boston, MA 02110-1832 (617) 345-1000 (617) 345-1300 4 EX-10.3 3 0003.txt EXHIBIT 10.3 PROMISSORY NOTE $4,419,500 May 31, 1997 For value received, Banyan Strategic Land Fund II, a Delaware corporation (the "Maker"), having an address at 150 South Wacker Drive,, Suite 290, Chicago Illinois 60606 promises to pay to the order of Equis Exchange LLC, a Massachusetts Limited Liability Company (the "Payee"), having a place of business at 98 North Washington Street, Boston, Massachusetts, 02114, the principal sum of FOUR MILLION FOUR HUNDRED NINETEEN THOUSAND FIVE HUNDRED DOLLARS ($4,419,500) together with interest on the outstanding principal balance hereof on or before April 30, 2000. Until the Stockholders Consent referred to in clause a below has been obtained, interest shall accrue on the outstanding principal balance hereof at a rate per annum equal to the rate at which interest is earned by the Payee on the Payee's investment of the proceeds of the funds loaned to the Payee hereunder. From and after the date on which the Stockholders Consent is obatined, interest shall accrue on the outstanding principal balance hereof at the rate of ten percent (10%) per annum and shall be --------- paid quarterly in arrears on the last business day of each calendar quarter and at the maturity of this Note. Unpaid interest shall be compounded annually on December 31 of each year. When and as Banyan or any of its subsidiaries shall receive any proceeds from the sale or refinancing of all or part of that certain 274 acre property in Los Angeles County, California known as the Rancho Malibu property (the "Rancho Malibu Property"), prior to the maturity hereof, the Maker shall immediately apply such funds, net of any identifiable costs directly associated with such sale or refinancing, to the prepayment of this Note, to the extent of any outstanding principal or interest hereunder. This Note may be prepaid in whole or in part without premium or penalty. This Note is being issued by the Maker to the Payee pursuant to the terms of an Exchange Agreement dated as of April 30, 1997, by and among the Maker, the Payee, AFG Hato Arrow Limited Partnership, AFG Dove Arrow Limited Partnership and AIP/Larkfield Limited Partnership (the "Partnerships") and Equis Financial Group Limited Partnership ("EFG") and is being assigned to EFG Financial Group Limited Partnership, having the same address as the Payee, as agent for the Partnerships and their respective assignees. Capitalized terms used herein and not defined herein shall have the definitions set forth in the Exchange Agreement. All amounts payable under this Note shall immediately become due and payable in full at the option of the holder of this note ("Holder") without notice or demand if any one or more of the following events shall occur: a. The Stockholders Consent as that term is defined in Section 4.10 of the Exchange Agreement (the "Stockholders Consent") shall not have been obtained by October 31, 1997. b. Additional outstanding indebtedness secured by the Rancho Malibu Property in excess of $2,500,000 shall be incurred by the Maker or any other person. c. The Board of Directors of the Maker shall at any time fail to include at least two persons nominated by the Holder of this Note and the Maker shall fail to fill any such vacancy by causing the election of a person or persons nominated by the Holder to the Board of Directors within twenty (20) days after the Holder shall have given written notice to Maker of such failure and the name or names of the nominee or nominees. d. Maker shall fail to make any payment hereunder when and as the same shall become due and payable, and such failure shall not be cured within ten (10) days after Holder shall have given written notice to Maker of such failure. e. Maker shall admit in writing its inability to pay its debts as they mature or shall make an assignment for the benefit of creditors. f. Maker shall apply for or consent to the appointment of a trustee or receiver for all or a major part of its property. g. A trustee or receiver shall be appointed for Maker or for all or a major part of its property and such trustee or receiver shall not be discharged within sixty (60) days after such appointment. h. Bankruptcy, reorganization, arrangement or insolvency proceedings or other proceedings for relief under any bankruptcy or similar law or laws for the relief of debtors shall be instituted by or against Maker and, if instituted against it, shall be consented to or shall not be dismissed within sixty (60) days after being instituted. i. An order, judgment or decree declaring Maker to be bankrupt or insolvent shall be entered and shall not be vacated, set aside or stayed within sixty (60) days after the entry thereof. Maker hereby waives presentment, demand, notice, protest, dishonor and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of the obligations of Maker under this Note, and the exercise of and enforcement of any rights hereunder by Holder, and assents without notice to any extension or postponement of the time of payment, to the addition or release of any party or person in any way liable hereunder, and to the compromise or settlement of the liability -2- of any such party or person hereunder, which may from time to time be agreed to by Holder. All notices required or permitted hereunder shall be in writing and shall be delivered in hand or by facsimile, overnight courier or certified or registered mail, return receipt requested, postage prepaid, to the Maker or the Payee, as the case may be, at its respective address set forth above, or such other address or addresses as Maker or Holder may designate from time to time by notice given in accordance with the foregoing. All of the provisions of this Note shall be binding upon and inure to the benefit of Maker and Payee and their respective successors, assigns and legal representatives. This Note shall be governed by and construed in accordance with the laws of the State of Illinois without regard to conflict or choice of law principles. IN WITNESS WHEREOF, Maker has executed and delivered this Note on the date first above written. BANYAN STRATEGIC LAND FUND II By: /s/ Leonard G. Levine ------------------------------- Leonard G. Levine, President -3- EX-10.4 4 0004.txt EXHIBIT 10.4 FIRST ALLONGE TO PROMISSORY NOTE -------------------------------- This First Allonge to Promissory Note (this "Allonge"), made and entered into as of March 21, 2000, between Semele Group Inc. (formerly known as Banyan Strategic Land Fund II), a Delaware corporation (the "Maker"), and Equis Financial Group Limited Partnership, as assignee of Equis Exchange LLC (the "Payee"), is firmly affixed to and made a part of that certain Promissory Note dated May 31, 1997, in the original principal amount of $4,419,500, payable to the order of the Payee (the "Note"). For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties hereto, the Maker and the Payee hereby agree that, effective as of the date hereof, the Note shall be amended as follows: 1. The name and address of the Maker shall be Semele Group Inc., 200 Nyala Farms, Westport, Connecticut 068810. 2. The address of the Payee shall be 88 Broad Street, Boston, Massachusetts 02110. 3. The date on which the outstanding principal balance of the Note together with interest thereon is due and payable shall be April 30, 2001. As hereby amended, the Note is hereby ratified and confirmed in all respects. SEMELE GROUP INC. By: /s/ JAMES A. COYNE ------------------------- Title: President & CEO ---------------------- The foregoing is accepted: EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP By: Equis Corporation, its General Partner By: /s/ GARY D. ENGLE -------------------------- Title: PRESIDENT & CEO ----------------------- EX-10.5 5 0005.txt EXHIBIT 10.5 SECOND ALLONGE TO PROMISSORY NOTE --------------------------------- This Second Allonge to Promissory Note (this "Allonge"), made and entered into as of March 12, 2001, between Semele Group Inc. (formerly known as Banyan Strategic Land Fund II), a Delaware corporation (the "Maker"), and Equis Financial Group Limited Partnership, as assignee of Equis Exchange LLC (the "Payee"), is firmly affixed to and made a part of that certain Promissory Note dated May 31, 1997, as amended by that certain First Allonge to Promissory Note dated March 21, 2000, in the original principal amount of $4,419,500, payable to the order of the Payee (the "Note"). For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the parties hereto, the Maker and the Payee hereby agree that, effective as of the date hereof, the Note shall be further amended as follows: 1. The date on which the outstanding principal balance of the Note together with interest thereon is due and payable shall be April 30, 2003. As hereby amended, the Note is hereby ratified and confirmed in all respects. SEMELE GROUP INC. By: /s/ JAMES A. COYNE ------------------------- Title: President & CEO ---------------------- The foregoing is accepted: EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP By: Equis Corporation, its General Partner By: /s/ GARY D. ENGLE -------------------------- Title: PRESIDENT & CEO ----------------------- EX-13 6 0006.txt EXHIBIT 13 AMERICAN INCOME FUND I-E, a Massachusetts Limited Partnership Annual Report to the Partners, December 31, 2000 Dear Investor: We are pleased to provide the 2000 Annual Report for American Income Fund I-E, a Massachusetts Limited Partnership, which contains important information concerning the recent operating results and current financial position of your investment program. Please refer to the index on the following page for a listing of information contained in this report. If you have any questions about your investment program or, if you would like a copy of Form 10-K for this program, please contact our Investor Services Representatives at 1-800-247-3863. Very truly yours, /s/ GEOFFREY A. MACDONALD Geoffrey A. MacDonald Chairman and Co-founder AMERICAN INCOME FUND I-E, 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, 2000 and 1999............................................ 11 Statement of Operations for the years ended December 31, 2000, 1999 and 1998..................... 12 Statement of Changes in Partners' Capital for the years ended December 31, 2000, 1999 and 1998..................... 13 Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998..................... 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 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, 2000:
SUMMARY OF OPERATIONS 2000 1999 1998 1997 1996 --------------------- ------------ ------------ ------------ ------------- ------------ Operating and sales-type lease revenue........ $ 1,257,174 $ 2,106,199 $ 2,430,065 $ 5,115,146 $ 5,328,237 Interest income .............................. $ 261,010 $ 395,312 $ 306,920 $ 152,995 $ 158,602 Net (loss) income ............................ $ (240,313) $ 1,649,283 $ 137,523 $ 1,252,723 $ 1,062,652 Per Unit: Net (loss) income ....................... $ (0.26) $ 1.77 $ 0.15 $ 1.35 $ 1.14 Cash distributions declared ............. $ -- $ 1.01 $ 1.01 $ 1.27 $ 2.40 FINANCIAL POSITION ------------------ Total assets ................................. $ 13,391,568 $ 14,289,258 $ 14,457,880 $ 15,908,093 $ 18,074,828 Total long-term obligations .................. $ 2,249,301 $ 2,651,371 $ 3,688,947 $ 4,768,982 $ 6,586,970 Partners' capital ............................ $ 10,589,711 $ 10,912,512 $ 10,136,041 $ 10,706,355 $ 10,865,261
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999 AND THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998 Certain statements in this annual report of American Income Fund I-E, 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 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 10 to the accompanying financial statements, the remarketing of the Partnership's equipment and the performance of the Partnership's non-equipment assets. 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. 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 10 to the accompanying financial statements. Pursuant to the Amended and Restated Agreement and Certificate of Limited Partnership (the "Restated Agreement, as amended"), the Partnership is scheduled to be dissolved by December 31, 2002. However, the General Partner does not expect that the Partnership will be dissolved until such time that the Class Action Lawsuit is settled or adjudicated. The final settlement has not been effected and therefore dissolution of the Partnership has been deferred until a later date. The Investment Company Act of 1940 (the "Act") places restrictions on the capital structure and business activities of companies registered thereunder. The Partnership has active business operations in the financial services industry, including equipment leasing, the loan to Echelon Residential Holdings LLC ("Echelon Residential Holdings") and its ownership of securities of Semele Group, Inc. ("Semele"). The Partnership does not intend to engage in investment activities in a manner or to an extent that would require the Partnership to register as an investment company under the Act. However, it is possible that the Partnership may unintentionally engage in an activity or activities that may be construed to fall within the scope of the Act. If the Partnership were to be determined to be an investment company, its business would be adversely affected. If necessary, the Partnership intends to avoid being deemed an investment company by disposing of or acquiring certain assets that it might not otherwise dispose of or acquire. RESULTS OF OPERATIONS For the year ended December 31, 2000, the Partnership recognized operating lease revenue of $1,254,943 compared to $2,106,199 and $2,430,065 for the years ended December 31, 1999 and 1998, respectively. The decrease in operating lease revenue from 1999 to 2000 resulted primarily from the expiration of lease terms related to the Partnership's interest in three Boeing 737-2H4 aircraft and a McDonnell Douglas aircraft. The decrease in operating lease revenue from 1998 to 1999 resulted from lease term expirations and equipment sales. The amount of operating lease revenue in the near term will increase due to the re-lease of the McDonnell Douglas MD-82 aircraft and one of the Boeing 737-2H4 aircraft in September 2000. Subsequently, operating lease revenue is expected to decline due to primary and renewal lease term expirations and equipment sales. See discussion below related to the Partnership's sales-type lease revenue for the year ended December 31, 2000. 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 3 sponsored by Equis Financial Group Limited Partnership ("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. The lease terms related to the three Boeing 737-2H4 aircraft, in which the Partnership held a proportionate interest, expired on December 31, 1999 and the aircraft were stored pending their remarketing. In July 2000, one of the Boeing 737-2H4 aircraft was sold resulting in $228,930 of proceeds to the Partnerships and a net gain, for financial statement purposes, of $38,598 for the Partnership's proportional interest in the aircraft. In September 2000, a second Boeing 737-2H4 aircraft was re-leased with a lease term expiring in September 2003. Under the terms of this re-lease agreement, the Partnership will receive rents of $316,980 over the term of the lease. The Partnership entered into a conditional sales agreement to sell its interest in the remaining Boeing 737-2H4 aircraft as described below. The lease term associated with a McDonnell Douglas MD-82 aircraft, in which the Partnership holds an ownership interest, expired in January 2000. The aircraft was re-leased in September 2000 to Aerovias de Mexico S.A. de C.V., with a lease term expiring in September 2004. Under the terms of this re-lease agreement, the Partnership will receive rents of $769,344 over the term of the lease. Interest income for the year ended December 31, 2000 was $261,010 compared to $395,312 and $306,920 for the years ended December 31, 1999 and 1998, respectively. Interest income is generated principally from temporary investment of rental receipts and equipment sale proceeds in short-term instruments. The amount of future interest income is expected to fluctuate as a result of changing interest rates and the amount of cash available for investment, among other factors. Interest income included $93,872 in each of the years ended December 31, 2000,1999 and 1998 earned on a note receivable from Semele (see Note 6 to the accompanying financial statements). The note receivable from Semele is scheduled to mature in April 2003. On March 8, 2000, the Partnership utilized $4,790,000 of available cash for a loan to Echelon Residential Holdings. The loan is presented in the accompanying financial statements in accordance with the guidance set forth in the Third Notice to Practitioners by the American Institute of Certified Public Accountants in February 1986 entitled "ADC Arrangements", and therefore the Partnership does not recognize interest income related to this loan. (See further discussion included in Note 4 to the financial statements herein). In October 2000, the Partnership and certain of its affiliates executed a conditional sales agreement with Royal Aviation Inc. for the sale of the Partnership's interest in a Boeing 737-2H4 aircraft. The title to the aircraft transfers to Royal Aviation Inc., at the expiration of the lease term. The sale of the aircraft has been recorded by the Partnership as a sales-type lease, with a lease term expiring in January 2002. For the year ended December 31, 2000, the Partnership recorded a net gain on sale of equipment, for financial statement purposes, of $81,911 for the Partnership's proportional interest in the aircraft and recognized sales-type lease revenue of $2,231. During the year ended December 31, 2000, the Partnership sold other fully-depreciated equipment to existing lessees and third parties, resulting in a net gain, for financial reporting purposes of $65,855. During the year ended December 31, 1999, the Partnership sold equipment having a net book value of $1,223,569 to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $908,298 compared to a net gain in 1998 of $208,143 on equipment having a net book value of $108,381. 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 4 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 for 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 may not be indicative of the total residual value the Partnership achieved from leasing the equipment. Depreciation expense was $698,894, $948,344, and $1,438,667 for the years ended December 31, 2000, 1999 and 1998, 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 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 $222,126, $234,357 and $338,932 for the years ended December 31, 2000, 1999, and 1998, respectively. Interest expense in the near term will increase as a result of the Partnership's debt refinancing in February 2001. (See Note 12 to the financial statements.) Subsequently, interest expense will decline as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt. See additional discussion below regarding the refinancing of the debt in 2001. Management fees were $60,456, $99,353, and $110,415 for the years ended December 31, 2000, 1999, and 1998, 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 $377,849 for the year ended December 31, 1998. The General Partner determined that the decline in market value of its Semele common stock was other-than-temporary. 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). See further discussion below. Operating expenses were $599,807, $478,472, and $541,742 for the years ended December 31, 2000, 1999 and 1998, respectively. The primary reason for the increase in operating expenses from 1999 to 2000 is storage, remarketing and maintenance costs associated with the Partnership's aircraft. In 2000 and 1999, the Partnership accrued approximately $97,000 and $131,000, respectively, for the reconfiguration costs and completion of a D-Check incurred to facilitate the remarketing of the McDonnell Douglas MD-82 aircraft released in September 2000. In 2000, the Partnership also accrued approximately $131,000 for a required D-check for a second McDonnell Douglas MD-82 aircraft. In addition, in 1999 the Partnership incurred approximately $52,000 in connection with the remarketing of an aircraft in which it held an ownership interest. The Partnership sold its interest in this aircraft during 1999. Operating expenses in 2000, 1999 and 1998 also included approximately $41,000, $50,000 and $334,000, respectively, related to the Class Action Lawsuit described in Note 10 to the financial statements. Other operating expenses consist principally of professional service costs, such as audit and other legal fees, as well as printing, distribution and other remarketing expenses. For the year ended December 31, 2000, the Partnership's share of losses in Echelon Residential Holdings was $363,578. The loss is reflected on the Statement of Operations as "Partnership's share of unconsolidated real estate venture's loss". See further discussion below. 5 LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS The Partnership by its nature is a limited life entity. The Partnership's principal operating activities derive from asset rental transactions. Accordingly, the Partnership's 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 $1,130,729, $1,469,365, and $2,642,701 for the years ended 2000, 1999 and 1998 respectively. Future renewal, re-lease and equipment sale activities will cause a decline in the Partnership's lease revenues 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 remarkets its equipment. The Partnership, however, may continue to incur significant costs to faciliate the successful remarketing of its aircraft in the future. The amount of future interest income is expected to fluctuate as a result of changing interest rates and the level of cash available for investment, among other factors. Cash realized from asset disposal transactions is reported under investing activities on the accompanying Statement of Cash Flows. During 2000, the Partnership realized net proceeds of $294,785, compared to $2,131,867 and $316,524 in 1999 and 1998, 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. At December 31, 2000, the Partnership was due aggregate future minimum lease payments of $2,535,833 from contractual operating and sales-type 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 $2,249,301 (see Note 8 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. In connection with a preliminary settlement agreement for a Class Action Lawsuit described in Note 10 to the financial statements, the court permitted the Partnership to invest in any new investment, including but not limited to new equipment or other business activities, subject to certain limitations. On March 8, 2000, the Partnership loaned $4,790,000 to a newly formed real estate company, Echelon Residential Holdings to finance the acquisition of real estate assets by that company. Echelon Residential Holdings, through a wholly owned subsidiary ("Echelon Residential LLC"), used the loan proceeds, along with the loan proceeds from similar loans by ten affiliated partnerships representing $32 million in the aggregate, to acquire various real estate assets from Echelon International Corporation, an independent Florida-based real estate company. Echelon Residential Holding's interest in Echelon Residential LLC is pledged pursuant to a pledge agreement to the partnerships as collateral for the loans. The loan has a term of 30 months maturing on September 8, 2002 and bears interest at the annual rate of 14% for the first 24 months and 18% for the final six months. Interest accrues and compounds monthly and is payable at maturity. As discussed in Note 4 to the Partnership's financial statements, the loan is considered to be an investment in a real estate venture for accounting purposes. In accordance with the provisions of Statement of Position No. 78-9, "Accounting for Investments in Real Estate Ventures", the Partnership reports its share of income or loss of Echelon Residential Holdings under the equity method of accounting. The loan made by the Partnership to Echelon Residential Holdings is, and will continue to be, subject to various risks, including the risk of default by Echelon Residential Holdings, which could require the Partnership to foreclose under the pledge agreement on its interests in Echelon Residential LLC. The ability of Echelon Residential Holdings to make loan payments and the amount the Partnership may realize after a default would be dependent upon the risks generally associated with the real estate lending business including, without limitation, 6 the existence of senior financing or other liens on the properties, general or local economic conditions, property values, the sale of properties, interest rates, real estate taxes, other operating expenses, the supply and demand for properties involved, zoning and environmental laws and regulations, rent control laws and other governmental rules. A default by Echelon Residential Holdings could have a material adverse effect on the future cash flow and operating results of the Partnership. The Restated Agreement, as amended, prohibits the Partnership from making loans to the General Partner or its affiliates. Since the acquisition of the several parcels of real estate from the owner had to occur prior to the admission of certain independent third parties as equity owners, Echelon Residential Holdings and its wholly owned subsidiary, Echelon Residential LLC, were formed in anticipation of their admission. The General Partner agreed to an officer of the Manager serving as the initial equity holder of Echelon Residential Holdings and as an unpaid manager. The officer made a $185,465 equity investment in Echelon Residential Holdings. His return on his equity investment is restricted to the same rate of return as the partnerships realize on their loans. There is a risk that the court may object to the general partner's action in structuring the loan in this way and may require the partnerships to restructure or divest the loan. As a result of an exchange transaction in 1997, the Partnership is the beneficial owner of 42,574 shares of Semele common stock and a beneficial interest in the Semele Note of $938,718. The Semele Note bears an annual interest rate of 10% and is scheduled to mature in April 2003. The note also requires mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities", marketable equity securities classified as available-for-sale are 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 $143,690. This loss was reported as a component of comprehensive income, included in the Statement of Changes 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 for a total realized loss of $377,849 in 1998. During the year ended December 31, 1999, the Partnership increased the carrying value of its investment in Semele common stock to $5.75 per share (the quoted price of the Semele stock on NASDAQ SmallCap market at December 31, 1999), resulting in an unrealized gain of $69,184. During the year ended December 31, 2000, the Partnership decreased the carrying value of its investment in Semele common stock to $3.8125 per share (the quoted price of the Semele stock on NASDAQ Small Cap market nearest December 31, 2000), resulting in an unrealized loss of $82,488. The unrealized gain in 1999 and unrealized loss in 2000 were reported as a component of comprehensive income and loss, respectively, included in the Statement of Changes in Partners' Capital. The Semele Note and the Semele common stock are subject to a number of risks including, Semele's ability to make loan payments which is dependent upon the liquidity of Semele and primarily Semele's ability to sell or refinance its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. The market value of the Partnership's investment in Semele common stock has generally declined since the Partnership's initial investment in 1997. In 1998, the General Partner determined that the decline in market value of the stock was other-than-temporary and wrote down the Partnership's investment. Subsequently, the market value of the Semele common stock has fluctuated. The market value of the stock could decline in the future. Gary D. Engle, President and Chief Executive Officer of EFG, the sole shareholder of the General Partner, and is Chairman and Chief Executive Officer of Semele and James A. Coyne, Executive Vice President of EFG is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. The Partnership obtained long-term financing in connection with certain equipment leases. The origination of such indebtedness and the subsequent repayments of principal related to such indebtedness are reported as a component of financing activities in the Partnership's Statement of Cash Flows. The corresponding note 7 agreements are 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 the near term, the amount of cash used to repay debt obligations will increase due to the refinancing discussed below. Subsequently the amount of cash used will decline as the principal balance of notes payable is reduced through the collection and application of rents. However, the Partnership has a balloon payment obligation at the expiration of the lease term related to aircraft leased by Reno Air, Inc. of $555,597, which matures in January 2003. In February 2000, the Partnership and certain affiliated investment programs (collectively, the "Programs") refinanced the indebtedness, which matured in January 2000 associated with a McDonnell Douglas MD-82 aircraft re-leased in September 2000. In addition to refinancing the existing indebtedness of $3,370,000, the Programs received additional debt proceeds of $1,350,000 required to perform a D-Check on the aircraft. The Partnership received $131,618 from such proceeds. The note had a fluctuating interest rate based on LIBOR plus a margin with interest payments due monthly. The Partnership's aggregate share of the refinanced and new indebtedness was $458,801, which matured in August 2000. The Partnership paid interest-only on the debt throughout 2000. In February 2001, the Programs refinanced the outstanding indebtedness and accrued interest related to this aircraft. In addition to refinancing the Programs' total existing indebtedness and accrued interest of $4,758,845, the Programs received additional debt proceeds of $3,400,177. The Partnership's aggregate share of the refinanced and new indebtedness was $792,567 including $462,274 used to repay the existing indebtedness on the refinanced aircraft. The Partnership used a portion of its share of the additional proceeds of $330,293 to repay the outstanding balance of the indebtedness and accrued interest related to the aircraft on lease to Finnair OY of $85,579 and certain aircraft reconfiguration costs that the Partnership had accrued at December 31, 2000. The new indebtedness bears a fixed interest rate of 7.65%, principal is amortized monthly and the Partnership has a balloon payment obligation at the expiration of the lease term of $264,310 in September 2004. 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. In addition to the need for funds in connection with the Class Action Lawsuit, 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. At December 31, 2000, the Partnership's equipment portfolio included ownership interests in four commercial jet aircraft, one of which is a Boeing 737 aircraft. The Boeing 737 aircraft is a Stage 2 aircraft, meaning that it is prohibited from operating in the United States unless it is retro-fitted with hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation Administration. During 2000, this aircraft was re-leased to Air Slovakia BWJ, Ltd. through September 2003. The remaining three aircraft in the Partnership's portfolio already are Stage 3 compliant. These aircraft have lease terms expiring in April 2001, January 2003, and September 2004, respectively. Cash distributions to the General and Limited Partners had been 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 on the accompanying Statement of Cash Flows. No cash distributions were declared for the year ended December 31, 2000, however, the fourth quarter 1999 cash distribution of $235,495 was paid in January 2000. In any given year, it is possible that Limited Partners will be allocated taxable income in excess of 8 distributed cash. This discrepancy between tax obligations and cash distributions may or may not continue in the future, and cash may or may not be available for distribution to the Limited Partners adequate to cover any tax obligation. 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, the residual value realized for each asset at its disposal date and the performance of the Partnership's non-equipment assets. 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 9 to the financial statements). For instance, selling commissions and 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 and the treatment of unrealized gains or losses on investment securities 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 and different treatment for book and tax purposes related to the real estate venture. For financial reporting purposes, the General Partner has accumulated a capital deficit at December 31, 2000. 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 Restated Agreement, as amended, 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, 2000, the General Partner had a positive tax capital account balance. The Partnership is a Nominal Defendant in a Class Action Lawsuit described in Note 10 to the accompanying financial statements. The proposed settlement to that lawsuit, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. In addition, commencing with the first quarter of 2000, the General Partner suspended the payment of quarterly cash distributions pending final resolution of the Class Action Lawsuit. Accordingly, future cash distributions are not expected to be paid until the Class Action Lawsuit is settled or adjudicated. 9 REPORT OF INDEPENDENT AUDITORS To the Partners of American Income Fund I-E, a Massachusetts Limited Partnership: We have audited the accompanying statements of financial position of American Income Fund I-E, a Massachusetts Limited Partnership, as of December 31, 2000 and 1999, 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, 2000. 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. The consolidated financial statements of Echelon Residential Holdings LLC, (a limited liability company to which the Partnership has loaned $4,790,000), have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the financial statements relates to data included for Echelon Residential Holdings LLC, it is based solely on their report. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of American Income Fund I-E, a Massachusetts Limited Partnership at December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. 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. /s/ ERNST & YOUNG LLP Tampa, Florida March 30, 2001 10 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2000 AND 1999
2000 1999 ------------ ------------ ASSETS Cash and cash equivalents .................................. $ 2,087,671 $ 6,089,722 Rents receivable ........................................... 227,675 171,582 Accounts receivable - affiliate ............................ 85,244 555,112 Accounts receivable - other ................................ 32,056 -- Investment in real estate venture .......................... 4,426,422 -- Net investment in sales-type lease ......................... 215,215 -- Note receivable - affiliate ................................ 938,718 938,718 Investment securities - affiliate - at fair market value ... 162,313 244,801 Equipment at cost, net of accumulated depreciation of $4,823,912 and $6,929,313 at December 31, 2000 and 1999, respectively ............. 5,216,254 6,289,323 ------------ ------------ Total assets ....................................... $ 13,391,568 $ 14,289,258 ============ ============ LIABILITIES AND PARTNERS' CAPITAL Notes payable .............................................. $ 2,249,301 $ 2,651,371 Accrued interest ........................................... 17,870 25,556 Accrued liabilities ........................................ 481,926 398,951 Accrued liabilities - affiliate ............................ 21,651 17,512 Deferred rental income ..................................... 31,109 47,861 Cash distributions payable to partners ..................... -- 235,495 ------------ ------------ Total liabilities .................................. 2,801,857 3,376,746 ------------ ------------ Partners' capital (deficit): General Partner .......................................... (444,865) (428,725) Limited Partnership Interests (883,829.31 Units; initial purchase price of $25 each) ... 11,034,576 11,341,237 ------------ ------------ Total partners' capital ............................ 10,589,711 10,912,512 ------------ ------------ Total liabilities and partners' capital ............ $ 13,391,568 $ 14,289,258 ============ ============
The accompanying notes are an integral part of these financial statements 11 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998 ----------- ----------- ----------- Income: Operating lease revenue ....................... $ 1,254,943 $ 2,106,199 $ 2,430,065 Sales-type lease revenue ...................... 2,231 -- -- Interest income ............................... 167,138 301,440 213,048 Interest income - affiliate ................... 93,872 93,872 93,872 Gain on sale of equipment ..................... 186,364 908,298 208,143 ----------- ----------- ----------- Total income .............................. 1,704,548 3,409,809 2,945,128 ----------- ----------- ----------- Expenses: Depreciation .................................. 698,894 948,344 1,438,667 Interest expense .............................. 222,126 234,357 338,932 Equipment management fees - affiliate .................................. 60,456 99,353 110,415 Write-down of investment securities - affiliate ................................... -- -- 377,849 Operating expenses - affiliate ................ 599,807 478,472 541,742 Partnership's share of unconsolidated real estate venture's loss .................. 363,578 -- -- ----------- ----------- ----------- Total expenses ............................ 1,944,861 1,760,526 2,807,605 ----------- ----------- ----------- Net (loss) income .................................. $ (240,313) $ 1,649,283 $ 137,523 =========== =========== =========== Net (loss) income per limited partnership unit .................. $ (0.26) $ 1.77 $ 0.15 =========== =========== =========== Cash distributions declared per limited partnership unit .................. $ -- $ 1.01 $ 1.01 =========== =========== ===========
The accompanying notes are an integral part of these financial statements 12 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
GENERAL LIMITED PARTNERS PARTNER ------------------------- AMOUNT UNITS AMOUNT TOTAL ------------ ---------- ------------ ------------ Balance at December 31, 1997 ....................... $ (439,033) 883,829.31 $ 11,145,388 $ 10,706,355 Net income - 1998 ............................... 6,877 -- 130,646 137,523 Unrealized loss on investment securities - affiliate ..................................... (7,184) -- (136,506) (143,690) Less: Reclassification adjustment for write- down of investment securities - affiliate ..... 18,892 -- 358,957 377,849 ------------ ---------- ------------ ------------ Comprehensive income ............................ 18,585 -- 353,097 371,682 Cash distributions declared ........................ (47,100) -- (894,896) (941,996) ------------ ---------- ------------ ------------ Balance at December 31, 1998 ....................... (467,548) 883,829.31 10,603,589 10,136,041 Net income - 1999 ............................... 82,464 -- 1,566,819 1,649,283 Unrealized gain on investment securities - affiliate .................................... 3,459 -- 65,725 69,184 ------------ ---------- ------------ ------------ Comprehensive income ............................ 85,923 -- 1,632,544 1,718,467 Cash distributions declared ..................... (47,100) -- (894,896) (941,996) ------------ ---------- ------------ ------------ Balance at December 31, 1999 ....................... (428,725) 883,829.31 11,341,237 10,912,512 Net loss - 2000 ................................. (12,016) -- (228,297) (240,313) Unrealized loss on investment securities - affiliate ..................................... (4,124) -- (78,364) (82,488) ------------ ---------- ------------ ------------ Comprehensive loss .............................. (16,140) -- (306,661) (322,801) ------------ ---------- ------------ ------------ Balance at December 31, 2000 ....................... $ (444,865) 883,829.31 $ 11,034,576 $ 10,589,711 ============ ========== ============ ============
The accompanying notes are an integral part of these financial statements 13 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998 ----------- ----------- ----------- Cash flows provided by (used in) operating activities: Net (loss) income .............................................. $ (240,313) $ 1,649,283 $ 137,523 Adjustments to reconcile net (loss) income To net cash provided by operating activities: Depreciation .............................................. 698,894 948,344 1,438,667 Sales-type lease revenue................................... (2,231) -- -- Gain on sale of equipment ................................. (186,364) (908,298) (208,143) Write-down of investment securities - affiliate ........... -- -- 377,849 Partnership's share of unconsolidated real estate venture's loss ............................ 363,578 -- -- Changes in assets and liabilities: Decrease (increase) in: Rents receivable ...................................... (56,093) 129,981 (90) Accounts receivable - affiliate ....................... 469,868 (442,428) 696,759 Accounts receivable - other ........................... (32,056) -- -- Collections on net investment in sales-type lease...... 52,770 -- -- Increase (decrease) in: Accrued interest ...................................... (7,686) (10,741) 4,801 Accrued liabilities ................................... 82,975 103,451 286,300 Accrued liabilities - affiliate ....................... 4,139 (80) (33,178) Deferred rental income ................................ (16,752) (147) (57,787) ----------- ----------- ----------- Net cash provided by operating activities ........... 1,130,729 1,469,365 2,642,701 ----------- ----------- ----------- Cash flows (used in) provided by investing activities: Proceeds from equipment sales ............................. 294,785 2,131,867 316,524 Investment in real estate venture ......................... (4,790,000) -- -- ----------- ----------- ----------- Net cash (used in) provided by investing activities ...................... (4,495,215) 2,131,867 316,524 ----------- ----------- ----------- Cash flows (used in) provided by financing activities: Proceeds from notes payable ............................... 131,618 -- -- Principal payments - notes payable ........................ (533,688) (1,037,576) (1,080,035) Distributions paid ........................................ (235,495) (941,996) (941,996) ----------- ----------- ----------- Net cash used in financing activities ............... (637,565) (1,979,572) (2,022,031) ----------- ----------- ----------- Net (decrease) increase in cash and cash equivalents ........... (4,002,051) 1,621,660 937,194 Cash and cash equivalents at beginning of year ................. 6,089,722 4,468,062 3,530,868 ----------- ----------- ----------- Cash and cash equivalents at end of year ....................... $ 2,087,671 $ 6,089,722 $ 4,468,062 =========== =========== =========== Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 229,812 $ 245,098 $ 334,131 =========== =========== =========== Supplemental disclosure of non-cash investing and financing activities: Equipment sold on sales-type lease......................... $ 265,754 $ -- $ -- =========== =========== ===========
See Note 6 to the financial statements regarding the carrying value of the Partnership's investment securities - affiliate. The accompanying notes are an integral part of these financial statements 14 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 2000 NOTE 1 - ORGANIZATION AND PARTNERSHIP MATTERS American Income Fund I-E, a Massachusetts Limited Partnership (the "Partnership") was organized as a limited partnership under the Massachusetts Uniform Limited Partnership Act (the "Uniform Act") on August 29, 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 December 4, 1991, the Partnership concluded an Interim Closing and issued 587,079.96 units of limited partnership interest (the "Units") to 654 investors for a purchase price of $14,569,875. Included in the 587,079.96 units were 4,284.96 bonus units. On January 31, 1992, the Partnership concluded its Final Closing. An additional 296,749.35 units (including 626.35 bonus units) were purchased for an additional purchase price of $7,403,075 and an additional 735 investors became Limited Partners of the Partnership. As of January 31, 1992, an aggregate total of 883,829.31 units (including 4,911.31 bonus units) had been purchased for an aggregate total purchase price of $21,972,950 and an aggregate of 1,089 investors had become Limited Partners of the Partnership. 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 December 4, 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 7). 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 Equipment 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-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH 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 in 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, 2000, the Partnership had $1,970,913 invested in federal agency discount notes, repurchase agreements secured by U.S. Treasury Bills or interests in U.S. Government securities, or other highly liquid overnight investments. REVENUE RECOGNITION Effective January 1, 2000, the Partnership adopted the provisions of Securities Exchange Commisssion Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101 provides guidance for the recognition, presentation and disclosure of revenue in financial statements. The adoption of SAB No. 101 had no impact on the Partnership's financial statements. 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 majority of the leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. In certain instances, the Partnership may enter renewal or re-lease agreements which expire beyond the Partnership's anticipated dissolution date. This circumstance is not expected to prevent the orderly wind-up of the Partnership's business activities as the General Partner and EFG would seek to sell the then-remaining equipment assets either to the lessee or to a third party, taking into consideration the amount of future noncancellable rental payments associated with the attendant lease agreements. See also Note 10 regarding the Class Action Lawsuit. Future minimum rents for operating leases of $2,307,117 are due as follows: For the year ending December 31, 2001...... $ 863,952 2002...... 807,482 2003...... 458,522 2004...... 177,161 ---------- Total..... $2,307,117 ========== Future minimum rents for operating leases does not include the operating leases for which the lease payments are based on the usage of the equipment leased. Lease payments for the sales-type lease are due monthly and the related revenue is recognized by a method which produces a constant periodic rate of return on the outstanding investment in the lease. Future minimum lease payments for the sales-type lease of $228,716 are due in the year ending December 31, 2001. Unearned income is recognized sales-type lease revenue over the lease term using the interest method. 16 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Revenue from major individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 2000, 1999 and 1998 is as follows: 2000 1999 1998 -------- -------- -------- Reno Air, Inc. ......................... $314,580 $302,809 $306,806 Finnair OY ............................. $226,908 $415,268 $418,516 General Motors Corporation ............. $210,609 $286,911 $363,440 Union Pacific Railroad Company ......... $195,745 $ -- $ -- Trans Ocean Container Corp. ............ $142,258 $ -- $279,105 Southwest Airlines, Inc. ............... $ -- $340,916 $338,112 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. 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. 17 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) INVESTMENT SECURITIES - AFFILIATE The Partnership's investment in Semele Group Inc. ("Semele") is considered to be available-for-sale and as such is carried at fair value with unrealized gains and losses reported as a separate component of partners' capital. Other-than-temporary declines in market value are recorded as write-down of investment in the Statement of Operations (see Note 6). Unrealized gains or losses on the Partnership's available-for-sale securities are required to be included in comprehensive (loss) income. REAL ESTATE LOAN The Partnership accounts for the loan to a real estate company using the guidance set forth in the Third Notice to Practitioners by the American Institute of Certified Public Accountants ("AICPA") in February 1986 entitled "ADC Arrangements" (the "Third Notice"). The Partnership has evaluated this loan and has determined that real estate accounting is appropriate. This determination affects the Partnership's balance sheet classification of the loan and the recognition of revenues derived therefrom. The Third Notice was issued to address those real estate acquisition, development and construction arrangements where a lender has virtually the same risk and potential rewards as those of owners or joint ventures. Emerging Issues Task Force ("EITF") 86-21, "Application of the AICPA Notice to Practitioners regarding Acquisition, Development and Construction Arrangements to Acquisition of an Operating Property" expanded the applicability of the Third Notice to entities other than financial institutions. Based on the applicability of the Third Notice, EITF 86-21 and consideration of the economic substance of the transaction, the loan is considered to be an investment in a real estate venture for accounting purposes. In accordance with the provisions of Statement of Position No. 78-9, "Accounting for Investments in Real Estate Ventures", the Partnership reports its share of income or loss of the real estate company under the equity method of accounting. NET INVESTMENT IN SALES-TYPE LEASE For leases that qualify as sales-type leases, the Partnership recognizes profit or loss at lease inception to the extent the fair value of the property leased differs from the carrying value. For balance sheet purposes, the aggregate lease payments receivable are recorded on the balance sheet net of unearned income, representing interest, as net investment in sales-type lease. Unearned income is recognized as sales-type lease revenue over the lease term using the interest method. IMPAIRMENT OF LONG-LIVED ASSETS The carrying value of long-lived assets, including equipment and the real estate loan, will be reviewed for impairment whenever events or changes in circumstances indicate that the recorded value cannot be recovered from undiscounted future cash flows. 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 7). CONTINGENCIES It is the Partnership's policy to recognize a liability for goods and services during the period when the goods or services are received. To the extent that the Partnership has a contingent liability, meaning generally a liability the payment of which is subject to the outcome of a future event, the Partnership recognizes a liability in accordance with Statement of Financial Accounting Standards No. 5 "Accounting for Contingencies" ("SFAS No. 5"). SFAS No. 5 requires the recognition of contingent liabilities when the amount of liability can be reasonably estimated and the liability is probable. The Partnership is a Nominal Defendant in a Class Action Lawsuit. In 1998, a settlement proposal to resolve that litigation was negotiated and remains pending (see Note 10). The Partnership's estimated exposure for costs anticipated to be incurred in pursuing the settlement proposal is approximately $425,000 consisting principally of legal fees and other professional service costs. These costs are expected to be incurred regardless of whether 18 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) the proposed settlement ultimately is effected and, therefore, the Partnership expensed approximately $334,000 of these costs in 1998 following the Court's approval of the settlement plan. The cost estimate is subject to change and is monitored by the General Partner based upon the progress of the settlement proposal and other pertinent information. As a result, the Partnership expensed additional amounts of approximately $41,000 and $50,000 for such costs during 2000 and 1999, respectively. 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 9 for allocation of income or loss for income tax purposes. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," effective in 1998, requires the disclosure of comprehensive income (loss) to reflect changes in partners' capital that result from transaction and economic events from nonowner sources. Accumulated other comprehensive income (loss) for the years ended December 31, 2000, 1999 and 1998 primarily represents the Partnership's unrealized gains (losses) on the investment in Semele:
2000 1999 1998 --------- --------- --------- Beginning balance ....................... $ 69,184 $ -- $(234,159) Adjustments primarily related to the Partnership's investment in Semele .... (82,488) 69,184 234,159 --------- --------- --------- Ending balance .......................... $ (13,304) $ 69,184 $ -- ========= ========= =========
NET INCOME (LOSS) AND CASH DISTRIBUTIONS PER UNIT Net income (loss) and cash distributions per Unit are based on 883,829.31 Units outstanding during each of the three years in the period ended December 31, 2000 and are 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 separate tax returns. NOTE 3 - EQUIPMENT The following is a summary of equipment owned by the Partnership at December 31, 2000. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 2000 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 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.............................................. 4-44 $ 5,659,663 NV/Foreign Trailers/intermodal containers........................ 30 1,756,524 CA Railroad.............................................. 39 1,522,810 NE Materials handling.................................... 0-12 1,093,020 CT/IL/MI/PA/SC/TX Photocopying.......................................... 0 8,149 CA ----------- Total equipment cost.............................. 10,040,166 Accumulated depreciation.......................... 4,823,912 ----------- Equipment, net of accumulated depreciation........ $ 5,216,254 ===========
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, 2000, the 19 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Partnership's equipment portfolio included equipment having a proportionate original cost of $8,940,072, representing approximately 89% 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 approximately $6,610,000 and a net book value of approximately $4,506,000 at December 31, 2000 (see Note 8). 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. At December 31, 2000, all of the Partnership's equipment was subject to contracted leases or being leased on a month-to-month basis. NOTE 4 - INVESTMENT IN REAL ESTATE VENTURE On March 8, 2000, the Partnership and 10 affiliated partnerships (the "Exchange Partnerships") collectively loaned $32 million to Echelon Residential Holdings LLC ("Echelon Residential Holdings"), a newly formed real estate company. Echelon Residential Holdings is owned by several investors, including James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates of the General Partner made loans to Echelon Residential Holdings in their individual capacities. The Partnership's participation in the loan is $4,790,000. Echelon Residential Holdings, through a wholly-owned subsidiary (Echelon Residential LLC), used the loan proceeds to acquire various real estate assets from Echelon International Corporation, a Florida-based real estate company. The loan has a term of 30 months, maturing on September 8, 2002, and an annual interest rate of 14% for the first 24 months and 18% for the final six months. Interest accrues and compounds monthly and is payable at maturity. In connection with the transaction, Echelon Residential Holdings has pledged a security interest in all of its right, title and interest in and to its membership interests in Echelon Residential LLC to the Exchange Partnerships as collateral. The loan is presented in accordance with the guidance for ADC Arrangements as described in Note 2, Real Estate Loans, in the Partnership's financial statements as of and for the year December 31, 2000. The loan is accounted for as an investment in real estate venture and is presented net of the Partnership's share of losses in Echelon Residential Holdings. For the year ended December 31, 2000, the Partnership's share of losses in Echelon Residential Holdings was $363,578 and is reflected on the Statement of Operations as "Partnership's share of unconsolidated real estate venture's loss." 20 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) The summarized financial information for Echelon Residential Holdings as of December 31, 2000 and for the period March 8, 2000 (commencement of operations) through December 31, 2000 is as follows: Total assets.................................... $ 68,580,891 Total liabilities............................... $ 70,183,162 Minority Interest............................... $ 2,257,367 Total deficit .................................. $ (3,859,638) Total revenues.................................. $ 5,230,212 Total expenses, minority interest and equity in loss of unconsolidated joint venture....... $ 11,936,238 Net loss........................................ $ (6,706,026) NOTE 5 - NET INVESTMENT IN SALES-TYPE LEASE The Partnership's net investment in a sales-type lease is the result of the conditional sale of the Partnership's proportionate interest in a Boeing 737 aircraft executed in October 2000. The title to the aircraft transfers to Royal Aviation Inc., at the expiration of the lease term. The sale of the aircraft has been recorded by the Partnership as a sales-type lease, with a lease term expiring in January 2002. For the year ended December 31, 2000, the Partnership recorded a net gain on sale of equipment, for financial statement purposes, of $81,911 for the Partnership's proportional interest in the aircraft and recognized sales-type lease revenue of $2,231. The net book value of equipment sold on sales-type lease totaled $265,754, which was a non-cash transaction. The components of the net investment in the sales-type lease are as follows: Total minimum lease payments to be received ........................ $228,716 Less: Unearned income ............................................. 13,501 -------- Total .................................. $215,215 ======== Unearned income is being amortized to revenue over the lease term, expiring in January 2002. NOTE 6 - INVESTMENT SECURITIES - AFFILIATE - AT FAIR MARKET VALUE AND NOTE RECEIVABLE - AFFILIATE As a result of an exchange transaction in 1997, the Partnership is the beneficial owner of 42,574 shares of Semele common stock. The Partnership also received a beneficial interest in a note receivable from Semele ("the Semele Note") of $938,718 in connection with the exchange. 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 $143,690. This loss was reported as a component of comprehensive income, included in the Statement of Changes 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 for a total realized loss of $377,849 in 1998. During the year ended December 31, 1999, the Partnership increased the carrying value of its investment in Semele common stock to $5.75 per share (the quoted price of the Semele stock on NASDAQ Small Cap market at December 31, 1999), resulting in an unrealized gain of $69,184. During the year ended December 31, 2000, the Partnership decreased the carrying value of its investment in Semele common stock to $3.8125 per share (the quoted price of the Semele stock on NASDAQ Small Cap market at the date the stock traded closest to 21 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) December 31, 2000), resulting in an unrealized loss of $82,488. The unrealized gain in 1999 and the unrealized loss in 2000 were reported as a component of comprehensive income and loss, respectively, included in the Statement of Changes in Partners' Capital. The Semele Note bears an annual interest rate of 10% and is scheduled to mature in April 2003.The note requires mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of its principal real estate asset consisting of an undeveloped 274-acre parcel of land near Malibu, California. The Partnership recognized interest income related to the Semele Note of $93,872 in each of the years ended December 31, 2000, 1999 and 1998. NOTE 7 - 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 ended December 31, 2000, 1999 and 1998, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows: 2000 1999 1998 -------- -------- -------- Equipment management fees ..................... $ 60,456 $ 99,353 $110,415 Administrative charges ........................ 118,142 115,923 66,924 Reimbursable operating expenses due to third parties ..................... 481,665 362,549 474,818 -------- -------- -------- Total .......... $660,263 $577,825 $652,157 ======== ======== ======== 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 was 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 revenues 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 acquired 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, "Equipment on Lease". 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, 2000, the Partnership was owed $85,244 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 2001. 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 23,472 2.66% - ----------------------------------------------- -------------------------- ------------------------ Old North Capital Limited Partnership 87,118.15 9.86% - ----------------------------------------------- -------------------------- ------------------------
22 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Atlantic Acquisition Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC") are both Massachusetts Limited Partnerships formed in 1995. The general partners of AALP and ONC are controlled by Gary Engle. EFG owns limited partnership interests, representing substantially all of the economic benefit, in AALP and the limited partnership interests of ONC are owned by Semele. Gary D. Engle is Chairman and Chief Financial Officer of Semele and President and Chief Executive Officer of EFG and sole shareholder and Director of EFG's general partner. James A. Coyne, Executive Vice President of EFG, is Semele's President and Chief Operating Officer. Mr. Engle and Mr. Coyne are both members of the Board of Directors of, and own significant stock in, Semele. NOTE 8 - NOTES PAYABLE Notes payable at December 31, 2000 consisted of installment notes of $2,249,301 payable to banks and institutional lenders. The installment notes bear an interest rate of either 8.22% or a fluctuating interest rate based on LIBOR (approximately 6.7% at December 31, 2000) plus a margin. All of the installment notes are non-recourse and are collateralized by the equipment and assignment of the related lease payments. The Partnership has a $555,597 balloon payment obligation to be paid at the expiration of the lease term related to aircraft leased by Reno Air, Inc. in January 2003. The Partnership also had a balloon payment obligation of due at the expiration of the lease term related to an aircraft leased to Finnair OY. The Finnair indebtedness was due to mature in 2001. In addition, the Partnership had a balloon obligation of $458,501, which matured in August 2000. The Partnership paid interest-only on this debt through 2000 and in February 2001, the Partnership and certain affiliated investment programs refinanced this indebtedness and repaid the outstanding indebtedness related to the Finnair OY aircraft. See Note 12 - Subsequent Event, regarding this refinancing. Management believes that the carrying amount of notes payable approximates fair value at December 31, 2000 based on its experience and understanding of the market for instruments with similar terms. The annual maturities of the installment notes payable at December 31, 2000, reflecting the maturity of the notes in consideration of the February 2001 refinancing discussed above, are as follows: For the year ending December 31, 2001 $ 470,927 2002 558,317 2003 837,160 2004 382,897 ---------- Total $2,249,301 ========== NOTE 9 - 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 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 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, 2000, the General Partner had a positive tax capital account balance. 23 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) The following is a reconciliation between net income or loss reported for financial statement and federal income tax reporting purposes for the years ended December 31, 2000, 1999 and 1998:
2000 1999 1998 ----------- ----------- ----------- Net (loss) income .................................. $ (240,313) $ 1,649,283 $ 137,523 Financial statement depreciation less than tax depreciation ................. (409,157) (722,770) (586,707) Deferred rental income ........................ (16,752) (147) (57,787) Interest income - real estate venture ......... 584,948 -- -- Partnership's share of unconsolidated real estate venture's loss ................. 363,578 -- -- Other ......................................... 76,515 1,244,412 448,330 ----------- ----------- ----------- Net income (loss) for federal income tax reporting purposes ............................ $ 358,819 $ 2,170,778 $ (58,641) =========== =========== ===========
The principal component of "Other" consists of the difference between the tax and financial statement gain or loss on equipment 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, 2000 and 1999:
2000 1999 ------------ ------------ Partners' capital ........................................................ $ 10,589,711 $ 10,912,512 Add back selling commissions and organization and offering costs .... 2,466,957 2,466,957 Unrealized loss/(gain) on investment securities - affiliate ......... 13,304 (69,184) Cumulative difference between federal income tax and financial statement income (loss) ............................... (1,583,555) (2,182,687) ------------ ------------ Partners' capital for federal income tax reporting purposes .............. $ 11,486,417 $ 11,127,598 ============ ============
Unrealized loss/(gain) on investment securities and cumulative difference between federal income tax and financial statement income (loss) represent timing differences. NOTE 10 - 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". 24 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 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 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"). On March 12, 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 12, 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, divided the Class Action Lawsuit into two separate sub-classes that could be settled individually. On May 26, 1999, the Court issued an Order and Final Judgment approving settlement of one of the sub-classes. Settlement of the second sub-class, involving the Partnership and 10 affiliated partnerships (collectively referred to as the "Exchange Partnerships"), remains pending due, in part, to the complexity of the proposed settlement pertaining to this class. In February 2000, counsel for the Plaintiffs and the Defendants entered into a second amended stipulation of settlement (the "Second Amended Stipulation") which modified certain of the settlement terms contained in the Amended Stipulation. The Second Amended Stipulation was preliminarily approved by the Court by its "Second Modified Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing For Notice of, and Hearing On, the Proposed Settlement" dated March 6, 2000 (the "March 2000 Order"). Prior to issuing a final order approving the settlement of the second sub-class involving the Partnership, the Court will hold a fairness hearing that 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 sub-class members 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. 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 principally as a finance company and 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. 25 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) To facilitate the realization of this objective, the Amended Stipulation provided, among other things, that commencing March 22, 1999, the Exchange Partnerships could 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 believed to be consistent with the anticipated business interests and objectives of Newco, subject to certain limitations. The Second Amended Stipulation, among other things, quantified the 40% limitation using a whole dollar amount of $32 million in the aggregate. On March 8, 2000, the Exchange Partnerships collectively made a $32 million loan as permitted by the Second Amended Stipulation approved by the Court. The Partnership's portion of the aggregate loan is $4,790,000. The loan consists of a term loan to Echelon Residential Holdings, a newly-formed real estate company that is owned by several independent investors and, in his individual capacity, James A. Coyne, Executive Vice President of EFG. In addition, certain affiliates of the General Partner made loans to Echelon Residential Holdings in their individual capacities. Echelon Residential Holdings, through a wholly owned subsidiary ("Echelon Residential LLC"), used the loan proceeds, along with the loan proceeds from similar loans by ten affiliated partnerships representing $32 million in the aggregate, to acquire various real estate assets from Echelon International Corporation, an independent Florida-based real estate company. The loan has a term of 30 months maturing on September 8, 2002 and bears interest at the annual rate of 14% for the first 24 months and 18% for the final six months of the term. Interest accrues and compounds monthly but is not payable until maturity. Echelon Residential Holdings has pledged its membership interests in Echelon Residential LLC to the Exchange Partnerships as collateral for the loan. In the absence of the Court's authorization to enter into new investment activities, the Partnership's Restated Agreement, as amended, would not permit such activities without the approval of limited partners owning a majority of the Partnership's outstanding Units. Consistent with the Amended Stipulation, the Second Amended Stipulation provides terms for unwinding any new investment transactions in the event that the Consolidation is not effected or the Partnership objects to its participation in the Consolidation. The Second Amended Stipulation, as well as the Amended Stipulation and the original Stipulation of Settlement, prescribe certain conditions necessary to effect a final settlement, 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 and the Consolidation is estimated to be approximately $425,000, of which approximately $334,000 was expensed by the Partnership in 1998 and additional amounts of approximately $41,000 and $50,000 were expensed in 2000 and 1999, respectively. 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 permitted 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 the sub-class involving the Exchange Partnerships 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. Notwithstanding the extent of delays experienced thus far in achieving a final settlement of the Class Action Lawsuit with respect to the Exchange Partnerships, the General Partner and its affiliates, in consultation with counsel, continue to feel that there is a reasonable basis to believe that a final settlement of the sub-class 26 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) involving the Exchange Partnerships ultimately will be achieved. However, in the absence of a final settlement 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. NOTE 11 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the quarterly results of operations for the years ended December 31, 2000 and 1999:
THREE MONTHS ENDED --------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, TOTAL --------- -------- ------------- ------------ --------- 2000 ---- Total operating and sales-type lease revenue .......................... $324,453 $294,311 $ 289,953 $ 348,457 $1,257,174 Net income (loss) ...................... 97,104 42,906 (223,596) (156,727) (240,313) Net income (loss) per limited partnership unit ............. 0.10 0.05 (0.24) (0.17) (0.26) 1999 ---- Total lease revenue .................... $519,367 $599,836 $507,181 $479,815 $2,106,199 Net income ............................. 201,588 741,730 228,275 477,690 1,649,283 Net income per limited partnership unit ............. 0.22 0.80 0.25 0.50 1.77
NOTE 12 - SUBSEQUENT EVENT In February 2001, the Partnership and certain affiliated investment programs (collectively "the Programs") refinanced the outstanding indebtedness and accrued interest related to an aircraft on lease to Aerovias de Mexico, S.A. de C.V. In addition to refinancing the Programs' total existing indebtedness and accrued interest of $4,758,845, the Programs received additional debt proceeds of $3,400,177. The Partnership's aggregate share of the refinanced and new indebtedness was $792,567, including $462,274 used to repay the existing indebtedness on the refinanced aircraft. The Partnership used a portion of its share of the additional proceeds of $330,293 to repay the outstanding balance of the indebtedness and accrued interest related to the aircraft on lease to Finnair OY of $85,579 and certain aircraft reconfiguration costs that the Partnership had accrued at December 31, 2000. The new indebtedness bears a fixed interest rate of 7.65%, principal is amortized monthly and the Partnership has a balloon payment obligation at the expiration of the lease term of $264,310 in September 2004. 27 ADDITIONAL FINANCIAL INFORMATION AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP SCHEDULE OF EXCESS (DEFICIENCY) OF TOTAL CASH GENERATED TO COST OF EQUIPMENT DISPOSED FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 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, 2000, 1999 and 1998.
2000 1999 1998 ---------- ---------- ---------- Rents earned prior to disposal of equipment, net of interest charges ......... $3,114,612 $5,548,630 $2,495,772 Sale proceeds realized upon disposition of equipment ............................... 294,785 2,131,867 316,524 ---------- ---------- ---------- Total cash generated from rents and equipment sale proceeds ................ 3,409,397 7,680,497 2,812,296 Original acquisition cost of equipment disposed ................................... 2,605,499 5,359,549 2,214,718 ---------- ---------- ---------- Excess of total cash generated to cost of equipment disposed ...................... $ 803,898 $2,320,948 $ 597,578 ========== ========== ==========
28 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CASH AND DISTRIBUTABLE CASH FROM OPERATIONS, SALES AND REFINANCINGS FOR THE YEAR ENDED DECEMBER 31, 2000
SALES AND OPERATIONS REFINANCINGS TOTAL ----------- ------------ ----------- Net (loss) income .................................. $ (344,766) $ 104,453 $ (240,313) Add: Depreciation .................................. 698,894 -- 698,894 Collections on net investment in sales-type lease............................. 52,770 -- 52,770 Management fees ............................... 60,456 -- 60,456 Book value of disposed equipment .............. -- 190,332 190,332 Partnership's share of unconsolidated real estate venture's loss .................... 363,578 -- 363,578 Less: Non-cash gain on sales-type lease ............. (81,911) -- (81,911) Sales-type lease revenue....................... (2,231) -- (2,231) Principal reduction of notes payable .......... (533,688) -- (533,688) ----------- ----------- ----------- Cash from operations, sales and refinancings .................................. 213,102 294,785 507,887 Less: Management fees ............................... (60,456) -- (60,456) ----------- ----------- ----------- Distributable cash from operations, sales and refinancings ........................ 152,646 294,785 447,431 Other sources and uses of cash: Cash and cash equivalents at .................. 4,899,851 1,189,871 6,089,722 beginning of year Net change in receivables and accruals ...................................... 444,395 -- 444,395 Investment in real estate venture ............. (3,540,839) (1,249,161) (4,790,000) Proceeds from notes payable ................. 131,618 -- 131,618 Less: Cash distributions paid ....................... -- (235,495) (235,495) ----------- ----------- ----------- Cash and cash equivalents at end of year ........... $ 2,087,671 $ -- $ 2,087,671 =========== =========== ===========
29 AMERICAN INCOME FUND I-E, 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 FOR THE YEAR ENDED DECEMBER 31, 2000 For the year ended December 31, 2000, the Partnership reimbursed the General Partner and its Affiliates for the following costs: Operating expenses $ 512,693 30 EX-23 7 0007.txt 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-E, a Massachusetts Limited Partnership, of our report dated March 30, 2001, on the financial statements of American Income Fund I-E, included in the 2000 Annual Report to the Partners of American Income Fund I-E, a Massachusetts Limited Partnership. /s/ ERNST & YOUNG LLP Tampa, Florida March 30, 2001 EX-99.I 8 0008.txt EXHIBIT 99.I LEASE OF RAILROAD EQUIPMENT DATED AS OF NOVEMBER 1, 1991, BETWEEN CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY, A DELAWARE CORPORATION (THE "LESSEE"), AND NATIONAL RAILWAY EQUIPMENT COMPANY (THE "LESSOR") The Lessee desires to lease from Lessor the units of Railroad Equipment described in Schedule A hereto (each a "Unit" and collectively the "Equipment") upon the terms and conditions hereinafter provided. Accordingly, in consideration of the premises and of the rentals to be paid and the covenants hereinafter mentioned to be kept and performed by the Lessee, the Lessor hereby leases the Units to the Lessee upon the following terms and conditions: SECTION 1. NET LEASE. This Lease is a net lease and the Lessee shall not be entitled to any abatement or rent or additional rent, or setoff against or recoupment or reduction of rent or additional rent, including, but not limited to, abatements, setoffs, reductions or recoupments due or alleged to be due by reason of any past, present or future claims or counterclaims of the Lessee against the Lessor under this Lease or otherwise. The Lessee's obligations hereunder, including its obligations to pay all rentals, additional rentals and other accounts hereunder, shall be absolute and unconditional under any and all circumstances, and, except as otherwise expressly provided herein, this Lease shall not terminate, nor shall the respective obligations of the Lessor or the Lessee be otherwise affected, by reason of any defect, whether latent or patent, in or damage to or loss of possession or loss of use or destruction of all or any of the Units from whatsoever cause, any liens, encumbrances or rights of others with respect to any of the Units, the prohibition of or other restriction against the Lessee's use of all or any of the Units, the interference with such use by any corporation, association, individual, unit of government or other entity (each a "Person"), the invalidity or unenforceability or lack of due authorization of this Lease, any insolvency of or any bankruptcy, reorganization or similar proceeding against the Lessee, or for any other cause whether similar or dissimilar to the foregoing, any present or future law to the contrary notwithstanding, it being the intention of the parties hereto that the rents and other amounts payable by the Lessee hereunder shall continue to be payable in all events in the manner and at the time herein provided unless the obligation to pay the same shall be terminated pursuant to the express provisions of this Lease. To the extent permitted by applicable law, the Lessee hereby waives any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender the lease of any of the Units except in accordance with the express terms hereof. Each rental or other payment made by the Lessee hereunder shall be final and the Lessee shall not seek to recover all or any part of such payment from the Lessor for any reason whatsoever. SECTION 2. DELIVERY AND ACCEPTANCE OF UNITS. Acceptance of the Units by Lessee shall be deemed to be a delivery by the Lessor to the Lessee under this Lease at the point or points within the United States of America at which such Unit is so delivered to the Lessee. Upon such delivery, the Lessee will cause an employee of the Lessee to inspect the same and, if such Unit is found to be acceptable, to accept delivery of such Unit and execute and deliver to the Lessor a certificate of inspection and acceptance (the "Certificate of Inspection and Acceptance") whereupon, except as provided in the next sentence, such Unit shall be deemed to have been delivered to and accepted by the Lessee hereunder and shall be subject thereafter to all the terms and conditions of this Lease. Lessor agrees to deliver all of the Unites between November 15, 1991 and March 31, 1992, inclusive. SECTION 3. RENTALS. The Lessee agrees to pay to the Lessor, as rental for each Unit, 48 consecutive quarterly rental payments in advance of $17,795 per Unit, the first such payment being due April 1, 1992 and subsequent quarterly payments being due on the first day of each succeeding quarter (each such date being hereinafter called a "Rental Payment Date"). Additionally, Lessee agrees to pay Lessor on April 1, 1992 interim rental for all Units accepted by Lessee at the rate of $195 per day from the date of acceptance or January 1, 1992, whichever is later, through March 31, 1992. If any of the Rental Payment Dates referred to above is not a business day, the rental payment otherwise payable on such date shall be payable on the next succeeding business day. The term "business day" as used herein means a calendar day, excluding Saturdays, Sundays and any other day on which banking institutions in Chicago, Illinois, are authorized or obligated to be closed. The Lessor irrevocably instructs the Lessee to make all the payments provided for in this Lease to be made by the Lessee, including, but not limited to, the payments provided for in this Section 3 and in Section 7 hereof, as follows: ________________________________. The Lessee agrees to make such payment provided for in this Lease in Federal or other funds immediately available by 11:00 a.m., Chicago time, on the date such payment is due. SECTION 4. TERMS OF LEASE. The term of this Lease as to each Unit shall begin on the date of delivery and acceptance of such Unit hereunder and, subject to the provisions of Sections 7, 2 10 and 13 hereof, shall terminate on March 31, 2004. The obligations of the Lessee hereunder (including, but not limited to, the obligations under Sections 3, 6, 7, 9 and 14 hereof) shall survive the expiration or termination of the term of this Lease and the full payment of all amounts payable under this Lease. So long as no Event of Default exists hereunder, this Lease may not be terminated and the Lessee shall be entitled to the rights of possession and use provided under section 12 hereof. SECTION 5. IDENTIFICATION MARKS. The Lessee will cause each Unit to be kept numbered with the identification number set forth in schedule A hereto, and will keep and maintain plainly, distinctly, permanently and conspicuously marked on each side of each Unit, in letters not less than one inch in height, the words "Ownership Subject to a Security Agreement Filed with the Interstate Commerce Commission", with appropriate changes thereof as from time to time may be required by law, in the opinion of the Lessor, in order to protect the Lessor's rights to and interests in such unit. The Lessee will replace promptly any such markings which may be removed, defaced, obliterated or destroyed. Except as provided in the preceding paragraph, the Lessee will not allow the name of any Person to be placed on any Unit as a designation that might be interpreted as a claim of ownership; PROVIDED, HOWEVER, that the Units may be lettered with the names or initials or other insignia customarily used by the Lessee or its affiliates. SECTION 6. TAXES. Whether or not any of the transactions contemplated hereby are consummated, the Lessee agrees to pay, or cause to be paid, and to indemnify and hold the Lessor and its respective successors, affiliates, assigns, agents and servants (collectively "Indemnified Persons") harmless from, all taxes (including without limitation taxes on income, gross receipts, franchise sales, use, property [real or personal, tangible or intanqible], and stamp taxes), assessments, fees and charges of any nature and whatsoever, together with any penalties, fines, additions to tax or interest thereon, howsoever imposed, whether levied or imposed upon the Equipment, the Lessor or otherwise, by any Federal, state or local government or governmental subdivision in the United States of America or by any foreign country or subdivision thereof, upon or with respect to: any Unit or any part thereof; the manufacture, purchase, ownership, delivery, nondelivery, rejection, leasing, possession, sale, use, operation, rebuilding, replacement, transfer of title, return or other disposition thereof; the rentals, receipts or earnings arising therefrom; or this Lease, any payment made pursuant to such agreement, or THE property, the income or other 3 proceeds received with respect to any Unit (all such taxes, assessments, fees, charges, penalties, fines, additions to tax and interest imposed as aforesaid being hereinafter called "Taxes"), EXCLUDING, HOWEVER: (i) Taxes of the United States of America or any state or political subdivision thereof imposed on or measured solely by the net income or excess profits of the lessor or value-added taxes in lieu of any such net income or excess profits taxes, other than Taxes arising out of or imposed in respect of the receipt of indemnification payments pursuant to this Lease; (ii) any Taxes imposed on or measured by an fees or compensation received by the Lessor; (iii) franchise taxes based on the corporate characteristics of the Lessor; (iv) any tax or similar charge included in the Original Fair Market Value of the Units; and (v) Taxes imposed by a foreign government or taxing authority or governmental subdivision of a foreign country to the extent such Taxes are utilized by the Lessor as a credit against United States Federal income taxes otherwise payable by the Lessor; PROVIDED, HOWEVER, that the Lessee shall not be required to pay any Taxes during the period it may be contesting the same in the manner provided below in this Section 6. In the event any returns, statements or reports with respect to any Taxes are required to be made, the Lessee will make such returns, statements and reports in such manner as to show the interest of the Lessor in such Units, as shall be satisfactory to the Lessor or, where not so permitted, will notify the Lessor of such requirement and will prepare and deliver such reports to the Lessor within a reasonable period of time prior to the time such reports are to be filed in such manners as shall be satisfactory to the Lessor. In the event that, with respect to any period during the continuance of this Lease, the Lessee becomes liable for the payment or reimbursement of any Taxes, pursuant to this Section 6, such liability shall continue, notwithstanding the expiration or termination of this Lease, until all such Taxes are paid or reimbursed by the Lessee. If claim is made against any Indemnified Person for any Taxes indemnified against this Section 6, such party shall promptly notify the Lessee in writing. If reasonably requested by the Lessee in writing and so long as the Lessee is prohibited or impaired from doing so in its own name, such Indemnified Person shall, upon receipt of indemnity reasonably satisfactory to it for all costs, expenses, losses, legal and accountants, fees and disbursements, penalties, fines, additions to tax and interest, and at the expense of the Lessee, contest in good faith the validity, applicability or amount of such Taxes by (a) resisting payment thereof if legally permissable (provided that the nonpayment thereof does not, in the opinion of such Indemnified Person adversely effect the interests of such Indemnified Person in and to the Units) and/or (b) not paying the 4 same except under protest, if protest is necessary and proper and/or (c) if payment is made, filing for and making reasonable efforts to obtain a refund thereof by appropriate administration or judicial proceedings, or both. At the request of the Lessee, such Idemnified Person shall keep the Lessee informed of the status of such contest and, at the Lessee's expense, supply copies of briefs and other pleadings with respect to such contest to the extent they do not relate to claims not indemnified by the Lessee hereunder. The Lessee may also contest, at its own expense, the applicability or amount of such Taxes in the name of such Indemnified Person; PROVIDED, HOWEVER, that no proceeding or action relating to such contest shall be commenced (nor shall any pleading, motion, brief or other paper be submitted or filed in the name of such Indemnified capital person in any such proceeding or action) without the prior written consent of such Indemnified Person. If such Indemnified Person shall obtain a refund of all or any part of such Taxes previously reimbursed by the Lessee in connection with any such contest or an amount representing interest thereon, such Indemnified Person shall, within 30 days, pay the Lessee the amount of such refund or interest net of expenses; PROVIDED, HOWEVER, that no Event of Default (as defined in Section 10), or event which with notice or lapse of time or both would become an Event of Default (a "Default"), shall have occurred and be continuing. The Lessee shall, whenever reasonably requested by an Indemnified Person or the Lessor, submit to such party copies of returns, statements, reports, billings and remittances, or furnish other evidence satisfactory to such party of the Lessee's performance of its duties under this Section 6. The Lessee shall also furnish promptly upon request such data as such party reasonably may require to permit such party's compliance with the requirements of taxing jurisdictions, including data available to the Lessee relating to use of any Unit outside the United States. The amount which the Lessee shall be required to pay with respect to any Taxes which are subject to indemnification under this Section 6 shall be an amount sufficient to restore the Indemnified Person to the same net after-tax rate of return and after-tax cash position, after considering the effect of such payment on its United States Federal income taxes and state and city income taxes or franchise taxes based on net income and foreign taxes, that such Indemnified Person would have been in had such Taxes not been imposed. The indemnities shall be available hereunder to any Indemnified Person irrespective of the negligence or misconduct of any other Indemnified Person. SECTION 7. MAINTENANCE; CASUALTY OCCURRENCES; INSURANCE; TERMINATION. The Lessee at its own expense will maintain, service, test, repair and overhaul each Unit (including 5 any parts installed or replacements made to any Unit and considered an Addition (as defined in Section 9 hereof) hereunder) so that it will remain (a) in good operating order, repair and condition, reasonable wear and tear excepted, (b) in compliance with all Applicable Law (as defined in Section 9 hereof) and (c) eligible for railroad interchange in the hands of the Lessee or Lessor in accordance with the interchange rules of the Federal Railroad Administration and the Association of American Railroads, if any, to the extent such rules are applicable. In the event that any Unit shall (i) become, in the reasonable opinion of the Lessee, worn out from any cause whatsoever (except by reason of a breach of the obligations of the Lessee under the preceding paragraph), (ii) suffer an event which involves an actual, constructive or compromised total loss as a result of an insurance settlement or be returned permanently to the builder thereof in connection with a warranty or patent indemnity settlement; (iii) be destroyed or damaged beyond economic repair such that the Lessee will lose the use thereof for a period of equal to the lesser of 60 consecutive days and the number of days then remaining in the term of this Lease for such Unit; (iv) be stolen or disappear so that the Lessee will lose the use thereof for a period equal to the lesser of 60 consecutive days and the number of days remaining in the term of this Lease for such Unit; (v) be condemned, confiscated, seized or title taken for use by a foreign government for a period equal to the lesser of 180 consecutive days and the number of days remaining in the term of this Lease for such Unit or by a government of or in the United States (the "Government") for a stated period which shall exceed the then remaining term of this Lease for such Unit or for an indefinite period (or, if such taking, requisition or condemnation shall occur during a renewal term, for a stated period which shall exceed such then remaining renewal term or for an indefinite period) (such occurrences being hereinafter called "Casualty Occurrences"), prior to the return of such Unit in the manner set forth in Section 14 hereof, the Lessee shall promptly and fully notify the Lessor with respect thereto. On the Rental Payment Date next succeeding such Casualty Occurrence (or on the following Rental Payment Date, if such next Rental Payment Date is less than fifteen days after such Casualty Occurrence), the Lessee (subject to the next paragraph) shall pay to the Lessor an amount equal to the rental payment or payments in respect of such Unit due and payable through and including such date of payment plus a sum equal to the Casualty Value (as hereinafter defined) of such Unit as of such date. The "Casualty Value" of any Unit as of any Rental Payment Date shall be an amount equal to that percentage of the Original Fair Market Value of such Unit set forth opposite such Rental Payment Date in Schedule B hereto. Upon the making of such payment, the rental for such Unit shall cease to accrue, the term of this Lease as to such Unit shall terminate, and, except 6 in the case of the loss, theft, or complete destruction of such Unit, the Lessor shall be entitled to recover possession of such Unit. Unless an Event of Default or an event that, with the passage of time or the giving of notice, would become an Event of Default ("Default") shall have occurred and be continuing, by notice to the Lessor not less than 15 days prior to the date such Casualty Value is required to be paid, the Lessee may elect to substitute for the Unit having suffered such Casualty Occurrence another locomotive (other than a passenger or work locomotive) with fair market value, useful life and utility equal to or exceeding that of the Unit having suffered such casualty occurrence, provided that such substitution does not result in any adverse tax or other adverse consequences to the Lessor. If such substitution is effected (as set forth below) prior to the date the casualty Value is required to be paid, the Lessee shall be relieved of its obligation to pay such Casualty Value. If such substitution cannot be so effected prior to the date that the casualty Value is required to be paid, the Lessee shall deposit with the Lessor on or prior to such date an amount equal to the casualty Value, with instructions to the Lessor to hold such amount pending delivery of a locomotive for substitution. If and so long as no Event of Default or event that, with the passage of time or the giving of notice, would become an Event of Default shall have occurred and shall be continuing, the Lessor shall invest such amounts in "Permitted Investments," as defined below, at the expense end risk and for account of the Lessee, and shall disburse such amounts and any earnings and gain from such investments to the Lessee upon effectiveness of much substitution. If such an Event of Default or Default shall occur, any amounts so held will be applied to the payment or the Casualty Value at the Unit for which substitution was contemplated and any surplus shall be applied to damages pursuant to Section 10. If such substitution shall not be effected prior to the Rental Payment Date next succeeding such deposit, the Casualty Value (of the Unit for which substitution was contemplated) shall be due on much Rental Payment Date, and any amounts so held by the Lessor shall be applied to the payment thereof with any excess being paid to the Lessee. Any such substitution shall be effected by: (a) preparation, execution and delivery of suitable amendments or supplements including such substituted unit as a Unit hereunder and recording or depositing the same in all public offices where this Lease shall have been recorded or deposited hereunder; (b) delivery to the Lessor of a certificate of an officer of the Lessee certifying that no Event of Default or Default has occurred and is continuing and 7 that such substitute unit is a locomotive (other than a passenger or work locomotive) with a fair market value, useful life and utility equal to or exceeding the Unit for which substitution is being made, accompanied by a bill of sale and opinion of counsel with respect thereto of the same scope and tenor as that delivered in connection with the original delivery of the Unit for which substitution is being made. Upon completion of such steps, the substitute unit shall be regarded as a Unit hereunder having the same Original Fair Market Value as the Unit having suffered the Casualty Occurrence. The Lessee shall pay all costs and expenses related to such substitution. The term "Permitted Investment," as used herein shall mean (i) direct obligations of the United States of America or obligations for which the full faith and credit of the United States of America is pledged to provide for the payment of principal and interest, (ii) open market commercial paper rated A-1 by Standard & Poor's Corporation ("STP") or prime-1 by NCO---Moody's Commercial Paper Division of Moody's Debt Participants Service, Inc., or equivalent ratings of the successor of either of them, or (iii) certificates of deposit or banker's acceptances of domestic banks having total assets in excess of $1,000,000,000 and which has outstanding at least one issue of securities rated in at least one of the three highest categories by STP or Moody's Investors Service, Inc., in each case maturing in not more than 95 days from the data of such investment. Whenever any Unit shall suffer a Casualty Occurrence after the final payment of rent in respect thereof is due and has been paid pursuant to Section 3 hereof and before (a) such Unit shall have been returned in the manner provided in Section 14 hereof and (b) the storage period therein provided with respect to such Unit shall have expired, the Lessee shall promptly (as provided above) and fully notify the Lessor with respect thereto and pay to the Lesser an amount equal to the Casualty Value of such Unit, which shall, except as otherwise provided in Section 13 hereof, be an amount equal to the last Casualty Value for such Unit shown on Schedule B hereto. Upon the making of any such payment by the Lessee in respect of any Unit (except in the case of the loss, theft or complete destruction of such Unit), the Lessor shall be entitled to recover possession of such Unit. In the event of the requisition (other than a requisition which constitutes a Casualty Occurrence) for use by the Government of any Unit during the term of this Lease, all of the Lessee's obligations (including, without limitation, the obligation to pay rent) under this Lease with respect to such Unit shall continue to the same extent as if such requisition had not occurred, except that if such Unit is returned by the 8 Government at any time after the end of the term of this Lease, the Lessee shall be obligated to return such Unit to the Lessor pursuant to Section 11 or 14 hereof, as the case may be, promptly upon such return by the Government rather than at the end of the term of this Lease, but the Lessee shall in all other respects comply with the provisions of said Section 11 or 14, as the case may be, with respect to such Unit. All payments received by the Lessor or the Lessee from the Government for the use of such Unit in respect of the term of this Lease shall be paid over to, or retained by, the Lessee, provided no Event or Default or Default shall have occurred and be continuing; and all payments received by the Lessor of the Lessee from the Government for the use of such Unit in respect of the period after the term of this Lease shall be paid over to, or retained by, the Lessor. The Lessor hereby appoints the Lessee its agent to dispose of any Unit suffering a Casualty Occurrence, or any component thereof, at the best price obtainable on an "as is, where is" basis and the Lessee shall notify the Lessor prior to any such sale. Provided that the Lessee has previously paid the Casualty Value to the Lessor or has effected substitution for such Unit and provided no Event of Default or Default shall have occurred and be continuing, the Lessee shall be entitled to the proceeds of such sale to the extent they do not exceed the Casualty Value of such Unit plus the Lesse's out-of-pocket expenses in connection with such sale and any excess shall be paid to the Lessor. The Lessee will pay all costs and expenses in connection with the sale of any Unit pursuant to a Casualty Occurrence. The Lessee shall be entitled to credit against the Casualty Value payable in respect of any Unit permanently returned to its builder pursuant to any patent indemnity provision of any purchase agreement covering such Unit an amount equal to any net patent indemnity payment in respect of such Unit made by the builder to the Lessor. Except as hereinabove to this Section 7 provided, the Lessee shall not be released from its obligations hereunder in the event of, and shall bear the risk of, any Casualty Occurrence or other damage to or destruction or loss of any Unit from and after delivery and acceptance thereof by the Lessee hereunder. The Lessee will, at all times prior to the return of the Equipment to the Lessor, at its own expense, cause to be carried and maintained (and shall furnish to the Lessor an insurer's or broker's certificate evidencing) property insurance and public liability insurance in respect of the Units at the time subject hereto, in amounts (subject to customary deductibles) and against risks customarily insured against by the Lessee on locomotives owned or leased by the Lessee but in any event consistent with prudent industry standards. Any policies of insurance carried in accordance with this paragraph, including, without limitation, liability insurance obtained after 9 the date hereof, shall in effect name the Lessor as an additional insureds as its interests may appear and shall provide for 30 days, prior written notice to the Lessee of any material change or cancellation. If the Lessor shall receive any property insurance proceeds or condemnation payments in respect of a Unit suffering a Casualty Occurrence, the Lessor shall, subject to the Lessee's having made payment of the Casualty Value in respect of such Unit and provided no event of Default or Default shall have occurred and be continuing, pay such proceeds or condemnation payments to the Lessee up to an amount equal to the Casualty Value with respect to such Unit paid by the Lessee and any balance of such proceeds or condemnation payments shall remain the property of the Lessor. Provided no Event of Default or Default shall have occurred and be continuing, all insurance proceeds received by the Lessor from the Lessee's property insurance coverage in respect of any Unit not suffering a Casualty Occurrence shall be paid to the Lessee upon proof satisfactory to the Lessor that any damage to such Unit in respect of which such proceeds were paid has been fully repaired. Nothing herein shall be construed to prohibit the Lessor from carrying any insurance on the Equipment for its own benefit; PROVIDED, HOWEVER, that any such insurance shall not require any premiums to be paid by the Lessee nor shall any such insurance require the Lessee to carry additional insurance not specifically required of the Lessee herein. In the event that the Lessee shall, in its reasonable judgment, determine that one or more of the Units have become economically obsolete in the Lessee,s business or shall be surplus to its requirements or it is not feasible to comply with the provisions of paragraph (C) of Section 9 hereof with respect thereto, the Lessee shall have the right, on at least 180 days, (and not more than 360 days,) prior irrevocable written notice to the Lessor to terminate this Lease as to such Units as of the succeeding Rental Payment Date specified in such notice (hereinafter called the "Termination Date"); PROVIDED, HOWEVER, that (i) no Event of Default or Default shall have occurred and be continuing (other than pursuant solely to a violation of paragraph (I) of Section 9 hereof) and (ii) on the Termination Date each such Unit shall be in the same condition as if redelivered pursuant to Section 14 hereof. During the period from the date of termination notice until the fifth business day preceding the Termination Date, the Lessee shall use its best efforts to, and the Lessor say if it so chooses, obtain bids for the purchase of all such Units, and the Lessee shall at least five business days prior to the Termination Date certify to the Lessor the amount of each such bid and the name and address of the party submitting such bid. On the Termination Date the Lessor may elect to sell all such Units for cash to the bidder 10 (who shall not be the Lessee or any affiliate thereof) who shall have submitted the highest bid prior to the Termination Date. The total sale price realized at any such sale shall be retained by the Lessor and on the Termination Date the Lessee shall pay to the Lessor (a) the excess, if any, of the Casualty Value for each such unit computed as of such date over the sale price of such Unit after the deduction of all expenses incurred by the Lessor in connection with the sale, and (b) the rental payment due on the Termination Date. The Lessor may, however, by irrevocable written notice to the Lessee given prior to the Termination Date, elect to retain all such Units, in which case (1) the Lessee shall pay to the Lessor (a) the excess, if any, of the Casualty Value for each such Unit computed as of the Termination Date over the assumed net sales value of each such Unit (as determined by mutual agreement or by an appraisal agreed to by the Lessor and the Lessee), and (b) the rental payment due on the Termination Date and (2) the Lessee shall deliver all such Units to the Lessor in accordance with the provisions of Section 14 hereof. SECTION 8. REPORTS AND INSPECTION. On or before March 31 in each year, commencing with 1993, the Lessee will furnish to the Lessor an accurate statement (i) setting forth as at the preceding December 31 the amount, description and numbers of all Units then leased hereunder, the amount, description and numbers of all Units that have suffered a Casualty Occurrence during the preceding calendar year or are then undergoing repairs (other than running repairs) or then withdrawn from use pending such repairs (other than running repairs) and such other information regarding the condition and state of repair of the Units as the Lessor may reasonably request, and (ii) stating that, in the case of all Units repainted or repaired during the period covered by each statement, the numbers and markings required by Section 5 hereof have been preserved or replaced. In addition, within 30 days following the renewal date of any insurance coverage hereunder, the Lessee shall so furnish a verification or certification of insurance coverage from the Lessee's insurer or independent broker stating the amounts of such insurance in effect and the amounts of deductibles. The Lessor, at its sole cost end expense, shall have the right by its agents to inspect the Units and the Lessee's records with respect thereto at such reasonable times as the Lessor may request during the continuance of this Lease, but the Lessor shall not have any obligation to do so. The Lessee shall promptly notify the Lessor of any material changes or any material proposed changes of which the Lessee has knowledge in its insurance coverage in effect with respect to the Units pursuant to Section 7 hereof. The Lessee shall promptly notify the Lessor of any occurrence of an event of Default or Default, specifying such Event of Default or Default and the nature and status thereof. 