-----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, JroqfJj0f+ejVexk3wkhgl/YqDEIu0OOAVbxhl40w7IvFnOMeyrqL2jBtZl2zv4N ZtCWhQnnE+4KpkqF842UuA== 0001047469-99-012784.txt : 19990402 0001047469-99-012784.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012784 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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: 99581396 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 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM ______________ TO ______________ COMMISSION FILE NUMBER 0-20029 ------------------------ 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 Identification No.) incorporation or organization) 88 BROAD STREET, SIXTH FLOOR, BOSTON, MA 02110 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 854-5800 Securities registered pursuant to Section 12(b) of the Act NONE NAME OF EACH EXCHANGE ON WHICH TITLE OF EACH CLASS REGISTERED ---------------------------------------- --------------------------------- Securities registered pursuant to Section 12(g) of the Act: 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 / / State the aggregate market value of the voting stock held by nonaffiliates of the registrant. Not applicable. Securities are nonvoting for this purpose. Refer to Item 12 for further information. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to security holders for the year ended December 31, 1998 (Part I and II) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP FORM 10-K TABLE OF CONTENTS
PAGE --------- PART I Item 1. Business...................................................................................... 3 Item 2. Properties.................................................................................... 5 Item 3. Legal Proceedings............................................................................. 5 Item 4. Submission of Matters to a Vote of Security Holders........................................... 5 PART II Item 5. Market for the Partnership's Securities and Related Security Holder Matters................... 6 Item 6. Selected Financial Data....................................................................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 8 Item 8. Financial Statements and Supplementary Data................................................... 8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 8 PART III Item 10. Directors and Executive Officers of the Partnership........................................... 9 Item 11. Executive Compensation........................................................................ 11 Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 12 Item 13. Certain Relationships and Related Transactions................................................ 12 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 14-15
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 industry segment: the business of acquiring capital equipment and leasing the equipment to creditworthy lessees on a full payout or operating lease basis. Full payout leases are those in which aggregate undiscounted, noncancellable rents equal or exceed the acquisition cost of the leased equipment. Operating leases are those in which the aggregate undiscounted, noncancellable rental payments are less than the acquisition cost of the leased equipment. Industry segment data is not applicable. (c) Narrative Description of Business The Partnership was organized to acquire a diversified portfolio of capital equipment subject to various full payout and operating leases and to lease the equipment to third parties as income-producing investments. More specifically, the Partnership's primary investment objectives were to acquire and lease equipment that would: 1. Generate quarterly cash distributions; 2. Preserve and protect Partnership capital; and 3. Maintain substantial residual value for ultimate sale. The Partnership has the additional objective of providing certain federal income tax benefits. The Closing Date of the Offering of Units of the Partnership was December 4, 1991. Significant operations commenced with the initial purchase of equipment and the associated lease commitments on December 4, 1991. The Restated Agreement, as amended, provides that 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 3 of the Partnership's organization and its future business operations. See Note 8 to the accompanying financial statements. The Partnership has no employees; however, it is managed pursuant to a Management Agreement with EFG or one of its affiliates. The Manager's role, among other things, is to (i) evaluate, select, negotiate, and consummate the acquisition of equipment, (ii) manage the leasing, re-leasing, financing, and refinancing of equipment, and (iii) arrange the resale of equipment. The Manager is compensated for such services as provided for in the Restated Agreement, as amended, described in Item 13 herein, and in Note 5 to the financial statements included in Item 14, herein. The Partnership's investment in equipment is, and will continue to be, subject to various risks, including physical deterioration, technological obsolescence and defaults by lessees. A principal business risk of owning and leasing equipment is the possibility that aggregate lease revenues and equipment sale proceeds will be insufficient to provide an acceptable rate of return on invested capital after payment of all debt service costs and operating expenses. In addition, the leasing industry is very competitive. The Partnership is subject to considerable competition when equipment is re-leased or sold at the expiration of primary lease terms. The Partnership must compete with lease programs offered directly by manufacturers and other equipment leasing companies, including limited partnerships organized and managed similarly to the Partnership, and including other EFG-sponsored partnerships and trusts, which may seek to re-lease or sell equipment within their own portfolios to the same customers as the Partnership. Many competitors have greater financial resources and more experience than the Partnership, the General Partner and the Manager. In addition, default by a lessee under a lease may cause equipment to be returned to the Partnership at a time when the General Partner or the Manager is unable to arrange for the re-lease or sale of such equipment. This could result in the loss of anticipated revenues. Revenue from individual lessees which accounted for 10% or more of lease revenue during the years ended December 31, 1998, 1997 and 1996 is incorporated herein by reference to Note 2 to the financial statements in the 1998 Annual Report. Refer to Item 14(a)(3) for lease agreements filed with the Securities and Exchange Commission. EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as Manager or Advisor to the Partnership and several other direct-participation equipment leasing programs sponsored or co-sponsored by EFG (the "Other Investment Programs"). The Company arranges to broker or originate equipment leases, acts as remarketing agent and asset manager, and provides leasing support services, such as billing, collecting, and asset tracking. The general partner of EFG, with a 1% controlling interest, is Equis Corporation, a Massachusetts corporation owned and controlled entirely by Gary D. Engle, its President, Chief Executive Officer and sole Director. Equis Corporation also owns a controlling 1% general partner interest in EFG's 99% limited partner, GDE Acquisition Limited Partnership ("GDE LP"). Mr. Engle established Equis Corporation and GDE LP in December 1994 for the sole purpose of acquiring the business of AFG. In January 1996, the Company sold certain assets of AFG relating primarily to the business of originating new leases, and the name "American Finance Group," and its acronym, to a third party. AFG changed its name to Equis Financial Group Limited Partnership after the sale was concluded. Pursuant to terms of the sale agreements, EFG specifically reserved the rights to continue using the name American Finance Group and its acronym in connection with the Partnership and the Other Investment Programs and to continue managing all assets owned by the Partnership and the Other Investment Programs. (d) Financial Information About Foreign and Domestic Operations and Export Sales Not applicable. 4 ITEM 2. PROPERTIES. Incorporated herein by reference to Note 3 to the financial statements in the 1998 Annual Report. ITEM 3. LEGAL PROCEEDINGS. Incorporated herein by reference to Note 8 to the financial statements in the 1998 Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 5 PART II ITEM 5. MARKET FOR THE PARTNERSHIP'S SECURITIES AND RELATED SECURITY HOLDER MATTERS. (a) Market Information There is no public market for the resale of the Units and it is not anticipated that a public market for resale of the Units will develop. (b) Approximate Number of Security Holders At December 31, 1998, there were 1,016 record holders in the Partnership. (c) Dividend History and Restrictions Pursuant to Article VI of the Restated Agreement, as amended, the amount of cash distributions to be declared and paid to the Partners is determined on a quarterly basis. Each quarter's distribution may vary in amount and is made 95% to the Limited Partners and 5% to the General Partner. Generally, cash distributions are paid within 30 days after the completion of each calendar quarter. Distributions in 1998 and 1997 were as follows:
GENERAL LIMITED TOTAL PARTNER PARTNERS ------------ ---------- ------------ Total 1998 distributions.................................................. $ 941,996 $ 47,100 $ 894,896 Total 1997 distributions.................................................. 1,177,470 58,873 1,118,597 ------------ ---------- ------------ Total............................................................... $ 2,119,466 $ 105,973 $ 2,013,493 ------------ ---------- ------------ ------------ ---------- ------------
Distributions payable were $235,495 at both December 31, 1998 and 1997. There are no formal restrictions under the Restated Agreement, as amended, that materially limit the Partnership's ability to pay cash distributions, except that the General Partner may suspend or limit cash distributions to ensure that the Partnership maintains sufficient working capital reserves to cover, among other things, operating costs and potential expenditures, such as refurbishment costs to remarket equipment upon lease expiration. Liquidity is especially important as the Partnership matures and sells equipment, because the remaining equipment base consists of fewer revenue-producing assets that are available to cover prospective cash disbursements. Insufficient liquidity could inhibit the Partnership's ability to sustain its operations or maximize the realization of proceeds from remarketing its remaining assets. In particular, the Partnership must contemplate the potential liquidity risks associated with its investment in commercial jet aircraft. The management and remarketing of aircraft can involve, among other things, significant costs and lengthy remarketing initiatives. Although the Partnership's lessees are required to maintain the aircraft during the period of lease contract, repair, maintenance, and/or refurbishment costs at lease expiration can be substantial. For example, an aircraft that is returned to the Partnership meeting minimum airworthiness standards, such as flight hours or engine cycles, nonetheless may require heavy maintenance in order to bring its engines, airframe and other hardware up to standards that will permit its prospective use in commercial air transportation. Individually, these repairs can cost in excess of $1 million and, collectively, they could require the disbursement of several million dollars, depending upon the extent of refurbishment. In addition, the Partnership's equipment portfolio includes an interest in three Stage 2 aircraft having scheduled lease expiration dates of December 31, 1999. These aircraft are prohibited from operating in the United States after December 31, 1999 unless they are retro-fitted with hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation Administration. The cost to hush-kit an aircraft, such as the Partnership's Boeing 737s, can approach $2 million. Although the Partnership is not required to retro-fit its aircraft with hush-kits, insufficient liquidity could jeopardize the re-marketing of these aircraft and risk their disposal at a depressed value at a time when a better economic return would be realized 6 from refurbishing the aircraft and re-leasing them to another user. Collectively, the aggregation of the Partnership's potential liquidity needs related to aircraft and other working capital requirements could be significant. Accordingly, the General Partner has maintained significant cash reserves within the Partnership in order to minimize the risk of a liquidity shortage, particularly in connection with the Partnership's aircraft interests. Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit described in Note 8 to the accompanying financial statements. A preliminary settlement agreement will allow the Partnership to invest in new equipment or other activities, subject to certain limitations, effective March 22, 1999. To the extent that the Partnership continues to own aircraft investments that could require capital reserves, the General Partner does not anticipate that the Partnership will invest in new assets, regardless of its authority to do so. Until the Class Action Lawsuit is adjudicated, the General Partner does not expect that the level of future quarterly cash distributions paid by the Partnership will be increased above amounts paid in the fourth quarter of 1998. In addition, the proposed settlement, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. See Note 8 to the accompanying financial statements. Cash distributions consist of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings. "Distributable Cash From Operations" means the net cash provided by the Partnership's normal operations after general expenses and current liabilities of the Partnership are paid, reduced by any reserves for working capital and contingent liabilities to be funded from such cash, to the extent deemed reasonable by the General Partner, and increased by any portion of such reserves deemed by the General Partner not to be required for Partnership operations and reduced by all accrued and unpaid Equipment Management Fees and, after Payout, further reduced by all accrued and unpaid Subordinated Remarketing Fees. Distributable Cash From Operations does not include any Distributable Cash From Sales or Refinancings. "Distributable Cash From Sales or Refinancings" means Cash From Sales or Refinancings as reduced by (i)(a) amounts realized from any loss or destruction of equipment which the General Partner determines shall be reinvested in similar equipment for the remainder of the original lease term of the lost or destroyed equipment, or in isolated instances, in other equipment, if the General Partner determines that investment of such proceeds will significantly improve the diversity of the Partnership's equipment portfolio, and subject in either case to satisfaction of all existing indebtedness secured by such equipment to the extent deemed necessary or appropriate by the General Partner, or (b) the proceeds from the sale of an interest in equipment pursuant to any agreement governing a joint venture which the General Partner determines will be invested in additional equipment or interests in equipment and which ultimately are so reinvested and (ii) any accrued and unpaid Equipment Management Fees and, after Payout, any accrued and unpaid Subordinated Remarketing Fees. "Cash From Sales or Refinancings" means cash received by the Partnership from sale or refinancing transactions, as reduced by (i)(a) all debts and liabilities of the Partnership required to be paid as a result of sale or refinancing transactions, whether or not then due and payable (including any liabilities on an item of equipment sold which are not assumed by the buyer and any remarketing fees required to be paid to persons not affiliated with the General Partner, but not including any Subordinated