11 SECTION 9. WARRANTIES; COMPLIANCE WITH LAWS AND RULES; INDEMNIFICATION. (A) Lessee hereby acknowledges that Lessee has had or will have the opportunity to inspect the Equipment prior to accepting delivery of same, and that acceptance of delivery of the Equipment by Lessee constitutes acknowledgement that they have been received in good condition and repair. (B) Delivery to and acceptance of the Equipment by, and execution of an acceptance certificate with respect thereto by Lessee shall constitute Lessee's acknowledgement that the Equipment is of the manufacture, design and utility, quality and capacity selected by the Lessee, that Lessee is satisfied that the same is suitable for Lessee's purpose and that, LESSOR MAKES NO REPRESENTATION OR WARRANTY EXPRESS OR IMPLIED, WITH RESPECT TO THE CONDITION, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF THE EQUIPMENT, except as otherwise stated herein or in any express warranty to Lessee. (C) The Lessee agrees, for the benefit of the Lessor at all times to comply in all respects (including, without limitation, with respect to the use, maintenance and operation of each Unit) with all applicable laws of the jurisdictions in which operations involving the Units extend, with the interchange rules or the Association of American Railroads (which term shall include any successor organization thereof) to the extent applicable, and with all lawfu1 rules of the United States Department of Transportation, the Interstate Commerce Commission and any other legislative, executive, administrative or judicial body exercising any power or jurisdiction over the Units, to the extent that such laws and rules affect the title, operation or use of the Units (all such laws and rules to such extent being hereinafter called the "Applicable Laws"), and in the event that, prior to the expiration of the term of this Lease, any Applicable Law requires any alteration, replacement, addition or modification of or to any part on any Unit the Lessee will conform therewith at its own expense; PROVIDED, HOWEVER, that the Lessee may at its own expense, in good faith, contest the validity or application of any Applicable Law in any reasonable manner which does not, in the opinion of the Lessor adversely affect the property or riqhts of the Lessor under this Lease. The Lessee, at its own cost and expense, may furnish other additions, modifications and improvements (including, without limitation, any 12 special devices, assemblies or racks at any time attached or affixed to any Unit, the cost of which is not included in the Original Fair Market Value of such Unit and which are not required for the operation or use of such Unit by the United States Department of Transportation, the Interstate Commerce Commission or any other legislative, executive, administrative or judicial body exercising any power or jurisdiction over such Unit) (collectively "Additions") to the Units as the Lessee may deem desirable in the proper conduct of its business so long as such Additions shall not be inconsistent with the continuing operation of the Units, shall not diminish the value, utility or condition of the Units below the value, utility and condition thereof immediately prior to the making of such Additions, assuming the Units were then in the condition required to be maintained by the terms of this Lease, and shall not render the Units ineligible for interchange service under the rules of the Association of American Railroads to the extent applicable. Title to all Parts (as herein below defined) incorporated in or installed as part of the Units shall without further act vest in the Lessor in the following cases: (i) such Part is in replacement of or in substitution for, and not in addition to, any Part originally incorporated in or installed as part of a Unit at the time of the acceptance thereof hereunder or any Part in replacement of, or in substitution for, any such original or replaced or substituted Part; (ii) such Part is required to be incorporated in or installed as part of the Units pursuant to the provisions of the first paragraph of Section 7 hereof or the first sentence of this paragraph; or (iii) such Part cannot be readily removed from the Unit to which it relates without material damage thereto and without diminishing or impairing the value or utility which such Unit shall have had at such time had such alteration or addition not occurred. In all other cases, if no Event of Default or Default shall have occurred and be continuing, title to Parts incorporated in or installed as parts of the Units as a result of such alterations or additions shall vest in the Lessee and may be removed by the Lessee at any time during the term of this Lease and prior to the return of the Units to the Lessor pursuant to Section 14 hereof. The term "Part" for the purposes of this paragraph shall mean any appliance, part, instrument, accessory, furnishing or other equipment of any nature which may from time to time be incorporated in or installed as part of any Unit. 13 (D) The Lessee agrees to indemnify, protect and hold harmless each Indemnified Person from and against all losses, damages, injuries, liabilities, claims (including, without limitation, claims for strict liability in tort and claims based on the passive or active negligence of an Indemnified Person) and demands whatsoever, regardless of the cause thereof, and expenses in connection therewith, including, but not limited to, counsel fees and expenses, the annual fees, costs and disbursements of the Lessor, and patent, trademark or copyright liabilities, penalties and interest, arising out of or alleged to arise out of or as the result of the entering into or the performance of, or the occurrence of a default, a Default or an Event of Default under this Lease or any sublease entered into pursuant to Section 12 hereof, the ownership of any Unit, the ordering, acquisition, replacement, operation, use, condition (including any latent or patent defects in any Unit), purchase, delivery, rejection, storage or return of any Unit or any accident resulting in damage to or loss of property or injury or death to any Person in connection with, or alleged to have occurred in connection with, the ordering, acquisition, replacement, operation, use, condition, purchase, delivery, possession, storage or return of any Unit (except as otherwise expressly provided in Section 14 of this Lease), the transfer of title to the Equipment by the Lessor pursuant to any provisions of this Lease or the alleged violation of the terms of any agreement, this Lease or any law, regulation, ordinance or restriction affecting the Units, or the insolvency, bankruptcy, reorganization, recapitalization or restructuring of the Lessee or this transaction, except any matter otherwise indemnified by the Lessee caused by any act or omission of such Indemnified Person not related to the transactions contemplated by this Lease (all of which matters indemnified against pursuant to the above being hereinafter called the "Indemnified Matters"). The amount the Lessee shall be required to pay with respect to any Indemnified Matter shall include a payment to the Indemnified Person sufficient to restore such Person to the same position, after considering the effect of such payment on its United States Federal income taxes and state and city income taxes or franchise taxes based on net income, that the Indemnified Person would have been in had the Indemnified Matter not occurred. The Lessee shall be obligated under this Section 9 irrespective of whether any Indemnified Person shall also be indemnified with respect to the same matter under any other agreement by any other Person and irrespective of the negligence or 14 conduct of any other Person, and the Indemnified Person seeking to enforce the indemnification may proceed directly against the Lessee under this Section 9 without first resorting to any such other rights of indemnification. (E) The Lessee shall not be released from its obligations hereunder in the event of any damage to or the destruction or loss of any or all of the Units. (F) The Lessee agrees to prepare and deliver to the Lessor, within a reasonable time prior to the required filing date (or, to the extent permissible, file on behalf of the Lessor and furnish copies thereof to the Lessor upon request) any and all reports (other than tax returns, except as otherwise provided in Section 6 hereof) to be filed by the Lessor with any Federal, State or other regulatory authority by reason of the Ownership by the Lessor of the Units or the leasing thereof to the Lessee. (G) None of the indemnities in this Section 9 shall be deemed to create any rights of subrogation, from or under any Indemnified Person, in any insurer or third party against the Lessee or the Lessor therefor, whether because of any claim paid or defense provided for the benefit thereof or otherwise. The indemnities contained in this Section 9 shall survive the expiration or termination of this Lease and return of the Units as provided in Section 11 or 14 hereof with respect to all events, facts, conditions or other circumstances occuring or existing prior to such expiration or termination and are expressly made for the benefit of, and shall be enforceable by, any Indemnified Person. (H) Upon the payment in full of any indemnities as contained in this Section 9 by the Lessee, and provided that no Event of Default or Default shall have occurred and be continuing (i) the Lessee shall be subrogated to any right of such Indemnified Person (except against another Indemnified Person) in respect of the matter against which indemnity has been given and (ii) any payments received by such Indemnified Person from any Person (except the Lessee) as a result of any matter with respect to which such Indemnified Person has been indemnified by the Lessee pursuant to this Section 9 shall be paid over to the Lessee to the extent necessary to reimburse the Lessee for indemnification payments previously made in respect of such matter. 15 SECTION 10. EVENT OF DEFAULT. If, during the continuance of this Lease, one or more of the following events (each such event being herein sometimes called an "Event of Default") shall occur: (A) default shall be made in the payment of any rent due hereunder and such default shall continue for five days or default shall be made in the payment of any other amount due hereunder and such default shall continue for ten days; (B) the Lessee shall make or permit any unauthorized assignment or transfer of this Lease or of its leasehold interest in the Units hereunder; or the Lessee shall make or permit any unauthorized use or transfer of the possession of any Unit and shall fail to recover such Unit within 30 days; (C) the Lessee shall fail to maintain (i) the public liability insurance coverage required by Section 7 hereof or (ii) the property insurance coverage required by Section 7 hereof and such failure shall continue for 20 days; (D) default shall be made in the observance or performance of any other of the covenants, conditions and agreements on the part of the Lessee contained in or contemplated by this Lease (other than as described in the last paragraph of Section 9 hereof), and such default shall continue for 30 days after the earlier of (i) knowledge of such Default by a Responsible Officer of the Lessee or (ii) written notice from the Lessor to the Lessee specifying the default and demanding that the same be remedied (Responsible Officer shall mean the Senior Vice President-Finance and Accounting, the Treasurer, the Vice President or the Assistant Vice President-Motive Power or any other officer whose position and responsibilities require that such officer know the requirements of this Lease); (E) a petition for reorganization under Title 11 of the United States Code, as now constituted or as may hereafter be amended, shall be filed by or against the Lessee and, unless such petition shall have been dismissed, nullified, stayed or otherwise rendered ineffective (but then only so long as such stay shall continue in force or such ineffectiveness shall continue), all the obligations of the Lessee under this Lease shall not have been or shall not continue thereafter to be duly assumed in writing, pursuant to a court order or decree, by a trustee or trustees appointed (whether or not subject to ratification) in 16 such proceedings in such manner that such obligations shall have the same status as expenses of administration and obligations incurred by such trustee or trustees, within 60 days after such petition shall have been filed and otherwise in accordance with the provisions of 11 U.S.C. Section 1168, or any successor provision; or (F) any other proceeding shall be commenced by or against the Lessee for any relief which includes, or might result in, any modification of the obligations of the Lessee hereunder, under any bankruptcy or insolvency laws, or laws relating to the relief of debtors, readjustments of indebtedness, reorganizations, arrangements, compositions or extensions (other than a law which does not permit the liquidation of the Lessee or any readjustments of the obligations of the Lessee hereunder), and, unless such proceedings shall have been dismissed, nullified, stayed or otherwise rendered ineffective (but then only so long as such stay shall continue in force or such ineffectiveness shall continue), all such obligations shall not have been or shall not continue thereafter to be duly assumed in writing pursuant to a court order or decree, by a trustee or trustees or receiver or receivers appointed (whether or not subject to ratification) for the Lessee, or for the property of the Lessee, in connection with any such proceedings in such manner that such obligations shall have the same status as expenses of administration and obligations incurred by such trustee or trustees or receiver or receivers, within 60 days after such proceedings shall have been commenced; then, in any such case, the Lessor, at its option, may do any one or more of the following: (a) proceed by appropriate court action or actions either at law or in equity to enforce performance by the Lessee of the applicable covenants of this Lease or to recover damages for the breach thereof; or (b) by notice in writing to the Lessee terminate this Lease, whereupon all rights of the Lessee to the use of the Units shall absolutely cease and terminate as though this Lease had never been made, but the Lessee shall remain liable as herein provided; the Lessor may by its agents, subject to compliance with all mandatory requirements of law, enter upon the premises of the Lessee or other premises where any of the Units may be and take possession of all or any such 17 Units and thenceforth hold, possess, sell, operate, lease to others and enjoy the same free from any right of the Lessee, or its successors or assigns, use the Units for any purposes whatever and without any duty to account to the Lessee for such action or inaction or for any proceeds arising therefrom; the Lessor shall, nevertheless, have a right to recover from the Lessee damages for the breach of the covenants hereof and any Event of Default and any and all amounts which under the terms of this Lease may be then due or which may have accrued to the data of such termination (computinq the rental for any number of days less than a full rental period [based on a 360 day year] by multiplying the rental for such full rental period by a fraction of which the numerator is such number of days and the denominator is the total number of days in such full rental period) and also to recover forthwith from the Lessee as damages for loss of the bargain for future rents and not as a penalty whichever of the following amounts the Lessor, in its sole discretion, shall specify: (x) a sum, with respect to each Unit, equal to (A) the excess of the present value, at the time of such termination, of the entire unpaid balance of all rental for such Unit which would otherwise have accrued hereunder from the date of such termination to the end of the term of this Lease as to such Unit over (B) the present value of the rental which the Lessor reasonably estimates to be obtainable for the Unit during such period (such present value to be computed in each case on the basis of a 10% per annum discount, compounded semi-annually from the respective dates upon which rentals would have been payable hereunder had this Lease not been terminated) or (y) an amount equal to the excess, if any, of the Casualty Value of such Unit as of the Rental Payment Date on or next precedinq the date of termination over tbe amount the Lessor reasonably estimates to be the net sales value of such Unit at such time (after deduction of all estimated expenses of such sale); PROVIDED, HOWEVER, that in the event the Lessor shall have sold any Unit, the Lessor, in lieu of collecting any amounts payable to the Lessor by the Lessee pursuant to the preceding clause (y) with respect to such Unit, may, if it shall so elect, demand that the Lessee pay the Lessor and the Lessee shall pay to the Lessor an the date of such sale, as liquidated damages for loss of a bargain for future rents and not as a penalty, an amount equal to the excess., if any, of the Casualty Value for such Unit, as of the Rental Payment Date on or next preceding the date of termination, over the net proceeds of such sale. 18 The Lessor may collect, receive and apply to the obligations of the Lessee hereunder any proceeds from the use or sublease of the Units or other proceeds from or with respect to the Units and any amounts held by the Lessor pending substitution for Units having suffered a Casualty Occurrence. In addition, the Lessee shall be liable, except as otherwise provided above, for any and all unpaid amounts due hereunder before, during or after the exercise of any of the foregoing remedies and for all reasonable attorneys, fees and other costs and expenses incurred in the enforcement of this Lease or by reason of the occurrence of any Default or Event of Default or the exercise of the Lessor's remedies with respect thereto, including all costs and expenses incurred in connection with the return of any Unit. Each of the foregoing amounts payable by the Lessee shall bear interest ("Overdue Rate") at the higher of (a) the rate payable with respect to amounts overdue on the Certificates and (b) the prime rate of interest per annum announced by Continental Bank N.A. from time to time in effect (regardless of whether such bank actually charges such rate to any customer) plus a 1.5% per annum from the date such amount was due hereunder to the date of payment thereof, in either case to the extent permitted by law. The remedies in this Lease provided in favor of the Lessor shall not be deemed exclusive, but shall be cumulative and may be exercised concurrently or consecutively, and shall be in addition to all other remedies in its favor existing at law or in equity. The Lessee hereby waives any mandatory requirements of law, now or hereafter in effect, which might limit or modify the remedies herein provided, to the extent that such waiver is not, at the time in question, prohibited by law. The Lessee hereby waives any and all existing or future claims to any offset against the rental payments due hereunder, and agrees to make such payments regardless of any offset or claims which may be asserted by the Lessee or on its behalf. The, Lessee hereby waives any and all claims against the Lessor and its agent or agents for damages of whatever nature in connection with any retaking of any Unit in any reasonable manner. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege preclude any other or further exercise thereof, or the exercise of any other right, power or privilege. SECTION 11. RETURN OF UNITS UPON EVENT OF DEFAULT. If this Lease shall terminate pursuant to Section 10 hereof, the Lessee shall forthwith deliver possession of the Units to the Lessor. Except as hereinafter provided, each Unit so delivered shall be in the condition required by the first paragraph of 19 Section 7 hereof. For the purpose of delivering possession, the Lessee shall: (a) forthwith and in the usual manner (including, but not by way of limitation, giving prompt telegraphic and written notice to the Association of American Railroads and all railroads to which any Unit or Units have been interchanged or which may have possession thereof to return the Unit or Units) place such Units upon such storage tracks of the Lessee or any of its affiliates as the Lessor reasonably may designate; (b) permit the Lessor to store such Units on such tracks at the risk of the Lesee without charge for insurance (which shall conform to the provisions of Section 7 hereof), rent or storage until such Units have been sold, leased or otherwise disposed of by the Lessor; and (c) transport the same to any place on the lines of railroad operated by the Lessee or any of its affiliates or to any connecting carrier for shipment, all as directed by the Lessor. The assembling, delivery, storage, insurance and transporting of the Units as hereinbefore provided shall be at the expense and risk of the Lessee and are of the essence of this Lease, and, upon application to any court having jurisdiction, the Lessor shall be entitled to a decree against the Lessee requiring specific performance of the covenants of the Lessee so to assemble, deliver, store and transport the Units. Except as hereinaftar provided, during any storage period, the Lessee will, at its own expense, maintain and keep the Equipment in the condition required by the first paragraph of Section 7 hereof and will permit the Lessor or any Person designated by it, including the authorized representative or representatives of any prospective purchaser, lessee or user of any such Unit, to inspect the same. All rent earned in respect of the Units after the date of termination of this Lease shall belong to the Lessor and, if received by the Lessee, shall be promptly turned over to the Lessor. Without in any way limiting the foregoing obligations of the Lessee under this Section 11, the Lessee hereby irrevocably appoints the Lessor as the agent and attorney of the Lessee, with full power and authority, at any time while the Lessee is obligated to deliver possession of any Unit to the Lessor, to demand and take possession of such Unit in the name and on behalf of the Lessee from whosoever shall be in possession of such Unit at the time. 20 SECTION 12. POSSESSION AND USE. So long as (i) no Event of Default exists hereunder, and (ii) the Lessee is complying with the provisions hereof, the Lessee shall be entitled to the possession and use of the Units in accordance with the terms of this Lease. Without the prior written consent of the Lessor, the Lessee may not sublease any Unit, except that, subject to the conditions of the preceding sentence, the Lessee may sublease (which sublease by its terms shall be subject and subordinate to this Lease and the rights and remedies of the Lessor), the Units to, or permit their use by, a railroad company incorporated in the United States of America (or any State thereof or the District of Columbia) upon lines of railroad owned or operated by the Lessee or by a railroad company or companies incorporated in the United States of America (or any State thereof or the District of Columbia) or over which the Lessee or such railroad company or companies have trackage rights or rights for operation of their trains or over which their equipment is regularly operated pursuant to contract, and upon the lines of railroad of connecting and other carriers in the usual interchange of traffic or in through or run-through service, but only upon and subject to all the terms and conditions of this Lease; PROVIDED, HOWEVER, that (a) the Lessor's consent, not to be unreasonably withheld, must be obtained for any sublease that, taken together with all renewal terms provided for therein, would he longer than six months during any period of 12 consecutive months. The Lessee shall not use, sublease or permit the sublease or use of any Unit in service involving operation or maintenance outside the United States of America except that occasional service in Canada and Mexico shall be permitted so long as such service in Canada and Mexico is on a temporary basis which is not expected to exceed a total of 90 days in any taxable year of the Lessor. The Lessee shall not sublease to or permit the sublease or use of any Unit by any person in whose hands such Unit would qualify as tax-exempt use property under Section 168(g) of the Internal Revenue Code of 1986, as amended to the date hereof. No such assignment or sublease shall relieve the Lessee of its obligations hereunder, which shall be and remain those of a principal and not a surety. Nothing in the first paragraph of this Section 12 shall be deemed to restrict the right of the Lessee to assign or transfer its leasehold interest under this Lease in the Units or possession of the Units to any railroad corporation incorporated under the laws of the United States of America or any State thereof or the District of Columbia (which shall have duly assumed the obligations of the Lessee hereunder) into or with which the Lessee shall have become merged or consolidated or which shall have acquired or leased all or substantially all the lines of railroad of the Lessee; PROVIDED, HOWEVER, that the Lessee is not in default under any provision of this Lease 21 immediately before the effectiveness of such merger, consolidation, lease or acquisition and that such assignee, lessee or transferee, immediately after the effectiveness of such merger, consolidation, lease or acquisition (i) will have a net worth of not less than the net worth of the Lessee immediately before such effectiveness, and (ii) will not be in default under any provision of this Lease. The Lessee will not create or suffer to exist and as soon as possible, at its own expense, will cause to be duly discharged, any lien, charge, security interest or other encumbrance (except any sublease as aforesaid and other than an encumbrance created by the Lessor which is not contemplated by this Lease or results from claims against the Lessor not related to the ownership or leasing of the Units) which may at any time be imposed on or with respect to any Unit including any Addition, Part or accession thereto or the interest of the Lessor therein; except that this covenant will not be breached by reason of liens for taxes, assessments or governmental charges or levies, in each case not due and delinquent, or undetermined or inchoate materialmen's, mechanics', workmen's, repairmen's or other like liens arising in the ordinary course of business and, in each case, not delinquent and any lien of any mortgage or security agreement of the Lessee that may attach to the Lessee's leasehold interest in and to the Units and shall, in accordance with the terms of such instruments, be subordinate to the interests of the Lessor hereunder (collectively, the "Permitted Liens"); and the Lessee shall be under no obligation to discharge any such lien, charge, security interest or encumbrance so long as it is diligently contesting the same in good faith and by appropriate legal proceedings and the failure to discharge the same does not, in the opinion of the Lessor adversely affect the title, property or rights of the Lessor. SECTION 13. RIGHT OF RENEWAL; PURCHASE OPTION. Provided that this Lease has not been earlier terminated and no Event of Default or Default exists, the Lessee may, by irrevocable written notice delivered to the Lessor not less than 180 days (nor more than 360 days) prior to the end of the original term of this lease, elect to extend the term of this Lease in respect of all of the Units then subject to this Lease, for a period acceptable to both the lessor and the Lessee at tile Fair Market Rental (as hereinafter defined). Provided that this Lease has not been earlier terminated and no Event of Default or Default exists, the Lessee may by irrevocable written notice delivered to the Lessor not less than 180 days (nor more than 360 days) prior to the end of the original term of the renewal term, if elected, of this Lease elect to purchase all of the Units then subject to this Lease at a Fair Market Purchase Price payable in immediately available funds on the expiration of the original term or renewal term, as 22 the case may be. Upon payment of the Fair Market Purchase Price of any Unit pursuant to such exercise by the Lessee of its right to purchase such Units, the Lessor shall execute and deliver to the Lessee, or upon request of the Lessee, to the Lessee's assignee or nominee, a bill of sale (without warranties except as hereinafter provided in this sentence) for such Units such as will transfer to the Lessee title to such Units free and clear of all claims, liens, security interests and other encumbrances created by or arising through the Lessor, other than claims, liens, security interests and encumbrances which the Lessee is obligated to pay or discharge under or pursuant to this Lease. Such bill of sale shall be accompanied by an opinion of Lessor's legal counsel to the effect that the Lessor is authorized to complete such transaction and that the bill of sale is effective to accomplish that which is set forth therein. The Fair Market Rental and Fair Market Purchase Price shall be determined on the basis of, and shall be equal in amount to, the cash rental, or the purchase price (as of such date as the context herein requires), as the case may be, which would obtain in an arm's-length transaction between an informed and willing lessee or purchaser, as the case may be, and an informed and willing lessor or seller, as the case may be (other than a lessee currently in possession), under no compulsion to lease or sell, as the case may be, but there shall be excluded from such determination any rental or purchase value attributable to additions, modifications and improvements which the Lessee is entitled to remove pursuant to Section 9 hereof and without consideration of the Lessee's purchase or renewal option; PROVIDED, HOWEVER, that Fair Market Rental shall be determined on the basis of the term and other terms and conditions of the lease being considered. In making such determination, costs of removal from the location of current use shall not be a deduction from such rental or purchase price and it shall be assumed that the Units have been collected in one place on the lines of the Lessee as directed by the Lessor. If, after 20 days from the giving of notice by the Lessee of the Lessee's election to extend the term of this Lease or the giving of notice by the Lessee that it intends to purchase Units, as aforesaid, the Lessor and the Lessee are unable to agree upon a determination of the Fair Market Rental or Original Fair Market Value of the Units, such rental or purchase price shall be determined in accordance with the foregoing definition by the following procedure: If either the Lessor or the Lessee shall have given written notice to the other requesting determination of such rental or purchaser price by this appraisal procedure, such parties shall consult for the purpose of appointing a qualified independent appraiser by mutual agreement. If no such appraiser is appointed within 15 business days after such notice is given, each such party shall appoint an independent appraiser within 20 business days after such notice is given, and the two appraisers so appointed shall within 25 business days after such notice is given appoint a third 23 independent appraiser. If no such third appraiser is appointed within 25 business days after such notice is given, either such party may request the American Arbitration Association to make such appointment, and both parties shall be bound by any appointment so made. Any appraiser or appraisers appointed pursuant to the foregoing procedure shall be instructed to determine the Fair Market Rental or the Fair Market Purchase Price, as the case may be, of the units then to be appraised, within 30 days after his or their appointment. If such parties shall have appointed a single appraiser or if either such party shall have failed to appoint an appraiser, the determination of Fair Market Rental or Fair Market Purchase Price, as the case may be, of the single appraiser appointed shall be final. If three appraisers shall be appointed, the determination of the appraiser which differs most from that of the other two appraisers shall be excluded, the remaining two determinations shall be averaged and such latter average shall be final and binding as the Fair Market Rental or Fair Market Purchase Price, as the case may be. The appraisal proceedings shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association as in effect on the date hereof, except as modified hereby. The provision for this appraisal procedure shall be the exclusive means of determining Fair Market Rental or Original Fair Market Value, as the case may be, and shall be in lieu of any judicial or other procedure for the determination thereof, and each party hereto hereby consents and agrees not to assert any judicial or other procedures. Except as otherwise provided herein, the Lessee and the Owner shall equally share all appraisal procedure expenses. SECTION 14. RETURN OF UNITS UPON EXPIRATION OF TERM. As soon as practicable on or after the expiration of the original or any renewal term of this Lease with respect to any Unit and in any event within 60 days thereof, the Lessee will, at its own cost and expense, at the request of the Lessor, deliver possession of such Unit (if not purchased by the Lessee to the Lessor upon such storage tracks of the Lessee as the Lessee nay reasonably designate and as shall be acceptable to the Lessor at a location east of the Missouri River and permit the Lessor to store such Unit on such tracks for a period not exceeding 90 days following notification to the Lessor by the Lessee that 80% of the Units have been assembled and delivered for storage (or, with respect to any Unit not delivered at the time of such notification, 90 days following notification from the Lessee to the Lessor that such Unit has been delivered for storage) and upon not less than 30 days prior written notice from the Lessor to the Lessee, transport the same, at any time within such 90-day period but not more than one time, to any reasonable place on the lines of railroad operated by the Lessee, or to any connecting carrier for shipment, all as reasonably directed by the Lessor and as acceptable to the Lessee, the movement and storage of such Units to be at the expense and risk of the Lessee (which shall 24 during such period maintain the insurance required by Section 7 hereof); and in the event that any Unit shall suffer a Casualty Occurrence during such storage period, the Lessee shall pay the Lessor the Casualty Value thereof as provided in Section 7 hereof. During any such storage period the Lessee will permit the Lessor or any Person designated by the Lessor, including the authorized representatives of any prospective purchaser, lessee or user of such Unit, to inspect the same; PROVIDE, HOWEVER, that the Lessee shall not be liab1e, except in the case of willful misconduct, negligence or strict liability of the Lessee or of its employees or agents, for any injury to, or the death of, any Person exercising, on behalf of either the Lessor, the Owner, the Security Trustee or any prospective purchaser, lessee or user, such rights of inspection. Except as hereinafter provided in this Section 14, each Unit returned to the Lessor pursuant to this Section 14 shall (except for additions, modifications and improvements which the Lessee is entitled to remove and does remove pursuant to Section 9 hereof) be in the condition required by the first sentence of Section 7 hereof. The assembling, delivery, storage and transporting of the Units as hereinbefore provided are of the essence of this Lease and, upon application to any court of equity having jurisdiction in the premises, the Lessor shall be entitled to a decree against the Lessee requiring specific performance thereof. During any storage period, the Lessee will, at its own expense, maintain and keep the Units (except for additions, modifications and improvements which the Lessee is entitled to remove and does remove pursuant to Section 9 hereof) in the condition required by the first sentence of Section 7 hereof. Notwithstanding anything to the contrary contained in this Section 14, the Lessee shall have no obligation under clauses (b) through (d) of the first sentence of Section 7 hereof after return of a Unit upon expiration of the original or any renewal term of this Lease or with respect to a termination of the nature described in the last paragraph of Section 7 hereof. All rent earned in respect of the Units after the date of termination of this Lease shall belong to the Lessor and, if received by the Lessee, shall be promptly turned over to the Lessor. If any Unit is not returned on a date within 30 days of the expiration of the original or any renewal term of this Lease, the Lessee will pay to the Lessor as rental for such Unit from such date until such Unit is returned an amount equal to (a) the average quarterly rental payment payable with respect to such Unit during the original term hereof times (b) a fraction the numerator of which is the actual number of days from such date until the return of such Unit and the denominator of which is 90. Concurrently with each delivery of a Unit to the Lessor hereunder, the Lessee will deliver to the Lessor all records in its possession relating to the repair end maintenance history of such Unit, including without limitation all logs, schedules and computer data relating to such history of the type maintained in the ordinary course of business of the Lessee with respect to locomotives owned or leased by the Lessee. 25 After the 90-day storage period described above, the Lessee will store any such Unit at the risk of the Lessor and at then prevailing storage rates for 180 days or for such longer period as the parties may agree. SECTION 15. RECORDING. The Lessee, at its own expense, will cause this Lease to be recorded at the Interstate Commerce Commission pursuant to 49 U.S.C. Section 11303. The Lessee will from time to time do and perform any other act and will execute, acknowledge, deliver, file, register, record (and will refile, reregister, deposit and redeposit or rerecord whenever required) any and all further instruments required by law or reasonably requested by the Lessor for the purpose of proper protection, to its satisfaction, of the Lessor's respective rights in the Units, or for the purpose of carrying out the intention of this Lease; and the Lessee will promptly furnish to the Lessor evidence of all such filing, registering, depositing, recording and other acts which nay be required under this Section 15, and an opinion or opinions of counsel for the Lessee with respect thereto satisfactory to the Lessor. This Lease shall be filed with the Interstate Commerce Commission prior to the delivery and acceptance hereunder of any Unit. SECTION 16. INTEREST ON OVERDUE RENTALS. Anything to the contrary herein contained notwithstanding, any nonpayment of rent or other obligation due hereunder shall result in the obligation on the part of the Lessee promptly to pay, to the extent legally enforceable, an amount on the overdue rentals and other obligations for the period of time during which they are overdue at the Overdue Rate as defined in Section 10. SECTION 17. NOTICES. All communications and notices provided for herein shall be in writing and shall become effective when delivered by mail, by hand or by any other means of communication of written notice, addressed as follows: (a) if to the Lessor, at 14400 South Robey Street, P.O. Box 2270, Dixmoor, Illinois 60426, Attention: President; (b) If to the Lessee, at One North Western Center, 165 Worth Canal Street, Chicago, Illinois 60606, Attention: Vice President - Finance; or addressed to either party at such other address as such party shall hereafter furnish to the other party in writing. SECTION 18. SEVERABILITY; EFFECT AND MODIFICATION OF LEASE; THIRD-PARTY BENEFICIARIES. Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall be, as to such jurisdiction, ineffective to the extent of such prohibition or unenforceability without invalidating the 26 remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. This Lease exclusively and completely states the rights of the Lessor and the Lessee with respect to the leasing of the Units and supersedes all other agreements, oral or written, with respect thereto. No variation or modification of this Lease and no waiver of any of its provisions or conditions shall be valid unless in writing and signed by duly authorized signatories for the Lessor and the Lessee. The parties hereto intend this instrument to be a true lease and that the rights conferred upon the Lessee in the Units are only a leasehold interest for the term of this Lease. SECTION 19. EXECUTION. This Lease may be executed in several counterparts, such counterparts together constituting but one and the same instrument. It shall not be necessary that any counterpart be signed by both parties hereto so long as each party hereto shall have executed and delivered one counterpart hereof. Although for convenience this Lease is dated as of the date first set forth above, the actual date or dates of execution hereof by the parties hereto is or are, respectively, the date or dates shown below their signatures. SECTION 20. LAW GOVERNING. The terms of this Lease and all rights and obligations hereunder shall he governed by the laws of the State of Illinois; PROVIDED, HOWEVER, that the parties shall be entitled to all rights, conferred by 49 U.S.C. Section 11303 and such additional rights arising out of the filing or deposit hereof, if any, and of any assignment hereof and any markings on the Units as shall be conferred by the laws of the several jurisdictions in which this Lease or any assignment hereof shall be filed or deposited. SECTION 21. LESSOR'S RIGHT TO PERFORM. If the Lessee fails to perform or comply with any of its agreements contained herein, the Lessor may (but shall have no obligation to do so) upon notice to the Lessee, and without releasing the Lease from any of its obligations hereunder, perform or comply with such agreement, and the amount of the reasonable costs and expenses (including reasonable counsel fees, if any) incurred in connection with such performance or compliance, together with interest on such amount at the Overdue Rate, shall be payable by the Lessee upon demand. No such performance or compliance by the Lessor shall be deemed a waiver of any rights and remedies against the Lessee hereunder nor be deemed to ours any default by the Lessee hereunder. 27 IN WITNESS WHEREOF, the parties hereto have each caused this agreement to be duly executed by their respective officers thereunto duly authorized. CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY By: /s/ DENNIS E. WALLER ----------------------------- Name: Dennis E. Waller Title: Vice President - Engineering & Materials NATIONAL RAILWAY EQUIPMENT COMPANY By: /s/ L. J. BEAL ----------------------------- Name: L. J. Beal Title: President 28 STATE OF ILLINOIS ) ) SS: COUNTY OF COOK ) On this 7th day of November, 1991, before me personally appeared Dennis E. Waller, to me personally known, who, by me being duly sworn, says that he is a Vice President - Engineering & Materials of Chicago and North Western Transportation Company, and that the foregoing instrument was signed on behalf of said corporation by authority of its Board of Directors, and he acknowledged that the execution of the foregoing instrument was the free act and deed of said corporation. /s/ JUDITH A. SIMM ---------------------------- Notary Public My commission expires: 6-7-93 STATE OF ILLINOIS ) ) SS: COUNTY OF COOK ) On this 7th day of November, 1991, before me personally appeared L. J. Beal, to me personally known, who, by me being duly sworn, says that he is a President of National Railway Equipment Company, and that the foregoing instrument was signed on behalf of said corporation by authority of its Board of Directors, and he acknowledged that the execution of the foregoing instrument was the free act and deed of said corporation. /s/ JUDITH A. SIMM ---------------------------- Notary Public My commission expires: 6-7-93 29 SCHEDULE A TO LEASE DESCRIPTION OF EQUIPMENT Type and General Description of Locomotive Unit, Marks and Numbers: UNIT NO. TYPE GENERAL DESCRIPTION - -------- ------- -------------------------- CNW 4701 GP-38-2 General Purpose Locomotive CNW 4702 GP-38-2 General Purpose Locomotive CNW 4703 GP-38-2 General Purpose Locomotive CNW 4704 GP-38-2 General Purpose Locomotive CNW 4705 GP-38-2 General Purpose Locomotive CNW 4706 GP-38-2 General Purpose Locomotive CNW 4707 GP-38-2 General Purpose Locomotive CNW 4708 GP-38-2 General Purpose Locomotive CNW 4709 GP-38-2 General Purpose Locomotive CNW 4710 GP-38-2 General Purpose Locomotive CNW 4711 GP-38-2 General Purpose Locomotive LEASE RATE ORIGINAL FAIR PER LOCOMOTIVE MARKET VALUE TERM QUARTERLY DAILY - ------------ ---------- ---------- ------- $600,000.00 144 Months $17,795.90 $195.00 30 SCHEDULE B TO LEASE CASUALTY VALUE PER UNIT PAYMENT NUMBER PAYMENT DATE CASUALTY VALUE PERCENTAGE - -------------- ------------ ------------------------- 1 04/01/92 100.00% 2 07/01/92 98.98% 3 10/01/92 97.93% 4 01/01/93 96.87% 5 04/01/93 95.78% 6 07/01/93 94.68% 7 10/01/93 93.55% 8 01/01/94 92.40% 9 04/01/94 91.23% 10 07/01/94 90.04% 11 10/01/94 88.82% 12 01/01/95 87.58% 13 04/01/95 86.31% 14 07/01/95 85.02% 15 10/01/95 83.71% 16 01/01/96 82.37% 17 04/01/96 81.00% 18 07/01/96 79.61% 19 10/01/96 78.19% 20 01/01/97 76.74% 21 04/01/97 75.27% 22 07/01/97 73.76% 23 10/01/97 72.23% 24 01/01/98 70.67% 25 04/01/98 69.07% 26 07/01/98 67.45% 27 10/01/98 65.79% 28 01/01/99 64.10% 29 04/01/99 62.38% 30 07/01/99 60.63% 31 10/01/99 58.84% 32 01/01/00 57.02% 33 04/01/00 55.16% 34 07/01/00 53.26% 35 10/01/00 51.33% 36 01/01/01 49.36% 37 04/01/01 47.35% 38 07/01/01 45.31% 39 10/01/01 43.22% 40 01/01/02 41.10% 41 04/01/02 38.93% 42 07/01/02 36.72% 43 10/01/02 34.47% 44 01/01/03 32.17% 45 04/01/03 29.83% 46 07/01/03 27.44% 47 10/01/03 25.01% 48 01/01/04 22.53% (LAW-2) A:\C17688.002 31 CERTIFICATE OF ACCEPTANCE I. John E. Voldseth, Vice President - Finance, as the duly authorized representative of Chicago and North Western Transportation Company ("CNW") do hereby certify that I have inspected and accepted the following Units on behalf of CNW in accordance with the terms of that certain Lease of Railroad Equipment Agreement dated as of November 1, 1991 ("Lease Agreement"). All capitalized terms used herein shall have the same meaning as in the Lease Agreement: TYPE OF EQUIPMENT: EMD GP38-2 Locomotive Units (2,000 horsepower) DATE ACCEPTED: December 12, 1991 NUMBER OF UNITS: Five (5) IDENTIFYING NUMBERS: CNW 4701, CNW 4702, CNW 4703, CNW 4704 and CNW 4706 I do further certify that the foregoing Units are in Acceptable Condition and conform to the specifications, requirements and standards applicable thereto as provided in the Lease Agreement. /s/ JOHN E. VOLDSETH --------------------------- John E. Voldseth Chicago and North Western Transportation Company Date: December 12, 1991 (LAW) A:\L352\L352-6.815 (9) Exhibit "B" PURCHASE AGREEMENT THIS AGREEMENT dated as of October 22, 1991 is by and between CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY ("CNW") and NATIONAL RAILWAY EQUIPMENT CO. ("NRE"). WITNESSETH: WHEREAS, CNW desires to sell to NRE eighteen (18) used EMD GP3O locomotives, twenty-five (25) used EMD 6P35 locomotives and ten (10) used EMD SD4O locomotives (collectively called the "Units") currently owned by CNW currently bearing the CNW-assigned road numbers as listed on Exhibit "A" hereto: and WHEREAS, NRE desires to purchase the Units from CNW. NOW, THEREFORE, in consideration of the terms, conditions and covenants contained in this Agreement, the adequacy of which being hereby acknowledged by both CNW and NRE, it is hereby agreed as follows: 1. AUTHORITY. CNW hereby agrees to sell to NRE the Units pursuant to authority given by CNW's Board of Directors. 2. PURCHASE PRICE. The Purchase Price ("Purchase Price") for the Units shall be $397,675 for the eighteen (18) EMD GP30 locomotives, $552,325 for the twenty-five (25) EMD GP35 locomotives and $1,750,000 for the ten (10) operable EMD SD40 locomotives in legal currency of the USA. 3. DELIVERY. The Units shall be delivered to NRE in Lots (as hereinafter defined) A-IS F.0.T. CNW's Des Moines Short Line Yard at Des Moines, Iowa (the "Interchange Point"). CNW shall use its best efforts to deliver the first Lot of Units to NRE within fifteen (15) days following final execution of this Agreement and remaining Lots on or before December 9, 1991. CNW agrees to move the Units without cost to NRE to the Interchange Point. 4. PAYMENT. The Purchase Price is to be paid to CMW in not more than three (3) installments. The first installment shall be $397,675 payable in cash (via bank wire transfer) within ten (10) working days from date of delivery at the Interchange Point for the eighteen (18) GP30 locomotives. The second installment shall be $552,325 payable in cash (via bank wire transfer) within ten (10) working days from date of delivery at the Interchange Point for the twenty-five (25) GP35 locomotives. The third and final payment shall be $1,750,000 payable in cash (via bank wire transfer) within ten (10) working days from date of delivery at the Interchange Point for the ten (10) SD4O locomotives. The 10th calendar day after delivery of a Lot of the Units to NRE at the Interchange Point shall be the "Closing Date" and all payments and all closing documents for such Lot shall be exchanged between CNW and NRE on such Closing Date. If a Closing Date falls on a weekend or national holiday, the closing shall occur on the next succeeding business day. Each payment for the - 2 - Units will be made by wire transfer in immediately available funds on the applicable due date of closing by 11:00 a.m., Chicago time, to CNW account number 07-00010 at The First National Bank of Chicago (the "Bank"), Wire ABA Bank #071000013, or otherwise in accordance with CNW's instructions. NRE will pay, to the extent legally enforceable, interest upon all amounts remaining unpaid after the same shall have become due and payable pursuant to the terms of this Agreement at the rate of (a) 10% per annum or (b) 2% over the prime commercial rate of the Bank, whichever is higher. 5. INSPECTIONS. On or prior to delivery, NRE shall deliver to CNW an Acceptance Certificate in the form of Exhibit "B" hereto signed by a duly authorized NRE officer identifying all such Units as accepted. NRE will take delivery of and settle on the applicable Closing Date for all accepted Units delivered to the Interchange Point. The Units will be moved to the Interchange Point and delivered to NRE in no more than three (3) Lots, the first Lot consisting of eighteen (18) GP30 locomotives, the second Lot consisting of twenty-five (25) GP35 locomotives and the third Lot consisting of ten (10) SD40 locomotives, each being (a "Lot"). Nothing in this Agreement shall preclude CNW from delivering and closing on Lots on a more expeditious basis provided both CNW and NRE mutually agree to any such acceleration. 6. DISCLAIMER OF WARRANTY. CNW HAS NOT MADE AND DOES NOT MAKE ANY REPRESENTATION OR WARRANTY, EXPRESS OR INPLIED, AS TO TITLE (EXCEPT SUCH WARRANTY OF TITLE AS IS EXPRESSLY PROVIDED IN THE BILL OF SALE REFERRED TO BELOW), CONDITION, COMPLIANCE WITH SPECIFICATIONS, QUALITY, DURABILITY, SUITABILITY, MERCHANTABILITY OR FITNESS FOR USE OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE UNITS. THE UNITS ARE SOLD HEREUNDER BY CNW "AS-IS" AND "WITH ALL FAULTS" F.O.T. THE INTERCHANGE POINT. NRE will have no right hereunder or othwerwise (and waives all rights) to make any claim against CNW for breach of warranty of any kind whatsoever (except for breach of CNW's title warranty) or for ajdustment in the price of the Units delivered to an accepted by NRE hereunder. 7. RISK OF LOSS AND NRE'S INDEMNITY. On delivery of each Unit CNW will have no further responsibility for such Unit. Except for damage or loss in transportation on CNW's lines, NRE assumes all risk of loss, damage or destruction of each delivered Unit and any component or part thereof, and commencing upon delivery by CNW, NRE will indemnify, protect and hold harmless CNW from and against all losses, damages, injuries, liabilities, claims (including, without limitation, claims for strict liability tort) and demands whatsoever, regardless of the cause thereof, including the sole negligence of CNW, its employees or agents, and any expenses in connection therewith, including but not limited to counsel fees and expenses, arising out of or as a result of the condition, purchase, use, or storage of any Unit delivered to this Interchange Point or any accident (except in the aforesaid transportation by CNW) in connection with the inspection, operation, use, condition, possession, storage, or return of any such Unit resulting in damage to property or injury or death to any person. 8. CLOSING DOCUMENTS. CNW will deliver to NRE on or before the applicable Closing Date for Units for which CNW has received an Acceptance Certificate from NRE as provided in this Agreement the following documents: - 3 - (a) Bill of Sale in the form of Exhibit "C" attached hereto, evidencing transfer to NRE on the Closing Date of title to the Units and warranting that at the time of delivery of such Units and warranting that at the time of delivery of such Units, CNW had legal title thereto and good and lawful right to sell such Units and that such Units were at such time free of all claims, liens and encumbrances of any nature. (b) Invoice for Units to be closed for in the form of Exhibit "D" attached hereto. (b) Invoice for Units to be closed for in the form of Exhibit "D" attached hereto. 9. COSTS (a) BROKERS. CNW shall in no event be liable to any party for any commission, finder's fee, attorney's fee or similar expense arising out of the sale and assignment effected thereby, except for fees or charges for which CNW shall expressly contract. (b) EXPENSES. Except as otherwise provided, all legal, accounting and other costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expenses. (c) SALES, EXCISE, TRANSFER AND PROPERTY TAXES. NRE shall bear and pay all local, state or federal tax (other than federal, state or city net income taxes or franchise taxes measured by net income on such receipts) or license or registration fees, assessments, charges, fines, levies, imposts, duties, withholdings, stamp taxes and penalties levied or imposed on or in connection with the sale of the Units, and any filing or recording fees payable in connection with the instruments or transfer provided for herein. 10. FORM OF AGREEMENT. (a) SECTION HEADINGS. The subject headings to the paragraphs and subparagraphs of this Agreement is included for purposes of convenience only, and shall not affect the construction or interpretation of any of its provisions. (b) ENTIRE AGREEMENT: MODIFICATION; WAIVER. This Agreement constitutes the entire Agreement between the parties pertaining to the subject matter contained in it and supersedes all prior and contemporary agreements, representations, and understandings of the parties. No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by all parties. No waiver of any of the provisions of this Agreement shall be deemed, or shall constitute, a waiver of any other provisions, whether or not similar, - 4 - nor shall any waiver constitute a continuing waiver. No waiver shall be binding unless executed in writing by the party making the waiver. 11. ASSIGNMENT. This Agreement shall be binding on, and shall inure to the benefit of, the parties to is and their respective successors and assigns; provided, however, CNW may not assign any of its rights under it, except to a wholly-owned subsidiary corporation of CNW or to any corporation which shall acquire all or substantially all of the stock or assets of CNW or unless NRE consents in writing to such assignment, which consent shall not be unreasonably withheld. Any assignment by CNW and/or NRE shall not relieve either CNW and/or NRE of any of their obligations or duties under this Agreement. NRE may not assign any of its rights or delegate any of its duties under this Agreement without the consent in writing from CNW, which consents shall not be unreasonably withheld. 12. PARTIES IN INTEREST. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any person other than parties to it and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third person to any party to this Agreement or the property of any such party, nor shall any provision give any third persons any right of subrogation or action over or against any party to this Agreement or the property of any such party. 13. GOVERNING LAW. This Agreement shall be construed in accordance with and be governed by the laws in effect in the State of Illinois. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. NATIONAL RAILWAY EQUIPMENT CO. CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY By: /s/ [illegible] By: /s/ D. E. WELLER ------------------------------- -------------------------------- Title: [illegible] Title: Vice President - Engineering and Materials Date: [illegible] Date: November 7, 1991 L352-6 (1-4) EXHIBIT "A" GP35 LOCOMOTIVES SD40 LOCOMOTIVES GP30 LOCOMOTIVES (25) (10) (18) - ---------------- ---------------- ---------------- CNW 824 CNW 869 CNW 802 CNW 825 CNW 870 CNW 803 CNW 826 CNW 872 CNW 804 CNW 827 CNW 878 CNW 805 CNW 828 CNW 882 CNW 806 CNW 829 CNW 886 CNW 807 CNW 830 CNW 889 CNW 808 CNW 833 CNW 892 CNW 809 CNW 836 CNW 923 CNW 810 CNW 838 CNW 926 CNW 811 CNW 841 CNW 812 CNW 843 CNW 813 CNW 847 CNW 816 CNW 848 CNW 818 CNW 849 CNW 819 CNW 850 CNW 821 CNW 851 CNW 822 CNW 852 CNW 823 CNW 853 CNW 854 CNW 855 CNW 861 CNW 863 CNW 864 CNW 865 L352-6 (5.*) EXHIBIT "B" CERTIFICATE OF ACCEPTANCE I, _____________________________, _________________________________, (Name) (Title) as the duly authorized representative of National Railway Equipment Co. ("NRE"), do hereby certify that I have inspected and accepted the following Units on behalf of NRE in accordance with the terms of that certain Purchase Agreement dated as of October 22, 1991 ("Purchase Agreement"). All capitalized terms used herein shall have the same meaning as in the Purchase Agreement: TYPE OF EQUIPMENT: DATE ACCEPTED: NUMBER OF UNITS: IDENTIFYING NUMBERS: I do further certify that the foregoing Units are in Acceptable Condition and conform to the specifications, requirements and standards applicable thereto as provided in the Purchase Agreement. ------------------------------ Authorized Representative National Railway Equipment Co. Date: ______________________ L352-6 (6.*) EXHIBIT "C" BILL OF SALE FOR AN IN CONSIDERATION and upon the payment of Ten Dollars ($10.00) and other good and valuable consideration, the adequacy of which is hereby acknowledged, CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY, a Delaware Corporation (the Seller), does hereby grant, bargain, sell, transfer and deliver unto NATIONAL RAILWAY EQUIPMENT CO. (the Buyer), its successors and assigns, all of the Seller's right, title to and interest in the equipment described on Schedule A attached hereto and made a part hereof (the Units). The Seller hereby warrants that at the time of delivery of the Units to the Buyer, the Seller had legal title thereto and good and lawful right to sell the Units and that the Units were at such time free of all claims, liens and encumbrances of any nature: and the Seller covenants to defend such title against the lawful claims and demands of any persons whomsoever based on claims originating prior to such delivery of the Units. IN WITNESS WHEREOF, Chicago and North Western Transportation Company has executed this Bill of Sale this ______ day of _____________, 1991. CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY /s/ J. E. VOLDSETH ------------------------------- J. E. Voldseth Vice President-Finance ATTEST: /s/ - ---------------------------- Assistant Secretary L352-6 (7.*) EXHIBIT "D" NORTH WESTERN LEASING COMPANY and CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY One North Western Center Chicago, Illinois 60606 I N V O I C E Date: SOLD TO: * NATIONAL RAILWAY EQUIPMENT CO. o In accordance with the Purchase Agreement (Agreement) dated as of October 22, 1991 between NATIONAL RAILWAY EQUIPMENT CO. (NRE) and CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY (CNW). DESCRIPTION: For description of equipment see the attached Schedule. PAYMENT TERMS: First National Bank of Chicago Account No. 07-00010 Chicago and North Western Transportation Company Chicago, Illinois WIRE: ABA Bank #07100013 L352-6 (8.*) Chicago and NorthWestern Transportation Company [LOGO OMITTED] October 30, 1991 Mr. L. J. Beal President National Railway Equipment Co. 14400 S. Robey Street P.O. Box 2270 Dixmoor, IL 60426 Dear Mr. Beal: This letter confirms the agreement between Chicago and North Western Transportation Company ("CNW") and National Railway Equipment Company ("NRE") to enter into (i) a lease agreement (the "Lease") in the form of Exhibit "A" hereto, covering the lease for a period of not less than twelve (12) years from NRE as Lessor to CNW as Lessee of eleven (11) GP38-2 locomotives (the "Lease Locomotives") consisting of: three (3) units built in 1979, being original GP38-2 locomotives with extended range dynamics, one (1) unit built in 1974, being an original GP38-2 locomotive without dynamics, and seven (7) units that are GP38-2 conversion units, these locomotives being equipped with standard range dynamics (see Schedule "As" hereto), and (ii) a purchase agreement (the "Purchase Agreement") in the form of Exhibit "B" hereto, covering the purchase by NRE from CNW of eighteen (18) used EMD GP30 locomotives for $397,675, twenty-five (25) used EMD GP35 locomotives for $552,325 and ten (10) used EMD SD40 locomotives for $1,750,000 (collectively the "Purchase Locomotives"). The final closing under the Purchase Agreement for the Purchase Locomotives shall take place on or before December 23, 1991. As specified in the Lease, NRE will provide the Lease Locomotives at a daily rate of $195.00 per day per unit for a period of twelve (12) years. The Lease Locomotives will include four (4) units that have recently completed totally rebuilt engines and three (3) units just have been recently completely repacked. As for the balance of the Lease Locomotives, all engines will be qualified and checked for excessive wear and/or damage as outlined in Schedule "B" prior to delivery. National Railway Equipment Company October 30, 1991 Page 2 NRE fully warrants all replacement components in the Lease Locomotives to be free from all defects in material and workmanship for a period of two (2) years commencing upon acceptance of all such Lease Locomotives by CNW under the Lease. This warranty also includes the replacement of all such failed replacement components. In addition, with regard to each Lease Locomotive, NRE warrants (i) all traction motors and replacements therefor to be free from all defects in material and workmanship for a period of six (6) years, (ii) all AR-10 alternators and replacements therefor for a period of twelve (12) years against any major failure and (iii) all crankshafts and replacements therefor to be free from all defects in material and workmanship for a period of twelve (12) years. This warranty also includes the replacement of all such failed components. NRE has the option to replace such failed components with qualified, rebuilt or take out components. NRE agrees to apply "electronic temperature control" mechanism to all leased locomotives. NRE will provide for purchase by CNW at NRE's cost, all items for the Lease Locomotives that are recommended on Schedule "C" hereto for changeout at the stated periodical basis. NRE will replace the failed components only, no freight or labor to be included. This warranty does not apply to any other parts of the Lease Locomotives, and CNW shall be responsible for the repair and maintenance of any part not so covered. Moreover, NRE shall have the option, if any of the parts covered by this warranty in the preceding paragraph above fails to furnish qualified rebuilt parts. If NRE cannot provide qualified rebuilt parts, NRE has the right to secure said part from a dealer of its choice at the right to secure said part from a dealer of its choice at NRE's sole cost and expense. NRE shall use its best efforts to prevent service interruptions which may be incurred by CNW as a result of delays incurred by NRE while NRE secures parts from the dealer of its choice. Such best efforts shall include the provision of replacement locomotives on a temporary basis if NRE is unable to provide qualified parts within fifteen (15) working days from receipt of notice from CNW. It is expressly understood that the terms of this letter agreement and these warranty obligations of NRE are supplementary to the provisions of the Lease and that these warranty obligations may not be assigned or delegated by NRE to a third party without CNW's express written consent. All Lease Locomotives are to be delivered by NRE to CNW between November 15, 1991 and March 31, 1992, inclusive. Interim rental for Lease Locomotives and delivered and accepted under the Lease may not begin to accrue until January 1, 1992. National Railway Equipment Company October 30, 1991 Page 3 It is expressly understood by both CNW and NRE that (i) CNW shall have no obligation to enter into the Lease unless and until CNW has received applicable authority from its Board of Directors, (ii) CNW shall have no obligation to pay and rental for any Lease Locomotive nor perform any other obligation under the Lease unless and until NRE has closed for all of the Purchase Locomotives under the Purchase Agreement on or prior to December 23, 1991 and (iii) if CNW does not secure applicable authority from its Board of Directors, NRE has no obligation under the Purchase Agreement. If NRE concurs with the foregoing please so indicate by signing, dating and returning to me the duplicate original of this letter agreement. Sincerely, CHICAGO AND NORTH WESTERN TRANSPORTATION COMPANY By: /s/ D. E. WALLER --------------------------- Vice President - Engineering & Materials AGREED TO AND ACCEPTED this 7th day of November, 1991. NATIONAL RAILWAY EQUIPMENT COMPANY By: /s/ L. J. BEAL --------------------------- L. J. Beal Its: President L352-5 (1-3) SCHEDULE "A" Type and General Description of Locomotive Unit, Marks and Numbers: UNIT NO. TYPE GENERAL DESCRIPTION - -------- ------ -------------------------- CNW 4701 GP38-2 General Purpose Locomotive CNW 4702 GP38-2 General Purpose Locomotive CNW 4703 GP38-2 General Purpose Locomotive CNW 4704 GP38-2 General Purpose Locomotive CNW 4705 GP38-2 General Purpose Locomotive CNW 4706 GP38-2 General Purpose Locomotive CNW 4707 GP38-2 General Purpose Locomotive CNW 4708 GP38-2 General Purpose Locomotive CNW 4709 GP38-2 General Purpose Locomotive CNW 4710 GP38-2 General Purpose Locomotive CNW 4711 GP38-2 General Purpose Locomotive LEASE RATE ORIGINAL FAIR PER LOCOMOTIVE MARKET VALUE TERM QUARTERLY DAILY - ------------ ---- --------- ----- $600,000.00 144 MONTHS $17,795.00 $195.00 L352-5 (4.*) SCHEDULE "B" QUALIFICATION WORK SCOPE A. ENGINES 1. Cylinders to be inspected for scoring, scuffing, broken rings, and high ring land wear per OEM specs. All defects will be corrected. (This is for engines not receiving rebuilt power assemblies). 2. Leads to be taken on each assembly. All lead readings to be within .020 to .68, but not to exceed .05 side to side, for all power assemblies. 3. Lube oil samples taken prior to start up and after load test, results will be made available at your request. 4. Rods and main bearings visually inspected and spot checks made. (All rebuilt engines and engines receiving rebuilt power assemblies will receive new bearings). 5. Injectors, rockers, and valve bridges replaced as required. 6. Roots blowers monitored for oil leakage. (Rebuilt engines will receive rebuilt blowers). 7. Engine load tested and governors and racks set to gain proper horsepower. 8. Major oil leaks corrected and tightened up. B. TRUCKS 1. Wheels to be 2 inch minimum (usable rim) with a maximum flange reading of .04. 2. Bad order brake shoes renewed with new. 3. Bent or off running shoes and rigging to be repaired. 4. Bad order pedestal liners replaced when cracked or out of limits with new. 5. Traction motors, D77's or as in units, will be run checked, inspected and completely rebrushed. 6. Motor supports and J-boxes will be serviced and inspected. New wicks to be supplied. -2- 7. Gear case leakage deemed excessive will be corrected and all relubed per standards. 8. Outboard sanders will be repaired in kind. 9. Center bearing and side bearing clearances to be within specifications. 10. Trucks cleaned as necessary. C. MAIN GENERATOR 1. Electrically qualified for service. 2. Brushes renewed as required. 3. Commutators to meet specification. 4. Interior cleaned as practical. 5. Armature bearing monitored for noise. D. ELECTRICAL SYSTEM 1. Will be inspected for defects and corrected. 2. Free locomotive of grounds, low voltage system to be a minimum of 500,000 OHM above ground and high voltage to be a minimum of 3 meg OHM above ground. 3. System function test all circuits. 4. Cycle and recalibrate transition circuits. 5. Batteries to meet a specific gravity level of 1125 or greater when fully charged or be replaced with new. 6. Set voltage regulation. 7. Apply all missing covers. 8. Apply all light bulbs as necessary. 9. Load test system. 10. Replace brushes as required. E. AIR BRAKE 1. Give fresh 1092 day FRA. -3- 2. Inspect air compressor for pumping oil, repair as necessary. 3. Renew air intake filters. F. COOLING 1. Inspect for leaks while under hydro test and correct defects. 2. Load test and monitor all systems. G. LUBE SYSTEM 1. Repair leaks as necessary. 2. Load test and monitor temperature difference on lube oil coolers. H. FUEL 1. 60 lb. test engine fuel lines and injectors for leakage. 2. Change all filters. I. ENGINE AIR FILTERS 1. Renew all filters on engine air intake. 2. Carbody filter will be renewed. J. UNDER FRAME 1. Inspect draft gear and draft pocket for damage and correct as required. 2. Inspect safety appliances repair or replace as required. K. LOAD TEST 1. Do standard 4 hour load test. Supply horsepower test date sheet to Lessee. 2. Adjust and correct defects. L. PAINTING 1. Interior and exterior to be steam cleaned. 2. Unit to be sanded and primed. 3. Unit to be painted to customer specifications using enamel paint. M. 1. All locomotives to be in compliance with all FRA Regulations. N. 1. Major component serial numbers as required by Lessee to be supplied. L352-5 (4.*-8.*) SCHEDULE "C" PERIODICAL CHANGE-OUT FOR GP38-2 LOCOMOTIVES Components used during 12 year cycle of 16 cylinder "E" GP Locomotive. Valve Bridge 6 years Head-liner-piston-thrust washer 6 years upper con-lower mains-thrust collars (or according to lab reports) 6 years Engine blower 6 years Water pumps 6 years Oil pumps 12 years Engine governor 6 years Stack base gasket 12 years Lube oil cooler 6 years Fuel injectors 3 years Fuel pump and motor 6 years Top deck cover seals 2 years Complete retorque of engine 1 year Air compressor valves 2 years Air compressor bearing 4 years Air compressor drive bushings 6 years Air brake equipment 3 years Auxiliary generator (rebearing-qualify) 6 years Wheels 5-6 years (depending on track service) Traction motor (rebearing-qualify) 5-6 years Alternator bearing repack 6 years L352-5 (9.*) EX-99.J 9 0009.txt EXHIBIT 99.J LEASE AGREEMENT 21722 dated August 31, 2000 between FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as owner trustee f/b/o the Beneficiaries named herein (Lessor) - and - AIR SLOVAKIA BWJ, Ltd., Lessee - relating to - Boeing Model 737-200A Aircraft Manufacturers Serial No: 21722 FELTMAN, KARESH, MAJOR & FARBMAN, Limited Liability Partnership Carnegie Hall Tower 152 West 57th Street New York, New York 10019 THIS LEASE AGREEMENT HAS BEEN EXECUTED IN SEVERAL COUNTERPARTS. TO THE EXTENT, IF ANY, THAT THIS LEASE AGREEMENT CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION), NO SECURITY INTEREST IN THIS LEASE AGREEMENT MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE ORIGINAL EXECUTED COUNTERPART CONTAINING THE RECEIPT EXECUTED BY LESSOR ON THE SIGNATURE PAGE OF THIS LEASE AGREEMENT. TABLE OF CONTENTS
Section Page 1. DEFINITIONS and INTERPRETATION 1 1.1 Definitions 1 1.2 Interpretation 18 2. REPRESENTATIONS and WARRANTIES 19 2.1 Lessee's Representations and Warranties 19 2.2 Lessee's Further Representations and Warranties 20 2.3 Repetition 22 2.4 Lessor's Representations and Warranties 22 2.5 Repetition 23 3. CONDITIONS PRECEDENT 23 3.1 Lessor's Documentary Conditions Precedent 23 3.2 Lessor's Other Conditions Precedent 25 3.3 Lessor's Waiver 26 3.4 Lessee's Conditions Precedent 26 3.5 Lessee's Waiver 26 4. COMMENCEMENT 27 4.1 Leasing 27 4.2 Delivery 27 4.3 Delayed Delivery 28 4.4 Acceptance and Risk 29 5. PAYMENTS 29 5.1 Security Deposits 29 5.2 Rental Periods 30 5.3 Basic Rent 30 5.4 Additional Rent 30 5.5 Pledged Moneys 31 5.6 Payments 32 5.7 Gross-up 33
5.8 Taxation 33 5.9 Value Added Tax 34 5.10 Information 34 5.11 Taxation of Indemnity Payments 35 5.12 Default Interest 35
5.13 Contest 36 5.14 Absolute 37 6. MANUFACTURER'S WARRANTIES 38 6.1 Assignment 38 6.2 Proceeds 38 6.3 Parts 38 6.4 Agreement 39 7. LESSOR'S COVENANTS and DISCLAIMERS 39 7.1 Quiet Enjoyment 39 7.2 Lessor's Post-Delivery Modifications Contribution 39 7.3 Lessor's Maintenance Contribution 40 7.4 Lessor's AD Cost Sharing Contribution 43 7.5 Registration and Filings 44 7.6 Lessor's Obligations Following Termination 45 7.7 Agreed Maintenance Performers 45 7.8 Exclusion 45 7.9 Lessee's Waiver 46 7.10 Lessee's Confirmation 46 8. LESSEE'S COVENANTS 46 8.1 Duration 46 8.2 Information 47 8.3 Operation of the Aircraft 49 8.4 Taxes and Other Charges 50 8.5 Sub-Leasing 51 8.6 Inspection 53 8.7 Protection of Title 54 8.8 General 55 8.9 Records 56 8.10 Registration and Filings 56 8.11 Maintenance and Repair 57 8.12 Removal of Engines and Parts 59 8.13 Installation of Engines and Parts 59 8.14 Non-Installed Engines and Parts 61 8.15 Pooling of Engines and Parts 62 8.16 Equipment Changes 63
8.17 Title to Engines and Parts 63 8.18 Third Parties 64 8.19 Non-Discrimination 64 9. INSURANCE 65 9.1 Insurances 65 9.2 Requirements 65 9.3 Insurance Covenants 65 9.4 Renewal of Insurances 67 9.5 Failure to Insure 67 9.6 Continuing Insurance for Indemnity 68 9.7 Application of Insurance Proceeds 68 9.8 Repossession Insurance 69 10. INDEMNITY 69 10.1 General 69 10.2 Mitigation 71 10.3 Duration 71 11. EVENTS OF LOSS 72 11.1 Total Loss Before Delivery 72 11.2 Total Loss After Delivery 72 11.3 Engine Loss 73 11.4 Requisition 74 12. RETURN OF AIRCRAFT 74 12.1 Redelivery 74 12.2 Final Checks 75 12.3 Final Inspection 76 12.4 Non-Compliance 77 12.5 Export Documentation 77 12.6 Acknowledgment 77 12.7 Maintenance Program 77 12.8 Storage 78 13. DEFAULT 79 13.1 Events 79 13.2 Rights 83
13.3 Default Payments 84 13.4 Waiver of Certain Article 2A Rights 85 14. ASSIGNMENT and TRANSFER 85 14.1 No Assignment by Lessee 85 14.2 Lessor Assignment 85 14.3 Grants of Security Interests 87 14.4 Sale and Leaseback by Lessor 89 14.5 Further Acknowledgments 89 14.6 Certain Protections for Lessee's Benefit 89 15. GOVERNING LAW AND JURISDICTION 90 15.1 Governing Law 90 15.2 Consent to Jurisdiction 90 15.3 Waiver of Jury Trial 90 15.4 Service of Process 91 16. MISCELLANEOUS 91 16.1 Waivers, Remedies Cumulative 91 16.2 Delegation 91 16.3 Appropriation 91 16.4 Currency Indemnity 92 16.5 Payment by Lessor 92 16.6 Severability 92 16.7 Remedy 93 16.8 Expenses 93 16.9 Time of Essence 93 16.10 Notices 93 16.11 Sole and Entire Agreement 95 16.12 Indemnities 95 16.13 Counterparts 95 16.14 Confidentiality 95 16.15 Waiver of Immunity 96 SCHEDULE 1 - DESCRIPTION OF LEASED PROPERTY 98 SCHEDULE 2 - OPERATING CONDITION AT DELIVERY 104
Schedule 3 - Operating Condition at Redelivery 107 Schedule 4 - Insurance Requirements 112 Schedule 5 - Post-Delivery Modifications 115 Exhibit A - Certificate of Acceptance 116 Exhibit B - Certificate of Delivery Condition 118 Exhibit C - Form of Letter of Credit 122 Exhibit D - Form of Legal Opinion 128 Exhibit E - Form of Deregistration Power of Attorney 129 Exhibit F - Form of Monthly Status REPORT 132
LEASE AGREEMENT 21722 This LEASE AGREEMENT 21722, dated August 31, 2000, is between: (1) FIRST SECURITY BANK, NATIONAL ASSOCIATION, a national banking association of the United States of America, having its principal place of business at c/o Corporate Trust Department, 79 South Main Street, Salt Lake City, Utah 84111 (in its individual capacity, the "Trust Company"), not in its individual capacity but solely as owner trustee pursuant to the Trust Agreement (in such owner trustee capacity, "Lessor"), and (2) Air Slovakia BWJ, Ltd. a company organized and existing under the laws of the Republic of Slovakia having its principal place of business at Pestovate l'ska 2, 820 01 Bratislava, The Slovak Republic ("Lessee"), having Slovak identification number OM-ERA. RECITALS: (A) Pursuant to Trust Agreement No. III, dated as of December 30, 1991 (the "Trust Agreement"), between the Trust Company and Beneficiaries, the Trust Company acts as owner trustee for the benefit of the Beneficiaries. (B) Pursuant to the Trust Agreement, Lessor has legal ownership of the Leased Property described in this Agreement on this date. (C) Lessor wishes to lease the Leased Property to Lessee, and Lessee agrees to lease the Leased Property from Lessor, upon and subject to the covenants, terms and conditions set out in this Agreement. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration whose receipt and sufficiency are acknowledged, Lessor and Lessee agree as follows: 1. DEFINITIONS and INTERPRETATION 1.1 Definitions ----------- In this Agreement the following expressions shall, unless the context otherwise requires, have the following respective meanings: Actual Cost as it applies to any maintenance work on the Aircraft, means 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) or at third party costs charged to Lessee (if the work is performed by third parties) and shall in no event include late charges, mark-ups, interest or other similar amounts. Additional Rent collectively, Airframe Additional Rent, APU Additional Rent, Engine Additional Rent and Landing Gear Additional Rent. Affiliate in relation to any Person, any other Person controlled directly or indirectly by that Person, any other Person that controls directly or indirectly that Person or any other Person under common control with that Person. For this purpose "control" of any Person means ownership of a majority of the voting power of such Person. Agreed Maintenance Performer Lessee or any other reputable maintenance organization that is (i) experienced in maintaining aircraft and/or engines of the same type as the Aircraft and the Engines, (ii) duly certificated by the FAA under FAR Part 145 and by the Aviation Authority, and (iii) not objected to by Lessor pursuant to Section 7.7. Agreed Value $4,000,000.00 Aircraft the aircraft described in Part 1 of Schedule 1 (which term includes, where the context admits, a separate reference to all Engines and Parts). Aircraft Documents the documents, data and records identified in Part 2 of Schedule 1 and all additions, renewals, revisions and replacements from time to time made in accordance with this Agreement. Airframe the Aircraft, excluding the Engines and the Aircraft Documents. Airframe Additional Rent as defined in Section 5.4(a). Airframe Additional Rent Rate $80.00 per Flight Hour, as adjusted from time to time pursuant to Section 5.4(b). Airframe Reimbursable Expenses as defined in Section 7.3(a)(i). Applicable Law all applicable (i) laws, treaties and international agreements of any national government, (ii) laws of any state, province, territory, locality or other political subdivision of a national government, and (iii) rules, regulations, judgments, decrees, orders, injunctions, writs, directives, licenses and permits of any Government Entity or arbitration authority. Approved Maintenance Program the maintenance program of Lessee approved by Lessor in writing on or before the Delivery Date, which shall at all times be in compliance with the Manufacturer's MPD and the Engine Manufacturer's MPD, as the same may be amended from time to time in accordance with this Agreement. APU (i) the auxiliary power unit listed in Schedule 1, (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 8.17(b) 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 Agreement. APU Additional Rent as defined in Section 5.4(a)(iv). APU Additional Rent Rate $8.00 per Flight Hour of the Airframe, as adjusted from time to time pursuant to Section 5.4(b). APU Reimbursable Expenses as defined in Section 7.3(d)(i). Assignment any present or future assignment by Lessor in favor of any Financing Party of Lessor's rights under this Agreement as security for its obligations to a Financing Party. Aviation Authority any and all Government Entities that, under the laws of the State of Registration, from time to time (i) have control or supervision of civil aviation; or (ii) have jurisdiction over the registration, airworthiness or operation of, or matters relating to, the Aircraft. Basic Rent all amounts payable pursuant to Section 5.3. Basic Rent Amount $75,000 Beneficiaries Airfund I Limited Partnership, Airfund II Limited Partnership, American Income Fund I-C Limited Partnership, American Income Fund I- D Limited Partnership and American Income Fund I-E Limited Partnership, each a Massachusetts limited partnership. Business Day a day (other than a Saturday or Sunday) on which business of the nature required by this Agreement is carried out in the city in which Lessee's office listed in Section 16.10(b) is located. C-Check a maintenance check on the Airframe under the Approved Maintenance Program designated as a "C" check and consisting of full and complete zonal, systems and structural check including the corresponding lower checks ("A" and "B" or equivalent) and any other maintenance and inspections tasks that are a part of such checks, all in accordance with the Approved Maintenance Program, or if the Approved Maintenance Program changes and no longer refers to a full and complete zonal, systems and structural block "C" check, then a check consisting of those items of maintenance characterized by the MPD and best industry practice as a "C" check (or its equivalent), but in any event not including repairs arising as the result of operational or maintenance mishandling or accidental damage. CER a complete engine refurbishment, including with respect to any Engine the complete visual inspection and repair as necessary of all modules of the Engine in an engine repair/overhaul station, including complete disassembly of the Engine, complete visual inspection of the Engine, de-blading of LLPs as required, visual inspection of all LLPs, verification that all snap diameters on LLPs are within limits, inspection of all blades for proper chord dimensions and cracking, repair or replacement of all blades below minimums, inspection and repair of stators as necessary, blade-up of LLPs using new lock plates, assembly of rotors in the turbine, balance of all rotors, and installation of rotors in the Engine. Certificate of Acceptance a certificate in the form attached as Exhibit A to be completed and executed by Lessor and Lessee at the time of Delivery. Certificate of Delivery Condition a certificate in the form attached as Exhibit B to be completed and executed by Lessor and Lessee at the time of Delivery. CPCP Lessee's Corrosion Prevention and Control Program that is a part of the Approved Maintenance Program. Credit Agreement any loan or credit agreement between Lessor and any Financing Party in which the obligations of Lessor are secured by a Security Interest in any of the Leased Property or this Agreement. Cycle one take-off and landing of an airframe. Damage Notification Threshold $100,000. Default any Event of Default and any event which with the giving of notice, lapse of time, determination of materiality or fulfilment of other condition or any combination of the foregoing would constitute an Event of Default. Default Rate at any time and from time to time, 4.0% plus the base commercial lending rate as announced by Citibank, N.A., compounded monthly and calculated on the basis of the actual number of days elapsed and on a 360 day year. Delivery the delivery of the Aircraft to Lessee in accordance with the terms of this Agreement. Delivery Date the date on which Delivery takes place, which shall be the Scheduled Delivery Date or such other date notified by Lessor to Lessee in accordance with the provisions of this Agreement. Delivery Location Tucson, Arizona. Dollars and $ the lawful currency of the United States of America. Engine whether or not installed on the Aircraft: (a) each engine of the manufacture, model and serial number specified in Part 1 of Schedule 1, title to which shall belong to Lessor; or (b) any engine which replaces that engine, title to which passes to Lessor in accordance with Section 8.17(d); and in each case includes all modules and Parts from time to time belonging to, installed in or appurtenant to that engine. Engine Additional Rent as defined in Section 5.4(a)(ii). Engine Additional Rent Rate $80.00 per Flight Hour per Engine, as adjusted from time to time pursuant to Section 5.4(b). Engine Loss the occurrence, with respect to an Engine, of one of the events set forth in clauses (a) through (d) of the definition of "Total Loss" as if references to the "Airframe" were to such "Engine". Engine Loss Date the relevant date determined in accordance with the definition of "Total Loss Date" as if that definition applied to an Engine Loss. Engine Manufacturer the Pratt & Whitney Division of United Technologies Corporation. Engine Reimbursable Expenses as defined in Section 7.3(b)(i). Engine Shop Visit a shop visit requiring disassembly of an Engine (but excluding for this purpose any removal, installation, maintenance and repair of Quick Engine Change kits) and during which there shall be performed a hot section restoration or repair or a cold section restoration or repair or a replacement of LLPs. Equipment Change any modification, alteration, addition to or removal from the Aircraft during the Term. Escrow Agent shall mean Feltman, Karesh, Major & Farbman, Limited Liability Partnership, in its capacity as escrow agent pursuant to the Escrow Agreement. Escrow Agreement Amended and Restated Escrow Agreement, dated as of August 17, 2000, as amended and restated as of August 28, 2000, between Lessor, Lessee and Escrow Agent. Event of Default an event specified in Section 13.1. Excusable Delay with respect to delivery of the Aircraft, delay or non-performance due to or arising out of acts of God or public enemy, civil war, insurrection or riot, fire, flood, explosion, earthquake, serious accident, epidemic, quarantine restriction, import restriction, any act of government, governmental priority, allocation, regulation or order affecting directly or indirectly, the Aircraft, any manufacturer, Lessor or any materials or facilities, strike or labor dispute causing cessation, slowdown or interruption of work, inability after due and timely diligence to procure equipment, data or materials from manufacturers, suppliers, any existing owner, seller or lessee in a timely manner, damage, destruction or loss, adverse weather conditions preventing any services, inspections or flights of the Aircraft or any other cause to the extent that such cause is beyond the control of Lessor, whether above mentioned or not and whether or not similar to the foregoing. Expiry Date the Scheduled Expiry Date or any other date on which: (a) the Aircraft has been redelivered in accordance with this Agreement and all obligations of Lessee have been satisfied; or (b) Lessor receives the Agreed Value following a Total Loss and any other amounts then due and owing in accordance with this Agreement. FAA the Federal Aviation Administration of the U.S. Department of Transportation, or any successor Government Entity succeeding to the functions thereof. Financial Indebtedness any indebtedness in respect of: (a) moneys borrowed; (b) any liability under any debenture, bond, note, loan stock, acceptance credit, documentary credit or other security; (c) the acquisition cost of any asset to the extent payable before or after the time of acquisition or possession; or (d) the capitalized value (determined in accordance with accounting practices generally accepted in the United States of America) of obligations under finance leases; or (e) any guarantee, indemnity or similar assurance against financial loss of any Person in respect of the above. Financing Parties collectively (i) any Lenders, (ii) any Mortgagee, (iii) any Additional Mortgagee, (iv) any Person that lends money to Lessor and for whom an Additional Mortgagee holds a Security Interest in the Leased Property, and (v) the successors and permitted assigns of such Persons. Flight Hour each hour or part thereof (rounded up to one decimal place) elapsing from the moment the wheels of the Airframe leave the ground on take off until the moment the wheels of the Airframe next touch the ground. GAAP generally accepted accounting principles as in effect from time to time and, subject to changes in such principles from time to time, consistently applied in accordance with the past practices of a Person. Government Entity (a) any national, state or local government, political subdivision thereof or local jurisdiction therein; (b) any board, commission, department, division, instrumentality, court, agency or political subdivision thereof; and (c) any association, organization or institution of which any of the above is a member or to whose jurisdiction any thereof is subject or in whose activities any of the above is a participant. Habitual Base Bratislava, Slovakia, or, subject to the prior written consent of Lessor, any other state, province or country in which the Aircraft is for the time being habitually based. Heavy Check all maintenance checks under the Agreed Maintenance Program designated as "C" checks or "D" checks on the date of this Agreement (or any comparable airframe overhaul check under the Agreed Maintenance Program as amended in the future), including all structural inspections, CPCP work and other inspections, repairs, maintenance and other work performed during such check. Hull Insurance Deductible $100,000.00 IATA the International Air Transport Association. Indemnitees Lessor, Trust Company, Beneficiary, any Financing Party, the respective successors and assigns of such Persons and the shareholders, Affiliates, partners, contractors, directors, officers, servants, agents and employees of such Persons. Insurance Letter of Credit as defined in Section 9.8(d). Insurances as defined in Section 9.1. Landing Gear the landing gear assembly of the Aircraft excluding the wheels and brake units. Landing Gear Additional Rent as defined in Section 5.4(a)(iii). Landing Gear Additional Rent Rate $12.00 per Flight Hour of the Airframe, as adjusted from time to time pursuant to Section 5.4(b). Landing Gear Reimbursable as defined in Section 7.3(c)(i). Expenses Leased Property the Aircraft and the Aircraft Documents. Lenders any financial institutions signatory to any Credit Agreement as lenders. Lessee Installed Part a Part installed on the Aircraft after Delivery not in replacement for any Part and not required under Applicable Law on the Aircraft title to which is held by Lessee subject to a Security Interest in favor of an unrelated third party or title to which is held by an unrelated third party and such Part is leased or conditionally sold to Lessee. Lessor Lien (a) any Security Interest from time to time created by or arising through Lessor or any Financing Party in connection with the financing or refinancing of the Aircraft; (b) any other Security Interest in respect of the Aircraft that results from acts or omissions of, or claims against, Lessor or any Financing Party not related to the operation of the Aircraft or the transactions contemplated by or permitted under this Agreement; and (c) Security Interests in respect of the Aircraft for Non-Indemnified Taxes. LLPs life limited Parts. Maintenance Program an Aviation Authority approved maintenance program for the Aircraft encompassing scheduled maintenance, condition monitored maintenance and/or on-condition maintenance of Airframe, Engines and Parts, including servicing, testing, preventative maintenance, repairs, structural inspections, system checks, overhauls, approved modifications, service bulletins, engineering orders, airworthiness directives, corrosion control, inspections and treatments. Major Checks any C-Check, "C" check, multiple or phase "C" check, "D" check or annual heavy maintenance visit or segment thereof suggested for commercial aircraft of the same model as the Aircraft by the Manufacturer (however denominated in the Approved Maintenance Program). Mandatory Equipment Change an Equipment Change that is required by or performed to comply with an airworthiness directive of the Aviation Authority or the FAA or a Manufacturer's service bulletin Manufacturer The Boeing Company, a Delaware corporation with a place of business in Seattle, Washington. Minimum Liability Coverage $500,000,000.00 on each occurrence. Mortgage any chattel mortgage or security agreement entered into between Lessor, as debtor, and any Mortgagee, as secured party, whereby Lessor grants to such Mortgagee a first priority security interest in the Aircraft and its right, title and interest in the Operative Documents. Mortgagee any mortgagee under a Mortgage. MPD for any manufacturer, such manufacturer's Maintenance Planning Document. Non-Indemnified Taxes (a) Taxes imposed as a direct result of activities of any Tax Indemnitee in the jurisdictions imposing the liability unrelated to such Tax Indemnitee's dealings with Lessee pursuant to this Agreement or to the transactions contemplated by this Agreement or the operation of the Aircraft by Lessee; (b) Taxes imposed on the income, profits or gains of any Tax Indemnitee (i) by any Federal Government Entity in the United States of America, (ii) by any Government Entity in the jurisdictions where such Tax Indemnitee is incorporated, formed or organized or has its principal place of business, or (iii) by any Government Entity in any other jurisdiction where such Tax Indemnitee is liable for such Taxes and such liability has or would have arisen in the absence of the transactions contemplated by this Agreement; (c) Taxes imposed with respect to any period commencing or event occurring before the date of this Agreement or after the Expiry Date and unrelated to any Tax Indemnitee's dealings with Lessee pursuant to this Agreement or to the transactions contemplated by this Agreement; (d) Taxes imposed as a direct result of the sale or other disposition of the Aircraft, unless such sale or disposition occurs as a consequence of an Event of Default; (e) Taxes imposed by a taxing jurisdiction for a particular tax period in which none of the following is true for that tax period: (i) the operation, registration, location, presence or use of the Aircraft, the Airframe, any Engine or any Part thereof in such jurisdiction, (ii) the place of incorporation, commercial domicile or other presence in such jurisdiction of Lessee, any sublessee or any user of or Person in possession of the Aircraft, the Airframe, any Engine or any Part thereof in such jurisdiction, or (iii) any payments made under this Agreement and related documents being made from such jurisdiction; (f) Taxes to the extent caused by the gross negligence or willful misconduct of any Tax Indemnitee; and (g) Taxes to the extent caused by a failure by any Tax Indemnitee to furnish in a timely manner notice or information which it is required to furnish to Lessee by the terms of this Agreement. Operative Documents this Agreement, the Certificate of Acceptance and the Certificate of Delivery Condition. Option Price $750,000 Part whether or not installed on the Aircraft: (a) any component, furnishing or equipment (other than a complete Engine) furnished with, installed on or appurtenant to the Airframe and Engines on Delivery; and (b) any other component, furnishing or equipment (other than a complete Engine) title to which has, or should have, passed to Lessor pursuant to this Agreement, but excludes any such items title to which has, or should have, passed to Lessee pursuant to Section 8.17(c) and any Lessee Installed Part. Permitted Lien (a) any lien for Taxes not assessed or, if assessed, not yet due and payable, or being contested in good faith by appropriate proceedings; (b) any lien of a repairer, mechanic, carrier, hangar keeper, unpaid seller or other similar lien arising in the ordinary course of business or by operation of law in respect of obligations which are not overdue in accordance with Applicable Law (or, if applicable, generally accepted accounting principles and practices in the relevant jurisdiction) or are being contested in good faith by appropriate proceedings; and (c) any Lessor Lien; but only if, in the case of (a) and (b), (i) adequate reserves have been provided by Lessee for the payment of the Taxes or obligations in accordance with generally accounting principles and practices in the relevant jurisdiction; and (ii) such proceedings, or the continued existence of the lien, do not give rise to any reasonable likelihood of the sale, forfeiture or other loss of the Aircraft or any interest therein or of criminal liability on the part of Lessor or any Financing Party. Person any individual, corporation, partnership, limited liability company, limited liability partnership, joint venture, association, joint stock company, trust, unincorporated organization or Government Entity. Post-Delivery Modifications the fuselage sanding and painting, and the installation of navigational instrumentation not installed on the Aircraft on the Delivery Date but required in order to register the Aircraft in the State of Registration, as described more fully on Schedule 5. Previous Operator Southwest Airlines, Inc. Redelivery Location Bratislava Airport, Slovakia or any other location to which Lessor and Lessee may agree in writing. Reimbursable Expenses collectively, Airframe Reimbursable Expenses, APU Reimbursable Expenses, Engine Reimbursable Expenses and Landing Gear Reimbursable Expenses. Rent collectively, all Basic Rent, Additional Rent and Supplemental Rent. Rent Date the Delivery Date and the corresponding day of each calendar month during the Term or, for any calendar month that does not have a corresponding day, the last day of such calendar month. Rental Period each period ascertained in accordance with Section 5.2. Scheduled Delivery Date August 25, 2000 or such other date mutually agreed by Lessor and Lessee. Scheduled Expiry Date the third anniversary of the Delivery Date. Security Deposit shall mean the amount of $225,000. Security Interest any mortgage, charge, pledge, lien, assignment, hypothecation, right of set-off, or any agreement or arrangement having the effect of creating a security interest. Special Slovakian Counsel Alianciaadvokatov, Advokatska Kancelaria, JUDr. Gerta Flasikova. SRM the Manufacturer's structural repair manual. State of Incorporation Slovakia. State of Registration Slovakia. Subsidiary (a) in relation to any reference to accounts, any company wholly or partially owned by Lessee whose accounts are consolidated with the accounts of the Lessee in accordance with accounting principles generally accepted under accounting standards of the State of Incorporation; and (b) for any other purpose, an entity from time to time: (i) of which another has direct or indirect control or owns directly or indirectly more than 50% of the voting share capital; or (ii) which is a direct or indirect subsidiary of another under the laws of the jurisdiction of its incorporation. Supplemental Rent all amounts, liabilities and obligations (other than Basic Rent and Additional Rent) that Lessee assumes or agrees to pay under this Agreement to Lessor or any other Person, including payment of deposits, indemnities and the Agreed Value. Tax Indemnitees Lessor, Trust Company, Beneficiary, any Financing Party and their respective successors and assigns. Taxes all present and future taxes, levies, imposts, duties or charges in the nature of taxes, whatever and wherever imposed, including customs duties, value added taxes or similar taxes and any franchise, transfer, sales, use, business, occupation, excise, personal property, stamp or other tax or duty imposed by any national or local taxing or fiscal authority or agency, together with any withholding, penalties, additions to tax, fines or interest thereon or with respect thereto. Term the period commencing on the Delivery Date and ending on the Expiry Date or any later date pursuant to Clause 12.4. Total Loss with respect to the Airframe: (a) the actual, arranged or constructive total loss of the Airframe (including any damage to the Airframe which results in an insurance settlement on the basis of a total loss, or requisition for use or hire which results in an insurance settlement on the basis of a total loss); (b) the Airframe being destroyed, damaged beyond repair or permanently rendered unfit for normal use for any reason whatsoever; (c) the requisition of title, or other compulsory acquisition, capture, seizure, deprivation, confiscation or detention for any reason of the Airframe by the government of the State of Registration (whether de jure or de facto), but excluding requisition for use or hire not involving requisition of title; or (d) the hi-jacking, theft, condemnation, confiscation, seizure or requisition for use or hire of the Airframe which deprives any Person permitted by this Agreement to have possession and/or use of the Airframe for more than 60 consecutive days. Total Loss Date (a) in the case of an actual total loss, the actual date on which the loss occurs or, if such date is unknown, the day on which the Aircraft was last heard of; (b) in the case of any of the events described in sub-paragraph (a) of the definition of "Total Loss" (other than an actual total loss), the earlier of (i) 30 days after the date on which notice claiming such total loss is given to the relevant insurers, and (ii) the date on which such loss is admitted or compromised by the insurers; (c) in the case of any of the events described in sub-paragraph (b) of the definition of "Total Loss", the date on which such destruction, damage or rendering unfit occurs; (d) in the case of any of the events described in sub-paragraph (c) of the definition of "Total Loss", the date on which the relevant requisition of title or other compulsory acquisition, capture, seizure, deprivation, confiscation or detention occurs; (e) in the case of any of the events described in sub-paragraph (d) of the definition of "Total Loss", the expiry of the period of 60 days referred to in such sub- paragraph (d); and, in each case, the Total Loss shall be deemed to have occurred at noon Greenwich Mean Time on such date. Trust Agreement Trust Agreement No. III, dated as of December 30, 1991, between Trust Company and Beneficiaries. Voluntary Equipment Change an Equipment Change other than a Mandatory Equipment Change. 1.2 Interpretation -------------- (a) In this Agreement, unless the contrary intention is stated, a reference to: (i) each of "Lessor", "Lessee", "Financing Party" or any other Person includes without prejudice to the provisions of this Agreement any successor in title to it and any permitted assignee; (ii) words importing the plural shall include the singular and vice versa; (iii) the term "including", when used in this Agreement, means "including without limitation" and "including but not limited to"; (iv) any document shall include that document as amended, novated or supplemented from time to time unless expressly stated to the contrary; (v) a law (1) includes any statute, decree, constitution, regulation, order, judgment or directive of any Government Entity; (2) includes any treaty, pact, compact or other agreement to which any Government Entity is a signatory or party; (3) includes any judicial or administrative interpretation or application thereof; and (4) is a reference to that provision as amended, substituted or re- enacted; and (b) A "Section", "Schedule" or "Exhibit" is a reference to a section of, a schedule to or an exhibit to this Agreement. (c) The headings in this Agreement are to be ignored in construing this Agreement. 2. REPRESENTATIONS and WARRANTIES ------------------------------ 2.1 Lessee's Representations and Warranties --------------------------------------- Lessee represents and warrants to Lessor as follows: (a) Status: Lessee is a company duly organized, validly existing and in ------ good standing under the laws of the State of Incorporation, has the corporate power to own its assets and carry on its business as it is being conducted and is (or will at the relevant time be) the holder of all necessary air transportation licenses required in connection therewith and with the use and operation of the Aircraft. (b) Power and Authority: Lessee has the corporate power to enter into and ------------------- perform, and has taken all necessary corporate action to authorize the entry into, performance and delivery of, each of the Operative Documents and the transactions contemplated by the Operative Documents. (c) Legal validity: Each of the Operative Documents constitutes Lessee's -------------- legal, valid and binding agreement, enforceable against Lessee in accordance with its terms. (d) Non-conflict: The entry into and performance by Lessee of, and the ------------ transactions contemplated by, the Operative Documents do not and will not: (i) conflict with any Applicable Laws binding on Lessee; (ii) conflict with the constitutional documents of Lessee; or (iii) conflict with or result in default under any document which is binding upon Lessee or any of its assets, or result in the creation of any Security Interest over any of its assets, other than Permitted Liens. (e) Authorization: All authorizations, consents and registrations required ------------- by, and all notifications to be given by, Lessee in connection with the entry into, performance, validity and enforceability of, the Operative Documents and the transactions contemplated by the Operative Documents have been (or will on or before Delivery have been) obtained, effected or given (as appropriate) and are (or will on their being obtained or effected be) in full force and effect. (f) No Immunity: ----------- (i) Lessee is subject to civil commercial law with respect to its obligations under this Agreement. (ii) Neither Lessee nor any of its assets is entitled to any right of immunity and the entry into and performance of the Operative Documents by Lessee constitute private and commercial acts. (g) Financial Statements: the audited consolidated financial -------------------- statements of Lessee and its Subsidiaries most recently delivered to Lessor: (i) have been prepared in accordance with accounting principles and practices generally accepted and consistently applied in the State of Registration; and (ii) fairly present the consolidated financial condition of the Lessee and its Subsidiaries as at the date to which they were drawn up and the consolidated results of operations of the Lessee and its Subsidiaries for the periods covered by such statements. (h) Restricted Countries: Lessee does not hold a contract or other -------------------- obligation to operate the Aircraft to or from any of the countries that are the subject of sanctions under U.N. security council directives. (i) Pari Passu: The obligations of Lessee under this Agreement rank ---------- at least pari passu with all other present and future unsecured and unsubordinated obligations (including contingent obligations) of Lessee, with the exception of such obligations as are mandatorily preferred by law and not by virtue of any contract. 2.2 Lessee's Further Representations and Warranties ----------------------------------------------- Lessee further represents and warrants to Lessor that: (a) No Default: ---------- (i) No Event of Default has occurred and is continuing or might reasonably be expected to result from the entry into or performance of any of the Operative Documents. (ii) No event has occurred and is continuing that constitutes, or with the giving of notice, lapse of time, determination of materiality or fulfilment of any other applicable condition, or any combination of the foregoing, might constitute, a material default under any document that is binding on Lessee or any assets of Lessee. (b) Registration: ------------ (i) It is not necessary or advisable under the laws of the State of Incorporation, the State of Registration or the Habitual Base in order to ensure the validity, effectiveness and enforceability of the Operative Documents or to establish, perfect or protect the property rights of Lessor or any Financing Party in the Leased Property that any instrument relating thereto other than this Agreement and the Certificate of Acceptance be filed, registered or recorded or that any other action be taken or, if any such filings, registrations, recordings or other actions are necessary, the same have been effected or will have been effected on or before Delivery. (ii) Under all Applicable Laws, including the laws of the State of Incorporation, the State of Registration and the Habitual Base, the property rights of Lessor and any Financing Parties notified to Lessee in the Leased Property have been fully established, perfected and protected and this Agreement will have priority in all respects over the claims of all creditors of Lessee, with the exception of such claims as are mandatorily preferred by law and not by virtue of any contract. (c) Litigation: No litigation, arbitration or administrative ---------- proceedings are pending or, to Lessee's knowledge, threatened against Lessee which, if adversely determined, would have a material adverse effect upon its financial condition or business or its ability to perform its obligations under the Operative Documents. (d) Taxes: Lessee has delivered all necessary returns and payments ----- due to all tax authorities having jurisdiction over Lessee, including those in the State of Incorporation, the State of Registration and the Habitual Base, and Lessee is not required by law to deduct or withhold any Taxes from any payments under this Agreement. (e) Material Adverse Change: No material adverse change in the ----------------------- financial condition of Lessee has occurred since the date of the financial statements most recently provided to Lessor on or before the Delivery Date. (f) Information: The financial and other information furnished by ----------- Lessee in connection with the Operative Documents does not contain any untrue statement of material fact or omit to state any fact the omission of which makes the statements therein, in light of the circumstances under which they were made, materially misleading, and does not omit to disclose any material matter. All forecasts and opinions contained in the financial and other information furnished by Lessee in connection with the Operative Documents were honestly made on reasonable grounds after due and careful inquiry by Lessee. (g) Air Traffic Control: Lessee is not in default in the payment of ------------------- any sums due by Lessee to any relevant air traffic control authority in respect of all aircraft operated by Lessee. 2.3 Repetition ---------- The representations and warranties in Section 2.1 and Section 2.2 will survive the execution of this Agreement. The representations and warranties contained in Section 2.1 and Section 2.2 will be deemed to be repeated by Lessee on Delivery with reference to the facts and circumstances then existing. The representations and warranties contained in Section 2.1 will be deemed to be repeated by Lessee on each Basic Rent Date as if made with reference to the facts and circumstances then existing. 2.4 Lessor's Representations and Warranties --------------------------------------- Lessor represents and warrants to Lessee that: (a) Status: The Trust Company is a national banking association duly ------ formed and validly existing under the federal banking laws of the United States of America and has the power to act as trustee pursuant to the Trust Agreement. Lessor is a duly created trust pursuant to the Trust Agreement and has the power to own the Leased Property and carry on the business contemplated of Lessor under the Operative Documents. (b) Power and Authority: Lessor has the trust power to enter into and ------------------- perform, and has taken all necessary action to authorize the entry into, performance and delivery of, the Operative Documents and the transactions contemplated by the Operative Documents. (c) Enforceability: Each of the Operative Documents constitutes Lessor's -------------- legal, valid and binding agreement, enforceable against Lessor in accordance with its terms. (d) Non-conflict: The entry into and performance by Lessor of, and the ------------ transactions contemplated by, the Operative Documents do not and will not: (i) conflict with any Applicable Laws binding on Lessor; (ii) conflict with the Trust Agreement; or (iii) conflict with or result in a default under any document which is binding upon Lessor or any of its assets. (e) Authorization: So far as concerns the obligations of Lessor, all ------------- authorizations, consents, registrations and notifications required in connection with the entry into, performance, validity and enforceability of, and the transactions contemplated by, the Operative Documents by Lessor have been (or will on or before Delivery have been) obtained or effected (as appropriate) and are (or will on their being obtained or effected be) in full force and effect. (f) No Immunity: ----------- (i) Lessor is subject to civil commercial law with respect to its obligations under the Operative Documents. (ii) Neither Lessor nor any of its assets is entitled to any right of immunity and the entry into and performance of the Operative Documents by Lessor constitute private and commercial acts. (g) Right to Lease: On the Delivery Date, Lessor shall have the right -------------- to lease the Aircraft to Lessee under this Agreement. 2.5 Repetition ---------- The representations and warranties in Section 2.4 will survive the execution of this Agreement. The representations and warranties contained in Section 2.4 will be deemed to be repeated by Lessor on Delivery and on each subsequent Basic Rent Date as if made with reference to the facts and circumstances then existing. 3. CONDITIONS PRECEDENT -------------------- 3.1 Lessor's Documentary Conditions Precedent ----------------------------------------- Lessor's obligation to lease the Leased Property to Lessee under this Agreement is subject to the receipt of the following by Lessor from Lessee on or before Delivery in form and substance satisfactory to Lessor, provided, that it shall not be a condition precedent to the obligations of Lessor that any document be produced, or action taken, which is to be produced or taken by Lessor or any Person within its control: (a) Constitutional Documents: an officially verified copy of the ------------------------ constitutional documents of Lessee as amended to the Delivery Date, together with an English translation thereof and the actual Extract from the commercial registry of the Lessee; (b) Resolutions: a true copy of a resolution of the board of ----------- directors (or the equivalent) of Lessee approving the terms of, and the transactions contemplated by, the Operative Documents to which it is a party, resolving that it enter into the Operative Documents to which it is a party, and authorizing a specified individual or individuals to execute the Operative Documents to which it is a party and, in the case of Lessee, accept delivery of the Aircraft on its behalf; (c) Operative Documents: a copy of each of the Operative Documents, ------------------- duly executed and, if necessary, notarized by Lessee, and the original chattel paper copy of this Agreement; (d) Opinions: (i) an opinion, in the form set out in Exhibit D, in -------- respect of Lessee's obligations under the Operative Documents issued by independent legal counsel to Lessee acceptable to Lessor, and (ii) an opinion from Special Slovakian Counsel to Lessor as to such matters as Lessor may reasonably request; (e) Approvals: evidence of the issuance of each approval, license and --------- consent which may be required in relation to, or in connection with, the performance by Lessee of its obligations under the Operative Documents; (f) Filings and Registrations: evidence that all filings, ------------------------- registrations, recordings and other actions have been taken or made that are necessary or advisable to ensure the validity, effectiveness and enforceability of the Operative Documents and to protect the property rights of Lessor in the Leased Property; (g) Licenses: copies of Lessee's air transport license, air -------- operator's certificate and all other licenses, certificates and permits required by Lessee in relation to, or in connection with, the operation of the Aircraft; (h) Certificate: a certificate of a duly authorized officer of ----------- Lessee: (i) setting out a specimen of each signature of an officer of Lessee referred to in Section 3.1(b); and (ii) certifying that each copy of a document specified in this Section 3.1 is correct, complete and in full force and effect; (i) Insurances: certificates of insurance, certificates of ---------- reinsurance, insurance brokers' undertakings, reinsurance broker's undertakings and other evidence satisfactory to Lessor that Lessee is taking the required steps to ensure due compliance with the provisions of this Agreement as to insurances with effect on and after Delivery; (j) Registration; Filings: evidence that the Aircraft has been --------------------- validly registered under the laws of the State of Registration and that all filings, registrations, recordings and other actions have been or will be taken which are necessary to ensure the validity, effectiveness and enforceability of the Operative Documents and to protect the rights of Lessor in the Leased Property; (k) Air Traffic Control: if requested by Lessor, a letter from Lessee ------------------- addressed to Eurocontrol or any other designated air traffic control authority pursuant to which Lessee authorizes such authority to issue to Lessor, upon Lessor's request from time to time, a statement of account of all sums due by Lessee to such authority in respect of all aircraft (including the Aircraft) operated by Lessee; (l) Deregistration Power of Attorney: an irrevocable power of -------------------------------- attorney in substantially the form attached as Exhibit E; (m) Acceptance by Process Agent: a letter from the process agent --------------------------- appointed by Lessee pursuant to Section 15.4(a) accepting its appointment; (n) Aviation Authority Letter: a letter from the appropriate Aviation ------------------------- Authority confirming that, upon certification by Lessor that an Event of Default under this Agreement has occurred and is continuing, and a request for deregistration by Lessor, the Aviation Authority will deregister the Aircraft and authorize the export of the Aircraft from Slovakia; (o) General: such other documents as Lessor may reasonably request. ------- 3.2 Lessor's Other Conditions Precedent ----------------------------------- The obligation of Lessor to deliver and lease the Leased Property under this Agreement is also subject to the following additional conditions precedent: (a) Representations and Warranties: the representations and ------------------------------ warranties of Lessee under Sections 2.1 and 2.2 are correct and would be correct if repeated on Delivery; (b) Payments: all payments due to Lessor under this Agreement on or -------- before Delivery, including the Basic Rent due on the Delivery Date from the Escrow Agent and the Security Deposit, shall have been received by Lessor; and (c) Repossession Insurance: Lessor shall received satisfactory ---------------------- evidence of the existence of a policy in Lessor's favor of repossession insurance commonly known as "Political Risk" insurance. 3.3 Lessor's Waiver --------------- The conditions specified in Sections 3.1 and 3.2(a) and (b) are for the sole benefit of Lessor and may be waived or deferred in whole or in part and with or without conditions by Lessor. If any of those conditions are not satisfied on or before Delivery and Lessor (in its absolute discretion) nonetheless agrees to deliver the Leased Property to Lessee, then Lessee will ensure that those conditions are fulfilled within one month after the Delivery Date and Lessor may treat as an Event of Default the failure of Lessee to do so. 3.4 Lessee's Conditions Precedent ----------------------------- Lessee's obligation to accept the Leased Property on lease from Lessor under this Agreement is subject to the satisfaction by Lessor of the following conditions precedent: (a) Certificate: the receipt by Lessee of a certificate of a duly ----------- authorized officer of Lessor setting out a specimen of the signature of each individual that executes an Operative Document on behalf of Lessor; (b) Representations and Warranties: the representations and ------------------------------ warranties of Lessor under Section 2.4 are correct and would be correct if repeated on Delivery; (c) Registration: Lessee is obligated to provide Lessor with all ------------ necessary co-operation in the registration procedure in compliance with the Aviation Act No. 143/1998 coll, as amended by the Republic of Slovakia and Lessee will provide evidence that the Aircraft has been validly registered under the laws of the State of Registration; provided, that any costs associated with the registration of the Aircraft or this Agreement with the Aviation Authority shall be the responsibility of the Lessee; and (d) Delivery Condition: the Aircraft shall be in the condition set ------------------ forth on Schedule 2; 3.5 Lessee's Waiver --------------- The conditions specified in Section 3.4 are for the sole benefit of Lessee and may be waived or deferred in whole or in part and with or without conditions by Lessee. If any of those conditions are not satisfied on or before Delivery and Lessee (in its absolute discretion) nonetheless agrees to lease the Leased Property from Lessor, then Lessor will ensure that those conditions are fulfilled within one month after the Delivery Date. 4. COMMENCEMENT ------------ 4.1 Leasing ------- (a) Lessor will lease the Leased Property to Lessee and Lessee will take the Leased Property on lease in accordance with this Agreement for the duration of the Term. (b) Lessor and Lessee intend that this Agreement constitute a "true lease" and a lease for all United States federal income tax purposes. 4.2 Delivery -------- (a) Delivery Condition: Lessor shall deliver the Leased Property "as is, where is and with all faults", except for any items set forth on Annex 2 to the Certificate of Delivery Condition and any other items agreed in writing by Lessor and Lessee. (b) Delivery Inspection: Before the Delivery Date, Lessor shall make the Leased Property available for Lessee to conduct a ground inspection of the Aircraft and an inspection of the Aircraft Documents to its satisfaction (collectively, the "Ground Inspection"). The Ground Inspection of the Aircraft shall include the following: (i) Lessor shall perform a videotape borescope inspection of all accessible gas path sections of each Engine (accessible whether by borescope port or other means), including the low pressure and high pressure compressors and the turbine area of such Engine, and Lessee's representatives will be entitled to observe such borescope inspection. All items beyond the Engine Manufacturer's maintenance manual serviceable limits will be rectified at Lessor's sole cost and expense. (ii) Lessor shall perform a maximum power assurance run and condition, acceleration and bleed valve scheduling checks on each Engine in accordance with the Engine Manufacturer's maintenance manual. Lessor will record and evaluate each Engine's performance, with Lessee's representatives entitled to be present. Each Engine shall pass such tests without operational limitations throughout the operating envelope in accordance with the Engine Manufacturer's maintenance manual. (iii) Lessor shall perform a videotape borescope inspection of the APU, and Lessee's representatives will be entitled to observe such borescope inspection. All items beyond the manufacturer's recommended limits will be rectified at Lessor's sole cost and expense. (c) Aircraft Documents: The Aircraft will be accompanied by the ------------------ Aircraft Documents listed on Part 2 of Schedule 1. Lessor will also provide to Lessee all historical and current maintenance manuals, aircraft and engine technical records and data, and other aircraft documentation in the possession of Lessor. Upon the request of Lessee, Lessor shall use reasonable efforts to obtain any required maintenance and technical records or documents not in its custody. (d) Acceptance Flight: Immediately prior to acceptance of the ----------------- Aircraft, on the Delivery Date, Lessor shall cause an acceptance flight of the Aircraft to be performed of up to one hour at Lessor's cost in accordance with the test flight procedures of the Manufacturer and Engine Manufacturer (with up to two representatives of Lessee on-board as observers), and such further acceptance flights as may be necessary in the event that the first or subsequent flights do not confirm that the Aircraft complies with the delivery conditions set forth in Schedule 2. (e) Correction of Discrepancies: The obligation of Lessee to lease --------------------------- the Leased Property from Lessor is subject to Lessor delivering the Leased Property to Lessee in compliance with the conditions set forth on Schedule 2. If Lessor corrects all material discrepancies from the conditions set forth on Schedule 2 before Delivery, or if Lessor and Lessee agree that Lessor will correct or pay for their correction as set forth on Annex 2 to the Certificate of Delivery Condition, then Lessee shall accept the Leased Property. If, on the Scheduled Delivery Date, the Aircraft is not, in all material respects, in the condition set forth in Schedule 2 and Lessor and Lessee do not agree upon the correction of such material discrepancies within 30 days after the Scheduled Delivery Date, then Lessee may by notice to the Lessor terminate this Agreement, in which event neither Lessor nor Lessee shall have any further obligations under this Agreement except as set forth in Section 7.6. If Lessee fails to give any such termination notice within 34 days after the Scheduled Delivery Date, Lessee shall be deemed to have accepted the Leased Property for all purposes of this Agreement. 4.3 Delayed Delivery ---------------- If, as a result of the occurrence of damage to the Aircraft not constituting a Total Loss or any Excusable Delay, Lessor delays in the delivery of, or fails to deliver, the Aircraft under this Agreement on the Scheduled Delivery Date, and so long as such failure does not result from the gross negligence or wilful misconduct of Lessor, then in any such case: (a) Lessor will not be responsible for any losses, including loss of profit, costs or expenses arising from or in connection with the delay or failure suffered or incurred by Lessee; and (b) if the Aircraft is not in the condition provided in Section 4.2(e) within 30 days after the Scheduled Delivery Date, either Lessor or Lessee may terminate this Agreement upon giving five Business Days prior written notice to the other, in which event neither Lessor nor Lessee shall have any further obligations under this Agreement except as set forth in Section 7.6. 4.4 Acceptance and Risk ------------------- (a) The Leased Property will be delivered to, and will be accepted by, Lessee at the Delivery Location on the Delivery Date immediately following satisfaction of the conditions precedent specified in Sections 3.1, 3.2 and 3.4 (or their waiver or deferral by the party entitled to grant such waiver or deferral). (b) Immediately following satisfaction of the conditions precedent specified in Sections 3.1, 3.2 and 3.4 (or their waiver or deferral by the party entitled to grant such waiver or deferral), Lessee and Lessor shall forthwith complete Annex 1 to the Certificate of Delivery Condition (specifying the maintenance status of the Airframe, Engines, APU and Landing Gear) and Lessor and Lessee shall sign and deliver to each other the Certificate of Acceptance and the Certificate of Delivery Condition. Delivery of the signed Certificate of Acceptance to Lessor shall constitute deemed delivery of the Aircraft to Lessee. (c) On and from Delivery, the Leased Property will be in every respect at the sole risk of Lessee, which will bear all risk of loss, theft, damage or destruction to the Leased Property from any cause whatsoever. (d) Concurrently with Delivery, Lessor shall cause this Agreement and the Certificate of Acceptance to be registered with the Aviation Authority. 5. PAYMENTS -------- 5.1 Security Deposits ----------------- (a) Security Deposit: Prior to the execution of this Agreement, Lessee has --------------------- deposited with Lessor the amount of $75,000, and upon execution of this Agreement, Lessee shall pay to Lessor in immediately available funds the additional amount of $150,000. Said sums shall constitute the Security Deposit hereunder and shall he held and applied by Lessor as provided in this Agreement. (b) Application of Security Deposit: If an Event of Default occurs and for ------------------------------------ as long as it continues, Lessor may (but shall not be obliged to) apply all or any part of the Security Deposit against or towards satisfaction of any sums due and payable or that subsequently become due and payable to Lessor under this Agreement or to compensate Lessor for any sums which it may, in its discretion, at any time advance or expend as a result of any such Event of Default. Notwithstanding any such use or application by Lessor, Lessee shall remain in default under this Agreement until the full amount owed by Lessee, including interest accrued thereon pursuant to Section 5.12, shall have been paid to Lessor. If Lessor uses or applies all or any portion of the amount available under the Security Deposit, Lessee shall immediately, on demand of Lessor made from time to time, pay to Lessor an amount in cash equal to the amount so used or applied pursuant to this Section 5.1(b) so that the total amount held by Lessor in accordance with Section 5.1(a) shall at all times equal the full amount of the Security Deposit. 5.2 Rental Periods -------------- The first Rental Period will commence on the Delivery Date and each subsequent Rental Period will commence on the date succeeding the last day of the previous Rental Period. Each Rental Period will end on the date immediately preceding the next succeeding Rent Date, except that if a Rental Period would otherwise overrun the Expiry Date, it will end on the Expiry Date. 5.3 Basic Rent ---------- (a) Time of Payment: For each Rental Period during the Term, Lessee --------------- shall pay to Lessor or its order Basic Rent in advance on each Basic Rent Date. Payment must be initiated adequately in advance of the Basic Rent Date to ensure that Lessor receives credit for the payment on the Basic Rent Date. (b) Amount: The Basic Rent payable in respect of each Rental Period ------ will be the Basic Rent Amount. 5.4 Additional Rent --------------- (a) Amount: Subject to the proviso to Section 7.3(e)(iii), Lessee will ------ pay to Lessor Additional Rent in relation to each Rental Period (or portion thereof) during the Term on the 10th day following the end of that Rental Period (but not later than the Expiry Date) and within ten days following the Delivery Date in relation to the acceptance flight referenced in Section 4.2(d) and any ferry flight from the Delivery Location as follows: (i) in respect of the Airframe, Lessee shall pay the Airframe Additional Rent Rate for each Flight Hour flown by the Airframe during that Rental Period ("Airframe Additional Rent"); (ii) in respect of each Engine, Lessee shall pay the Engine Additional Rent Rate for each Flight Hour operated by each Engine during that Rental Period ("Engine Additional Rent"); (iii) in respect of the Landing Gear, Lessee shall pay the Landing Gear Additional Rent Rate for each Flight Hour flown by the Airframe during that Rental Period ("Landing Gear Additional Rent"); and (iv) in respect of the APU, Lessee shall pay the APU Additional Rent Rate for each Flight Hour flown by the Airframe during that Rental Period ("APU Additional Rent"); (b) Adjustment: Lessor or Lessee may adjust the amount of Additional Rent ---------- after the Delivery Date by notice to Lessee not more frequently than annually based on the following: (i) by reference to increases in the Consumer Price Index as released by the Bureau of Labor Statistics, United States Department of Labor since the date of this Agreement; (ii) by reference to Manufacturer's and Engine Manufacturer's recommendations, industry experience, any change in the operational environment of the Aircraft that materially affects the cost of maintaining the Aircraft and any change in the Flight Hour to Cycle ratio of the operation of the Aircraft (it being understood that the Additional Rent is based on the assumption that the operation of the Aircraft during the Term will, on average, be not less than one Flight Hour for each Cycle); and (iii) by reference to the Actual Costs experienced by Lessee in the maintenance of the Aircraft under this Agreement. 5.5 Pledged Moneys: -------------- (a) Lessor and Lessee intend that the Additional Rent are amounts paid by Lessee to Lessor in consideration for the use of the Leased Property by Lessee and the satisfaction of Lessor's obligations under the Operative Documents and that, when paid, the Additional Rent is irrevocably and unconditionally the property of Lessor. (b) Notwithstanding the intent of Lessor and Lessee stated in Section 5.5(a), if and to the extent that the Additional Rent, or any part thereof, under any Applicable Law or otherwise, is determined to be security deposits or otherwise the property of Lessee, or if it is so determined the Additional Rent is a debt owed to Lessee or that Lessee shall have any interest in the Additional Rent, then Lessee and Lessor agree that Sections 5.5(b)(i) and (ii) below shall apply to the Additional Rent as well as to the Security Deposit (collectively, the "Pledged Moneys"): (i) To the fullest extent permitted by law and by way of continuing security, Lessee grants a Security Interest in the Pledged Moneys and all rights of Lessee to payment thereof, the debt represented thereby and all interest thereon and/or any and all interest of Lessee therein to Lessor by way of first priority Security Interest as security for Lessee's obligations and liability under the Operative Documents (the "Secured Liabilities"). Except as expressly permitted under this Agreement, Lessee will not be entitled to payment of the Pledged Moneys. Lessee will not assign, transfer or otherwise dispose of all or part of its rights or interest in the Pledged Moneys and Lessee agrees that it will enter into any additional documents and instruments necessary or reasonably requested by Lessor to evidence, create or perfect Lessor's rights to the Pledged Moneys. (ii) If Lessee fails to comply with any provision of this Agreement or any Event of Default has occurred and is continuing, Lessor may immediately or at any time thereafter, without prior notice to Lessee: (1) offset all or any part of Secured Liabilities against the liabilities of Lessor in respect of the Pledged Moneys; or (2) apply or appropriate the Pledged Moneys in or towards the payment or discharge of Secured Liabilities in such order as Lessor sees fit. 5.6 Payments -------- (a) All payments of Rent by Lessee to Lessor under this Agreement will be made for value on the due date, for the full amount due, in Dollars and in same day funds, settled through the New York Clearing House System or such other funds as may for the time being be customary for the settlement in New York City of payments in Dollars by telegraphic transfer to the following account of Lessor: Fleet Bank, N.A. New York, New York ABA No. 021-200-339 Account No. 9403-530699 Account Name: EFG Rent Escrow Reference: N57SW or to such other account in North America or the European Union as Lessor may direct by at least five Business Days prior written notice. (b) If any Rent or other payment would otherwise become due on a day which is not a Business Day, it shall be due on the immediately succeeding Business Day. 5.7 Gross-up -------- (a) All payments by Lessee under or in connection with this Agreement will be made without offset or counterclaim, free and clear of and without deduction or withholding, except to the extent required by Slovak law, for or on account of any Taxes (other than Non-Indemnified Taxes that Lessee is compelled by law to deduct or withhold). Lessee acknowledges hereby to pay all amounts due hereunder grossed up accordingly in order that Lessor or the Financing Parties receive the full amount of Rent or other payments then due hereunder. (b) All Taxes (other than Non-Indemnified Taxes) in respect of payments under this Agreement shall be for the account of Lessee. (c) If Lessee is compelled by law to make payment to an Indemnitee under or in connection with this Agreement subject to any Tax and such Indemnitee does not actually receive for its own benefit on the due date a net amount equal to the full amount provided for under this Agreement (other than Non-Indemnified Taxes that Lessee is compelled by law to deduct or withhold), Lessee will pay all necessary additional amounts to ensure receipt by such Indemnitee of the full amount (other than Non-Indemnified Taxes that Lessee is compelled by law to deduct or withhold) provided for under this Agreement. 5.8 Taxation -------- (a) Lessee will on demand pay and indemnify each Tax Indemnitee against all Taxes (other than Non-Indemnified Taxes) levied or imposed against or upon such Tax Indemnitee or Lessee and relating to or attributable to Lessee, the Operative Documents or the Leased Property directly or indirectly in connection with the importation, exportation, registration, ownership, leasing, subleasing, purchase, delivery, possession, use, operation, repair, maintenance, overhaul, transportation, landing, storage, presence or redelivery of the Aircraft or any part thereof or any rent, receipts, insurance proceeds, income or other amounts arising therefrom. (b) If any Tax Indemnitee shall, based upon its own reasonable interpretation of any relevant laws or regulations, realize any Tax savings (by way of refund, deduction, credit or otherwise) in respect of any amount with respect to which Lessee shall have made a payment (or increased payment) pursuant to Section 5.7, 5.9 or 5.11 or shall have indemnified such Tax Indemnitee pursuant to Section 5.8(a), or in respect of the occurrence or transaction which gave rise to such payment or indemnification, and such Tax savings shall not have been taken into account previously in calculating any indemnity payment made by Lessee, then such Tax Indemnitee shall, to the extent that it can do so without prejudice to the retention of the relevant savings and subject to Lessee's obligations to repay such amount to such Tax Indemnitee if the relevant savings are subsequently disallowed or canceled, pay to Lessee such amount as such Tax Indemnitee shall in its opinion have concluded to be the amount of such Tax savings (together with, in the case of a refund, any interest received thereon); provided, that such Tax Indemnitee shall not be obliged to make any payment to Lessee pursuant to this Section 5.8(b) to the extent that the amount of any Tax savings in respect of which such payment is to be made would exceed the aggregate amount of all prior payments made by Lessee to, on behalf of or as indemnification of such Tax Indemnitee under this Agreement for Taxes less the amount of all prior payments made pursuant to this Section 5.8(b) in respect of such Tax savings. Lessee acknowledges that nothing contained in this Section 5.8(b) shall interfere with the right of any Tax Indemnitee to arrange its tax affairs in whatsoever proper manner it thinks fit (or give Lessee any right to investigate, or impose any obligation on any Tax Indemnitee to disclose, the same) and, in particular, no Tax Indemnitee shall be under any obligation to claim any Tax savings in priority to any other savings available to it; provided, that subject to the foregoing Lessor shall use reasonable good faith diligence to realize Tax savings as described above. 5.9 Value Added Tax --------------- (a) For purposes of this Section 5.9, "VAT" means value added tax and any goods and services, sales or turnover tax, imposition or levy of a similar nature, and "supply" includes anything on or in respect of which VAT is chargeable. (b) Lessee shall pay each Tax Indemnitee or the relevant taxing authority, as the case may be, the amount of any VAT chargeable in respect of any supply for VAT purposes under this Agreement. (c) Each amount stated as payable by Lessee under this Agreement is exclusive of VAT (if any), and if VAT is payable in respect of any amount payable by Lessee under this Agreement, Lessee shall pay all such VAT and shall indemnify each Tax Indemnitee against any claims for the same, and where appropriate Lessee shall increase the payments that would otherwise be required to be made under this Agreement so that such Tax Indemnitee is left in the same position as it would have been had no VAT been payable. Lessee shall provide evidence to Lessor, if available, in respect of payment of any VAT paid by Lessee with respect to this Agreement. 5.10 Information ----------- If Lessee is required by any Applicable Law, or by any third party, to deliver any report or return in connection with any Taxes, then Lessee will duly complete the same and, in particular, will not state therein that any Person other than Lessee is responsible for the use and operation of the Aircraft and for the Taxes (other than Non-Indemnified Taxes) arising therefrom, and Lessee will, on request, supply a copy of the report or return to any Tax Indemnitee. If Lessee requires any information or cooperation from any Tax Indemnitee in order to satisfy its obligations as set forth above, such Tax Indemnitee shall promptly furnish such information or cooperation as Lessee may reasonably request in writing. If actual notice is given by any taxing authority to Lessor that a report or return is required to be filed with respect to any Taxes (other than Non- Indemnified Taxes), Lessor shall promptly notify Lessee of such required report or return. 5.11 Taxation of Indemnity Payments ------------------------------ (a) If and to the extent that any sums payable to any Tax Indemnitee by Lessee under this Agreement by way of indemnity are insufficient, by reason of any Taxes payable in respect of those sums, for such Tax Indemnitee to discharge the corresponding liability to the relevant third party (including any taxation authority), or to reimburse such Tax Indemnitee for the cost incurred by it to a third party (including any taxation authority), Lessee will pay to such Tax Indemnitee such sum as will, after the tax liability has been fully satisfied, leave such Tax Indemnitee with the same amount as it would have been entitled to receive in the absence of that liability, together with interest on the amount of the deficit at the Default Rate in respect of the period commencing on the date on which the payment of taxation is finally due until payment by Lessee (both before and after judgment). (b) If and to the extent that any sums constituting (directly or indirectly) an indemnity to any Tax Indemnitee but paid by Lessee to any Person other than such Tax Indemnitee are treated as taxable in the hands of such Tax Indemnitee, then Lessee will pay to such Tax Indemnitee such sum as will, after the tax liability has been fully satisfied, indemnify such Tax Indemnitee to the same extent as it would have been indemnified in the absence of such liability, together with interest on the amount payable by Lessee under this Section 5.11(b) at the Default Rate in respect of the period commencing on the date on which the payment of taxation is finally due until payment by Lessee (both before and after judgment). 5.12 Default Interest ---------------- If Lessee fails to pay any amount payable under this Agreement on the due date, Lessee will pay on demand from time to time to any Tax Indemnitee interest (both before and after judgment) at the Default Rate on such amount from the due date to the day of payment in full by Lessee to such Tax Indemnitee. All such interest shall be compounded monthly and calculated on the basis of the actual number of days elapsed assuming a year of 360 days. 5.13 Contest ------- If written claim is made against any Tax Indemnitee for or with respect to any Taxes (other than Non-Indemnified Taxes), such Tax Indemnitee shall promptly notify Lessee. If reasonably requested by Lessee in writing within 30 days after such notification, such Tax Indemnitee shall, upon receipt of indemnity satisfactory to such Tax Indemnitee and at the expense of Lessee (including all costs, expenses, losses, legal and accountants' fees and disbursements, penalties and interest), in good faith contest or to the extent permissible by law allow Lessee to contest in Lessee's or such Tax Indemnitee's name the validity, applicability or amount of such Taxes by either (i) resisting payment thereof if practicable and permitted by Applicable Law, or (ii) if payment is made, using reasonable efforts to obtain a refund thereof in appropriate administrative and judicial proceedings, and in the contest of any such claim by any Tax Indemnitee, such Tax Indemnitee shall apprize Lessee of all material developments with respect to such contest, shall forward copies of all material submissions made in such contest and shall materially comply in good faith with any reasonable request concerning the conduct of any such contest; provided, that no Tax Indemnitee will be obliged to take any such action: (a) that such Tax Indemnitee considers, in its reasonable discretion, may prejudice it; or (b) that such Tax Indemnitee reasonably considers does not have a reasonable prospect of success; or (c) for which Lessee has not made adequate provision to the reasonable satisfaction of such Tax Indemnitee in respect of the expense concerned; or (d) that gives rise to any material likelihood of the Aircraft or any interest of any Tax Indemnitee in the Aircraft being sold, forfeited or otherwise lost, or of criminal liability on the part of any Tax Indemnitee. If any Tax Indemnitee, in accordance with the foregoing, determines to pay such Taxes and seek a refund, Lessee will either pay such Taxes on such Tax Indemnitee's behalf and pay such Tax Indemnitee any amount due with respect to such payment or will promptly reimburse such Tax Indemnitee for such Taxes. If any Tax Indemnitee shall obtain a refund of all or any part of such Taxes paid by Lessee, such Tax Indemnitee shall pay Lessee the amount of such refund; provided, that such amount shall not be payable before such time as Lessee shall have made all payments or indemnities to any Tax Indemnitee then due with respect to Taxes and so long as no Default has occurred and is continuing. If in addition to such refund any Tax Indemnitee shall receive an amount representing interest, attorneys fees or any other amount with respect to such refund, Lessee shall be paid that proportion of such interest, attorneys fees or any other amount which is fairly attributable to the Taxes paid by Lessee prior to the receipt of such refund. No Tax Indemnitee shall enter into a settlement or other compromise with respect to, or otherwise concede, any claim by a taxing authority on account of Taxes being contested by Lessee pursuant to this Section 5.13 without the written consent of Lessee, which consent shall not be unreasonably withheld, unless such Tax Indemnitee waives its right to be indemnified by Lessee with respect to such claim (but not with respect to any future claims). 5.14 Absolute -------- Lessee's obligations under this Agreement are absolute and unconditional irrespective of any contingency whatever including (but not limited to): (a) any right of offset, counterclaim, recoupment, defense or other right which either party to this Agreement may have against the other; (b) any unavailability of the Aircraft for any reason, including a requisition of the Aircraft or any prohibition or interruption of, interference with or other restriction against Lessee's use, operation or possession of the Aircraft; provided, however, to the extent the foregoing constitutes a Total Loss hereunder, the Lessee's obligations shall be as set forth in Section 11.2 hereof; (c) any lack or invalidity of title or any other defect in title, airworthiness, merchantability, fitness for any purpose, condition, design or operation of any kind or nature of the Aircraft for any particular use or trade, or for registration or documentation under the laws of any relevant jurisdiction, or any Total Loss in respect of or any damage to the Aircraft; provided, however, in the event of a Total Loss the Lessee's obligations shall be as set forth in Section 11.2 hereof; (d) any insolvency, bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceedings by or against Lessor or Lessee; (e) any invalidity, unenforceability or lack of due authorization of, or other defect in, this Agreement; or (f) any other cause which, but for this provision, would or might otherwise have the effect of terminating or in any way affecting any obligation of Lessee under this Agreement; provided always, however, that this Section 5.14 shall be without prejudice to Lessee's right to claim damages and other relief from the courts in the event of any breach by Lessor of its obligations under this Agreement, or in the event that, as a result of any lack or invalidity of title to the Aircraft on the part of Lessor, Lessee is deprived of its possession of the Aircraft. 6. MANUFACTURER'S WARRANTIES 6.1 Assignment ---------- Notwithstanding this Agreement and subject to the rights of any Mortgagee pursuant to a Mortgage or Assignment, Lessor will remain entitled to the benefit of each warranty, express or implied, and any unexpired customer and/or product support given or provided in respect of the Aircraft, any Engine or Part by any manufacturer, vendor, maintenance performer, subcontractor or supplier. Unless an Event of Default shall have occurred and be continuing, Lessor hereby authorizes Lessee to pursue any claim thereunder in relation to defects affecting the Aircraft, any Engine or Part, and Lessee agrees diligently to pursue any such claim which arises at its own cost. Lessee will notify Lessor promptly upon becoming aware of any such claim. Lessor will provide such assistance to Lessee in making a claim under any such warranties or customer and/or product support as Lessee may reasonably request, and, if requested by Lessee and at Lessee's expense, will pursue a claim in its own name where the relevant manufacturer, vendor, maintenance performer, subcontractor or supplier has refused to acknowledge Lessee's right to pursue that claim. 6.2 Proceeds -------- Unless an Event of Default shall have occurred and be continuing, all proceeds of any such claim as is referred to in Section 6.1 and which exceed $100,000 will be paid directly to Lessor at the account set forth in Section 5.6(a), but if and to the extent that such claim relates: (a) to defects affecting the Aircraft which Lessee has rectified; or (b) to compensation for loss of use of the Aircraft, an Engine or any Part during the Term; or (c) to costs incurred by Lessee in pursuing such claim (whether or not proceeds of such claim are payable to Lessee); and provided no Default shall have occurred and be continuing, the proceeds will be promptly paid to Lessee by Lessor but, in the case of (a), only on receipt of evidence reasonably satisfactory to Lessor that Lessee has rectified the relevant defect. 6.3 Parts ----- Except to the extent Lessor otherwise agrees in a particular case, Lessee will procure that all engines, components, furnishings or equipment provided by the manufacturer, vendor, maintenance performer, subcontractor or supplier as a replacement for a defective Engine or Part pursuant to the terms of any warranty or customer and/or product support arrangement comply with Section 8.13(a), are installed on the Aircraft promptly and that title thereto vests in Lessor in accordance with Section 8.17(a). On installation those items will be deemed to be an Engine or Part, as applicable. 6.4 Agreement --------- To the extent any warranties or customer and/or product support relating to the Aircraft are made available under an agreement between any manufacturer, vendor, maintenance performer, subcontractor or supplier and Lessee, this Section 6 is subject to that agreement. However, Lessee will: (a) pay the proceeds of any claim thereunder that exceed $100,000 to Lessor at the account set forth in Section 5.6(a) to be applied pursuant to Section 6.2 and, pending such payment, will hold the claim and the proceeds on trust for Lessor; and (b) take all such steps as are necessary and requested by Lessor at the end of the Term to ensure the benefit of any of those warranties or customer and/or product support which have not expired are vested in Lessor (but subject to the rights of any Mortgagee under any Mortgage). 7. LESSOR'S COVENANTS and DISCLAIMERS ---------------------------------- 7.1 Quiet Enjoyment Provided no Event of Default shall have occurred and be continuing, none of Lessor, its successors and assigns, any Financing Party or any Person claiming by, through or on account of any of such parties will interfere with the quiet use, possession and enjoyment of the Aircraft by Lessee. 7.2 Lessor's Post-Delivery Modifications Contribution (a) Lessor shall contribute to Lessee a portion of the Actual Cost of the Post-Delivery Modifications (whether performed before or after Delivery) as follows: (i) Lessor shall pay to Lessee the lesser of $40,000 and the Actual Cost of having the Airframe fuselage sanded and painted in the Lessee's livery; and (ii) Lessor shall pay to Lessee the lesser of $40,000 and the Actual Cost of installing the navigational equipment listed on Schedule 5. (b) The Post-Delivery Modifications shall be performed by an Agreed Maintenance Provider, and Lessee's workscope shall be reviewed and approved in writing by the Lessor. Upon completion of the Post- Delivery Modifications, Lessee shall submit to Lessor an invoice and documentation reasonably satisfactory to Lessor evidencing the completion of such work and the Actual Costs incurred by Lessee. In connection with any invoice submitted to Lessor pursuant to this Section 7.2(b), Lessor shall be entitled, before payment, to request any supporting documentation reasonably necessary and available to confirm the scope, completion and Actual Cost of the Post-Delivery Modification work. (c) Provided no Default has occurred and is continuing, upon the completion of the Post-Delivery Modifications on the Aircraft, Lessor shall pay its portion of the Actual Costs of the work as set forth in Section 7.2(a) within 30 days after submission by Lessee to Lessor of an invoice and supporting documentation in accordance with Section 7.2(b). Notwithstanding the foregoing sentence, Lessor shall not be liable to pay any amounts to Lessee for the Actual Cost of Post-Delivery Modifications in respect of any invoice submitted to Lessor more than six months after the Delivery Date. 7.3 Lessor's Maintenance Contribution --------------------------------- (a) Airframe Reimbursable Expenses: (i) In connection with the performance by Lessee of a Heavy Check on the Airframe during the Term of this Lease, Lessee's Actual Costs incurred in completing, with respect to the Airframe, all routine Heavy Check tasks shall constitute "Airframe Reimbursable Expenses". (ii) Before the performance of a Heavy Check on the Airframe, Lessee shall present written evidence satisfactory to Lessor as to the workscope to be performed and the payment installments to be made to any independent Agreed Maintenance Performer that will be performing such workscope. Upon the accomplishment of a Heavy Check on the Airframe, Lessee shall present written evidence satisfactory to Lessor as to the completion of such Heavy Check and the amount of the Airframe Reimbursable Expenses for approval by Lessor. Upon receipt of such written evidence, and provided there then exists no Default, Lessor shall pay to the Agreed Maintenance Performer performing such work if directed by Lessee and as required under Lessee's agreement with such independent repair facility, or to Lessee, an amount equal to the lesser of (i) the Airframe Reimbursable Expenses for such Heavy Check or (ii) an amount equal to (1) all Airframe Additional Rent previously paid by Lessee under this Lease, minus (2) all previous payments by Lessor under this Section 7.3(a). (b) Engine Reimbursable Expenses: ---------------------------- (i) In connection with the accomplishment of any CER for any Engine during the Term requiring an Engine Shop Repair, including any premature removal of an Engine due to accelerated performance deterioration revealed by Lessee's trend monitoring data and replacement of LLPs during any such Engine Shop Visit, Lessee's Actual Cost incurred in completing such CER shall constitute "Engine Reimbursable Expenses". (ii) Before the performance of a CER on an Engine, Lessee shall present written evidence satisfactory to Lessor as to the workscope to be performed and the payment installments to be made to any independent Agreed Maintenance Performer that will perform such CER. Upon accomplishment of a CER on an Engine, Lessee shall present written evidence to Lessor as to the completion of such CER and the amount of Engine Reimbursable Expenses for approval by Lessor. Upon receipt of such written evidence, and provided there then exists no Default, Lessor shall pay to the independent Agreed Maintenance Performer that performed the CER, if directed by Lessee and as required under Lessee's agreement with such independent repair facility, or to Lessee, an amount equal to the lesser of (i) the Engine Reimbursable Expenses for such CER or (ii) an amount equal to (1) all Engine Additional Rent previously paid by Lessee for such Engine pursuant to this Lease, minus (2) all previous payments for such Engine by Lessor under this Section 7.3(b). (c) Landing Gear Reimbursable Expenses: ---------------------------------- (i) In connection with the performance by Lessee of an overhaul of the Landing Gear in accordance with the Agreed Maintenance Program, Lessee's Actual Cost incurred in completing such overhaul shall constitute "Landing Gear Reimbursable Expenses". (ii) Before the performance of an overhaul of the Landing Gear, Lessee shall present written evidence satisfactory to Lessor as to the workscope to be performed and the payment installments to be made to any independent Agreed Maintenance Performer that will perform such overhaul. Upon accomplishment of an overhaul of the Landing Gear, Lessee shall present written evidence satisfactory to Lessor as to the completion of such overhaul and the amount of Landing Gear Reimbursable Expenses for approval by Lessor. Upon receipt of such written evidence, and provided there then exists no Default, Lessor shall pay to the independent Agreed Maintenance Performer that performed such overhaul, if directed by Lessee and as required under Lessee's agreement with such independent repair facility, or to Lessee, an amount equal to the lesser of (i) the Landing Gear Reimbursable Expenses for such overhaul or (ii) an amount equal to (1) all Landing Gear Additional Rent previously paid by Lessee pursuant to this Lease, minus (2) all previous payments by Lessor under this Section 7.3(c). (d) APU Reimbursable Expenses: -------------------------- (i) In connection with the performance by Lessee of an overhaul of the APU in accordance with the Agreed Maintenance Program, Lessee's Actual Cost incurred in completing such overhaul shall constitute "APU Reimbursable Expenses". (ii) Before the performance of an overhaul of the APU, Lessee shall present written evidence satisfactory to Lessor as to the workscope to be performed and the payment installments to be made to any independent Agreed Maintenance Performer that will perform such overhaul. Upon accomplishment of an overhaul, Lessee shall present written evidence satisfactory to Lessor as to the completion of such overhaul and the amount of APU Reimbursable Expenses for approval by Lessor. Upon receipt of such written evidence, and provided there then exists no Default, Lessor shall pay to the independent Agreed Maintenance Performer that performed such overhaul, if directed by Lessee and as required under Lessee's agreement with such independent repair facility, or to Lessee, an amount equal to the lesser of (i) the APU Reimbursable Expenses of such overhaul or (ii) an amount equal to (1) all APU Additional Rent previously paid by Lessee pursuant to this Lease, minus (2) all previous payments by Lessor under this Section 7.3(d). (e) Additional Provisions: --------------------- (i) Notwithstanding the provisions of Sections 7.3(a) through (d), Reimbursable Expenses shall not include the cost of (1) any replacements or repairs caused by foreign object damage ("FOD") or internal object damage ("IOD"), (2) any replacements or repairs caused by accident, faulty maintenance or installation, any incident, improper operations, abuse, neglect, misuse or elective parts replacement (except to the extent ordinarily accomplished during such maintenance or overhaul), (3) any modifications not required by the Aviation Authority or this Agreement, (4) any interior reconfiguration, (5) the accomplishment of non-repetitive airworthiness directives or manufacturer's service bulletins, (6) maintenance work that is reimbursable by a claim under the manufacturer's warranties or by insurance (but including deductibles for purposes of this provision), or (7) any overhaul of time controlled components accomplished during a Heavy Check, CER or overhaul except such as are part of the routine tasks included at such Heavy Check, CER or overhaul. (ii) Notwithstanding anything to the contrary contained in this Section 7.3, any such maintenance and the extent and nature of such maintenance to be performed shall be conducted at an Agreed Maintenance Performer. Lessor shall be entitled to have representatives present during the performance of such maintenance to oversee and approve all aspects of such performance, including the workscope thereof. Lessor shall be notified by Lessee prior to the commencement of any maintenance work described in this Section 7.3, including as to the Agreed Maintenance Performer and for Lessor's reasonable approval of the workscope. (iii) Lessee acknowledges that Lessee is required to pay the full cost of and to perform (or cause to be performed) any Heavy Check, Engine Shop Visit, overhaul or other maintenance required by the Agreed Maintenance Program, whether or not Lessor is required to make any payments pursuant to this Section 7.3, and any costs incurred by Lessee in performing any such Heavy Check, Engine Shop Visit, overhaul or other maintenance required by the Agreed Maintenance Program shall be for Lessee's account solely; provided, that if Lessor's contribution pursuant to Section 7.3(a) through (d) above is ever less than the Reimbursable Expenses incurred by Lessee with respect to the Airframe, any Engine, the Landing Gear or the APU, then Lessee's obligation under Section 5.4 to make payments of Additional Rent with respect to the Airframe, such Engine, the Landing Gear or the APU, respectively, shall be suspended until an equivalent amount to such shortfall has been retained by Lessee. 7.4 Lessor's AD Cost Sharing Contribution ------------------------------------- (a) Provided no Default has occurred and is continuing, upon the performance by Lessee of "Qualifying AD Work" (as hereinafter defined) relating to any single airworthiness directive issued by the Aviation Authority after the Delivery Date and requiring terminating action during the Term, Lessor will pay to Lessee, by way of contribution to the cost of the maintenance of the Aircraft, an amount equal to the product of (i) the amount by which the Actual Cost of the Qualifying AD Work exceeds $75,000 (ii) multiplied by a fraction the numerator of which is 96 minus the number of whole calendar months remaining in the Term from the date of completion of such Qualifying AD Work to the Scheduled Expiry Date and the denominator of which is 96. (b) "Qualifying AD Work" means maintenance work performed on the Aircraft solely in order to comply fully with airworthiness directives and service bulletins issued by the Aviation Authority (whether or not such airworthiness directives or service bulletins were issued before or after the Delivery Date) on a terminating action basis, and excluding work performed for any other purpose, such as compliance with airworthiness directives by means of repetitive inspections, recording compliance work in the Aircraft Documents and all other maintenance work. (c) Lessor will be obligated to pay any amount specified in Section 7.4(a) within 30 days after submission by Lessee to Lessor of an invoice and supporting documentation reasonably satisfactory to Lessor evidencing the performance of Qualifying AD Work for an airworthiness directive. (d) Before performing (or causing to be performed) any Qualifying AD Work, if Lessee estimates in good faith that Lessor's contribution pursuant to Section 7.4(a) together with all previous contributions by Lessor pursuant to Section 7.4(a) would be more than $1,000,000, then Lessee shall give written notice to Lessor of its planned performance of such Qualifying AD Work and Lessor shall, within 10 Business Days of receiving such notice from Lessee, either (A) notify Lessee of Lessor's election to contribute its portion of such Qualifying AD Work, in which event the leasing of the Leased Property pursuant to this Agreement will continue, Lessee shall perform such Qualifying AD Work and Lessor shall make any contribution required pursuant to Section 7.4(a), or (B) notify Lessee of Lessor's election not to contribute to such Qualifying AD Work. In the event that Lessor elects not to contribute to such Qualifying AD Work, Lessee may, by written notice given to Lessor within 10 Business Days, elect to either (1) advance the Scheduled Expiry Date to a date not earlier than one month before such Qualifying AD Work is required to be performed, or (2) perform (or cause to be performed) such Qualifying AD Work, in which event Lessor shall not be required to make the contribution set forth in Section 7.4(a). Any failure by Lessor to notify Lessee within 10 Business Days pursuant to this Section 7.4(d) shall be deemed to be an election by Lessor to make its contribution pursuant to Section 7.4(a). Any failure by Lessee to notify Lessor within 10 Business Days pursuant to this Section 7.4(d) shall be deemed to be an election by Lessee not to advance the Scheduled Expiry Date and to perform the Qualifying AD Work without contribution from Lessor. If Lessee elects to advance the Scheduled Expiry Date, Lessee shall return the Leased Property on such Scheduled Expiry Date in the condition required by Section 12 and Schedule 4 and otherwise in accordance with all provisions of this Agreement. 7.5 Registration and Filings ------------------------ Lessor shall, at Lessee's cost: (a) maintain the registration of the Aircraft with the Aviation Authority reflecting (so far as permitted by Applicable Law) the respective interests of Lessor, any Mortgagee and Lessee and not do or suffer to be done anything which might reasonably be expected to adversely affect that registration; and (b) do all acts and things (including making any filing or registration with the Aviation Authority or any other Government Entity) as may be required following any change in the ownership or financing of the Aircraft. 7.6 Lessor's Obligations Following Termination ------------------------------------------ So long as no Default has occurred and is continuing, within five Business Days of: (a) termination of this Agreement before Delivery pursuant to Section 4.2(e) or 4.3; or (b) redelivery of the Aircraft to Lessor in accordance with and in the condition required by this Agreement; or (c) receipt by Lessor of the Agreed Value following a Total Loss and all other amounts due under Section 10.1(a); or in any such case at such later time as Lessee has irrevocably paid to Lessor all amounts which are then outstanding under this Agreement, Lessor shall pay to Lessee any amounts remaining of the Security Deposit, and deliver to Lessee the Insurance Letter of Credit. 7.7 Agreed Maintenance Performers ----------------------------- Lessor may object to and may exclude any maintenance organization (other than Lessee) being included as an "Agreed Maintenance Performer" for a valid business reason. Lessor shall furnish to Lessee in writing from time to time a list of all maintenance organizations excluded from the definition of "Agreed Maintenance Performer" pursuant to the preceding sentence, which list may be amended by Lessor from time to time. Lessor and Lessee shall consult in good faith regarding any organizations on such list from time to time at the request of either party. 7.8 Exclusion --------- THE AIRCRAFT IS ACCEPTED BY LESSEE "AS IS, WHERE IS WITH ALL FAULTS" AND LESSEE AGREES AND ACKNOWLEDGES THAT, SAVE AS IS EXPRESSLY STATED IN THIS AGREEMENT, LESSOR WILL HAVE NO LIABILITY IN RELATION TO, AND LESSOR HAS NOT AND WILL NOT BE DEEMED TO HAVE MADE OR GIVEN, ANY CONDITIONS, WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT, INCLUDING: (a) THE DESCRIPTION, AIRWORTHINESS, MERCHANTABILITY, FITNESS FOR (b) ANY USE OR PURPOSE, VALUE, CONDITION, OR DESIGN, OF THE AIRCRAFT OR ANY PART; OR (c) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM LESSOR'S NEGLIGENCE, ACTUAL OR IMPUTED (BUT EXCLUDING ANY SUCH OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT WHICH ARISES FROM LESSOR'S GROSS NEGLIGENCE OR WILFUL MISCONDUCT); OR (d) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO THE AIRCRAFT, FOR ANY LIABILITY OF LESSEE TO ANY THIRD PARTY, OR FOR ANY OTHER DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES. 7.9 Lessee's Waiver --------------- LESSEE HEREBY WAIVES, AS BETWEEN ITSELF AND LESSOR, ALL ITS RIGHTS IN RESPECT OF ANY CONDITION, WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, ON THE PART OF LESSOR AND ALL CLAIMS AGAINST LESSOR HOWSOEVER AND WHENEVER ARISING AT ANY TIME IN RESPECT OF OR OUT OF THE OPERATION OR PERFORMANCE OF THE AIRCRAFT OR THIS AGREEMENT EXCEPT AS IS OTHERWISE EXPRESSLY STATED IN THIS AGREEMENT. 7.10 Lessee's Confirmation --------------------- LESSEE CONFIRMS THAT IT IS FULLY AWARE OF THE PROVISIONS OF SECTIONS 7.8 AND 7.9 AND ACKNOWLEDGES THAT BASIC RENT, ADDITIONAL RENT AND ALL OTHER AMOUNTS PAYABLE BY LESSEE UNDER THIS AGREEMENT HAVE BEEN CALCULATED NOTWITHSTANDING ITS PROVISIONS. 8. LESSEE'S COVENANTS ------------------ 8.1 Duration The undertakings in this Section 8 and in Section 12 will: (a) except as otherwise stated, be performed at the expense of Lessee; and (b) remain in force until redelivery of the Aircraft to Lessor in accordance with this Agreement and thereafter to the extent of any accrued rights of Lessor in relation to those undertakings. 8.2 Information ----------- Lessee shall: (a) furnish to Lessor, with a copy to any Mortgagee: (i) within 60 days after the last day of the first three fiscal quarters of each fiscal year of the Lessee, unaudited consolidated quarterly financial statements of the Lessee prepared for such quarter, including a consolidated balance sheet of the Lessee and its Subsidiaries as of the last day of such quarter and consolidated statements of income and retained earnings for such fiscal quarter and for the year to date and, on a comparative basis, figures for the corresponding periods of the immediately preceding fiscal year, all in reasonable detail, each such statement to be certified in a certificate of Lessee's chief financial officer or chief accounting officer as fairly presenting the financial position and the results of operations of the Lessee as at its date and for such quarter (subject to year-end audit adjustments) and as having been prepared in accordance with GAAP; (ii) as soon as available but not in any event later than 90 days after the last day of each fiscal year of the Lessee, audited consolidated financial statements of the Lessee prepared for such year, including a consolidated balance sheet of the Lessee and its Subsidiaries as of the last day of such year, consolidated statements of income and retained earnings of the Lessee and its Subsidiaries for such fiscal year, a consolidating balance sheet of Lessee and its Subsidiaries as of the last day of such year and consolidating statements of income and retained earnings of Lessee and its Subsidiaries for such fiscal year and in all cases on a comparative basis figures for the immediately preceding fiscal year, all in reasonable detail, each prepared in accordance with GAAP and certified without qualification by [Name of Lessee's Auditors] or another of the largest international firms of independent certified public accountants as fairly presenting the financial position and the results of operations of Lessee and its Subsidiaries at the end of and for such fiscal year and as having been prepared in accordance with GAAP; (iii) in lieu of delivering to Lessor and any Mortgagee the financial statements referred to in Sections 8.2(a)(i) and (ii) above, Lessee may cause such financial statements to be publicly available on the internet within the time periods set forth in Sections 8.2(a)(i) and (ii) above at a location identified to Lessor and any Mortgagee in writing; (iv) concurrently with the financial statements furnished pursuant to Sections 8.2(a)(i) and (ii) above, an officer's certificate signed by the chief financial officer or chief accounting officer of Lessee certifying to the best knowledge after due inquiry of such officer that no Default occurred during the period covered by such financial statements and no Default exists on the date of such officer's certificate or, if a Default occurred or exists, stating that fact and specifying the nature and period of existence of such Default and the actions Lessee took or proposes to take with respect to such Default; (v) at the same time as it is issued to the creditors of Lessee, a copy of each notice or circular issued to Lessee's creditors as a group; and (vi) on request from time to time such other information regarding Lessee and its business and affairs as Lessor or any Mortgagee may reasonably request; (b) on request, inform Lessor as to the current location of the Airframe and Engines, the serial number and owner of any engine installed on the Airframe and the serial number, registration mark and owner of any airframe on which an Engine is installed; (c) promptly furnish to Lessor all information that Lessor from time to time reasonably requests regarding the Aircraft, any Engine or any Part and its use, location and condition, including the hours available on the Aircraft and any Engine until the next scheduled check, inspection, overhaul or shop visit, as the case may be; (d) on request, furnish to Lessor evidence reasonably satisfactory to Lessor that all Taxes and charges incurred by Lessee with respect to the Aircraft have been paid and discharged in full; (e) provide to Lessor, within 10 days following the end of each Rental Period during the Term, a monthly report on the Aircraft in the form set out in Exhibit F or such other form as Lessee may select providing substantially the same information; (f) promptly notify Lessor and any Mortgagee of: (i) any Total Loss, any Engine Loss, any theft of the Airframe or any Engine, any damage to the Aircraft if the potential cost of repair may reasonably be expected to exceed the Damage Notification Threshold or any modification to the Aircraft if the potential cost may reasonably be expected to exceed the Damage Notification Threshold; (ii) any claim or other occurrence likely to give rise to a claim under the Insurances (but, in the case of hull claims only, in excess of the Damage Notification Threshold) and details of any negotiations with the insurance brokers over any such claim; and (iii) any litigation, arbitration or administrative proceedings that are pending or, to Lessee's knowledge, threatened against Lessee which, if adversely determined, would have a material adverse effect upon its financial condition or business or its ability to perform its obligations under this Agreement. 8.3 Operation of the Aircraft ------------------------- Lessee shall: (a) comply with all Applicable Law for the time being in force in any country or jurisdiction in which the Aircraft is being operated which is applicable to the Aircraft or the use and operation of the Aircraft; (b) not use the Aircraft in any manner contrary to any recommendation of the Aviation Authority, the Manufacturer, the Engine Manufacturer or the manufacturer of any Part or any rule or regulation of the Aviation Authority or for any purpose for which the Aircraft is not designed or reasonably suitable; (c) ensure that the crew and engineers employed by it in connection with the operation and maintenance of the Aircraft have the qualifications and hold the licenses required by the Aviation Authority and Applicable Law; (d) use the Aircraft solely in commercial or other operations for which Lessee is duly authorized by the Aviation Authority and Applicable Law; (e) not knowingly use the Aircraft (or use it when Lessee ought reasonably to have known that it was being so used) for the carriage of: (i) whole animals, living or dead, except in the cargo compartments according to IATA regulations, and except domestic pet animals carried in a suitable container to prevent the escape of any liquid and to ensure the welfare of the animal; (ii) acids, toxic chemicals, other corrosive materials, explosives, nuclear fuels, nuclear wastes or any nuclear assemblies or components, except as permitted for cargo aircraft under the "Restriction of Goods" schedule issued by IATA from time to time and provided that all the requirements for packaging or otherwise contained therein are fulfilled; (iii) any other goods, materials or items of cargo which could reasonably be expected to cause damage to the Aircraft and which would not be adequately covered by the Insurances; or (iv) any illegal item or substance; (f) not utilize the Aircraft for purposes of training, qualifying or re- confirming the status of cockpit personnel except for the benefit of Lessee's cockpit personnel, and then only if the use of the Aircraft for such purpose is not disproportionate to the use for such purpose of other aircraft of the same type operated by Lessee; (g) not (other than for bona fide safety reasons) cause or permit the Aircraft to proceed to, or remain at, any location which is for the time being the subject of a prohibition order (or any similar order or directive) by: (i) any Government Entity of the State of Registration or the Habitual Base; or (ii) any Government Entity of the country in which such location is situated; or (iii) any Government Entity having jurisdiction over Lessor, any Financing Party or the Aircraft; (h) obtain and maintain in full force all certificates, licenses, permits and authorizations required for the use and operation of the Aircraft for the time being, and for the making of payments required by, and the compliance by Lessee with its other obligations under, this Agreement; (i) not change the location of the Habitual Base of the Aircraft without the prior written consent of Lessor; and (j) not operate the Aircraft to, from or in any country that is the subject of sanctions under United Nations Security Council directives. 8.4 Taxes and Other Charges ----------------------- As between Lessor and Lessee, Lessee shall be responsible for all fees, expenses, charges and other costs related to the use, operation and maintenance of the Leased Property, and shall promptly pay: (a) all license and registration fees, Taxes (other than Non-Indemnified Taxes) and other amounts of any nature imposed by any Government Entity that are imposed on Lessee or for which Lessee is responsible under this Agreement with respect to the Aircraft, including the purchase, ownership, delivery, leasing, possession, use, operation, return, sale or other disposition of the Aircraft; (b) all rent, fees, charges, Taxes (other than Non-Indemnified Taxes) imposed on Lessee and other amounts in respect of any premises where the Aircraft or any Part thereof is located from time to time during the Term; and (c) all sums due by Lessee to each relevant airport authority and air traffic control authority in respect of any aircraft (including without limitation the Aircraft) operated by Lessee before such sums become overdue and in default, except to the extent that such payment is being contested in good faith by appropriate proceedings in accordance with Section 5.13. 8.5 Sub-Leasing ----------- Lessee will not sub-lease or otherwise part with possession of the Aircraft, the Engines or any Part except that Lessee may part with possession: (a) with respect to the Aircraft, the Engines or any Part, to the relevant manufacturers for testing or similar purposes or to an Agreed Maintenance Performer for service, repair, maintenance or overhaul work or for alterations, modifications or additions to the extent required or permitted by this Agreement; (b) with respect to an Engine or Part, as expressly permitted by this Agreement; (c) with respect to the Aircraft or an Engine, pursuant to an ACMI (aircraft crew, maintenance and insurance) lease or charter of the Aircraft in which operational control of the Aircraft remains with Lessee at all times, provided the Aircraft remains registered with the Aviation Authority; (d) with respect to the Aircraft, pursuant to a code-sharing arrangement so long as operational control of the Aircraft remains with Lessee at all times. (e) with respect to the Aircraft or an Engine, and only with the prior written consent of Lessor and any Mortgagee (which consent may be withheld in either Lessor's or such Mortgagee's sole and arbitrary discretion), pursuant to a sublease to a certificated air carrier under the following conditions: (i) no Default shall have occurred and be continuing; (ii) notwithstanding such sublease, Lessee shall remain primarily responsible to Lessor hereunder and the sublease, by its terms, shall be expressly subject and subordinate in all respect to this Agreement; (iii) the sublease shall include sections identical to or having the same substantive effect as Sections 2.1, 2.2, 5, 7.8, 7.9, 8, 9, 10, 13 and 15 and Schedule 4 of this Agreement, except that a sublease may impose additional or more stringent obligations on, or give fewer rights to, any sublessee than are imposed on Lessee under the provisions of this Agreement and that the term of the sublease shall not be capable of extending beyond the Expiry Date; (iv) the rights, title and interests of Lessor and the Financing Parties in and to the Leased Property and this Agreement shall be duly evidenced and protected to the satisfaction of Lessor and such Financing Parties (including as to the making of all necessary filings and registrations) and such interests shall not, in Lessor's reasonable opinion, be prejudiced by the sublease; (v) Lessee shall have executed and delivered to Lessor a security agreement granting to Lessor, and assigned to any Mortgagee, a Security Interest in all of Lessee's right, title and interest in the sublease agreement, and the sublessee shall have executed and delivered to Lessor an acknowledgment of such security agreement, each such document to be in such form as Lessor and such Mortgagee shall reasonably require; (vi) the sublessee shall be a reputable air carrier, experienced in operating aircraft of the same type as the Aircraft, shall hold all necessary consents, licenses, permits and authorizations required under the applicable law of the state of incorporation or establishment of such carrier for the public transport of passengers and cargo, and shall not be subject to any event of the types described in Sections 13.1(g), (h) or (i) as of the commencement of the sublease; (vii) the Aircraft shall not be based or re-registered outside the Habitual Base or the State of Registration if either Lessor or any Mortgagee determines, in its sole and absolute discretion, that the foreign jurisdiction is unacceptable in terms of political or judicial risk; (viii) Lessee shall give written notice to Lessor and the Financing Parties of any proposed sublease at least 30 days prior to the date on which it is proposed that such sublease be executed (which notice shall include the identity of any proposed change in the State of Registration and, if then determined, the term and the delivery date of the proposed sublease), and within a reasonable period prior to the execution by Lessee of any sublease, Lessee will provide Lessor and the Financing Parties with a copy of the draft sublease in order for Lessor and the Financing Parties to satisfy themselves that the conditions set out in this Section 8.5(d) as to the form of the sublease are fulfilled; (ix) prior to delivery of the Aircraft to the sublessee under any sublease, Lessee shall deliver to Lessor an original counterpart of the sublease duly executed by Lessee and sublessee, and shall provide Lessor with the equivalent of the conditions precedent set forth in Section 3.1 and 3.2 applicable to such sublessee; (x) Lessee shall be responsible for all reasonable costs incurred by Lessor and any Financing Party in connection with the sublease; and (xi) the sublease shall provide that no further subleases of the Aircraft by the sublessee shall be permitted. 8.6 Inspection ---------- (a) Lessor, any Financing Party and any Person designated by Lessor or any Financing Party may at any time on reasonable notice to Lessee (except while a Default has occurred and is continuing when no notice shall be required), visit, inspect and survey the Aircraft, any Engine or any Part and the Aircraft Documents and any other records relating to the Aircraft, and for the purpose of such inspection, Lessor, a Financing Party or their respective designees may, subject to any applicable Aviation Authority regulation, travel on the flight deck as observer. Lessor, any Financing Party or any designee shall not be restricted during such inspection from opening any panels, bays or doors on the Aircraft or from inspecting any part of the Aircraft, provided that no such inspection shall unreasonably disrupt the normal commercial use of the Aircraft by Lessee. (b) Lessee shall have no responsibility for the costs and expenses of Lessor and any Financing Party in connection with any such visit, inspection or survey unless the visit, inspection or survey discloses that Lessee is in breach of its material obligations under this Agreement, in which case such costs and expenses shall be paid by Lessee on demand. (c) Lessor shall: (i) have no duty to make, or liability arising out of, any such visit, inspection or survey; and (ii) so long as no Default has occurred and is continuing, not exercise such right other than on reasonable notice and so as not to disrupt unreasonably the maintenance or operation of the Aircraft. 8.7 Protection of Title ------------------- Lessee shall: (a) not do or knowingly permit to be done or omit or knowingly permit to be omitted to be done any act or thing which might reasonably be expected to jeopardize the respective rights, title and interest of any Mortgagee as mortgagee of the Aircraft and assignee of this Agreement or Lessor as owner of the Aircraft and lessor under this Agreement or the validity, enforceability or priority of any Mortgage, any Additional Mortgage or any Assignment; (b) on all occasions when the ownership of the Aircraft, any Engine or any Part is relevant, make clear to third parties that title is held by Lessor and is subject to any Mortgage; (c) not at any time: (i) represent or hold out Lessor or any Financing Party as carrying goods or passengers on the Aircraft or as being in any way connected or associated with any operation or carriage (whether for hire or reward or gratuitously) which may be undertaken by Lessee; or (ii) pledge the credit of Lessor or any Financing Party; (d) ensure that there is always affixed, and not removed or in any way obscured, a fireproof plate (having dimensions of not less than 6 in. x 4 in.) in a reasonably prominent position on the Aircraft and on each Engine stating: "This [Aircraft/Engine] is owned by First Security Bank, National Association, not in its individual capacity but solely as owner trustee, and is leased to Air Slovakia BWJ, Ltd. It may not be operated by any other person without the prior written consent of First Security Bank, National Association, as owner trustee." (e) not create or permit to exist any Security Interest upon the Aircraft, any Engine or any Part, except Permitted Liens; (f) not do or permit to be done anything which may reasonably be expected to expose the Aircraft, any Engine or any Part to penalty, forfeiture, impounding, detention, appropriation, damage or destruction and, without prejudice to the foregoing, if any such penalty, forfeiture, impounding, detention, appropriation, damage or destruction occurs, give Lessor notice and use its best efforts to procure the immediate release of the Aircraft, such Engine or such Part, as the case may be; (g) not abandon the Aircraft, the Engine or any Part; (h) pay and discharge or cause to be paid and discharged when due and payable or make adequate provision by way of security or otherwise for all debts, damages, claims and liabilities which have given or might reasonably be expected to give rise to a Security Interest over or affecting the Aircraft, any Engine or any Part; and (i) not attempt, or hold itself out as having any power, to sell, lease or otherwise dispose of the Aircraft, any Engine or any Part other than as expressly permitted by this Agreement. 8.8 General ------- Lessee will: (a) not make any substantial change in the nature of the business in which it is engaged if such change, in the reasonable opinion of Lessor, might reasonably be expected to have a material adverse effect on Lessee's performance of its obligations under this Agreement; (b) preserve its corporate existence, and will not merge or consolidate with any Person unless the successor Person resulting from such merger or consolidation (the "Successor") (i) is a Person incorporated, formed or organized under the laws of the State of Registration; (ii) shall have a net worth immediately after such merger or consolidation of not less than Lessee's net worth immediately prior thereto; (iii) shall be authorized under Applicable Law to perform Lessee's obligations under this Agreement to the same extent as Lessee; (iv) shall deliver to Lessor an agreement in form and substance reasonably satisfactory to Lessor containing an assumption by the Successor of Lessee's representations and warranties under this Agreement, together with the due and punctual performance of all of Lessee's obligations under this Agreement; and (v) shall deliver to Lessor an opinion of counsel reasonably satisfactory in form and substance to Lessor covering the Operative Documents and the agreement referred to in Section 8.8(b)(iv) above and substantially in the form of the legal opinion set forth in Exhibit D. 8.9 Records ------- Lessee shall procure that accurate, complete and current records of all flights made by, and all maintenance, repairs, replacements, removals, modifications, alterations and additions carried out on or made to, the Aircraft (including, in relation to each Engine or Part subsequently installed, before its installation) are kept in English, and shall keep the records in such manner as the Aviation Authority and the FAA may from time to time require. All Airframe and Engine LLPs shall have documentation substantiating traceability "back-to-birth" to confirm current, accumulated Flight Hours and Cycles. The records will form part of the Aircraft Documents. 8.10 Registration and Filings ------------------------ Lessee shall at its cost: (a) maintain the registration of the Aircraft with the Aviation Authority reflecting (so far as permitted by Applicable Law) the respective interests of the Lessor and any Mortgagee and not do or suffer to be done anything which might reasonably be expected to adversely affect that registration; and (b) do all acts and things (including making any filing or registration with the Aviation Authority or any other Government Entity) and executing and delivering all documents (including any amendment of this Agreement) as may be required by the Lessor: (i) following any change or proposed change in the ownership or financing of the Aircraft or in the manner of securing the Lessor's obligations to the Lenders; (ii) following any modification of the Aircraft, any Engine or any Part or the permanent replacement of any Engine or Part in accordance with this Agreement, so as to ensure that the respective rights of the Lessor and any Mortgagee under this Agreement apply with the same effect as before; or (iii) to establish, maintain, preserve, perfect and protect the respective rights of Lessor and any Mortgagee under this Agreement and under any Mortgage. 8.11 Maintenance and Repair ---------------------- Lessee shall at its sole cost and expense (except only as expressly set forth in section 7.3 hereof): (a) keep the Aircraft airworthy in all respects and in good repair and condition, and all maintenance will be carried out to a standard acceptable to Lessor; (b) advise Lessor in writing of all material changes to the Approved Maintenance Program, and shall not (i) change the intervals between Major Checks under the Approved Maintenance Program without the written consent of Lessor, or (ii) change the Approved Maintenance Program in any other material respect without the written consent of Lessor unless recommended by the Manufacturer or mandated by the Aviation Authority; (c) incorporate in the Approved Maintenance Program (i) a CPCP as recommended by the Manufacturer, (ii) an aging aircraft program as recommended by the Manufacturer, and SID program approved by the Manufacturer, and (iv) an anti-fungus and anti-biological growth and contamination prevention, control and treatment program for all fuel tanks in accordance with the Manufacturer's approved procedures; (d) maintain the Aircraft in accordance with the Approved Maintenance Program through Agreed Maintenance Performers and perform (at the respective intervals provided in the Approved Maintenance Program) all Major Checks, and at least 20 days before performing any Major Check Lessee will consult with Lessor as to the workscope for such Major Check; (e) maintain the Aircraft in accordance with all rules and regulations of the Aviation Authority as are applicable to passenger aircraft of the same type as the Aircraft, and maintain the Aircraft so as to comply at all times with the type certificate specification and data sheets for the Aircraft; (f) comply with all mandatory inspection and modification requirements, airworthiness directives and similar requirements applicable to the Aircraft, any Engine or Part having a compliance date on or before the Expiry Date and that are required by the Aviation Authority and the FAA; (g) comply with all alert service bulletins issued by any manufacturer of the Aircraft, Engines or Parts, and comply (including scheduling compliance work and then performing such work on schedule) with all other service bulletins issued by any such manufacturer; (h) comply with all Applicable Laws and the regulations of the Aviation Authority and any other aviation authorities with jurisdiction over Lessee or the Aircraft, any Engine or Part that relate to the maintenance, condition, use or operation of the Aircraft or require any modification or alteration to the Aircraft, any Engine or Part; (i) maintain in good standing a certificate of airworthiness for the Aircraft in the appropriate category for the nature of the operations of the Aircraft issued by the Aviation Authority except when the Aircraft is undergoing maintenance, modification or repair required or permitted by this Agreement, and from time to time Lessee shall provide to Lessor a copy on request; (j) if required by the Aviation Authority, maintain a current certification as to maintenance issued by or on behalf of the Aviation Authority in respect of the Aircraft and shall from time to time provide to Lessor a copy on request; (k) maintain the Engines with respect to overhaul build standards and disc replacements at a level which is consistent with the level required by the Engine Manufacturer; (l) maintain the Engines and the APU in an "on condition" program as set forth in the respective manufacturer's maintenance manual; (m) subject to Section 11.3, procure promptly the replacement of any Engine or Part which has become time, cycle or calendar expired, lost, stolen, seized, confiscated, destroyed, damaged beyond repair, unserviceable or permanently rendered unfit for use, with an engine or part complying with the conditions set out in Section 8.13(a); (n) accomplish all repairs, modifications and alterations in accordance with the SRM or, if the repair, modification or alteration is outside the scope of the SRM, as recommended in writing by the applicable manufacturer and approved by the Aviation Authority; (o) provide Lessor with a written summary of all sampling programs involving or affecting the Aircraft; and (p) ensure that overhauls are accomplished using maintenance and quality control procedures approved by the Aviation Authority, and that each Agreed Maintenance Performer provides a complete record of all work performed during the course of such overhaul was accomplished in accordance with Aviation Authority and FAA requirements. 8.12 Removal of Engines and Parts ---------------------------- Lessee will ensure that no Engine or Part installed on the Aircraft is at any time removed from the Aircraft other than: (a) if replaced as expressly permitted by this Agreement; or (b) if the removal is of an obsolete item and is in accordance with the Approved Maintenance Program; or (c) pursuant to, and in accordance with, Section 8.15; or (d) during the course of maintaining, servicing, repairing, overhauling or testing that Engine or the Aircraft, as the case may be; or (i) as part of a normal engine or part rotation program; or (ii) for the purpose of making such modifications to the Engine or the Aircraft, as the case may be, as are permitted under this Agreement, and then in each case only if it is reinstalled or replaced by an engine or part complying with Section 8.13(a) as soon as practicable and in any event no later than the Expiry Date. 8.13 Installation of Engines and Parts --------------------------------- (a) Lessee will ensure that, except as permitted by this Agreement, no engine or part is installed on the Aircraft unless: (i) in the case of an engine, it is an engine of the same model as, or an improved or advanced version of the Engine it replaces (provided, in the case of an improved or advanced version, it can be installed and operated on the Airframe without modification of the Airframe or the engine, whether or not the other installed Engine is also such an improved or advanced version), and is in the same or better operating condition, has substantially similar hours available until the next scheduled checks, inspections, overhauls and shop visits, has the same or greater value and utility as the replaced Engine and has attached to it a current "serviceable tag" issued by the Engine Manufacturer or approved vendor indicating that the engine is new, serviceable or overhauled, and Lessee shall retain all such tags and all installed LLP's shall have documentation substantiating traceability "back-to-birth"; (ii) in the case of a part, it is in as good operating condition, has substantially similar hours available until the next scheduled checks, inspections, overhauls and shop visits, is of the same or a more advanced make and model, is of the same interchangeable modification status as the replaced Part and has attached to it a current "serviceable tag" issued by the manufacturer or approved vendor indicating that the part is new, serviceable or overhauled, and Lessee shall retain all such tags; (iii) in the case of a part, it has become and remains the property of Lessor free from Security Interests and on installation on the Aircraft will, without further act, be subject to this Agreement and to the Security Interest created by any Mortgage, in which case title to the removed part shall automatically become vested in Lessee without further action or warranty on the part of Lessor except that such Part shall be free of Lessor Liens; and (iv) in each case, Lessee will provide full details as to its source and maintenance records. (b) If no Default has occurred and is continuing, Lessee will be entitled to install any engine or part on the Aircraft by way of replacement notwithstanding Section 8.13(a) if: (i) there is not available to Lessee at the time and in the place that engine or part is required to be installed on the Aircraft a replacement engine or part complying with the requirements of Section 8.13(a); (ii) it would result in an unreasonable disruption of the operation of the Aircraft or the business of Lessee to ground the Aircraft until an engine or part complying with Section 8.13(a) becomes available for installation on the Aircraft; and (iii) as soon as practicable after installation of the same on the Aircraft but, in any event, no later than the earlier of (1) 60 days after such installation and (2) the Expiry Date, Lessee removes any such engine or part and replaces it with the Engine or Part replaced by it or by an engine or part complying with Section 8.13(a). (c) If no Default has occurred which is continuing, Lessee will be entitled to install Lessee Installed Parts on the Airframe by way of replacement notwithstanding Section 8.13(a)(iii) so long as: (i) the terms of any lease, conditional sale agreement or security agreement, as the case may be, covering such Lessee Installed Part will not have the effect of prejudicing the title and interest of Lessor in and to the Aircraft (including its Engines and Parts) or the interest of any Mortgagee in respect thereof under any Mortgage; (ii) the secured party, lessor or conditional vendor, as the case may be, of such Lessee Installed Part has confirmed and acknowledged in writing (which confirmation and acknowledgment may be contained in the lease, conditional sale agreement or security agreement covering such Lessee Installed Part) to Lessor that it will recognize the respective rights, title and interest of Lessor and any Mortgagee in and to the Aircraft (including its Engines and Parts) and that it will not seek to exercise any rights whatever in relation thereto; and (iii) before the Expiry Date Lessee removes any such Lessee Installed Part and replaces it with the Part replaced by it or by another part, in either case complying with Section 8.13(a). 8.14 Non-Installed Engines and Parts (a) Lessee shall ensure that any Engine or Part which is not installed on the Airframe (or any other airframe as permitted by this Agreement) is, except as expressly permitted by this Agreement, properly and safely stored and kept free from Security Interests (other than Permitted Liens), with insurance thereon complying with the requirements of this Agreement. (b) Lessee shall notify Lessor whenever an Engine is removed from the Aircraft and, from time to time, upon request procure that any Person to whom possession of an Engine is given acknowledges in writing to Lessor, in form and substance satisfactory to Lessor, that such Person will respect the interests of Lessor and any Mortgagee in such Engine and will not seek to exercise any rights whatsoever in relation to such Engine. (c) Notwithstanding Section 8.14(a), Lessee shall be permitted, if no Default has occurred and is continuing, to install any Engine on an airframe and any Part on an airframe or engine: (i) owned and operated by Lessee free from Security Interests, other than Permitted Liens; (ii) leased or hired to Lessee pursuant to a lease or conditional sale agreement on a long-term basis and on terms whereby Lessee has full operational control of that aircraft or engine; or (iii) acquired or financed by Lessee and operated by Lessee on terms that ownership of that aircraft or engine, as the case may be, pursuant to a lease, conditional sale agreement or Security Interest is vested in or held by any other Person; provided that in the case of (ii) and (iii): (1) the terms of any such lease, conditional sale agreement or Security Interest will not have the effect of prejudicing the title and interest of Lessor in and to that Engine or Part or the interest of any Mortgagee in respect thereof under any Mortgage; and (2) the lessor under such lease, the seller under such conditional sale agreement or the secured party of such Security Interest, as the case may be, has confirmed and acknowledged in writing (which such confirmation and acknowledgment may be contained in the lease, conditional sale agreement or document creating the Security Interest covering that Engine or Part) to Lessor, in form and substance satisfactory to Lessor, that it will recognize the respective rights, title and interest of Lessor and any Mortgagee to and in that Engine or Part and that it will not seek to exercise any rights whatever in relation thereto. 