Remarketing Fees whether or not then due and payable) and (b) general 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 7 Sales or Refinancings, regardless of the treatment of such payments by the Partnership for tax or accounting purposes. If the Partnership receives purchase money obligations in payment for equipment sold, which are secured by liens on such equipment, the amount of such obligations shall not be included in Cash From Sales or Refinancings until the obligations are fully satisfied. "Payout" is defined as the first time when the aggregate amount of all distributions to the Limited Partners of Distributable Cash From Operations and Distributable Cash From Sales or Refinancings equals the aggregate amount of the Limited Partners' original capital contributions plus a cumulative annual distribution of 11% (compounded quarterly and calculated beginning with the last day of the month of the Partnership's Closing Date) on their aggregate unreturned capital contributions. For purposes of this definition, capital contributions shall be deemed to have been returned only to the extent that distributions of cash to the Limited Partners exceed the amount required to satisfy the cumulative annual distribution of 11% (compounded quarterly) on the Limited Partners' aggregate unreturned capital contributions, such calculation to be based on the aggregate unreturned capital contributions outstanding on the first day of each fiscal quarter. ITEM 6. SELECTED FINANCIAL DATA. Incorporated herein by reference to the section entitled "Selected Financial Data" in the 1998 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated herein by reference to the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1998 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Incorporated herein by reference to the financial statements and supplementary data included in the 1998 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 8 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP. (a-b) Identification of Directors and Executive Officers The Partnership has no Directors or Officers. As indicated in Item 1 of this report, AFG Leasing VI Incorporated is the sole General Partner of the Partnership. Under the Restated Agreement, as amended, the General Partner is solely responsible for the operation of the Partnership's properties. The Limited Partners have no right to participate in the control of the Partnership's general operations, but they do have certain voting rights, as described in Item 12 herein. The names, titles and ages of the Directors and Executive Officers of the General Partner as of March 15, 1999 are as follows: DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER (SEE ITEM 13)
NAME TITLE AGE TERM - ------------------------------------ --------------------------------------------- --- --------------------- Geoffrey A. MacDonald Chairman and a member of the Executive Until a successor is Committee of EFG and President and a Director duly elected and of the General Partner 50 qualified Gary D. Engle President and Chief Executive Officer and member of the Executive Committee of EFG 50 Gary M. Romano Executive Vice President and Chief Operating Officer of EFG and Clerk of the General Partner 39 James A. Coyne Executive Vice President of EFG 38 Michael J. Butterfield Senior Vice President, Finance and Treasurer of EFG and Treasurer of the General Partner 39 Sandra L. Simonsen Senior Vice President, Information Systems of EFG 48 Gail D. Ofgant Senior Vice President, Lease Operations of EFG 33
(c) Identification of Certain Significant Persons None. (d) Family Relationship No family relationship exists among any of the foregoing Partners, Directors or Executive Officers. (e) Business Experience Mr. MacDonald, age 50, is a co-founder, Chairman and a member of the Executive Committee of EFG and President and a Director of the General Partner. Mr. MacDonald was also a co-founder, Director, and Senior Vice President of EFG's predecessor corporation from 1980 to 1988. Mr. MacDonald is President of American Finance Group Securities Corp. and a limited partner in Atlantic Acquisition 9 Limited Partnership ("AALP") and Old North Capital Limited Partnership ("ONC"). Prior to co-founding EFG's predecessors, Mr. MacDonald held various executive and management positions in the leasing and pharmaceutical industries. Mr. MacDonald holds a M.B.A. from Boston College and a B.A. degree from the University of Massachusetts (Amherst). Mr. Engle, age 50, is President and Chief Executive Officer of EFG and sole shareholder and Director of its general partner, Equis Corporation and a member of the Executive Committee of EFG and President of AFG Realty Corporation. Mr. Engle joined EFG in 1990 as Executive Vice President and acquired control of EFG and its subsidiaries in December 1994. Mr. Engle is Vice President and a Director of certain of EFG's subsidiaries and affiliates, a limited partner in AALP and ONC and controls the general partners of AALP and ONC. Mr. Engle is also Chairman, Chief Executive Officer, and a member of the Board of Directors of Semele Group, Inc. ("Semele"). From 1987 to 1990, Mr. Engle was a principal and co-founder of Cobb Partners Development, Inc., a real estate and mortgage banking company. From 1980 to 1987, Mr. Engle was Senior Vice President and Chief Financial Officer of Arvida Disney Company, a large-scale community development company owned by Walt Disney Company. Prior to 1980, Mr. Engle served in various management consulting and institutional brokerage capacities. Mr. Engle has a MBA from Harvard University and a BS degree from the University of Massachusetts (Amherst). Mr. Romano, age 39, became Executive Vice President and Chief Operating Officer of EFG, and Secretary of Equis Corporation in 1996 and is Secretary or Clerk of several of EFG's subsidiaries and affiliates. Mr. Romano joined EFG in November 1989, became Vice President and Controller in April 1993 and Chief Financial Officer in April 1995. Mr. Romano assumed his current position in April 1996. Mr. Romano is also Vice President and Chief Financial Officer of Semele. Prior to joining EFG, Mr. Romano was Assistant Controller for a privately held real estate development and mortgage origination company that he joined in 1987. Previously, Mr. Romano was an Audit Manager at Ernst & Whinney (now Ernst & Young LLP), where he was employed from 1982 to 1986. Mr. Romano is a Certified Public Accountant and holds a B.S. degree from Boston College. Mr. Coyne, age 38, is Executive Vice President, Capital Markets of EFG and President, Chief Operating Officer and a member of the Board of Directors of Semele. Mr. Coyne joined EFG in 1989, remained until May 1993, and rejoined EFG in November 1994. In September 1997, Mr. Coyne was appointed Executive Vice President of EFG. Mr. Coyne is a limited partner in AALP and ONC. From May 1993 through November 1994, he was employed by the Raymond Company, a private investment firm, where he was responsible for financing corporate and real estate acquisitions. From 1985 through 1989, Mr. Coyne was affiliated with a real estate investment company and an equipment leasing company. Prior to 1985, he was with the accounting firm of Ernst & Whinney (now Ernst & Young LLP). He has a BS in Business Administration from John Carroll University, a Masters Degree in Accounting from Case Western Reserve University and is a Certified Public Accountant. Mr. Butterfield, age 39, is Senior Vice President, Finance and Treasurer of EFG and certain of its affiliates and is Treasurer of the General Partner and Semele. Mr. Butterfield joined EFG in June 1992, became Vice President, Finance and Treasurer of EFG and certain of it's affiliates in April 1996 and in July 1998, was promoted to Senior Vice President, Finance and Treasurer of EFG and certain of its affiliates. Prior to joining EFG, Mr. Butterfield was an Audit Manager with Ernst & Young LLP, which he joined in 1987. Mr. Butterfield was employed in public accounting and industry positions in New Zealand and London (UK) prior to coming to the United States in 1987. Mr. Butterfield attained his Associate Chartered Accountant (A.C.A.) professional qualification in New Zealand and has completed his CPA requirements in the United States. He holds a Bachelor of Commerce degree from the University of Otago, Dunedin, New Zealand. Ms. Simonsen, age 48, joined EFG in February 1990 and was promoted to Senior Vice President, Information Systems of EFG in April 1996. Prior to joining EFG, Ms. Simonsen was Vice President, Information Systems with Investors Mortgage Insurance Company, which she joined in 1973. 