8.15 Pooling of Engines and Parts ---------------------------- Lessee will not enter into nor permit any pooling agreement or arrangement in respect of an Engine or Part without the prior written consent of Lessor, such consent not to be unreasonably withheld in any case where an Engine or Part is leased, let on hire or otherwise made available by Lessee (on terms conferring no more than a contractual right in personam against Lessee and not a right in rem against such Engine or Part) pursuant to a pooling agreement to which Lessee is a party and: (a) the other parties to which are reputable, solvent commercial air carriers or the manufacturers or suppliers of the Engine or Part (or other reputable, solvent organizations whose business includes the administration of and participation in such pooling agreements or arrangements); and (b) which does not contemplate the transfer of title to the pooled Engine or Part; and (c) either provides that Lessor (or any Mortgagee designated by Lessor) will be sole loss payee in respect of any loss or damage to the Engine or Part, or provides for Lessor to acquire title to a substitute engine or part satisfying the conditions set out in Section 8.13(a) if the Engine or Part is destroyed. 8.16 Equipment Changes ----------------- (a) Lessee will not make any Voluntary Equipment Change expected to cost over $250,000 or that deviates from the Aircraft's original type design or configuration without the prior written consent of Lessor, which consent shall not be unreasonably withheld. (b) Lessor may review Lessee's proposed designs, plans, engineering drawings and diagrams, and flight and maintenance manual revisions for any proposed Equipment Change. If requested by Lessor, Lessee will furnish Lessor (at Lessee's expense) with such documents in final form and any other documents required by Applicable Law as a result of an Equipment Change. All Equipment Changes made to the Aircraft will be properly documented in the Aircraft Documents and be fully approved by the Aviation Authority. (c) Lessor shall not make any Voluntary Equipment Change that has the effect of diminishing or impairing the value, utility, condition or airworthiness of the Aircraft. (d) All permanent or structural Equipment Changes and all Mandatory Equipment Changes will, upon installation, become a part of the Aircraft and the property of Lessor. All temporary and non-structural Voluntary Equipment Changes will remain the property of Lessee and, at Lessor's request, will be removed from the Aircraft before return of the Aircraft to Lessor and the Aircraft will be restored to its condition prior to that Equipment Change; provided, that Lessee may not remove a Voluntary Equipment Change without Lessor's consent during the continuation of a Default. 8.17 Title to Engines and Parts -------------------------- (a) Title to all Parts installed on the Aircraft, whether by way of replacement, as the result of an Equipment Change or otherwise (except those installed pursuant to Section 8.13(b) or Section 8.15) will on installation, without further act, vest in Lessor subject to this Agreement free and clear of all Security Interests. Lessee will at its own expense take all such steps and execute, and procure the execution of, all such instruments that are necessary to ensure that title so passes to Lessor and is subject to the Security Interest created by any Mortgage according to all Applicable Laws. At any time when requested by Lessor, Lessee will provide evidence to Lessor's reasonable satisfaction (including the provision, if required, to Lessor of one of more legal opinions) that title has so passed to Lessor and is subject to the Security Interest created by any Mortgage. (b) Any Engine at any time removed from the Aircraft will remain the property of Lessor until a replacement has been made in accordance with this Agreement and title to that replacement has passed, according to Applicable Laws, to Lessor subject to this Agreement free of all Security Interests, whereupon title to the removed Engine will, provided no Default has occurred and is continuing, pass to Lessee free of Lessor Liens. Except as referred to in Section 8.17(a), any Part at any time removed from the Aircraft will remain the property of Lessor until a replacement has been made in accordance with this Agreement and until title to that replacement has passed, according to Section 8.17(a) and Applicable Laws, to Lessor subject to this Agreement free of all Security Interests, whereupon title to the removed Part will, provided no Default has occurred and is continuing, pass to Lessee free of Lessor Liens. 8.18 Third Parties ------------- Lessee shall procure that no Person having possession of the Aircraft during the Term will act in any manner inconsistent with Lessee's obligations under this Agreement and that all such Persons shall comply with those obligations as if references to "Lessee" included a separate reference to those Persons. 8.19 Non-Discrimination ------------------ (a) Lessee shall not discriminate against the Aircraft in its use, maintenance or operation of the Aircraft compared to similar aircraft owned or operated by Lessee, and Lessee shall service, repair, maintain and overhaul the Aircraft so as to keep the Aircraft maintained in the same manner and with the same care as used by Lessee with similar aircraft owned or operated by Lessee. (b) Subject to a sublease permitted pursuant to Section 8.5, Lessee shall continue to use the Aircraft in its regular commercial passenger operations until delivery to the Return Location immediately prior to the Final Inspection. (c) Lessee further agrees that normal progressive maintenance will continue to be performed on the Aircraft throughout the Term, and no unusual maintenance procedures or cessation of maintenance shall occur during the one year period prior to the Expiry Date. 9. INSURANCE --------- 9.1 Insurances ---------- Lessee will maintain in full force and effect during the Term insurances in respect of the Aircraft in form and substance reasonably satisfactory to Lessor (the "Insurances") through such brokers and having such deductibles and being subject to such exclusions as are usual and customary in the worldwide aviation insurance marketplace for major international air carriers operating similar equipment. The Insurances will be effected either: (a) on a direct basis with insurers of internationally recognized standing who normally participate in the London, French or U.S. markets and who are satisfactory to Lessor, and led by reputable underwriters approved by Lessor and any Mortgagee, or (b) with a single insurer or group of insurers approved by Lessor and any Mortgagee who does not retain the risk, but effects substantial reinsurance in the leading international insurance markets and through reinsurance brokers of recognized standing and acceptable to Lessor and any Mortgagee for a percentage acceptable to Lessor and any Mortgagee of all risks insured, and Lessor acknowledges and confirms that the current deductibles and exclusions, together with the existing brokers and insurers, in respect of the insurances and reinsurances maintained by Lessee on the date of this Agreement are acceptable to it. 9.2 Requirements ------------ Lessor's current requirements as to Insurances are as specified in this Section 9 and in Schedule 4. Except for the amount of the Agreed Value, the Minimum Liability Coverage and the deductible under Lessee's hull and war risk insurance policies, Lessor may from time to time stipulate such other requirements for the Insurances as Lessor reasonably considers necessary to ensure that the scope and level of cover is maintained in accordance with the then prevailing industry practice in relation to aircraft of the same type as the Aircraft and in relation to operators of similar standing to Lessee. In the event that it proposes any such stipulation, Lessor shall notify Lessee accordingly and Lessor and/or its brokers will then consult in good faith with Lessee and Lessee's brokers (as for the time being approved by Lessor) with regard to such proposed stipulation. If, following the consultation, Lessor is satisfied that the stipulation should be made, Lessee shall then comply with the stipulated requirements. 9.3 Insurance Covenants ------------------- Lessee shall: (a) ensure that all legal requirements as to insurance of the Aircraft, any Engine or any Part that may from time to time be imposed by the laws of the State of Registration or any jurisdiction to, from or over which the Aircraft may be flown, in so far as they affect or concern the operation of the Aircraft, are complied with and, in particular, those requirements compliance with which is necessary to ensure that: (i) the Aircraft does not become subject to detention or forfeiture; (ii) the Insurances remain valid and in full force and effect; and (iii) the interests of the Indemnitees in the Insurances and the Aircraft or any Part are not thereby prejudiced; (b) not use, cause or permit the Aircraft, any Engine or any Part to be used for any purpose or in any manner not covered by the Insurances or outside any geographical limit imposed by the Insurances; (c) comply with the terms and conditions of each policy of the Insurances and not do, consent or agree to any act or omission that: (i) invalidates or may reasonably be expected to invalidate the Insurances; (ii) renders or may reasonably be expected to render void or voidable the whole or any part of any of the Insurances; or (iii) brings any particular liability within the scope of an exclusion or exception to the Insurances; (d) not take out without the prior written approval of Lessor any insurance in respect of the Aircraft other than those of the type required under this Agreement unless relating solely to hull total loss, business interruption, engine break-down, profit commission and deductible risk; (e) provide to Lessor and any Mortgagee copies of those documents evidencing the Insurances which Lessor and any Mortgagee may reasonably request; (f) on request, provide to Lessor and any Mortgagee evidence that the Insurance premiums have been paid; (g) not make any modification or alteration to the Insurances material and adverse to the interests of any of the Indemnitees; (h) be responsible for any deductible under the Insurances; and (i) provide any other insurance related information, or assistance, in respect of the Insurances as Lessor may reasonably request. 9.4 Renewal of Insurances --------------------- Lessee shall commence renewal procedures at least 30 days prior to the expiration of any of the Insurances and provide to Lessor and any Mortgagee: (a) if requested by Lessor, a written status report of renewal negotiations 14 days prior to each expiration date; (b) telefaxed confirmation of completion of renewal prior to each expiration date; and (c) a certificate of insurance and broker's letter of undertaking substantially in the form delivered to Lessor on the Delivery Date, detailing the coverage and confirming the insurers agreement to the specified insurance requirements of this Agreement within seven days after each renewal date; 9.5 Failure to Insure ----------------- If Lessee fails to maintain the Insurances in compliance with this Agreement: (a) Lessee shall immediately ground the Aircraft and shall keep it grounded until such time as the Insurances shall again be in full force and effect. (b) Lessee shall immediately notify Lessor and any Mortgagee of the non- compliance of the Insurances with the requirements of this Agreement, and Lessee shall provide Lessor with full details of all steps that Lessee is taking or proposes to take in order to remedy such non- compliance. (c) Each of the Indemnitees will be entitled but not obligated (without prejudice to any other rights of Lessor under this Agreement): (i) to pay the premiums due or to effect and maintain insurances satisfactory to it or otherwise remedy Lessee's failure in such manner (including to effect and maintain an "owner's interest" policy) as it considers appropriate, and any sums so expended by it will become immediately due and payable by Lessee to Lessor on demand (such demand being made as soon as reasonably practicable following the incurring of such expenditure), together with interest thereon at the Default Rate from the date of expenditure by it up to the date of reimbursement by Lessee (before and after any judgment); and (ii) at any time while such failure is continuing to require the Aircraft to remain at any airport or to proceed to and remain at any airport designated by it until the failure is remedied to its reasonable satisfaction. 9.6 Continuing Insurance for Indemnity --------------------------------- (a) Lessor may require Lessee to effect and to maintain insurance after the Expiry Date with respect to its liability under the indemnities in Section 10 for such period as Lessor may reasonably require (but in any event not more than three years) providing for each Indemnitee to be named as an additional insured. (b) Lessee's obligation under this Section 9.6 shall not be affected by Lessee ceasing to be lessee of the Aircraft or any of the Indemnitees ceasing to have any interest in respect of the Aircraft, and upon a Transfer pursuant to Section 14.2, Lessee shall continue to name the Indemnitees as additional insureds under the Insurance policies covered by Section 1(d) of Schedule 4 for three years after the Transfer date. 9.7 Application of Insurance Proceeds --------------------------------- As between Lessor and Lessee: (a) All insurance payments, up to the Agreed Value, received as the result of a Total Loss occurring during the Term will be paid solely to Lessor (unless or until Lessor notifies Lessee that said payments should be made to a Mortgagee). (b) All insurance proceeds in respect of any damage or loss to the Aircraft, any Engine or any Part occurring during the Term not constituting a Total Loss and involving insurance proceeds in excess of the Damage Notification Threshold will be paid solely to Lessor (unless or until Lessor notifies Lessee that said payments should be made to a Mortgagee) and applied in payment (or to reimburse Lessee) for repairs or replacement property upon Lessor and any Mortgagee being reasonably satisfied that the repairs or replacement have been effected in accordance with this Agreement. Insurance proceeds in amounts less than the Damage Notification Threshold may be paid by the insurer directly to Lessee. Any balance remaining after payment for the repairs or replacement of the damage shall be paid to or may be retained by Lessee. (c) All insurance proceeds in respect of third party liability will be paid to the relevant third party. (d) Notwithstanding Sections 9.7(a) and (b), if at the time of the payment of any such insurance proceeds a Default has occurred and is continuing, all such proceeds will be paid to or retained by Lessor (unless or until Lessor notifies Lessee that said payments should be made to a Mortgagee) to be applied toward payment of any amounts that may be or become payable by Lessee in such order and at any time as Lessor sees fit or as Lessor may elect. In the event that Lessee remedies any such Default to the reasonable satisfaction of Lessor, then Lessor shall procure that all such insurance proceeds then held by Lessor or any Mortgagee, as the case may be, in excess of the amounts (if any) applied by Lessor or any Mortgagee, as the case may be, in accordance with this Section 9.7(d) shall be paid promptly to Lessee. 9.8 Repossession Insurance (a) Lessor may maintain in effect throughout the Term, aircraft repossession/political risk insurance underwritten by Lloyd's or such other insurers ("Repossession Insurance") as shall be acceptable to Lessor and in an agreed amount acceptable to Lessor, naming Lessor or its designee as the sole loss payee thereunder. Lessee shall be required to pay, and shall indemnify and hold Lessor harmless from, all premiums and other costs and expenses of or associated with such repossession/political risk insurance. (b) If Lessee or Lessor is unable to obtain the Repossession Insurance, Lessee may deliver to Lessor an unconditional and irrevocable stand-by letter of credit in substantially the form attached as Exhibit C and otherwise acceptable to Lessor in an amount equal to not less than 12 months Basic Rent payments (the "Insurance Letter of Credit") and issued or confirmed by a bank located in New York, New York U.S.A. acceptable to Lessor. The Insurance Letter of Credit shall remain in full force and effect during the Term. Lessor may draw upon all or a portion of the amount of the Insurance Letter of Credit upon the occurrence of an Event of Default, and may use, apply or retain all or any portion of the funds paid pursuant to the Insurance Letter of Credit. After expiration of the Term, and provided that Lessee has been discharged of all its obligations under this Agreement, Lessor shall return the Insurance Letter of Credit to Lessee for cancellation. 10. INDEMNITY --------- 10.1 General ------- Lessee shall defend, indemnify and hold harmless the Indemnitees from and against any and all claims, proceedings, losses, liabilities, suits, judgments, costs, expenses, penalties or fines (each a "Claim") regardless of when the same is made or incurred, whether during or after the Term (but not before): (a) that may at any time be suffered or incurred directly or indirectly as a result of or connected with possession, delivery, performance, management, registration, control, maintenance, condition, service, repair, overhaul, leasing, subleasing, use, operation or return of the Aircraft, any Engine or Part (either in the air or on the ground) whether or not the Claim may be attributable to any defect in the Aircraft, any Engine or any Part or to its design, testing, use or otherwise, and regardless of when the same arises or whether it arises out of or is attributable to any act or omission, negligent or otherwise, of any Indemnitee; (b) that arise out of any act or omission that invalidates or that renders voidable any of the Insurances; (c) that may at any time be suffered or incurred as a consequence of any design, article or material in the Aircraft, any Engine or any Part or its operation or use constituting an infringement of patent, copyright, trademark, design or other proprietary right or a breach of any obligation of confidentiality owed to any Person, but excluding any Claim to the extent that: (1) it arises directly as a result of the wilful misconduct or gross negligence of an Indemnitee; (2) it arises directly as a result of a breach by Lessor of its express obligations under this Agreement or as a result of a representation or warranty given by Lessor in this Agreement not being true and correct at the date when, or when deemed to have been, given or made; (3) it constitutes a Non-Indemnified Tax or Lessor Lien; (4) it represents a Tax or loss of tax benefits (Lessee's liabilities for which, to the extent thereof, are set out in Sections 5.7, 5.8, 5.9 and 5.11); (5) it constitutes a cost or expense that is required to be borne by Lessor in accordance with another provision of this Agreement; (6) it results from any disposition not caused by Lessee of all or any part of Lessor's rights, title or interest in or to the Aircraft or under this Agreement, unless such disposition occurs as a consequence of an Event of Default; (7) it is attributable to an event occurring after the Term unless the Claim results from or arises out of an act or omission by Lessee, or any circumstance existing, during the Term; (8) it is brought after the Term and relates to a claimed patent infringement by the Manufacturer; or (9) it arises out of actions taken by the Lessor not permitted by the terms of the Lease. 10.2 Mitigation ---------- (a) Lessor agrees that it shall, as soon as reasonably practicable after it becomes aware of any circumstances that would, or would reasonably be expected to, become the subject of a claim for indemnification pursuant to Section 10.1, notify Lessee in writing accordingly. Lessor (and any other Indemnitee seeking indemnification, as the case may be) and Lessee shall then consult with one another in good faith in order to determine what action (if any) may reasonably be taken to avoid or mitigate such Claim. Lessee shall have the right to take all reasonable action (on behalf and, if necessary, in the name of Lessor or such other Indemnitee) in order to resist, defend or settle (provided such settlement is accompanied by payment) any claims by third parties giving rise to such Claim, provided always that Lessee shall not be entitled to take any such action unless adequate provision, reasonably satisfactory to Lessor and such other Indemnitee, shall have been made in respect of the third party claim and the costs thereof. Lessee or, if the Claim is covered by Lessee's Insurances, Lessee's insurers shall be entitled to select any counsel to represent it or them, Lessor and such other Indemnitee in connection with any such action, subject in the case of Lessee to the approval of Lessor and such other Indemnitee (such approval not to be unreasonably withheld) and any action taken by Lessee shall be on a full indemnity basis in respect of Lessor and such other Indemnitee. (b) Any sums paid by Lessee to Lessor or any Indemnitee in respect of any Claim pursuant to Section 10.1 shall be paid subject to the condition that, in the event that Lessor or such Indemnitee is subsequently reimbursed in respect of that Claim by any other Person, Lessor or such Indemnitee shall, provided no Default shall have occurred and be continuing, promptly pay to Lessee an amount equal to the sum paid to it by Lessee, including any interest on such amount to the extent attributable thereto and received by Lessor or such Indemnitee, less any Tax payable by Lessor or such Indemnitee in respect of such reimbursement. 10.3 Duration -------- The indemnities contained in this Agreement will survive and continue in full force after the Expiry Date. 11. EVENTS OF LOSS -------------- 11.1 Total Loss Before Delivery -------------------------- If a Total Loss occurs before Delivery, this Agreement will immediately terminate and neither party will have any further obligation or liability under this Agreement except as set forth in Section 7.6. 11.2 Total Loss After Delivery ------------------------- (a) If a Total Loss occurs after Delivery, Lessee will pay the Agreed Value to Lessor (or any Mortgagee designated by Lessor) on the earlier of: (i) the date of receipt of the insurance proceeds payable as a result of the Total Loss, or (ii) the 30th day after the Total Loss Date (the "Settlement Date"), in either case unless the Aircraft is restored to Lessor or Lessee within that period (or, in the case of a Total Loss coming within paragraph (c) of the definition of Total Loss and involving the loss of Lessor's title to the Aircraft, if both the Aircraft and Lessor's title thereto are restored to Lessor or, in the case of the Aircraft, to Lessee). (b) The receipt by Lessor or any Mortgagee (on behalf of Lessor) of the insurance proceeds in respect of the Total Loss on or prior to the Settlement Date shall discharge Lessee from its obligation to pay the Agreed Value to Lessor pursuant to this Section 11.2, provided such proceeds are not less than the Agreed Value. In the event that the insurance proceeds are paid initially to Lessee and not to Lessor or any Mortgagee, they may be retained by Lessee if Lessee shall have paid the Agreed Value to Lessor or any Mortgagee (on behalf of Lessor); otherwise Lessee shall pay the Agreed Value to Lessor or any Mortgagee (on behalf of Lessor) not later than the next Business Day following receipt by Lessee of such proceeds. In the event that Lessee pays the Agreed Value to Lessor or any Mortgagee (on behalf of Lessor) in accordance with this Section 11.2, Lessor shall promptly assign to Lessee its rights under the Insurances to receive the insurance proceeds in respect of the Total Loss to the extent that such proceeds shall not have been paid to Lessee. (c) Subject to the rights of any insurers or other third parties, upon irrevocable payment in full to Lessor or any Mortgagee (on behalf of Lessor) of the Agreed Value and all other amounts that may be or become payable to Lessor under this Agreement, Lessor shall: (i) without recourse or warranty (except as to the absence of Lessor Liens), and without further act, be deemed to have transferred to Lessee all of Lessor's rights to any Engines or Parts not installed when the Total Loss occurred, all on an "as-is where is" basis, and shall, at Lessee's expense, execute and deliver such bills of sale and other documents and instruments as Lessee may reasonably request to evidence (on the public record or otherwise) the transfer and the vesting of Lessor's rights in such Engines and Parts in Lessee, free and clear of all rights of Lessor and any Lessor Liens; and (ii) pay to Lessee, as a rebate of prepaid Basic Rent, an amount equal to the product of (1) one month's Basic Rent multiplied by (2) a fraction the numerator of which is the number of days remaining in the then current Rental Period and the denominator of which is the number of days in the then current Rental Period. 11.3 Engine Loss ----------- (a) Upon the occurrence of an Engine Loss (including, for the avoidance of doubt, at a time when the Engine is not installed on the Airframe) in circumstances in which there has not also occurred a Total Loss, Lessee shall give Lessor and any Mortgagee written notice promptly upon becoming aware of the same and shall, within 60 days after the Engine Loss Date, convey or cause to be conveyed to Lessor, as replacement for such Engine, title to a replacement engine that is in the same or better operating condition, has the same or greater value and utility as the lost Engine and that complies with the conditions set out in Section 8.13(a). (b) Lessee will at its own expense take all such steps and execute, and procure the execution of, a full warranty bill of sale covering such replacement engine, a supplement to this Agreement adding such replacement engine to the Leased Property and all such other agreements and instruments that are necessary to ensure that title to such Engine passes to Lessor and is subject to the Security Interest created by any Mortgage and such replacement engine becomes an "Engine", all according to Applicable Laws. At any time when requested by Lessor, Lessee will provide evidence to Lessor's reasonable satisfaction (including the provision, if required, to Lessor of one of more legal opinions) that title has so passed to Lessor and is subject to the Security Interest created by any Mortgage. (c) Upon compliance with the foregoing title transfer provisions, the leasing of the replaced Engine that suffered the Engine Loss shall cease and title to such replaced Engine shall (subject to any salvage rights of insurers) vest in Lessee free of Lessor Liens. If Lessor or any Mortgagee subsequently receives any insurance proceeds relating to such Engine Loss, Lessor shall promptly remit such proceeds or cause such proceeds to be remitted to Lessee. (d) No Engine Loss with respect to any Engine that is replaced in accordance with the provisions of this Section 11.3 shall result in any increase or decrease in Basic Rent, Additional Rent or the Agreed Value. 11.4 Requisition During any requisition for use or hire of the Aircraft, any Engine or Part that does not constitute a Total Loss: (a) the Basic Rent, Additional Rent and Supplemental Rent payable under this Agreement will not be suspended or abated either in whole or in part, and Lessee will not be released from any of its other obligations under this Agreement (other than operational obligations with which Lessee is unable to comply solely by virtue of the requisition); (b) so long as no Default has occurred and is continuing, Lessee will be entitled to any compensation payable by the requisitioning authority in respect of the Term; (c) Lessee will, as soon as practicable after the end of any such requisition (with the Term being extended if and to the extent that the period of requisition continues beyond the Scheduled Expiry Date), cause the Aircraft to be put into the condition required by this Agreement; and (d) Lessor will be entitled to all compensation payable by the requisitioning authority in respect of any change in the structure, state or condition of the Aircraft arising during the period of requisition, and Lessor will apply such compensation in reimbursing Lessee for the cost of complying with its obligations under this Agreement in respect of any such change; provided, that, if any Default has occurred and is continuing, Lessor may apply the compensation in or towards settlement of any amounts owing by Lessee under this Agreement. 12. RETURN OF AIRCRAFT ------------------ 12.1 Redelivery ---------- On the Expiry Date or termination of the leasing of the Aircraft under this Agreement, Lessee shall, unless a Total Loss has occurred, at its expense, redeliver the Aircraft and Aircraft Documents to Lessor at the Redelivery Location in a condition complying with this Section 12 and Schedule 3, free and clear of all Security Interests and Permitted Liens (other than Lessor Liens). Upon the request Lessor, Lessee shall ferry the Aircraft to a location other than the Redelivery Location. Lessor shall pay the costs of, and bear the risk of loss to the Aircraft during, such ferry flight. 12.2 Final Checks ------------ Immediately prior to return of the Aircraft, Lessee shall perform the following: (a) Lessee shall perform (or have performed by an Agreed Maintenance Performer) a C-Check. At return, the Airframe will have zero Flight Hours since such C-Check, except for the acceptance flights and the ferry flight to the Redelivery Location. Lessee will also weigh the Aircraft. Any discrepancies revealed during such inspection will be corrected in accordance with the Manufacturer's maintenance and repair manuals. Lessee shall also perform or cause to be performed during such check, to the extent it is able, any other work reasonably required by Lessor (and not otherwise required under this Agreement) so long as such work does not prevent Lessee from returning the Aircraft on the Expiry Date, and Lessor shall reimburse Lessee for the Actual Cost of such work. (b) Lessee shall perform (or have performed by an Agreed Maintenance Performer) an internal and external corrosion inspection in accordance with the CPCP, and correct any discrepancies in accordance with the recommendations of the Manufacturer and the SRM. In addition, all inspected areas will be properly treated with corrosion inhibitor as recommended by Manufacturer. (c) If Lessee performed any structural inspections or tasks on a sampling basis but did not perform such inspections on the Aircraft, such work shall also be performed on the Aircraft. (d) Lessee shall perform a videotape borescope inspection of all accessible gas path sections of each Engine (accessible whether by borescope port or other means), including the low pressure and high pressure compressors and the turbine area of such Engine. All items beyond the Engine Manufacturer's maintenance manual serviceable 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. (e) In accordance with the Engine Manufacturer's maintenance manual, Lessee shall perform a maximum power assurance run and condition, acceleration and bleed valve scheduling checks on each Engine. Lessee will record and evaluate each Engine's performance, with Lessor and/or its representatives entitled to be present. Each Engine shall pass such tests without operational limitations throughout the operating envelope in accordance with the Engine Manufacturer's maintenance manual. (f) Lessee shall perform a power assurance run and a videotape borescope inspection of the APU, and all items beyond the manufacturer's recommended limits will be rectified at Lessee's sole cost and expense. (g) If any historical and technical records, condition trend monitoring data, power assurance runs or borescope inspection indicate an abnormal acceleration in the rate of performance deterioration or oil consumption in any Engine or the APU, Lessee shall correct such conditions causing the accelerated rate of deterioration or oil consumption. (h) Lessee shall notify Lessor at least 30 days prior to commencing the final checks and tests required pursuant to this Section 12.2 and Lessor and the Financing Parties or their respective representatives may inspect the Aircraft during any such examination or test. 12.3 Final Inspection ---------------- (a) At least 10 days prior to redelivery of the Aircraft, Lessee will make the Aircraft available to representatives of Lessor and the Financing Parties for inspection ("Final Inspection") in order to verify that the condition of the Aircraft complies with this Agreement. The Final Inspection will be long enough to permit the representatives of Lessor and the Financing Parties to inspect, at their own cost, the Aircraft Documents, the Aircraft and any uninstalled Parts and Engines. The representatives of Lessor and the Financing Parties shall attend and conduct the Final Inspection diligently and, without limiting their right to conduct the full Final Inspection permitted by this Agreement, will cooperate with Lessee in order to complete the Final Inspection as soon as reasonably practical. (b) Lessor and the Financing Parties shall also be entitled, as part of the Final Inspection, to require Lessee to perform an acceptance flight of up to one hour at Lessee's cost (with up to two representatives of Lessor and the Financing Parties on-board as observers) and such further acceptance flights as may be necessary in the event that the first or subsequent flights do not confirm that the Aircraft complies with the redelivery requirements of this Agreement. (c) At the request of Lessor, Lessee shall perform "bridging" maintenance procedures for the purpose of standardizing the Aircraft to the maintenance program of any subsequent operator of the Aircraft; provided, that Lessor shall pay to Lessee the Actual Cost of all "bridging" procedures that are in excess of or not in lieu of the final checks and maintenance work to be performed pursuant to Section 12.2 and Schedule 3. 12.4 Non-Compliance -------------- To the extent that, at the time of Final Inspection, the condition of the Aircraft does not comply with this Agreement, Lessee shall, at the option of Lessor: (a) immediately rectify the non-compliance and, to the extent the non- compliance extends beyond the Expiry Date, the Term will be automatically extended until the non-compliance has been rectified; or (b) redeliver the Aircraft to Lessor and indemnify Lessor, and provide security reasonably acceptable to Lessor for that indemnity, against the cost of putting the Aircraft into the condition required by this Agreement. During any extension of the Term pursuant to Section 12.4(a), this Agreement will remain in full force and effect, including the obligation to pay lease rental (which Lessee shall pay on a per diem basis weekly in advance in an amount equal to one-fourth of the Basic Rent Amount); provided, however, that Lessee shall not operate, or permit others to operate, the Aircraft after the Expiry Date except for acceptance flights pursuant to Section 12.2 and a ferry flight to the Redelivery Location. 12.5 Export Documentation -------------------- Upon redelivery and upon request by Lessor, Lessee shall (a) provide to Lessor all documents necessary to export the Aircraft from the State of Registration (including a valid and subsisting export license for the Aircraft), and (b) provide any documents requested by Lessor in connection with, and otherwise cooperate with, the deregistration of the Aircraft by the Aviation Authority, including causing the Aviation Authority to issue an Export Certificate of Airworthiness to a country specified by Lessor. 12.6 Acknowledgment -------------- Provided Lessee has complied with its obligations under this Agreement, following redelivery of the Aircraft by Lessee to Lessor at the Redelivery Location, Lessor will deliver to Lessee an acknowledgment confirming that Lessor is satisfied that the Aircraft is in the condition required by this Agreement and has been redelivered to Lessor in accordance with this Agreement. 12.7 Maintenance Program ------------------- (a) During the 20 day period preceding the Scheduled Expiry Date and upon Lessor's request, Lessee will provide Lessor or its agent reasonable access to the Approved Maintenance Program and the Aircraft Documents in order to facilitate the Aircraft's integration into any subsequent operator's fleet. Lessor agrees that it will not disclose the contents of the Approved Maintenance Program to any Person except to the extent necessary to monitor Lessee's compliance with this Agreement and/or to bridge the maintenance program for the Aircraft from the Approved Maintenance Program to another program after the Expiry Date. (b) Concurrent with providing the Aircraft Documents for Lessor's review, Lessee shall provide to Lessor a written summary of all sampling programs involving or affecting the Aircraft. 12.8 Storage ------- (a) If Lessor so requests, and subject to the availability of the requisite space, Lessee shall park and store the Aircraft at a secure storage area, which may be at the Redelivery Location or at any other suitable facility of Lessee selected by Lessee, wherever located (the "Storage Location"), on behalf of Lessor for a period not exceeding 30 days from the Expiry Date. During that period the Aircraft shall be at Lessee's risk (save as to any loss or damage caused by Lessor's wilful misconduct or gross negligence), and Lessee shall maintain and store the Aircraft in accordance with the respective manufacturer's maintenance planning document and shall insure the Aircraft in accordance with a "ground risk only" policy usual and customary in the worldwide aviation insurance marketplace. All storage, maintenance and insurance costs shall be borne by Lessee. (b) If Lessor so requests, and subject to the availability of the requisite space, Lessee shall continue to park and store the Aircraft at the Storage Location on behalf of Lessor for a further period not exceeding 60 days. During that further period the Aircraft shall be at Lessor's risk (save as to any loss or damage caused by Lessee's wilful misconduct or gross negligence), but Lessee shall continue to maintain, store and insure the Aircraft in accordance with this Section 12.8. All reasonable storage, maintenance and insurance costs incurred by Lessee (excluding any profit element accruing to Lessee) during such further period shall be reimbursed by Lessor promptly upon presentation of supporting invoices and/or receipts. 12.9 In lieu of returning the Aircraft, Lessee may purchase the Aircraft for the Option Price by giving notice to Lessor not less than 180 days prior to the Scheduled Expiry Date of Lessee's intent to purchase the Aircraft. Said notice shall be irrevocable once given. If Lessee shall have given such notice, then on the Scheduled Expiry Date: (i) Lessee shall (subject to the provisions of the last sentence of this Section 12.9) pay the Option Price to Lessor by wire transfer of immediately available US Dollars to the account specified in Section 5.6 of this Agreement, and (ii) upon receipt of the Option Price, Lessor shall convey title to the Aircraft to Lessee or Lessee's designee free of Lessor Liens by executing and delivering to Lessee a bill of sale for the Aircraft. The Aircraft shall be transferred without warranty (except as to title being free of Lessor Liens), "as is, where is, with all faults." In addition, Lessor shall execute such other documents including a certificate terminating this Agreement as Lessee may reasonably request, provided such documents are prepared at Lessee's sole cost and expense and are satisfactory in all respects to Lessor. If Lessee purchases the Aircraft in accordance with the foregoing provisions, and if no Default shall have occurred and be then continuing, Lessor shall retain and apply the balance then in Lessor's possession on account of Additional Rent and the amount of the Security Deposit as a credit against the Option Price. 13. DEFAULT ------- 13.1 Events ------ Each of the following events will constitute an Event of Default and a repudiation of this Agreement by Lessee: (a) Non-payment: Lessee (i) fails to pay the Agreed Value and all ----------- other amounts required under Section 11.2 on the Settlement Date, (ii) fails to make any payment of Basic Rent or Additional Rent within two Business Days after the date on which such payment is due, or (iii) fails to pay any other amount payable by it under this Agreement within five Business Days after written notice from Lessor that such amounts are due; or (b) Material Covenants: Lessee (i) fails to maintain in full force and ------------------ effect any insurance required to be maintained under Section 9, or (ii) transfers possession of the Airframe or any Engine to another Person other than as permitted by this Agreement; or (c) Breach: Lessee fails to comply with any other provision of this ------ Agreement and, if such failure is, in the reasonable opinion of Lessor, capable of remedy, the failure continues for 30 days after notice from Lessor to Lessee, provided, that if such failure cannot reasonably be remedied within such 30 day period and Lessee is diligently undertaking all necessary remedial action, the 30 day period shall be extended for a further 15 days; or (d) Representation: any representation or warranty made (or deemed to be -------------- repeated) by Lessee in this Agreement or in any document or certificate furnished to Lessor pursuant to or in connection with this Agreement is or proves to have been incorrect in any material respect when made or deemed to be repeated and Lessee's ability to comply with its obligations under this Agreement, and/or Lessor's or any Mortgagee's rights, title and interest to and in the Aircraft and/or under this Agreement, are thereby materially and adversely affected; or (e) Cross Default: ------------- (i) any Financial Indebtedness of Lessee or any of its Affiliates that exceeds $500,000 is not paid when due and any applicable grace period shall have expired; (ii) the security for any Financial Indebtedness is enforced; (iii) any lease, conditional sale, installment sale or forward purchase agreement of Lessee or any of its Affiliates in respect of an aircraft is terminated as a consequence of an event of default or termination event (however described); or (iv) an event of default (however described) occurs under any lease, conditional sale, installment sale or forward purchase agreement between Lessor or any of its Affiliates and Lessee or any of its Affiliates; provided always, in any such case, it shall not constitute an Event of Default under this Agreement: (1) if the relevant Financial Indebtedness constitutes non- recourse borrowing or financing; or (2) if the non-payment, acceleration, termination or event in question is being contested by Lessee in good faith and on reasonable grounds and any declaration of default, termination of agreement or enforcement of security has been stayed by a court of competent jurisdiction; or (f) Approvals: any consent, authorization, license, certificate or --------- approval of or registration with or declaration to any Government Entity in connection with this Agreement, including: (i) any authorization required by Lessee of, or in connection with, the execution, delivery, validity, enforceability or admissibility in evidence of this Agreement or the performance by Lessee of its obligations under this Agreement; or (ii) any airline license, air transport license, franchise, concession, permit, certificate, right or privilege required by Lessee for the conduct of its business, is modified, withheld, revoked, suspended, canceled, withdrawn, terminated or not renewed, or otherwise ceases to be in full force and is not reissued, reinstated or renewed within 30 days, provided however that any such modification, withholding, revocation, suspension, cancellation, withdrawal, termination or non-renewal shall only constitute an Event of Default if it has a material adverse effect on Lessee's ability to perform its obligations under the Operative Documents or on Lessor's rights, title and interest to and in the Aircraft or under this Agreement; or (g) Insolvency: ---------- (i) Lessee or any of its Affiliates is, or is deemed for the purposes of any relevant law to be, unable to pay its debts as they fall due or to be insolvent, or admits inability to pay its debts as they fall due; or (ii) Lessee or any of its Affiliates suspends making payments on all or any class of its debts or announces an intention to do so, or a moratorium is declared in respect of any of its indebtedness; or (h) Bankruptcy and Similar Proceedings ---------------------------------- (i) Lessee shall consent to the appointment of a receiver, trustee or liquidator for itself or for a substantial part of its property; or (ii) Lessee shall admit in writing its inability to pay its debts generally as they become due, or Lessee shall make a general assignment for the benefit of creditors; or (iii) 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 or answer consent to or fail to oppose the seeking of relief under the provisions of any Bankruptcy Laws; or (iv) any order, judgment or decree is entered by a court of competent jurisdiction appointing a receiver, trustee or liquidator of Lessee or a substantial part of its property, or ordering a substantial part of Lessee's property to be sequestered, is instituted or done with the consent of Lessee or, if instituted by another Person, the order, judgment or decree is not dismissed, remedied or relinquished within 30 days; or (v) a petition against Lessee in a proceeding under any Bankruptcy Laws shall be filed and shall not be withdrawn or dismissed within 30 days thereafter, or if, under the provisions of any Bankruptcy Laws that 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; or (vi) any step (including petition, proposal or convening a meeting) is taken with a view to a composition, assignment or arrangement with any creditors of, or the reorganization, rehabilitation, administration, liquidation, or dissolution of, Lessee or any of its Affiliates or any other insolvency proceedings involving Lessee or any of its Affiliates; or (i) Other Jurisdiction: there occurs in relation to Lessee or any of its ------------------ Affiliates any event anywhere which, in the reasonable opinion of Lessor, corresponds with any of those mentioned in Section 13.1(h); or (j) Suspension of Business: Lessee or any of its Affiliates suspends or ---------------------- ceases to carry on all or a substantial part of its business; or (k) Disposal: Lessee or any of its Affiliates disposes or threatens to -------- dispose of all or a material part of its assets, whether by one or a series of transactions, related or not, other than pursuant to a merger or consolidation as referred to in, and subject to, Section 8.8(b) or for the purpose of any other reorganization or amalgamation the terms of which have received the previous consent in writing of Lessor; or (l) Rights: the existence, validity, enforceability or priority of the ------ rights of Lessor as owner and lessor in respect of the Aircraft or the rights of any Mortgagee as mortgagee of the Aircraft and assignee of this Agreement are challenged by Lessee or any other Person claiming by or through Lessee; or (m) Change of Ownership: any single Person or group of Persons acquire ------------------- control, directly or indirectly, of Lessee without the previous consent in writing of Lessor (which consent shall not be withheld unless Lessor is of the reasonable opinion that such acquisition of control will have a materially adverse effect on Lessee's ability to perform its obligations under this Agreement or Lessor's rights, title and interest in and to the Aircraft or under this Agreement), not including (i) individuals or other Persons that are currently in control of Lessee, (ii) spouses of any such individuals, (iii) any lineal ancestor or descendant of any such individual, (iv) any spouse of any individual covered by clause (iii), or (v) a partnership or trust set up for the benefit of individuals identified in clauses (i) through (iv); or (n) Delivery: Lessee fails to accept delivery of the Aircraft when validly -------- tendered pursuant to this Agreement by Lessor (provided that Lessor shall have satisfied the conditions precedent set out in Section 3.4); (o) Adverse Change: any event or series of events occurs which, in the -------------- reasonable opinion of Lessor, could be expected to have a material adverse effect on the financial condition or operations of Lessee and its Affiliates or on the ability of Lessee to comply with its obligations under this Agreement; or 13.2 Rights ------ If an Event of Default occurs, and for as long as it shall continue, Lessor may at its option (and without prejudice to any of its other rights under this Agreement or that may arise by operation of Applicable Law), at any time thereafter: (a) accept such repudiation by Lessee of its obligations under this Agreement and by notice to Lessee with immediate effect terminate the leasing of the Aircraft (but without prejudice to the continuing obligations of Lessee under this Agreement), whereupon all rights of Lessee under this Agreement shall cease; and/or (b) proceed by appropriate court action or actions to enforce performance of this Agreement or to recover damages for the breach of this Agreement; and/or (c) either: (i) take possession of the Aircraft, for which purpose Lessor may enter any premises belonging to, occupied by or under the control of Lessee (for which purpose Lessee hereby grants to Lessor an irrevocable license to the extent permitted by Applicable Law) where the Aircraft may be located, or cause the Aircraft to be redelivered to Lessor at the Redelivery Location (or such other location as Lessor may require), and Lessor is hereby irrevocably authorized and empowered, to the extent permitted by Applicable Law, to direct pilots of Lessee or other pilots to fly the Aircraft to that airport and will have all the powers and authorizations necessary for taking such action; or (ii) by serving notice, require Lessee to redeliver the Aircraft to Lessor at the Redelivery Location (or such other location as Lessor may require) in the condition required by Section 12 and Schedule 3. (d) If an Event of Default occurs, Lessor may sell, lease or otherwise deal with the Leased Property in such manner as Lessor in its absolute discretion considers appropriate. (e) If an Event of Default occurs, Lessee shall at the request of Lessor take all steps necessary to deregister the Aircraft from the aircraft registry of the State of Registration and export the Aircraft from the country where the Aircraft is for the time being registered or situated and any other steps necessary to enable the Aircraft to be redelivered to Lessor in accordance with this Agreement. Lessee hereby irrevocably and by way of security for its obligations under this Agreement authorizes and empowers Lessor as its attorney-in-fact and agent (such agency being coupled with an interest), in Lessor's own name or in the name of Lessee, to execute and deliver any documentation and to do any act or thing required in connection with the foregoing. 13.3 Default Payments ---------------- If an Event of Default occurs, Lessee will indemnify and pay to Lessor on demand against any loss (including loss of profit), damage, expense, cost or liability that Lessor may sustain or incur directly or indirectly as a result, including: (a) all unpaid Basic Rent, Additional Rent and Supplemental Rent then due and unpaid; (b) any loss of profit (calculated on an after-tax basis) suffered by Lessor because of Lessor's inability to place the Aircraft on lease with another Lessee on terms as favorable to Lessor as this Agreement or because whatever use, if any, to which Lessor is able to put the Aircraft upon its return to Lessor, or the funds arising upon a sale or other disposal of the Aircraft, is not as profitable (calculated on an after-tax basis) to Lessor as this Agreement would have been but for such Event of Default; (c) in the event that the Aircraft is sold prior to Lessor entering into a replacement lease, the amount (if any) by which (i) the aggregate of (1) the net sale proceeds (calculated by deducting the costs of sale together with the cost of preparing the Aircraft for sale and the repayment of any outstanding indebtedness in relation to the financing of the Aircraft) plus (2) the present value of the anticipated after- tax net income to be derived from such net sale proceeds up to the Scheduled Expiry Date, discounted on a monthly basis using 9.5% per annum as the discount rate, are less than (ii) the aggregate of (1) the anticipated net sale proceeds (computed on the same basis as the net sale proceeds referred to in (i)(1) above), assuming that the Aircraft would have been sold as soon as reasonably practicable following the Scheduled Expiry Date plus (2) the present value of the income that would have been derived from the future Basic Rent payable until the Scheduled Expiry Date, discounted on a monthly basis using 9.5% per annum as the discount rate; (d) any amount of principal, interest, fees or other sums whatsoever paid or payable on account of funds borrowed in order to carry any amount unpaid by Lessee; (e) any loss, premium, penalty or expense that may be incurred in repaying funds raised to finance the Aircraft or in unwinding any swap, forward interest rate agreement or other financial instrument relating in whole or in part to Lessor's financing of the Aircraft; and (f) any loss, cost, expense or liability sustained or incurred by Lessor owing to Lessee's failure to redeliver the Aircraft on the date, at the place and in the condition required by this Agreement. 13.4 Waiver of Certain Article 2A Rights ----------------------------------- To the fullest extent permitted by Applicable Law, each of Lessor and Lessee hereby agree that no rights or remedies referred to in Article 2A of the Uniform Commercial Code shall be conferred upon either Lessor or Lessee unless otherwise expressly granted in this Agreement. 14. ASSIGNMENT and TRANSFER ----------------------- 14.1 No Assignment by Lessee ----------------------- Lessee will not assign any of its right, title, interests, duties, obligations or liabilities in, to or under this Agreement, or create or permit to exist any Security Interest (other than Permitted Liens) over any of its rights under this Agreement, and any such purported assignment or grant of a Security Interest shall be void ab initio and of no force or effect. Without limiting the foregoing, if any assignment prohibited under the foregoing sentence shall be valid by operation of any non-waivable provision of Applicable Law, Lessee shall nevertheless remain fully liable for the payment and performance of all of Lessee's obligations to be paid and performed hereunder as fully and to the same extent as if such assignment had not been effected, without prejudice to the obligations of such assignee. 14.2 Lessor Assignment ----------------- Lessor may sell, assign (for purposes of this Section 14.2, not including an assignment for security purposes) or transfer all or any of its rights under this Agreement and in the Leased Property (a "Transfer") and Lessor will have no further obligation under this Agreement following a Transfer but, notwithstanding any Transfer, will remain entitled to the benefit of each indemnity under this Agreement. (a) In connection with any Transfer, the following conditions shall apply: (i) Lessor shall give Lessee written notice of such Transfer at least 10 Business Days before the date of such Transfer, specifying the name and address of the proposed purchaser, assignee or transferee (the "Transferee"); (ii) the Transferee will be a Person reasonably experienced in aircraft leasing (or the Transferee's rights and powers under this Agreement shall be exercised or serviced on its behalf pursuant to an appropriate management or servicing agreement by a Person having such experience); (iii) the Transferee will have full corporate power and authority to enter into and perform the transactions contemplated by this Agreement on the part of "Lessor"; (iv) on the Transfer date Lessor and the Transferee shall enter into an agreement or agreements in which the Transferee confirms that it shall be deemed a party to this Agreement and agrees to be bound by all the terms of, and to undertake all of the obligations of, Lessor contained in this Agreement; (v) such Transfer shall not violate any Applicable Law; and (vi) the Transferee shall provide to Lessee an opinion of its regular independent counsel as to the matters set forth in Section 14.2(a)(iii) and as to the legality, validity, binding effect and enforceability of the agreement or agreements between Lessor and Transferee referred to in Section 14.2(a)(iv). (b) Upon any Transfer, the Transferee shall be deemed Lessor for all purposes of this Agreement, each reference in this Agreement to "Lessor" shall thereafter be deemed for all purposes to refer to the Transferee, and the transferor shall be relieved of all obligations of "Lessor" under this Agreement arising after the time of such Transfer except to the extent attributable to acts or events occurring prior to the time of such Transfer. (c) Upon compliance by Lessor and a Transferee with the terms and conditions of Section 14.2(a), Lessee shall at the time of Transfer, at the specific written request of Lessor and with Lessor paying all of Lessee's reasonable out-of- pocket costs and expenses: (i) execute and deliver to Lessor and to such Transferee an agreement, in form and substance satisfactory to Lessor, Lessee and such Transferee, dated the date of such transfer, consenting to such transfer, agreeing to pay all or such portion of the Basic Rent, Additional Rent and other payments under this Agreement to such Transferee or its designee as such Transferee shall direct, and agreeing that such Transferee shall be entitled to rely on all representations and warranties made by Lessee in the Operative Documents or in any certificate or document furnished by Lessee in connection with the Operative Documents as though such Transferee was the original "Lessor"; (ii) execute and deliver to Lessor or such Transferee, as appropriate, precautionary Uniform Commercial Code financing statements or amendments reflecting the interests of such Transferee in the Aircraft and this Agreement; (iii) deliver to Lessor and to such Transferee a certificate, signed by a duly authorized officer or Lessee, dated the date of such transfer, to the effect that no Event of Default has occurred and is continuing or, if one is then continuing, describing such Event of Default; (iv) cause to be delivered to Lessor and such Transferee certificates of insurance and broker's letter of undertaking substantially in the form delivered to Lessor on the Delivery Date, detailing the coverage and confirming the insurers' agreement to the specified insurance requirements of this Agreement and listing Lessor and Transferee as additional insureds and the Transferee as sole loss payee (subject to other direction by any Mortgagee); (v) deliver to Lessor and to such Transferee an opinion of Lessee's counsel (which may be Lessee's General Counsel), addressed to Lessor and such Transferee to the effect that the agreement referred to in Section 14.2(c)(i) has been duly authorized and executed by Lessee and constitutes the legal, valid and binding obligation of Lessee, enforceable against Lessee in accordance with its terms (subject to customary exceptions), and to the effect that such Transferee may rely on the opinion delivered by such counsel or its predecessor counsel in connection with this Agreement on the Delivery Date with the same force and effect as if such Transferee was an original addressee of such opinion when given; (vi) deliver to Lessor and such Transferee information on the location of the Airframe and Engines at all times requested by Lessor in order to permit the Transfer to take place at a time and on a date so as to eliminate or minimize any Taxes applicable to the Transfer; and (vii) such other documents as Lessor or such Transferee may reasonable request. 14.3 Grants of Security Interests ---------------------------- Lessor shall be entitled at any time after Delivery to grant a security interest in the Leased Property or its right, title and interest in this Agreement (each, an "Additional Mortgage") in favor of any Person (each, an "Additional Mortgagee"). Any Additional Mortgage may be a successor mortgage to the Security Interest granted to any Mortgagee, or may be in addition to any Mortgagee's Security Interest and previous Additional Mortgages and with a priority senior, equal or subordinate to any Mortgagee's Security Interest and previous Additional Mortgages as such Mortgagee and previous Additional Mortgagees may permit. In the case of any such grant by Lessor of an Additional Mortgage to an Additional Mortgagee in all or any portion of Lessor's rights, title and interest in and to the Aircraft and this Agreement, Lessee shall promptly, at the specific written request of Lessor and with Lessor paying all of Lessee's reasonable out-of- pocket costs and expenses: (a) execute and delivery to Lessor and to such Additional Mortgagee an agreement in form and substance satisfactory to Lessor, such Additional Mortgagee and Lessee, dated the date of the grant of such Additional Mortgage, (i) consenting to such Additional Mortgage and to any assignment of Lessor's rights, title and interest in and to this Agreement to such Additional Mortgagee for security purposes, (ii) if requested by Lessor and consented to by the previous payee, agreeing that Lessee will pay the Basic Rent and other payments under this Agreement to such Additional Mortgagee, and (iii) agreeing that such Additional Mortgagee shall be entitled to rely on all representations and warranties made by Lessee in this Agreement or in any certificate or document furnished by Lessee in connection with this Agreement Documents as though such Additional Mortgagee was originally the "Mortgagee"; (b) execute and deliver to Lessor and such Additional Mortgagee such agreements as Lessor may reasonably require for the purposes of effecting all necessary amendments to this Agreement; (c) execute and deliver to Lessor or such Additional Mortgagee, as the case may be, precautionary Uniform Commercial Code financing statements or amendments reflecting the assignment of Lessor's interests in the Operative Documents to such Additional Mortgagee; (d) deliver to Lessor and such Additional Mortgagee a certificate, signed by a duly authorized officer of Lessee, dated the date of the grant of the Additional Mortgage, to the effect that no Event of Default has occurred and is continuing or, if one is then continuing, describing such Event of Default; (e) cause to be delivered to Lessor and such Additional Mortgagee certificates of insurance and broker's letter of undertaking substantially in the form delivered to Lessor on the Delivery Date, detailing the coverage and confirming the insurers' agreement to the specified insurance requirements of this Agreement, adding such Additional Mortgagee as an additional insured and, if requested by Lessor and consented to by the previous loss payee, listing such Additional Mortgagee as sole loss payee; (f) deliver to Lessor and such Additional Mortgagee an opinion of Lessee's counsel (which may be Lessee's General Counsel), addressed to Lessor and such Additional Mortgagee (i) to the effect that the agreements referred to in sub-clauses (a) and (b) have been duly authorized and executed by Lessee and constitute the legal, valid and binding obligations of Lessee, enforceable against Lessee in accordance with their terms (subject to customary exceptions), and (ii) to the effect that such Additional Mortgagee may rely on the opinion delivered by such counsel or its predecessor counsel in connection with this Agreement on the Delivery Date with the same force and effect as if such Additional Mortgagee was an original addressee of such opinion when given; and (g) such other documents as Lessor or such Additional Mortgagee may reasonably request. 14.4 Sale and Leaseback by Lessor ---------------------------- In addition to the Transfers and grants of Security Interests permitted by Sections 14.2 and 14.3, Lessor shall be entitled to transfer its right, title and interests in and to the Leased Property to any Person and lease the Aircraft from such Person (a "Head Lessor"), and in such event Lessor shall retain its rights and obligations as "Lessor" under this Agreement. In the event of such a sale and lease-back by Lessor, (a) the Head Lessor shall meet the requirements for a "Transferee" as defined in Section 14.2(a)(ii) above, (b) Lessor shall be entitled to assign its rights in this Agreement to such Head Lessor as security for its obligations under the head lease, (c) the Head Lessor shall be entitled to grant to one or more purchase money lenders, or to an indenture trustee on behalf of such lenders, an Additional Mortgage covering the Leased Property and the Operative Documents, (d) Lessee shall execute and deliver to Lessor, such Head Lessor, such Additional Mortgagee and any trustees on their behalf, as appropriate, the documents specified in Sections 14.2(c)(i) through (vii) and Sections 14.3(a) through (g) above, and Lessee shall cooperate with Lessor to make such other changes to this Agreement, such as including such Head Lessor, such Additional Mortgagee and the trustees on their behalf as additional insureds and "Indemnitees", as Lessor may reasonably request so long as such changes do not adversely affect the rights or obligations of Lessee under this Agreement or otherwise adversely affect Lessee and with Lessor paying all of Lessee's reasonable out-of-pocket costs and expenses. 14.5 Further Acknowledgments ----------------------- Lessee further acknowledges that any Transferee or Additional Mortgagee shall in turn have the rights of, and be subject to the conditions to, transfer and grants of Security Interests set forth above in this Section 14. 14.6 Certain Protections for Lessee's Benefit ---------------------------------------- The rights of Lessee under this Agreement shall be superior to the rights of any Additional Mortgagee or Head Lessor, and Lessor shall require each Additional Mortgagee and Head Lessor to agree in writing with Lessee that such Additional Mortgagee's and Head Lessor's rights in and to the Leased Property shall be subject to the terms of this Agreement, including to Lessee's rights to the quiet use, possession and enjoyment provisions contained in this Agreement. Lessor's obligations to perform the terms and conditions of this Agreement shall remain in full force and effect notwithstanding the creation of any Additional Mortgage or Head Lease. Lessor shall not create any Additional Mortgage or enter into any Head Lease that violates the terms of this Section 14.6. 15. GOVERNING LAW AND JURISDICTION 15.1 Governing Law ------------- THIS AGREEMENT SHALL, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS ENTERED INTO IN THE STATE OF NEW YORK BY RESIDENTS OF SUCH STATE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. 15.2 Consent to Jurisdiction ----------------------- The Lessee and the Lessor each hereby irrevocably consents that any legal action or proceeding against it or any of its assets arising out of or relating to this Lease shall be brought in the United States District Court for the Southern District of New York or the Supreme Court for the State of New York, County of New York, and any appellate court thereto (the "Agreed Courts"), and by execution and delivery of this Lease each of the Lessor and the Lessee hereby irrevocably submits to and accepts with regard to any such action or proceeding, for itself and in respect of its assets, generally and unconditionally, the exclusive jurisdiction of the aforesaid courts and irrevocably agrees to be bound by any judgment rendered thereby. Nothing herein shall prevent any party from bringing any legal action or proceeding against the Aircraft in rem or to obtain execution of judgment in any other appropriate jurisdiction. The Lessee and the Lessor further agree that a final judgment in any action or proceeding in an Agreed Court arising out of or relating to this Lease shall be conclusive and may be enforced in any other jurisdiction within or outside the United States by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and the amount of the indebtedness or liability therein described, or in any other manner provided by Law. Each of Lessee and Lessor hereby irrevocably waives, to the fullest extent permitted by Law, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Lease brought in an Agreed Court, and hereby further irrevocably waives any claim that any such suit, action or proceeding in such court has been brought in an inconvenient forum. 15.3 Waiver of Jury Trial -------------------- LESSEE AND LESSOR HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING TO WHICH THEY ARE PARTIES INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT. 15.4 Service of Process ------------------ (a) Without prejudice to any other mode of service, Lessee (i) appoints LEXIS Document Services, 125 Park Avenue, 23/rd/ Floor, New York, New York 10017 as its agent for service of process relating to any proceedings before the Agreed Courts in connection with this Agreement and agrees to maintain the process agent in New York, New York notified to Lessee, and (ii) agrees that failure by a process agent to notify Lessor of the process shall not invalidate the proceedings concerned. (b) Without prejudice to any other mode of service, each of Lessor and Lessee consents to the service of process relating to any proceedings involving, directly or indirectly, any matter arising out of or relating to this Agreement by U.S. Postal Service registered mail (prepaid, return receipt requested) of a copy of the process to Lessee's address identified in Section 16.10(b). 16. MISCELLANEOUS ------------- 16.1 Waivers, Remedies Cumulative ---------------------------- The rights of Lessor or Lessee under this Agreement may be exercised as often as necessary, are cumulative and not exclusive of that party's rights under any law and may be waived only in writing and specifically. Delay in exercising or non-exercise of any such right is not a waiver of that right. 16.2 Delegation ---------- Lessor or any Financing Party may delegate to any Person or Persons all or any of the trusts, powers or discretions vested in it by this Agreement and any such delegation may be made upon such terms and conditions and subject to such regulations (including power to sub-delegate) as Lessor or such Financing Party, respectively, in its absolute discretion thinks fit. 16.3 Appropriation ------------- If any sum paid or recovered in respect of the liabilities of Lessee under this Agreement is less than the amount then due, Lessor may apply that sum to amounts due under this Agreement in such proportions and order and generally in such manner as Lessor may determine. 16.4 Currency Indemnity ------------------ (a) If Lessor receives an amount in respect of the Lessee's liability under this Agreement or if such liability is converted into a claim, proof, judgment or order in a currency other than the currency (the "contractual currency") in which the amount is expressed to be payable under this Agreement: (i) Lessee will indemnify Lessor, as an independent obligation, against any loss arising out of or as a result of such conversion; (ii) if the amount received by Lessor, when converted into the contractual currency (at the market rate at which Lessor is able on the relevant date to purchase the contractual currency in New York City with that other currency) is less than the amount owed in the contractual currency, Lessee will, forthwith on demand, pay to Lessor an amount in the contractual currency equal to the deficit; and (iii) Lessee will pay to Lessor on demand any exchange costs and Taxes payable in connection with the conversion. (b) Lessee waives, to the extent permitted by Applicable Law, any right it may have in any jurisdiction to pay any amount under this Agreement in a currency other than that in which it is expressed to be payable. 16.5 Payment by Lessor ----------------- Lessor will not be obliged to pay any amounts to Lessee under this Agreement so long as any sums which are then due from Lessee under this Agreement remain unpaid and any such amounts which would otherwise be due will fall due only if and when Lessee has paid all such sums. 16.6 Severability If a provision of this Agreement is or becomes illegal, invalid or unenforceable in any jurisdiction, that will not affect: (a) the legality, validity or enforceability in that jurisdiction of any other provision of this Agreement; or (b) the legality, validity or enforceability in any other jurisdiction of that or any other provision of this Agreement. 16.7 Remedy ------ If Lessee fails to comply with any provision of this Agreement, Lessor may, without being in any way obliged to do so or responsible for so doing and without prejudice to the ability of Lessor to treat the non-compliance as a Default, effect compliance on behalf of Lessee, whereupon Lessee shall become liable to pay immediately any sums expended by Lessor together with all costs and expenses (including reasonable legal costs) necessarily incurred in connection therewith. 16.8 Expenses -------- (a) Lessor and Lessee shall each bear their respective expenses (including legal, professional and out-of-pocket expenses) incurred or payable in connection with the negotiation, preparation and execution of this Agreement. (b) Lessee shall pay to Lessor on demand all expenses (including legal, professional and out-of-pocket expenses) incurred or payable by Lessor in connection with the granting of any waiver or consent under this Agreement. (c) Lessee will pay to Lessor on demand all expenses (including legal, survey and other costs) payable or incurred by Lessor in contemplation of, or otherwise in connection with, the enforcement of or preservation of any of Lessor's rights under this Agreement, or in respect of the repossession of the Aircraft. (d) Lessor will pay to Lessee on demand all expenses (including legal costs) payable or incurred by Lessee in contemplation of, or otherwise in connection with, the enforcement of or preservation of any of Lessee's rights under this Agreement. 16.9 Time of Essence --------------- The time stipulated in this Agreement for all payments payable by Lessee to Lessor and for the performance of Lessee's other obligations under this Agreement that are due on a specified or determinable date will be of the essence of this Agreement (subject always to any applicable grace period). 16.10 Notices (a) All notices and other communications given under or in connection with this Agreement shall be in writing (including telefax) and shall be deemed to have been received as follows: (i) If sent by telefax, at the time of receipt by the sender of a transmission report indicating that all pages of the telefax transmission were properly transmitted (unless the recipient notifies the sender promptly, or if received after 5:30 p.m. local time, by no later than 10:00 a.m. local time the following Business Day, that the transmission was incomplete or illegible, in which case the telefax shall be deemed to have been received at the time of receipt by the sender of a further clear transmission report on retransmitting the telefax), provided the relevant telefax transmission (or retransmission, as the case may be) was transmitted to the receiver between 9:00 a.m. and 5:30 p.m. local time. If it was transmitted later, then it shall be deemed to have been received at 9:00 a.m. local time on the succeeding Business Day. (ii) In any other case, when delivered to the address specified in clause 16.10(b). (b) All such notices, requests, demands and other communications shall be sent: (i) to Lessor at: 79 South Main Street, Salt Lake City, Utah 84111 Attention: Corporate Trust Department Telephone: +1-801-246-5826 Telefax: +1-801-246-5053 copied to Beneficiary at: 88 Broad Street Boston, Massachusetts 02110 Attention: Operations Department Telephone: +1-617-854-5862 Telefax: +1-617-695-0596 with an additional copy to: Sigma Aircraft Management LLC 232 East 50th Street New York, New York 10022 Attention: Mr. Anders Hebrand Telephone: +1-212-752-9800 Telefax: +1-212-752-9801 (ii) to Lessee at: Air Slovakia BWJ, Ltd. Letisko M.R. Stefanika Ivanska cesta P.O. Box 2 82001 Bratislava Attention: Jan Janok Telephone: +421-7-4342-2742 Telefax: +421-7-4342-2742 or to such other address or telefax number as shall have been notified by one party to the other in the manner set out in this Section 16.10. 16.11 Sole and Entire Agreement ------------------------- This Agreement is the sole and entire agreement between Lessor and Lessee in relation to the leasing of the Aircraft, and supersedes all previous agreements in relation to that leasing. The terms and conditions of this Agreement can only be varied by an instrument in writing executed by both parties or by their duly authorized representatives. 16.12 Indemnities ----------- All rights expressed to be granted to each Indemnitee under this Agreement (other than any Financing Party) are given to Lessor as agent for and on behalf of that Indemnitee. 16.13 Counterparts ------------ This Agreement may be executed in one or more counterparts, each of which shall constitute an original and, when taken together, all of which shall constitute one and the same Agreement. 16.14 Confidentiality --------------- Neither Lessor nor Lessee shall, without the other's prior written consent, communicate or disclose the terms of this Agreement or any information or documents furnished pursuant to this Agreement (except to the extent that the same are within the public domain) to any third party (other than any Financing Party, any prospective Transferee, any material investor in Lessee or creditor in Lessee, Additional Mortgagees or Head Lessors, the respective external legal advisers, auditors, insurance brokers or underwriters of Lessor, Lessee and such parties, and the Manufacturer and Engine Manufacturer); provided, that disclosure will be permitted, to the extent required: (a) pursuant to an order of any court of competent jurisdiction; or (b) pursuant to any procedure for discovery of documents in any proceedings before any such court; or (c) pursuant to any law or regulation having the force of law; or (d) pursuant to a lawful requirement of any authority with whose requirements the disclosing party is legally obliged to comply; or (e) in order to perfect any assignment of any assignable warranties. 16.15 Waiver of Immunity. To the extent that any party may in any jurisdiction ------------------ claim for itself or its assets immunity from suit, execution, attachment (whether in aid of execution before judgment or otherwise) or other legal process and to the extent that in any such jurisdiction there may be attributed to itself or its assets such immunity (whether or not claimed), that party hereby irrevocably agrees not to claim and hereby irrevocably waives such immunity to the full extent permitted by the laws of such jurisdiction. [signature page follows] IN WITNESS WHEREOF Lessor and Lessee have executed this Lease Agreement 21722 on the date shown at the beginning of this Agreement. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as owner trustee By:________________________________ Name: Title: AIR SLOVAKIA BWJ, LTD. By:________________________________ Name: Title: [First Security Bank, National Association, in its capacity as owner trustee, hereby acknowledges receipt of this Original Executed Counterpart of Lease Agreement 21722 in New York, New York on this ____ day of August 2000. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as owner trustee By:________________________________ Name: Title]/1/ _________________________ /1/ This text will only appear on one counterpart of Lease Agreement 21722. Schedule 1 -- Description of Leased Property Part 1 -- Aircraft Specification IDENTIFICATION: Aircraft Model: Boeing Model 737-200A Current U.S. Registration Mark: N57SW Serial Number: 21722 Date of Manufacture: April 12, 1979 WEIGHT DATA: Maximum Gross Taxi Weight: 116,000 lbs. Maximum Gross Takeoff Weight: 115,500 lbs. Maximum Landing Weight: 103,000 lbs. Maximum Zero Fuel Weight: 95,000 lbs. Empty Weight: 64,736 lbs. Payload: 30,264 lbs. Fuel Capacity: 5,461 U.S. gallons AIRFRAME AND INTERIOR EQUIPMENT: Galleys: two Locations: one forward; one aft Lavatories: two Locations: one forward; one aft Passenger Seats: 122 Types: all economy ENGINES: Manufacturer: Pratt & Whitney Position No.1 No.2 Model: JT8D-9A JT8D-9A Serial Numbers: 707430 665325 APU: Manufacturer: Allied Signal Corporation Model: GTCP85-129C Serial Number: P-40107 LANDING GEAR: - ------------ Position: Nose Left Main Right Main ---- --------- Manufacturer: Boeing Boeing Boeing Model: 65-73762-2 65-73761-87 65-73761-88 Serial Number: R9138P883 MC01011P544 MC01012P544 MAJOR AVIONICS EQUIPMENT:
Nomenclature Manufacturer Model/Part Number - ---------------------------------------------------------------------------------------- Digital Air Data Computer Honeywell HG480-B13 Mach Trim Coupler Sperry 2590650-901 Landing Gear Accessory Boeing 65-52811-115 Cabin Temperature Controller Garrett 548376-6 Cabin Pressure Controller Hamilton Standard 763810-1 Component Overheat Unit Boeing 65-52808-7 Engine Accessory Unit Boeing 65-73606-34 Air Condition Relay Unit Boeing 65-52810-25 Misc. Solid State Switch Unit Boeing 65-52806-110 Audio Accessory Unit Boeing 65-52804-79 Yaw Damper Coupler Sperry 4030952-902 Flap/Slat Position Switch Accessory Boeing 65-52807-66 Flight Instrument Accessory Unit Boeing 65-52805-122
Nav/ILS Receiver No. 1 - 3 King 066-1060-48 Monitor Comparator Warning Collins 522-3949-002 APU Control Unit Boeing 65-52801-31 Fire Detection Unit Boeing 65-52809-15 Battery Charger ELDEC 2-301-3 Static Inverter Bendix 39B168-1-B Steering Computer No. 1 & 2 Collins 622-2500-001 Anti-Skid Control Crane 42-265 Pitch Control Channel Sperry 2588810-903 Roll Control Channel Sperry 2588812-902 Auto Pilot Accessory Unit Boeing 65-52812-52 Instrument Amplifier No. 1 & 2 Collins 522-3120-004 Compass System Rack No. 1 & 2 Sperry 614937-101 Power Supply, TR1, TR2 & TR3 OECO Corp. 080-20325-01 VHF Comm No. 1 King KTR9100A Passenger Address Collins 622-4096-001 ATC Mode S Transponder No. 1 & 2 Bendix/King 066-01127-1301 DME No. 1 & 2 King KDM7000B Window Heat Controller No. 1 - 4 Koito Manufacturing 83000-0560 Directional Gyro No. 1 & 2 Sperry 2588302-4 Vertical Gyro No. 1 - 3 Sperry 2587335-11 TCAS Processor Bendix/King 066-50000-0108 ADF Receiver King KDF8000 GPWS Mark VII/Windshear Computer Sundstrand 965-0876-001 Weather Radar Bendix RTA4B066-50008-04 Cockpit Voice Recorder Fairchild 93-A100-80 Digital Flight Data Recorder Sundstrand 980-4100-GXUS Marker Beacon Receiver Collins 522-2996-000
Part 2 -- Aircraft Documents BOX #1 of 4 ----------- 1. Certificates 2. Delivery Documents 3. Regulatory Correspondence 4. A/C Spec Sheet 5. Interior Specs 6. Last Test Flight 7. Accident History 8. Airframe Modification Data 9. Service Bulletin Modification Data 10. FAR/FAR Modification Data 11. Weight and Balance 12. Last Daily / Preflight 13. A/C Time/Cycles Report 14. Maintenance Program/Bridge 15. Items on Continued Inspection 16. Gear Records 17. APU Records 18. Engine Records 19. Components 20. AD Report, Aging A/C, CPCP BOX #2 of 4 ----------- MAINTENANCE RECORDS MICROFILM: 1. April -- June 1979 2. July -- December 1979 3. January -- June 1980 4. July -- December 1980 5. January -- June 1981 6. July -- December 1981 7. January -- June 1982 8. July -- December 1982 9. January -- June 1983 10. July -- December 1983 11. January -- June 1984 12. July -- December 1984 13. January -- June 1985 14. July -- December 1985 15. January -- June 1986 16. July -- December 1986 17. January -- April 1987 18. May -- August 1987 19. September -- December 1987 20. January -- April 1988 21. May -- August 1988 22. September -- December 1988 23. January -- April 1989 24. May -- August 1989 25. September -- December 1989 26. January -- April 1990 27. May -- August 1990 28. September -- December 1990 29. January -- April 1991 30. May -- August 1991 31. September -- December 1991 32. January -- April 1992 33. May -- August 1992 34. September -- December 1992 35. 1/2 D check 6/13/92 36. January -- April 1993 37. May -- August 1993 38. September -- December 1992 39. January -- April 1994 40. May -- August 1994 41. September -- December 1994 42. January -- April 1995 43. N/57 Tramco 10-87 Book 1-5 44. N/57 Tramco 10-87 Book 6-9 45. Lap Joint Inspection 46. May -- August 1995 47. Special Visit Dalfort 11-15-95 48. September -- December 1995 49. January -- April 1996 50. Tramco D check 5/4/96 -- 6/8/96 Books 1 thru 7 51. Tramco D check 5/4/96 -- 6/8/96 Books 6 thru 9 52. Tramco D check 5/4/96 -- 6/8/96 Non-routine work cards 53. May -- August 1996 54. Daily Packages September -- December 1996 55. Daily Packages January -- April 1997 56. May -- August 1997 57. September -- December 1997 58. January -- April 1998 & Spec Visit 3/25/98 59. May -- August 1998 60. September -- December 1998 Document Spliced at end of roll 61. January -- April 1999 62. May -- August 1999 INSTALLED PART TAGS BY ATA CHAPTERS: 21-29 31-36 38,49 52-57 71-75 77-80 BOX #3 of 4 ----------- APU GTCP85-129C S/N P-40107 records Engine No. 1 JT8D-9A S/N 707430 General Electric Shop Visit Records WO UR1941 (2 CD's) Engine Video Borescope -- Hot Section Engine No. 2 JT8D-9A S/N 665323 General Electric Shop Visit Records WO UR1479 (3 CD's) Engine Video Borescope -- Hot Section Engine Part Tags Aircraft Log Pages September 1999 thru December 1999 Deferred Maintenance Logs October 1999 thru December 1999 Wiring Diagram Manual (2 CD's) Structural Repair Manual (1 CD) Maintenance Manual/IPC (1 CD) Pinpoint Software 1 CD (software for manuals) Section Page - ------- ---- BOX #4 of 4 ----------- Southwest C Check December 1999 "B" and C4 Check Nov. 10, 1999 Service Checks November 1999 Service Checks October 1999 Service Checks September 1999 Southwest C1 - C4 Routine Cards Schedule 2 - Operating Condition at Delivery On the Delivery Date the Aircraft will be in the condition set out below: 1. General Condition ----------------- The Aircraft will: (a) be clean by major international airline standards; (b) be airworthy, conform to type design and be in a condition for safe operation with all equipment, components and systems operating in accordance with their intended use and within limits established by the manufacturer and approved by the FAA, and all pilot discrepancies and deferred maintenance items cleared on a terminating action basis; (c) have a valid export certificate of airworthiness with respect to the Aircraft issued by the FAA; (d) have zero flight Hours (except for test and acceptance flights) since undergoing a block "C" Check in accordance with the Previous Operator's maintenance program before the Scheduled Delivery Date; (e) have had accomplished all outstanding airworthiness directives and mandatory orders affecting that model of Aircraft issued by the FAA that are due before the Delivery Date on a terminating action basis; (f) have no special or unique manufacturer inspection or check requirements specific to the Aircraft that exist unless there is no terminating action available from any source; (g) be free of any system-related leaks; (h) have all fluid reservoirs (including fuel, oil, oxygen, hydraulic and water) full, and the waste tank serviced in accordance with the manufacturer's instructions; (i) have all signs and decals clean, secure and legible; and (j) be in a 122 all economy seating configuration. 2. Engines ------- (a) Each Engine shall have at least 3,000 Cycles remaining until the next scheduled CER or LLP replacement under the Previous Operator's maintenance program. (b) No Engine shall be "on engineering watch", on a reduced interval inspection or otherwise have any defect that reduces the Flight Hours or Cycles (whichever is more limiting) of remaining life pursuant to Engine Manufacturer's or airworthiness requirements until overhaul to less than 3,000. 3. Fuselage, Windows and Doors --------------------------- (a) The fuselage will not contain any dents, corrosion or abrasions that exceed the prescribed parameters under the SRM and shall be free of scab patches and loose, pulled or missing rivets. (b) The windows will not contain any delamination, blemishes or crazing that exceed the prescribed parameters under the Manufacturer's maintenance manual and will be properly sealed. (c) The doors will be free moving, correctly rigged and fitted with serviceable seals. 4. Wings and Empennage ------------------- (a) The leading edges will not contain any damage that exceeds the prescribed parameters under the SRM. (b) All unpainted cowlings and fairings will be polished. (c) All wings will be free of fuel leaks. 5. Interior -------- (a) The interior will be fully serviceable. (b) All curtains, carpets, seat covers and seat cushions will be clean and free from stains and worn out (threadbare) areas and will conform to FAR fire resistance regulations as applicable to an FAR Part 121 operator. 6. Cockpit ------- (a) All fairing panels shall be free of stains and cracks, clean, secure and repainted as necessary. (b) All floor coverings will be clean and effectively sealed. (c) All seat covers will be in good condition, clean and free of stains and will conform to FAR fire resistance regulations as applicable to an FAR Part 121 operator. (d) All seats will be serviceable, in good condition and repainted as necessary. 7. Cargo Compartments ------------------ (a) All panels will be in good condition and effectively sealed. (b) All nets will be in good condition. (c) The cargo compartments will comply with FAR fire resistance and containment regulations as applicable to an FAR Part 121 operator. 8. Landing Gear ------------ (a) The landing gear and wheel wells will be clean, free of leaks and repaired as necessary. 9. APU --- (a) The APU shall be serviceable in accordance with the MPD. Schedule 3 - Operating Condition at Redelivery On the Expiry Date the Aircraft, subject to fair wear and tear generally, will be in the condition set out below: 1. General Condition ----------------- The Aircraft will: (a) be clean by major international airline standards; (b) have installed the full complement of engines and other equipment, parts and accessories and loose equipment required under the Approved Maintenance Program and usually installed in the other aircraft of the same model operated by Lessee (together with any additions and improvements thereto, or replacements thereof, effected pursuant to and in accordance with this Agreement) and be in a condition suitable for immediate operation in commercial service; (c) be airworthy, conform to type design and be in a condition for safe operation with all equipment, components and systems operating in accordance with their intended use and within limits established by the manufacturer and approved by the Aviation Authority, and all pilot discrepancies and deferred maintenance items cleared on a terminating action basis; (d) have a standard passenger transport category Certificate of Airworthiness issued by the Aviation Authority in accordance with the Aviation Law or, if requested by Lessor, a valid export certificate of airworthiness with respect to the Aircraft issued by the Aviation Authority for a country designated by Lessor, be eligible for the issuance of a standard certificate of airworthiness issued by the FAA (passenger transport category) and meet all requirements for immediate, unrestricted commercial passenger operations promulgated by the Aviation Authority and the FAA other than Stage 3 or higher noise regulations. (e) comply with the manufacturer's original specification to the extent that it so complied on the Delivery Date and subject to any alterations made pursuant to and in accordance with this Agreement after such date; (f) have undergone, immediately prior to redelivery, a C-Check in accordance with Section 12.2(a) so that all Airframe inspections falling due within the next following 3,000 Flight Hours or Cycles of operation or 12 months (whichever shall be the most limiting) in accordance with the Approved Maintenance Program have been accomplished; (g) have had accomplished all outstanding airworthiness directives and mandatory orders affecting that model of Aircraft issued by the Aviation Authority and the FAA, and all mandatory service bulletins issued by the Manufacturer or Engine Manufacturer, that are due during the Term on a terminating action basis; airworthiness directives and mandatory orders that do not have a terminating action will be accomplished at the highest level of inspection or modification permitted; (h) no special or unique manufacturer inspection or check requirements specific to the Aircraft will exist unless there is no terminating action available from any source; (i) have installed all applicable vendor's and manufacturer's service bulletin kits received free of charge by Lessee that are appropriate for the Aircraft and, to the extent not installed, those kits retained by Lessee will be furnished free of charge to Lessor; (j) be free of any system-related leaks; (k) all fluid reservoirs (including fuel, oil, oxygen, hydraulic and water) will be full, and the waste tank serviced in accordance with the manufacturer's instructions; (l) all fuel tanks will have recently undergone an anti- fungus/biological growth contamination laboratory evaluation, and any excessive levels of contamination corrected; (m) have all signs and decals clean, secure and legible; and (n) shall be stripped of Lessee's livery, sanded and either painted white or painted in the livery of the next operator, as identified by Lessor (for this purpose, Lessor shall furnish the next operator's paint scheme and logo pounce pattern and shall pay Lessee for any incremental cost in connection with the next operator's livery), in either case in accordance with the SRM and the paint manufacturer's instructions and avoiding any overspray on other surfaces. 2. Parts ----- (a) Each life limited or hard time controlled Part, excluding Engine Parts, shall have not less than 12 months, 3,000 Flight Hours and 3,000 Cycles remaining to the next scheduled removal in accordance with the Approved Maintenance Program; (b) Each calendar limited Part (including hard time controlled Parts with calendar limits but excluding Engine Parts) will have at least 12 months remaining to its next scheduled removal or overhaul in accordance with the Approved Maintenance Program; and (c) Each "on-condition" and "condition monitored" Part will be serviceable in accordance with the Aviation Authority prescribed parameters. 3. Engines ------- (a) Each engine installed on the Aircraft shall be an Engine and (if not the engine installed at Delivery) shall, to the extent not previously provided to Lessor, be accompanied by all documentation Lessor may require to evidence that title thereto is properly vested in Lessor in accordance with Section 8.17. (b) Each Engine shall have at least 3,000 Cycles remaining until the next scheduled CER or LLP replacement under the Approved Maintenance Program; (c) No Engine shall be "on engineering watch", on a reduced interval inspection or otherwise have any defect that reduces the Flight Hours or Cycles (whichever is more limiting) of remaining life pursuant to Engine Manufacturer's or airworthiness requirements until overhaul to less than 3,000; and (d) Each Engine shall be in a condition that can operate at maximum rated take-off power at sea level with an E.G.T. margin of 15 (degrees)C. 4. Fuselage, Windows and Doors --------------------------- (a) The fuselage will not contain any dents, corrosion or abrasions that exceed the prescribed parameters under the SRM and shall be free of scab patches and loose, pulled or missing rivets. (b) The windows will not contain any delamination, blemishes or crazing that exceed the prescribed parameters under the Manufacturer's maintenance manual and will be properly sealed. (c) The doors will be free moving, correctly rigged and fitted with serviceable seals. 5. Wings and Empennage ------------------- (a) The leading edges will not contain any damage that exceeds the prescribed parameters under the SRM. (b) All unpainted cowlings and fairings will be polished. (c) All wings will be free of fuel leaks. 6. Interior -------- (a) The interior will be fully serviceable and in the configuration as at the Delivery Date. (b) All emergency equipment having a calendar life will have a minimum of one year or 100% of its total approved life remaining, whichever is less. (c) All curtains, carpets, seat covers and seat cushions will be clean and free from stains and worn out (threadbare) areas and will conform to FAR fire resistance regulations as applicable to an FAR Part 121 operator. 7. Cockpit ------- (a) All fairing panels shall be free of stains and cracks, clean, secure and repainted as necessary. (b) The windshields will not contain any delamination, blemishes or crazing that exceed the prescribed parameters under the Manufacturer's maintenance manual and will be properly sealed. (c) All floor coverings will be clean and effectively sealed. (d) All seat covers will be in good condition, clean and free of stains and will conform to FAR fire resistance regulations as applicable to an FAR Part 121 operator. (e) All seats will be serviceable, in good condition and repainted as necessary. 8. Cargo Compartments ------------------ (a) All panels will be in good condition and effectively sealed. (b) All nets will be in good condition. (c) The cargo compartments will comply with FAR fire resistance and containment regulations as applicable to an FAR Part 121 operator. 9. Landing Gear ------------ (a) The installed main and nose landing gear components and their associated actuators and parts will be in serviceable condition with no less than 3,000 Cycles or 12 months (whichever is the most limiting factor) remaining until the next scheduled overhaul or shop visit under the Approved Maintenance Program. (b) The tires and brakes will have 50% of the wear, as specified by the manufacturer as serviceable limits, remaining until next removal. (c) The landing gear and wheel wells will be clean, free of leaks and repaired as necessary. 10. APU --- (a) The APU shall be serviceable in accordance with the Approved Maintenance Program parameters. (b) The APU shall have not more than 1,500 Flight Hours of operation since its last hot section inspection. 11. Corrosion --------- (a) The Aircraft will be in compliance with the CPCP and will have been inspected and treated with respect to corrosion as required by the CPCP; and (b) Fuel tanks will be free from contamination and corrosion and the fuel tank treatment program that is part of the Approved Maintenance Program will be current. Schedule 4 -- Insurance Requirements 1. The Insurances required to be maintained are as follows: (a) HULL "ALL RISKS" of loss or damage while flying and on the ground with respect to the Aircraft for the Agreed Value and with a deductible not exceeding the Hull Insurance Deductible. (b) HULL WAR AND ALLIED PERILS, covering those war risks excluded from the Hull "All Risks" Policy to the extent such coverage is available from the leading international insurance markets, including confiscation and requisition by the State of Registration, for the Agreed Value; (c) "ALL RISKS" PROPERTY INSURANCE (INCLUDING WAR AND ALLIED RISK except when on the ground or in transit other than by air or sea) on all Engines and Parts when not installed on the Aircraft (to the extent not covered under the Aircraft hull insurances described in paragraphs (a) and (b) above), including Engine test and running risks, in an amount equal to replacement value in the case of the Engines; (d) AIRCRAFT THIRD PARTY, BODILY INJURY/PROPERTY DAMAGE, PASSENGER, BAGGAGE, CARGO AND MAIL AND AIRLINE GENERAL THIRD PARTY (INCLUDING PRODUCTS) LEGAL LIABILITY for a combined single limit (Bodily Injury/Property Damage) of an amount not less than the Minimum Liability Coverage for the time being in respect of any one occurrence (but, in respect of products liability, this limit may be an aggregate limit for any and all losses occurring during the currency of the policy, and in respect of liability arising out of certain offences, the limit (within the said combined single limit) may be $25,000,000 in respect of any one offence and in the aggregate, and cargo and mail legal liability may be subject to a limit of $1,000,000 any one occurrence); War and Allied Risks are also to be covered under the Policy to the extent available in the leading international insurance markets. The Minimum Liability Coverage may be adjusted upwards from time to time to such an amount as Lessor may be advised by its insurance brokers constitutes the standard Minimum Liability Coverage applicable to aircraft of the make, model and series as the Aircraft operating internationally by an airline similarly situated as Lessee. If Lessee disputes any such adjustment, the matter shall be referred to a reputable independent insurance broker appointed by Lessor, whose decision, acting as expert, shall be conclusive and binding on Lessee. 2. All required hull and spares insurance specified in Sections 1(a), 1(b) and 1(c) above, so far as it relates to the Aircraft, will: (a) provide that any loss will be settled with Lessee (who undertakes to consult with Lessor and any Mortgagee in regard thereto), and any claim that becomes payable on the basis of a Total Loss shall be paid in Dollars to Lessor (unless or until the Lessor notifies Lessee that said payments should be made to a Mortgagee) as sole loss payee up to the Agreed Value, and loss proceeds in excess of the Agreed Value shall be payable to Lessee, with any other claim being payable as may be necessary for the repair of the damage to which it relates; (b) if separate Hull "All Risks" and "War Risks" insurances are arranged, include a 50/50 provision in the terms of Lloyd's endorsement AVS103 or its equivalent; (c) confirm that the Insurers are not entitled to replace the Aircraft in the event of a Total Loss; and (d) conform to AVN67B except to the extent greater protection is afforded under any provision contained in section 9 of, or in this Schedule 4 to, the Agreement. 3. All required liability insurances specified in Section 1(d) above will: (a) include the Indemnitees as additional insureds for their respective rights and interests, warranted (each as to itself only) no operational interest; but the coverage provided will not include claims arising out of their legal liability as manufacturer, repairer or servicing agent of the aircraft or any part thereof; (b) include a severability of interest clause; (c) contain a provision confirming that the policy is primary without right of contribution and that the liability of the insurers will not be affected by any other insurance of which any Indemnitee or Lessee have the benefit; and (d) accept and insure the indemnity provisions of this Agreement to the extent of the risks covered by the relevant policy or policies. 4. All Insurances specified in Sections 1(a) through (d) above will: (a) be in accordance with normal industry practice of Persons operating similar aircraft in similar circumstances; (b) provide coverage on a worldwide basis subject to those territorial exclusions which are usual and customary for carriers similarly situated with Lessee in the case of War Risks and Allied Perils coverage which are advised to and approved by Lessor, such approval not to be unreasonably withheld; (c) acknowledge that the insurers are aware that the Aircraft is owned by Lessor and is subject to this Agreement; (d) provide that, in relation to the interests of each of the additional insureds, in accordance with AVN67B, the Insurances will not be invalidated by any act or omission of the Insured which results in a breach of any terms, conditions or warranty of the policies; (e) provide that the Insurers will waive any rights of recourse and/or subrogation against each additional assured to the same extent that Lessee has waived or has no rights of recovery against such additional assured in the Lease; (f) provide that the additional insureds will have no obligation or responsibility for the payment of any premiums (but reserve the right to pay the same should any of them elect to do so) and that the Insurers will waive any right of offset or counterclaim against the respective additional insureds other than for outstanding premiums in respect of the Aircraft, any Engine or Part; (g) provide that, except in the case of any provision for cancellation or automatic termination specified in the policies or endorsements thereof, the Insurance can only be canceled or materially altered in a manner adverse to the additional insureds by giving at least 30 days' written notice to Lessor and each Financing Party, except in the case of war risks (or radioactive contamination), for which seven days' written notice (or such lesser period as is or may be customarily available in respect thereof) will be given; and (h) include a services of suit clause. Schedule 5 -- Post-Delivery Modifications The Post-Delivery Modifications to be performed in accordance with Section 7.2 are as follows: 1. 2x Comm. transceiver with range 118-137 Mhz/ 8.33 Khz separation. 2. 2x FM imune NAV receiver / FM imunity upgrade. 3. B-RNAV navigation system. 4. ACAS II (TCAS II equipped with software version no. 7/TPA-81A TCAS processor-change 7 upgrade). 5. ELT automatic-portable + 'ELT automatic-fixed 406 Mhz 6. RUSM -modification in accordance with Boeing S/B ###-##-#### and Boeing 737 S/L -02015 Exhibit A -- Certificate of Acceptance Certificate of Acceptance This Certificate of Acceptance is delivered on the date set forth in paragraph 1 below by Air Slovakia BWJ, Ltd. (the "Lessee") to First Security Bank, National Association, not in its individual capacity but solely as owner trustee (the "Lessor") pursuant to Lease Agreement 21722, dated August __, 2000, between Lessor and Lessee (the "Agreement"). Capitalized terms used but not defined in this Certificate of Acceptance shall have the meaning given to such terms in the Agreement. 1. Details of Acceptance --------------------- Lessee hereby confirms to Lessor that Lessee has at __:__ _.m. G.M.T. on this _____ day of August 2000, at ____________________, Tucson, Arizona, accepted the following, in accordance with the provisions of the Agreement. (a) one Boeing Model 737-200A airframe, bearing manufacturer's serial number 21722 and registration mark _____; (b) two Pratt & Whitney Model JT8D-9A engines, bearing manufacturer's serial numbers ________ and ________; (c) all Parts installed on, attached to or appurtenant to the Airframe and Engines; and (d) the Aircraft Documents specified in Part 2 of Schedule 1 to the Agreement. 2. Lessee's Confirmation Lessee confirms to Lessor that as at the time --------------------- indicated above, being the time of Delivery: (a) Lessee's representations and warranties contained in Sections 2.1 and 2.2 of the Agreement are hereby repeated; (b) the Aircraft is insured as required by the Agreement; and (c) Lessee confirms that there have been affixed to the Aircraft and the Engines the fireproof notices required by the Agreement. (d) Lessee confirms that the Leased Property has been delivered in working order and is fit for the use specified in the Lease Agreement. 3. Lessor's Confirmation Lessor confirms to Lessee that, as at the time --------------------- indicated above, being the time of Delivery, Lessor's representations and warranties contained in Section 2.4 of the Agreement are hereby repeated. IN WITNESS WHEREOF Lessor and Lessee have executed this Certificate of - ------------------ Acceptance on the date set forth in Section 1 of this Certificate. SIGNED on behalf of ------ FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as owner trustee By:_______________________________ Name: Title: SIGNED on behalf of AIR SLOVAKIA BWJ, LTD. By:_______________________________ Name: Title: Exhibit B - Certificate of Delivery Condition Certificate of Delivery Condition This Certificate of Delivery Condition is delivered on August __, 2000 by Air Slovakia BWJ, Ltd. (the "Lessee") to First Security Bank, National Association, not in its individual capacity but solely as owner trustee (the "Lessor") pursuant to Lease Agreement 21722, dated August __, 2000, between Lessor and Lessee (the "Agreement"). Capitalized terms used but not defined in this Certificate of Delivery Condition shall have the meaning given to such terms in the Agreement. 1. Aircraft Acceptance: Lessee hereby confirms to Lessor that, pursuant to the Agreement, Lessee has accepted the Boeing Model 737-200A airframe bearing manufacturer's serial number 21722 and registration mark ______, together with the two Pratt & Whitney Model JT8D-9A aircraft engines bearing manufacturer's serial numbers ______ and _______, all Parts installed on, attached to or appurtenant to the Airframe and Engines and the Aircraft Documents, and Lessor and Lessee agree that such Airframe, Engines and Parts are in the condition set forth on the attached Annex 1. 2. Confirmation of Delivery Condition: Lessee confirms to Lessor that at the ---------------------------------- time of acceptance of the Leased Property, the Leased Property complied in all respects with the condition required at Delivery under Section 4.2 and Schedule 2 of the Agreement, except for the items (if any) listed on the attached Annex 2 (the "Discrepancies"). Lessor and Lessee agree that the Discrepancies (if any) shall be corrected as set forth on the attached Annex 2. IN WITNESS WHEREOF Lessor and Lessee have executed this Certificate of Delivery Condition on the date set forth at the beginning of this Certificate. SIGNED on behalf of SIGNED on behalf of FIRST SECURITY BANK, NATIONAL AIR SLOVAKIA BWJ, LTD. ASSOCIATION, not in its individual capacity but solely as owner trustee By:_______________________________ By:_______________________________ Name: Name: Title: Title: ANNEX 1 ------- MAINTENANCE STATUS AT DELIVERY ------------------------------ DATE: August __, 2000 AIRFRAME TIME: - ------------- Total Flight Hours: [_____] Total Cycles: [_____] AIRFRAME LIMITS: - --------------- Type of Check: C Check Check Interval: [_____] Time Since Last Check: [_____] ENGINE DATA: - ----------- Position: No.1 No.2 Model: JT8D-9A JT8D-9A Serial Numbers: [_____] [_____] Total Flight Hours: [_____] [_____] Total Cycles: [_____] [_____] Flight Hours Since Last CER: [_____] [_____] Cycles Since Last CER: [_____] [_____] Flight Hours to Next Hard Limit: [_____] [_____] Cycles to Next Hard Limit: [_____] [_____] APU: - --- Manufacturer: [_____] Model: [_____] Serial Number: [_____] Total Flight Hours: [_____] Total Cycles: [_____] Flight Hours Since Last CER: [_____] Cycles Since Last CER: [_____] Flight Hours Remaining on LLPs: [_____] Cycles Remaining on LLPs: [_____] LANDING GEAR LIMITS: Position: Nose Left Right Overhaul Interval: [_____] [_____] [_____] Time Since Overhaul: [_____] [_____] [_____] Time to Next Overhaul: [_____] [_____] [_____] ANNEX 2 ------- DISCREPANCIES ------------- Description of Discrepancy Agreed Corrective Action -------------------------- ------------------------ Exhibit C - Form of Letter of Credit [LETTERHEAD OF ISSUING BANK] IRREVOCABLE LETTER OF CREDIT ---------------------------- Current Date: ___________, 20__ Irrevocable Letter of Credit No. ___________ Re: Lease Agreement 21722, dated August __, 2000 between First Security Bank, National Association, as owner trustee, and Air Slovakia BWJ, Ltd. relating to the Boeing Model 737-200A aircraft bearing serial no. 21722 Expiration Date: ____________, 20__ First Security Bank, National Association, as owner trustee 79 South Main Street Salt Lake City, Utah 84111 U.S.A. Attention: Corporate Trust Department Ladies and Gentlemen: We hereby issue in your favor, at the request of and for the account of Air Slovakia BWJ, Ltd. ("Lessee"), this Irrevocable Letter of Credit No. ______ in the amount of ____________________________________ Dollars (US$________) (the "Stated Amount") available upon presentation in accordance with this Letter of Credit of (i) a Sight Draft drawn on us dated on or before the date of such presentation and in the form attached as Annex 1 and (ii) a Drawing Certificate dated the date of such draft in the form attached as Annex and signed by an individual being or purporting to be your authorized representative. Such presentation musts be made on a Banking Day to our offices at [insert address of Issuing Bank], Facsimile Number: [_________], confirming Telephone Number: [____________] on or before the Expiration Date set forth above or, if such date is not a Banking Day, then on or before the following Banking Day. "Banking Day" means a day other than a Saturday, a Sunday or a day on which banks are required or authorized to be closed in [City/State of Issuing Bank]. Any such presentation may be made by means of electronic facsimile transmission and we shall be entitled to rely thereon as if such draft and certificate were presented in person, provided such draft and certificate are in conformity with the requirements for the same as set forth herein, but for the requirement of an original signature. In addition, any draft and certificate hereunder may be presented by U.S. Mail, express courier (e.g., Federal Express or DHL) or in person at the address set forth above. A Sight Draft presented hereunder may be in an amount of up to the Stated Amount. More than one Sight Draft may be presented hereunder, provided the aggregate amount of such drafts shall not exceed the Stated Amount. We hereby agree that, to the extent that within five (5) calendar days of any drawing by you hereunder, such drawing is reimbursed in full to us by, or on behalf of, Lessee, including any banking charges, such drawing shall not be considered as a drawing hereunder for the purposes of, and only for such purposes, calculating the aggregate maximum amount of all drawings made hereunder. We hereby agree that each draft presented hereunder in compliance with the terms hereof will be duly honored by the amount of such draft in immediately available funds in United States dollars to the account specified on the sight draft: (a) not later than 3:00 p.m., [City of Issuing Bank] time, on the day such draft is presented to us as aforesaid, if such presentation is made to us at or before 12:00 noon, [City of Issuing Bank] time, or (b) not later than 3:00 p.m., [City of Issuing Bank] time, on the Business Day following the day such draft is presented to us as aforesaid, if such presentation is made to us after 12:00 noon, [City of Issuing Bank] time. Upon the earlier of (a) the Expiration Date set forth above or (b) irrevocable payment of the entire Stated Amount (in one or more drawings), this Letter of Credit shall automatically terminate. It is a condition of this Letter of Credit that it shall be deemed automatically extended without amendment for a period of one year from the Expiration Date and from each anniversary of the Expiration Date unless, 30 days prior to such date, we shall notify you in writing that we elect not to consider this Letter of Credit renewed for any such additional period. In the event that we notify you that we elect not to renew this Letter of Credit, a drawing can be made by you by presenting a sight draft and a certificate in the forms attached hereto. Except as otherwise provided herein, this Letter of Credit shall be governed by and construed in accordance with the Uniform Customs and Practice for Documentary Credits (1993 Revision), ICC Publication No. 500 (the "UCP"). Notwithstanding Article 17 of the UCP, if this Letter of Credit expires during an interruption of business as described in said Article 17, we agree to effect payment if a drawing is made against this Letter of Credit within 30 days after the resumption of business. Upon request, but no more than once in any 30 day period, we will confirm to you in writing that this Letter of Credit is in full force and effect and is enforceable against us in accordance with its terms. This Letter of Credit sets forth in full the terms of our undertaking and shall not in any way be modified, amended or amplified by reference to any documents, instruments or agreements referred to herein, or in which this Letter of Credit is referred to or to which this Letter of Credit relates, and any such reference shall not be deemed to incorporate herein by reference any such documents, instruments and agreements. This Letter of Credit may be transferred by you to any person and we will honor a drawing hereunder by such transferee. Communications with respect to this Letter of Credit shall be in writing, addressed to [name of Issuing Bank] at [address of Issuing Bank]. Attention: [___________], specifically referring to the number of this Letter of Credit, and if directed to you, shall be addressed to you at First Security Bank, National Association, as owner trustee, 79 South Main Street, Salt Lake City, Utah, U.S.A., Attention: Corporate Trust Department. All banking charges in connection with this Letter of Credit and any drawings made hereunder shall be for the account of Lessee. All payments made to you pursuant to this Letter of Credit shall be made free and clear of, and without deduction for, any present or future fees, taxes, restrictions or conditions of any nature, and without set off of counterclaim for any reasons whatsoever. We hereby confirm and engage with drawers, endorsers and bonafide holders of Sight Drafts drawn and in compliance with the terms of this Letter of Credit that the same shall be duly honored upon presentation and delivery of documents as specified at this office, if negotiated on/or before the expiration date of this letter of Credit. [ISSUING BANK] ________________________________ [Name] [Title] Annex 1 to Irrevocable Letter of Credit No. ______ SIGHT DRAFT Irrevocable Letter of Credit No. _______ Date of Draft: ________________ To the Order of First Security Bank, National Association, as owner trustee Pay _______________________________________ ($_____________) US DOLLARS At SIGHT by wire transfer of such amount to the account of First Security Bank, National Association, as owner trustee, at: First Security Bank, National Association 79 South Main Street Salt Lake City, Utah 84111 U.S.A. ABA Number: 124000012 Account Number: 051-0922115 for credit to account no. _______ Reference: Air Slovakia B737 s/n 21722 DRAWN UNDER IRREVOCABLE LETTER OF CREDIT NO. _________________. TO: [Name of Issuing Bank] [Address of Issuing Bank] FIRST SECURITY BANK, NATIONAL ASSOCIATION, as owner trustee By:_______________________________ Name: Title: [Endorse on back] Annex 2 to Irrevocable Letter of Credit No. ______ DRAWING CERTIFICATE Irrevocable Letter of Credit No. ___________ The undersigned, a duly authorized representative of First Security Bank, National Association, as owner trustee ("Beneficiary"), hereby certifies to [Issuing Bank](the "Bank") with reference to Irrevocable Letter of Credit No. _________ (the "Letter of Credit"), issued by the Bank in favor of Beneficiary, as follows: 1. Beneficiary is presenting a sight draft herewith to draw funds under the Letter of Credit in the amount of US$[____________]. 2. Demand for payment under the Letter of Credit is being made prior to the expiration thereof. 3. Either (a) an Event of Default has occurred and is continuing under and as defined in Lease Agreement 21722, dated August __, 2000, between Beneficiary and Air Slovakia BWJ, Ltd. ("Lessee"); or (b) the Letter of Credit expires within 30 days of the date hereof and Lessee has not as of the date hereof provided Beneficiary with evidence of a renewal or extension of the Letter of Credit or with a substitute Letter of Credit, in each case, in form and substance satisfactory to Beneficiary. IN WITNESS WHEREOF, Beneficiary has caused this Drawing Certificate and the accompanying Sight Draft to be executed as of the ____ day of _________, ____. FIRST SECURITY BANK, NATIONAL ASSOCIATION, as owner trustee By:________________________________ Name: Title: Exhibit D - Form of Legal Opinion [to be supplied] Exhibit E - Form of Deregistration Power of Attorney Irrevocable Power of Attorney By this Irrevocable Power of Attorney, Air Slovakia BWJ, Ltd. a company incorporated under the laws of Slovakia and having its registered office at ______________________________ (together with its successors and assigns, the "Lessee"), hereby irrevocably nominates and appoints First Security Bank, National Association, as owner trustee, having its principal place of business at 79 south Main Street, Salt Lake City, Utah 84111, U.S.A., acting alone and without the authorization of any other person, to be the Lessee's true and lawful attorney-in-fact (the "Lessor") so that the Lessor may take any of the following actions in the name of and for Lessee with respect to the Boeing 737- 200A airframe bearing manufacturer's serial no. 21722 and Slovakian registration mark ______, including the engines and any and all parts installed on or appurtenant to such airframe (collectively, the "Aircraft"), leased by the Lessor to the Lessee pursuant to Lease Agreement 21722, dated August __, 2000, between the Lessor and the Lessee (the "Lease"): 1. In the exercise of the rights of the Lessor under the Lease to recover the Aircraft from Lessee after termination of the Lease due to an Event of Default under the Lease or for termination of the Lease for any other reason, the Lessor may take all action, and may execute in the Lessee's name and for and on behalf of the Lessee any and all documents, applications and instruments, that may at any time be required in order to (a) cause the Aircraft to be repossessed by the Lessor, (b) cause the Aircraft to be deregistered from the register of aircraft maintained by the Civil Aviation Authority ("CAA"), (c) obtain any document (whether in the nature of an export license, certificate of airworthiness for export or otherwise) that is required for the purpose of canceling the registration of the Aircraft with the CAA and/or securing the export of the Aircraft from Slovakia, and (d) export the Aircraft after the expiration of the Lease. 2. Pursuant to the Lease, Lessee is maintaining all risk hull and war risk insurance and reinsurance covering the Aircraft, and the Lessor has been named loss payee on such insurance and reinsurance policies in the event of a total loss or constructive total loss of the Aircraft, in the event of damage to the Aircraft in excess of $100,000 or in the event of damage to the Aircraft while an "Event of Default" under the Lease has occurred and is continuing. The Lessor may take all action, and may execute in the Lessee's name and for and on behalf of the Lessee any and all documents, applications and instruments, including executing on behalf of the Lessee an appropriate form of discharge and release, that may at any time be required in order for the Lessor to collect such insurance proceeds or to adjust or settle any claim under such insurance policies. 3. In the exercise of the rights listed in paragraphs 1 and 2, the Lessor may take all such other actions and sign all such other documents as the Lessor considers necessary or appropriate in its absolute discretion. In connection with such documents, or in connection with any registrations or filings to which such documents are subject, the Lessor may represent the Lessee before and submit any such document, application or instrument to any applicable authorities, government department and agencies (including without limitation, the CAA) of Slovakia as shall be necessary to achieve the aforementioned purposes. 4. The Lessee hereby undertakes from time to time and at all times to indemnify the Lessor against all costs, claims, expenses and liabilities lawfully and reasonably incurred by such Lessor in connection with this Irrevocable Power of Lessor and, upon request, to ratify and confirm whatever the Lessor shall lawfully and reasonably do or cause to be done by virtue of this Irrevocable Power of Attorney. 5. The Lessee hereby grants to the Lessor the full power and authority to substitute and appoint in its place one or more attorney or attorneys to exercise for it as attorney or attorneys of the Lessee any or all the powers and authorities conferred on the Lessor by this Irrevocable Power of Attorney, and to revoke any such appointment from time to time and to substitute or appoint any other or others in the place of such attorney or attorneys, all as the Lessor shall from time to time deem appropriate. Any person, agency or company relying upon this Irrevocable Power of Attorney need not and will not make any determination or require any court judgment as to whether an "Event of Default" has occurred under the Lease or whether the Lease has been terminated. Lessee hereby waives any claims against (i) any person acting on the instructions given by Lessor or its designee pursuant to this Irrevocable Power of Attorney and (ii) any person designated by Lessor or an officer of Lessor to give instructions pursuant to this Irrevocable Power of Attorney. Lessee also agrees to indemnify and hold harmless any person, agency or company that may act in reliance upon this Irrevocable Power of Attorney and pursuant to instructions given by Lessor or its designee. This Power of Attorney is given as security by the Lessee for the performance of its obligations under the Lease. This Power of Attorney is irrevocable and coupled with an interest. Lessee hereby represents, warrants and covenants that this Irrevocable Power of Attorney is irrevocably granted to the Lessor, and constitutes the legal, valid and irrevocably binding obligation of the Lessee, enforceable against the Lessee in accordance with its terms. This Power of Attorney shall be governed by the laws of Slovakia. IN WITNESS WHEREOF, AIR SLOVAKIA BWJ, Ltd. has executed and delivered this Irrevocable Power of Attorney this ____ day of August 2000. AIR SLOVAKIA BWJ, INC. By:________________________________ Name: Title: Exhibit F - Form of Monthly Status Report Monthly Status Report AIRCRAFT TYPE REG. MARK SERIAL NO. MONTH ENDING --------- ---------- ------------ Boeing 737-200A 21722 .......... 1. AIRCRAFT UTILIZATION: -------------------- (a) Airframe Total Flight Hours ........... (b) Airframe Total Cycles ........... (c) Airframe Flight Hours for Month ........... (d) Airframe Cycles for Month ........... (e) Airframe Flight Hours since Overhaul ........... (f) Airframe Cycles since Overhaul ........... (g) Airframe Flight Hours since C-Check ........... (h) Airframe Cycles since C-Check ........... 2. POWERPLANT STATUS: No.1 No.2 ----------------------- (a) Serial Nos. of Delivered Engines (b) Serial Nos. of Replacement Engines .......... .......... (if applicable) (c) Serial Nos. of Installed Engines .......... .......... (if different from (a) or (b) above) (d) Current Location of Delivered or .......... .......... Replacement Engines (as applicable) (if not installed on Airframe) (e) Total Time Since New of Delivered .......... ......... or Replacement Engines (as applicable) (f) Total Cycles Since New of Delivered .......... ......... or Replacement Engines (as applicable) (g) Total Time Since Last Service .......... ......... (h) Total Cycles Since Last Service .......... ......... (i) Flight Hours to Limiter .......... ......... (j) Cycles to Limiter .......... ......... (k) Limiter .......... ......... (l) Total Flight Hours for the Month for .......... ......... each Delivered or Replacement Engine (as applicable) (m) Total Cycles for the Month for each .......... ......... Delivered or Replacement Engine (as applicable) (n) Serial No. of Delivered APU [________] (o) Serial No. of Replacement APU .......... (if applicable) (p) Serial No. of Installed APU .......... (if different from (a) or (b) above) (q) Current Location of Delivered or ............. Replacement APU (as applicable) (if not installed on Airframe) (r) Total Time Since New of Delivered ............. or Replacement APU (as applicable) (s) Total Cycles Since New of Delivered ............. or Replacement APU (as applicable) (t) Total Hours for the Month for ............. Delivered or Replacement APU (as applicable) (u) Total Cycles for the Month for ............. Delivered or Replacement APU (as applicable) 3. ROUTINE CHECKS / A.D. AND S.B. COMPLIANCE: ----------------------------------------- (a) Routine Checks (A and above) performed during Month: (b) Airworthiness Directives complied with during Month: (c) Service Bulletins complied with during Month: 4. AIRCRAFT DAMAGE OR ENGINE CHANGES: --------------------------------- Details of any repairs carried out to the Aircraft beyond SRM limits and Engine changes, giving reasons for repair or change: 5. UPCOMING MAINTENANCE CHECKS (a) Maintenance Checks (C-Check or segment and above) scheduled or expected to be performed on the Airframe during the next 12 months: (b) Scheduled shop visits or heavy maintenance visits scheduled or expected to be performed on the Engines during the next 12 months: (c) Overhauls, or replacements scheduled or expected to be performed on the APU or Landing Gear during the next 12 months: Date: ___________, ____ Certified for and on Behalf of AIR SLOVAKIA BWJ, LTD. By:_______________________________ Name: Title: EX-99.K 10 0010.txt EXHIBIT 99.K ================================================================================ THIS LEASE AGREEMENT HAS BEEN EXECUTED IN SEVERAL COUNTERPARTS. TO THE EXTENT, IF ANY, THAT THIS LEASE AGREEMENT CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION), NO SECURITY INTEREST IN THIS LEASE AGREEMENT MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE ORIGINAL EXECUTED COUNTERPART CONTAINING THE RECEIPT EXECUTED BY LESSOR OR, IF LESSOR HAS ASSIGNED ITS RIGHTS TO A THIRD PARTY IN ACCORDANCE WITH THIS LEASE AGREEMENT, SUCH THIRD PARTY ON THE SIGNATURE PAGE OF THIS LEASE AGREEMENT. - -------------------------------------------------------------------------------- LEASE AGREEMENT dated September 7, 2000 between INVESTORS ASSET HOLDING CORP., as owner trustee (Lessor) - and - AEROVIAS de MEXICO, S.A. de C.V. (Lessee) ___________________________________ - relating to - Boeing/McDonnell Douglas MD-82 Manufacturer's Serial No: 49150 U.S. Registration No.: N491SH _____________________________________ Steel Hector & Davis LLP 200 S. Biscayne Boulevard Miami, Florida 33131-2398 ================================================================================ TABLE OF CONTENTS
Clause Page 1. DEFINITIONS and INTERPRETATION............................ 1 1.1 Definitions............................................... 1 1.2 Interpretation............................................ 13 2. REPRESENTATIONS and WARRANTIES............................ 14 2.1. Lessee's Representations and Warranties................... 14 2.2. Lessee's Further Representations and Warranties........... 15 2.3. Repetition................................................ 17 2.4. Trustee's Representations and Warranties.................. 17 2.5. Lessor's Representations and Warranties................... 17 2.6. Repetition................................................ 18 3. CONDITIONS PRECEDENT...................................... 18 3.1. Lessor's Documentary Conditions Precedent................. 18 3.2. Lessor's Other Conditions Precedent....................... 20 3.3. Lessor's Waiver........................................... 20 3.4. Lessee's Conditions Precedent............................. 20 4. COMMENCEMENT.............................................. 21 4.1. Leasing................................................... 21 4.2. Delivery.................................................. 21 4.3. Delivery Inspection....................................... 22 4.4. Acceptance and Risk....................................... 22 5. PAYMENTS.................................................. 22 5.1. Rental Periods............................................ 22 5.2. Basic Rent................................................ 23 5.3. Extension Option.......................................... 23 5.4. Payments.................................................. 23 5.5. Gross-up.................................................. 23 5.6. Taxation.................................................. 24 5.7. Information............................................... 25 5.8. Taxation of Indemnity Payments............................ 26 5.9. Default Interest.......................................... 27 5.10. Contest................................................... 27 5.11. Verification.............................................. 29 5.12. Forms..................................................... 30
i 5.13. Absolute.................................................. 30 5.14. Deposit................................................... 31 6. MANUFACTURER'S WARRANTIES................................. 32 6.1. Assignment................................................ 32 6.2. Proceeds.................................................. 32 6.3. Parts..................................................... 33 6.4. Agreement................................................. 33 7. LESSOR'S COVENANTS and DISCLAIMERS........................ 33 7.1. Quiet Enjoyment........................................... 33 7.2. Registration and Filings.................................. 33 7.3. Exclusion................................................. 34 7.4. Lessee's Waiver........................................... 34 7.5. Adverse Tax Change........................................ 35 7.6. Lessee's Confirmation..................................... 35 7.7. Lessor Contribution....................................... 35 8. LESSEE'S COVENANTS........................................ 35 8.1. Duration.................................................. 35 8.2. Information............................................... 36 8.3. Lawful and Safe Operation................................. 37 8.4. Taxes and Other Charges................................... 39 8.5. Sub-Leasing............................................... 40 8.6. Inspection................................................ 42 8.7. Protection of Title....................................... 42 8.8. General................................................... 44 8.9. Records................................................... 45 8.10. Registration and Filings.................................. 45 8.11. Maintenance and Repair.................................... 46 8.12. Removal of Engines and Parts.............................. 48 8.13. Installation of Engines and Parts......................... 48 8.14. Non-Installed Engines and Parts........................... 50 8.15. Pooling of Engines and Parts.............................. 50 8.16. Equipment Changes......................................... 51 8.17. Title to Parts............................................ 52 8.18. Third Parties............................................. 52 9. INSURANCE................................................. 52 9.1. Insurances................................................ 52 9.2. Requirements.............................................. 53
ii 9.3. Insurance Covenants....................................... 53 9.4. Failure to Insure......................................... 55 9.5. Continuing Indemnity...................................... 56 9.6. Application of Insurance Proceeds......................... 56 9.7. Additional Insurance...................................... 57 10. INDEMNITY................................................. 57 10.1. General................................................... 57 10.2. Mitigation................................................ 58 10.3. Duration.................................................. 59 11. EVENTS OF LOSS............................................ 60 11.1. Total Loss................................................ 60 11.2. Requisition............................................... 61 12. RETURN OF AIRCRAFT........................................ 62 12.1. Redelivery................................................ 62 12.2. Final Checks.............................................. 62 12.3. Final Inspection.......................................... 64 12.4. Non-Compliance............................................ 65 12.5. Export Documentation...................................... 65 12.6. Acknowledgment............................................ 65 13. DEFAULT................................................... 66 13.1. Events.................................................... 66 13.2. Rights.................................................... 70 13.3. Repossession and Removal.................................. 70 13.4. Default Payments.......................................... 70 14. ASSIGNMENT and TRANSFER................................... 71 14.1. No Assignment by Lessee................................... 71 14.2. Lessor Assignment......................................... 72 14.3. Grants of Security Interests.............................. 74 14.4. Sale and Leaseback by Lessor.............................. 75 14.5. Further Acknowledgments................................... 76 14.6. Certain Protections for Lessee's Benefit.................. 76 15. MISCELLANEOUS............................................. 76 15.1. Waivers; Remedies Cumulative.............................. 76 15.2. Delegation................................................ 77 15.3. Certificates.............................................. 77
iii 15.4. Appropriation............................................. 77 15.5. Currency Indemnity........................................ 77 15.6. Severability.............................................. 78 15.7. Remedy.................................................... 78 15.8. Expenses.................................................. 78 15.9. Time of Essence........................................... 78 15.10.Notices................................................... 78 15.11.Law and Jurisdiction...................................... 79 15.12.Sole and Entire Agreement................................. 81 15.13.Indemnities............................................... 81 15.14.Counterparts.............................................. 81 15.15.Confidentiality........................................... 81 SCHEDULE 1 -- TERMINATION VALUE 85 SCHEDULE 2 -- DESCRIPTION OF AIRCRAFT 87 SCHEDULE 3 -- CERTIFICATE OF ACCEPTANCE 89 SCHEDULE 4 -- CONDITION AT DELIVERY 93 SCHEDULE 5 -- OPERATING CONDITION AT REDELIVERY 95 SCHEDULE 6 -- INSURANCE PROVISIONS 103 SCHEDULE 7 -- FORM OF LEGAL OPINION 109 SCHEDULE 8 -- FORM OF MONTHLY STATUS REPORT 110 SCHEDULE 9 -- BASIC RENT, DEPOSIT AND AGREED VALUE 113 SCHEDULE 9-A -- FORM OF LETTER OF CREDIT 115
iv LEASE AGREEMENT This LEASE AGREEMENT, dated September 7, 2000 (this "Agreement"), is between Investors Asset Holding Corp., a Massachusetts corporation, not in its individual capacity except as set forth in this Agreement but as owner trustee pursuant to the Trust Agreement (the "Lessor"), and Aerovias de Mexico, S.A. de C.V., a corporation formed under the laws of Mexico (the "Lessee"). RECITALS: (A) Aircraft is owned by Lessor and is subject to (1) an Aircraft Chattel Mortgage and Security Agreement [49150], dated as of July 21, 2000 (the "Senior Mortgage"), between Lessor, as mortgagor, and CL/PK Funding Trust, a Delaware business trust (the "Senior Mortgagee"), as mortgagee, and (2) a Second Priority Aircraft Chattel Mortgage and Security Agreement [49150], dated as of July 21, 2000 (the "Junior Mortgage"), between Lessor, as mortgagor, and PK AirFinance S.A., New York Branch, a societe anonyme organized and existing under the laws of the Grand Duchy of Luxembourg acting through its New York branch (the "Junior Mortgagee"), as mortgagee. (B) Lessor and Lessee wish to provide for the leasing of the Aircraft to the Lessee upon and subject to the covenants, terms and conditions set out in this Agreement. In consideration of the foregoing and for other good and valuable consideration whose receipt and sufficiency Lessor and Lessee hereby acknowledge, Lessor and Lessee agree as follows: 1. DEFINITIONS and INTERPRETATION ------------------------------ 1.1 Definitions ----------- In this Agreement the following expressions shall, unless the context otherwise requires, have the following respective meanings: Affiliate means, in relation to any Person, any other Person controlled directly or indirectly by that Person, any other Person that controls directly or indirectly that Person or any other Person under common control with that Person. For this purpose "control" of any Person means ownership of a majority of the voting power of the Person. Agreed Maintenance Performer means the Lessee or any other reputable maintenance organization that is experienced in maintaining aircraft and/or engines of the same type as the Aircraft and the Engines, and duly certificated by the Aviation Authority. -1- Agreed Maintenance Program means the Lessee's current Maintenance Program (which includes the adoption of MSG-3) as the same may be amended from time to time with the approval of the Aviation Authority. Agreed Value means on any date the amount set forth for such date in Schedule 9. Agreement has the meaning specified in the preamble. Aircraft means the aircraft described in Part 1 of Schedule 2 (which term includes, where the context admits, a separate reference to all Engines, Parts and Aircraft Documents). Aircraft Documents means the documents, data and records identified in Part 2 of Schedule 2 and all additions, renewals, revisions and replacements from time to time made in accordance with this Agreement. Airframe means the Aircraft, excluding the Engines and the Aircraft Documents. APU means (i) the auxiliary power unit listed in Schedule 2, (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 the Lessor in accordance with the terms of Clause 8.17(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 Agreement. Appraisal Procedure means shall mean, with respect to any amount to be determined, the amount mutually agreed by Lessor and Lessee or, if Lessor and Lessee are unable to agree upon any such amount to be determined, the average of the amounts determined by three FAA-approved service centers in the continental United States, one such service center appointed by Lessor, one by Lessee and one by their appointed service centers, except that if any party fails to appoint a service center within thirty (30) days of receipt of written notification from the other party that it has named a service center, the Manufacturer or Engine Manufacturer (whichever is appropriate) shall be deemed appointed. Aviation Authority means the FAA or, if the State of Registration ceases to be the United States of America, the Person and/or Government Entity which, under the laws of the State of Registration, from time to time (a) has control or supervision of civil aviation; or (b) has jurisdiction over registration, airworthiness or operation of the Aircraft. Bankruptcy Laws has the meaning specified in Clause 13.1. -2- Basic Rent means all amounts payable pursuant to Clause 5.2. Business Day means a day (other than a Saturday or Sunday) on which banks are open for business in Mexico City (D.F.), Mexico, New York, New York, and Boston, Massachusetts. Certificate of Acceptance means a certificate in the form of Schedule 3 to be completed and executed by the Lessee on Delivery. Cintra Group Airline means any airline, duly certificated by the aviation authority in its jurisdiction of incorporation, owned or controlled by or under common control with Cintra, S.A. de C.V., a Mexican corporation, or any of its Subsidiaries. Claim has the meaning specified in Clause 10.1. CPCP has the meaning specified in Clause 12.2. Cycle means one take-off and landing of an airframe. Damage Notification Threshold means $500,000. Default means any Event of Default and any event which with the giving of notice, lapse of time, determination of materiality or fulfillment of other condition or any combination of the foregoing would constitute an Event of Default. Default Rate has the meaning specified in Clause 5.10. Delivery means the delivery of the Aircraft to the Lessee in accordance with the terms of this Agreement. Delivery Date means the date of the Acceptance Certificate. Delivery Location means a mutually agreed location in the State of Arizona, U.S.A. or any other location mutually agreed by Lessor and Lessee. Deposit means the amount, or other security, set forth or specified in Schedule 9. DGAC means the Direccion General de Aeronautica Civil of the Secretaria de Comunicaciones y Transportes of Mexico. Dollars and $ means the lawful currency of the United States of America. -3- Engine means whether or not installed on the Aircraft: (a) each engine of the manufacture, model and serial number specified in Part 1 of Schedule 2, title to which shall belong to the Lessor; or (b) any engine which replaces that engine, title to which passes to the Lessor in accordance with Clause 8.17(a); and in each case includes all modules and Parts from time to time belonging to, installed in or appurtenant to that engine but excludes any engine replaced in accordance with Clause 8.13(a) title to which has, or should have, passed to the Lessee in accordance with Clause 8.17(c) pursuant to this Agreement. Engine Loss means the occurrence of any of the events referred to in the definition of "Total Loss" but with the references therein to "Airframe" being construed as references to an Engine. Engine Loss Date means the relevant date determined in accordance with the definition of "Total Loss Date" as if that definition applied to an Engine Loss. Engine Manufacturer means the Pratt & Whitney Division of United Technologies Corporation. Event of Default means an event specified in Clause 13.1. Expiry Date means the day preceding the numerically corresponding day forty-eight (48) months after the later of the Delivery Date or September 1, 2000, or, if the extension option has been elected by Lessee pursuant to Clause 5.3, sixty (60) months after the later of the Delivery Date or September 1, 2000, whichever is appropriate, or if earlier the date on which: (a) the Aircraft has been redelivered in accordance with this Agreement and all outstanding obligations of Lessee have been satisfied; or (b) the Lessor receives the Agreed Value following a Total Loss and any other amounts then due and owing in accordance with this Agreement. FAA means the United States Federal Aviation Administration of the Department of Transportation or any Person or Government Entity succeeding to the functions thereof. -4- FAR means the Federal Aviation Regulations for the time being in force, issued by the FAA pursuant to the Federal Aviation Law and published in Title 14 of the Code of Federal Regulations. Federal Aviation Law means Title 49 of the United States Code, as amended, or any successor statutory provisions and the regulations promulgated under such provisions. Financial Indebtedness means any indebtedness in respect of (a) moneys borrowed, (b) any liability under any debenture, bond, note, loan stock, acceptance credit, documentary credit or other security, (c) the acquisition cost of any asset to the extent payable before or after the time of acquisition or possession, (d) the capitalized value (determined in accordance with accounting practices generally accepted in the State of Incorporation) of obligations under finance leases, or (e) any guarantee, indemnity or similar assurance against financial loss of any Person in respect of the above. Flight Hour means each hour or part thereof (rounded up to two decimal places) elapsing from the moment the wheels of an airframe leave the ground on take off until the moment the wheels of such airframe next touch the ground. Government Entity means (a) any national government, political subdivision thereof or local jurisdiction therein, (b) any instrumentality, board, commission, court, or agency of any thereof, however constituted, and (c) any association, organization, or institution of which any of the above is a member or to whose jurisdiction any thereof is subject or in whose activities any of the above is a participant. Habitual Base means Mexico or, subject to the prior written consent of the Lessor (which will not be unreasonably withheld), any other country or countries in which the Aircraft is for the time being habitually based. Head Lease has the meaning specified in Clause 14.4. Head Lessor has the meaning specified in Clause 14.4. IATA means the International Air Transport Association. Indemnitees means Lessor, Trustee, any Lessor Lender, any Owner Participant, any successors and permitted assigns of Lessor, Trustee or Owner Participant and their respective shareholders, members, Affiliates, partners, contractors, directors, managers, officers, servants, agents and employees. -5- Landing Gear means the landing gear assembly of the Aircraft excluding the wheels and brake units. Lessee has the meaning specified in the preamble. Lessor has the meaning specified in the preamble. Lessor Contribution has the meaning specified in Clause 7.7. Lessor Lender means: (i) the Senior Mortgagee, CL/PK Funding Trust, and any other lender for whom the Senior Mortgagee acts as security agent under the Senior Mortgage and related loan documents, and PK AirFinance S.A., New York Branch as servicer on behalf of CL/PK Funding Trust; (ii) the Junior Mortgagee, PK AirFinance S.A., New York Branch, and any other lender for whom Junior Mortgagee acts as security agent under the Junior Mortgage and related loan documents; (iii) any other Person to whom Lessor or Owner Participant grants a Mortgage for the purpose of any financing or refinancing to be accomplished by Lessor, any Owner Participant or any Affiliate thereof, and any Person that lends money to Lessor and for whom a Mortgagee holds a Mortgage; and (iv) the successors and permitted assigns of such Persons. Lessor Lien means any Security Interest from time to time created by or arising through the Lessor, the Trustee or the Owner Participant that results from acts or omissions of, or claims against, the Lessor, the Trustee or the Owner Participant not related to the operation of the Aircraft during the Term or the transactions contemplated by or permitted under this Agreement, and any Security Interest in respect of the Aircraft for Lessor Taxes. Lessor Taxes means: (a) Taxes imposed or to the extent increased as a direct result of the incorporation, residence, presence or activities of the Lessor, Trustee, each Lessor Lender or Owner Participant, as the case may be, in the jurisdictions imposing the liability unrelated to the Lessor's, Trustee's, Lessor Lenders' or Owner Participant's dealings with the Lessee pursuant to this Agreement or to the transactions contemplated by this Agreement or the operation of the Aircraft by the Lessee; (b) Taxes imposed on the gross or net income, profits, receipts, capital, franchises, excess profit or conduct of business or gains of the Lessor, Trustee, a Lessor Lender or Owner Participant, as the case may be, (i) by any Government Entity in the jurisdiction in which such Lessor, Trustee, Lessor Lender or Owner Participant, as the case may be, is organized or incorporated -6- or in which it has its principal place of business, or (ii) by any Government Entity in any other jurisdiction where the Lessor, Trustee, a Lessor Lender or Owner Participant, as the case may be, is liable for such Taxes other than as a result of the transactions contemplated by this Agreement; (c) Taxes imposed with respect to any period commencing or event occurring before the date of this Agreement or after the Expiry Date and unrelated to the Lessor's, Trustee's, a Lessor Lender's or Owner Participant's, as the case may be, dealings with the Lessee pursuant to this Agreement or to the transactions contemplated by this Agreement during such period; (d) Taxes imposed as a direct result of the initial sale of the Aircraft to the Lessor or as a result of the sale or other disposition by the Lessor, the Trustee, a Lessor Lender or the Owner Participant, as the case may be, of all or a portion of its interest in the Aircraft or this Agreement or any interest in the Lessor, unless such sale or disposition occurs as a consequence of the exercise of remedies following an Event of Default; (e) Taxes attributable to the failure of the Lessor, Trustee, a Lessor Lender or Owner Participant, as the case may be, to provide any forms or certificates reasonably requested by the Lessee; (f) Taxes imposed on any Lessor's, Trustee's, a Lessor Lender's or Owner Participant's, as the case may be, assignee (i) if such Tax would not have been imposed on the Lessor, Trustee, Lessor Lender or Owner Participant, as the case may be, or (ii) to the extent such Tax exceeds the Tax that would have been imposed on the Lessor, Trustee, Lessor Lender or Owner Participant, as the case may be; (g) Taxes attributable to the failure of the Lessor, Trustee, a Lessor Lender or Owner Participant, as the case may be, to comply with certification, information or reporting requirements or to file proper, accurate and timely reports or returns to avail itself of any applicable extensions or exemptions in (i) their respective state of incorporation or the state of their respective principal place of business or any other jurisdiction in which the relevant Indemnitee would be subject to taxation with respect to its net income other than in connection with this transaction and, or (ii) such other jurisdictions as Lessee may advise; (h) Taxes imposed in the nature of an intangible or similar tax upon or with respect to the value of an interest of the Lessor, Trustee, a Lessor Lender or -7- Owner Participant, as the case may be, in the Aircraft, Airframe, Engine or any Part thereof, or in the Agreement, except to the extent such Taxes arise in any jurisdiction as a result of the use or operation of the Aircraft or the activities of the Lessee in such taxing jurisdiction; (i) Taxes which arise out of or are caused by (i) the breach of any representation, warranty or covenant of such Lessor, Trustee, Lessor Lender or Owner Participant, as the case may be, (ii) any act or omission of the Lessor, Trustee, a Lessor Lender or Owner Participant, as the case may be, prohibited by this Agreement, (iii) the gross negligence or willful misconduct of such Lessor, Trustee, Lessor Lender or Owner Participant, or (iv) the existence of any Lessor Liens; and (j) Taxes imposed as a result of any financing or refinancing of the Aircraft undertaken by the Lessor, Trustee, a Lessor Lender or Owner Participant. Maintenance Program means an FAA or Aviation Authority approved maintenance program for the Aircraft encompassing scheduled maintenance, condition monitored maintenance and/or on-condition maintenance of Airframe, Engines and Parts, including servicing, testing, preventative maintenance, repairs, structural inspections, system checks, overhauls, approved modifications, service bulletins, engineering orders, airworthiness directives, corrosion control, inspections and treatments. Major Checks means each of the MSG-3 packages P-1 through P-6, inclusive, as set out in the Agreed Maintenance Program, and any other heavy maintenance visit or segment thereof suggested for commercial aircraft of the same model as the Aircraft by its Manufacturer. Manufacturer means (i) The Boeing Company, as successor by acquisition to McDonnell Douglas Corporation, and (ii) prior to such acquisition, McDonnell Douglas Corporation . Mexican GAAP means generally accepted accounting principles as in effect from time to time in Mexico and, subject to changes in such principles from time to time, consistently applied in accordance with the past practices of a Person. Mexico means the United Mexican States. Minimum Liability Coverage means $750,000,000 combined single limit. Mortgage has the meaning specified in Clause 14.3. Mortgagee has the meaning specified in Clause 14.3. -8- MSG-3 means The Boeing Company's "MSG-3" Maintenance Program. Owner Participant means, individually or collectively, as the case may require, each of Airfund International Limited Partnership, a Massachusetts limited partnership, Airfund II International Limited Partnership, a Massachusetts limited partnership, American Income Fund I-C, a Massachusetts limited partnership, American Income Fund I-D, a Massachusetts limited partnership, and American Income Fund I-E, a Massachusetts limited partnership, in each case having an address c/o Equis Financial Group, 200 Nyala Farms, Westport, CT 06880, Attention: Mr. James Coyne, Telefax No.: +1-203-341-9988. Part means, whether or not installed on the Aircraft: (a) any component, furnishing or equipment (other than a complete Engine) furnished with, installed on or appurtenant to the Airframe and Engines on Delivery; and (b) any other component, furnishing or equipment (other than a complete Engine) title to which has, or should have, passed to the Lessor pursuant to Clause 8.17(a), but excludes any such items title to which has, or should have, passed to the Lessee pursuant to Clause 8.17(c). Permitted Lien means: (a) any Security Interest for Taxes not assessed or, if assessed, not yet due and payable, or being contested in good faith by appropriate proceedings; (b) any Security Interest of a repairer, mechanic, carrier, hangar keeper, unpaid seller or other similar lien arising in the ordinary course of business or by operation of law in respect of obligations which are not overdue in accordance with applicable law (or, if applicable, generally accepted accounting principles and practices in the relevant jurisdiction) or are being contested in good faith by appropriate proceedings; (c) any Lessor Lien; (d) the respective rights of the Lessor and the Lessee as herein provided (including such rights with respect to Subleases permitted hereunder); -9- (e) any other Security Interest with respect to which Lessee shall have provided a bond or other security in an amount and under terms reasonably satisfactory to Lessor (as evidenced by Lessor's prior written consent thereto); and (f) Security Interests arising out of any judgment or award against the Lessee that is, within 60 days after entry, discharged, vacated or appealed, with execution stayed pending appeal; but only if, in the case of (a) and (b): (i) adequate reserves have been provided by the Lessee for the payment of the Taxes or obligations in accordance with generally accounting principles and practices in the relevant jurisdiction; and (ii) such proceedings, or the continued existence of the Security Interest, do not give rise to any reasonable likelihood of the sale, forfeiture or other loss of the Aircraft or any interest therein or of criminal liability on the Lessor. Person means any individual person, corporation, partnership, limited liability company, firm, joint stock company, joint venture, trust, estate, unincorporated organization, association, Government Entity or organization or association of which any of the above is a member or a participant. Redelivery Credit means the net amount, if any, determined to be payable by Lessor and due to Lessee pursuant to Schedule 5 after the return of the Aircraft and the due performance of all other obligations then due in accordance with this Agreement. Redelivery Location means Mexico City International Airport, or such other airport in the continental United States of America as may be specified by Lessor. Rent means collectively, all Basic Rent and all Supplemental Rent. Rental Period means each period ascertained in accordance with Clause 5.1. Rent Date means the Delivery Date and the day after the last day of each Rental Period during the Term. Security Interest means any mortgage, charge, pledge, lien, assignment, hypothecation, right of set-off, or any agreement or arrangement having the effect of creating a security interest, other than a Permitted Lien. Settlement Date has the meaning specified in Clause 11.1. SRM has the meaning specified in Clause 12.2. -10- State of Incorporation means Mexico. State of Registration means United States of America. Subsequent Investment means each payment made or to be made by or on behalf of the Lessor after the Delivery Date pursuant to Clause 7.7 or Schedule 10. Subsidiary means: (a) in relation to any reference to financial statements, any company whose financial statements are consolidated with the financial statements of the Lessee in accordance with accounting principles generally accepted under accounting standards of the State of Incorporation; and (b) for any other purpose, an entity from time to time (i) of which another has direct or indirect control or owns directly or indirectly more than 50% of the voting share capital, or (ii) which is a direct or indirect subsidiary of another under the laws of the jurisdiction of its incorporation. Successor has the meaning specified in Clause 8.8. Supplemental Rent means all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees to pay under this Agreement to Lessor or any other Person, including payment of indemnities, Agreed Value and Termination Value. Taxes means all present and future taxes, levies, imposts, duties or charges in the nature of taxes, whatever and wherever imposed, including customs duties, value added taxes or similar taxes and any franchise, transfer, sales, use, asset, business, occupation, excise, personal property, stamp, income or other tax or duty imposed by any national or local taxing or fiscal authority or agency, together with any penalties, additions to tax, fines or interest thereon. Term means the period commencing on the Delivery Date and ending on the Expiry Date. Termination Value means on any date the amount set forth for such date in Schedule 1. Total Loss means with respect to the Airframe: (a) the actual, arranged or constructive total loss of the Airframe (including any damage to the Airframe which results in an insurance settlement on the basis -11- of a total loss, or requisition for use or hire which results in an insurance settlement on the basis of a total loss); (b) the Airframe being destroyed, damaged beyond repair or permanently rendered unfit for normal use for any reason whatsoever; (c) the requisition of title, or other compulsory acquisition, capture, seizure, deprivation, confiscation or detention (for a period in excess of 120 days) for any reason of the Airframe by any Government Entity (whether de jure or de facto), but excluding requisition for use or hire not involving requisition of title; or (d) the hi-jacking, theft, condemnation, confiscation, seizure or requisition for use or hire of the Airframe which deprives any Person permitted by this Agreement to have possession and/or use of the Airframe of its possession and/or use for more than 120 consecutive days. Total Loss Date means: (a) in the case of an actual total loss, the actual date on which the loss occurs or, if such date is unknown, the day on which the Aircraft was last heard of; (b) in the case of any of the events described in sub-paragraph (a) of the definition of "Total Loss" (other than an actual total loss), the earlier of (i) 30 days after the date on which notice claiming such total loss is given to the relevant insurers, and (ii) the date on which such loss is admitted or compromised by the insurers; (c) in the case of any of the events described in sub-paragraph (b) of the definition of "Total Loss", the date on which such destruction, damage or rendering unfit occurs; (d) in the case of any of the events described in sub-paragraph (c) of the definition of "Total Loss", the date on which the relevant requisition of title or other compulsory acquisition, capture, seizure, deprivation, confiscation or detention occurs; (e) in the case of any of the events described in sub-paragraph (d) of the definition of "Total Loss", the expiry of the period of 120 days referred to in such sub-paragraph (d); -12- and, in each case (other than an actual Total Loss), the Total Loss shall be deemed to have occurred at noon New York City time on such date. Transfer has the meaning specified in Clause 14.2. Transferee has the meaning specified in Clause 14.2. Trust Agreement means the "IAHC/Finnair 1996-1 Trust" Trust Agreement dated as of March 19, 1996, between Trustee and the Owner Participant. Trustee means Investors Asset Holding Corp., a Massachusetts corporation, in its individual capacity, having its principal corporate trust office at 200 Nyala Farms, Westport, CT 06880, Attention: Mr. James Coyne, Telefax No.: +1-203-341-9988. 1.2 Interpretation -------------- a. In this Agreement, unless the contrary intention is stated, a reference to: i. each of "the Lessor", "the Lessee" or any other Person includes without prejudice to the provisions of this Agreement any successor in title to it and any permitted assignee; ii. terms used herein include, as appropriate, all genders and the plural as well as the singular; iii. the term "including", when used in this Agreement, means "including without limitation" and "including but not limited to" and the term "or" shall include "and/or". iv. any document shall include that document as amended, novated or supplemented and all schedules thereto; v. a law (1) includes any statute, decree, constitution, regulation, order, judgment or directive of any Government Entity; (2) includes any treaty, pact, compact or other agreement to which any Government Entity is a signatory or party; (3) includes any judicial or administrative interpretation or application thereof; and (4) is a reference to that provision as amended, substituted or re-enacted; and vi. a Clause or a Schedule is a reference to a clause of or a schedule to this Agreement, including any sub-clause or sub-part of such clause or schedule. -13- b. The headings in this Agreement are to be ignored in construing this Agreement. 2. REPRESENTATIONS and WARRANTIES ------------------------------ 2.1. Lessee's Representations and Warranties --------------------------------------- The Lessee represents and warrants to the Lessor as follows: a. Status: The Lessee is a corporation duly organized and validly ------ existing under the laws of the State of Incorporation, has the corporate power to own its assets and carry on its business as it is being conducted and is (or will at the relevant time be) the holder of all necessary air transportation licenses required in connection therewith and with the use and operation of the Aircraft. b. Power and authority: The Lessee has the corporate power to enter into ------------------- and perform, and has taken all necessary corporate action to authorize the entry into, performance and delivery of, this Agreement and the transactions contemplated by this Agreement. c. Legal validity: This Agreement constitutes the Lessee's legal, valid -------------- and binding obligation. d. Non-conflict: The entry into and performance by the Lessee of, and ------------ the transactions contemplated by, this Agreement do not and will not: i. conflict with any laws binding on the Lessee; ii. conflict with the constitutional documents of the Lessee; or iii. conflict with or result in default under any document which is binding upon the Lessee or any of its assets, or result in the creation of any Security Interest over any of its assets. e. Authorization: All authorizations, consents and registrations ------------- required by, and all notifications to be given by, the Lessee in connection with the entry into, performance, validity and enforceability of, this Agreement and the transactions contemplated by this Agreement have been (or will on or before Delivery have been) obtained, effected or given (as appropriate) and are (or will on their being obtained or effected be) in full force and effect, including the authorization from the DGAC to acquire the Aircraft on lease with foreign registration marks and to incorporate the Aircraft into Lessee's fleet; provided, that within thirty (30) days after the -------- ---- Delivery -14- Date, a Spanish translation of this Agreement, together with a notarized copy of the original English version of this Agreement, shall be filed with the DGAC. f. No Immunity: ----------- i. The Lessee is subject to civil commercial law with respect to its obligations under this Agreement. ii. Neither the Lessee nor any of its assets is entitled to any right of immunity and the entry into and performance of this Agreement by the Lessee constitute private and commercial acts. g. Financial Statements: the audited consolidated financial statements -------------------- of the Lessee and its Subsidiaries most recently delivered to the Lessor: i. have been prepared in accordance with accounting principles and practices generally accepted in Mexico and consistently applied; and ii. fairly present the consolidated financial condition of the Lessee and its Subsidiaries as at the date to which they were drawn up and the consolidated results of operations of the Lessee and its Subsidiaries for the periods covered by such statements. 2.2. Lessee's Further Representations and Warranties ----------------------------------------------- The Lessee further represents and warrants to the Lessor that: a. No Default: No Default or Event of Default has occurred and is ---------- continuing or might reasonably be expected to result from the entry into or performance of this Agreement. b. Registration: ------------ i. It is not necessary or advisable under the laws of the State of Incorporation, the State of Registration or the Habitual Base in order to ensure the validity, effectiveness and enforceability of this Agreement or to establish, perfect or protect the property rights of the Lessor and any Lessor Lender in the Aircraft, any Engine or Part that this Agreement or any other instrument relating thereto be filed, registered or recorded or that any other action be taken or, if any such filings, registrations, recordings or other actions are necessary, the same have been effected or will have been -15- effected on or before Delivery or, as to the filing of this Agreement, together with a Spanish translation of this Agreement, with the DGAC, within thirty (30) days after the Delivery Date. ii. Under the applicable laws of the State of Incorporation, the State of Registration and the Habitual Base, the property rights of the Lessor and any Lessor Lender in the Aircraft have been fully established, perfected and protected and, with respect to such rights, this Agreement will have priority in all respects over the claims of all creditors of the Lessee, with the exception of such claims as are mandatorily preferred by law and not by virtue of any contract. c. Litigation: No litigation, arbitration or administrative proceedings ---------- are pending or, to the Lessee's knowledge, threatened against the Lessee which, if adversely determined, would be reasonably likely to have a material adverse effect upon its financial condition or business or its ability to perform its obligations under this Agreement. d. Pari Passu: The obligations of the Lessee under this Agreement rank ---------- at least pari passu with all other present and future unsecured and unsubordinated obligations (including contingent obligations) of the Lessee, with the exception of such obligations as are mandatorily preferred by law and not by virtue of any contract. e. Material Adverse Change: There has been no material adverse change in ----------------------- the consolidated financial condition of the Lessee and its Subsidiaries or the financial condition of the Lessee since December 31, 1999. f. Taxes: The Lessee has delivered all necessary returns and payments ----- due to the tax authorities in the State of Incorporation, the State of Registration and the Habitual Base other than any Taxes (i) which are being contested by the Lessee in good faith and by appropriate proceedings, (ii) which do not involve any material risk of the creation of a Lessor Lien on, or the sale, forfeiture, loss or other disposition of, the Aircraft, the Airframe or any Engine or interest therein, and (iii) where the failure to do so could not reasonably be expected to have a material adverse effect on the business or operations of Lessee or its ability to comply with its obligations hereunder. -16- 2.3. Repetition ---------- The representations and warranties contained in Clause 2.1 and Clause 2.2 will be deemed to be repeated by the Lessee on Delivery with reference to the facts and circumstances then existing. The representations and warranties contained in Clause 2.1 will be deemed to be repeated by the Lessee on each Rent Date as if made with reference to the facts and circumstances then existing. 2.4. Trustee's Representations and Warranties ---------------------------------------- The Trustee represents and warrants to the Lessee that: a. Status: The Trustee is a corporation duly organized and validly ------ existing under the laws of the Commonwealth of Massachusetts and has full power to carry on its business as it is now being conducted, including to act as trustee pursuant to the Trust Agreement. b. Power and authority: The Trustee has the power to enter into and ------------------- perform, and has taken all necessary trust action to authorize the entry into, performance and delivery of, the Trust Agreement and the transactions contemplated by the Trust Agreement. 2.5. Lessor's Representations and Warranties --------------------------------------- The Lessor represents and warrants to the Lessee that: a. Power and authority: The Lessor has the power to enter into and ------------------- perform, and has taken all necessary trust action to authorize the entry into, performance and delivery of, this Agreement and the transactions contemplated by this Agreement. b. Legal validity: This Agreement constitutes the Lessor's legal, valid -------------- and binding obligation. c. Non-conflict: The entry into and performance by the Lessor of, and ------------ the transactions contemplated by, this Agreement do not and will not: i. conflict with any laws binding on the Lessor; ii. conflict with the constitutional documents of the Lessor; or iii. conflict with or cause a default under any document which is binding upon the Lessor or any of its assets. -17- d. Authorization: So far as concerns the obligations of the Lessor, all ------------- authorizations, consents, registrations and notifications required under the laws of the United States of America in connection with the entry into, performance, validity and enforceability of, and the transactions contemplated by, this Agreement by the Lessor have been (or will on or before Delivery have been) obtained or effected (as appropriate) and are (or will on their being obtained or effected be) in full force and effect. e. No Immunity: ----------- i. The Lessor is subject to civil commercial law with respect to its obligations under this Agreement. ii. Neither the Lessor nor any of its assets is entitled to any right of immunity and the entry into and performance of this Agreement by the Lessor constitute private and commercial acts. f. Lessor Tax Status: The Lessor is a taxpayer in the United States of ----------------- America and, upon the reasonable request of the Lessee, the Lessor will provide the Lessee with a copy of any relevant forms, duly completed by the Lessor, certifying that the Lessor has filed a tax return with the Internal Revenue Service of the United States of America. g. Right to Lease: On the Delivery Date, the Lessor shall have the right -------------- to lease the Aircraft to the Lessee in accordance with the terms of this Agreement. 2.6. Repetition ---------- The representations and warranties in Clauses 2.4 and 2.5 will survive the execution of this Agreement. The representations and warranties contained in Clauses 2.4 and 2.5 will be deemed to be repeated by the Trustee and the Lessor, respectively, on Delivery and on each subsequent Rent Date as if made with reference to the facts and circumstances then existing. 3. CONDITIONS PRECEDENT -------------------- 3.1. Lessor's Documentary Conditions Precedent ------------------------------------------ The Lessor's obligation to lease the Aircraft to the Lessee under this Agreement is subject to the receipt of the following by the Lessor from the Lessee on or before Delivery in form and substance reasonably satisfactory to the Lessor, provided that it shall not be a condition -18- precedent to the obligations of the Lessor that any document be produced, or action taken, which is to be produced or taken by it or any Person within its control: a. Constitutional Documents: a copy of the constitutional documents of ------------------------ the Lessee; b. Opinion: an opinion, in the form set out in Schedule 7, in respect of ------- the Lessee's obligations under this Agreement issued by Lessee's chief internal legal counsel, and an opinion issued by White & Case, special New York and U.S. counsel to Lessee, in a form reasonably acceptable to Lessor; c. Licenses: copies of the Lessee's air transport license, air -------- operator's certificate and all other licenses, certificates and permits required by the Lessee (including any authorization required under FAR Part 129.14) in relation to, or in connection with, the operation of the Aircraft; d. Certificate: a certificate of a duly authorized officer of the ----------- Lessee: i. setting out a specimen of the signature of the officer of the Lessee referred to in Clause 3.1(h); and ii. certifying that each copy of a document specified in this Clause 3.1 is correct, complete and in full force and effect; e. Insurances: a certificate of insurance and brokers' undertakings, ---------- substantially in the form of Part 3 and Part 2, respectively, of Schedule 6; f. Registration: evidence that the Aircraft has been validly registered ------------ under the laws of the State of Registration and that all filings, registrations, recordings and other actions have been or will be taken which are necessary to ensure the validity and effectiveness of this Agreement and to protect the respective rights of the Lessor and any Lessor Lender in the Aircraft or any Part; g. Process Agent: a letter from the process agent appointed by the Lessee ------------- in this Agreement accepting such appointment together with a power of attorney executed before a Mexican notary public, in form and substance satisfactory to Lessor, granting powers of attorney with respect to lawsuits and collections to such process agent; h. Execution Power of Attorney: a copy of the general power of attorney --------------------------- in favor of an authorized officer of the Lessee, executed before a Mexican notary public, granting to such officer the power, on behalf of the Lessee, to execute, deliver and bind the -19- Lessee to perform this Agreement and all related documents including the Certificate of Acceptance; i. DGAC Approvals: evidence, in form and substance reasonably -------------- satisfactory to the Lessor, that the Lessee has obtained all necessary approvals, consents or authorizations from the DGAC or any other Government Entity in Mexico in respect of the leasing of the Aircraft by the Lessee under this Agreement and the operation of the Aircraft by the Lessee whilst the Aircraft is registered with the Aviation Authority; and j. General: this Agreement, completed, duly executed and delivered by ------- Lessee and such other documents as the Lessor may reasonably request. k. Asset Tax Election: evidence that Lessee has elected to treat the ------------------ Aircraft as a part of its property for purposes of the Mexican assets tax law (Ley del Impuesto al Activo). 3.2. Lessor's Other Conditions Precedent ----------------------------------- The obligation of the Lessor to deliver and lease the Aircraft under this Agreement is also subject to the following additional conditions precedent: a. that the representations and warranties of the Lessee under Clauses 2.1 and 2.2 are correct and would be correct if repeated on Delivery; and b. that all payments due to the Lessor under this Agreement on or before Delivery, including the first payment of Basic Rent, shall have been received by the Lessor. 3.3. Lessor's Waiver --------------- The conditions specified in Clauses 3.1 and 3.2 are for the sole benefit of the Lessor and may be waived or deferred in whole or in part and with or without conditions by the Lessor. Without limiting the generality of the foregoing, Lessor hereby agrees to defer for ten (10) Business Days after the Delivery Date the obligation of the Lessee to deliver (i) documents evidencing the due appointment of Lessee's agent for service of process in the State of New York and acceptance of such appointment, (ii) a notarized version of the authorizing resolutions of Lessee relating to the transactions contemplated by this Agreement, and (iii) documents evidencing Lessee's election to treat the Aircraft as a part of its property for purposes of the Mexican assets tax law. 3.4. Lessee's Conditions Precedent ----------------------------- -20- The Lessee's obligation to accept the Aircraft on lease from the Lessor under this Agreement is subject to the satisfaction by the Lessor of the following conditions precedent: a. Condition of Aircraft: the Aircraft shall be in the condition set --------------------- forth in Schedule 4 and the tests and inspections mentioned in Schedule 4 shall have been performed to the Lessee's reasonable satisfaction; b. Certificate: the receipt by the Lessee of a certificate of a duly ----------- authorized officer of the Lessor setting out a specimen of each signature of an officer signing this Agreement or any document or instrument in connection herewith; and c. Representations and Warranties: that the representations and ------------------------------ warranties of the Trustee and Lessor under Clauses 2.4 and 2.5, respectively are correct and would be correct if repeated on Delivery. d. Documents: Receipt by Lessee of the following documents, in form and --------- substance satisfactory to Lessee: i. this Agreement, completed, duly executed and delivered by Lessor; ii. a pro forma invoice for the Aircraft (for customs purposes only) signed by Lessor, as required for importation of the Aircraft into Mexico; iii. quiet enjoyment letters from each Lessor Lender, addressed to Lessee; and iv. such other documents as Lessee may reasonably request. 4. COMMENCEMENT ------------ 4.1. Leasing ------- The Lessor will lease the Aircraft to the Lessee and the Lessee will take the Aircraft on lease in accordance with this Agreement for the duration of the Term. 4.2. Delivery -------- The Aircraft will be delivered to, and will be accepted by, the Lessee at the Delivery Location on the Delivery Date or on such other day as may be agreed, immediately following satisfaction of the conditions precedent specified in Clauses 3.1, 3.2 and 3.4 (or their waiver or deferral by the party entitled to grant such waiver or deferral). -21- 4.3. Delivery Inspection ------------------- Lessee acknowledges that the Aircraft and Aircraft Documents have been made available for inspection by Lessee to Lessee's satisfaction prior to the date of this Agreement. Lessee confirms that it has performed such inspections as it deems necessary and, pursuant to such inspections and subject to the Aircraft meeting the conditions set forth in Schedule 4, all of the Aircraft and the Aircraft Documents are in acceptable condition for Lessee to enter into this Agreement, to take Delivery of the Aircraft and Aircraft Documents and to lease the Aircraft and Aircraft Documents. 4.4. Acceptance and Risk ------------------- a. Immediately following satisfaction of the conditions precedent specified in Clauses 3.1, 3.2 and 3.4 (or their waiver or deferral by the party entitled to grant such waiver or deferral), the Lessor and the Lessee shall forthwith complete Annex 1 to the Certificate of Acceptance (specifying the maintenance status of the Airframe, Engines, APU and Landing Gear) and the Lessee shall sign and deliver to the Lessor the Certificate of Acceptance. b. On and from Delivery, the Aircraft and every Part will be in every respect at the sole risk of the Lessee, which will bear all risk of loss, theft, damage or destruction to the Aircraft from any cause whatsoever. c. Upon or immediately following Delivery, the Lessor shall file this Lease and complete the registration of the ownership of the Aircraft at the FAA Aircraft Registry, and shall provide to the Lessee a copy of the certificate of registration and certificate of airworthiness. d. Upon or immediately following Delivery, the Lessee shall deliver to Lessor a copy of the required Mexican import permit (pedimento de importacion). 5. PAYMENTS -------- 5.1. Rental Periods -------------- The first Rental Period will commence on the Delivery Date and end on September 30, 2000. Each subsequent Rental Period will commence on the first day of each succeeding calendar month during the Term. Each Rental Period will end on the date immediately preceding the first day of the next Rental Period except that if a Rental Period would otherwise overrun the Expiry Date, it will end on the Expiry Date. -22- 5.2. Basic Rent ---------- a. Time of Payment: the Lessee will pay to the Lessor or its order Basic --------------- Rent on the Delivery Date and in advance on each subsequent Rent Date. Payment must be initiated adequately in advance of the Rent Date to ensure that the Lessor receives credit for the payment on the Rent Date. b. Amount: The Basic Rent payable on (i) the later of the Delivery Date ------ and September 1, 2000, and (ii) each subsequent Rent Date in respect of the immediately following Rental Period shall be the amount set forth in Schedule 9. 5.3. Extension Option ---------------- Provided that no Default or Event of Default shall have occurred and be continuing, if Lessee shall have given written notice to Lessor not less than one hundred and eighty (l80) days prior to the original Expiry Date, which notice shall be irrevocable, Lessee shall have the option to extend of the Term this Agreement for an additional term of twelve (12) months. All of the terms and conditions of this Agreement with respect to the original Term shall continue in full force and effect during any such extension of the Term. 5.4. Payments -------- a. All payments of Rent by the Lessee to the Lessor under this Agreement will be made for value on the due date, for the full amount due, in Dollars and in same day funds, settled through the New York Clearing House System or such other funds as may for the time being be customary for the settlement in New York City of payments in Dollars by telegraphic transfer to the account of the Lessor at Fleet Bank, NA, New York, New York, ABA No. 021-200-339, Account No. 9403-530699, reference "EFG Rent Escrow", or to such other account as Lessor may direct in writing upon five Business Days prior written notice to Lessee. b. If any Rent or other payment would otherwise become due on a day which is not a Business Day, it shall be due on the immediately succeeding Business Day. 5.5. Gross-up -------- a. All payments by the Lessee under or in connection with this Agreement will be made without offset or counterclaim, free and clear of and without deduction or withholding for or on account of any Taxes. -23- b. All Taxes (other than Lessor Taxes) in respect of payments under this Agreement shall be for the account of the Lessee. c. If the Lessee is compelled by law to make payment to the Lessor or any indemnitee under or in connection with this Agreement subject to any Tax, other than Lessor Taxes, and the Lessor or such indemnitee does not actually receive for its own benefit on the due date a net amount equal to the full amount provided for under this Agreement, the Lessee will pay all necessary additional amounts to ensure receipt by the Lessor or such indemnitee of the full amount so provided for. 5.6. Taxation -------- a. The Lessee will, on written demand, pay and indemnify the Lessor, Trustee, any Lessor Lender and Owner Participant against all Taxes levied or imposed against or upon the Lessor, Trustee, any Lessor Lender, Owner Participant or the Lessee and relating to or attributable to the Lessee, this Agreement or the Aircraft directly or indirectly in connection with the importation, exportation, registration, ownership, leasing, sub-leasing, purchase, delivery, possession, use, operation, repair, maintenance, overhaul, transportation, landing, storage, presence or redelivery of the Aircraft or any part thereof or any rent, receipts, insurance proceeds, income or other amounts arising therefrom; provided, however, that the Lessee shall have no liability for Lessor Taxes except to the extent resulting from or increased by any Default or the exercise of any right or remedy pursuant to Clause 13. The verification provisions of Clause 5.11 shall be applied, upon the Lessee's request, with respect to any indemnity payments due pursuant to this Clause 5.6.a. b. If the Lessor, Trustee, any Lessor Lender or Owner Participant (as the case may be) shall, in its reasonable opinion and based upon its own reasonable interpretation of any relevant laws or regulations, realize any Tax savings (by way of refund, deduction, credit or otherwise, including foreign tax credits and any reduction in Taxes) in respect of any amount with respect to which the Lessee shall have made a payment (or increased payment) pursuant to Clause 5.5 or 5.8, or shall have paid or indemnified the Lessor, Trustee, any Lessor Lender or Owner Participant pursuant to sub-clause (a) above, and such Tax savings shall not have been taken into account previously in calculating any indemnity payment made by the Lessee, then the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, shall, subject to the Lessee's obligations to repay such amount to the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, if the relevant Tax savings are subsequently disallowed or canceled (including by reason of such payment), promptly pay to the Lessee such amount as the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, shall, in its reasonable opinion (supported -24- by a written calculation thereof setting forth in reasonable detail the basis for determination), have concluded to be the amount of such Tax savings (together with, in the case of a refund, any interest received thereon); provided however that none of the Lessor, Trustee, any Lessor Lender nor Owner Participant shall be obliged to make any payment to the Lessee pursuant to this sub-clause (b) to the extent that the amount of any Tax savings in respect of which such payment is to be made would exceed the aggregate amount of all prior payments made by the Lessee to, on behalf of or as indemnification of the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, under this Agreement for Taxes less the amount of all prior payments made pursuant to this sub-clause (b) in respect of such Tax savings, provided further, that any amount not paid to the Lessee pursuant to the foregoing limitation shall be carried forward to reduce pro tanto any future payments or indemnity that the Lessee may be required to make to the Lessor, Trustee, any Lessor Lender or Owner Participant (as the case may be) pursuant to Clause 5.5, 5.6(a) and 5.8. The Lessee acknowledges that nothing contained in this sub-clause (b) shall interfere with the right of the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, to arrange its tax affairs in whatsoever manner it thinks fit and, in particular, neither the Lessor, Trustee, any Lessor Lender nor Owner Participant shall be under any obligation to claim any Tax savings in priority to any other savings available to it; provided, however, that such Lessor, Trustee, any Lessor Lender or Owner Participant (as the case may be) shall not discriminate against the Lessee in its use and allocation of any credit or savings. Notwithstanding anything to the contrary, each of the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, shall in good faith use reasonable diligence in filing its tax returns and in dealing with taxing authorities to seek and claim any such Tax savings. 5.7. Information ----------- If the Lessee is required by any applicable law, or by any third party, to deliver any report or return in connection with any Taxes, the Lessee will duly complete the same and Lessee will 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 will notify Lessor of such requirement and make such report or return in such manner as shall be reasonably satisfactory to Lessor. If actual notice is given by any taxing authority to Lessor, Trustee, a Lessor Lender or Owner Participant (as the case may be) that a report or return is required to be filed in its name with respect to any Taxes that are the responsibility of the Lessee under this Agreement, the Lessor, Trustee, such Lessor Lender or Owner Participant shall promptly notify Lessee of such required report or return. Lessor, Trustee, any Lessor Lender or Owner Participant (as the case may be) agrees to respond to any reasonable request of Lessee for information within its control with respect to the filing of any report or return, but Lessee agrees to duly complete the same or pay any reasonable costs, fees or other charges -25- of independent counsel or independent accountants incurred in connection with such request. Lessee shall have no obligation under the preceding sentence if such Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) has failed to furnish the Lessee with such information as is within such Lessor's, Trustee's, Lessor Lender's or Owner Participant's control and is necessary to file such returns. 5.8. Taxation of Indemnity Payments ------------------------------ a. If and to the extent that any sums payable to the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, by the Lessee under this Agreement by way of indemnity are insufficient, by reason of any Taxes payable in respect of those sums, for the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, to discharge the corresponding liability to the relevant third party (including any taxation authority), or to reimburse the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, for the cost incurred by it to a third party (including any taxation authority) the Lessee will, upon the written request for payment of such amount, pay to the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, such sum as will, after the tax liability has been fully satisfied, leave the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, with the same amount as it would have been entitled to receive in the absence of that liability, together with interest on the amount of the deficit at the Default Rate in respect of the period commencing on the date on which the payment of taxation is finally due or, if later, five (5) Business Days after the date on which the Lessor, Trustee, Lessor Lender or Owner Participant, as the case may be, notified the Lessee in writing of the deficit and made payment therefor, until payment by the Lessee (both before and after judgment). b. If and to the extent that any sums constituting (directly or indirectly) an indemnity to the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, but paid by the Lessee to any Person other than the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, are treated as taxable in the hands of the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, the Lessee will, upon the written request for payment of such amount, pay to the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, such sum as will, after the tax liability has been fully satisfied, indemnify the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, to the same extent as it would have been indemnified in the absence of such liability, together with interest on the amount payable by Lessee under this sub-clause at the Default Rate in respect of the period commencing on the date on which the payment of taxation is finally due or, if later, five (5) Business Days after the date on which the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, notified the Lessee in -26- writing of its liability for Taxes with respect to indemnity amounts treated as taxable in the hands of the Lessor, Trustee, any Lessor Lender or Owner Participant, as the case may be, until payment by the Lessee (both before and after judgment). 5.9. Default Interest ---------------- If the Lessee fails to pay any amount payable under this Agreement on the due date, the Lessee will pay on demand from time to time to the Lessor or any indemnitee interest (both before and after judgment) on the amount, from the due date to the day of payment in full by the Lessee to the Lessor or indemnitee, at a per annum rate equal to the lower of (i) the base rate or prime rate for commercial loans as announced from time to time by Fleet Bank at its principal lending office in New York, New York, plus 3.0% per annum (the "Default Rate"), or (ii) the maximum lawful per annum rate for commercial loans. In addition, should the Lessee's failure to pay extend past the time period set forth in Section 13.1, the Lessee shall pay one hundred fifty ($150.00) Dollars per each unpaid invoice. All such interest will be calculated on the basis of the actual number of days elapsed and on a 365 day year. 5.10. Contest ------- If a written claim is made against the Lessor, Trustee, a Lessor Lender or Owner Participant for any Taxes for which the Lessee is responsible under this Agreement or if the Lessor, Trustee, a Lessor Lender or Owner Participant claims any indemnity hereunder, such Lessor, Trustee, Lessor Lender or Owner Participant shall promptly notify the Lessee in writing within 30 days of its receipt of any written claim or knowledge of any indemnity claim and shall provide the Lessee such information regarding such claim as the Lessee may reasonably request. If the Lessee disputes the payment of any Taxes payable by the Lessor, Trustee, a Lessor Lender or Owner Participant, as the case may be, for which the Lessee is responsible under this Agreement or the payment of any indemnity claimed hereunder, the Lessor, Trustee, Lessor Lender or Owner Participant, as the case may be, will take such action as the Lessee may reasonably request, at the Lessee's expense, in good faith diligently to contest the validity, applicability or amount of such Taxes by (i) resisting payment thereof to the extent permitted by applicable law, (ii) not paying the same except under protest, if protest is necessary and proper, (iii) if payment is made, using reasonable efforts to obtain a refund thereof in appropriate administrative or judicial proceedings, and (iv) considering in good faith any other reasonable action as the Lessee may reasonably request, but will not be obliged to take any such action: a. which the Lessor, Trustee, Lessor Lender or Owner Participant, as the case may be, considers, in its reasonable judgment, may materially prejudice it; -27- b. unless the Lessee shall have provided such Person with an opinion of counsel, reasonably acceptable to such Person, that a reasonable basis exists for such contest, which the Lessor, Trustee, Lessor Lender or Owner Participant, as the case may be, considers does not have a reasonable prospect of success; c. for which the Lessee has not made adequate provision to the reasonable satisfaction of the Lessor, Trustee, Lessor Lender or Owner Participant, as the case may be, in respect of the expense concerned; or d. if such action gives rise to any material likelihood of the Aircraft or any interest therein being sold, forfeited or otherwise lost or of criminal liability on the part of the Lessor, Trustee, Lessor Lender or Owner Participant, as the case may be. In the event of a contest of any Taxes hereunder, the Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) shall keep the Lessee informed as to the progress of the contest and provide the Lessee with copies of correspondence and other documents received by such Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) from the taxing authority, consult with the Lessee if requested by the Lessee, make available for review and comment to the Lessee any written documents or materials relating to the contest that such Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) proposes to submit to the taxing authority, forward copies of all material submissions made in such contest, consider in good faith any request concerning the conduct of any such contest and without waiving its right to be indemnified hereunder with respect to such claim shall not settle any such claim or contest pursuant to this provision without the written consent of the Lessee. Any contest required pursuant to the preceding sentence shall, at the option of such Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) be conducted by such Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) or the Lessee in the name of the Lessee or such Lessor, Trustee, Lessor Lender or Owner Participant; provided however that if a claim with respect to a Tax for which the Lessee has agreed to indemnify the Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) can be contested separately from the contest of any other Tax of such Lessor, Trustee, Lessor Lender or Owner Participant and in the name of the Lessee, and the separation of the contest of such Tax does not prejudice such Lessor, Trustee, Lessor Lender or Owner Participant in any way, then such Lessor, Trustee, Lessor Lender or Owner Participant shall permit the Lessee, at the Lessee's sole cost and expense, to contest such claim in the Lessee's name. If the Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) shall obtain a refund or credit of all or any part of any Taxes paid by the Lessee, such Lessor, Trustee, Lessor Lender or Owner Participant shall pay to the Lessee the amount of such refund or -28- credit (taking into account any Tax savings resulting therefrom), net of expenses not already paid or reimbursed by the Lessee, and any interest fairly attributable thereto plus an amount equal to the Tax savings realized by such Lessor, Trustee, Lessor Lender or Owner Participant as a result of any payment to the Lessee pursuant to this sentence. The Lessee shall not be required to make payment to the Lessor, Trustee, a Lessor Lender or Owner Participant on any indemnification claim being diligently contested pursuant to this Clause 5.10 unless (and only to the extent) the Lessor, Trustee or Owner Participant has been required to make any payment of taxes giving rise to such indemnification claim. 5.11. Verification ------------ The Lessor, Trustee, a Lessor Lender or Owner Participant, as the case may be, shall provide the Lessee, upon the Lessee's request, with a written statement setting forth in reasonable detail the computation of the amount of any payment or increased payment to be made by the Lessee pursuant to Clause 5.5 and 5.8, or any indemnity by the Lessee pursuant to Clause 5.6(a), or any Tax savings in respect of which a payment is to be made to the Lessee pursuant to Clause 5.6(b). At the Lessee's request, the amount of any such payments or indemnities by the Lessee or payment by the Lessor, Trustee, a Lessor Lender or Owner Participant (as the case may be) to the Lessee pursuant to this Agreement shall be verified by the independent, internationally recognized accounting firm of the Lessor, Trustee, Lessor Lender or the Owner Participant, as they shall elect, or (if not) by another firm of accountants mutually acceptable to such Lessor, Trustee, Lessor Lender or Owner Participant and the Lessee, who shall be asked to verify, after consulting with the Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be), whether such Lessor's, Trustee's, Lessor Lender's or Owner Participant's computations are correct and to report its conclusions to both the Lessee and such Lessor, Trustee, Lessor Lender or Owner Participant. The Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) and the Lessee hereby agree to provide the accountants with all information and materials as shall be reasonably necessary or desirable in connection herewith. The fees and disbursements of such accounting firm shall be paid by the Lessee unless such verification shall result in an adjustment in the Lessee's favor greater than or equal to the greater of (i) five percent (5%) of the total amount verified, or (ii) the fee charged by such accounting firm, in which case such fee shall be paid by such Lessor, Trustee, Lessor Lender or Owner Participant. Any information provided to such accountants by the Lessee or the Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) shall be and remain the exclusive property of the Lessee or such Lessor, Trustee, Lessor Lender or Owner Participant and shall be deemed by the parties to be (and the accountants will confirm in writing that they will treat such information as) the private, proprietary and confidential property of such Lessee, or Lessor, Trustee, Lessor Lender or Owner Participant, as the case may be, and no person other than the Lessee or the Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) and the accountants shall be entitled thereto, and all such materials shall be returned to the Lessee or the Lessor, Trustee, Lessor -29- Lender or Owner Participant, as the case may be. Such accounting firm shall be requested to make its determination within thirty (30) days. In the event such accounting firm shall determine that such computations are incorrect, then such firm shall determine what it believes to be the correct computations. The computations of the accounting firm shall be final, binding and conclusive upon the Lessee and the Lessor, Trustee, Lessor Lender or Owner Participant (as the case may be) absent manifest error, and the Lessee shall have no right to inspect the books, records, tax returns or other documents of or relating to such Lessor, Trustee, Lessor Lender or Owner Participant to verify such computations or for any other purpose. If for any reason Lessee makes any payment with respect to Taxes imposed on Lessor, Trustee, a Lessor Lender or Owner Participant in respect of the transactions contemplated hereby, which Taxes are not the responsibility of Lessee under Section 5.5, 5.6 or 5.8, then the applicable Lessor, Trustee, Lessor Lender or Owner Participant shall pay to Lessee within ten (10) days of Lessee's demand therefor an amount equal to the amount paid by Lessee with respect to such Taxes, provided, however, that no such demand shall be honored unless made within thirty (30) days after the date of such payment. If Lessor, Trustee, a Lessor Lender or Owner Participant shall obtain a refund of all or any part of such taxes paid by Lessee, such Lessor, Trustee, Lessor Lender or Owner Participant shall promptly pay to Lessee the amount of such refund less the amount of any taxes payable by such Lessor, Trustee, Lessor Lender or Owner Participant in respect of the receipt of such refund. 5.12. Forms ----- Each of Lessor, Trustee, any Lessor Lender or Owner Participant agrees to furnish from time to time to the Lessee or to such other person as the Lessee may designate such duly executed and properly completed forms that such Lessor, Trustee, any Lessor Lender or Owner Participant is legally able to deliver and as may be necessary in order to claim any reduction of, or exemption from any Tax which the Lessee may be required to indemnify against hereunder. 5.13. Absolute -------- The Lessee's obligations under this Agreement are absolute and unconditional irrespective of any contingency whatever including (but not limited to): a. any right of offset, counterclaim, recoupment, defense or other right which either party to this Agreement may have against the other; b. except as specified in clause (c) below, any unavailability of the Aircraft for any reason, including a requisition of the Aircraft or any prohibition or interruption of, interference with or other restriction against the Lessee's use, operation or possession of the Aircraft; -30- c. any lack or invalidity of title or any other defect in title (provided that such lack or invalidity of title or other defect does not result in the Lessee being deprived of its possession or use of the Aircraft or prevent the Lessee from purchasing the Aircraft free of Lessor Liens), airworthiness, merchantability, fitness for any purpose, condition, design or operation of any kind or nature of the Aircraft for any particular use or trade, or for registration or documentation under the laws of any relevant jurisdiction, or any Total Loss in respect of or any damage to the Aircraft; d. any insolvency, bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceedings by or against the Lessor or the Lessee; e. any invalidity, unenforceability or lack of due authorization of, or other defect in, this Agreement; or f. any other cause which, but for this provision, would or might otherwise have the effect of terminating or in any way affecting any obligation of the Lessee under this Agreement. provided, however, that this Clause 5.13 shall be without prejudice to the Lessee's right to claim damages and/or other relief from the courts in the event of any breach by the Lessor of its obligations under this Agreement, or in the event that, as a result of any lack or invalidity of title to the Aircraft on the part of the Lessor, the Lessee is deprived of its possession of the Aircraft. 