10 Ms. Simonsen provided systems consulting for a subsidiary of American International Group and authored a software program published by IBM. Ms. Simonsen holds a BA degree from Wilson College. Ms. Ofgant, age 33, is Senior Vice President, Lease Operations of EFG and certain of its affiliates. Ms. Ofgant joined EFG in July 1989, was promoted to Manager Lease Operations in April 1994, and became Vice President of Lease Operations in April 1996. In July 1998, Ms. Ofgant was promoted to Senior Vice President of Lease Operations. Prior to joining EFG, Ms. Ofgant was employed by Security Pacific National Trust Company. Ms. Ofgant holds a BS degree in Finance from Providence College. (f) Involvement in Certain Legal Proceedings None. (g) Promoters and Control Persons See Item 10 (a-b) above. ITEM 11. EXECUTIVE COMPENSATION. (a) Cash Compensation Currently, the Partnership has no employees. However, under the terms of the Restated Agreement, as amended, the Partnership is obligated to pay all costs of personnel employed full or part-time by the Partnership, including officers or employees of the General Partner or its Affiliates. There is no plan at the present time to make any officers or employees of the General Partner or its Affiliates employees of the Partnership. The Partnership has not paid and does not propose to pay any options, warrants or rights to the officers or employees of the General Partner or its Affiliates. (b) Compensation Pursuant to Plans None. (c) Other Compensation Although the Partnership has no employees, as discussed in Item 11(a), pursuant to Section 9.4(c) of the Restated Agreement, as amended, the Partnership incurs a monthly charge for personnel costs of the Manager for persons engaged in providing administrative services to the Partnership. A description of the remuneration paid by the Partnership to the Manager for such services is included in Item 13, herein and in Note 5 of the financial statements included in Item 14, herein. (d) Compensation of Directors None. (e) Termination of Employment and Change of Control Arrangement There exists no remuneration plan or arrangement with the General Partner or its Affiliates which results or may result from their resignation, retirement or any other termination. 11 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). As of March 1, 1999, the following person or group owns beneficially more than 5% of the Partnership's 883,829.31 outstanding Units:
NAME AND AMOUNT PERCENT ADDRESS OF OF BENEFICIAL OF TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS - ----------------------------------------- ----------------------------------------- ----------------- ----------- Units Representing Old North Capital Limited Partnership Limited Partnership 88 Broad Street Interests Boston, MA 02110 87,118.15 Units 9.86%
Messrs. Engle, MacDonald and Coyne have ownership interests in ONC. The general partner of ONC is controlled by Gary D. Engle. The ownership and organization of EFG is described in Item 1 of this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The General Partner of the Partnership is AFG Leasing VI Incorporated, an affiliate of EFG. (a) Transactions with Management and Others All operating expenses incurred by the Partnership are paid by EFG on behalf of the Partnership and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years ended December 31, 1998, 1997 and 1996, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
1998 1997 1996 ---------- ---------- ---------- Equipment management fees.................................................... $ 110,415 $ 183,112 $ 154,545 Administrative charges....................................................... 66,924 63,126 39,739 Reimbursable operating expenses due to third parties......................... 474,818 135,893 122,586 ---------- ---------- ---------- Total........................................................................ $ 652,157 $ 382,131 $ 316,870 ---------- ---------- ---------- ---------- ---------- ----------
As provided under the terms of the Management Agreement, EFG is compensated for its services to the Partnership. Such services include acquisition and management of equipment. For acquisition services, EFG is compensated by an amount equal to 2.23% of Equipment Base Price paid by the Partnership. For management services, EFG is compensated by an amount equal to 5% of gross operating lease rental 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. 12 Administrative charges represent amounts owed to EFG, pursuant to Section 9.4(c) of the Restated Agreement, as amended, for persons employed by EFG who are engaged in providing administrative services to the Partnership. Reimbursable operating expenses due to third parties represent costs paid by EFG on behalf of the Partnership which are reimbursed to EFG at actual cost. All equipment was purchased from EFG, one of its affiliates or from third-party sellers. The Partnership's acquisition cost was determined by the method described in Note 2 to the financial statements included in Item 14, herein. During 1997, the Partnership and certain affiliated investment programs sponsored by EFG exchanged their ownership interests in certain vessels for aggregate consideration of $11,565,375. The Partnership's share of such consideration was $2,456,528 consisting of common stock in Semele valued at $638,615, a note receivable from Semele of $938,718 and cash of $879,195. For further discussion, see Note 4, "Investment Securities--Affiliate / Note Receivable Affiliate" to the financial statements included in Item 14 herein and Item 10. All rents and proceeds from the sale of equipment are paid directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 1998, the Partnership was owed $112,684 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 1999. During 1996, the Partnership received payment in full from EFG of a note and accrued interest thereon which was beneficially assigned to the Partnership in 1994 by a former affiliate of AFG as partial consideration for the exchange of certain intermodal cargo containers. Certain affiliates of the General Partner own Units in the Partnership as follows:
NUMBER OF PERCENT OF TOTAL AFFILIATE UNITS OWNED OUTSTANDING UNITS - ------------------------------------------------------------- ------------- ------------------- Atlantic Acquisition Limited Partnership..................... 23,472 2.66% Old North Capital Limited Partnership........................ 87,118 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. In addition, the limited partnership interests of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and CEO of Semele. (b) Certain Business Relationships None. (c) Indebtedness of Management to the Partnership None. (d) Transactions with Promoters See Item 13(a) above. 13 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Documents filed as part of this report: (1) Financial Statements: Report of Independent Auditors................................................. * Statement of Financial Position at December 31, 1998 and 1997.................. * Statement of Operations for the years ended December 31, 1998, 1997 and 1996... * Statement of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996............................................................ * Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996... * Notes to the Financial Statements.............................................. * (2) Financial Statement Schedules: None required. (3) Exhibits: Except as set forth below, all Exhibits to Form 10-K, as set forth in Item 601 of Regulation S-K, are not applicable.