5.14. Deposit ------- The Lessor (or one or more Lessor Lenders) shall retain the Deposit during the Term as additional security for Lessee's obligations under this Agreement. On the Delivery Date, the Deposit, together with any interest earned thereon shall constitute a security deposit under this Lease, shall be non-refundable during the Term of this Lease, and shall be held by Lessor (or one or more Lessor Lenders) in an interest bearing account (which may be a general account and need not be segregated) as security for the timely and faithful performance by Lessee of all of Lessee's obligations under this Lease. If Lessee fails to pay Rent hereunder or to pay any other sums due or to or to perform any of the other terms and provisions of this Lease or an Event of Default has otherwise occurred and is continuing hereunder, Lessor may use, apply, draw upon or retain all or any portion of the Deposit in partial payment for sums due to Lessor by Lessee, to compensate Lessor for any sums it may in its discretion advance as a result of an Event of Default, or to apply toward losses or expenses Lessor may suffer or incur as a result of the occurrence of an Event of Default hereunder. If Lessor uses, draws upon or applies all or any portion of the Deposit, such application shall not be deemed a cure of any Default or Event of Default, and Lessee shall within five (5) Business Days after -31- written demand therefor deposit with Lessor cash or other collateral acceptable to Lessor in an amount sufficient to restore the Security Deposit to its original level as set forth in Schedule 9 hereto, and the failure of Lessee to do so shall be a material breach of this Lease by Lessee. Provided no Default has occurred and is continuing under this Lease, the Deposit shall be returned to Lessee, together with interest (net of any reasonable fees, commissions and other expenses incurred in connection with investment of the Deposit), if any, earned thereon, within five (5) Business Days following the Expiry Date, or, if later, the date Lessee's obligations relating to the return of the Aircraft have been fully performed. 6. MANUFACTURER'S WARRANTIES ------------------------- 6.1. Assignment ---------- Notwithstanding this Agreement, the Lessor will remain entitled to the benefit of each warranty, express or implied, and any unexpired customer and/or product support given or provided in respect of the Aircraft, any Engine or Part by any manufacturer, vendor, maintenance performer, subcontractor or supplier. Unless an Event of Default shall have occurred and be continuing, the Lessor hereby authorizes the Lessee to pursue any claim thereunder in relation to defects affecting the Aircraft, any Engine or Part and the Lessee agrees diligently to pursue any such claim which arises at its own cost. The Lessee will notify the Lessor promptly upon becoming aware of any such claim. The Lessor will provide such assistance to the Lessee in making a claim under any such warranties or customer and/or product support as the Lessee may reasonably request, and, if requested by the Lessee and at the Lessee's expense, will pursue a claim in its own name where the relevant manufacturer, vendor, maintenance performer, subcontractor or supplier has refused to acknowledge the Lessee's right to pursue that claim. 6.2. Proceeds -------- All proceeds of any such claim as is referred to in Clause 6.1 which exceed the Damage Notification Threshold will be paid directly to the Lessor, but to the extent that such claim relates: a. to defects affecting the Aircraft which have been rectified; or b. to compensation for loss of use of the Aircraft, an Engine or any Part during the Term; or c. to costs incurred by the Lessee in pursuing such claim (whether or not proceeds of such claim are payable to the Lessee); or -32- d. to any proceeds in an amount less than the Damage Notification Threshold; and provided no Default shall have occurred and be continuing, such proceeds shall be paid directly to the Lessee. 6.3. Parts ----- Except to the extent the Lessor otherwise agrees in a particular case, the Lessee will assure that all engines, components, furnishings or equipment provided by the manufacturer, vendor, maintenance performer, subcontractor or supplier as a replacement for a defective Engine or Part pursuant to the terms of any warranty or customer and/or product support arrangement comply with Clause 8.13(a), are installed on the Aircraft promptly and that title to any such engine or part vests in the Lessor in accordance with this Agreement. On installation those items will be deemed to be a Engine or Part, as applicable. 6.4. Agreement --------- To the extent any warranties or customer and/or product support relating to the Aircraft are made available under an agreement between any manufacturer, vendor, maintenance performer, subcontractor or supplier and the Lessee, this Clause 6 is subject to that agreement. Lessee shall take all such steps as are necessary and requested by the Lessor at the end of the Term to ensure the benefit of any of those warranties or customer and/or product support which have not expired are vested in the Lessor. 7. LESSOR'S COVENANTS and DISCLAIMERS ---------------------------------- 7.1. Quiet Enjoyment --------------- Provided no Event of Default shall have occurred and be continuing, neither the Lessor nor any Person claiming by, through or on account of the Lessor will interfere with the quiet use, possession and enjoyment of the Aircraft by the Lessee. 7.2. Registration and Filings ------------------------ The Lessor shall, at the Lessor's cost: a. not do or suffer to be done anything which might reasonably be expected to adversely affect the registration of the Aircraft with the Aviation Authority; and -33- b. do all acts and things (including making any filing or registration with the Aviation Authority or any other Government Entity) as may be required following any change in the ownership of the Aircraft. 7.3. Exclusion --------- THE AIRCRAFT IS ACCEPTED BY THE LESSEE "AS IS, WHERE IS" AND LESSEE AGREES AND ACKNOWLEDGES THAT, SAVE AS IS EXPRESSLY STATED IN THIS AGREEMENT, LESSOR WILL HAVE NO LIABILITY IN RELATION TO, AND LESSOR HAS NOT AND WILL NOT BE DEEMED TO HAVE MADE OR GIVEN, ANY CONDITIONS, WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT, INCLUDING: a. THE DESCRIPTION, AIRWORTHINESS, MERCHANTABILITY, FITNESS FOR ANY USE OR PURPOSE, VALUE, CONDITION, OR DESIGN, OF THE AIRCRAFT OR ANY PART; OR b. ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT ARISING FROM LESSOR'S NEGLIGENCE, ACTUAL OR IMPUTED (BUT EXCLUDING ANY SUCH OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT WHICH ARISES FROM LESSOR'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT); OR c. ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF OR DAMAGE TO THE AIRCRAFT, FOR ANY LIABILITY OF LESSEE TO ANY THIRD PARTY, OR FOR ANY OTHER DIRECT, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES. 7.4. Lessee's Waiver --------------- EXCEPT FOR THE LESSOR'S PERFORMANCE OF EACH COVENANT AND AGREEMENT OF LESSOR EXPRESSLY SET FORTH IN THIS AGREEMENT (INCLUDING ITS COVENANT OF QUIET ENJOYMENT), LESSEE HEREBY WAIVES, AS BETWEEN ITSELF AND THE LESSOR, ALL ITS RIGHTS IN RESPECT OF ANY CONDITION, WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, ON THE PART OF LESSOR AND ALL CLAIMS AGAINST LESSOR HOWSOEVER AND WHENEVER ARISING AT ANY TIME IN RESPECT OF OR OUT OF THE OPERATION OR PERFORMANCE OF THE AIRCRAFT OR THIS AGREEMENT, INCLUDING ANY RIGHTS ARISING OUT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THE LESSOR. -34- 7.5. Adverse Tax Change ------------------ If as a result of any change in, or amendment to, the laws (or any regulations or rulings promulgated thereunder) of Mexico or of any political subdivision or taxing authority thereof or therein affecting taxation, or any change in official position regarding application or interpretation of such laws (including a holding of a court of competent jurisdiction), which change or amendment becomes effective after Delivery, the Lessee determines, based upon the opinion of independent tax counsel or an independent accounting firm of recognized standing in Mexico, that it has or will become obligated to pay Taxes in excess of those payable on the date hereof due to the jurisdiction of incorporation, domicile or principal place of business of the Lessor, the Trustee or the Owner Participant, the Lessor, the Trustee or the Owner Participant, as the case may be, shall, if requested by the Lessee, use reasonable efforts to assign or otherwise transfer its rights and interests in and to the Aircraft and this Agreement to an Affiliate in a jurisdiction that is not affected by such event; provided that such assignment or transfer can be made upon terms such that the Lessor, Trustee or Owner Participant, as the case may be, suffers no economic, legal or regulatory disadvantage. The Lessee shall pay all costs and expenses incurred by the Lessor in connection with any such assignment or transfer. 7.6. Lessee's Confirmation --------------------- LESSEE CONFIRMS THAT IT IS FULLY AWARE OF THE PROVISIONS OF CLAUSES 7.3 AND 7.4 AND ACKNOWLEDGES THAT BASIC RENT AND OTHER AMOUNTS HAVE BEEN CALCULATED NOTWITHSTANDING ITS PROVISIONS. 7.7. Lessor Contribution ------------------- Provided that no Default has occurred and is continuing, the Lessor shall, at the Lessor's sole cost, make each Subsequent Investment as required in accordance with Schedule 10. The notification and verification provisions of Clause 5.11 shall apply, mutatis mutandi, to any amounts Lessee claims to be due from Lessor pursuant to this Clause 7.7 or Schedule 10; provided, however, that in place of a firm of accountants any disputes not resolved by the parties shall be determined by such other arbitrator(s) as the Lessor and Lessee shall agree upon, or if the parties can not so agree, such arbitrator as shall be appointed in accordance with the Commercial Arbitration Rules of the American Arbitration Association. 8. LESSEE'S COVENANTS ------------------ 8.1. Duration -------- The undertakings in this Clause 8 and in Clause 12 will: -35- a. except as otherwise stated, be performed at the expense of the Lessee; and b. remain in force until redelivery of the Aircraft to the Lessor in accordance with this Agreement and thereafter to the extent of any accrued rights of the Lessor in relation to those undertakings. 8.2. Information ----------- The Lessee shall: a. notify the Lessor forthwith of the occurrence of any Event of Default; b. furnish to the Lessor: i. within 60 days after the last day of the first three fiscal quarters of each fiscal year of the Lessee, unaudited quarterly financial statements of the Lessee prepared for such quarter, including a balance sheet as of the last day of such quarter and statements of income and retained earnings and statements of cash flow for such fiscal quarter, all in reasonable detail (subject to year-end audit adjustments) and prepared in accordance with Mexican GAAP; ii. as soon as available but not in any event later than 120 days after the last day of each fiscal year of the Lessee, audited consolidated financial statements of the Lessee prepared for such year, including a consolidated balance sheet of the Lessee and its Subsidiaries as of the last day of such year and consolidated statements of income and retained earnings and consolidated statements of cash flow for such fiscal year and on a comparative basis figures for the immediately preceding fiscal year, all in reasonable detail, each prepared in accordance with Mexican GAAP and certified by Coopers & Lybrand or another firm of internationally recognized independent certified public accountants as fairly presenting the financial position and the results of operations of Lessee and its Subsidiaries at the end of and for such fiscal year and as having been prepared in accordance with Mexican GAAP; iii. at the same time as it is issued to the creditors of the Lessee, a copy of each notice or circular issued to the Lessee's creditors as a group; and iv. on request from time to time such other information regarding the Lessee and its business and affairs as the Lessor may reasonably request; -36- c. on request, inform the Lessor as to the current serial numbers of the Engines and any engine installed on the Airframe; d. promptly furnish to the Lessor all information which the Lessor from time to time reasonably requests regarding the Aircraft, any Engine or any Part and its use, location and condition, including the hours available on the Aircraft and any Engine until the next scheduled check, inspection, overhaul or shop visit, as the case may be; e. on request, furnish to the Lessor evidence reasonably satisfactory to the Lessor that all Taxes and charges incurred by the Lessee with respect to the Aircraft have been paid and discharged in full; f. provide the Lessor, within 15 days following the end of each Rental Period, with a monthly report on the Aircraft in the form set out in Schedule 8; g. give the Lessor annual written notice of the time and location of all Major Checks during the succeeding 12-month period; h. promptly notify the Lessor of: i. any loss, theft, damage or destruction to the Airframe, any Engine or any Part, or any modification to the Aircraft if the potential cost may reasonably be expected to exceed the Damage Notification Threshold; ii. any claim or other occurrence likely to give rise to a claim under the Insurances (but, in the case of hull claims only, in excess of the Damage Notification Threshold) and details of any negotiations with the insurance brokers over any such claim; and iii. any litigation, arbitration or administrative proceedings that are pending or, to the Lessee's knowledge, threatened against the Lessee which, if adversely determined, would have a material adverse effect upon its financial condition or business or its ability to perform its obligations under this Agreement. All reports delivered to the Lessor, Trustee or Owner Participant pursuant to this Clause 8.2 shall be in English. 8.3. Lawful and Safe Operation ------------------------- The Lessee shall: -37- a. comply with the law for the time being in force in any country or jurisdiction in which the Aircraft is being operated which is applicable to the Aircraft or the use and operation of the Aircraft; b. not use the Aircraft in any manner contrary to any requirement of the Aviation Authority or the DGAC or the manufacturers of the Aircraft, any Engine or any Part or any rule or regulation of the Aviation Authority or the DGAC or for any purpose for which the Aircraft is not designed or reasonably suitable; provided, that, after providing the Lessor with a certificate of its President, Director of Finance or chief internal legal counsel stating all relevant facts with respect thereto, the Lessee may, in good faith and by appropriate procedures, contest the validity or application of any such requirement, rule or regulation in any reasonable manner which does not materially adversely affect the Lessor, or any of its interests in or to the Aircraft or this Agreement; c. ensure that the crew and engineers employed by it in connection with the operation and maintenance of the Aircraft have the qualifications and hold the licenses required by the Aviation Authority (or the DGAC, if applicable) and applicable law; d. use the Aircraft solely in commercial or other operations for which the Lessee is duly authorized by the Aviation Authority, the DGAC and applicable law; e. not knowingly use the Aircraft (or use it when the Lessee ought reasonably to have known that it was being so used) for the carriage of: i. whole animals, living or dead, except in the cargo compartments according to IATA regulations, and except domestic pet animals carried in a suitable container to prevent the escape of any liquid and to ensure the welfare of the animal; ii. acids, toxic chemicals, other corrosive materials, explosives, nuclear fuels, nuclear wastes or any nuclear assemblies or components, except as permitted for cargo aircraft under the "Restriction of Goods" schedule issued by IATA from time to time and provided that all the requirements for packaging or otherwise contained therein are fulfilled; iii. any other goods, materials or items of cargo which could reasonably be expected to cause damage to the Aircraft and which would not be adequately covered by the Insurances; or iv. any illegal item or substance; -38- f. not utilize the Aircraft for purposes of training, qualifying or re- confirming the status of cockpit personnel except for the benefit of the Lessee's cockpit personnel, and then only if the use of the Aircraft for such purpose is not disproportionate to the use for such purpose of other aircraft of the same type operated by the Lessee; g. not cause or permit the Aircraft to proceed to, or remain at, any location which is for the time being the subject of a prohibition order (or any similar order or directive) by: i. any Government Entity of the State of Registration or the Habitual Base; or ii. any Government Entity of the country in which such location is situated; or iii. any Government Entity having jurisdiction over the Lessor or the Aircraft; provided, however, that the failure of the Lessee to comply with the provisions of this sentence shall not give rise to a Default or an Event of Default hereunder where such failure is attributable to a hijacking, medical emergency, equipment malfunction, weather condition, navigational error or other isolated extraordinary event (not within the Lessee's control) and the Lessee is diligently proceeding to rectify such failure as soon as is reasonably practicable. h. obtain and maintain in full force all certificates, licenses, permits and authorizations required for the use and operation of the Aircraft for the time being, and for the making of payments required by, and the compliance by the Lessee with its other obligations under, this Agreement. 8.4. Taxes and Other Charges ----------------------- Subject to Clauses 5.6(b), 5.10 and 5.11, the Lessee will promptly pay: a. all license and registration fees, Taxes (other than Lessor Taxes) and other amounts of any nature imposed by any Government Entity that are imposed on the Lessee or for which the Lessee is responsible under this Agreement with respect to the Aircraft, including the purchase, ownership, delivery, leasing, possession, use, operation, return, sale or other disposition of the Aircraft; and b. all rent, fees, charges, Taxes (other than Lessor Taxes) imposed on the Lessee and other amounts in respect of any premises where the Aircraft or any Part thereof is located from time to time during the Term; -39- except to the extent that such payment is being contested in good faith by appropriate proceedings in respect of which adequate resources have been provided by the Lessee and non-payment of which does not give rise to any material likelihood of the Aircraft or any interest therein being sold, forfeited or otherwise lost or of criminal liability on the part of the Lessor. 8.5. Sub-Leasing ----------- a. Lessee will not, without the prior written consent of Lessor (except as set forth in clause (b) below), sub-lease or part with possession of the Aircraft, the Engines or any Part except that Lessee may part with possession (i) with respect to the Aircraft, the Engines or any Part to the relevant manufacturers for testing or similar purposes or to an Agreed Maintenance Performer for service, repair, maintenance or overhaul work, or alterations, modifications or additions to the extent required or permitted by this Agreement, and (ii) with respect to an Engine or Part, as expressly permitted by this Agreement. For the avoidance of doubt, Lessee shall be entitled to enter into "wet lease" or charter arrangements with the Aircraft for short-term periods that, including all renewals, do not exceed six months so long as possession and operational control of the Aircraft remains with the Lessee at all times. b. Lessee may sub-lease (a "Sub-Lease") the Aircraft to a Cintra Group Airline, incorporated in the State of Registration or the State of Incorporation, without the prior consent of the Lessor if the following conditions are fulfilled: i. no Event of Default shall have occurred and be continuing; ii. notwithstanding such Sub-Lease, Lessee shall remain primarily responsible to Lessor hereunder and the Sub-Lease, by its terms, shall be expressly subject and subordinate in all respects to this Agreement; iii. the Sub-Lease shall include clauses identical to or having the same substantive effect as Clauses 2.1 (except that the State of Incorporation may be the state of incorporation of the relevant sublessee), 8, 9, 13, 15.12 and Schedule 6 of this Agreement save that a Sub-Lease may impose additional or more stringent obligations on, or give fewer rights to, any Sub-Lessee than are imposed on Lessee under such provisions of this Agreement and that the term of the Sub-Lease shall not be capable of extending beyond the Expiry Date; iv. the rights, title and interests of Lessor and the Indemnitees in and to the Aircraft and this Agreement shall be duly evidenced and protected to the -40- reasonable satisfaction of Lessor and such Indemnitee (including as to the making of all necessary filings and registrations); v. Lessee and the Sub-Lessee shall have executed and delivered to Lessor a security assignment in respect of the Sub-Lease together with an acknowledgment of such assignment, and, if requested by Lessor or any Lessor Lender, Lessee and the Sub- Lessee shall have executed and delivered to Lessor and any mortgagee an acknowledgment of any assignment by Lessor of such security agreement to such mortgagee, each such document to be in a form reasonably acceptable to the Lessor; vi. the Sub-Lessee shall be a reputable air carrier and shall hold all necessary consents, licenses, permits and authorizations required under the applicable law of the state of incorporation or establishment of such carrier for the public transport of passengers and cargo, and shall not be subject to any event of the types described in Clause 13.1(g), (h) or (i) as of the commencement of the Sub-Lease; vii. the Aircraft shall not be re-registered outside the State of Registration without the prior written consent of Lessor which shall not be unreasonably withheld. Lessor shall be entitled to withhold such consent if the suggested jurisdiction of re- registration is a jurisdiction which Lessor or any Lessor Lender reasonably determines to be unacceptable in terms of political or judicial risk; viii. at least five Business Days prior to the execution by Lessee of any Sub-Lease, Lessee will provide Lessor with a copy of the draft Sub-Lease in order for Lessor to satisfy itself that the conditions set out in this Clause as to form of the Sub- Lease are fulfilled. Prior to delivery of the Aircraft under any Sub-Lease, Lessee will provide Lessor with an original counterpart of the Sub-Lease duly executed by Lessee and Sub- Lessee; ix. Lessee shall be responsible for all reasonable costs incurred by Lessor in connection with the Sub-Lease; x. the Sub-Lease shall provide that no further subleases of the Aircraft by the Sub-Lessee shall be permitted; and xi. Lessee shall give written notice to Lessor of any Sub-Lease at least ten (10) days prior to the date on which such Sub-Lease is to be executed (which notice shall include the identity of any proposed change in the State of -41- Registration and the Habitual Base of the Aircraft and, if then determined, the term and the delivery date of the proposed sublease). c. In circumstances where the conditions set out in (b) above are not fulfilled in relation to any Sub-Lease, the consent of Lessor to such Sub-Lease shall be required. 8.6. Inspection ---------- a. The Lessor and any Person designated by the Lessor may, at any reasonable time and upon prior written notice, visit, inspect and survey the Aircraft, any Engine or any Part for the purpose of verifying compliance by the Lessee with its obligations under this Agreement as to the maintenance, use or operation of the Aircraft; provided, that such inspection shall not unreasonably interfere with the operation of the Aircraft or the conduct of the Lessee's business. b. The Lessor shall bear its own costs and expenses in connection with any such visit, inspection or survey unless the visit, inspection or survey discloses that the Lessee is in breach of its material obligations under this Agreement, in which case such costs and expenses shall be paid by the Lessee on demand. c. The Lessor shall: i. have no duty to make, or liability arising out of, any such visit, inspection or survey; and ii. so long as no Event of Default has occurred and is continuing, not exercise such right other than on reasonable notice and so as not to disrupt unreasonably the maintenance or operation of the Aircraft. 8.7. Protection of Title ------------------- The Lessee shall: a. not do or knowingly permit to be done or omit or knowingly permit to be omitted to be done any act or thing which might reasonably be expected to jeopardize the respective rights, title and interest of the Lessor as owner of the Aircraft and lessor under this Agreement, the right, title and interest of any mortgagee of the Aircraft and assignee of this Agreement or the validity, enforceability or priority of any mortgage; -42- b. on all occasions when the ownership of the Aircraft, any Engine or any Part is relevant, make clear to third parties that title is held by the Lessor and is subject to any Mortgage; c. not at any time: i. represent or hold out the Lessor as carrying goods or passengers on the Aircraft or as being in any way connected or associated with any operation or carriage (whether for hire or reward or gratuitously) which may be undertaken by the Lessee; or ii. pledge the credit of the Lessor; d. ensure that there is always affixed, and not removed or in any way obscured, a fireproof plate (having dimensions of not less than 6 in. x 4 in.) in a location reasonably adjacent to, and not less prominent than, the airworthiness certificate for the Aircraft and in a reasonably prominent position on each Engine stating: "This Aircraft/Engine is leased to Aerovias de Mexico, S.A. de C.V. Owner: Investors Asset Holding Corp., not in its Individual ----- Capacity but Solely as Owner Trustee Mortgagees: CL/PK Funding Trust and ---------- PK AirFinance S.A., New York Branch" and Lessee agrees to make such changes to such lease identification plates as Lessor may reasonably request from time to time. e. not create or permit to exist any Security Interest upon the Aircraft, any Engine or any Part; f. not do or permit to be done anything which may reasonably be expected to expose the Aircraft, any Engine or any Part to penalty, forfeiture, impounding, detention, appropriation, damage or destruction and, without prejudice to the foregoing, if any such penalty, forfeiture, impounding, detention, appropriation, damage or destruction occurs, give the Lessor notice and use its best efforts to procure the immediate release of the Aircraft, such Engine or such Part, as the case may be; g. not abandon the Aircraft, the Engine or any Part; h. pay and discharge or cause to be paid and discharged when due and payable or make adequate provision by way of security or otherwise for all debts, damages, claims and -43- liabilities which have given or might reasonably be expected to give rise to a Security Interest over or affecting the Aircraft, any Engine or any Part; i. not attempt, or hold itself out as having any power, to sell, lease or otherwise dispose of the Aircraft, any Engine or any Part other than as expressly permitted by this Agreement; and j. do or cause to be done, at its sole cost and expense, any and all acts and things which may be required under the terms of any applicable law (other than Federal Aviation Law) involving any jurisdiction in which Lessee may operate, or any and all acts and things which the Lessor or any Lessor Lender may reasonably request, to perfect and preserve Lessor's ownership rights regarding and any Lessor Lender's security interest in and to the Aircraft within any such jurisdiction. 8.8. General ------- The Lessee will: a. not make any substantial change in the nature of the business in which it is engaged if such change, in the reasonable opinion of the Lessor, might reasonably be expected to have a material adverse effect on the Lessee's performance of its obligations under this Agreement; b. preserve its corporate existence, and will not merge or consolidate with any Person unless the successor Person resulting from such merger or consolidation (the "Successor"): i. is the Lessee or an Affiliate incorporated in the State of Incorporation or the State of Registration; ii. shall have a net worth immediately after such merger or consolidation of not less than the Lessee's net worth immediately prior thereto; iii. shall be authorized under applicable law to perform the Lessee's obligations under this Agreement and any assignment or assumption relating thereto to the same extent as the Lessee; iv. shall deliver to the Lessor an agreement, in form and substance reasonably satisfactory to the Lessor, containing an assumption by the Successor of the Lessee's representations and warranties under this Agreement (with such changes and qualifications as are appropriate), together with the due and -44- punctual performance of all the Lessee's obligations under this Agreement; and v. shall deliver to the Lessor an opinion of counsel reasonably satisfactory in form and substance to the Lessor to the effect that the agreements referred to in sub-clauses (iii) and (iv) above constitute the Successor's legal, valid and binding obligations; and c. other than pursuant to a Sub-Lease permitted under Section 8.5 hereof, ensure that no change will occur in the Habitual Base of the Aircraft without the prior written consent of the Lessor. 8.9. Records ------- The Lessee shall procure that accurate, complete and current records of all flights made by, and all maintenance carried out on, the Aircraft (including, in relation to each Engine and Part subsequently installed, before the installation) are kept in English (to the extent required for FAR Part 129 operators and otherwise by applicable law), and shall keep the records in such manner as the Aviation Authority may from time to time require and ensure that they comply with the requirements of the manufacturers of the Aircraft, any Engine or any Part. The records will form part of the Aircraft Documents. 8.10. Registration and Filings ------------------------ The Lessee shall: a. maintain the registration of the Aircraft with the Aviation Authority reflecting (so far as permitted by applicable law) the title and interest of Lessor and the security interest of any Lessor Lender in the Aircraft and this Agreement, and not do or suffer to be done anything that might reasonably be expected to adversely affect such registration (to the extent that such is the Lessee's, and not the Lessor's, obligation under applicable law), title or interest; b. do all acts and things (including making any filing or registration with the Aviation Authority, the DGAC or any other Government Entity) and executing and delivering all documents (including any amendment of this Agreement) as may be reasonably required by the Lessor: i. following any change or proposed change in the ownership or financing of the Aircraft (but, in each case, at the Lessor's cost); or -45- ii. following any modification of the Aircraft, any Engine or any Part or the permanent replacement of any Engine or Part in accordance with this Agreement, so as to ensure that the rights of the Lessor under this Agreement apply with the same effect as before; or iii. to establish, maintain, preserve, perfect and protect the rights of the Lessor under this Agreement; and c. within thirty (30) days after the Delivery Date, cause a notarized copy of this Agreement, together with certified Spanish translation of this Agreement, to be filed with the DGAC and deliver a certified copy of such filing to the Lessor. 8.11. Maintenance and Repair ---------------------- The Lessee shall: a. keep the Aircraft airworthy in all respects and in good repair and condition; b. not make any material change to the Agreed Maintenance Program without the approval of the Aviation Authority, and not change the intervals between Major Checks of the Airframe without the consent of Lessor, not to be unreasonably withheld; c. maintain the Aircraft in accordance with the Agreed Maintenance Program through Agreed Maintenance Performers and perform (at the respective intervals provided in and to the extent required by the Agreed Maintenance Program) all Major Checks; d. maintain the Aircraft in accordance with FAA Part 129 and any other rules and regulations of the Aviation Authority as are applicable to passenger category aircraft of the same type as the Aircraft operated by non-United States air carriers; provided, that after providing the Lessor with a certificate of its President, Director of Finance or chief internal legal counsel stating all relevant facts with respect thereto, Lessee may, in good faith and by appropriate procedures, contest the validity or application of any such rule or regulation in any reasonable manner which does not materially adversely affect the Lessor, or any of its interests in or to the Aircraft or this Agreement; e. comply with all mandatory inspection and modification requirements, airworthiness directives and similar requirements applicable to the Aircraft, any Engine or Part having a compliance date during the Term and that are required by the Aviation Authority; provided, that after providing the Lessor with a certificate of its President, -46- Director of Finance or chief internal legal counsel stating all relevant facts with respect thereto, Lessee may, in good faith and by appropriate procedures, contest the validity or application of any such requirements or airworthiness directives in any reasonable manner which does not materially adversely affect the Lessor, or any of its interests in or to the Aircraft or this Agreement; f. comply with all mandatory service bulletins issued by any manufacturer of the Aircraft, Engines or Parts and comply with all other service bulletins issued by any such manufacturer if and to the extent that the Lessee generally complies with such other service bulletins in relation to the other leased or owned Boeing/McDonnell Douglas MD-82 aircraft in its fleet; g. comply with all applicable laws and the regulations of the Aviation Authority and any other aviation authorities with jurisdiction over the Lessee or the Aircraft, any Engine or Part, and comply with all requirements of the Manufacturer, the Engine Manufacturer and the manufacturers of Parts, that relate to the maintenance, condition, use or operation of the Aircraft or require any modification or alteration to the Aircraft, any Engine or Part; provided, that after providing the Lessor with a certificate of its President, Director of Finance or chief internal legal counsel stating all relevant facts with respect thereto, the Lessee may, in good faith and by appropriate procedures, contest the validity or application of any such regulations or requirements in any reasonable manner which does not materially adversely affect the Lessor, or any of its interests in or to the Aircraft or this Agreement; h. maintain in good standing a current Certificate of Airworthiness for the Aircraft issued by the Aviation Authority except when the Aircraft is undergoing maintenance, modification or repair required or permitted by this Agreement, and from time to time provide to the Lessor a copy on request; i. maintain the Engines with respect to overhaul build standards and disc replacements at a level which is not materially inferior to the level applied by the Lessee in relation to other engines of the same type as the Engines in its fleet; j. maintain the Engines and the APU in an "on condition" program in accordance with the Approved Maintenance Program; k. subject to Clause 11.1(c), procure promptly the replacement of any Engine or Part which has become time, cycle or calendar expired, lost, stolen, seized, confiscated, destroyed, damaged beyond repair, unserviceable or permanently rendered unfit for use, with an engine or part complying with the conditions set out in Clause 8.13(a); and -47- l. maintain, protect and preserve the Aircraft in a manner consistent with Lessee's practices applied to similar equipment owned by Lessee or leased from other lessors, without in any way materially favoring or disfavoring the Aircraft relative to such other equipment. 8.12. Removal of Engines and Parts ---------------------------- The Lessee will ensure that no Engine or Part installed on the Aircraft is at any time removed from the Aircraft other than: a. if replaced as expressly permitted by this Agreement; or b. if the removal is of an obsolete item and is in accordance with the Agreed Maintenance Program; or c. pursuant to, and in accordance with, Clause 8.15; or d. i. during the course of maintaining, servicing, repairing, overhauling or testing that Engine or the Aircraft, as the case may be; or ii. as part of a normal engine or part rotation program; or iii. for the purpose of making such modifications to the Engine or the Aircraft, as the case may be, as are permitted under this Agreement, and then in each case only if it is reinstalled or replaced by an engine or part complying with Clause 8.13(a) as soon as practicable and in any event no later than the Expiry Date. 8.13. Installation of Engines and Parts --------------------------------- a. The Lessee will ensure that, except as permitted by this Agreement, no engine or part is installed on the Aircraft unless: i. in the case of an engine, it is an engine of the same model as, or an improved or advanced version of, the Engine it replaces (provided, in the case of an improved or advanced version, it can be installed and operated on the Airframe without modification of the Airframe or the engine, whether or not the other installed Engine is also such an improved or advanced version) and it has attached to it a current "serviceable tag" issued by the manufacturer or -48- supplier indicating that the engine is new, serviceable or overhauled, and the Lessee shall retain all such tags to the extent required under applicable law; ii. in the case of a part, it is in as good operating condition, is of the same or a more advanced make and model and is of the same interchangeable modification status as the replaced Part and has attached to it a current "serviceable tag" issued by the manufacturer or supplier indicating that the part is new, serviceable or overhauled, and the Lessee shall retain all such tags to the extent required under applicable law; provided, that the replacement of parts will not, in the aggregate, result in the material diminution in the value or utility of the Aircraft; iii. in the case of a part, it has become and remains the property of the Lessor free from Security Interests and on installation on the Aircraft will, without further act, be subject to this Agreement; and iv. in each case, the Lessee has full details as to its source and maintenance records as required by the Aviation Authority for Part 129 operators. b. If no Event of Default has occurred which is continuing, the Lessee will be entitled to install any engine or part on the Aircraft by way of replacement notwithstanding Clause 8.13(a) if: i. there is not available to the Lessee at the time and in the place that engine or part is required to be installed on the Aircraft a replacement engine or part complying with the requirements of Clause 8.13(a); ii. it would result in an unreasonable disruption of the operation of the Aircraft or the business of the Lessee to ground the Aircraft until an engine or part complying with Clause 8.13(a) becomes available for installation on the Aircraft; and iii. as soon as practicable after installation of the same on the Aircraft but, in any event, no later than the Expiry Date, the Lessee removes any such engine or part and replaces it with the Engine or Part replaced by it or by an engine or part complying with Clause 8.13(a). c. The Lessor agrees, for the benefit of the Lessee and any mortgagee or holder of any other Security Interest in any engine or part (other than an Engine or Part) owned by the Lessee, any lessor of any engine or part (other than an Engine or Part leased to the Lessee) and any conditional vendor of any engine or part (other than an Engine or -49- Part purchased by the Lessee subject to a conditional sale agreement or any other security agreement), that no right, title to or interest in any such engine or part shall be exercised or asserted by the Lessor and the Lessor acknowledges and confirms that it will not acquire any right, title or interest to or in any such engine or part as a result of its installation on the Airframe. 8.14. Non-Installed Engines and Parts ------------------------------- a. The Lessee shall ensure that any Engine or Part which is not installed on the Airframe (or any other airframe as permitted by this Agreement) is, except as expressly permitted by this Agreement, properly and safely stored and kept free from Security Interests. b. Notwithstanding sub-clause (a), the Lessee shall be permitted, if no Event of Default has occurred and is continuing, to install any Engine on an airframe and any Part on an airframe or engine: i. owned and operated by the Lessee free from Security Interests; or ii. operated by the Lessee and either (1) leased or hired to the Lessee pursuant to a lease or conditional sale agreement on terms whereby the Lessee has full operational control of that aircraft or engine, or (2) owned by the Lessee and subject to a mortgage, a lease, conditional sale agreement or other agreement that constitutes a Security Interest vested in or held by any other Person, provided that: (A) the terms of any such lease, conditional sale agreement or security Interest will not have the effect of prejudicing the title and interest of the Lessor or any mortgagee in and to that Engine or Part; and (B) the lessor under such lease, the seller under such conditional sale agreement or the secured party of any Security Interest, as the case may be, has confirmed and acknowledged in writing (which confirmation and acknowledgment may be contained in the lease, conditional sale agreement or document creating the Security Interest) to the Lessor, in form and substance reasonably satisfactory to the Lessor, that it will recognize the rights, title and interest of the Lessor and any mortgagee to and in that Engine or Part and that it will not acquire any rights of ownership whatever in relation thereto. 8.15. Pooling of Engines and Parts ---------------------------- -50- The Lessee will not enter into nor permit any pooling agreement or arrangement in respect of an Engine or Part without the prior written consent of the Lessor, such consent not to be unreasonably withheld in any case where an Engine or Part is leased, let on hire or otherwise made available by the Lessee (on terms conferring no more than a contractual right in personam against the Lessee and not a right in rem against such Engine or Part) pursuant to a pooling agreement to which the Lessee is a party and: a. the other parties to which are reputable, solvent commercial air carriers or the manufacturers or suppliers of the Engine or Part (or other reputable, solvent organizations whose business includes the administration of and participation in such pooling agreements or arrangements); and b. which does not contemplate the transfer of title to the pooled Engine or Part; and c. either provides that the Lessor (or any mortgagee designated by Lessor) will be sole loss payee in respect of any loss or damage to the Engine or Part, or provides for Lessor to acquire title to a substitute engine or part satisfying the conditions set out in Clause 8.13(a) if the Engine or Part is destroyed. 8.16. Equipment Changes ----------------- a. The Lessee will not make any modification or addition to the Aircraft (each an "Equipment Change"), except for an Equipment Change that: i. is expressly permitted or required by any other provision of this Agreement, or ii. the Lessee may deem desirable in the proper conduct of its business, provided that no such Equipment Change impairs the condition or airworthiness of the Aircraft, or diminishes the value, useful life or utility of the Airframe, Engine or Part, or iii. has the prior written approval of the Lessor, or iv. is made promptly following Delivery in order to conform the configuration of the Aircraft to Lessee's standard configuration for MD-82 aircraft. b. So long as no Event of Default has occurred and is continuing, the Lessee may remove any Equipment Change if it can be removed from the Aircraft without diminishing or impairing the value, utility, condition or airworthiness of the Aircraft. -51- 8.17. Title to Parts -------------- a. Subject to Clause 8.13(c), title to all parts installed on the Aircraft, whether by way of replacement as the result of an Equipment Change or otherwise (except those installed pursuant to Clause 8.13(b) or Clause 8.15) will on installation, without further act, vest in the Lessor subject to this Agreement free and clear of all Security Interests. The Lessee will at its own expense take all such steps and execute, and procure the execution of, all such instruments that are necessary to ensure that title so passes to the Lessor according to all applicable laws. At any time when requested by the Lessor, the Lessee will provide evidence to the Lessor's reasonable satisfaction (including the provision, if required, to the Lessor of a legal opinion of Lessee's chief internal counsel) that title has so passed to the Lessor. b. Except as referred to in Clause 8.16(b), any Engine or Part at any time removed from the Aircraft will remain the property of the Lessor until a replacement has been made in accordance with this Agreement and until title to that replacement has passed, according to applicable laws, to the Lessor subject to this Agreement free of all Security Interests, whereupon title to the Engine or Part will, provided no Event of Default has occurred and is continuing, pass to the Lessee. 8.18. Third Parties ------------- The Lessee shall ensure that no Person having possession of the Aircraft during the Term (other than the Lessor) will act in any manner inconsistent with the Lessee's obligations under this Agreement and that all such Persons shall comply with those obligations as if references to "Lessee" included a separate reference to those Persons. 9. INSURANCE --------- 9.1. Insurances ---------- The Lessee will maintain in full force and effect during the Term insurances in respect of the Aircraft in form and substance reasonably satisfactory to the Lessor (the "Insurances" which expression includes, where the context so admits, any relevant re-insurances). The Insurances will be effected either: a. on a direct basis with insurers of recognized standing who normally participate in aviation insurances in the leading international insurance markets and led by reputable underwriters reasonably satisfactory to the Lessor; or -52- b. with a single insurer or group of insurers reasonably satisfactory to the Lessor who does not retain the risk, but effects substantial reinsurance in the leading international insurance markets and through brokers and underwriters each of recognized standing and reasonably acceptable to the Lessor for a percentage reasonably acceptable to the Lessor of all risks insured (the "Reinsurances"), and the Lessor acknowledges and confirms that the current deductibles and exclusions, together with the existing brokers and insurers in respect of the insurances maintained by Lessee on the date of this Agreement are acceptable to it. 9.2. Requirements ------------ The Lessor's current requirements as to Insurances are as specified in this Clause and in Part 1 of Schedule 6. The Lessor may from time to time stipulate such other requirements for the Insurances as the Lessor reasonably considers necessary to ensure that the scope and level of cover is maintained in accordance with the then prevailing industry practice in relation to aircraft of the same type as the Aircraft and in relation to operators of similar standing to the Lessee. In the event that the Lessor proposes any such stipulation, it shall notify the Lessee accordingly and the Lessor and/or its brokers will then consult in good faith with the Lessee and the Lessee's brokers with regard to such proposed stipulation. If, following the consultation, the Lessor and the Lessee are satisfied that the stipulation should be made, the Lessee shall then comply with the stipulated requirements. If, however, the Lessor and the Lessee do not agree regarding the proposed stipulation, the Lessor and the Lessee (and their respective brokers) shall agree upon and name a third broker, to determine whether the proposed stipulation is required in order to ensure that the scope and level of cover is maintained in accordance with the then prevailing industry practice in relation to aircraft of the same type and in relation to operators of similar standing to the Lessee. The party whose position is not accepted by the third broker shall pay all costs and expenses of such broker in connection with the making of its determination. 9.3. Insurance Covenants ------------------- The Lessee shall: a. ensure that all legal requirements as to insurance of the Aircraft, any Engine or any Part that may from time to time be imposed by the laws of the State of Registration or any jurisdiction to, from or over which the Aircraft may be flown, in so far as they affect or concern the operation of the Aircraft, are complied with and, in particular, those requirements compliance with which is necessary to ensure that: i. the Aircraft does not become subject to detention or forfeiture; -53- ii. the Insurances remain valid and in full force and effect; and iii. the interests of the Indemnitees in the Insurances and the Aircraft or any Part are not thereby prejudiced; b. not use, cause or permit the Aircraft, any Engine or any Part to be used for any purpose or in any manner not covered by the Insurances or outside any geographical limit imposed by the Insurances; c. comply with the terms and conditions of each policy of the Insurances and not do, consent or agree to any act or omission that: i. invalidates or may reasonably be expected to invalidate the Insurances; ii. renders or may reasonably be expected to render void or voidable the whole or any part of any of the Insurances; or iii. brings any particular liability within the scope of an exclusion, exception or sub-limit to the Insurances; d. not take out without the prior written approval of the Lessor any insurance or reinsurance in respect of the Aircraft other than those required or permitted under this Agreement unless relating solely to hull total loss, business interruption, engine break-down, profit commission and deductible risk; e. commence renewal procedures at least 30 days prior to the expiration of any of the Insurances and provide to the Lessor: i. if requested by the Lessor, a written status report of renewal negotiations 14 days prior to each expiration date; ii. telefaxed confirmation of completion of renewal prior to each expiration date; iii. certificates of insurance (and where appropriate certificates of reinsurance), and broker's (and any reinsurance brokers') letter of undertaking substantially in the form set out in Parts 2 and 3 of Schedule 6, detailing the coverage and confirming the insurers' (and any reinsurers') agreement to the specified insurance requirements of this Agreement within seven days after each renewal date; -54- f. provide to the Lessor copies of those documents evidencing the Insurances which the Lessor may reasonably request (but not including information regarding premiums); g. on request, provide to the Lessor evidence that the Insurance premiums have been paid; h. not make any modification or alteration to the Insurances material and adverse to the interests of any of the Indemnitees; i. be responsible for any deductible under the Insurances; and j. provide any other insurance and reinsurance related information, or assistance, in respect of the Insurances as the Lessor may reasonably request (but not including copies of the insurance policies (unless a dispute as to coverage arises) or information regarding premiums). 9.4. Failure to Insure ----------------- If the Lessee fails to maintain the Insurances in compliance with this Agreement, or to provide Lessor with the evidence thereof required under Clause 9, each of the Indemnitees will be entitled but not obligated (without prejudice to any other rights of the Lessor under this Agreement): a. to pay the premiums due or to effect and maintain insurances satisfactory to it or otherwise remedy the Lessee's failure in such manner (including to effect and maintain an "owner's interest" policy) as it considers appropriate. Any sums so expended by it will become immediately due and payable by the Lessee to the Lessor on demand (and Lessor will endeavor to make such demand promptly following the incurring of such expenditure), together with interest thereon at the Default Rate from the date of expenditure by it up to the date of reimbursement by the Lessee (before and after any judgment); and b. at any time while such failure is continuing to require the Aircraft to remain at any airport or to proceed to and remain at any airport designated by it until the failure is remedied to its reasonable satisfaction. -55- 9.5. Continuing Indemnity -------------------- The Lessor may require the Lessee to effect and to maintain insurance after the Expiry Date with respect to its liability under the indemnities in Clause 10 for such period as the Lessor may reasonably require (but in any event not more than two years) providing for each Indemnitee to be named as additional insured. The Lessee's obligation under this Clause 9.6 shall not be affected by the Lessee ceasing to be lessee of the Aircraft or any of the Indemnitees ceasing to have any interest in respect of the Aircraft. Such insurance shall be maintained at the cost of Lessee until the Aircraft has been returned and Lessee has performed its obligations relating to such return under this Agreement and, thereafter, at the cost of Lessor. 9.6. Application of Insurance Proceeds --------------------------------- As between the Lessor and the Lessee: a. All insurance payments received as the result of a Total Loss or an Engine Loss occurring during the Term will be paid to the Lessor (or any mortgagee designated by Lessor), and the Lessor shall promptly pay the balance of those amounts to the Lessee after deduction of all amounts then due and payable by the Lessee to the Lessor under this Agreement, including under Clause 11.1(b) and Clause 11.1(c). b. All insurance proceeds in respect of any damage or loss to the Aircraft, any Engine or any Part occurring during the Term not constituting a Total Loss and in excess of the Damage Notification Threshold will be paid to the Lessor (or any mortgagee designated by Lessor) and applied in payment (or to reimburse the Lessee) for repairs or replacement property upon the Lessor being reasonably satisfied that the repairs or replacement have been effected in accordance with this Agreement. Insurance proceeds in amounts below the Damage Notification Threshold may be paid by the insurer directly to the Lessee. Any balance remaining shall be paid to or retained by the Lessee. c. All insurance proceeds in respect of third party liability will, except to the extent paid by the insurers to the relevant third party, be paid to the Lessor to be paid directly in satisfaction of the relevant liability or promptly to the Lessee in reimbursement of any payment so made. d. Notwithstanding Clauses 9.6(a), (b) and (c), if at the time of the payment of any such insurance proceeds a Default has occurred and is continuing all such proceeds will be paid to or retained by the Lessor (or any mortgagee designated by Lessor) to be applied toward payment of any amounts then due and payable by the Lessee in such -56- order as the Lessor sees fit or as the Lessor may elect. In the event that the Lessee remedies any such Default to the reasonable satisfaction of the Lessor, the Lessor shall procure that all such insurance proceeds then held by the Lessor in excess of the amounts (if any) applied by the Lessor (or any mortgagee designated by Lessor) in accordance with this sub-clause (d) shall be paid promptly to the Lessee. 9.7. Additional Insurance. -------------------- The Lessee agrees to procure any additional Insurances as at any time requested by the Lessor and Lessor agrees to reimburse the Lessee for the cost of, and all reasonable expenses incurred in obtaining, any such additional Insurances. 10. INDEMNITY --------- 10.1. General ------- The Lessee shall defend, indemnify and hold harmless the Indemnitees from and against any and all claims, proceedings, losses, liabilities, suits, judgments, costs, expenses, penalties or fines (each a "Claim") regardless of when the same is made or incurred, whether during or after the Term (but not before): a. that may at any time be suffered or incurred directly or indirectly as a result of or connected with possession, delivery, performance, management, registration, control, maintenance, condition, service, repair, overhaul, leasing, sub-leasing, use, operation or return of the Aircraft, any Engine or Part (either in the air or on the ground) whether or not the Claim may be attributable to any defect in the Aircraft, any Engine or any Part or to its design, testing, use or otherwise, and regardless of when the same arises or whether it arises out of or is attributable to any act or omission, negligent or otherwise, of any Indemnitee; b. that arise out of any act or omission that invalidates or that renders voidable any of the Insurances; c. that may at any time be suffered or incurred as a consequence of any design, article or material in the Aircraft, any Engine or any Part or its operation or use constituting an infringement of patent, copyright, trademark, design or other proprietary right or a breach of any obligation of confidentiality owed to any Person, but excluding any Claim to the extent that: -57- i. it arises as a result of the willful misconduct or gross negligence of such Indemnitee; ii. it arises as a result of a breach by the Lessor of its express obligations under this Agreement or as a result of a representation or warranty given by the Lessor in this Agreement not being true and correct at the date when, or when deemed to have been, given or made; iii. it constitutes a Lessor Tax or Lessor Lien; iv. it represents a Tax or loss of tax benefits (the Lessee's liabilities for which, to the extent thereof, are set out in Clauses 5.5, 5.6 and 5.8); v. it constitutes a cost or expense that is required to be borne by the Lessor in accordance with any other provision of this Agreement; vi. it results from any voluntary disposition by the Lessor of all or any part of its rights, title or interest in or to the Aircraft or under this Agreement, unless such disposition occurs as a consequence of an Event of Default; or vii. it is attributable to an event occurring after the Term unless the Claim results from or arises out of an act or omission by the Lessee, or any circumstance existing, during the Term. 10.2. Mitigation ---------- a. The Lessor agrees that it shall, as soon as reasonably practicable after it becomes aware of any circumstances that would, or would reasonably be expected to, become the subject of a claim for indemnification pursuant to Clause 10.1, notify the Lessee in writing accordingly. The Lessor (and any other Indemnitee seeking indemnification, as the case may be) and the Lessee shall then consult with one another in good faith in order to determine what action (if any) may reasonably be taken to avoid or mitigate such Claim. The Lessee shall have the right to take all reasonable action (on behalf and, if necessary, in the name of the Lessor or such other Indemnitee) in order to resist, defend or settle (provided such settlement is accompanied by payment in full and requires no admissions or covenants by Lessor) any claims by third parties giving rise to such Claim, provided always that the Lessee shall not be entitled to take any such action unless adequate provision, reasonably satisfactory to the Lessor and such other Indemnitee, shall have been made in respect of the third party claim and the costs thereof. The Lessee or, if the Lessee's insurers have confirmed that the Claim is covered by Lessee's Insurances, the Lessee's -58- insurers shall be entitled to select any counsel to represent it or them, the Lessor and such other Indemnitee in connection with any such action, subject in the case of Lessee to the approval of the Lessor and such other Indemnitee (such approval not to be unreasonably withheld) and any action taken by the Lessee shall be on a full indemnity basis in respect of the Lessor and such other Indemnitee. b. Any sums paid by the Lessee to the Lessor or any Indemnitee in respect of any Claim pursuant to Clause 10.1 shall be paid subject to the condition that, in the event that the Lessor or such Indemnitee is subsequently reimbursed in respect of that Claim by any other Person, the Lessor or such Indemnitee shall, provided no Default shall have occurred and be continuing, promptly pay to the Lessee an amount equal to the sum paid to it by the Lessee, including any interest on such amount to the extent attributable thereto and received by the Lessor or such Indemnitee, less any Tax payable by the Lessor or such Indemnitee in respect of such reimbursement. c. Upon the making of any indemnity payment pursuant to Clause 10.1, the Lessee, without any further action, shall be subrogated to any claims the Lessor may have relating thereto to the extent of such payment. The Lessor agrees to give such further assurances or agreements and to cooperate with the Lessee to permit the Lessee to pursue such claims, if any, to the extent reasonably requested by the Lessee and at the Lessee's sole cost and expense. d. In the event that the Lessee shall have paid an amount to the Lessor pursuant to Clause 10.1, and the Lessor subsequently shall be reimbursed in respect of such indemnified amount from any other person, the Lessor shall promptly (but not before the Lessee shall have made all payments then due to the Lessor under this Agreement) pay to the Lessee an amount equal to the amount of such reimbursement. 10.3. Duration -------- The indemnities contained in this Agreement will survive and continue in full force after the Expiry Date. -59- 11. EVENTS OF LOSS -------------- 11.1. Total Loss ---------- a. Pre-delivery: If a Total Loss occurs prior to Delivery, this ------------ Agreement will immediately terminate and, except as expressly stated in this Agreement, neither party will have any further obligation or liability under this Agreement except that the Lessor will return to the Lessee the Deposit and any other amounts paid by the Lessee to the Lessor with respect to the Aircraft prior to Delivery. b. Post-delivery: If a Total Loss occurs after Delivery, the Lessee will ------------- pay to the Lessor (or any mortgagee designated by Lessor), no later than 90 days after the Total Loss Date (the "Settlement Date"), the Termination Value on the Settlement Date, less any portion of Basic Rent previously paid by the Lessee and corresponding to periods after the date of such payment, unless the Aircraft is restored to the Lessor or the Lessee within that period (or, in the case of a Total Loss coming within paragraph (c) of the definition of Total Loss and involving the loss of the Lessor's title to the Aircraft, if both the Aircraft and the Lessor's title thereto are restored to the Lessor or, in the case of the Aircraft, to the Lessee). The receipt by the Lessor (or any mortgagee designated by Lessor) of the insurance proceeds in respect of the Total Loss on or prior to the Settlement Date shall discharge the Lessee from its obligation to pay the Termination Value to the Lessor pursuant to this sub-clause (b), provided such proceeds are not less than an amount equal to the Termination Value less an amount equal to the portion of any Basic Rent previously paid by the Lessee and corresponding to periods after the date of such payment. In the event that the insurance proceeds are paid initially to the Lessee and not to the Lessor, they may be retained by the Lessee if the Lessee shall have paid the Termination Value, less an amount equal to the portion of any Basic Rent previously paid by the Lessee and corresponding to periods after the date of such payment, to the Lessor; otherwise, the Lessee shall pay the Termination Value, less an amount equal to the portion of any Basic Rent previously paid by the Lessee and corresponding to periods after the date of such payment, to the Lessor within two (2) Business Days following receipt by the Lessee of such proceeds. In the event that the Lessee pays the Termination Value, less an amount equal to the portion of any Basic Rent previously paid by the Lessee and corresponding to periods after the date of such payment, to the Lessor in accordance with this sub- clause (b), the Lessor shall promptly assign to the Lessee its rights under the Insurances to receive the insurance proceeds in respect of the Total Loss to the extent that such proceeds shall not have been paid to the Lessee. Subject to the rights of any insurers and reinsurers or other third parties, upon irrevocable payment in full to the Lessor of that amount and all other amounts then due and payable to the Lessor under this Agreement, the Lessor shall, without -60- recourse or warranty (except as to the absence of Lessor Liens and as to good and marketable title), and without further act, be deemed to have transferred to the Lessee all of the Lessor's rights to any Engines or Parts not installed when the Total Loss occurred, all on an "as-is, where is" basis, and shall, at the Lessee's expense, execute and deliver such bills of sale and other documents and instruments as the Lessee may reasonably request to evidence (on the public record or otherwise) the transfer and the vesting of the Lessor's rights in such Engines and Parts in the Lessee, free and clear of all rights of the Lessor and any Lessor Liens. c. Engine Loss: Upon the occurrence of an Engine Loss (including, for ----------- the avoidance of doubt, at a time when the Engine is not installed on the Airframe) in circumstances in which there has not also occurred a Total Loss, the Lessee shall give the Lessor written notice promptly upon becoming aware of the same and shall (unless the Lessor has received the insurance proceeds relating to such Engine Loss), within 90 days after the Engine Loss Date, convey or cause to be conveyed to the Lessor, as replacement for such Engine, title to a replacement engine that is in the same or better operating condition, has as many or more Flight Hours and Cycles available until the next scheduled checks, inspections, overhauls and shop visits and has the same or greater value and utility as the lost Engine and that complies with the conditions set out in Clause 8.13(a). The Lessee will at its own expense take all such steps and execute, and procure the execution of, all such instruments that are necessary to ensure that title to the replacement engine passes to the Lessor according to all applicable laws, and if requested by the Lessor, will provide evidence to the Lessor's reasonable satisfaction (including the provision, if required, to the Lessor of a legal opinion of counsel to Lessee reasonably satisfactory to Lessor) that title has so passed to the Lessor, whereupon the leasing of the replaced Engine the subject of the Engine Loss shall cease and title to such replaced Engine shall (subject to any salvage rights of insurers) vest in the Lessee pursuant to Clause 8.17(c). If the Lessor subsequently receives any insurance proceeds relating to such Engine Loss, the Lessor shall promptly remit such proceeds to the Lessee. No Engine Loss with respect to any Engine that is replaced in accordance with the provisions of this Clause 11.1(c) shall result in any increase or decrease in Basic Rent, the Agreed Value or the Termination Value. 11.2. Requisition ----------- During any requisition for use or hire of the Aircraft, any Engine or Part that does not constitute a Total Loss: a. the Basic Rent and Supplemental Rent payable under this Agreement will not be suspended or abated either in whole or in part, and the Lessee will not be released -61- from any of its other obligations under this Agreement (other than operational obligations with which the Lessee is unable to comply solely by virtue of the requisition); and b. so long as no Event of Default has occurred and is continuing, the Lessee will be entitled to any compensation payable by the requisitioning authority in respect of the Term. The Lessee will, as soon as practicable after the end of any such requisition, cause the Aircraft to be put into the condition required by this Agreement. The Lessor will be entitled to all compensation payable by the requisitioning authority in respect of any change in the structure, state or condition of the Aircraft arising during the period of requisition, and the Lessor will apply such compensation in reimbursing the Lessee for the cost of complying with its obligations under this Agreement in respect of any such change, but so that, if any Event of Default has occurred and is continuing, the Lessor may apply the compensation in or towards settlement of any amounts owing by the Lessee under this Agreement. All such sums shall be held by the Lessor. 12. RETURN OF AIRCRAFT ------------------ 12.1. Redelivery ---------- On the Expiry Date or termination of the leasing of the Aircraft under this Agreement, the Lessee shall, unless a Total Loss has occurred, at its expense, redeliver the Aircraft and Aircraft Documents to the Lessor at the Redelivery Location in a condition complying with this Clause 12 and Schedule 5, free and clear of all Security Interests (other than Lessor Liens); provided, however, that if Lessor designates an alternate Redelivery Location in the continental United States of America then the Lessor shall reimburse the Lessee for the cost of a ferry flight from Mexico City International Airport (or such closer location at which Lessee has then placed the Aircraft) to such alternate Redelivery Location, provided, however, that if such cost is in excess of $10,000.00 any excess shall not be reimbursed and shall be borne by the Lessee. 12.2. Final Checks ------------ Immediately prior to return of the Aircraft, Lessee shall perform the following: a. Lessee shall perform (or have performed by an Agreed Maintenance Performer) a full and complete zonal, systems and structural check ("C" or its equivalent), the work, if any, required to be performed within thirty (30) days thereafter in accordance with the heavy work cards, the corresponding lower checks ("A" and "B" or equivalent) and any other maintenance and inspections tasks that are a part thereof, all in -62- accordance with the Agreed Maintenance Program. At return, the Airframe will have zero Flight Hours since such "C" check and any such heavy maintenance work, except for the acceptance flights and the ferry flight to the Redelivery Location. Lessee will also weigh the Aircraft. Lessee shall also perform during such check any other work reasonably requested by Lessor (and not otherwise required under this Agreement) so long as such work does not prevent Lessee from returning the Aircraft on the Expiry Date, and Lessor shall reimburse Lessee for the cost of such work based on its third-party labor rates. The Lessor shall indemnify and hold harmless the Lessee from and against any and all costs and expenses incurred by the Lessee in the event the performance of such additional work causes a delay in the return of the Aircraft. b. Lessee shall perform (or have performed by an Agreed Maintenance Performer) an internal and external corrosion inspection in accordance with the manufacturer's corrosion prevention and control program ("CPCP") specified for the model type and correct any discrepancies in accordance with the recommendations of the manufacturer and the manufacturer's structural repair manual ("SRM"). In addition, all inspected areas will be properly treated with corrosion inhibitor as recommended by the manufacturer. c. With respect to the Engines: i. Lessee shall perform a videotape borescope inspection of the low pressure and high pressure compressors and the turbine area of the Engines. 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. ii. In accordance with the applicable manufacturer's maintenance manual, Lessee shall perform a maximum power assurance run and condition, acceleration and bleed valve scheduling checks on the Engines, and 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 Engine manufacturer's maintenance manual. iii. If the Engine historical and technical records and the condition trend monitoring data of any Engine or the APU indicate an abnormal acceleration (as determined with reference to the applicable maintenance manual) in the rate of deterioration in the performance of such Engine or APU, Lessee shall correct such conditions causing the accelerated rate of deterioration. -63- d. Lessee shall remove its logo and exterior markings and shall repaint the Airframe white in accordance with the SRM and the paint manufacturer's instructions, avoiding any over-spray on other surfaces. 12.3. Final Inspection ---------------- a. At least 45 days before the redelivery of the Aircraft, the Lessee will make available to the Lessor at its maintenance base (i) the Aircraft Documents, (ii) a current and complete copy of the Agreed Maintenance Program, (iii) a copy of all Engine and APU trend monitoring data, (iv) a written summary of all sampling programs involving or affecting the Aircraft, and (v) a copy of all other documentation and data reasonably requested by Lessor and required to be maintained by FAR Part 129 operators for review and inspection in order to prepare for the Final Inspection of the Aircraft and in order to facilitate the Aircraft's integration into any subsequent operator's fleet. The Lessor agrees that it will not disclose the contents of the Agreed Maintenance Program to any Person except to the extent necessary to monitor the Lessee's compliance with this Agreement and/or to bridge the maintenance program for the Aircraft from the Agreed Maintenance Program to another program after the Expiry Date. b. During the 30 days immediately prior to redelivery of the Aircraft, the Lessee will make the Aircraft available to the Lessor at the Lessee's maintenance base for inspection (the "Final Inspection") in order to verify that the condition of the Aircraft complies with this Agreement. c. At the request of Lessor, Lessee shall perform "bridging" maintenance procedures for the purpose of standardizing the Aircraft to the maintenance program of any subsequent operator of the Aircraft; provided, however, that Lessor shall pay to Lessee all costs and expenses incurred by the Lessee relating to the "bridging" procedures. The Lessor shall indemnify and hold harmless the Lessee from and against any and all costs and expenses incurred by the Lessee in the event the performance of such "bridging" causes a delay in the return of the Aircraft. d. The Lessor shall also be entitled, as part of the Final Inspection, to require the Lessee to perform an acceptance flight of up to two hours at the Lessee's cost (with up to three of the Lessor's representatives as on-board observers) and such further acceptance flights as may be necessary in the event that the first or subsequent flights do not confirm that the Aircraft complies with the requirements of this Agreement. The Lessee's pilots shall be in control of such acceptance flights at all times. -64- 12.4. Non-Compliance -------------- To the extent that, on the Expiry Date, the condition of the Aircraft does not comply with this Agreement, the Lessee shall at the option of the Lessor: a. immediately rectify the non-compliance and, to the extent the non- compliance extends beyond the Expiry Date due to acts or omissions of the Lessee, the Term will be automatically extended until the non- compliance has been rectified; or b. redeliver the Aircraft to the Lessor and indemnify the Lessor, and provide security reasonably acceptable to the Lessor for that indemnity, against the cost of putting the Aircraft into the condition required by this Agreement. During any extension of the Term pursuant to sub-clause (a), this Agreement will remain in full force and effect, including the obligation to pay rent (which Lessee shall pay at the rate of $5,500 per day weekly in arrears); provided, however, that Lessee shall not operate, or permit others to operate, the Aircraft after the Expiry Date except for acceptance flights pursuant to Clause 12.2 and a ferry flight to the Redelivery Location. c. The Lessor may require the Lessee to remove any Equipment Change that would diminish or impair the value, utility, condition or airworthiness of the Aircraft and to restore the Aircraft to its condition prior to that Equipment Change. 12.5. Export Documentation -------------------- Upon redelivery and upon request by the Lessor, the Lessee shall provide to the Lessor all documents necessary to export the Aircraft from the State of Incorporation (including a valid and subsisting export license for the Aircraft). 12.6. Acknowledgment ------------- Provided the Lessee has complied with its obligations under this Agreement, upon redelivery of the Aircraft by the Lessee to the Lessor at the Redelivery Location, the Lessor will deliver to the Lessee a written acknowledgment confirming that the Lessor is satisfied that the Aircraft is in the condition required by this Agreement and has been redelivered to the Lessor in accordance with this Agreement. Within one (1) Business Day of the delivery of such acknowledgment the Lessor shall return the balance, if any, of the Deposit to Lessee. -65- 13. DEFAULT ------- 13.1. Events ------ Each of the following events will constitute an Event of Default and a repudiation of this Agreement by the Lessee: a. Non-payment: the Lessee fails to pay any amount of Basic Rent and ----------- such failure continues for three Business Days after written notice from Lessor, or Lessee fails to pay any amount of Termination Value when due, or, after the Lessor gives written notice to the Lessee that Supplemental Rent is due, fails to make any payment of Supplemental Rent in accordance with the terms of this Agreement and such failure continues for 15 days; or b. Insurance: the Lessee fails to comply with any provision of clause 9 --------- or any insurance required to be maintained under this Agreement is canceled or terminated; or c. Breach: the Lessee fails to comply with any other provision of this ------ Agreement and the failure continues for 30 days after written notice from the Lessor to the Lessee, provided however, that, if such failure cannot reasonably be remedied within such 30 day period and the Lessee is diligently undertaking all necessary remedial action, the 30 day period shall be extended once for a further 30 days; or d. Representation: any representation or warranty made by the Lessee in -------------- this Agreement or in any document or certificate furnished to the Lessor pursuant to or in connection with this Agreement is or proves to have been incorrect in any material respect when made and the Lessee's ability to comply with its obligations under this Agreement, and/or the Lessor's or any mortgagee 's rights, title and interest to and in the Aircraft and/or under this Agreement, are thereby materially and adversely affected and, if the effect of such misrepresentation is curable, shall not have been cured within thirty days after the Lessee's receipt of written notice thereof from the Lessor; or e. Cross Default: ------------- i. any Financial Indebtedness of the Lessee that exceeds $7,500,000 is not paid when due and any applicable grace period shall have expired; ii. the security for any such Financial Indebtedness is enforced; or -66- iii. any material lease, conditional sale, installment sale or forward purchase agreement of the Lessee in respect of an aircraft is terminated as a consequence of an event of default or termination event (however described); provided always, in any such case, it shall not constitute an Event of Default under this Agreement: i. if the relevant Financial Indebtedness constitutes non-recourse borrowing or financing; or ii. if the non-payment, acceleration, termination or event in question is being contested by the Lessee in good faith and on reasonable grounds and any termination of agreement or enforcement of security through judicial process has been stayed by a court of competent jurisdiction; or f. Approvals: any consent, authorization, license, certificate or --------- approval of or registration with or declaration to any Government Entity in connection with this Agreement, including: i. any authorization required by the Lessee of, or in connection with, the execution, delivery, validity, enforceability or admissibility in evidence of this Agreement or the performance by the Lessee of its obligations under this Agreement; or ii. any airline license, air transport license, franchise, concession, permit, certificate, right or privilege required by the Lessee for the conduct of its business, is modified, withheld, revoked, suspended, canceled, withdrawn, terminated or not renewed, or otherwise ceases to be in full force and is not reissued, reinstated or renewed within 30 days, provided however that any such modification, withholding, revocation, suspension, cancellation, withdrawal, termination or non-renewal shall only constitute an Event of Default if it has a material adverse effect on the Lessee's ability to perform its obligations under this Agreement or the Lessor's rights, title and interest to and in the Aircraft or under this Agreement; or -67- g. Insolvency: ---------- i. the Lessee is, or is deemed for the purposes of any relevant law to be, unable to pay its debts as they fall due or to be insolvent, or admits in writing its inability to pay its debts as they fall due (disregarding for that purpose any assumed, and not actual acceleration of such debts made solely for the purpose of complying with applicable accounting rules); or ii. the Lessee suspends making payments on all or any class of its debts or a moratorium is declared in respect of any of its indebtedness; or h. Bankruptcy and Similar Proceedings: ---------------------------------- i. Lessee shall consent to the appointment of a receiver, trustee or liquidator for itself or for a substantial part of its property and such appointment has a material adverse effect on the Lessee's ability to perform its obligations under this Agreement; or ii. 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, concurso mercantil, 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; or iii. any order, judgment or decree is entered by a court of competent jurisdiction appointing a receiver, trustee or liquidator of Lessee or a substantial part of its property and such appointment will have a material adverse effect on the Lessee's ability to perform its obligations under this Agreement, or ordering a substantial part of Lessee's property to be sequestered and such sequestering will have a material adverse effect on the Lessee's ability to perform its obligations under this Agreement, and such actions are instituted or done with the consent of Lessee or, if instituted by another Person, the order, judgment or decree is not dismissed, remedied or relinquished within 60 days; or iv. a petition against Lessee in a proceeding under any Bankruptcy Laws shall be filed and shall not be withdrawn or dismissed within 60 days thereafter, or if, under the provisions of any Bankruptcy Laws that may apply to Lessee, any court of competent jurisdiction shall assume jurisdiction, custody or control -68- of Lessee or of any substantial part of its property and such assumption of jurisdiction, custody or control will have a material adverse effect on the Lessee's ability to perform its obligations under this Agreement and such jurisdiction, custody or control remains in force unrelinquished, unstayed or unterminated for a period of 60 days; or v. the Lessee enters into a concurso mercantil, composition, assignment or arrangement with any creditors of, or the reorganization, rehabilitation, administration, liquidation, or dissolution of, the Lessee; or i. Unlawful: it becomes unlawful for the Lessee to perform any of its -------- material obligations under this Agreement or this Agreement becomes wholly or partly invalid or unenforceable, provided that any such partial invalidity or unenforceability shall only constitute an Event of Default if it has a material adverse effect on the Lessee's ability to perform its obligations under this Agreement or the Lessor's rights, title and interest in and to the Aircraft or under this Agreement; or j. Suspension of Business: the Lessee suspends or ceases to carry on a ---------------------- substantial part of its business and such suspension or cessation of business will have a material adverse effect on the Lessee's ability to perform its obligations under this Agreement; or k. Disposal: the Lessee disposes of a substantial part of its assets and -------- the disposal of such assets will have a material adverse effect on the Lessee's ability to perform its obligations under this Agreement, whether by one or a series of transactions, related or not, other than pursuant to a merger or consolidation as referred to in, and subject to, Clause 8.8(b) or for the purpose of any other reorganization or amalgamation the terms of which have received the previous consent in writing of the Lessor; or l. Rights: the existence, validity, enforceability or priority of the ------ rights of the Lessor as owner and lessor in respect of the Aircraft is challenged by the Lessee or any other Person lawfully claiming by or through the Lessee; or m. Change of Ownership: any single Person or group of Persons acquire ------------------- control, directly or indirectly, of the Lessee where such acquisition of control will have a materially adverse effect on the Lessee's ability to perform its obligations under this Agreement or the Lessor's rights, title and interest in and to the Aircraft or under this Agreement). -69- 13.2. Rights ------ If an Event of Default occurs, and for as long as it shall continue, the Lessor may at its option (and without prejudice to any of its other rights under this Agreement): a. treat such event as a repudiation by the Lessee of its obligations under this Agreement and by notice to the Lessee with immediate effect terminate the leasing of the Aircraft (but without prejudice to the continuing obligations of the Lessee under this Agreement), whereupon all rights of the Lessee under this Agreement shall cease; and/or b. proceed by appropriate court action or actions to enforce performance of this Agreement or to recover damages for the breach of this Agreement; and/or c. either: i. take possession of the Aircraft, for which purpose the Lessor may enter any premises belonging to, occupied by or under the control of the Lessee (for which purpose the Lessee hereby grants to the Lessor an irrevocable license to the extent permitted by applicable law) where the Aircraft may be located, or cause the Aircraft to be redelivered to the Lessor at the Redelivery Location; or ii. by serving notice, require the Lessee to redeliver the Aircraft to the Lessor at the Redelivery Location. 13.3. Repossession and Removal ------------------------ If an Event of Default occurs, and for as long as it shall continue, the Lessor may sell or otherwise deal with the Aircraft as if this Agreement had never been made and the Lessee will, at the request of the Lessor, take all steps necessary to return the Aircraft to Lessor, including if requested by Lessor to export the Aircraft from the country where the Aircraft is for the time being situated, and any other steps necessary to enable the Aircraft to be redelivered to the Lessor in accordance with this Agreement. 13.4. Default Payments ---------------- If an Event of Default occurs, the Lessee will indemnify the Lessor on demand against any loss, damage, expense, cost or liability which the Lessor may sustain or incur directly or indirectly as a result, including: -70- a. in the event that the Aircraft has not been sold, upon written notice from Lessor to Lessee specifying a payment date not earlier than 15 days from the date of such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent for the Aircraft due for periods commencing after the date specified for payment in such notice), any unpaid Basic Rent due for periods prior to and including the period ending with the payment date specified in such notice plus an amount (together with interest, if any, at the Default Rate on the amount of any such unpaid Basic Rent and on such specified amount from the respective due dates to and including the actual date of payment) equal to the excess, if any, of (i) the Termination Value computed as of the Rent Date immediately preceding the date specified for payment in such notice, over (ii) the fair market sales value of the Aircraft; for purposes hereof, the "fair market sales value" of the Aircraft shall be as specified in an appraisal by a recognized independent aircraft appraiser chosen by the Lessor; b. in the event that the Aircraft is sold, the amount (if any) by which the aggregate of (i) the net sale proceeds (calculated on an after-tax basis by deducting the costs of sale, including the loss or recapture of the Lessor's tax benefits, if any, together with the cost of preparing the Aircraft for sale, and the repayment of any outstanding indebtedness in relation to the financing of the Aircraft) plus (ii) the present value of the anticipated after-tax net income to be derived from such net sale proceeds up to the scheduled Expiry Date, discounted on a monthly basis using 9.0% per annum as the discount rate, are less than the Termination Value computed as of the Rent Date immediately preceding the date of sale; c. any amount of principal, interest, fees or other sums whatsoever paid or payable on account of funds borrowed in order to carry any amount unpaid by the Lessee; and d. any loss, premium, penalty or expense that may be incurred in repaying funds raised to finance the Aircraft or in unwinding any swap, forward interest rate agreement or other financial instrument relating in whole or in part to the Lessor's financing of the Aircraft. For the avoidance of doubt, the provisions of Clause 5.9 will apply to any sums payable by the Lessee pursuant to this Clause 13.4. 14. ASSIGNMENT and TRANSFER ----------------------- 14.1. No Assignment by Lessee ----------------------- -71- The Lessee will not assign or create or permit to exist any Security Interest over any of its rights under this Agreement, except as expressly permitted hereunder, including under Clause 8.5 hereof. 14.2. Lessor Assignment ----------------- The Lessor may sell, assign or transfer all or any of its rights under this Agreement and in the Aircraft (a "Transfer") and the Lessor will, other than in the case of an assignment for security purposes, have no further obligation under this Agreement following a Transfer but, notwithstanding any Transfer, will remain entitled to the benefit of each indemnity under this Agreement. a. In connection with any Transfer, the following conditions shall apply: i. Lessor shall give Lessee written notice of such Transfer at least ten Business Days before the date of such Transfer, specifying the name and address of the proposed purchaser, assignee or transferee (the "Transferee"); ii. the Transfer will not adversely affect the Lessee's rights and interests in the Aircraft and/or this Agreement, nor subject the Lessee to any Tax or Claim or any other obligation or liability to which it would not have been subject had such assignment or transfer not taken place; iii. the Transferee will have full corporate power and authority to enter into and perform the transactions contemplated by this Agreement on the part of "Lessor"; iv. on the Transfer date the Lessor and the Transferee shall enter into an agreement or agreements in which the Transferee confirms that it shall be deemed a party to this Agreement and agrees to be bound by all the terms of, and to undertake all of the obligations of, the Lessor contained in this Agreement; v. either (x) the Transferee shall be a financial institution, a corporation or a partnership having experience in aircraft leasing and with a net worth of U.S. $10,000,000 (United States Dollars Ten Million) and shall not be an entity operating or having a bona fide intent to operate on the same routes as the Lessee; or (y) the Lessee has given its prior written consent to such assignment (which consent shall not be unreasonably withheld or delayed); -72- vi. in connection with such assignment, the Aircraft may be registered in the jurisdiction where it is registered prior to such assignment under the relevant laws and rules and regulations of such jurisdiction; vii. the Lessor shall pay all reasonable, out-of-pocket costs and expenses (including, without limitation, reasonable legal fees and registration costs) imposed on or incurred by the Lessee as a result of the entering into of such assignment. b. Upon any Transfer, the Transferee shall be deemed Lessor for all purposes of this Agreement, each reference in this Agreement to the "Lessor" shall thereafter be deemed for all purposes to refer to the Transferee, and the transferor shall be relieved of all obligations of the "Lessor" under this Agreement arising after the time of such Transfer except to the extent attributable to acts or events occurring prior to the time of such Transfer. c. Upon compliance by Lessor and a Transferee with the terms and conditions of Clause 14.2(a), Lessee shall at the time of Transfer, at the specific written request and at the sole cost and expense of Lessor: i. execute and deliver to Lessor and to such Transferee an agreement, in form and substance satisfactory to Lessor, Lessee and such Transferee, dated the date of such transfer, consenting to such transfer, agreeing to pay all or such portion of the Basic Rent and other payments under this Agreement to such Transferee or its designee as such Transferee shall direct, and agreeing that such Transferee shall be entitled to rely on all representations and warranties made by Lessee in this Agreement or in any certificate or document furnished by Lessee in connection with this Agreement as though such Transferee was the original "Lessor"; ii. deliver to Lessor and to such Transferee a certificate, signed by a duly authorized officer or Lessee, dated the date of such transfer, to the effect that no Event of Default has occurred and is continuing or, if one is then continuing, describing such Event of Default; iii. cause to be delivered to Lessor and such Transferee certificates of insurance (and where appropriate certificates of reinsurance) and broker's (and any reinsurance brokers') letter of undertaking substantially in the form set out in Parts 2 and 3 of Schedule 6, detailing the coverage and confirming the insurers' (and any reinsurers') agreement to the specified insurance requirements of this Agreement and listing the Lessor and Transferee as -73- additional insureds and the Transferee as sole loss payee (subject to other direction by the Lessor); iv. deliver to Lessor and to such Transferee an opinion of Lessee's chief internal counsel to the effect that such Transferee may rely on the opinion delivered by such counsel or its predecessor counsel in connection with this Agreement on the Delivery Date with the same force and effect as if such Transferee was an original addressee of such opinion when given; v. deliver to Lessor and such Transferee information on the location of the Airframe and Engines at all times requested by Lessor in order to permit the Transfer to take place at a time and on a date so as to eliminate or minimize any Taxes applicable to the Transfer; and vi. such other documents as Lessor or such Transferee may reasonable request, so long as such documents do not adversely affect the rights or obligations of Lessee under this Agreement or otherwise adversely affect Lessee. 14.3. Grants of Security Interests ---------------------------- The Lessor shall be entitled at any time after Delivery to grant a security interest in the Aircraft or its right, title and interest in this Agreement (each, a "Mortgage") in favor of any Person (each, a "Mortgagee"). In the case of any such grant by Lessor of a Mortgage to a Mortgagee in all or any portion of Lessor's rights, title and interest in and to the Aircraft and this Agreement, Lessee shall promptly, at the specific written request and at the sole cost and expense of Lessor: a. execute and delivery to Lessor and to such Mortgagee an agreement, in form and substance satisfactory to Lessor, such Mortgagee and Lessee, dated the date of the grant of such Mortgage, (i) consenting to such Mortgage and to any assignment of Lessor's rights, title and interest in and to this Agreement to such Mortgagee for security purposes, (ii) if requested in writing by Lessor, agreeing that Lessee will pay the Basic Rent and other payments under this Agreement to such Mortgagee, and (iii) agreeing that such Mortgagee shall be entitled to rely on all representations and warranties made by Lessee in this Agreement or in any certificate or document furnished by Lessee in connection with this Agreement as though such Mortgagee was originally the "Lessor"; b. execute and deliver to Lessor and such Mortgagee such agreements as the Lessor may reasonably require for the purposes of effecting all necessary amendments to this Agreement (including Clauses 8, 9 and 10 and Schedule 6); -74- c. deliver to Lessor and such Mortgagee a certificate, signed by a duly authorized officer of Lessee, dated the date of the grant of the Mortgage, to the effect that no Event of Default has occurred and is continuing or, if one is then continuing, describing such Event of Default; d. cause to be delivered to Lessor and such Mortgagee certificates of insurance (and where appropriate certificates of reinsurance) and broker's (and any reinsurance brokers') letter of undertaking substantially in the form set out in Parts 2 and 3 of Schedule 6, detailing the coverage and confirming the insurers' (and any reinsurers') agreement to the specified insurance requirements of this Agreement, adding such Mortgagee as an additional insured and, if requested by Lessor, listing such Mortgagee as sole loss payee; e. deliver to Lessor and such Mortgagee an opinion of Lessee's chief internal counsel to the effect that such Mortgagee may rely on the opinion delivered by such counsel or its predecessor counsel in connection with this Agreement on the Delivery Date with the same force and effect as if such Mortgagee was an original addressee of such opinion when given; and f. such other documents as Lessor or such Mortgagee may reasonably request so long as such documents do not adversely affect the rights or obligations of Lessee under this Agreement or otherwise adversely affect Lessee. 14.4. Sale and Leaseback by Lessor ---------------------------- In addition to the Transfers and grants of Security Interests permitted by Clauses 14.2 and 14.3, Lessor shall be entitled to transfer its right, title and interests in and to the Aircraft to any Person and lease the Aircraft from such Person (a "Head Lessor"), and in such event Lessor shall retain its rights and obligations as the "Lessor" under this Agreement. In the event of such a sale and lease-back by Lessor, (a) the Lessor shall be entitled to assign its rights in this Agreement to such Head Lessor as security for its obligations under the lease from the Head Lessor (the "Head Lease"), (b) the Head Lessor shall be entitled to grant a Mortgage covering the Aircraft and this Agreement, (c) at the sole cost and expense of Lessor, Lessee shall execute and deliver to Lessor, such Head Lessor and such Mortgagee, as appropriate, the documents specified in Clauses 14.2(c)(i) through (vi) and Clauses 14.3(a) through (f) above, and Lessee shall cooperate with Lessor to make such other changes to this Agreement, such as including such Head Lessor and such Mortgagee as additional insureds and "Indemnitees", as Lessor may reasonably request so long as such changes do not adversely affect the rights or obligations of Lessee under this Agreement or otherwise adversely affect Lessee. -75- 14.5. Further Acknowledgments ----------------------- Lessee further acknowledges that any Transferee or Mortgagee shall in turn have the rights of, and be subject to the conditions to, transfer and grants of Security Interests set forth above in this Clause 14. 14.6. Certain Protections for Lessee's Benefit ---------------------------------------- The rights of Lessee under this Agreement shall be superior to the rights of any Mortgagee or Head Lessor, and the Lessor shall require each Mortgagee and Head Lessor to agree in writing with the Lessee that such Mortgagee's and Head Lessor's rights in and to the Aircraft shall be subject to the terms of this Agreement, including to the Lessee's rights to the quiet use, possession and enjoyment provisions contained in this Agreement. Except as expressly set forth in this Agreement, no Mortgage or Head Lease shall increase the responsibilities, obligations or liabilities (including with respect to Taxes) of the Lessee or deprive the Lessee of any of its rights or privileges under this Agreement (including the right to register the Aircraft in the State of Registration). The Lessor's obligations to perform the terms and conditions of this Agreement shall remain in full force and effect notwithstanding the creation of any Mortgage or Head Lease. Lessor shall not create any Mortgage or enter into any Head Lease that violates the terms of this Clause 14.6. 15. MISCELLANEOUS ------------- 15.1. Waivers; Remedies Cumulative ---------------------------- The rights of either party under this Agreement: a. may be exercised as often as necessary; b. are cumulative and not exclusive of that party's rights under any law; and c. may be waived only in writing and specifically. Delay in exercising or non-exercise of any such right is not a waiver of that right. -76- 15.2. Delegation ---------- The Lessor may delegate to any Person or Persons all or any of the trusts, powers or discretions vested in it by this Agreement and any such delegation may be made upon such terms and conditions and subject to such regulations (including power to sub-delegate) as the Lessor in its absolute discretion thinks fit; provided, that any such delegation shall be subject to the conditions set forth in Clause 14.2(a). 15.3. Certificates ------------ Except where expressly provided in this Agreement, any certificate or determination by the Lessor as to any rate of interest or as to any other amount payable under this Agreement will, in the absence of manifest error, be conclusive and binding on the Lessee. 15.4. Appropriation ------------- If any sum paid or recovered in respect of the liabilities of the Lessee under this Agreement is less than the amount then due, the Lessor may apply that sum to amounts due under this Agreement in such proportions and order and generally in such manner as the Lessor may determine. 15.5. Currency Indemnity ------------------ a. If the Lessor receives an amount in respect of the Lessee's liability under this Agreement or if such liability is converted into a claim, proof, judgment or order in a currency other than the currency (the "contract currency") in which the amount is expressed to be payable under this Agreement: i. the Lessee will indemnify the Lessor, as an independent obligation, against any loss arising out of or as a result of such conversion; ii. if the amount received by the Lessor, when converted into the contract currency (at the market rate at which the Lessor is able on the relevant date to purchase the contract currency in New York City with that other currency) is less than the amount owed in the contract currency, the Lessee will, forthwith on demand, pay to the Lessor an amount in the contract currency equal to the deficit; and iii. the Lessee will pay to the Lessor on demand any exchange costs and Taxes (other than Lessor Taxes) payable in connection with the conversion. -77- b. The Lessee waives, to the extent permitted by applicable law, any right it may have in any jurisdiction to pay any amount under this Agreement in a currency other than that in which it is expressed to be payable. 15.6. Severability ------------ If a provision of this Agreement is or becomes illegal, invalid or unenforceable in any jurisdiction, that will not affect: a. the legality, validity or enforceability in that jurisdiction of any other provision of this Agreement; or b. the legality, validity or enforceability in any other jurisdiction of that or any other provision of this Agreement. 15.7. Remedy ------ If the Lessee fails to comply with any provision of this Agreement, the Lessor may, without being in any way obliged to do so or responsible for so doing and without prejudice to the ability of the Lessor to treat the non- compliance as a Default, effect compliance on behalf of the Lessee, whereupon the Lessee shall become liable to pay immediately any sums expended by the Lessor together with all costs and expenses (including reasonable legal costs) necessarily incurred in connection therewith. 15.8. Expenses -------- Each party shall bear its own expenses incurred or payable in connection with the negotiation, preparation and execution of this Agreement, and shall share the fees and expenses of special FAA counsel retained by Lessor and Lessee. 15.9. Time of Essence --------------- The time stipulated in this Agreement for all payments payable by the Lessee to the Lessor and for the performance of the Lessee's other obligations under this Agreement will be of the essence of this Agreement (subject always to any applicable grace period). 15.10. Notices ------- a. All notices and other communications given under or in connection with this Agreement shall be in writing (including telefax) and in English, and shall be deemed to have been received as follows: -78- i. If sent by telefax, at the time of receipt by the sender of a transmission report indicating that all pages of the telefax transmission were properly transmitted (unless the recipient notifies the sender promptly, or if received after 5:30 p.m. local time, by no later than 10:00 a.m. local time the following Business Day, that the transmission was incomplete or illegible, in which case the telefax shall be deemed to have been received at the time of receipt by the sender of a further clear transmission report on re-transmitting the telefax), provided the relevant telefax transmission (or retransmission, as the case may be) was transmitted to the receiver between 9:00 a.m. and 5:30 p.m. local time. If it was transmitted later, then it shall be deemed to have been received at 9:00 a.m. local time on the succeeding Business Day. ii. In any other case, when delivered to the address specified in Clause 15.10(b). b. All such notices, requests, demands and other communications shall be sent: i. if to the Lessor, to it at: Investors Asset Holding Corp. 200 Nyala Farms Westport, CT 06880 Attention: James Coyne Telefax No.: +1-203-341-9988 with copies to: Sigma Aircraft Management LLC 232 East 50th Street New York, NY 10022 Attention: Jan Melgaard, President Telefax No.: +1-212-752 9801 ii. if to the Lessee, to it at: Paseo de la Reforma 445, Piso 10 Mexico City Mexico D.F. 06500 Attention: Director of Finance Telefax No.: +011-552-133-4606 or to such other address or telefax number as shall have been notified by one party to the other in the manner set out in this Clause 15.11. 15.11. Law and Jurisdiction -------------------- -79- a. THIS AGREEMENT SHALL, IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS ENTERED INTO IN THE STATE OF NEW YORK BY RESIDENTS OF SUCH STATE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE WITHOUT REGARD TO ANY OTHERWISE APPLICABLE PRINCIPLES OF CONFLICTS OF LAWS (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW). The United Nations Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. b. The Lessor and the Lessee hereby irrevocably agree to submit to the non-exclusive jurisdiction of the United States District Court for the Southern District of New York and the Supreme Court of the State of New York located in the Borough of Manhattan, County of New York (the "Agreed Courts") in the event of any claims or disputes arising under this Agreement. Such submission to jurisdiction shall not be construed so as to limit the right of either party to take proceedings against the other in whatsoever jurisdiction shall to it seem fit nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction, whether concurrently or not. Final judgment against Lessor or Lessee in any such suit shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment or as otherwise permitted by applicable law, a certified or true copy of which shall be conclusive evidence of the facts and of the amount of any indebtedness or liability of Lessor or Lessee. Each of Lessor and Lessee hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue in any suit, action or proceeding brought in any Agreed Court, and irrevocably waives any claim that any such suit, action or proceeding brought in any Agreed Court has been brought in an inconvenient forum. c. THE LESSEE AND THE LESSOR HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING TO WHICH THEY ARE PARTIES INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT. d. Without prejudice to any other mode of service, the Lessee (i) appoints CT Corporation System, 1633 Broadway, New York, New York 10019, as its agent for service of process relating to any proceedings before the Federal and State courts of New York in connection with this Agreement and agrees to maintain a process agent in New York City, and (ii) agrees that any failure by the process agent to notify the Lessee of the process shall not invalidate the proceedings concerned. -80- 15.12. Sole and Entire Agreement ------------------------- This Agreement, and a Delivery and Discrepancy Procedures Agreement of even date herewith, are the sole and entire agreements between the Lessor and the Lessee in relation to the leasing of the Aircraft, and supersede all previous agreements in relation to that leasing. The terms and conditions of this Agreement can only be varied by an instrument in writing executed by both parties or by their duly authorized representatives. 15.13. Indemnities ----------- All rights expressed to be granted to each Indemnitee under this Agreement are given to the Lessor as agent for and on behalf of that Indemnitee. 15.14. Counterparts ------------ This Agreement may be executed, manually or by telefacsimile signatures, in counterparts each of which will constitute one and the same document. 15.15. Confidentiality --------------- Neither the Lessor nor the Lessee shall, without the other's prior written consent, communicate or disclose the terms of this Agreement or any information or documents furnished pursuant to this Agreement (except to the extent that the same are within the public domain) to any third party (other than any prospective Transferee, Mortgagee or Head Lessor, the respective external legal advisers, auditors, insurance brokers or underwriters of Lessor, Lessee and such parties, the Manufacturer and the Engine Manufacturer); provided however that disclosure will be permitted, to the extent required: a. pursuant to an order of any court of competent jurisdiction; or b. pursuant to any procedure for discovery of documents in any proceedings before any such court; or c. pursuant to any law or regulation having the force of law; or d. pursuant to a lawful requirement of any authority with whose requirements the disclosing party is legally obliged to comply; or e. in order to perfect any assignment of any assignable warranties. -81- [signature page follows] -82- IN WITNESS WHEREOF Lessor and Lessee have executed this Lease Agreement on the date shown at the beginning of this Agreement. INVESTORS ASSET HOLDING CORP., not in its individual capacity except as set forth in this Agreement but as owner trustee pursuant to the Trust Agreement By:__________________________________ Name: Title: AEROVIAS de MEXICO, S.A. de C.V. By:__________________________________ Name: Title: By:__________________________________ Name: Title: This is the "Original Executed Counterpart" of this Lease Agreement received this 7th day of September, 2000 by the undersigned. CL/PK FUNDING TRUST BY: PK AIRFINANCE S.A., NEW YORK BRANCH, as Servicer By:_________________________________ Name: Title: SCHEDULE 1 -- TERMINATION VALUE (Termination Value) [The information contained in this Schedule has been omitted from the FAA filing counterpart of this Agreement as such information is confidential and proprietary.] SCHEDULE 2 -- DESCRIPTION OF AIRCRAFT Part 1 (Aircraft Specifications) Manufacturer: Boeing/McDonnell Douglas Model: MD-82 Manufacturer's Serial No: 49150 U.S. Registration No.: N491SH Configuration: 141Y Engine Type: JT8D-219 Engine Serial Numbers: 718165 and 708529 Part 2 (Aircraft Documents) 1. FAA Approved Flight Manual 2. Flight Crew Operations Manual 3. Last W&B Report 4. System Schematic Manual 5. Copy of Prior Operator Maintenance Program 6. Loose Equipment and Emerg. Location Chart 7. All Maint. Insp. Checks and Logs 8. Total Airframe Time and Cycles 9. Engine Total Time and Cycles and Eng. Disks records 10. Time & Cycles on LLP for Engines 11. Summary of AD's A/C, APU, Appliances Terminated/Repetitive 12. Copy of AD's Job Card, EO, etc. (except for AD's reported) 13. List of SB's and AOL accomplished 14. List of Operator EO's 15. Engine OH times & records 16. Maintenance Shop Visit, Work Packages for Engines 17. List of Major Structures Repairs 18. Aircrcraft external repairs damage table 19. Engineering Orders 20. Galleys (SELL) Manual SCHEDULE 3 -- CERTIFICATE OF ACCEPTANCE This Certificate of Acceptance is delivered on the date set forth in paragraph 1 below by Aerovias de Mexico, S.A. de C.V. (the "Lessee") to Investors Asset Holding Corp., not in its individual capacity except as set forth in this Agreement but as owner trustee pursuant to the Trust Agreement (the "Lessor") pursuant to the Lease Agreement, dated September 7, 2000, between the Lessor and the Lessee (the "Agreement"). Capitalized terms used but not defined in this Certificate of Acceptance shall have the meaning given to such terms in the Agreement. 1. Details of Acceptance. The Lessee hereby confirms to the Lessor that the Lessee has at 1:10 p.m. local time on this 8th day of September, 2000, in the airspace of the State of Arizona, accepted the following, in accordance with the provisions of the Agreement and the Annex attached hereto: (a) Airframe: Boeing/McDonnell Douglas MD-82 airframe, Manufacturer's Serial 49150, U.S. Registration No. N491SH; (b) Engines: two Pratt & Whitney JT8D-219 Engines, bearing Manufacturer's Serial Nos. 718165 and 708529; (c) All Parts installed on, attached to or appurtenant to the Airframe and Engines; and (d) Aircraft Documents as specified in Schedule 2 - Part 2 of the Agreement. 2. Lessee's Confirmation. The Lessee confirms to the Lessor that as at the time indicated above, being the time of Delivery: (a) the Lessee's representations and warranties contained in Clauses 2.1 and 2.2 (other than Clause 2.2(c)) of the Agreement are hereby repeated; (b) the Aircraft is insured as required by the Agreement; and (c) the Aircraft and Aircraft Documents have been made available for inspection by Lessee to Lessee's satisfaction prior to this date, Lessee has performed such inspections as it deems necessary and, pursuant to such inspections, all of the Aircraft and the Aircraft Documents are in acceptable condition for Lessee to enter into this Certificate of Acceptance, to take Delivery of the Aircraft and Aircraft Documents and to lease the Aircraft and Aircraft Documents pursuant to the Agreement. 3. Lessor's Confirmation. The Lessor confirms to the Lessee that, as at the time indicated above, being the time of Delivery, the Lessor's representations and warranties contained in Clause 2.4 of the Agreement are hereby repeated. IN WITNESS WHEREOF Lessor and Lessee have executed this Certificate of Acceptance on the date shown at the beginning of this Agreement. INVESTORS ASSET HOLDING CORP., as Owner Trustee By:_________________________________ Name: Title: AEROVIAS de MEXICO, S.A. de C.V. By:_________________________________ Name: Title: By:_________________________________ Name: Title: ANNEX 1 MAINTENANCE STATUS AT DELIVERY DATE: September 7, 2000 AIRFRAME TIME: Total Flight Hours [ ] Total Cycles [ ] AIRFRAME LIMITS: Type of Check: Check Interval: Time Since Last Check: ENGINE DATA: Position No. 1 No. 2 Type JT8D-219 JT8D-219 Serial Number 718165 708529 Total Flight Hours: [ ][ ] Total Cycles: [ ][ ] Flight Hours Since Last Shop Visit: [ ][ ] Cycles Since Last Shop Visit: [ ][ ] Flight Hours to Next Hard Limit: [ ][ ] Cycles to Next Hard Limit: [ ][ ] APU: Type: [ ] Serial Number: [ ] Total Flight Hours: [ ] Total Cycles: [ ] Flight Hours Since Last HSI Inspection: [ ] Cycles Since Last HSI Inspection: [ ] Flight Hours Remaining on Turbine and Compressor LLPs: [ ] Cycles Remaining on Turbine and Compressor LLPs: [ ] LANDING GEAR LIMITS: Position: Nose Left Right Overhaul Interval: Time Since Overhaul: Time to Next Overhaul: SCHEDULE 4 -- CONDITION AT DELIVERY The Aircraft and the Aircraft Documents shall conform to the following on the Delivery Date: (1) The Aircraft shall be clean in accordance with standard international airline practices. The cockpit shall be "touched-up" in accordance with standard international airline practices and shall have all necessary placards. (2) The Aircraft shall have installed the full complement of engines and other equipment, parts, components, accessories, furnishings and loose equipment as when redelivered by Finnair Oyj (the "Prior Operator") to the Lessor, each such item properly functioning in accordance with its intended use. (3) The Aircraft shall comply with all outstanding FAA Airworthiness Directives affecting the Aircraft which by their terms require compliance on or before September 1, 2000. (4) The Aircraft shall have a current and valid U.S. Standard Transport Category Certificate of Airworthiness. (5) The Aircraft shall be in good operating condition, ordinary wear and tear excepted. All temporary fuselage skin repairs shall have been made permanent. (6) The Aircraft fuselage shall have been stripped and repainted white in accordance with standard industry practices. (7) The Aircraft will meet the noise compliance requirements of FAA regulations found at 14 C.F.R. Part 36, Appendix C, Stage 3 (but only to the extent such regulations were in effect on June 8, 1994) without waiver or restriction. (8) In addition to compliance with all service bulletins which are mandated by FAA regulations and airworthiness directives, compliance with which is required by Clause (3) of this Schedule 4, the Aircraft shall be in compliance with all mandatory service bulletins issued by the Manufacturer, the Engine Manufacturer or any parts manufacturer which by their terms require compliance on or by September 1, 2000. (9) The Aircraft shall comply with the corrosion prevention and treatment cards prescribed in the Prior Operator's maintenance program. (10) The Aircraft shall be in substantially the same configuration (including, but not limited to, interior seating configuration, galleys and lavatories) as when the Aircraft was originally redelivered from the Prior Operator to the Lessor. (11) Neither the Aircraft nor any Engine shall have any open, deferred, continued, carry over or placarded log book items. (12) The Aircraft shall have received a complete "D" check (or its equivalent) immediately prior to the Aircraft being returned in accordance with the Prior Operator's maintenance program, subject to the passage of time and ferry and test flights. (13) Aircraft Documents shall consist of those items listed in Part 2 of Schedule 2, which items shall be complete, including the original aircraft records and documents delivered by the Manufacturer, the Engine Manufacturer and any parts manufacturer, and shall be in English or as documented by the historical operators and maintenance contractors and otherwise acceptable to the FAA. Lessor shall deliver one set of operational and maintenance documentation (including the FAA approved flight manual, aircraft operations manual, maintenance manual, wiring diagram and parts catalogue, updated to reflect any changes required by manufacturer or regulatory authority). (14) (a) Each Engine shall have just completed a hot (including burner cans) and cold section video borescope inspection, a copy of which shall be provided to Lessee. (b) No Engine shall be "on watch" for excessive oil consumption, high Exhaust Gas Temperature or for any reason requiring any special or out of sequence inspection. (15) Each time controlled, cycle controlled or calendar controlled component on the Aircraft, excluding the engines (but including any time controlled components thereon), shall have a minimum of 3,000 hours, 3,000 cycles or twelve months remaining (whichever is most limiting) until the next regularly scheduled overhaul, except that calendar controlled components which have a life of twelve months or less shall have 100% of the life remaining on such components at the time the Aircraft is redelivered from the Prior Operator. (16) All fluid reservoirs (including fuel, oil, oxygen, hydraulic and water) will be full and the waste tank serviced in accordance with the manufacturer's instructions. (17) The Lessor shall have provided the Lessee with a satisfactory acceptance flight of up to two hours at the Lessor's cost (with up to three of the Lessee's representatives on board as observers) and such further acceptance flights as may be necessary in the event the first such flight or subsequent flights do not confirm that the Aircraft complies with the delivery requirements of this Agreement. SCHEDULE 5 -- OPERATING CONDITION AT REDELIVERY [The information contained in this Schedule has been omitted from the FAA filing counterpart of this Agreement as such information is confidential and proprietary.] SCHEDULE 6 -- INSURANCE PROVISIONS Part 1 (Insurance Requirements) 1. The Insurances required to be maintained are as follows: (a) HULL "ALL RISKS" of Loss or Damage while flying and on the ground with respect to the Aircraft for the Agreed Value and with a deductible not exceeding $250,000 (such deductible being protected by separate insurance to pay up to $200,000 in excess of the first $50,000 thereof, subject to any aggregate limit stipulated in such insurance). (b) HULL WAR AND ALLIED PERILS, covering those risks excluded from the Hull "All Risks" Policy to the extent such coverage is available from the leading international insurance markets, including confiscation and requisition by the State of Registration, for the Agreed Value; (c) "ALL RISKS" PROPERTY INSURANCE (INCLUDING WAR AND ALLIED RISK except when on the ground or in transit other than by air or sea) on all Engines and Parts when not installed on the Aircraft (to the extent not covered under the Aircraft hull insurances described in paragraphs (a) and (b) above), including Engine test and running risks, in an amount equal to replacement value in the case of the Engines; (d) AIRCRAFT THIRD PARTY, BODILY INJURY/PROPERTY DAMAGE, PASSENGER, BAGGAGE, CARGO AND MAIL AND AIRLINE GENERAL THIRD PARTY (INCLUDING PRODUCTS) LEGAL LIABILITY for a combined single limit (Bodily Injury/Property Damage) of an amount not less than the Minimum Liability Coverage for the time being in respect of any one occurrence (but, in respect of products liability, this limit may be an aggregate limit for any and all losses occurring during the currency of the policy; War and Allied Risks are also to be covered under the Policy to the extent available from the leading international insurance markets. 2. All required hull and spares insurance (specified in (1)(a), (b) and (c) above), so far as it relates to the Aircraft, will: (a) include the Indemnitees as additional insureds (warranted no operational interest); (b) provide that any loss will be settled jointly with the Lessor and the Lessee, and any claim that becomes payable on the basis of a Total Loss shall be paid in Dollars to the Lessor as sole loss payee, with any other claim being payable as may be necessary for the repair of the damage to which it relates; (c) if separate Hull "All Risks" and "War Risks" insurances are arranged, include a 50/50 provision in the terms of Lloyd's endorsement AVS103; and (d) confirm that the Insurers are not entitled to replace the Aircraft in the event of a Total Loss. 3. All required liability insurances (specified in (1)(d) above) will: (a) include the Indemnitees as additional insureds for their respective rights and interests, warranted (each as to itself only) no operational interest; but the coverage provided will not include claims arising out of their legal liability as manufacturer, repairer or servicing agent; (b) include a severability of interest clause; (c) contain a provision confirming that the policy is primary without right of contribution and that the liability of the insurers will not be affected by any other insurance of which the Lessor or the Lessee have the benefit; and (d) accept and insure the indemnity provisions of this Agreement to the extent of the risks covered by the relevant policy or policies. 4. All Insurances will: (a) be in accordance with normal industry practice of Persons operating similar aircraft in similar circumstances; (b) operate on a worldwide basis subject to such limitations and exclusions as may be notified to the Lessor; (c) acknowledge that the insurers are aware that the Aircraft is owned by the Lessor and is subject to this Agreement; (d) provide that, in relation to the interests of each of the additional insureds, the Insurances will not be invalidated by any act or omission of any other Person which results in a breach of any terms conditions or warranty of the policies; provided, that the additional assured so protected has not caused, contributed to or knowingly condoned such act or omission; (e) provide all terms of Lloyd's endorsement AVN 67B including a statement that the Insurers will waive any rights of recourse and/or subrogation against the additional insureds, subject to and in accordance with Clause 3.4 of such endorsement; (f) provide that the additional insureds will have no obligation or responsibility for the payment of any premiums (but reserve the right to pay the same should any of them elect to do so) and that the Insurers will waive any right of offset or counterclaim against the respective additional insureds other than for outstanding premiums in respect of the Aircraft, any Engine or Part; (g) provide that, except in the case of any provision for cancellation or automatic termination specified in the policies or endorsements thereof, the Insurance can only be canceled or materially altered in a manner adverse to the additional insureds by giving at least 30 days' written notice to the Lessor, except in the case of war risks (or radioactive contamination), for which seven days' written notice (or such lesser period as is or may be customarily available in respect thereof) will be given; and (h) contain a provision entitling the Lessor to initiate a claim under any policy, if so desired. 5. All Reinsurances will: (a) be on the same terms as the Insurances and will include the provisions of this Schedule; (b) provide that, notwithstanding any bankruptcy, insolvency, liquidation, dissolution or similar proceedings of or affecting the reinsured, the reinsurers' liability will be to make such payment as would have fallen due under the relevant policy of reinsurance if the reinsured had (immediately before such bankruptcy, insolvency, liquidation, dissolution or similar proceedings) discharged its obligations in full under the original insurance policies in respect of which the then relevant policy of reinsurance has been effected; and (c) contain a "cut-through" clause in the following form (or such other form as is reasonably satisfactory to the Lessor), subject to the provisions of such clause not contravening any law of the State of Incorporation: "The Reinsurers and the Reinsured hereby agree that, in the event of any claim arising under the Reinsurances in respect of a total loss or other claim where, as provided by the Lease Agreement, dated September 7, 2000 and made between Investors Asset Holding Corp., as Owner Trustee, and Aerovias de Mexico, S.A. de C.V., such claim is to be paid to the person named as sole loss payee under the primary insurances, the Reinsurers will, in lieu of payment to the Reinsured, its successors in interest and assigns, pay to the person named as sole loss payee under the primary insurances effected by the Reinsured that portion of any loss for which the Reinsurers would otherwise be liable to pay the Reinsured (subject to proof of loss), it being understood and agreed that any such payment by the Reinsurers will (to the extent of such payment) fully discharge and release the Reinsurers from any and all further liability in connection therewith". PART 2 (Form of Broker's Undertaking) [Separately delivered by Lessee's Broker] PART 3 (Form of Insurance Certificate) [Separately delivered by Lessee's Broker] SCHEDULE 7 -- FORM OF LEGAL OPINION [Separately delivered by Lessee's counsel] SCHEDULE 8 -- FORM OF MONTHLY STATUS REPORT AIRCRAFT TYPE REG. MARK SERIAL NO. MONTH ENDING Boeing/McDonnell Douglas MD-82 N491SH 49150 ........... 1. AIRCRAFT UTILIZATION: (a) Airframe Total Flight Hours ....................... (b) Airframe Total Cycles ....................... (c) Airframe Flight Hours for Month ....................... (d) Airframe Flight Cycles for Month ....................... 2. POWERPLANT STATUS: No.1 No.2 (a) Serial Nos. of Delivered Engines 708529 718165 (b) Serial Nos. of Replacement Engines (if applicable) ...... ....... (c) Serial Nos. of Installed Engines (if different from (a) or (b) above) ...... ....... (d) Current Location of Delivered or Replacement Engines (as applicable) (if not installed on Airframe) ...... ....... (e) Total Time Since New of Delivered or Replacement Engines (as applicable) ...... ....... (f) Total Cycles Since New of Delivered or Replacement Engines (as applicable) ...... ....... (g) Total Flight Hours for the Month for each Delivered or Replacement Engine (as applicable) ...... ....... (h) Total Cycles for the Month for each Delivered or Replacement Engine (as applicable) ...... ....... 3. APU STATUS: (a) Serial No. of Delivered APU ........ (b) Serial No. of Replacement APU (if applicable) ........ (c) Serial No. of Installed APU (if different from (a) or (b) above) ........ (d) Current Location of Delivered or Replacement APU (as applicable) (if not installed on Airframe) ....... (e) Total Time Since New of Delivered or Replacement APU (as applicable) ........ (f) Total Cycles Since New of Delivered or Replacement APU (as applicable) ........ (g) Total Hours for the Month for Delivered or Replacement APU (as applicable) ........ (h) Total Cycles for the Month for Delivered or Replacement APU (as applicable) ........ 4. ROUTINE CHECKS / A.D. AND S.B. COMPLIANCE: (a) Routine Checks (A and above) performed during Month: (b) Airworthiness Directives complied with during Month: (c) Service Bulletins complied with during Month: 5. AIRCRAFT DAMAGE OR ENGINE CHANGES: Details of any repairs carried out to the Aircraft beyond SRM limits and Engine changes, giving reasons for repair or change: 6. UPCOMING MAINTENANCE CHECKS (a) Maintenance Checks (C segment and above) scheduled or expected to be performed on the Airframe during the next 12 months: (b) Scheduled shop visits or heavy maintenance visits scheduled or expected to be performed on the Engines during the next 12 months: (c) Overhauls, or replacements scheduled or expected to be performed on the APU or Landing Gear during the next 12 months: Date: ___________, 20__ CERTIFIED FOR AND ON BEHALF OF AEROVIAS de MEXICO, S.A. de C.V. By:______________________________ Name: Title: SCHEDULE 9 -- BASIC RENT, DEPOSIT AND AGREED VALUE [The information contained in this Schedule has been omitted from the FAA filing counterpart of this Agreement as such information is confidential and proprietary.] SCHEDULE 9-A [FORM OF] IRREVOCABLE TRANSFERABLE STANDBY LETTER OF CREDIT Date Of Issuance: __________________ [Name of Lessor/designated Lessor Lender] [Address] Re: Credit No. _______________ We hereby establish our Irrevocable Transferable Standby Letter of Credit in your favor for the account of Aerovias de Mexico, S.A. de C.V. (the "Account Party"), for the aggregate amount not exceeding ____________ United States Dollars ($_______), available to you at sight upon demand at our counters at (Location) on or before the expiration hereof against presentation to us of the -------- following statement, dated and signed by a representative of the beneficiary: "The amounts of US$________ is due to Investors Asset Holding Corp., as owner trustee, and is unpaid pursuant to the Lease Agreement, dated September __, 2000, between Investors Asset Holding Corp., as lessor, and the Account Party, as lessee, as the same may have been amended (the "Agreement")." The amount which may be drawn by you under this Letter of Credit shall be automatically reduced by the amount of any drawings paid through the Issuing Bank referencing this Letter of Credit No. ____. Partial drawings are permitted hereunder. This Letter of Credit shall expire ________________ (____) days from the date of issuance, but shall automatically extend without amendment for additional _____________ (_____)-day periods from such expiration date and from subsequent expiration dates, if you, as beneficiary, and the Account Party have not received due notice of our intention not to renew ninety (90) days prior to any such expiration date. We hereby agree with you that documents drawn under and in compliance with the terms of this Letter of Credit shall be duly honored upon presentation as specified. This Letter of Credit shall be governed by the Uniform Customs and Practice for Documentary Credits, 1993 Revision, International Chamber of Commerce Publication No. 500 (the "UCP"), except to the extent that the terms hereof are inconsistent with the provisions of the UCP, including but not limited to Articles 13(b) and 17 of the UCP, in which case the terms of this Letter of Credit shall govern. In the event of an Act of God, riot, civil commotion, insurrection, war or any other cause beyond our control that interrupts our business (collectively, an "Interruption Event") and causes the place for presentation of this Letter of Credit to be closed for business on the last day for presentation, the expiry date of this Letter of Credit will be automatically extended without amendment to a date thirty (30) calendar days after the place for presentation reopens for business. This Letter of Credit is transferable, and we hereby consent to such transfer, but otherwise may not be amended, changed or modified without the express written consent of the beneficiary, the Issuing Bank and the Account Party. [BANK SIGNATURE] SCHEDULE 10 -- SUBSEQUENT INVESTMENTS [The information contained in this Schedule has been omitted from the FAA filing counterpart of this Agreement as such information is confidential and proprietary.] EX-99.L 11 0011.txt EXHIBIT 99.L AIRCRAFT CONDITIONAL SALE AGREEMENT Dated as of October 24, 2000 between FIRST SECURITY BANK, N.A., as Seller not in its individual capacity but solely as trustee and ROYAL AVIATION INC., as Buyer ONE (1) BOEING B737-200A USED AIRCRAFT bearing Manufacturer's Serial Number 21721 equipped with two (2) Pratt & Witney JT8D-9A Engines bearing Manufacturer's Serial Numbers 707432 & 687834 Counterpart No. ____ of ____, serially numbered, manually executed counterparts. To the extent, if any, that this Aircraft Conditional Sale Agreement constitutes chattel paper under the UCC or similar Applicable Law in Canada, no security interest in it, or assignment of Seller's interest in it, may be created through the transfer and possession of any counterpart other than Counterpart No. 1. TABLE OF CONTENTS
SECTION 1. Definitions and Interpretation..................................................................... 1 ------------------------------ 1.1 Definitions........................................................................................... 1 ----------- 1.2 Other Terms........................................................................................... 8 ----------- 1.3 Interpretation........................................................................................ 8 -------------- SECTION 2. Purchase and Sale.................................................................................. 9 ----------------- 2.1 Agreement to Sell and Purchase........................................................................ 9 ------------------------------ 2.2 Purchase Price........................................................................................ 9 -------------- 2.3 Payment Terms......................................................................................... 9 ------------- 2.4 Aggregate Purchase Price Paid......................................................................... 9 ----------------------------- 2.5 Closing Deliveries.................................................................................... 10 ------------------ 2.6 Conditions Precedent.................................................................................. 10 -------------------- 2.7 Aircraft Condition.................................................................................... 10 ------------------ 2.8 Removal From Market................................................................................... 10 ------------------- SECTION 3. Interim Lease; Term and Rent....................................................................... 10 ---------------------------- 3.1 Interim Lease......................................................................................... 11 ------------- 3.2 Term and Basic Rent................................................................................... 11 ------------------- 3.3 Supplemental Rent..................................................................................... 11 ----------------- 3.4 Payments to Seller; Non-Business Day Due Date......................................................... 11 --------------------------------------------- 3.5 Force Majeure......................................................................................... 11 ------------- 3.6 Fuel at Interim Lease Date............................................................................ 12 -------------------------- SECTION 4. Conditions Precedent............................................................................... 12 -------------------- 4.1 Buyer's Conditions Precedent.......................................................................... 12 ----------------------------
ii
4.2 Seller's Conditions Precedent......................................................................... 12 ----------------------------- SECTION 5. Delivery Conditions................................................................................ 13 ------------------- SECTION 6. Return of Equipment................................................................................ 13 ------------------- 6.1 Return of Aircraft; Condition Upon Return............................................................. 13 ------------------------------------------ 6.2 Manuals............................................................................................... 16 ------- 6.3 Extension of Term Due to Conditions Upon Return....................................................... 16 ----------------------------------------------- 6.4 Non-Compliance........................................................................................ 16 -------------- 6.5 Fuel at Return........................................................................................ 17 -------------- SECTION 7. Seller's Representations and Warranties............................................................ 17 --------------------------------------- 7.1 Disclaimer of Representations......................................................................... 17 ----------------------------- 7.2 Seller's Representations, Warranties and Covenants.................................................... 17 -------------------------------------------------- 7.3 Enforcement of Warranties............................................................................. 19 ------------------------- 7.4 Assignment of Warranties.............................................................................. 19 ------------------------ SECTION 8. Buyer's Representations, Warranties and Covenants.................................................. 19 ------------------------------------------------- 8.1 Corporate Existence and Qualification................................................................. 19 ------------------------------------- 8.2 Certificated Air Carrier.............................................................................. 19 ------------------------ 8.3 Corporate Authority................................................................................... 19 ------------------- 8.4 Authorization and Non-contravention................................................................... 19 ----------------------------------- 8.5 Consents.............................................................................................. 20 -------- 8.6 Execution and Binding Effect.......................................................................... 20 ---------------------------- 8.7 Litigation............................................................................................ 20 ---------- 8.8 Filings............................................................................................... 20 ------- 8.9 Tax Returns and Payments.............................................................................. 20 ------------------------ 8.10 Disclosure............................................................................................ 21 ----------
iii
8.11 Principal Place of Business........................................................................... 21 --------------------------- SECTION 9. Additional Covenants of Buyer...................................................................... 21 ----------------------------- 9.1 Financial and Other Information....................................................................... 21 ------------------------------- 9.2 Liens................................................................................................. 22 ----- 9.3 Eurocontrol and Nav Canada............................................................................ 22 -------------------------- SECTION 10. Registration; Maintenance; Operation.............................................................. 22 ------------------------------------ 10.1 Registration.......................................................................................... 22 ------------ 10.2 Maintenance........................................................................................... 22 ----------- 10.3 Fees and Charges...................................................................................... 24 ---------------- 10.4 Operation of the Equipment............................................................................ 24 -------------------------- 10.5 Maintenance of Certain Engines........................................................................ 24 ------------------------------ 10.6 Data.................................................................................................. 24 ---- SECTION 11. Possession........................................................................................ 25 ---------- 11.1 Transfers of Possession............................................................................... 25 ----------------------- 11.2 Terms of Transfers.................................................................................... 26 ------------------ 11.3 Cross-Waiver.......................................................................................... 26 ------------ 11.4 Early Purchase Option................................................................................. 27 --------------------- SECTION 12. Replacement and Pooling of Parts; Modifications; Engine Exchange.................................. 27 ---------------------------------------------------------------- 12.1 Replacement of Parts.................................................................................. 27 -------------------- 12.2 Pooling of Parts...................................................................................... 27 ---------------- 12.3 Alterations, Modifications and Additions.............................................................. 28 ---------------------------------------- SECTION 13. Loss.............................................................................................. 29 ---- 13.1 Event of Loss With Respect to the Airframe............................................................ 29 ------------------------------------------
iv
13.2 Event of Loss With Respect to an Engine............................................................... 29 --------------------------------------- 13.3 Application of Payments............................................................................... 30 ----------------------- 13.4 Application of Payments During Default or Event of Default............................................ 30 ---------------------------------------------------------- SECTION 14. Insurance......................................................................................... 30 --------- 14.1 Insurance Requirements................................................................................ 30 ---------------------- 14.2 Insurance Reports..................................................................................... 33 ----------------- 14.3 Additional Insurance.................................................................................. 33 -------------------- SECTION 15. Inspections....................................................................................... 33 ----------- SECTION 16. Insignia.......................................................................................... 33 -------- SECTION 17. Events of Default................................................................................. 34 ----------------- SECTION 18. Remedies.......................................................................................... 36 -------- 18.1 Seller Entitled to Exercise Remedies.................................................................. 36 ------------------------------------ 18.2 Remedies of Seller.................................................................................... 36 ------------------ 18.3 Monetary Damages Payable by Buyer..................................................................... 37 --------------------------------- 18.4 Remedies Not Exclusive................................................................................ 37 ---------------------- SECTION 19. Seller's Right to Perform for Buyer............................................................... 37 ----------------------------------- SECTION 20. Further Assurances................................................................................ 38 ------------------ SECTION 21. Buyer's Indemnities............................................................................... 38 ------------------- 21.1 General Tax Indemnity................................................................................. 38 --------------------- 21.2 General Indemnity..................................................................................... 39 ----------------- 21.3 Survival of Indemnities; Net Obligations.............................................................. 40 ---------------------------------------- SECTION 22. Net Agreement; No Setoff or Counterclaim.......................................................... 40 ---------------------------------------- SECTION 23. Assignment........................................................................................ 41 ---------- 23.1 Binding on Assignees.................................................................................. 41 --------------------
v
23.2 No Assignment by Buyer................................................................................ 41 ---------------------- 23.3 Permitted Transfers by Seller......................................................................... 41 ----------------------------- 23.4 Tax-Free Exchange..................................................................................... 42 ----------------- SECTION 24. Quiet Enjoyment................................................................................... 42 --------------- SECTION 25. Gross-Up.......................................................................................... 43 -------- SECTION 26. Miscellaneous..................................................................................... 43 ------------- 26.1 Survival.............................................................................................. 43 -------- 26.2 Brokers............................................................................................... 43 ------- 26.3 Expenses.............................................................................................. 43 -------- 26.4 Governing Law......................................................................................... 44 ------------- 26.5 Consent to Jurisdiction............................................................................... 44 ----------------------- 26.6 Notices............................................................................................... 44 ------- 26.7 Severability.......................................................................................... 45 ------------ 26.8 Amendments............................................................................................ 45 ---------- 26.9 Interpretation........................................................................................ 45 -------------- 26.10 Descriptive Headings.................................................................................. 45 -------------------- 26.11 Counterparts.......................................................................................... 45 ------------ 26.12 Entire Agreement...................................................................................... 46 ---------------- Exhibit A - TECHNICAL ACCEPTANCE CERTIFICATE................................................................... 48 Exhibit B - AGREEMENT INTERIM LEASE SUPPLEMENT................................................................. 50 Exhibit C - LEASE DELIVERY RECEIPT............................................................................. 53 Exhibit D - BILL OF SALE ...................................................................................... 55 Exhibit E - CLOSING DELIVERY RECEIPT........................................................................... 56
vi Exhibit F - REDELIVERY RECEIPT.................................................................................. 58 Exhibit G - CONFIRMATION........................................................................................ 60 Exhibit H - AUTHORIZATION LETTER................................................................................ 61 Schedule I - FINANCIAL TERMS.................................................................................... 62
vii AIRCRAFT CONDITIONAL SALE AGREEMENT This AIRCRAFT CONDITIONAL SALE AGREEMENT (this "Agreement"), dated as of October 24, 2000 (the "Effective Date"), is by and between First Security Bank, N.A., a national banking association, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended ("Seller"), and Royal Aviation Inc., d/b/a/ Royal Airlines, a Canadian corporation ("Buyer"). The following sections set forth the agreement of Seller and Buyer. SECTION 1. Definitions and Interpretation. ------------------------------ 1.1 Definitions. The following terms shall have the following ----------- meanings for all purposes of this Agreement. "Actual Cost" means, as it applies to any maintenance work on the ----------- Equipment, the actual cost of replacement parts plus the cost of the associated labor at Buyer's lowest labor rates charged to third parties (if the work is performed by Buyer) or at third party costs charged to Buyer (if the work is performed by third parties) and shall not include late charges, interest or other similar amounts. "Additional Installment" has the meaning set forth in Section 2.3(b) ---------------------- -------------- hereof. "Additional Installment Date" has the meaning set forth in Section --------------------------- ------- 2.3(b) hereof, it being the intent of the parties that this Agreement be - ------ interpreted in such a manner such that each Additional Installment Date shall coincide with a Rent Payment Date. "Agreement Interim Lease Supplement" means the Agreement Interim Lease ---------------------------------- Supplement to be executed and delivered by Seller and Buyer on the Interim Lease Date substantially in the form attached as Exhibit B for the purpose of leasing the Equipment under this Agreement during the period from the Interim Lease Date to the Closing Date. "Aircraft" means the Airframe and each Engine. -------- "Airframe" means (i) the Boeing B737-200A aircraft airframe bearing -------- manufacturer's serial number 21721, excluding the Engines or engines from time to time installed on such airframe, (ii) any and all Parts so long as such Parts are incorporated in, installed on or attached to such airframe or so long as title to such Parts is vested in Seller in accordance with the terms of Section ------- 12 after removal from such airframe, and (iii) all substitutions, replacements - -- or renewals from time to time made in or to such airframe or to any of the Parts referred to in clause (ii) above as required or permitted under this Agreement. "Applicable Law" means all applicable (i) laws, treaties and -------------- international agreements of any national government, (ii) laws of any state, province, territory, locality or other political subdivision of a national government, and (iii) rules, regulations, judgments, decrees, orders, injunctions, writs, directives, licenses and permits of any Governmental Body or arbitration authority. "Application" means an application for registration of the Aircraft ----------- pursuant to this Agreement. "APU" means (i) the auxiliary power unit(s) installed in the Aircraft --- on the Interim Lease Date, (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 Seller in accordance with the terms of Section 12 after removal from such auxiliary power unit, and (iii) 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 Agreement. "Authorization Letter" means an letter on Buyer's letterhead -------------------- substantially in the form attached as Exhibit H. "Basic Rent" means the rent payable for the Equipment. ---------- "Bill of Sale" means the Bill of Sale to be executed and delivered by ------------ Seller to Buyer on the Closing Date substantially in the form attached as Exhibit D for the purpose of transferring title to the Equipment to Buyer. "Business Day" means any day other than (i) a Saturday, a Sunday or ------------ (ii) a day on which commercial banking institutions in Boston, Massachusetts, or Montreal, Quebec are authorized or required to be closed. "Canadian Aviation Law" means the Aeronautics Act (Canada) and/or the --------------------- Canada Transportation Act, as amended, or any successor statutory provisions and the regulations promulgated under such provisions. "Canadian Aviation Regulations" means the Canadian Aviation ----------------------------- Regulations and/or the Air Transportation Regulations of the Consolidated Regulations of Canada, or any successor regulatory provisions. "Canadian Government" means the federal government of Canada or any ------------------- Governmental Body of such government that is backed by the full faith and credit of such government. "`C' Check" means a "C" check on the Airframe under the Maintenance --------- Program. "Certificated Air Carrier" means any air carrier that either: ------------------------ (a) is a "citizen of the United States" as defined in Section 40102(a)(15) of the Federal Aviation Law, who (i) holds a valid air carrier certificate and operating specifications issued under Part 119 of the Federal Aviation Regulations authorizing said air carrier to conduct operations pursuant to Part 121 of the Federal Aviation Regulations, (ii) holds a valid certificate of public convenience and necessity issued under Chapter 411 of the Federal Aviation Law, and (iii) is a Person holding an "air carrier operating certificate issued pursuant to Chapter 447 of 2 Title 49 for aircraft capable of carrying 10 or more individuals or 6,000 pounds or more of cargo" as that phrase is used in Section 1110 of the Bankruptcy Code; or - -- (b) holds an Air Operator Certificate and the required Air Carrier Licenses issued under the Canadian Aviation Regulations. "Closing" means the performance of all actions necessary to consummate ------- the sale of the Equipment by Seller to Buyer, including, without limitation, payment in full of the Purchase Price by Buyer to Seller, and the transfer of title to the Equipment from Seller to Buyer. "Closing Date" means the day that is one month after the day on which ------------ the last Additional Installment becomes due and payable, unless such date is a day other than a Business Day, in which case the Closing Date shall be the immediately preceding Business Day. "Closing Delivery Receipt" means the Delivery Receipt to be executed ------------------------ and delivered by Seller and Buyer on the Closing Date substantially in the form attached as Exhibit E. "Confirmation" means the Confirmation of Interested Parties ------------ substantially in the form attached as Exhibit G. "Data" means (i) the logs, manuals and other documentation and data ---- delivered to Buyer in connection with the delivery of the Equipment, (ii) the logs, manuals and other documentation and data that Buyer is required to maintain with respect to the Equipment during the Interim Lease Term pursuant to the Maintenance Program and by any Governmental Body and pursuant to all other Applicable Laws as applicable to Buyer's maintenance and operation of the Equipment, updated and maintained by Buyer for the Equipment through the Return Date, and (iii) all logs, manuals and data that the Buyer maintains with respect to the Equipment. "Default" means an event that, upon the giving of notice or the lapse ------- of time, or both, would become an Event of Default. "Delivery Installment" has the meaning set forth in Section 2.3(a) -------------------- -------------- hereof. "Delivery Location" has the meaning set forth in Section 3.1(a) ----------------- -------------- hereof. "Dollars" or "$" shall mean the legal currency of the United States of ------- - America. "Engines" means those two (2) Pratt & Witney JT8D-9A Engines bearing ------- Manufacturer's Serial Numbers 707432 & 687834, whether or not from time to time installed on the Airframe or installed on any other airframe; provided, however, that any Replacement Engine may be substituted for any Engine from time to time pursuant to Section 13.2. The term "Engines" also includes any and all Parts, ------------ so long as such Parts are incorporated in, installed on or attached to an Engine or so long as title to such Parts is vested in Seller in accordance with the terms of Section 12 after removal from an Engine, and all substitutions, ---------- replacements or renewals from time to time made in or to an Engine or to any of the items referred to above or to any part of such items as required or permitted under this Agreement. 3 "Engine Maintenance Contract" has the meaning specified in Section --------------------------- ------- 10.2(c) hereof. - ------- "Engine Maintenance Provider" has the meaning specified in Section --------------------------- ------- 10.2(c) hereof. - ------- "Engine Shop Visit" means any scheduled or unscheduled maintenance or ----------------- overhaul performed on an Engine pursuant to the Maintenance Program (or, in connection with any period prior to the Interim Lease Date, an equivalent maintenance inspection under any prior maintenance program) that requires the removal of such Engine from the Airframe or an airframe in order that such scheduled or unscheduled maintenance or overhaul may be performed, the result of which is to restore serviceability; provided, however, that such maintenance or -------- ------- overhaul shall not include (a) maintenance of components associated with an installed Engine, e.g., quick engine change kits, nose cowls or thrust reversers, (b) any overhaul or maintenance required as a result of foreign object damage or mishandling, or (c) any cost that is covered by insurance or warranty. "Equipment" means, collectively, the Aircraft, and where the context --------- permits or requires, the Data. "Eurocontrol" means that organization (or any successor thereto) ----------- established under the 1960 Brussels Convention relating to Co-operation for the Safety of Air Navigation, as amended by the Brussels Protocol 1981, and as from time to time further amended. "Event of Default" has the meaning specified in Section 17 hereof. ---------------- ---------- "Event of Loss" with respect to any property means any of the ------------- following events with respect to such property: (a) the actual or constructive loss of such property or the use thereof due to the destruction of or damage to such property which renders repair uneconomical or which renders such property permanently unfit for normal use by Buyer; (b) any damage to such property or other occurrence which results in an insurance settlement with respect to such property on the basis of a total loss or a constructive, compromised, arranged or agreed total loss; (c) the confiscation, condemnation, seizure, forfeiture or requisition of the title to such property (for any reason whatsoever and whether de jure or de facto); (d) the disappearance, hijacking or theft (including a seizure of title or use not otherwise included in this definition) of such property for a continuous period in excess of sixty (60) days; and/or (e) requisition of use of such property by any Governmental Body or purported Government Entity of use or hire of such property which shall have resulted in the loss 4 of possession or use of such property by Buyer for a continuous period in excess of sixty (60) days or, if less, the remaining Interim Lease Term. 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. An Event of Loss with respect to any Engine without loss of the Airframe shall not be deemed to be an Event of Loss with respect to the Aircraft. "Event of Loss Date" shall mean (i) with respect to any Event of Less ------------------ set forth in clause (a) or (b) of the definition of "Event of Loss," the earliest of: (x) the date of actual loss, (y) the date on which the loss is agreed, arranged or compromised by the insurers, or (z) sixty (60) days after the date of notice to Buyer's brokers or insurers claiming the loss, (ii) with respect to any Event of Loss set forth in clause (c) of the definition of Event of Loss, the date such event, condition or circumstance occurs, or (iii) with respect to any Event of Loss set forth in clause (d) or (e) of the definition of Event of Loss, the date on which insurers make payment on the basis of a total loss. "FAA" means the Federal Aviation Administration of the U.S. Department --- of Transportation, or any successor agency administering the Federal Aviation Law. "Federal Aviation Regulations" means Title 14 of the United States ---------------------------- Code of Federal Regulations, as amended, or any successor regulatory provisions. "Federal Aviation Law" means Title 49 of the United States Code, as -------------------- amended, or any successor statutory provisions and the regulations promulgated under such provisions. "Final Installment" has the meaning set forth in section 2.3(c) ----------------- hereof. "Flight Hour" means (i) with respect to the Airframe, any hour or any ----------- fraction of an hour measured from the time the wheels of the Airframe leave the ground until the wheels next touch the ground, or (ii) with respect to any Engine, any Landing Gear or the APU, any hour or any fraction of an hour measured from the time the wheels of any airframe on which such Engine, Landing Gear or the APU is installed leave the ground until the wheels next touch the ground. "GAAP" means generally accepted accounting principles as in effect in ---- the United States, consistently applied, as of the date of such application. "Governmental Body" shall mean any department, commission, board, ----------------- bureau, court. legislature, agency, instrumentality or authority of any national government or any political subdivision of a national government to the extent that any such entity has jurisdiction over the Equipment, the Buyer or its operations. "Indemnitee" means and includes Seller, EQUIS Financial Group, LLC, ---------- any beneficiary of that certain Trust Agreement No. III dated as of December 30, 1991, as amended, of which Seller and various limited partnerships managed by EQUIS Financial Group, LLC, are parties, Sigma Aircraft Management, LLC, all shareholders, partners, directors, officers, 5 employees, contractors and agents of any of the foregoing, and any permitted successor or assignee of such parties. "Interim Lease Date" means the date of the Agreement Interim Lease ------------------ Supplement. "Interim Lease Term" means the period commencing on the Interim Lease ------------------ Date and terminating on the Closing Date, unless such term is earlier terminated or extended in accordance with the terms of this Agreement. "Landing Gear" means (i) each of the three landing gear listed in the ------------ Agreement Interim 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 or so long as title to such Parts is vested in Seller in accordance with the terms of Section 12 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 Agreement. "Landing Gear Overhaul" means any scheduled overhaul of the Landing --------------------- Gear under the Maintenance Program. "Lease Delivery Receipt" means the Delivery Receipt to be executed and ---------------------- delivered by Seller and Buyer on the Interim Lease Date substantially in the form attached as Exhibit C. "Lien" means any security agreement, mortgage, chattel mortgage, ---- pledge, lien, charge, encumbrance, hypothec, lease, exercise of rights, security interest or lease in the nature of a security interest (including any conditional sales agreement, equipment trust agreement or other title retention agreement), statutory rights in rem or claim of any kind. -- --- "Maintenance Program" means the Transport Canada approved air ------------------- operator's maintenance control system of Buyer that meets the requirements of the Canadian Aviation Regulations applicable to the Airframe and the Engines. "Nav Canada" means ANS Corporation, a corporation incorporated on May ---------- 26, 1995, under Part II of the Canada Corporations Act. "Operative Documents" means, collectively, this Agreement, Schedule I ------------------- hereof, the Technical Acceptance Certificate, Agreement Interim Lease Supplement, Lease Delivery Receipt, Bill of Sale, Closing Delivery Receipt, and the Redelivery Receipt, all as amended, restated, modified or supplemented from time to time. "Overdue Rate" means 15% per annum (calculated on the basis of a 360- ------------ day year and twelve 30-day months). "Parts" means any and all appliances, parts, instruments, ----- appurtenances, accessories, furnishings and other equipment or components of whatever nature, including landing gear and auxiliary power units but excluding complete Engines or engines, that may from time to time be incorporated in, installed on or attached to the Airframe or any Engine or 6 that remain the property of Seller pursuant to the terms of Section 12 of this ---------- Agreement despite removal from the Airframe or any Engine. "Permitted Liens" means: (i) Seller Liens, (ii) Liens for Taxes either --------------- not yet due or being contested in good faith by appropriate proceedings (and for the payment of which adequate reserves have been provided) so long as such proceedings do not involve any significant likelihood of the sale, forfeiture or loss of the Equipment, any part of the Equipment or any interest in the Equipment, and (iii) materialmen's, mechanics', workmen's, repairmen's, employees' or other like Liens securing obligations arising in the ordinary course of business for amounts the payment of which is either not yet due or is being contested in good faith by appropriate proceedings (and for the payment of which adequate reserves have been provided) so long as such proceedings do not involve any significant likelihood of the sale, forfeiture or loss of the Equipment, any Part or any interest in the Equipment. "Person" means any individual, corporation, partnership, joint ------ venture, association, joint stock company, trust, unincorporated organization or Governmental Body. "Purchase Price" has the meaning set forth in section 2.2 hereof. -------------- "Redelivery Location" has the meaning set forth in Section 6.1 hereof. ------------------- ----------- "Redelivery Receipt" means the Redelivery Receipt to be executed and ------------------ delivered by Seller and Buyer on the Return Date substantially in the form attached as Exhibit F. "Rent" means, collectively, Basic Rent and Supplemental Rent. ---- "Rent Payment Date" means the day that is one month after the Interim ----------------- Lease Date, and the same day of each subsequent calendar month during the Interim Lease Term. In the event a Rent Payment Date is a day other than a Business Day, any amount of Basic Rent payable by Buyer to Seller shall be due on the immediately preceding Business Day. "Rent Period" means any period commencing on any given Rent Payment ----------- Date and ending on the day immediately preceding the next succeeding Rent Payment Date, provided, however, that the last Rent Period shall in any event end on the Closing Date. "Replacement Engine" has the meaning specified in Section 13.2 hereof. ------------------ ------------ "Return Date" has the meaning specified in Section 6.1 hereof. ----------- ----------- "Seller Lien" means any Lien with respect to the Equipment or any part ----------- of the Equipment that results from (i) nonpayment by Seller of any Taxes imposed on it (except any Taxes in respect of which Buyer is obligated to indemnify Seller under this Agreement), (ii) claims against the Equipment or Seller not related to the transactions contemplated by this Agreement or arising out of the operation of the Equipment during the Interim Lease Term and for which Buyer is not obligated to indemnify Seller under this Agreement, or (iii) an affirmative action of Seller not (a) consented to by Buyer or (b) contemplated by this Agreement. 7 "Stipulated Loss Value" shall be the amount set forth in Schedule I --------------------- hereto. "Supplemental Rent" means all amounts, liabilities and obligations ----------------- which Buyer assumes or agrees to pay under any Operative Document to Seller or other persons, including, without limitation, payment of indemnities, and Stipulated Loss Value. "Supplier" means the manufacturer, supplier, contractor or -------- subcontractor of the Equipment or any component or part of the Equipment. "Taxes" shall mean any and all sales, income, withholding, use, ----- excise, personal property, ad valorem, value added, goods and services, stamp or other taxes levied upon Seller, Buyer, or the Equipment, including any and all gross levies or other charges of any nature, together with any penalties, fines, or interest thereon, imposed, levied or assessed by, or otherwise payable to any Governmental Body, foreign or domestic. "Technical Acceptance Certificate" means the Technical Acceptance -------------------------------- Certificate to be executed and delivered by Buyer to Seller substantially in the form attached as Exhibit A for the purpose of evidencing Buyer's satisfaction with the technical condition of the Aircraft prior to the Interim Lease Date. "Transport Canada" means the agency of the Canadian Government charged ---------------- with regulatory authority over civil aviation, or any successor agency administering the Canadian Aviation Law. "UCC" means the Uniform Commercial Code as adopted and in effect in --- any specified jurisdiction within the United States, or the functional equivalent thereof in effect in any specified jurisdiction within Canada. "United States Government" means the federal government of the United ------------------------ States of America or any Governmental Body of such government that is backed by the full faith and credit of such government. 1.2 Other Terms. ----------- (a) Any accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP. (b) All terms used in Article 9 of the UCC of the State of New York and not specifically defined in this Agreement are used in this Agreement as defined in Article 9 of the UCC of the State of New York. 1.3 Interpretation. -------------- (a) Terms defined in this Agreement in the singular include the plural of such terms, and terms defined in this Agreement in the plural include the singular of such terms. 8 (b) Unless otherwise indicated, any agreement defined or referred to in this Agreement is intended to mean or refer to such agreement as amended or supplemented from time to time or as the terms of such agreement are waived or modified in accordance with its terms. (c) Unless otherwise indicated, any Applicable Law defined or referred to in this Agreement is intended to mean or refer to such Applicable Law as amended from time to time or any successor Applicable Law as amended from time to time. (d) Unless otherwise indicated, all hourly references in this Agreement shall refer to Boston, Massachusetts time. SECTION 2. Purchase And Sale. ----------------- 2.1 Agreement to Sell and Purchase. Seller agrees to sell the ------------------------------ Equipment to Buyer and Buyer agrees to purchase the Equipment from Seller for the Purchase Price and subject to the terms and conditions set forth in this Agreement. 2.2 Purchase Price. The total purchase price for the Equipment shall -------------- be in the amount of the "Purchase Price" set forth in Schedule I. 2.3 Payment Terms. ------------- (a) On the Interim Lease Date, Buyer shall pay to Seller an initial installment in the amount of the "Delivery Installment" set forth in Schedule I. The foregoing notwithstanding, Seller acknowledges that prior to execution of this Agreement, Buyer paid a $100,000.00 deposit pending execution of this Agreement, and said deposit shall be applied as partial payment of the Delivery Installment. (b) Buyer shall pay to Seller, 14 additional installment payments (each an "Additional Installment"), each in the amount set forth in Schedule I, with the first Additional Installment due on the day that is one month after the Interim Lease Date, and another Additional Installment shall be due on the same day of each subsequent calendar month during the Interim Lease Term (each an "Additional Installment Date"), except that in the event any Additional Installment Date is other than a Business Day, such Additional Installment shall be due on the immediately preceding Business Day. (c) On the Closing Date, Buyer shall pay to Seller one (1) final payment in the amount of the "Final Installment" set forth in Schedule I. 2.4 Aggregate Purchase Price Paid. ----------------------------- (a) The aggregate amount of the Delivery Installment and all Additional Installments to the extent paid (the "Aggregate Purchase Price Paid") shall be held by Seller, without obligation or liability for payment of interest thereon, as security for the faithful performance by Buyer of all Buyer's obligations arising under this Agreement. Seller may, but 9 shall not be required to, segregate the Aggregate Purchase Price Paid from Seller's general funds. (b) The Aggregate Purchase Price Paid shall become non-refundable upon satisfaction of each of the Conditions Precedent set forth in Section 4.1, ----------- except in the event of an Event of Loss of the Airframe prior to the Interim Lease Date or in the event Seller fails to deliver the Equipment to Buyer on the Interim Lease Date in the condition required by Section 5. Upon becoming non- --------- refundable in accordance with the preceding sentence, the Aggregate Purchase Price Paid shall be applied to the Purchase Price on the Closing Date; provided, however, that if there is no Closing for any reason whatsoever, the Aggregate Purchase Price Paid shall be retained by Seller and deemed Supplemental Rent attributable to Buyer's use of the Equipment. 2.5 Closing Deliveries. ------------------ (a) On the Closing Date, and subject to Section 2.6 hereof, Seller ----------- shall deliver to Buyer the Bill of Sale. (b) On the Closing Date, Buyer shall deliver to Seller the Closing Delivery Receipt. 2.6 Conditions Precedent. Seller's obligation to sell the Equipment -------------------- to Buyer on the Closing Date is subject the satisfaction of each of the following conditions: (a) No Event of Default of the Buyer shall have occurred on or prior to the Closing Date and be continuing on the Closing Date; (b) Buyer shall have promptly paid when due all amounts due and payable hereunder by Buyer to Seller prior to the Closing Date, including, without limitation, all Basic Rent, the Delivery Installment, and each Additional Installment; and (c) Buyer shall have paid the Final Installment to Seller on the Closing Date. 2.7 Aircraft Condition. On the Closing Date, Buyer shall purchase ------------------ the Equipment in "AS IS," "WHERE IS" and "WITH ALL FAULTS" condition. Buyer hereby acknowledges that as at the Closing Date, Buyer shall have been in possession of the Equipment during the Interim Lease Term and shall have been solely responsible for all maintenance and repairs of the Equipment during such Interim Lease Term, and that Seller shall have no responsibility or liability to Buyer for the condition of the Equipment on the Closing Date. 2.8 Removal From Market. Seller has removed the Aircraft from the ------------------- market, and for so long as no Event of Default of the Buyer shall have occurred and be continuing, the Equipment shall remain off the market and be subject to Buyer's exclusive right to purchase. SECTION 3. Interim Lease; Term and Rent. ---------------------------- 10 3.1 Interim Lease. ------------- (a) On the Interim Lease Date, Seller shall lease to Buyer, and Buyer shall lease from Seller, the Equipment on the terms and conditions provided in this Agreement. On the Interim Lease Date, Seller shall deliver the Equipment to Buyer at the Tucson International Airport, Tucson, Arizona or such other location as Seller and Buyer shall agree (the "Delivery Location"). (b) The leasing of the Equipment shall become effective upon execution and delivery of the Agreement Interim Lease Supplement, and delivery of the executed Agreement Interim Lease Supplement by Buyer to Seller shall constitute, without further act, unconditional and irrevocable acceptance by Buyer of such Equipment under and for all purposes of this Agreement as being airworthy, in good working order and repair and without defect or inherent vice in condition, design, operation or fitness for use, whether or not discoverable by Buyer. Risk of loss with respect to the Equipment shall thereupon be borne by Buyer. 3.2 Term and Basic Rent. ------------------- (a) The Equipment shall be leased by the Seller to the Buyer for the Interim Lease Term. (b) For so long as no Event of Default of the Buyer shall have occurred or be continuing, and the Delivery Installment, all Additional Installments, and the Final Installment, and any other amounts due and payable hereunder shall be paid promptly when due, the amount of the Basic Rent shall be zero ($0.00). 3.3 Supplemental Rent. Buyer shall pay to Seller, or to the Person ----------------- entitled to receive it, the Stipulated Loss Value promptly as it becomes due and owing and any and all other Supplemental Rent due and owing within ten days after written demand. Upon any failure by Buyer to pay any Supplemental Rent, Seller shall have all rights, powers and remedies with respect to such failure that are provided in this Agreement or by law, equity or otherwise in case of nonpayment of Basic Rent. Buyer shall also pay to Seller as Supplemental Rent, on demand and to the extent permitted by Applicable Law, a late fee in the amount of $500, plus interest at the Overdue Rate on any part of any Delivery Installment, Additional Installment, or the Final Installment not paid when due for any period for which any such payment shall be overdue, and on any Supplemental Rent not paid when due or demanded by Seller for any period for which the same shall be overdue. The expiration or other termination of this Agreement shall not limit or modify the obligations of Buyer with respect to any indemnities contained in this Agreement. 3.4 Payments to Seller; Non-Business Day Due Date. All payments --------------------------------------------- payable to Seller hereunder shall be paid by Buyer in immediately available funds to such account as Seller shall advise Buyer of in writing at least five Business Days prior to the date such payment is due. Any payment due on a date other than a Business Day shall be due and payable on the immediately preceding Business Day. 3.5 Force Majeure. ------------- 11 (a) Seller shall not be responsible nor be deemed to be in default under this Agreement for any delay in delivery of possession or title to the Equipment or for failure or inability to perform any other obligation under any of the Operative Documents, if such delay, failure or inability results from any cause occurring without the gross negligence or willful misconduct of Seller and beyond the reasonable control of Seller including war, warlike operations, acts of government or governmental priorities, insurrections, riots, strikes or labor troubles causing cessation, slowdown or interruption of work, fire, floods, explosions, earthquakes, accidents, epidemics, quarantine restrictions, mechanical failure, inability for any reason to obtain materials, accessories, equipment or parts, delays in transportation or any act of God or the public enemy. (b) Buyer shall not be responsible nor be deemed to be in default under this Agreement if it is unable to perform any obligation under any of the Operative Documents, other than the obligations to maintain insurance under Section 14 hereof and to timely pay the Initial Deposit, all Additional - ---------- Installment, the Final Installment, and all Basic Rent and Supplemental Rent, and such inability results from any cause occurring without the gross negligence or willful misconduct of Buyer and beyond the reasonable control of Buyer including war, warlike operations, acts of government or governmental priorities, insurrections, riots, strikes or labor troubles causing cessation, slowdown or interruption of work, fire, floods, explosions, earthquakes, accidents, epidemics, quarantine restrictions, mechanical failure, inability for any reason to obtain materials, accessories, equipment or parts, delays in transportation or any act of God or the public enemy, so long as Buyer is diligently attempting to cure any such default. 3.6 Fuel at Interim Lease Date. In addition to all other amounts due -------------------------- and payable by Buyer to Seller on the Interim Lease Date, Buyer shall pay to Seller an amount equal to the fair market value of all fuel on board the Aircraft on such date. SECTION 4. Conditions Precedent. Seller's obligation to lease the -------------------- Equipment to Buyer for the Interim Lease Term is subject the satisfaction of each of the following conditions on or prior to the Interim Lease Date: 4.1 Buyer's Conditions Precedent. Buyer's obligation to purchase the ---------------------------- Equipment on the Closing Date and to lease the Equipment for the Interim Lease Term is subject the condition that on or prior to the Interim Lease Date, Seller shall have permitted Buyer to conduct an inspection of the Aircraft, which inspection shall be conducted at Buyer's sole cost and expense and may include a physical walk around inspection, a video borescope inspection, maximum power assurance runs of each Engine and APU, inspections of Aircraft records, documents and manuals, and such other inspections as are customarily performed by lessees of aircraft of the same make and model as the Aircraft; 4.2 Seller's Conditions Precedent. Seller's obligation to lease the ----------------------------- Equipment for the Interim Lease Term is subject to the satisfaction of each of the following conditions on or prior to the Interim Lease Date: (a) Buyer shall have delivered to Seller the Technical Acceptance Certificate not later than the 24/th/ day of October, 2000, and shall have indicated thereon that Buyer has inspected the Aircraft and is satisfied that the condition of the Aircraft is in the condition 12 required by Section 5 of this Agreement; provided, however, that if Buyer fails --------- to deliver an Technical Acceptance Certificate to Seller on or before the 25/th/ day of October, 2000, Buyer shall be deemed to have accepted the Aircraft in accordance with the terms of said Technical Acceptance Certificate; (b) Buyer shall have delivered to Seller Buyer's credit and financial information not later than the 24/th/ day of October, 2000, and Seller shall have determined that Buyer has the financial ability to meet all of Buyer's obligations arising under this Agreement; (c) Buyer shall have delivered to Seller not later than the 24/th/ day of October, 2000, a certified resolution of Buyer's Board of Directors ratifying this Agreement authorizing the appropriate officers of Buyer to perform on behalf of Buyer each and every obligation of Buyer arising under this Agreement; (d) Seller shall have received approval of this Agreement from the Investment Committee of EQUIS Financial Group, LLC, not later than two (2) days after Seller's receipt of Buyer's credit and financial information in accordance with Section 4.2(b), above; and -------------- (e) Buyer shall have paid to Seller the Delivery Installment specified in Section 2.3(a). SECTION 5. Delivery Conditions. The Seller shall deliver the ------------------- Equipment to Buyer on the Interim Lease Date in the following condition: (a) in compliance with airworthiness directives and mandatory requirements at the date returned to Seller by Seller's previous lessee; (b) with a fresh "C" Check inspection based on the maintenance program of Seller's previous lessee, except for the passage of time, and as attributable to ferry and test flights; (c) each Engine shall have not less than 3,000 cycles to removal of the most life-limited part or known scheduled repair visit under the maintenance program of Seller's previous lessee; (d) in a high-density seating configuration; and (e) except as provided in Section 5(a)-(e) above, in "AS IS," "WHERE ---------------- IS" and "WITH ALL FAULTS" condition. SECTION 6. Return of Equipment. ------------------- 6.1 Return of Aircraft; Condition Upon Return. In the event a ------------------------------------------ Closing shall not occur for any reason whatsoever, including without limitation an Event of Default of the Buyer (it being the intent of the parties that upon execution and delivery of the Agreement Interim Lease Supplement, the Equipment shall be accepted by Buyer for all purposes of this Agreement and a Closing shall occur except in the case of an Event of Default by the Buyer), on - ----- 13 the date on which the leasing of the Equipment terminates under this Agreement (the "Return Date"), Buyer will, at Buyer's sole expense, return the Equipment to Seller by delivering the Equipment to Seller at Montreal International Airport, Montreal, Quebec, Canada (the "Redelivery Location"). At the time of such return, the parties shall execute the Redelivery Receipt, and the following requirements and conditions shall apply: (a) The Equipment shall have a valid Canadian Certificate of Airworthiness for export to a country designated by Seller and be in such condition (including, without limitation, maintenance condition) and with full supporting documentation, as to be immediately registered and operated as a passenger aircraft under the Applicable Law of the country so designated by Seller. (b) All systems shall be functioning within Airframe Manufacturer's maintenance manual limits and the interior and exterior of the Aircraft shall be clean by established carrier standards for immediate passenger use. (c) The Airframe will be fully equipped with the Engines installed thereon. (d) All maintenance checks shall be current under the most recent Maintenance Program for the Aircraft. (e) All airworthiness directives and mandatory service bulletins requiring compliance prior to the Return Date shall have been complied with (without waiver, deferment, restriction or exception) or terminated (excluding repetitive inspections). (f) The Aircraft shall be painted all white, with all of Buyer's insignia and markings removed therefrom. (g) Such Airframe and Engines: (i) shall be in airworthy condition eligible for immediate operation in accordance with Federal Aviation Law and all systems shall be functioning within the respective manufacturer's maintenance manual limits; (ii) shall be free and clear of all Liens (other than Seller Liens) and rights of third parties under pooling, interchange, overhaul, repair or other similar agreements or arrangements; (iii) shall be in the same seating configuration and in as good a condition as when delivered by Seller to Buyer, ordinary wear and tear excepted, in accordance with established carrier standards; (iv) shall not have been discriminated against whether by reason of its leased status or otherwise in maintenance, use, operation or in any other manner whatsoever, including, without limitation, as to the type of maintenance program applicable to the Aircraft or as to compliance with airworthiness directives; 14 (v) the Aircraft shall have zero (0) hours of operation since the performance of the last phased "C" Check maintenance visit; (vi) each Engine shall have a minimum remaining service life of 3000 cycles remaining until removal of the most life-limited part or the next scheduled overhaul or shop visit under the manufacturer's maintenance program, whichever is more limiting; (vii) in no event shall any Engine be "on watch" for any reason requiring special or out of sequence inspection; (viii) the Airframe and all non-engine Parts which are time or cycle limited or calendar controlled shall be serviceable and have a minimum remaining time or service life of 3000 hours (for time-limited items) or 3000 cycles (for cycle-limited items) or twelve (12) months (for calendar-controlled Parts), as applicable; (ix) the Airframe and each Engine shall have no open, deferred or carryover items; (x) each Engine shall meet all Engine Manufacturer's specifications for engine condition applicable to such Engine and shall have received favorable results of the borescope inspection required hereunder; (xi) each Landing Gear shall have a minimum remaining service life of 3000 cycles or 12 months, whichever is more limiting, remaining until the next scheduled overhaul or shop visit under the manufacturer's maintenance program; and (i) All required placards per Buyer's maintenance and operations specifications must be current, in place and legible. (j) The Aircraft shall be free of major dents, and loose, pulled or missing rivets in excess of the Airframe manufacturer's structural repair manual limits. External patches shall be of a type consistent with industry standards and in accordance with the Airframe Manufacturer's approved maintenance manuals and structural repair manuals; and where applicable to Buyer, applicable engineering repair drawings will be provided by Buyer. In addition, all hail damage to the Aircraft shall have been permanently repaired consistent with industry standards and in accordance with the Airframe Manufacturer's approved Maintenance Manuals and Structural Repair Manuals. (k) Ceiling, sidewalls and bulkhead panels shall be clean in accordance with established commercial airline standards. (l) The Aircraft shall be delivered with carpets, flooring, drapes, tapestries, seat covers and seats and hard decor in their condition as on the Interim Lease Date, normal wear and tear excepted and with the same number of sets of galley carts and galley equipment as delivered on the Interim Lease Date. 15 (m) During the "C" Check that will occur prior to the redelivery of the Equipment to Seller, Seller shall be entitled to inspect the Equipment (the "Redelivery Inspection"). The Redelivery Inspection will be solely at Buyer's expense. In connection with the Redelivery Inspection, Seller may conduct any inspection of the Aircraft that Buyer deems necessary in order to verify to Seller's satisfaction that the condition of the Equipment complies with this Agreement, which inspections may include, without limitation, a physical inspection of the Equipment, a complete video borescope inspection of each Engine, maximum power assurance runs of each Engine and APU, inspections of Aircraft records, documents and manuals, and such other inspections as are customarily performed in connection with a transfer of possession of an aircraft of the same make and model as the Aircraft In addition, in connection with the Redelivery Inspection, Buyer, at Buyer's sole cost and expense, shall cause a demonstration flight of the Aircraft of not more than one (1) Flight Hour in duration to be performed in accordance with Buyer's test flight procedures, and shall permit two (2) observers selected by Seller to be on board the Aircraft during such demonstration flight. Promptly upon completion of the Redelivery Inspection, Buyer, at Buyer's own cost and expense, shall cause all discrepancies identified during the Redelivery Inspection and demonstration flight to be corrected and repaired. (n) Buyer will pay for all costs in connection with back to birth disk tracing for disks installed subsequent to the Interim Lease Date. 6.2 Manuals. Upon the return of the Equipment upon any termination ------- of this Agreement in accordance with Section 6.1, Buyer shall deliver or cause ----------- to be delivered to Seller all Data and any other logs, manuals, drawings and data and inspection, maintenance, modification and overhaul records required to be maintained during the Interim Lease Term (in each case in English) with respect to the Equipment by the Transport Canada and FAA, including, without limitation, all engine maintenance records generated by the Engine Maintenance Provider under the Engine Maintenance Contract or by any other approved maintenance provider that may from time to time perform maintenance services on the Airframe or any Engine. In addition, Buyer shall re-assign to Seller, at the expense of Buyer, the benefit of any manufacturer's warranty which has been assigned to Buyer. 6.3 Extension of Term Due to Conditions Upon Return. Should ----------------------------------------------- redelivery of the Equipment, and Data referred to in Section 6.2, from Buyer to Seller be delayed (which delay shall be deemed to have occurred until Buyer shall have complied with all of the return conditions set forth in this Section ------- 6) beyond the date required by the terms of this Agreement, all of Buyer's - - obligations under this Agreement will remain in full force and effect, including, without limitation the obligation to pay Rent hereunder; provided, however, that the amount of the Basic Rent due on a monthly basis during the period of the delay shall be (i) equal to the Delivery Installment for any period of delay resulting from a Force Majeure condition as defined in Section 3.5(b), or (ii) equal to 200% of the amount of the Delivery Installment for any period of delay not resulting from a Force Majeure condition. 6.4 Non-Compliance. To the extent that at the return of the -------------- Equipment, the condition of the Equipment, and Data referred to in Section 6.2, ----------- do not comply with this Section 6, Buyer will, at its sole cost and expense, --------- diligently proceed to rectify any defect or non-compliance as promptly as practicable (and in any event within thirty (30) days) to Seller's 16 reasonable satisfaction; and the Interim Lease Term will be automatically extended and this Agreement will remain in full force and effect and the Basic Rent shall be as provided in Section 6.3 above. ----------- 6.5 Fuel at Return. Upon the return of the Aircraft in the condition -------------- required by Section 6.1, and provided Buyer shall have paid all amounts due and payable by Buyer to Seller under this Agreement, Seller shall pay to Buyer an amount equal to the fair market value of all fuel on board the Aircraft on the date of such return. SECTION 7. Seller's Representations and Warranties. --------------------------------------- 7.1 Disclaimer of Representations. Except as specifically stated in ----------------------------- this Aircraft Conditional Sale Agreement, SELLER SHALL BE DEEMED TO HAVE NOT MADE OR GIVEN, AND SELLER EXPRESSLY DISCLAIMS, ANY REPRESENTATION, WARRANTY OR COVENANT, EXPRESS OR IMPLIED, IN FACT OR IN LAW, AS TO THE AIRWORTHINESS, DESCRIPTION, VALUE, QUALITY, DURABILITY, COMPLIANCE WITH SPECIFICATIONS, CONDITION, DESIGN, OPERATION, DEFECTS, USE OF PATENTED TECHNOLOGY OR EQUIPMENT, MERCHANTABILITY OR FITNESS FOR USE OR SUITABILITY OF THE EQUIPMENT OR ANY COMPONENT OF THE EQUIPMENT FOR ANY PARTICULAR PURPOSE, OR ANY OTHER REPRESENTATION OR WARRANTY WHATEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE EQUIPMENT OR ANY COMPONENT OF THE EQUIPMENT. Seller shall have no responsibility or liability to Buyer or any other Person with respect to any of the following, unless resulting from the gross negligence or willful misconduct of Seller: (a) any liability, loss or damage caused or alleged to be caused directly or indirectly by the Equipment or any component of the Equipment or by any inadequacy of the Equipment or deficiency or defect therein or any other circumstances in connection with the Equipment or the Operative Documents; (b) the use, operation or performance of the Equipment or any component of the Equipment or any risks relating to the Equipment; (c) any interruption of service, loss of business or anticipated profits or consequential damages; or (d) the delivery, operation, servicing, maintenance, repair, improvement or replacement of the Equipment or any component of the Equipment. Without limitation of the foregoing, Buyer waives any claim which it may have against Seller on account of any defect or alleged defect in the Equipment or any part thereof, known or unknown, exterior or interior, apparent or concealed. 7.2 Seller's Representations, Warranties and Covenants. Seller -------------------------------------------------- represents, warrants and covenants to Buyer as follows: (a) On the Interim Lease Date, Seller shall have full power and legal right to lease the Equipment to Buyer. (b) On the Closing Date, Seller shall have full power and legal right to sell the Equipment to Buyer. (c) Seller's execution of the Bill of Sale and delivery thereof to Buyer on the Closing Date shall convey to Buyer good title to the Equipment, free and clear of all liens, claims 17 or encumbrances arising by, through, or under Seller, excepting liens, claims and encumbrances rising by, through, or under Buyer. (d) Seller is and will continue to be a national banking association ------ duly organized and validly existing under the laws of the United States. Seller is and will continue to be duly qualified and authorized to do business and is and will continue to be in good standing as a foreign corporation in each jurisdiction where the character of its properties or the nature of its activities (including the leasing and operation of the Equipment) make such qualification necessary or where the failure to be qualified or authorized or to be in good standing would have a material adverse impact on its business (taken as a whole), financial condition or its ability to perform its obligations under the Operative Documents. (e) The execution, delivery and performance of the Operative Documents have been duly authorized by all necessary corporate action on the part of Seller. The execution, delivery and performance of the Operative Documents, the consummation by Seller of any transactions contemplated by the Operative Documents and the compliance by Seller with any of the terms or provisions of the Operative Documents does not and will not (a) require any approval of Seller's stockholders or any approval or consent of any trustee or holders of any indebtedness or obligations of Seller or which has not been obtained on or before the date hereof, (b) contravene any material Applicable Law binding on or applicable to Seller, (c) contravene the corporate charter or by-laws of Seller, or (d) contravene the provisions of, constitute a default under or result in the breach of, or the creation of any Lien (other than a Permitted Lien) upon any property of Seller under, any indenture, security agreement, mortgage, chattel mortgage, deed of trust, conditional sales contract, lease, loan or credit agreement, contract or other agreement or instrument to which it may be a party or by which any of their properties may be bound or affected. (f) Each of the Operative Documents has been duly authorized by Seller and, when executed and delivered by Seller, will constitute the legal, valid and binding agreement of Seller enforceable against Seller in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting enforcement of creditor's rights generally. (g) No suits or proceedings are pending and to the best knowledge of - Seller no suits are threatened against or affecting Seller in any court or before any Governmental Body that might have a material adverse effect on the financial condition or business of Seller or on the ability of Seller to perform its obligations under the Operative Documents. (h) None of the material documents furnished by or on behalf of Seller to Buyer in connection with the transactions contemplated by the Operative Documents contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in this Agreement not misleading. Seller knows of no fact that materially adversely affects or, so far as Seller can now reasonably foresee, will materially adversely affect the business, financial condition, operations or material portion of the properties of Seller or the ability of Seller to perform its obligations under the Operative Documents. 18 (i) Neither Seller's execution and delivery of the Operative Documents nor Seller's consummation of any of the transactions contemplated on its part by the Operative Documents requires the consent or approval of, the giving of notice to, the registration with, or the recording or filing of any documents with, or the taking of any other action in respect of any trustee or holder of any debt of Seller. 7.3 Enforcement of Warranties. Seller agrees that if any right of ------------------------- action arises against any Supplier of any part of the Equipment, unless and until any Event of Default shall have occurred and be continuing, Buyer shall be entitled, at its own expense, to exercise all rights of Seller against such Supplier. Seller shall use all reasonable efforts to assist Buyer, at Buyer's expense, in order to enable Buyer to assert any claim and prosecute any right of action arising against any Supplier pursuant to this Section 7.3. ----------- 7.4 Assignment of Warranties. To the extent that any warranties from ------------------------ manufacturers, service providers, or suppliers are still in effect with respect to the Aircraft (other than warranties which by their terms are unassignable), and provided a Closing shall occur, such warranties and all rights thereunder are hereby assigned to Buyer effective at the moment of Closing. SECTION 8. Buyer's Representations, Warranties and Covenants. Buyer ------------------------------------------------- represents, warrants and covenants as follows: 8.1 Corporate Existence and Qualification. Buyer is and will ------------------------------------- continue to be a corporation duly organized and validly existing under the laws of Canada. Buyer is and will continue to be duly qualified and authorized to do business and is and will continue to be in good standing as a foreign corporation in each jurisdiction where the character of its properties or the nature of its activities (including the leasing and operation of the Equipment) make such qualification necessary or where the failure to be qualified or authorized or to be in good standing would have a material adverse impact on its business (taken as a whole), financial condition or its ability to perform its obligations under the Operative Documents. 8.2 Certificated Air Carrier. Buyer is and will remain a ------------------------ Certificated Air Carrier. Buyer holds and will continue to hold all material licenses, certificates, permits and franchises from the Canadian Government necessary to authorize Buyer to engage in international commercial air transport and to carry on its business as a commercial air carrier of passengers and cargo. 8.3 Corporate Authority. Buyer has and will continue to have the ------------------- corporate power and authority to carry on its business as currently conducted and to enter into and perform its obligations under the Operative Documents. 8.4 Authorization and Non-contravention. The execution, delivery and ----------------------------------- performance of the Operative Documents have been duly authorized by all necessary corporate action on the part of Buyer. The execution, delivery and performance of the Operative Documents, the consummation by Buyer of any transactions contemplated by the Operative Documents and the compliance by Buyer with any of the terms or provisions of the Operative Documents does not and will not (a) require any approval of Buyer's stockholders or any 19 approval or consent of any trustee or holders of any indebtedness or obligations of Buyer or which has not been obtained on or before the date hereof, (b) contravene any material Applicable Law binding on or applicable to Buyer, (c) contravene the corporate charter or by-laws of Buyer, or (d) contravene the provisions of, constitute a default under or result in the breach of, or the creation of any Lien (other than a Permitted Lien) upon any property of Buyer under, any indenture, security agreement, mortgage, chattel mortgage, deed of trust, conditional sales contract, lease, loan or credit agreement, contract or other agreement or instrument to which it may be a party or by which any of their properties may be bound or affected. 8.5 Consents. Neither Buyer's execution and delivery of the -------- Operative Documents nor Buyer's consummation of any of the transactions contemplated on its part by the Operative Documents requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action in respect of Transport Canada or the FAA or any other Governmental Body, except for the actions referred to in Section 8.8, and normal periodic and ----------- other reporting requirements and renewals and extensions of exemptions, in each case only to the extent required to be given or obtained after the Interim Lease Date. 8.6 Execution and Binding Effect. Each of the Operative Documents ---------------------------- has been duly authorized by Buyer and, when executed and delivered by Buyer, will constitute the legal, valid and binding agreement of Buyer enforceable against Buyer in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting enforcement of creditor's rights generally. 8.7 Litigation. No suits or proceedings are pending and to the best ---------- knowledge of Buyer no suits are threatened against or affecting Buyer in any court or before any Governmental Body that might have a material adverse effect on the financial condition or business of Buyer or on the ability of Buyer to perform its obligations under the Operative Documents. 8.8 Filings. Except for the filing for recordation pursuant to the ------- Canadian Aviation Law of the Application, this Agreement and the Agreement Interim Lease Supplement or short forms thereof in form acceptable to Transport Canada, the filing of precautionary financing statements or other statements with respect to the interests created by this Agreement under the Applicable Laws of the Provinces of Ontario and Quebec, the filing of the Confirmation with Transport Canada, and the placing on the Airframe and the Engines of the plates containing the legends referred to in Section 16, no further action, including ---------- any filing or recording of any document or financing statement, is necessary in order to establish and perfect Seller's title to the Equipment as against Buyer and any third parties in Canada. 