EXHIBIT NUMBER - ------------- 4 Amended and Restated Agreement and Certificate of Limited Partnership included as Exhibit A to the Prospectus, which is included in Registration Statement on Form S-1 (No. 33-35148). 13 The 1998 Annual Report to security holders, a copy of which is furnished for the information of the Securities and Exchange Commission. Such Report, except for those portions thereof which are incorporated herein by reference, is not deemed "filed" with the Commission. 23 Consent of Independent Auditors. 99(a) Lease agreement with General Motors Corporation was filed in the Registrant's Annual Report on Form 10-K for the period ended December 31, 1991 as Exhibit 28 (b) and is incorporated herein by reference. 99(b) Lease agreement with Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 as Exhibit 28 (f) and is incorporated herein by reference 99(c) Lease agreement with National Steel Corporation was filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 as Exhibit 28 (h) and is incorporated herein by reference. 99(d) Lease agreement with Reno Air Inc. is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and is included herein.
- ------------------------ * Incorporated herein by reference to the appropriate portion of the 1998 Annual Report to security holders for the year ended December 31, 1998 (see Part II). 14
EXHIBIT NUMBER - ------------- 99(e) Lease agreement with Finnair OY is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and is included herein. 99(f) Lease agreement with Finnair OY is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and is included herein. 99(g) Lease agreement with Southwest Airlines is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and is include herein. 99(h) Lease agreement with Southwest Airlines is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and is include herein. 99(i) Lease agreement with Southwest Airlines is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and is include herein. 99(j) Lease agreement with Trans Ocean Corporation, Inc. is filed in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 and is included herein
(b) Reports on Form 8-K None. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant and in the capacity and on the date indicated. AMERICAN INCOME FUND I-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 AND A MEMBER OF THE EXECUTIVE PRESIDENT AND CHIEF EXECUTIVE OFFICER AND COMMITTEE OF EFG AND PRESIDENT AND A A MEMBER OF THE EXECUTIVE COMMITTEE OF DIRECTOR OF THE GENERAL PARTNER EFG (PRINCIPAL EXECUTIVE OFFICER) Date: March 31, 1999 Date: March 31, 1999 By: /s/ GARY M. ROMANO By: /s/ MICHAEL J. BUTTERFIELD ---------------------------------------- ---------------------------------------- Gary M. Romano Michael J. Butterfield EXECUTIVE VICE PRESIDENT AND CHIEF SENIOR VICE PRESIDENT, FINANCE AND OPERATING OFFICER OF EFG AND CLERK OF THE TREASURER OF EFG AND TREASURER OF THE GENERAL PARTNER (PRINCIPAL FINANCIAL GENERAL PARTNER (PRINCIPAL ACCOUNTING OFFICER) OFFICER) Date: March 31, 1999 Date: March 31, 1999
16 EX-13 2 EX-13 AMERICAN INCOME FUND I AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP ANNUAL REPORT TO THE PARTNERS, DECEMBER 31, 1998 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..................... 3-10 FINANCIAL STATEMENTS: Report of Independent Auditors............................................................................ 11 Statement of Financial Position at December 31, 1998 and 1997............................................. 12 Statement of Operations for the years ended December 31, 1998, 1997 and 1996.............................. 13 Statement of Changes in Partners' Capital for the years ended December 31, 1998, 1997 and 1996............ 14 Statement of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................. 15 Notes to the Financial Statements......................................................................... 16-28 ADDITIONAL FINANCIAL INFORMATION: Schedule of Excess (Deficiency) of Total Cash Generated to Cost of Equipment Disposed..................... 29 Statement of Cash and Distributable Cash From Operations, Sales and Refinancings.......................... 30 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................................... 31
1 SELECTED FINANCIAL DATA The following data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements. For each of the five years in the period ended December 31, 1998:
SUMMARY OF OPERATIONS 1998 1997 1996 1995 1994 - ------------------------------------- ------------- ------------- ------------- ------------- ------------- Lease revenue........................ $ 2,430,065 $ 5,115,146 $ 5,328,237 $ 5,590,621 $ 7,587,215 Net income........................... $ 137,523 $ 1,252,723 $ 1,062,652 $ 261,733 $ 948,185 Per Unit: Net income......................... $ 0.15 $ 1.35 $ 1.14 $ 0.28 $ 1.02 Cash distributions................. $ 1.01 $ 1.27 $ 2.40 $ 2.75 $ 2.75 FINANCIAL POSITION - ------------------------------------- Total assets......................... $ 14,457,880 $ 15,908,093 $ 18,074,828 $ 18,755,667 $ 22,075,839 Total long-term obligations.......... $ 3,688,947 $ 4,768,982 $ 6,586,970 $ 5,839,543 $ 6,657,115 Partners' capital.................... $ 10,136,041 $ 10,706,355 $ 10,865,261 $ 12,035,442 $ 14,332,162
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 Certain statements in this annual report of American Income Fund I-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 important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made herein. These factors include, but are not limited to, the outcome of the Class Action Lawsuit described in Note 8 to the accompanying financial statements, the collection of all rents due under the Partnership's lease agreements and the remarketing of the Partnership's equipment. YEAR 2000 ISSUE The Year 2000 Issue generally refers to the capacity of computer programming logic to correctly identify the calendar year. Many companies utilize computer programs or hardware with date sensitive software or embedded chips that could interpret dates ending in "00" as the year 1900 rather than the year 2000. In certain cases, such errors could result in system failures or miscalculations that disrupt the operations of the affected businesses. The Partnership uses information systems provided by EFG and has no information systems of its own. EFG has adopted a plan to address the Year 2000 Issue that consists of four phases: assessment, remediation, testing, and implementation and has elected to utilize principally internal resources to perform all phases. EFG completed substantially all of its Year 2000 project by December 31, 1998 at an aggregate cost of less than $50,000 and at a di minimus cost to the Partnership. Remaining items are expected to be minor and be completed by March 31, 1999. All costs incurred in connection with EFG's Year 2000 project have been expensed as incurred. EFG's primary information software was coded by IBM at the point of original design to use a four digit field to identify calendar year. All of the Partnership's lease billings, cash receipts and equipment remarketing processes are performed using this proprietary software. In addition, EFG has gathered information about the Year 2000 readiness of significant vendors and third party servicers and continues to monitor developments in this area. All of EFG's peripheral computer technologies, such as its network operating system and third-party software applications, including payroll, depreciation processing, and electronic banking, have been evaluated for potential programming changes and have required only minor modifications to function properly with respect to dates in the year 2000 and thereafter. EFG understands that each of its and the Partnership's significant vendors and third-party servicers are in the process, or have completed the process, of making their systems Year 2000 compliant. Substantially all parties queried have indicated that their systems would be Year 2000 compliant by the end of 1998. Presently, EFG is not aware of any outside customer with a Year 2000 Issue that would have a material effect on the Partnership's results of operations, liquidity, or financial position. The Partnership's equipment leases were structured as triple net leases, meaning that the lessees are responsible for, among other things, (i) maintaining and servicing all equipment during the lease term, (ii) ensuring that all equipment functions properly and is returned in good condition, normal wear and tear excepted, and (iii) insuring the assets against casualty and other events of loss. Non-compliance with lease terms on the part of a lessee, including failure to address Year 2000 Issues, could result in lost revenues and impairment of residual values of the Partnership's equipment assets under a worst-case scenario. EFG believes that its Year 2000 compliance plan will be effective in resolving all material Year 2000 risks in a timely manner and that the Year 2000 Issue will not pose significant operational problems with respect to its computer systems or result in a system failure or disruption of its or the Partnership's 3 business operations. However, EFG has no means of ensuring that all customers, vendors and third-party servicers will conform ultimately to Year 2000 standards. The effect of this risk to the Partnership is not determinable. OVERVIEW The Partnership was organized in 1991 as a direct-participation equipment leasing program to acquire a diversified portfolio of capital equipment subject to lease agreements with third parties. The value of the Partnership's equipment portfolio decreases over time due to depreciation resulting from age and usage of the equipment, as well as technological changes and other market factors. In addition, the Partnership does not replace equipment as it is sold; therefore, its aggregate investment value in equipment declines from asset disposals occurring in the normal course of business. Presently, the Partnership is a Nominal Defendant in a Class Action Lawsuit, the outcome of which could significantly alter the nature of the Partnership's organization and its future business operations. See Note 8 to the accompanying financial statements. Pursuant to the Restated Agreement, as amended, the Partnership is scheduled to be dissolved by December 31, 2002. RESULTS OF OPERATIONS For the year ended December 31, 1998, the Partnership recognized lease revenue of $2,430,065 compared to $5,115,146 and $5,328,237 for the years ended December 31, 1997 and 1996, respectively. The decrease in lease revenue from 1996 to 1998 reflects the effects of primary lease term expirations and the sale or exchange of equipment, including the vessel exchange in 1997 discussed below. In 1997 and 1996, the Partnership had recognized lease revenue from the vessel of $1,148,884 and $1,077,488, respectively. Partially offsetting the decrease from 1996 to 1997 was the effects of an aircraft exchange which concluded in March 1996. As a result of the aircraft exchange, the Partnership replaced its ownership interest in a Boeing 747-SP aircraft (the "United Aircraft"), having aggregate quarterly lease revenues of $174,279, with interests in six other aircraft, three Boeing 737 aircraft leased by Southwest Airlines, Inc., two McDonnell Douglas MD-82 aircraft leased by Finnair OY (the "Finnair Aircraft") and one McDonnell Douglas MD-87 aircraft leased by Reno Air, Inc. (the "Reno Aircraft"), having aggregate quarterly lease revenues of $266,911. The Southwest Aircraft were exchanged into the Partnership in 1995, while the Finnair Aircraft and the Reno Aircraft were exchanged into the Partnership on March 25 and March 26, 1996, respectively (see further discussion below). Accordingly, 1997 was the first year the Partnership recognized a full year's revenue related to its interest in all six of these aircraft. The Partnership's equipment portfolio includes certain assets in which the Partnership holds a proportionate ownership interest. In such cases, the remaining interests are owned by an affiliated equipment leasing program sponsored by EFG. Proportionate equipment ownership enabled the Partnership to further diversify its equipment portfolio at inception by participating in the ownership of selected assets, thereby reducing the general levels of risk which could have resulted from a concentration in any single equipment type, industry or lessee. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Interest income for the year ended December 31, 1998 was $306,920 compared to $152,995 and $158,602 for the years ended December 31, 1997 and 1996, respectively. Interest income is typically generated from temporary investment of rental receipts and equipment sale proceeds in short-term instruments. Interest income in 1998 and 1997 included $93,872 and 18,514, respectively, earned on a note receivable from Semele Group, Inc. (formerly Banyan Strategic Land Fund II) ("Semele") (see Note 4 to the financial statements herein). In 1996, the Partnership earned interest income of $36,763 on cash held in a special-purpose escrow account in connection with the aircraft exchange transactions. During 1996, the Partnership also earned interest income of $18,553, on a note receivable from EFG resulting from a settlement with ICCU Containers, S.p.A. (see Note 5 to the financial statements herein). The amount of 4 future interest income is expected to fluctuate in relation to prevailing interest rates, the collection of lease revenue and the proceeds from equipment sales. During the year ended December 31, 1998, the Partnership sold equipment having a net book value of $108,381 to existing lessees and third parties. These sales resulted in a net gain, for financial statement purposes, of $208,143 compared to a net gain in 1997 of $359,630 on equipment having a net book value of $535,501, and a net gain of $177,153 in 1996 on equipment having a net book value of $127,837. In 1997, the Partnership exchanged its interest in a vessel with an original cost and net book value of $5,160,573 and $2,386,249, respectively. In connection with this exchange, the Partnership realized proceeds of $1,578,208, which resulted in a net loss, for financial statement purposes, of $808,041. In addition, as this vessel was disposed of prior to the expiration of the related lease term, the Partnership received a prepayment of the remaining contracted rent due under the vessel's lease agreement of $878,320. During August 1997, the Partnership and another EFG-sponsored investment program exchanged certain locomotives for a proportionate interest in replacement locomotives. The Partnership's original locomotives had a cost and net book value of $1,572,197 and $1,047,043, respectively, and had associated indebtedness of $411,997 at the time of the exchange. The replacement locomotives were recorded at their fair value of $1,524,829 and the Partnership assumed associated debt of $1,040,043. The locomotive exchange resulted in the recognition of a net loss, for financial statement purposes, of $150,260. On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly issued shares (at $1.50 per share) of common stock in Semele, a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ (NASDAQ SmallCap Market effective January 5, 1999). At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the vessel exchange transaction and its original 67% beneficial ownership interest in Hato Arrow, one of the three Vessels, the Partnership received $879,195 in cash, became the beneficial owner of 425,743 shares of Semele common stock (valued at $638,615 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in the Semele Note of $938,718. The Semele Note bears an annual interest rate of 10% and will be amortized over three years with mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of Rancho Malibu. Cash equal to the amount of the Semele Note was placed in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele agreed to seek consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock 5 in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in the size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially owned by the Partnership. A dividend of $85,149 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. It cannot be determined whether future sales of equipment will result in a net gain or a net loss to the Partnership, as such transactions will be dependent upon the condition and type of equipment being sold and its marketability at the time of sale. In addition, the amount of gain or loss reported for financial statement purposes is partly a function of the amount of