8.9 Tax Returns and Payments. To the best of Buyer's knowledge, ------------------------ Buyer has filed or caused to be filed all tax returns that are required to be filed by any Governmental Body, or has filed for an automatic extension or obtained an extension in respect of such returns, which failure to so file or obtain an extension would have a material adverse effect on the financial condition or business of Buyer or Buyer's ability to perform its obligations under the Operative Documents. Buyer has paid or caused to be paid all Taxes shown to be due or payable on said returns or any assessment received by Buyer, to the extent that such Taxes have become due and 20 payable, except to the extent payment was precluded or delayed by previous bankruptcy action by Buyer. 8.10 Disclosure. None of the material documents furnished by or on ---------- behalf of Buyer to Seller in connection with the transactions contemplated by the Operative Documents contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained in this Agreement not misleading. Buyer knows of no fact that materially adversely affects or, so far as Buyer can now reasonably foresee, will materially adversely affect the business, financial condition, operations or material portion of the properties of Buyer or the ability of Buyer to perform its obligations under the Operative Documents. 8.11 Principal Place of Business. The principal place of business (or --------------------------- its chief executive office, if there is more than one place of business) and domocile of Buyer is located at 685 Stuart Graham Blvd. North, Dorval, Quebec, Canada, H4Y 1E4, and the office where the Buyer keeps its records concerning the Equipment and its interests in the Operative Documents is located at 685 Stuart Graham Blvd. North, Dorval, Quebec, Canada, H4Y 1E4. SECTION 9. Additional Covenants of Buyer. ----------------------------- 9.1 Financial and Other Information. Buyer shall furnish to Seller: ------------------------------- (a) within 90 days after the end of each fiscal year of Buyer during the Interim Lease Term, audited annual financial statements of Buyer reported on by independent certified public accountants of recognized national standing selected by Buyer; (b) within 45 days after the end of each of the first three fiscal quarter in each fiscal year during the Interim Lease Term, unaudited quarterly financial statements of Buyer; (c) concurrently with the financial statements furnished pursuant to Sections 9.1(a) and (b), an Officer's Certificate certifying to the best - ----------------------- knowledge, information and belief of such officer after due inquiry of the officer signing such Officer's Certificate (i) that no Default or Event of Default occurred during the period covered by such financial statements and no Default or Event of Default exists on the date of such Officer's Certificate, or (ii) if a Default or an Event of Default occurred or exists, stating that fact and specifying the nature and period of existence of such Default or Event of Default and the actions Buyer took or proposes to take with respect to such Default or Event of Default; (d) after the occurrence of any Default or Event of Default or any other event that will materially adversely affect the business, financial condition, operations or material portion of the properties of Buyer simultaneously and to the extent delivered by Buyer to any other Seller or creditor of Buyer, notice to Seller of such event; (e) such information to which Buyer has or should have reasonable access as may be required to enable Seller to file any reports required to be filed by Seller with any Governmental Body because of Seller's interest in the Equipment; and (f) the reports required pursuant to Section 10.2(d); and --------------- 21 (g) with reasonable promptness, such other information and data with respect to Buyer as Seller from time to time reasonably requests. 9.2 Liens. (a) Buyer shall not directly or indirectly create, incur, ----- assume or suffer to exist any Lien on or with respect to the Equipment, any part of the Equipment, title to the Equipment or any interest in the Operative Documents except the respective rights of Seller and Buyer under the Operative Documents, the rights of others under agreements or arrangements to the extent expressly permitted by the terms of Section 11, and Permitted Liens. Buyer ---------- shall promptly at its own expense take such action as may be necessary to discharge any such Lien other than Permitted Liens. (b) To the extent any Liens of which Buyer has actual knowledge have attached to the Equipment since the last Rent Payment Date, Buyer shall furnish to Seller on the next Rent Payment Date (i) an Officer's Certificate setting forth any Liens along with copies of any documentation or information received by Buyer in connection with such Liens and (ii) any authorizations which may be required to permit Seller to conduct an independent investigation and obtain information with respect to such Liens. 9.3 Eurocontrol and Nav Canada. Buyer shall promptly pay when due -------------------------- all overflying or other charges incurred by Buyer with respect to the Equipment which are payable to Eurocontrol, Nav Canada, or any other airport or aviation authorities and shall provide Seller with the Authorization Letter. SECTION 10. Registration; Maintenance; Operation. ------------------------------------ 10.1 Registration. As soon as reasonably practicable after the ------------ Interim Lease Date, Buyer, at Buyer's own cost and expense, shall cause the Aircraft to be registered with Transport Canada and shall cause this Agreement and the Agreement Interim Lease Supplement (or a short form aircraft lease mutually acceptable to the parties in lieu of this Agreement and the Agreement Interim Lease Supplement), and the Confirmation to be recorded with Transport Canada, and Buyer shall thereafter maintain in full force and effect the registration of the Aircraft and the recordation of this Agreement, the Agreement Interim Lease Supplement, and the Confirmation. Buyer shall promptly produce to Seller true copies of all applications made in relation to the Equipment or the Operative Documents, and shall not cause the Airframe due to Buyer's actions or inaction to be ineligible for registration under the Canadian Aviation Law or cause this Agreement or the Agreement Interim Lease Supplement to be ineligible for recordation under the Canadian Aviation Law. Seller shall use reasonable efforts to cooperate with Buyer in connection with any action required to be taken by Buyer pursuant to this Section 10.1. ------------ 10.2 Maintenance. ----------- (a) Buyer, at its own cost and expense, shall maintain, inspect, service, repair, overhaul and test (or cause to be maintained, inspected, serviced, repaired or overhauled) the Equipment and all Parts so as to keep the Equipment and all Parts in good operational repair and condition and airworthy in all respects and in compliance with the applicable type certificate 22 specifications and data sheets. To that end, Buyer shall cause the Aircraft to be placed on Buyer's Maintenance Program within 30 days following the Interim Lease Date, and shall maintain the Aircraft in accordance with Buyer's Maintenance Program during the Interim Lease Term. In furtherance of the foregoing, Buyer shall carry out all maintenance, overhauls, replacements and repairs to the Equipment in accordance with the Maintenance Program, at FAA- approved service centers and in the manner, to an extent and with a standard of care not less than that employed by Buyer with respect to similar aircraft operated by Buyer. In addition, Buyer shall maintain the Equipment in such condition as may be necessary to enable a Canadian Certificate of Airworthiness and all other applicable airworthiness certifications of the Equipment to be maintained in good standing at all times under the Canadian Aviation Law, and shall make or cause to be made all adjustments, repairs and replacements to the Equipment necessary to maintain the Equipment in accordance with the Maintenance Program. (b) Buyer shall cause the Equipment to be maintained in accordance with the appropriate Type Certificate Specification and Data Sheets. Buyer shall comply with all U.S. and Canadian airworthiness directives, mandatory notes or modifications or similar requirements affecting the Equipment, compliance with which is required on or before the date that is thirty days subsequent to the Closing Date. Buyer shall maintain the Equipment so as to comply with the Canadian Aviation Law from time to time in force and applicable to the Equipment, and will not permit the Equipment to be maintained in violation of any Applicable Law, in violation of any rule, regulation or order of any Governmental Body having jurisdiction or in violation of any airworthiness certificate, license or registration relating to the Equipment issued by any such Governmental Body. In the event there is a redelivery of the Aircraft to Seller under Section 6 and any Applicable Law applicable to Buyer's maintenance and operation of the Equipment, compliance with which is required on or before the date that is thirty days subsequent to the redelivery date, requires alteration of the Equipment. Buyer will modify the Equipment to conform to such Applicable Law, and will maintain the Equipment in proper operating condition under such Applicable Laws. (c) Buyer shall maintain the Engines under an "on condition" monitoring program in accordance with Buyer's normal practice with respect to similar engines it operates. Notwithstanding the provisions of the preceding sentence, Buyer shall be permitted to enter into a maintenance cost per hour agreement or similar maintenance agreement for Engine Shop Visits and other maintenance work on the Engines (the "Engine Maintenance Contract") with an engine servicer consented to by Seller, which consent shall not be unreasonably withheld (the "Engine Maintenance Provider") upon terms consented to by Seller, which consent shall not be unreasonably withheld. Concurrent with entering into the Engine Maintenance Contract, (i) Buyer shall enter into an agreement with Seller assigning and granting to Seller a security interest in all of Buyer's rights, title and interest in the Engine Maintenance Contract to secure the obligations of Buyer under the Operative Documents, and (ii) Buyer shall cause the Engine Maintenance Provider to consent to such assignment(s) and to confirm to Seller that upon notice from Seller to the Engine Maintenance Provider that Seller has terminated this Agreement pursuant to Section 18, the Engine ---------- Maintenance Provider will perform its obligations under the Engine Maintenance Contract for the benefit of Seller. Buyer and the Engine Maintenance Provider shall both agree that it will not amend or modify the terms of the Engine Maintenance Contract without prior notice to Seller and, if the amendment or modification would materially 23 adversely affect the interests of Seller, without the prior written consent of Seller, which consent shall not be unreasonably withheld. (d) Buyer shall provide the Seller with monthly reports with respect to the operation of the Aircraft, including therein data regarding the number of Flight Hours and cycles of operations conducted during the reporting period, the number of Flight Hours and/or months remaining until overhaul for the Airframe, Engines, and other major components, and such information concerning the location, condition, use and operation of the Aircraft as Seller may reasonably request. Buyer shall provide Seller maintenance schedules relating to the Equipment from time to time as such schedules are adjusted or updated. Buyer shall provide Seller reasonable prior notice of the date of, and any change in the date of, any phased "C" Checks, in order to enable Seller, or its agents, representatives or designees, to inspect the Aircraft, including, without limitation, the Data, at the time and place any such phased "C" Checks occur and to make a reasonable number of photocopies of any Data, at Seller's expense. Seller's technical representatives shall have an unrestricted right to conduct reasonable inspections of the equipment at any time prior to the Closing, provided, however, that so long as no Event of Default shall have occurred and be continuing, Seller shall provide reasonable notice of such inspection to Buyer and Seller shall not unreasonably disrupt the commercial use of the Aircraft. Buyer shall not materially alter the interval between scheduled maintenance checks of the Aircraft prior to the Closing without the prior approval of Seller 10.3 Fees and Charges. During the Interim Lease Term, Buyer shall pay ---------------- promptly when due any and all fees, charges, and taxes of any kind or nature whatsoever that are in any manner connected with Buyer's possession, use, maintenance, repair or operation of the Equipment. 10.4 Operation of the Equipment. Buyer shall operate the Equipment in -------------------------- accordance with its Transport Canada approved operations specifications. Buyer shall not operate the Equipment (i) in any zone which is declared a war zone by the United States Government, the Canadian Government, or by any insurer or reinsurer of the Equipment against hull or war risks, if any, or (ii) in any zone in respect of which any insurer or reinsurer of the Equipment shall have withdrawn any coverage for the Equipment. Buyer shall not use the Equipment nor suffer it to be used in any manner or for any purpose excepted from any of the insurance on the Equipment or for the purpose of carriage of goods of any description excepted from such insurance, or do or permit to be done anything which, or omit to do anything the omission of which, may invalidate any of such insurance. Buyer shall not allow the Aircraft or any airframe on which an Engine is installed to carry any goods which are declared contraband. 10.5 Maintenance of Certain Engines. An aircraft engine which is not ------------------------------ an Engine but which is installed on the Airframe shall be maintained in accordance with Section 10.2 while it is installed on the Airframe. ------------ 10.6 Data. Throughout the Interim Lease Term, Buyer shall maintain ---- accurate, complete and current Data, in English, with respect to all maintenance carried out on the Equipment and all operations of the Equipment. Such Data shall comply and be maintained in compliance with the Maintenance Program and with all Applicable Laws applicable to Buyer's maintenance and operation of the Equipment. Buyer shall permit Seller or any authorized 24 representative of Seller to examine such Data at any reasonable time upon reasonable notice to Buyer. SECTION 11. Possession. ---------- 11.1 Transfers of Possession. Buyer shall not, without the prior ----------------------- written consent of Seller, sublease or otherwise in any manner deliver, transfer or relinquish possession or control of, or transfer any right, title or interest in, any part of the Equipment (whether through pooling or interchange agreements or otherwise) or install any Engine, or permit any Engine to be installed, on any airframe other than the Airframe or permit any Part to be installed on an airframe or engine other than the Airframe or an Engine except in accordance with Section 12; provided, however, that so long as no Event of Default shall ---------- have occurred and be continuing, Buyer may, without the prior written consent of Seller, subject to Section 10 and as long as all necessary approvals of the FAA ---------- and/or Transport Canada have been obtained: (a) deliver temporary possession of the Airframe or any Engine to its manufacturer for testing or other similar purposes, or to any organization for testing, service, repair, maintenance or overhaul or, to the extent permitted by Section 12, for alterations, modifications or additions; - ---------- (b) enter into a wetlease for the Aircraft in the ordinary course of Buyer's business under which the Buyer's personnel and crew shall have exclusive possession, command, and operational control of the Aircraft at all times and shall have exclusive responsibility for maintenance of the Aircraft; (c) subject any Engine to normal pooling agreements customary to the airline industry and entered into by Buyer in the ordinary course of its business with any Certificated Air Carrier or, with the prior written consent of the Seller (such consent not to be unreasonably withheld), any other air carrier, provided that (i) any such agreement or arrangement does not contemplate, permit, require or result in any transfer of title to or registration of such Engine, and (ii) if Seller's title to such Engine shall be divested under any such agreement or arrangement, such divestiture shall be deemed to be an Event of Loss with respect to such Engine and Buyer shall comply with Section 13.2 in respect of such Event of Loss; ------------ (d) install an Engine on an airframe owned by Buyer free and clear of all Liens, except for Permitted Liens, and provided such airframe is maintained by Buyer under the Maintenance Program; (e) install an Engine on an airframe leased to Buyer, purchased by Buyer subject to a conditional sale agreement or owned by Buyer subject to a security agreement; provided, however, that (i) such airframe is free and clear of all Liens except the rights of the parties to the lease, conditional sale or security agreement and Liens covered by clauses (ii) and (iii) of the definition of Permitted Liens, (ii) prior to such installation, Seller shall have received from the seller, conditional vendor or secured party of such airframe a written agreement (which may be the lease, conditional sale agreement or security agreement covering such airframe), whereby such seller, conditional vendor or secured party expressly agrees that neither it nor its successors or assigns will acquire or claim any title or interest in any Engine by reason of such 25 Engine being installed on such airframe at any time while such Engine is subject to this Agreement or is owned by Seller, and (iii) such airframe is maintained by Buyer under the Maintenance Program; 11.2 Terms of Transfers. With respect to any transfer pursuant to ------------------ Section 11.1: - ------------ (a) The rights of any transferee that receives possession by reason of a transfer permitted by Section 11.1 shall be subject and subordinate to all ------------ the terms of this Agreement, including Seller's right of repossession pursuant to Section 18 and Seller's right to avoid such transferee's right to possession ---------- upon such repossession. (b) Buyer shall remain primarily liable under this Agreement at all times for the performance of all of the terms of this Agreement to the same extent as if such transfer had not occurred, and no relinquishment of possession of the Equipment shall in any way discharge or diminish any of Buyer's obligations to Seller under this Agreement or any of Seller's rights under this Agreement, and such rights shall continue as if such transfer had not occurred. (c) The term of any pooling arrangement shall terminate upon any return of the Equipment to Seller for any reason whatsoever. (d) At least 10 Business Days before a pooling arrangement becomes effective, Buyer shall give Seller written notice of its intent to subject the Engines to such pooling arrangement, which notice shall include a copy of such pooling arrangement. (e) Any pooling arrangement permitted by Section 11.1 shall expressly ------------ provide (i) that such transferee will not transfer possession or control of the Equipment to anyone other than Buyer or Seller, and (ii) for maintenance, operation, insurance provisions that are substantially the same as the provisions of this Agreement (whether by requiring such obligations to be performed by the transferee, by Buyer or by both). (f) Any transfer otherwise permitted by this Section 11 may be ---------- effected only if and so long as (i) the Equipment has a valid Canadian or U.S. Certificate of Airworthiness, except as may be required for normal maintenance, service, repair and overhaul, and (ii) no Default or Event of Default has occurred and is continuing or will occur as a result of such transfer. (g) Any pooling arrangement permitted by this Section 11.1 is hereby ------------ assigned by Buyer to Seller for purposes of securing Buyer's obligations under the Operative Documents, and Buyer hereby grants to Seller a security interest in all of Buyer's right, title and interest in any such pooling arrangement. 11.3 Cross-Waiver. Subject to the receipt of a reciprocal agreement ------------ as provided in Section 11.1(e), Seller hereby agrees for the benefit of Buyer --------------- and any Seller, conditional vendor or secured party of any engine leased to Buyer, purchased by Buyer pursuant to a conditional sale agreement or owned by Buyer subject to a security agreement that neither Seller nor its assignees will acquire or claim, as against Buyer, such Seller, conditional vendor or secured party or any of their respective assignees any right, title or interest in any engine owned 26 by such Seller 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. 11.4 Early Purchase Option. At any time during the Interim Lease --------------------- Term, Buyer shall have the right and option to terminate the Interim Lease Term and to immediately purchase the Equipment from Seller by paying the Purchase Price in full. SECTION 12. Replacement and Pooling of Parts; Modifications; Engine ------------------------------------------------------- Exchange. - -------- 12.1 Replacement of Parts. Throughout the Interim Lease Term and -------------------- until the return of the Equipment to Seller in accordance with the terms of this Agreement, Buyer shall promptly replace all Parts that become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason from time to time. In addition, Buyer may remove any Parts in the ordinary course of maintenance, service, repair, overhaul or testing, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use, but Buyer shall replace such Parts as promptly as possible. All replacement Parts shall be parts approved for use in accordance with the Maintenance Program, shall be free and clear of all Liens and shall be in at least as good operating condition as the Parts replaced assuming such replaced Parts were in the condition and repair required to be maintained by the terms of this Agreement immediately prior to such replacement. The replacement of Parts pursuant to this Section 12.1 shall be made in accordance with Buyer's standard practices ------------ and procedures and shall not, over time, have a material adverse effect on the value of the Airframe or any Engine. All Parts removed from the Airframe or any Engine at any time shall remain the property of Seller and subject to this Agreement, no matter where located, until such time as such Parts shall be replaced by Parts that have been incorporated in, installed on or attached to the Airframe or such Engine and that meet the requirements for replacement Parts specified in this Section 12.1. Upon any replacement Part becoming incorporated ------------ in, installed on or attached to the Airframe or any Engine as provided in this Section 12.1, immediately and automatically without further act (i) title to the - ------------ replaced part shall vest in Buyer free and clear of all rights of Seller and any Seller Liens, and such replaced part shall no longer be deemed a "Part" under this Agreement, title to the replacement Part shall vest in Seller and become subject to the Security Agreement, and (ii) such replacement Part shall become subject to this Agreement and be deemed a "Part" of the Airframe or such Engine for all purposes of this Agreement to the same extent as the part that was replaced. 12.2 Pooling of Parts. So long as no Event of Default shall have ---------------- occurred and be continuing, any Part may be removed from an Airframe or Engine and subjected by Buyer to a normal pooling arrangement customary in the airline industry entered into in the ordinary course of Buyer's business with Certificated Air Carriers or, with the prior written consent of the Seller (such consent not to be unreasonably withheld), other air carriers; provided, however, that the Part replacing such removed Part shall comply with the provisions of Section 12.1 with respect to replacement Parts and shall be incorporated in, - ------------ installed on or attached to the Airframe or an Engine in accordance with Section ------- 12.1 as promptly as practicable after the removal of such removed Part. In - ---- addition, any replacement Part when incorporated in, installed on or attached to the Airframe or an Engine in accordance with Section 12.1 may be owned by a ------------ 27 Certificated Air Carrier subject to such a normal pooling arrangement; provided, however, that Buyer as promptly thereafter as practicable either (a) causes title to such replacement Part to vest in Seller in accordance with Section 12.1 ------------ by Buyer acquiring title to such replacement Part for the benefit of, and transferring such title to, Seller free and clear of all Liens other than Permitted Liens, or (b) replaces such replacement Part by incorporating or installing in or attaching to the Airframe or any Engine from which it was removed a further replacement Part owned by Buyer free and clear of all Liens except for Permitted Liens and by causing title to such replacement Part to vest in Seller in accordance with Section 12.1. Immediately upon the vesting of ------------ title of any such replacement Part in Seller in accordance with the immediately preceding sentence, without further act title to the replaced part shall thereupon vest in Buyer, free and clear of all rights of Seller and any Seller Liens, and the replaced part shall no longer be deemed a "Part" under this Agreement. 12.3 Alterations, Modifications and Additions. (a) During the Interim ---------------------------------------- Lease Term Buyer shall, at Buyer's sole cost and expense, make or cause to be made such alterations and modifications in and additions to the Equipment as may be required from time to time to meet the standards of Transport Canada or the FAA and any other Governmental Body having jurisdiction, such requirements to include, without limitation, compliance with all applicable FAA and Transport Canada airworthiness directives and mandatory service bulletins, the compliance with which is required on or before the date one year after the end of the Interim Lease Term. The Buyer shall document in the Data the method and date of compliance with such requirements to the extent required for certification by Transport Canada and the FAA (with no variance, extension, carry-overs or deferrals). (b) In addition to its rights under Section 12.1, Buyer may, at ------------ Buyer's sole cost and expense, and with Seller's prior written consent, make such additional alterations and modifications in and additions to the Airframe or any Engine as Buyer may deem desirable in the proper conduct of its business; provided, however, that no such alteration, modification or addition shall diminish the value, utility or remaining useful life of the Equipment (taken as a whole) or impair the airworthiness and condition of the Equipment immediately prior to such alteration, modification or addition, assuming such Equipment was then of the value, utility and remaining useful life and in the airworthy and other condition required to be maintained by the terms of this Agreement. The alterations and modifications pursuant to this Section 12.3(b) shall not, over --------------- time, have a material adverse effect on the value of the Airframe or any Engine. (c) Title to all Parts incorporated in, installed on or attached or added to the Airframe or any Engine as the result of any alteration, modification or addition made as required or permitted by this Section 12.3 ------------ shall, without further act, vest in Seller and become subject to this Agreement; provided, however, that so long as no Default or Event of Default shall have occurred and be continuing, at any time during the Interim Lease Term, Buyer may remove any Part provided that (i) such Part is in addition to, and not in replacement of or in substitution for, an original Part, (ii) such Part is not required to be incorporated in, installed on or attached or added to the Airframe or any Engine pursuant to the terms of Sections 12.1 or 12.3(a), and ------------------------ (iii) such Part can be removed from the Airframe or such Engine without diminishing or impairing the value, utility, remaining useful life, airworthiness or condition required to be maintained by the terms of this Agreement that such Airframe or Engine would have had at such time had such alteration, modification or addition not occurred. Upon the removal by Buyer of any Part as 28 permitted by this Section 12.3, title to such removed Part shall, without ------------ further act, vest in Buyer and such removed part shall no longer be deemed a "Part" of the Equipment. Any Part not recovered by Buyer as provided above before the return to Seller of the Airframe or Engine in which such Part is incorporated or installed or to which such Part is attached shall remain the property of Seller and subject to this Agreement. SECTION 13. Loss. ---- 13.1 Event of Loss With Respect to the Airframe. If an Event of Loss ------------------------------------------ occurs with respect to the Airframe, Buyer shall immediately give Seller written notice of such Event of Loss and Buyer shall, not later than the earlier of (a) the 60th day following the occurrence of such Event of Loss, or (b) the date of receipt of insurance proceeds in respect of such occurrence, pay to Seller the Stipulated Loss Value. Upon payment in full of the Stipulated Loss Value, together with all Basic Rent payable on or before the last Rent Payment Date on or prior to the date of such Stipulated Loss Value payment and all Supplemental Rent due and payable on or before the date of such Stipulated Loss Value payment, (i) the obligation of Buyer to pay Basic Rent on any succeeding Rent Payment Date shall terminate, (ii) the Interim Lease Term shall end, and (iii) Seller shall transfer to Buyer all Seller's right, title and interest, if any, in and to the Equipment "as is, where is and with all faults" and without recourse or warranty, except a warranty that the Equipment is free of any Seller Liens. 13.2 Event of Loss With Respect to an Engine. If an Event of Loss --------------------------------------- occurs with respect to an Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe, Buyer shall immediately give Seller prompt written notice of such Event of Loss, and not later than 120 days after the occurrence of the Event of Loss shall convey or cause to be conveyed to Seller, as replacement for the Engine with respect to which such Event of Loss occurred, title to another engine of the same or an improved make and model and suitable for installation and use on the Airframe (any such engine, a "Replacement Engine"), free and clear of all Liens except Permitted Liens. As a condition to such replacement, the Replacement Engine shall have a value and utility at least equal to, and shall be in as good an operating condition as, the Engine, as the case may be, with respect to which such Event of Loss occurred had immediately before such Event of Loss (assuming such Engine had been properly maintained in accordance with the terms of this Agreement), as reasonably determined by Seller on the basis, among other things, of Seller's inspection of the records for the Replacement Engine. At the time of the conveyance of the Replacement Engine to Seller, Buyer shall (a) execute and deliver to Seller and duly file for recordation under Applicable Law a supplement to this Agreement describing such Replacement Engine and subjecting such Replacement Engine to this Agreement and such security documents, and (b) cause to be delivered to Seller evidence reasonably satisfactory to Seller as to the due compliance by Buyer with the insurance provisions of Section 14 with ---------- respect to such Replacement Engine. Upon compliance by Buyer with the foregoing terms of this Section 13.2 within the 120-day period referred to above, Seller ------------ will transfer title to the Engine so replaced to Buyer "as is, where is and with all faults" and without recourse or warranty except a warranty that such replaced Engine is free of any Seller Liens, and Seller will execute and deliver to Buyer a partial release, in form for recording under Applicable Law, releasing such replaced Engine from this Agreement. Such Replacement Engine shall thereupon constitute an "Engine", as the case may be) for all purposes of this Agreement. No 29 Event of Loss with respect to an Engine under the circumstances contemplated by the terms of this Section 13.2 shall result in any reduction in Rent. ------------ 13.3 Application of Payments. Any payments received at any time by ----------------------- Seller or Buyer from any Governmental Body, from any insurer under insurance maintained by Buyer pursuant to this Agreement or from any other Person (other than from an insurer under insurance maintained by Seller) with respect to an Event of Loss will be applied as follows: (a) if such payments are received with respect to an Event of Loss of the Airframe, the amount of such payments up to the Stipulated Loss Value required to be paid by Buyer pursuant to Section 13.1 and any other amounts ------------ payable to Seller under the Operative Documents (including without limitation, all installments to the extent actually paid) shall be applied in reduction of Buyer's obligation to pay such Stipulated Loss Value and other amounts if not already paid to Seller by Buyer or, if already paid to Seller by Buyer, shall be applied to reimburse Buyer for its payment of such Stipulated Loss Value, and any balance of such payments shall be paid over to or retained by Buyer; and (b) if such payments are received with respect to an Event of Loss of an Engine without an Event of Loss of the Airframe, such payments shall be paid at Seller's option (i) by Seller to Buyer to reimburse Buyer for its costs in performing its replacement obligations pursuant to Section 13.2, or (ii) ------------ directly to the third-party maintenance facility performing the repairs to the Engine that has suffered the Event of Loss, upon which in each case Buyer shall immediately thereafter perform the terms of Section 13.2 with respect to the ------------ Event of Loss for which such payments are made. 13.4 Application of Payments During Default or Event of Default. Any ---------------------------------------------------------- amount referred to in this Section 13 that is paid or payable to or retainable ---------- by Buyer shall not be paid to or retained by Buyer if at the time of such payment a Default or Event of Default shall have occurred and be continuing, but shall be paid to and held by the Seller and may be applied against the obligations of Buyer under this Agreement when and as due. At such time as no Default or Event of Default shall be continuing, such amount shall be paid to Buyer to the extent not previously applied in accordance with this Section 13.4. ------------ SECTION 14. Insurance. --------- 14.1 Insurance Requirements. ---------------------- (a) Comprehensive Airline Liability Coverage. At all times during ---------------------------------------- the Interim Lease Term and for a period of two (2) years after the Closing Date, Buyer shall, at its own expense, maintain or cause to be maintained with respect to the Equipment comprehensive airline liability (including, without limitation, third-party and passenger, bodily injury, property damage, product liability, cargo, mail, baggage (checked and unchecked), premises and hangar keepers' liability, and contractual liability) insurance in accordance with AVN67B (exclusive of any Airframe, Part and/or Engine manufacturer's product liability insurance), (i) in an amount not less than the greater of (A) the amounts of comprehensive airline liability insurance from time to time applicable to aircraft owned or leased and operated by the Buyer of the same type or of any other type having similar capacity and performance characteristics as the Aircraft, and (B) 30 the minimum amount of comprehensive airline liability insurance commonly maintained by U.S. and Canadian Certificated Air Carriers for aircraft of the same type as the Aircraft, (ii) of the type and covering the same risks usually carried by air carriers owning or operating similar aircraft and engines and covering risks of the kind customarily insured against by such air carriers, (iii) with insurers of recognized international reputation and responsibility in the London, United States, or French insurance markets who are reasonably acceptable to Seller, and (iv) that names the Indemnitees as additional insureds and otherwise complies with the requirements set forth in, and is consistent with the issuance of a valid certificate of insurance and a report of the insurance broker. (b) Insurance Against Expense or Damage to the Equipment. At all ---------------------------------------------------- times during the Interim Lease Term, Buyer shall, at its own expense, maintain or cause to be maintained, with respect to the Equipment, all-risk aircraft hull insurance covering the Equipment, all-risk property damage insurance covering the Engines and Parts while temporarily removed from the Airframe, and all-risk spares insurance in accordance with AVN67B (i) for an agreed value not less than the Stipulated Loss Value in respect of all-risk hull insurance, (ii) of the type and covering the same risks usually carried by air carriers owning or operating similar aircraft and engines and covering risks of the kind customarily insured against by such air carriers, (iii) confirming that the insurers shall not be entitled to replace an Aircraft or Airframe upon the occurrence of an Event of Loss with respect thereto, (iv) with insurers of recognized international reputation and responsibility in the London, United States, or French insurance markets who are reasonably acceptable to Seller, and (v) that names Seller as the loss payee to the extent of the Stipulated Loss Value less the Aggregate Purchase Price Paid, and Buyer as loss payee with respect to amounts in excess of the Stipulated Loss Value less the Aggregate Purchase Price Paid. Buyer agrees that it will not settle any claim with respect to the insurances provided hereunder without the consent of Seller (which consents shall not be unreasonably withheld). (c) War-Risk, Hijacking and Allied Perils Insurance. At all times ----------------------------------------------- during the Interim Lease Term, and, for liability coverage, Buyer shall, at its own expense, maintain or cause to be maintained, with respect to the Equipment, worldwide (subject to standard insurance market geographical limits) coverage of war-risk, hijacking and allied perils insurance of the type and in substantially the amounts carried by air carriers operating the same or comparable models of aircraft in such areas (i) in no event in an amount less than (A) the amount required by Section 14.1(a)(i) with respect to liability coverage and (B) the ------------------ Stipulated Loss Value with respect to property damage coverage, (ii) in any event, covering the perils of (U) war, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, martial law, military or usurped power or attempts at usurpation of power, (V) strikes, riots, civil commotions or labor disturbances, (W) any act of one or more Persons, whether or not agents of a sovereign power, for political or terrorist purposes and whether the loss or damage resulting therefrom is accidental or intentional, (X) any malicious act or act of sabotage, (Y) confiscation, nationalization, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any government (whether civil, military or de facto) or public or local authority, and (Z) hijacking, or any unlawful seizure or wrongful exercise of control of the aircraft or crew in flight (including any attempt at such seizure or control) made by any Person or Persons on board the aircraft acting without the consent of the insured, (iii) with insurers of recognized international reputation and responsibility in the 31 London, United States, or French insurance markets who are reasonably acceptable to Seller, and (iv) names Seller or its designee as loss payee. Buyer agrees that it will not settle any claim with respect to the insurances provided hereunder without the consents of Seller (which consent shall not be unreasonably withheld). (d) All required insurance (as specified in paragraphs (a), (b), and (c) above), shall: (i) in the case of the insurance required by Section ------- 14.1(a), name each Indemnitee as additional insureds for their respective rights - ------- and interests, warranted, each as to itself only, no operational interest; (ii) in the case of the insurance required by Section ------- 14.1(a), include a severability of interest clause which provides that the - ------- insurance shall operate to give each insured the same protection as if there were a separate policy issued to each assured; (iii) in the case of the insurance required by Section ------- 14.1(a), contain a provision confirming that the policy is primary without right - ------- of contribution and the liability of the insurers shall not be affected by any other insurance of which any Indemnitee or Buyer have the benefit so as to reduce the amount payable to the additional insureds under such policies; (iv) in the case of the insurance required by Section ------- 14.1(b), contain a 50/50% clause per AVS 103 or its equivalent; (v) shall provide that in respect of the respective interests of each Indemnitee in such policies the insurance shall not be invalidated or impaired by any action or inaction of Buyer or any other Indemnitee and shall insure the respective interests of each Indemnitee, as they appear, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by Buyer or by any other Person; (vi) provide coverage denominated in United States Dollars; (vii) provide that the insurers shall hold harmless and waive any rights of recourse and/or subrogation against each Indemnitee; (viii) provide that an Indemnitee shall have no obligation or responsibility for the payment of any premiums due (but reserve the right to pay the same should any of them elect so to do) and that the insurers will not exercise any right of set-off or counter-claim in respect of any premium due against the respective interests of an Indemnitee; (ix) provide that the insurances shall continue unaltered for the benefit of each Indemnitee for at least thirty (30) days after written notice by registered mail or telex of any cancellation, changes, event of nonpayment of premium or installment thereof shall have been sent to Seller, except in the case of war risks for which seven (7) days will be given, or in the case of war between the five great powers or nuclear peril for which termination is automatic; 32 (x) contain an initial term of at least twelve (12) months. 14.2 Insurance Reports. ----------------- (a) On the Interim Lease Date and within 30 days prior to the renewal date of any insurance during the Interim Lease Term, Buyer shall cause its independent insurance brokers to furnish to Seller (i) a certificate of insurance describing in reasonable detail the insurance carried on or with respect to the Equipment, and (ii) a report stating that in the opinion of such broker such insurance complies with the terms of this Section 14 and confirming ---------- that all premiums due in respect of such insurance have been paid. (b) Buyer shall also cause its independent insurance brokers to advise Seller in writing (i) promptly of any defaults in the payment of any premium and of any other act or omission on the part of Buyer or of any event of which they have knowledge that might invalidate or render unenforceable in whole or in part any insurance on the Equipment, and (ii) of any expiration or termination of such insurance at least 30 days prior to such expiration or termination or if any insurer cancels or gives notice of cancellation of such insurance. Buyer shall instruct its independent insurance brokers to hold any binders (subject to the rights of the insurers), policies and cover notes issued and any endorsements to the order of Seller. The reports and certifications to be given under this Section 14.2 shall confirm that the insurance extends to any ------------ Engine or Part while removed from the Airframe or any Engine. 14.3 Additional Insurance. Nothing in this Agreement shall prohibit -------------------- either Seller or Buyer from insuring the Equipment or their respective interests in the Equipment or the Operative Documents at their respective expense in an amount in excess of that required to be maintained by Buyer under this Section ------- 14. In the event Seller desires to insure its interests in the Equipment in an - -- amount in excess of that required to be maintained by Buyer under this Section ------- 14, Buyer agrees that it shall, at Seller's request, use its reasonable efforts - -- to provide for such excess amount on the insurance policies maintained by Buyer pursuant to this Section 14 and Seller agrees in such case to promptly reimburse ---------- Buyer for any additional premiums charged by the insurers for providing insurance in such excess amount. SECTION 15. Inspections. Buyer shall permit Seller or its officers ----------- or agents to inspect the Equipment, the Data and Buyer's other documents and records relating to the Equipment at such reasonable times as Seller may request in writing from time to time at least 15 calendar days before the date of such inspection; provided, however, that (a) such inspection shall not unreasonably interfere with Buyer's normal operation of the Equipment or its business, and (b) upon the occurrence and continuation of an Event of Default Seller and its officers and agents may inspect the Equipment at any time without such prior request and regardless of any such interference that may result from such inspection so long as such inspection is conducted in accordance with Applicable Law. Seller shall have no duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. SECTION 16. Insignia. Buyer agrees to maintain and affix to the -------- upper sill of the left-hand forward entry door of the Airframe adjacent to the Airframe manufacturer's plate, and to each Engine in a clearly visible place in close proximity to the manufacturer's plate, a 33 fireproof identification plate of a reasonable size bearing the inscription "THIS [AIRFRAME/ENGINE] IS THE PROPERTY OF FIRST SECURITY BANK, N.A., NOT IN ITS INDIVIDUAL CAPACITY BUT SOLELY AS TRUSTEE, AND HAS BEEN LEASED TO ROYAL AVIATION INC." or such other inscription as Seller may reasonably request from time to time. The foregoing identification plates shall be installed at Buyer's expense; provided, however, that Seller shall bear the reasonable costs of subsequent changes to the identification plates to the extent such changes are made at the request of Seller. The plates shall also state the type, manufacturer's serial number and, in the case of the Airframe, the current registration letters of the Airframe. Buyer shall not place or permit to be placed in or on the Equipment or any Part of the Equipment any other nameplates dealing with the rights of any Person other than Seller, but Buyer may cause the Airframe to be lettered in an appropriate manner for identification of the operational interests of Buyer. SECTION 17. Events of Default. Each of the following events (whether ----------------- any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree, order, rule or regulation of any Governmental Body) shall constitute an "Event of Default." (a) Buyer shall fail to pay in full any Basic Rent, Delivery Installment, Additional Installment, Final Installment, Supplemental Rent, or Stipulated Loss Value on the date due in the manner and at the place required by the Operative Documents; or (b) Buyer shall fail to pay in full any other payment required by the terms of this Agreement whenever the same shall become due in the manner and at the place required by the Operative Documents, and such failure shall continue for two (2) Business Days after written notice of such failure is given by Seller to Buyer; or (c) Buyer shall fail to carry and maintain insurance on or with respect to the Equipment in accordance with the provisions of Section 14, or ---------- Buyer shall operate the Equipment at a time when, or at a place in which, any of the insurance required by Section 14 shall not be in effect (provided that if ---------- the location of the Equipment is removed from the scope of its insurance coverage after its arrival at such location, or if the Equipment becomes located in an area that is outside the scope of its insurance coverage as a sole result of an act beyond Buyer's reasonable control, operating the Equipment for the purpose of removing it to a location that is within the scope of its insurance coverage shall not be deemed an Event of Default), so long as Buyer is diligently attempting to cure any such default; or (d) Buyer shall deliver, transfer or relinquish possession or control of, transfer any right, title or interest in or permit any such delivery, transfer or relinquishing of the Equipment except as permitted by the Operative Documents, or Buyer shall assign any rights, obligations or interests in the Operative Documents except as permitted by the Operative Documents; or (e) Buyer shall fail to perform or observe any other covenant, condition or agreement to be performed or observed by it under any Operative Document and such failure shall continue unremedied for a period of 30 days after written notice of such failure is given by Seller to Buyer; or (f) any representation or warranty made by Buyer in any Operative Document or in any document or certificate furnished by Buyer in connection with the Operative Documents shall have been incorrect in any material respect; or (g) Buyer shall default in any covenant or agreement relating to any obligation of Buyer for borrowed money in excess of $250,000.00 or for the deferred purchase price or the rental of property with a remaining balance (in the case of rentals discounted to present value using a discount rate of 5%) in excess of $250,000.00, and such failure or default shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such obligation or the maturity of such obligation has been accelerated by the holders of such obligation or any Seller shall have, based upon such a failure or default, terminated its lease or required the payment of any termination, stipulated loss, liquidated damages or similar amount, provided, however, that in any of the foregoing cases, an Event of Default shall not occur so long as Buyer is diligently and in good faith (i) disputing such matter or (ii) in cases other than a payment default, pursuing a resolution of such matter with such holder or Seller prior to the declaration of a default or acceleration by such holders or Sellers; or (h) one or more final, unappealable judgments for the payment of money in a cumulative amount in excess of $250,000.00 (or its equivalent in Canadian or other foreign currency) shall be rendered against Buyer and shall remain undischarged for a period of 30 days unless, within said 30-day period, Buyer and the applicable judgment creditor enter into a settlement agreement staying execution on such judgment and Buyer thereafter diligently performs its obligations pursuant to such settlement agreement; or (i) Buyer shall apply for or consent to the appointment of a custodian, receiver, trustee, liquidator or similar officer for it or for all or any substantial part of its property, make a general assignment for the benefit of its creditors, admit in writing its inability to pay its debts generally as they become due, generally not pay its debts as they become due, file a voluntary petition in bankruptcy, or a voluntary petition or an answer seeking reorganization in a proceeding under any bankruptcy law or an answer admitting the material allegations of a petition filed against Buyer in any such proceeding, by voluntary petition, application or answer, consent or otherwise institute any proceeding or seek relief under the provisions of any law relating to bankruptcy, insolvency, reorganization, arrangement, readjustment of debts, dissolution, liquidation or the like in respect of the reorganization or winding-up of corporations, or providing for an agreement, composition, extension or adjustment with its creditors, or take corporate action for the purpose of any of the foregoing; or (j) A petition against Buyer in a proceeding under bankruptcy, insolvency, or other similar laws is filed and is not withdrawn or dismissed within 60 days thereafter or an order, judgment or decree shall be entered by any Governmental Body of competent jurisdiction appointing, without the application or consent of Buyer, a custodian, receiver, trustee, liquidator, sequestrator or similar officer for Buyer or for all or any substantial part of its property, or any substantial part of the property of Buyer shall be sequestered, and any such order, judgment or decree of appointment or sequestration shall remain in force undismissed, undischarged, unstayed and unvacated for a period of 60 days after its date of entry; or 35 (k) Buyer shall voluntarily suspend all of its commercial air carrier operations, or the franchises, concessions, permits, rights or privileges required for the conduct of the commercial air carrier business of Buyer shall be revoked, canceled or otherwise terminated or the free and continued use and exercise thereof curtailed or prevented; or (l) Buyer shall cease to be a Certificated Air Carrier. SECTION 18. Remedies. -------- 18.1 Seller Entitled to Exercise Remedies. Upon the occurrence of any ------------------------------------ Event of Default specified in Sections 17(i) or 17(j), this Agreement shall be ----------------------- automatically deemed in default. Upon the occurrence of any other Event of Default and while such Event of Default is continuing, Seller may at its option by written notice to Buyer declare this Agreement to be in default. Any time after this Agreement has become or been declared by Seller to be in default in accordance with this paragraph and so long as Buyer has not remedied all outstanding Events of Defaults, Seller may exercise one or more of the following remedies with respect to all or any part of the Equipment as Seller elects in its sole discretion without making any demand, giving any notice or taking any other action, all to the extent permitted by and subject to compliance with any mandatory requirements of Applicable Law. 18.2 Remedies of Seller. (a) Upon the occurrence and during the ------------------ continuance of an Event of Default, Seller shall be entitled to cause Buyer to return all or such part of the Equipment as Seller may demand in writing to Buyer, and Buyer shall at its sole cost and expense return promptly such Equipment to Seller or at its order at Montreal International Airport, Montreal, Quebec, Canada. Upon such demand, (i) Buyer shall return the Equipment as demanded in the manner and condition required by, and otherwise in accordance with, all of the provisions of Section 6 as if such Equipment were being --------- returned at the end of the Interim Lease Term, and (ii) all Aggregate Purchase Price Paid shall be be retained by Seller and deemed Supplemental Rent attributable to Buyer's use of the Equipment during that portion of the Interim Lease Period preceding the Event of Default. In addition, Seller or any agent or representative of Seller shall be entitled by reasonable means to enter upon any premises where all or any part of the Equipment is located and take immediate possession of and remove the same (together with any engine which is not an Engine but which is installed on the Airframe, subject to all rights of any third party owner of such engine), by summary proceedings or otherwise, all without liability accruing to Seller or Seller's agent or representative by reason of such entry or taking of possession, whether for the restoration of damage to property caused in the reasonable execution of such entry or taking of possession or otherwise. (b) Upon the occurrence and during the continuance of an Event of Default, Seller shall be entitled, as it shall determine in its sole discretion as owner and repossessing Seller of the Equipment, (i) to sell, lease or otherwise dispose of any part of the Equipment at public or private sale, (ii) to use, operate, hold or keep idle any part of the Equipment, or (iii) to take any other action to which an owner of property is entitled, in each case free and clear of any rights of Buyer and without any obligation to remove any Seller Liens resulting from the affirmative actions of Seller during the period this Agreement is or is deemed to be in default. 36 (c) Upon the occurrence and during the continuance of an Event of Default, whether or not Seller shall have exercised or shall thereafter at any time exercise any of its rights under Section 18.2(a) or (b) above with respect ---------------------- to any item of the Equipment, Seller shall be entitled, by written notice to Buyer specifying a payment date which shall be a Rent Payment Date not earlier than 10 days after the date of such notice, to demand that Buyer pay to Seller, and Buyer shall pay to Seller, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent for the Equipment due for periods commencing after the payment date specified in such notice), an amount equal to the sum of any unpaid Basic Rent and Additional Installments for the Equipment due prior to the payment date specified in such notice (d) Upon the occurrence and during the continuance of an Event of Default, Seller may terminate this Agreement as to the Equipment, may retain all Aggregate Purchase Price Paid as deemed Supplemental Rent attributable to Buyer's use of the Equipment during that portion of the Interim Lease Period preceding the Event of Default, may exercise any other right or remedy available to it under Applicable Law, and may proceed by appropriate court action to enforce the terms of this Agreement or to recover damages for the breach of this Agreement. 18.3 Monetary Damages Payable by Buyer. Buyer shall be liable except --------------------------------- as provided above for all unpaid Basic Rent and Supplemental Rent due before, after or during the exercise of any of the Seller's remedies under Section 18.2 ------------ and Applicable Law until payment of the amounts due pursuant to Sections -------- 18.2(c), and for all actual, reasonable legal fees and other costs and expenses - ------- incurred by reason of the occurrence of any Event of Default or the exercise of Seller's remedies under Section 18.2 and Applicable Law, including all costs and ------------ expenses incurred in connection with the return of the Equipment in accordance with the terms of Section 6 or the placing of the Equipment in the condition --------- required by Section 6. --------- 18.4 Remedies Not Exclusive. No remedy referred to in this Section 18 ---------------------- ---------- is intended to be exclusive, and each such remedy shall be cumulative and in addition to any other remedy referred to above or otherwise available to Seller at law or in equity. The complete or partial exercise by Seller of any one or more of such remedies shall not preclude the simultaneous or later exercise by Seller of any other remedies. No express or implied waiver by Seller of any Event of Default shall in any way constitute a waiver of any future or subsequent Event of Default. To the extent permitted by Applicable Law, Buyer waives any rights now or hereafter conferred by Applicable Law that might require Seller to sell, lease or otherwise use the Equipment or any part of the Equipment in mitigation of Seller's damages as set forth in this Section 18 or ---------- that might otherwise limit or modify any of Seller's rights or remedies under this Section 18. No notice to or demand on Buyer in any case shall entitle ---------- Buyer to any other or further notice or demand in similar or other circumstances, or constitute a waiver of the right of Seller to any other or further action in any circumstances without notice or demand. SECTION 19. Seller's Right to Perform for Buyer. If Buyer fails to ----------------------------------- perform or comply in any material respect with any of its agreements contained in this Agreement, Seller may perform or comply with such agreement and the amount of the costs and expenses incurred in connection with the performance of or compliance with such agreement, together with interest on such amounts at the Overdue Rate, shall be payable by Buyer on demand as Supplemental Rent. 37 SECTION 20. Further Assurances. Buyer shall promptly and duly ------------------ execute and deliver to Seller such further documents and assurances and take such further action as Seller may from time to time reasonably request in order to carry out more effectively the intent and purpose of this Agreement and to establish and protect Seller's title to the Equipment, the interests of any subsequent transferee and Seller's rights (provided that Seller shall reimburse Buyer for reasonable costs actually incurred by Buyer in executing and delivering any documents and assurances necessary to protect the interests of any subsequent transferee and Seller's rights), and remedies created or intended to be created under the Operative Documents. SECTION 21. Buyer's Indemnities. ------------------- 21.1 General Tax Indemnity. --------------------- (a) Buyer agrees to pay and to indemnify and hold harmless the Indemnitees from and against all Taxes against or upon Seller, Buyer, the Equipment, or any part thereof, including, without limitation, all withholding Taxes in accordance with Section 25, those Taxes arising out of the purchase, ---------- sale, lease, use, ownership, delivery, warehousing, transportation, subleasing, possession, operation, repair, maintenance, or overhaul of the Equipment, or arising out of this Agreement, the Operative Documents, or the settlement of any insurance claim, the return or other disposition of the Equipment pursuant to this Agreement, or the payment of any Rent, receipts or earnings paid or payable to Seller or arising from the operation of the Equipment; provided, however, that Buyer shall not be responsible to indemnify or hold harmless any Indemnitee for: (i) any Taxes based solely on, or measured by, or imposed on, the net income, capital gains, profits, or alternative minimum taxes of any Indemnitee or Taxes in lieu thereof (including, without limitation, minimum taxes and taxes on, or measured by, an item of tax preference); (ii) any Taxes (other than sales, use, or similar taxes) based on gross receipts unless such Taxes are imposed solely as a result of Buyer's acquisition, use or operation of the Equipment in the taxing jurisdiction; or (iii) any Taxes imposed as a result of any Indemnitee's gross negligence, or willful misconduct, or as a result of Seller's breach of its obligations under this Agreement. (b) Buyer shall pay all Taxes for which it assumes liability under this Section 21.1 when such Taxes are due and shall indemnify each Indemnitee to ------------ the extent required by this Section 21.1 within the earlier of (i) 30 days after ------------ receipt of written request by such Indemnitee; or (ii) 5 days before such Taxes are due to the taxing authority. Unless Seller otherwise notifies Buyer in writing with respect to a particular Tax, Buyer shall, to the extent permitted by Applicable Law, at Buyer's cost and expense, make any returns, statements and reports required with respect to Taxes for which an indemnification obligation arises under this Section 21.1. Any such return, statement, or report shall be ------------ made so as to show the interest of Seller as owner of the Equipment, and Buyer shall, whenever reasonably requested by Seller, 38 submit to Seller copies of returns, statements and reports made pursuant to this Section 21.1. Seller and Indemnitees agree, for purposes of this Section 21.1 - ------------- ------------ (b), to furnish Buyer with such related information known to Seller and - --- Indemnitees, as Buyer may reasonably request, for purposes of preparing any returns, statements and reports. (c) If any Indemnitee receives a written notification from a taxing authority of proposed Taxes for which an amount is or may become payable by Buyer in accordance with this Section 21.1, such Indemnitee shall notify Buyer ------------ of such Taxes and shall furnish Buyer with such related information known to such Indemnitee as Buyer may reasonably request; if possible, such notice shall be furnished to Buyer so that Buyer has sufficient time to determine the propriety of the proposed Taxes. If (i) within 45 days after Buyer receives such notice from such Indemnitee, Buyer delivers to such Indemnitee a written request that such Indemnitee contest such Taxes, and (ii) Buyer delivers to such Indemnitee an indemnity, in form and substance reasonably satisfactory to such Indemnitee, for such Taxes (if and to the extent that such Indemnitee shall not prevail as to all matters involved in such contest) and for any liability, loss, or expense that such Indemnitee may reasonably incur as a result of contesting such Taxes, including, without limitation, all costs, expenses, losses, legal and accounting fees and disbursements, bonding fees, penalties, and interest paid to third parties, then Buyer may contest in the name of such Indemnitee, or, if possible, in its own name the validity, applicability, or amount of such Taxes, but only if such contest shall not, in such Indemnitee's reasonable opinion, materially and adversely affect the right, title, and interest of Seller. If an Indemnitee obtains a refund of all or any part of Taxes, to the extent such amount has been paid to such Indemnitee pursuant to this Section ------- 21.1, Buyer shall promptly be paid the amount of such refund and, if in addition - ---- to such refund an Indemnitee receives an amount representing interest on such refund, Buyer shall promptly be paid that proportion of such interest that is fairly attributable to Taxes paid by Buyer prior to the receipt of such refund, but such amounts shall not be payable to Buyer if an Event of Default shall have occurred and be continuing. (d) The indemnities and obligations of Buyer provided for under this Section 21.1 shall survive the Closing or expiration of the Interim Lease Term - ------------ or any other termination, in whole or in part, of this Agreement until such time as the applicable statute of limitations for such Taxes expires. 21.2 General Indemnity. Buyer assumes liability for, indemnifies each ----------------- Indemnitee against and shall protect, save and keep harmless each Indemnitee from, on an after-tax basis, any and all liabilities, obligations, losses, damages, penalties, claims (including claims for liability in tort, strict or otherwise), actions, suits, costs, expenses and disbursements (including, without limitation, reasonable legal fees and disbursements) of whatsoever kind and nature (collectively, "Liabilities"), imposed on, incurred by or asserted against any Indemnitee in any way relating to or arising out of (a) Buyer's obligations pursuant to any Operative Document, payments made pursuant to any Operative Document, any other transaction contemplated by any Operative Documents or the exercise of remedies under any Operative Document, (b) any non- compliance by the Buyer with the terms of any Operative Document, or (c) the delivery, non-delivery, warehousing, storage, transportation, removal, sale, purchase, lease, possession, use, operation, sublease, condition, maintenance, or return or other disposition pursuant to this Agreement of the Equipment or any part thereof or any accident in connection with any Equipment on or after the date of this Agreement (including without limitation latent or other 39 defects, whether or not discoverable, and claims for patent, trademark or copyright infringement), but the foregoing indemnity shall not extend to any Liabilities of any Indemnitee (i) resulting from the willful misconduct or gross negligence of such Indemnitee, or (ii) to the extent solely attributable to acts or events not attributable to Buyer that occur prior to the Effective Date of this Agreement or after possession of the Equipment has been redelivered to Seller in accordance with all the terms of this Agreement and Buyer has fully complied with all provisions of the Agreement with respect to such redelivery. 21.3 Survival of Indemnities; Net Obligations. The indemnities and ---------------------------------------- obligations of Buyer provided for under Section 21 shall survive the expiration ---------- of the Interim Lease Term or any other termination, in whole or in part, of this Agreement. Buyer shall pay all amounts due under Sections 21.1 and 21.2 free of ---------------------- any Taxes (other than those Taxes for which Buyer is not liable under Section ------- 21.1) and shall indemnify each Indemnitee against any such Taxes imposed by - ---- reason of any payment made by Buyer under Sections 21.1 and 21.2 so that the ---------------------- Indemnitee to whom or for whose benefit the payment is made shall receive an amount which, net of any Taxes required to be paid by such Indemnitee in respect of such payment, shall be equal to the amount of payment otherwise required under this Agreement. SECTION 22. Net Agreement; No Setoff or Counterclaim. THIS AGREEMENT ---------------------------------------- IS A CONDITIONAL SALES AGREEMENT, AND BUYER'S OBLIGATION TO PAY THE PURCHASE PRICE AND ALL RENT, THE DELIVERY INSTALLMENT, ALL ADDITIONAL INSTALLMENTS, THE FINAL INSTALLMENT, AND ANY OTHER SUMS PAYABLE HEREUNDER, SHALL BE ABSOLUTE AND UNCONDITIONAL UNDER ANY AND ALL CIRCUMSTANCES AND ARE NOT SUBJECT TO ABATEMENT FOR ANY REASON WHATSOEVER, including without limitation (i) any setoff, counterclaim, recoupment, defense or other right (including any right of reimbursement) which Buyer may have against Seller, any Supplier or any other Person for any reason whatsoever, including any claim of Buyer against any of the foregoing, whether under this Agreement or under any other document or agreement, (ii) any defect in the title, airworthiness, specifications, condition, design, operation, merchantability or fitness for use of, or any damage to or loss or destruction of any of the Equipment or any Part, or any interruption or cessation in the use or possession of the Equipment or any Part by Buyer for any reason whatsoever, (iii) any insolvency, bankruptcy, reorganization or similar proceedings by or against Seller, Buyer, or any other Person, (iv) any failure by Seller to comply with any provision of this Agreement or any other Operative Document, or any failure by any Supplier to comply with any agreement, or (v) any other circumstance, happening or event, whether or not similar to any of the foregoing, whether legal or equitable, which might act as a total or partial discharge of Buyer's obligation to pay Rent. Buyer hereby waives, to the extent permitted by Applicable Law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Agreement, except termination in accordance with the express provisions hereof. If for any reason whatsoever this Agreement shall be terminated in whole or in part by operation of law or otherwise except as specifically provided herein, other than in connection with any insolvency, bankruptcy, reorganization or similar proceedings by or against Seller, Buyer nonetheless agrees to pay to Seller an amount equal to each Intial Installment, Additional Installment, and Final Installment at the time such payment would have become due in accordance with the terms hereof had this Agreement not been terminated in whole or in part, and upon payment of all such installments, Seller shall transfer title to the 40 Equipment to Buyer I accordance with the terms and conditions herein contained. Each payment required hereunder to be made by Buyer shall be final and net and Buyer shall not seek to recover all or any part of any such payment from Seller for any reason whatsoever. SECTION 23. Assignment. ---------- 23.1 Binding on Assignees. The terms and provisions of this Agreement -------------------- shall be valid and binding upon Seller and Buyer and their respective successors and assigns and shall inure to the benefit of Seller, Buyer, and their respective successors and permitted assigns. 23.2 No Assignment by Buyer. Buyer may not assign all or any portion ---------------------- of its rights and obligations under the Operative Documents without the prior written consent of Seller, which consent shall not be unreasonably withheld or delayed. 23.3 Permitted Transfers by Seller. ----------------------------- (a) So long as the Equipment shall be leased to Buyer during the Interim Lease Term, Seller reserves the right, without prior notice or consent of Buyer, to sell, assign, convey or otherwise transfer any of its right, title or interest in and to the Operative Documents or the Equipment to any Person (the "Transferee"); provided that Buyer's rights and obligations under this Agreement are not adversely affected, and further provided that on the date of such transfer Seller and the Transferee enter into an agreement pursuant to which the Transferee confirms that Transferee shall be deemed a party to this Agreement and a party to the other Operative Documents and agrees to be bound by all the terms of, and to undertake all of the obligations of the Seller contained in, the Operative Documents. (b) Upon any transfer by Seller in accordance with Section 23.3(a), --------------- the Transferee shall become and be deemed to be the Seller for all purposes of the Operative Documents, and each reference in the Operative Documents to the Seller shall thereafter be deemed for all purposes to refer to the Transferee. (c) Upon compliance by Seller and a Transferee with the terms and conditions of Section 23.3(a), Buyer shall at the time of transfer, at the --------------- specific written request of Seller and with Seller paying all of Buyer's out-of- pocket costs and expenses: (i) execute and deliver to Seller and to such Transferee an agreement, in form and substance reasonably satisfactory to Seller, Buyer and such Transferee, dated the date of such transfer, consenting to such transfer, agreeing to pay all or such portion of the Basic Rent and all other payments under the Operative Documents to such Transferee or its designee, as such Transferee shall direct, and agreeing that such Transferee shall be entitled to rely on all representations and warranties made by Buyer in any Operative Document or in any certificate or document furnished by Buyer in connection with the Operative Documents as though such Transferee was the original "Seller"; (ii) deliver to Seller and to such Transferee a certificate, signed by a duly authorized officer of Buyer, dated the date of such transfer, to the effect that no Event 41 of Default has occurred and is continuing or, if one is then continuing, describing such Event of Default; (iii) cause to be delivered to Seller and such Transferee an insurance certificate and broker's report from Buyer's independent insurance broker, both addressed to Seller and Transferee, evidencing the full compliance by Buyer with the terms of Section 14 and listing the Seller and Transferee as ---------- additional insureds and, with the Transferee as sole loss payee up to the Stipulated Loss Value upon an Event of Loss of the Equipment or Airframe; (v) deliver to Seller and to such Transferee an opinion of Buyer's counsel, addressed to Seller and such Transferee (1) to the effect that the agreement referred to in Section 23.3(c)(i) has been duly authorized ------------------ and executed by Buyer and constitutes the legal, valid and binding obligation of Buyer, enforceable against Buyer in accordance with its terms (subject to customary exceptions), and (2) to the effect that such Transferee may rely on the opinion delivered by such counsel in connection with the Equipment and the Operative Documents on the Delivery Date with the same force and effect as if such Transferee was an original addressee of such opinion when given; and (vi) such other documents as Lessor or such Transferee may reasonable request, so long as such documents do not adversely affect the rights or obligations of Lessee under this Lease or otherwise adversely effect Lessee. 23.4 Tax-Free Exchange. Seller hereunder may elect to exchange all of ----------------- Seller's right, title, and interest in the Aircraft on the Closing Date for other property of like kind and qualifying use within the meaning of Section 1031 of the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder. In furtherance of the foregoing, Seller expressly reserves the rights (i) to assign its rights hereunder, but not its obligations, to a Qualified Intermediary as provided in Treasury Regulation 1.1031(k)-1(g)(4) on or before the Closing Date, (ii) to transfer, or cause the Qualified Intermediary to transfer, Qualified Indicia of Ownership (as such term is defined in Internal Revenue Service Revenue Procedure 2000-37) of the Aircraft to an Exchange Accommodation Titleholder (as such term is defined in Internal Revenue Service Revenue Procedure 2000-37) on or before the Closing Date, and/or (iii) to assign, or cause the Qualified Intermediary to assign, all of Seller's rights and obligations arising under this Agreement to an Exchange Accommodation Titleholder on or before the Closing Date. The requirements of Section 23.3 may be applied to any transfer or assignment pursuant to this - ------------ Section 23.4 if Seller deems appropriate. - ------------ SECTION 24. Quiet Enjoyment. So long as no Event of Default shall --------------- have occurred and be continuing, Seller shall not, except as expressly permitted in this Agreement, do anything to disturb, or that would allow any other Person to disturb, the quiet use, possession and enjoyment of the Equipment by Buyer in accordance with the terms of this Agreement. Seller agrees to indemnify and to hold harmless Buyer against and from any liabilities, losses, costs or expenses incurred by Buyer arising out of Seller's failure to comply with the foregoing covenant, but Seller shall not in any event be liable for any indirect, special, punitive, incidental or consequential damages in connection with such failure. 42 SECTION 25. Gross-Up. The amount of any payment to be made by Buyer -------- to Seller hereunder, including, without limitation, any payments with respect to the Purchase Price, the Delivery Installment, any Additional Installment, the Final Installment, and any payment of Basic Rent and Supplemental Rent (collectively "Payments"), shall be net to Seller of any and all Taxes for which Buyer is or may be responsible under Section 21.1, including, without ------------ limitation, any Taxes the legal incidence of which is imposed on Seller to the extent that Buyer has agreed pursuant to Section 21.1 of this Agreement to pay ------------ or to indemnify Seller against such Taxes (collectively "Buyer's Taxes"). In furtherance of the foregoing, all Payments shall be made to Seller free and clear of, and without deduction or withholding for or on account of, any such Buyer's Taxes, and in the event Seller is required by any Applicable Law to deduct or otherwise withhold any Buyer's Taxes from any Payments, the gross amount of such Payments shall be increased as much as necessary, but no more than necessary, to ensure that the net amount of such Payments payable to Seller after deduction and/or withholding of all Buyer's Taxes equals the amount of such Payment specified in Schedule I, and Buyer shall promptly pay to the appropriate taxing authority the amount of Buyer's Taxes deducted or withheld and shall send to Seller evidence of the payment of such Buyer's Taxes. SECTION 26. Miscellaneous. ------------- 26.1 Survival. The representations, warranties, indemnities and -------- agreements of Seller and Buyer provided for in this Agreement, and Seller's and Buyer's obligations under any and all provisions of this Agreement, shall survive the expiration or other termination of this Agreement and are expressly made for the benefit of, and shall be enforceable by, Seller and its successors and assigns and each Indemnitee in the case of Buyer's obligations and by Buyer in the case of Seller's obligations. 26.2 Brokers. Seller and Buyer each represents and warrants to the ------- other that it has retained no broker or finder with regard to this Agreement, and each indemnifies the other from any liability for fees, commissions or other claims made upon the other caused by the indemnifying party. 26.3 Expenses. Seller and Buyer will each assume its own costs, -------- fees (including legal and documentation fees) and other expenses incurred in connection with the preparation and execution of the documentation relating to the transactions contemplated by this Agreement. Seller shall assume all costs, fees and other expenses in connection with the deregistration of the Aircraft with the FAA and the acquisition of a certificate of airworthiness for export to Canada, including the fees and expenses of special FAA counsel. Buyer shall assume all costs, fees and other expenses, including fees of special counsel in Canada, incurred in connection with registering the Aircraft with Transport Canada, and with the filing and recordation of this Agreement and the Agreement Interim Lease Supplement with Transport Canada and under Applicable Law in the Provinces of Ontario and Quebec on the Interim Lease Date. In addition, Buyer shall assume, if any, all sales and use taxes or similar fees, costs or expenses imposed based on the Delivery Location of the Equipment, and Buyer shall assume all costs, fees and other expenses in connection with obtaining any other orders, exemptions, approvals, permits and licenses from the FAA or any other United States Governmental Body under Applicable Law in connection with the Buyer's purchase, lease, use and possession of the Equipment, other than the registering of the Aircraft under the Federal Aviation Law. Unless 43 expressly provided otherwise, Buyer shall perform its obligations and exercise its rights under the Operative Documents at its sole cost and expense without any obligation of Seller with respect to such costs and expenses. 26.4 Governing Law. This Agreement shall in all respects be governed ------------- by and construed in accordance with the laws of the State of New York, without regard to its conflicts of laws principles. 26.5 Consent to Jurisdiction. (a) Each of Seller and Buyer hereby ----------------------- expressly submits to the exclusive jurisdiction of the state and federal courts of the State of New York. Final judgment against Seller or Buyer in any such suit shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment or as otherwise permitted by Applicable Law, a certified or true copy of which shall be conclusive evidence of the facts and of the amount of any indebtedness or liability of Seller or Buyer. (b) Each of Seller and Buyer hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue in any suit, action or proceeding brought in any court located in the State of New York and irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. 26.6 Notices. All notices, requests, demands or other communications -------- required under or given pursuant to the Operative Documents shall be in writing unless otherwise expressly provided in the Operative Documents. Any notice, request, demand or other communication permitted under the Operative Documents shall become effective when delivered personally or by mail, or when transmitted by telefax or telex, and shall be directed to the following address: If to Seller: First Security Bank, N.A. 79 South Main Street Salt Lake City, UT 84111-1901 Attention: Gregg Hawley Telephone: (801) 246-5657 Telefax: (801) 246-5053 with a copy to: Fafinski Mark & Johnson, P.A. 6600 City West Parkway, Suite 300 Eden Prairie, Minnesota 55344 Attention: Robert R. Fafinski, Jr., Esq. Telephone: (952) 995-9500 Telefax: (952) 995-9577 44 and a copy to: EQUIS Financial Group, LLC 88 Broad Street Boston, MA 02110 Attention: Gail Ofgant Telephone: (617) 854-5833 Telefax: (617) 695-0596 If to Buyer: Royal Aviation Inc. 685 Stuart Graham Blvd. North Dorval, Quebec, Canada, H4Y 1E4 Attention: Michel Leblanc, President, Chairman & Chief Executive Officer Telephone: 514-828-8960 Telefax: 514-828-9090 with a copy to: Royal Aviation Inc. 685 Stuart Graham Blvd. North Dorval, Quebec, Canada, H4Y 1E4 Attention: Brenda Nichols, Legal Counsel Telephone: 514-828-8979 Telefax: 514-828-9090 26.7 Severability. Any provision of this Agreement that 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 of this Agreement, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by Applicable Law, Buyer waives any provision of Applicable Law that renders any provision of the Operative Documents prohibited or unenforceable in any respect. 26.8 Amendments. The terms and provisions of the Operative ---------- Documents may not be amended, waived, discharged or terminated orally. Any amendment, waiver, discharge or termination shall require a written instrument signed by the party against whom enforcement of the amendment, waiver, discharge or termination is sought. 26.9 Interpretation. This Agreement constitutes an agreement of -------------- lease, and nothing in this Agreement shall be construed as conveying to Buyer any right, title or interest in the Equipment except as a Buyer only. 26.10 Descriptive Headings. The section and paragraph headings in -------------------- this Agreement and the table of contents are for convenience of reference only and do not modify, define, expand or limit any of the terms or provisions of this Agreement. All references in this Agreement to numbered sections, unless otherwise indicated, are to sections of this Agreement. 26.11 Counterparts. This Agreement may be executed by Seller and ------------ Buyer in separate counterparts, each of which when so executed and delivered shall be an original, but all 45 counterparts shall together constitute but one and the same agreement; provided, however, each counterpart shall be serially numbered and only Counterpart No. 1 of this Agreement shall constitute chattel paper under the UCC or similar Applicable Law and no security interest in it or assignment of Seller's interest in it may be created through the transfer and possession of any counterpart other than Counterpart No. 1. 26.12 Entire Agreement. This Agreement is intended to be a complete ---------------- and exclusive statement of the terms of the agreement of the parties hereto, and this Agreement supersedes any prior or contemporaneous agreements, whether oral or in writing. [SIGNATURE PAGE FOLLOWS] 46 IN WITNESS WHEREOF, Seller and Buyer have each caused this Aircraft Conditional Sale Agreement to be duly executed and delivered as of the day and year first above written. Seller: First Security Bank, NA, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended. By: ____________________________ Name: __________________________ Title: _________________________ Buyer: Royal Aviation Inc., d/b/a/ Royal Airlines By: ____________________________ Name: __________________________ Title: _________________________ 47 Exhibit A - TECHNICAL ACCEPTANCE CERTIFICATE This TECHNICAL ACCEPTANCE CERTIFICATE, dated as of October 24, 2000, is between First Security Bank, N.A., a national banking association, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended ("Seller"), and Royal Aviation Inc., d/b/a/ Royal Airlines ("Buyer). WHEREAS, Seller and Buyer have entered into the Aircraft Conditional Sale Agreement, dated as of the 24/th/ day of October, 2000 (the "Agreement"), for the sale by Seller and the purchase by Buyer of that certain Boeing B737- 200A airframe bearing manufacturer's serial number 21721, together with those two (2) Pratt & Witney JT8D-9A engines bearing Manufacturer's Serial Numbers 707432 & 687834, and all Data and Parts (as defined in the Agreement) installed thereon, attached thereto, incorporated therein, and associated therewith (all of the foregoing collectively the "Equipment"); WHEREAS, the Agreement provides that until such time as consummation of the sale of the Equipment shall occur, Seller shall lease the Equipment to Buyer and Buyer shall lease the Equipment from Seller; and WHEREAS, the Agreement provides for the inspection of the Equipment by Buyer and the execution and delivery of this Technical Inspection Certificate prior to commencement. NOW THEREFORE, in consideration of the premises and other good and sufficient consideration, Seller and Buyer hereby agree as follows: 1. Capitalized terms used but not defined in this Delivery Receipt have the meanings defined for such terms in the Agreement. 2. Buyer represents that it has inspected the Equipment and found the Equipment to be satisfactory and in the condition under Section 5 of the --------- Agreement, and is hereby accepted in accordance with the terms thereof. [SIGNATURE PAGE FOLLOWS] 48 IN WITNESS WHEREOF, Seller and Buyer have duly executed and delivered this Technical Acceptance Certificate on the date first written above. Seller: First Security Bank, NA, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended. By: ____________________________ Name: __________________________ Title: _________________________ Buyer: Royal Aviation Inc., d/b/a/ Royal Airlines By: ____________________________ Name: __________________________ Title: _________________________ 49 Exhibit B - AGREEMENT INTERIM LEASE SUPPLEMENT COUNTERPART ___ OF ____. TO THE EXTENT, IF ANY, THAT THIS AGREEMENT INTERIM 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 IN, OR ASSIGNMENT OF SELLER'S INTEREST IN THIS AGREEMENT INTERIM LEASE SUPPLEMENT MAY BE CREATED THROUGH THE TRANSFER OF POSSESSION OF ANY COUNTERPART OTHER THAN COUNTERPART No. 1 OF THIS AGREEMENT INTERIM LEASE SUPPLEMENT. AGREEMENT INTERIM LEASE SUPPLEMENT This AGREEMENT INTERIM LEASE SUPPLEMENT, dated as of the 24/th/ day of October 2000, is between First Security Bank, N.A., a national banking association, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended ("Seller"), and Royal Aviation Inc., d/b/a/ Royal Airlines ("Buyer). WHEREAS, Seller and Buyer have entered into the Aircraft Conditional Sale Agreement, dated as of the 24/th/ day of October, 2000 (the "Agreement"), for the sale by Seller and the purchase by Buyer of that certain Boeing B737- 200A airframe bearing manufacturer's serial number 21721, together with those two (2) Pratt & Witney JT8D-9A engines bearing Manufacturer's Serial Numbers 707432 & 687834, and all Data and Parts (as defined in the Agreement) installed thereon, attached thereto, incorporated therein, and associated therewith (all of the foregoing collectively the "Equipment"); WHEREAS, the Agreement provides that until such time as consummation of the sale of the Equipment shall occur, Seller shall lease the Equipment to Buyer and Buyer shall lease the Equipment from Seller; and WHEREAS, the Agreement provides for the execution and delivery of this Agreement Interim Lease Supplement for the purpose of leasing the Equipment under the Agreement as and when delivered by Seller to Buyer in accordance with the terms of the Agreement; and WHEREAS, this Agreement Interim Lease Supplement, together with either the attached Agreement or a short form aircraft lease mutually acceptable to the parties, are being filed for recordation on the date of this Agreement Interim Lease Supplement with Transport Canada as one document. NOW THEREFORE, in consideration of the premises and other good and sufficient consideration, Seller and Buyer hereby agree as follows: 50 1. Capitalized terms used but not defined in this Agreement Interim Lease Supplement have the meanings defined for such terms in the Agreement. 2. Seller hereby delivers and leases to Buyer, and Buyer hereby accepts and leases from Seller, under the Agreement the Equipment 3. The Interim Lease Term for the Equipment shall commence on the date of this Agreement Interim Lease Supplement and shall terminate on the Closing Date (as defined in the Agreement). 4. Buyer hereby confirms to Seller that Buyer has accepted the Equipment for all purposes of the Agreement and of this Agreement Interim Lease Supplement. 5. The terms and provisions of this Agreement Interim Lease Supplement are supplemental to and incorporated into the Agreement to the same extent as if fully set forth in the Agreement. [SIGNATURE PAGE FOLLOWS] 51 IN WITNESS WHEREOF, Seller and Buyer have duly executed and delivered this Agreement Interim Lease Supplement on the date first written above. Seller: First Security Bank, NA, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended. By: ____________________________ Name: __________________________ Title: _________________________ Buyer: Royal Aviation Inc., d/b/a/ Royal Airlines By: ____________________________ Name: __________________________ Title: _________________________ 52 Exhibit C - LEASE DELIVERY RECEIPT This LEASE DELIVERY RECEIPT, dated as of October 24/th/, 2000, is between First Security Bank, N.A., a national banking association, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended ("Seller"), and Royal Aviation Inc., d/b/a/ Royal Airlines ("Buyer). WHEREAS, Seller and Buyer have entered into the Aircraft Conditional Sale Agreement, dated as of the 24/th/ day of October, 2000 (the "Agreement"), for the sale by Seller and the purchase by Buyer of that certain Boeing B737- 200A airframe bearing manufacturer's serial number 21721, together with those two (2) Pratt & Witney JT8D-9A engines bearing Manufacturer's Serial Numbers 707432 & 687834, and all Data and Parts (as defined in the Agreement) installed thereon, attached thereto, incorporated therein, and associated therewith (all of the foregoing collectively the "Equipment"); WHEREAS, the Agreement provides that until such time as consummation of the sale of the Equipment shall occur, Seller shall lease the Equipment to Buyer and Buyer shall lease the Equipment from Seller; and WHEREAS, the Agreement provides for the execution and delivery of this Lease Delivery Receipt at the time of the delivery of the Equipment to Buyer under the Agreement. NOW THEREFORE, in consideration of the premises and other good and sufficient consideration, Seller and Buyer hereby agree as follows: 1. Capitalized terms used but not defined in this Delivery Receipt have the meanings defined for such terms in the Agreement. 2. Buyer hereby unconditionally acknowledges delivery and receipt under the Agreement of the Equipment at Tucson International Airport, Tucson, Arizona, as of this date. 3. Buyer represents that it has inspected the Equipment and acknowledges that its execution and delivery to Seller of this Lease Delivery Receipt constitutes conclusive evidence as against Buyer that all conditions set forth in Section 4.1 and Section 5 of the Agreement have been satisfied or waived. ----------- --------- [SIGNATURE PAGE FOLLOWS] 53 IN WITNESS WHEREOF, Seller and Buyer have duly executed and delivered this Lease Delivery Receipt on the date first written above. Seller: First Security Bank, NA, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended. By: _________________________ Name: _________________________ Title: _________________________ Buyer: Royal Aviation Inc., d/b/a/ Royal Airlines By: _________________________ Name: _________________________ Title: _________________________ 54 Exhibit D - BILL OF SALE KNOW ALL MEN BY THESE PRESENTS: THAT, First Security Bank, NA, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended ("Seller"), is the lawful owner of all right, title and interest in and to: That certain Boeing B737-200A airframe bearing manufacturer's serial number 21721, together with those two (2) Pratt & Witney JT8D-9A engines bearing Manufacturer's Serial Numbers 707432 & 687834, and all Data and Parts (as defined in the Agreement) installed thereon, attached thereto, incorporated therein, and associated therewith (all of the foregoing collectively the "Equipment") THAT, for the sum of Ten Dollars ($10.00) and other good and valuable consideration, receipt and adequacy of which is hereby acknowledged, Seller does as of the date provided below, grant, convey, transfer, deliver and set over all of Seller's right, title and interest in and to the Equipment unto Royal Aviation Inc., d/b/a/ Royal Airlines ("Buyer") and unto its successors and assigns forever. THAT, Seller hereby warrants that there is hereby conveyed to Buyer on the date hereof, good title to the Equipment, free and clear of all liens, claims or encumbrances arising by, through, or under Seller, excepting liens, claims and encumbrances rising by, through, or under Buyer. IN WITNESS WHEREOF, Seller has caused this instrument to be executed and delivered by its duly authorized signatory as of this ___ day of _____, 20__. Seller: First Security Bank, NA, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended. By: _________________________ Name: _________________________ Title: _________________________ 55 Exhibit E - CLOSING DELIVERY RECEIPT This CLOSING DELIVERY RECEIPT, dated as of _____________, 20___, is between First Security Bank, N.A., a national banking association, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended ("Seller"), and Royal Aviation Inc., d/b/a/ Royal Airlines ("Buyer). WHEREAS, Seller and Buyer have entered into the Aircraft Conditional Sale Agreement, dated as of the 24/th/ day of October, 2000 (the "Agreement"), for the sale by Seller and the purchase by Buyer of that certain Boeing B737- 200A airframe bearing manufacturer's serial number 21721, together with those two (2) Pratt & Witney JT8D-9A engines bearing Manufacturer's Serial Numbers 707432 & 687834, and all Data and Parts (as defined in the Agreement) installed thereon, attached thereto, incorporated therein, and associated therewith (all of the foregoing collectively the "Equipment"); WHEREAS, the Agreement provides for the execution and delivery of this Closing Delivery Receipt at the time of the Closing under the Agreement; and WHEREAS, immediately prior to the Closing, Buyer was in physical possession of the Equipment in the legal capacity of lessee, and has possessed and operated the Equipment in such capacity during the Interim Lease Term. NOW THEREFORE, in consideration of the premises and other good and sufficient consideration, Seller and Buyer hereby agree as follows: 1. Capitalized terms used but not defined in this Delivery Receipt have the meanings defined for such terms in the Agreement. 2. Buyer hereby unconditionally acknowledges delivery and receipt under the Agreement of fee title to the Equipment at __________________ Airport, __________, ___________, as of this date. 3. Buyer represents and acknowledges that its execution and delivery to Seller of this Closing Delivery Receipt constitutes conclusive evidence as against Buyer that Seller has satisfied, or Buyer has waived, each and every obligation of Seller arising under the Agreement, and that Buyer is acquiring the Equipment in "AS IS," "WHERE IS" and "WITH ALL FAULTS" condition. Buyer further acknowledges that as at the date hereof, Buyer shall have been in possession of the Equipment during the Interim Lease Term and shall have been solely responsible for all maintenance and repairs of the Equipment during such Interim Lease Period, and that Seller shall have no responsibility or liability to Buyer for the condition of the Equipment on such date. [SIGNATURE PAGE FOLLOWS] 56 IN WITNESS WHEREOF, Seller and Buyer have duly executed and delivered this Closing Delivery Receipt on the date first written above. Seller: First Security Bank, NA, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended. By: _________________________ Name: _________________________ Title: _________________________ Buyer: Royal Aviation Inc., d/b/a/ Royal Airlines By: _________________________ Name: _________________________ Title: _________________________ 57 Exhibit F - REDELIVERY RECEIPT This REDELIVERY RECEIPT, dated as of the ______ day of ________, 20__, is between First Security Bank, N.A., a national banking association, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended ("Seller"), and Royal Aviation Inc., d/b/a/ Royal Airlines ("Buyer). WHEREAS, Seller and Buyer have entered into the Aircraft Conditional Sale Agreement, dated as of the 24/th/ day of October, 2000 (the "Agreement"), for the sale by Seller and the purchase by Buyer of that certain Boeing B737- 200A airframe bearing manufacturer's serial number 21721, together with those two (2) Pratt & Witney JT8D-9A engines bearing Manufacturer's Serial Numbers 707432 & 687834, and all Data and Parts (as defined in the Agreement) installed thereon, attached thereto, incorporated therein, and associated therewith (all of the foregoing collectively the "Equipment"); WHEREAS, the Agreement provides that until such time as consummation of the sale of the Equipment shall occur, Seller shall lease the Equipment to Buyer and Buyer shall lease the Equipment from Seller; WHEREAS, the Agreement provides for the execution and delivery of this Redelivery Receipt in the event the Equipment is returned to Seller and there is no Closing under the Agreement; and WHEREAS, Buyer is this date returning the Equipment to Seller. NOW THEREFORE, in consideration of the premises and other good and sufficient consideration, Seller and Buyer hereby agree as follows: 1. Capitalized terms used but not defined in this Redelivery Receipt have the meanings defined for such terms in the Agreement. 2. Seller hereby accepts redelivery from Buyer of the Equipment in accordance with the terms and conditions set forth in the Agreement. [SIGNATURE PAGE FOLLOWS] 58 IN WITNESS WHEREOF, Seller and Buyer have duly executed and delivered this Redelivery Receipt on the date first written above. Seller: First Security Bank, NA, not in its individual capacity but solely as trustee under that certain Trust Agreement No. III dated as of December 30, 1991, as amended. By: _________________________ Name: _________________________ Title: _________________________ Buyer: Royal Aviation Inc., d/b/a/ Royal Airlines By: _________________________ Name: _________________________ Title: _________________________ 59 Exhibit G - CONFIRMATION CONFIRMATION OF INTERESTED PARTIES [MSN 21721] To: Transport Canada Aviation Re: Application for Registration of B737-200A Aircraft, MSN 21721, C - (the "Aircraft") In connection with the attached Application for Registration for the Aircraft we hereby confirm that the identities of the parties holding an interest in the Aircraft are as follows: 1. Registered Owner and Conditional Buyer Royal Aviation Inc. 2. Entity with Legal Title: First Security Bank of Utah, National Association (as Trustee and Conditional Seller) 3. Entity with Beneficial Title: EQUIS Financial Group, LLC 4. Holder of First Priority Security N/A Interest: We hereby request that the interest(s) of the above parties be noted in the file for the Aircraft to the extent possible. DATED as of ____________, 2000. ROYAL AVIATION INC. By: __________________________ Name: Title: 60 Exhibit H - AUTHORIZATION LETTER [Royal Aviation Inc. Letterhead] [Date] NAV CANADA TRANSPORT CANADA AVIATION MONTREAL AIRPORTS AUTHORITY GREATER TORONTO AIRPORTS AUTHORITY Subject: Statements of Account - Relative to Royal Aviation Inc. Dear Sirs: We hereby confirm that First Security Bank (as "Conditional Seller") has entered into an Aircraft Conditional Sale Agreement with Royal Aviation Inc. (as "Conditional Buyer"). This agreement was executed as of October 24, 2000 in respect of one (1) B737-200A Aircraft, serial number 21721 (the "Aircraft"). We hereby irrevocably authorize you to release to Conditional Seller (or its duly authorized representative) upon Conditional Seller's request from time to time, a statement of account of all sums due by us to you, as of the date of each such request, in respect of all aircraft operated by Lessee, including but not limited to, the Aircraft. Yours faithfully, ROYAL AVIATION INC. ___________________________ Louis McGuire Vice President Finance 61 Schedule I Purchase Price: $2,400,000.00 Initial Installment: $150,000.00 14 Additional Installments: $150,000.00 each Final Installment: $150,000.00 Stipulated Loss Value: $3,500,000.00 62 -----END PRIVACY-ENHANCED MESSAGE-----