accumulated depreciation associated with the equipment being sold. The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, technological advances, and many other events can converge to enhance or detract from asset values at any given time. EFG attempts to monitor these changes in order to identify opportunities which may be advantageous to the Partnership and which will maximize total cash returns for each asset. The total economic value realized upon final disposition of each asset is comprised of all primary lease term revenue generated from that asset, together with its residual value. The latter consists of cash proceeds realized upon the asset's sale in addition to all other cash receipts obtained from renting the asset on a re-lease, renewal or month-to-month basis. The Partnership classifies such residual rental payments as lease revenue. Consequently, the amount of gain or loss reported in the financial statements may not be indicative of the total residual value the Partnership achieved from leasing the equipment. Depreciation expense was $1,438,667, $2,679,339 and $3,688,916 for the years ended December 31, 1998, 1997 and 1996, respectively. For financial reporting purposes, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset at the date of primary lease expiration on a straight-line basis over such term. For 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 $338,932 or 13.9% of lease revenue in 1998, compared to $355,277 or 6.9% of lease revenue in 1997 and $595,554 or 11.2% of lease revenue in 1996. The decrease in interest expense from 1996 to 1998 reflects the reduction of the Partnership's indebtedness utilizing rental payments and a portion of the Partnership's available cash. Interest expense in future years is expected to decline in amount and as a percentage of lease revenue as the principal balance of notes payable is reduced through the application of rent receipts to outstanding debt. Management fees were approximately 4.5% of lease revenue during the year ended December 31, 1998, compared to 3.6% and 2.9% during the years ended December 31, 1997 and 1996. 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 the Semele common stock was other-than- 6 temporary at December 31, 1998. As a result, the Partnership wrote down the cost of the Semele common stock from $15 per share to $4.125 per share (the quoted price of Semele stock on NASDAQ at December 31, 1998). Operating expenses were $541,742, $199,019 and $162,325 for the years ended December 31, 1998, 1997 and 1996, respectively. During the year ended December 31, 1998, the Partnership incurred or accrued approximately $334,000 for certain legal and administrative expenses related to the Class Action Lawsuit described in Note 8 to the financial statements. Other operating expenses consist principally of administrative charges, professional service costs, such as audit and other legal fees, as well as printing, distribution and remarketing expenses. In certain cases, equipment storage or repairs and maintenance costs may be incurred in connection with equipment being remarketed. The increase in operating expenses from 1996 to 1997 was primarily attributable to an increase in administrative charges and professional service costs. LIQUIDITY AND CAPITAL RESOURCES AND DISCUSSION OF CASH FLOWS The Partnership by its nature is a limited life entity. As an equipment leasing program, the Partnership's principal operating activities derive from asset rental transactions. Accordingly, the Partnership's principal source of cash from operations is provided by the collection of periodic rents. These cash inflows are used to satisfy debt service obligations associated with leveraged leases, and to pay management fees and operating costs. Operating activities generated net cash inflows of $2,642,701, $4,412,819 and $4,965,954 in 1998, 1997 and 1996, respectively. Future renewal, re-lease and equipment sale activities will cause a decline in the Partnership's lease revenue and corresponding sources of operating cash. Overall, expenses associated with rental activities, such as management fees, and net cash flow from operating activities will also decline as the Partnership experiences a higher frequency of remarketing events. Cash expended for equipment acquisitions and cash realized from asset disposal transactions are reported under investing activities on the accompanying Statement of Cash Flows. During 1998, the Partnership realized net cash proceeds of $316,524, compared to $896,006 and $304,990 in 1997 and 1996, respectively. Future inflows of cash from asset disposals will vary in timing and amount and will be influenced by many factors including, but not limited to, the frequency and timing of lease expirations, the type of equipment being sold, its condition and age, and future market conditions. In 1996, the Partnership completed the replacement of its interest in a Boeing 747-SP aircraft which it sold in 1995 with the acquisitions of an 9.71% ownership interest in two aircraft leased to Finnair OY and a 17.43% ownership interest in an aircraft leased to Reno Air, Inc. at a total cost of $2,718,900 and $2,367,806, respectively. To acquire the ownership interest in the Finnair Aircraft, the Partnership paid $909,035 in cash and obtained financing of $1,809,865 from a third-party lender. To acquire the ownership interest in the Reno Aircraft, the Partnership paid $404,693 in cash and obtained financing of $1,963,113 from a third-party lender. The Partnership utilized $1,276,051(classified ad Contractual Right for Equipment at December 31, 1995) which had been deposited into a special-purpose escrow account through a third-party exchange agent pending the completion of the aircraft exchange. The balance of $37,677 was expended from the Partnership's cash reserves. The remaining ownership interests of 90.29% and 82.57% in the Finnair Aircraft and the Reno Aircraft, respectively, are held by affiliated equipment leasing programs sponsored by EFG. There were no equipment acquisitions in 1998 or 1997. At December 31, 1998, the Partnership was due aggregate future minimum lease payments of $5,113,204 from contractual lease agreements (see Note 2 to the financial statements), a portion of which will be used to amortize the principal balance of notes payable of $3,688,947 (see Note 6 to the financial statements). At the expiration of the individual primary and renewal lease terms underlying the Partnership's future minimum lease payments, the Partnership will sell the equipment or enter re-lease or renewal agreements when considered advantageous by the General Partner and EFG. Such future remarketing activities will result in the realization of additional cash inflows in the form of equipment sale proceeds or rents from renewals and re-leases, the timing and extent of which cannot be predicted with certainty. This 7 is because the timing and extent of remarketing events often is dependent upon the needs and interests of the existing lessees. Some lessees may choose to renew their lease contracts, while others may elect to return the equipment. In the latter instances, the equipment could be re-leased to another lessee or sold to a third party. Accordingly, as the terms of the currently existing contractual lease agreements expire, the cash flows of the Partnership will become less predictable. In addition, the Partnership will need cash outflows to satisfy interest on indebtedness and to pay management fees and operating expenses. As a result of the vessel exchange (see Results of Operations), the Partnership became the beneficial owner of 425,743 shares of Semele common stock (valued at $638,615 ($1.50 per share) at the time of the exchange transaction). This investment was reduced by a dividend of $85,149 received in November 1997 representing a return of equity to the Partnership. The Partnership also received a beneficial interest in the Semele Note of $938,718 in connection with the exchange. On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed by a 30-for-1 forward stock split resulting in a reduction of the number of shares of Semele common stock owned by the Partnership to 42,574 shares. In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. During the year ended December 31, 1998, the Partnership decreased the carrying value of its investment in Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting in an unrealized loss in 1998 of $143,690. In 1997, the Partnership recorded an unrealized loss of $234,159 related to its Semele common stock. These losses were reported as components of comprehensive income, included in partners' capital. At December 31, 1998, the General Partner determined that the decline in market value of the Semele common stock was other-than-temporary. As a result, the Partnership wrote down the cost of the Semele common stock to $4.125 per share (the quoted price of the Semele common stock on NASDAQ at December 31, 1998) for a total realized loss of $377,849 in 1998. The Partnership obtained long-term financing in connection with certain equipment leases. The repayments of principal related to such indebtedness are reported as a component of financing activities. Each note payable is recourse only to the specific equipment financed and to the minimum rental payments contracted to be received during the debt amortization period (which period generally coincides with the lease rental term). As rental payments are collected, a portion or all of the rental payment is used to repay the associated indebtedness. In addition, during 1997 the Partnership utilized a portion of its available cash to repay certain of its debt obligations. In future years, the amount of cash used to repay debt obligations is scheduled to decline as the principal balance of notes payable is reduced through the collection and application of rents. The Partnership also has balloon payment obligations at the expiration of the respective primary lease terms related to the Finnair Aircraft and the Reno Aircraft of $922,830 and $555,597, respectively. There are no formal restrictions under the Restated Agreement, as amended, that materially limit the Partnership's ability to pay cash distributions, except that the General Partner may suspend or limit cash distributions to ensure that the Partnership maintains sufficient working capital reserves to cover, among other things, operating costs and potential expenditures, such as refurbishment costs to remarket equipment upon lease expiration. Liquidity is especially important as the Partnership matures and sells equipment, because the remaining equipment base consists of fewer revenue-producing assets that are available to cover prospective cash disbursements. Insufficient liquidity could inhibit the Partnership's ability to sustain its operations or maximize the realization of proceeds from remarketing its remaining assets. In particular, the Partnership must contemplate the potential liquidity risks associated with its investment in commercial jet aircraft. The management and remarketing of aircraft can involve, among other things, significant costs and lengthy remarketing initiatives. Although the Partnership's lessees are required to maintain the aircraft during the period of lease contract, repair, maintenance, and/or refurbishment costs at lease expiration can be substantial. For 8 example, an aircraft that is returned to the Partnership meeting minimum airworthiness standards, such as flight hours or engine cycles, nonetheless may require heavy maintenance in order to bring its engines, airframe and other hardware up to standards that will permit its prospective use in commercial air transportation. Individually, these repairs can cost in excess of $1 million and, collectively, they could require the disbursement of several million dollars, depending upon the extent of refurbishment. In addition, the Partnership's equipment portfolio includes an interest in three Stage 2 aircraft having scheduled lease expiration dates of December 31, 1999. These aircraft are prohibited from operating in the United States after December 31, 1999 unless they are retro-fitted with hush-kits to meet Stage 3 noise regulations promulgated by the Federal Aviation Administration. The cost to hush-kit an aircraft, such as the Partnership's Boeing 737s, can approach $2 million. Although the Partnership is not required to retro-fit its aircraft with hush-kits, insufficient liquidity could jeopardize the re-marketing of these aircraft and risk their disposal at a depressed value at a time when a better economic return would be realized from refurbishing the aircraft and re-leasing them to another user. Collectively, the aggregation of the Partnership's potential liquidity needs related to aircraft and other working capital requirements could be significant. Accordingly, the General Partner has maintained significant cash reserves within the Partnership in order to minimize the risk of a liquidity shortage, particularly in connection with the Partnership's aircraft interests. Finally, the Partnership is a Nominal Defendant in a Class Action Lawsuit described in Note 8 to the accompanying financial statements. A preliminary settlement agreement will allow the Partnership to invest in new equipment or other activities, subject to certain limitations, effective March 22, 1999. To the extent that the Partnership continues to own aircraft investments that could require capital reserves, the General Partner does not anticipate that the Partnership will invest in new assets, regardless of its authority to do so. Until the Class Action Lawsuit is adjudicated, the General Partner does not expect that the level of future quarterly cash distributions paid by the Partnership will be increased above amounts paid in the fourth quarter of 1998. In addition, the proposed settlement, if effected, will materially change the future organizational structure and business interests of the Partnership, as well as its cash distribution policies. See Note 8 to the accompanying financial statements. Cash distributions to the General and Limited Partners are declared and generally paid within fifteen days following the end of each calendar quarter. The payment of such distributions is presented as a component of financing activities. For the year ended December 31, 1998, the Partnership declared total cash distributions of $941,996. In accordance with the Restated Agreement, as amended, the Limited Partners were allocated 95% of these distributions, or $894,896 and the General Partner was allocated 5%, or $47,100. The fourth quarter 1998 cash distribution was paid on January 15, 1999. Cash distributions paid to the Limited Partners consist of both a return of and a return on capital. Cash distributions do not represent and are not indicative of yield on investment. Actual yield on investment cannot be determined with any certainty until conclusion of the Partnership and will be dependent upon the collection of all future contracted rents, the generation of renewal and/or re-lease rents, and the residual value realized for each asset at its disposal date. The Partnership's capital account balances for federal income tax and for financial reporting purposes are different primarily due to differing treatments of income and expense items for income tax purposes in comparison to financial reporting purposes (generally referred to as permanent or timing differences; see Note 7 to the financial statements). For instance, selling commissions 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, the difference between distributions (declared vs. paid) for income tax and financial reporting purposes, and the 9 treatment of unrealized gains or losses on investment securities, if any, for book and tax purposes. The principal component of the cumulative difference between financial statement income or loss and tax income or loss results from different depreciation policies for book and tax purposes. For financial reporting purposes, the General Partner has accumulated a capital deficit at December 31, 1998. This is the result of aggregate cash distributions to the General Partner being in excess of its capital contribution of $1,000 and its allocation of financial statement net income or loss. Ultimately, the existence of a capital deficit for the General Partner for financial reporting purposes is not indicative of any further capital obligations to the Partnership by the General Partner. The Amended and Restated Agreement and Certificate of Limited Partnership requires that, upon the dissolution of the Partnership, the General Partner will be required to contribute to the Partnership an amount equal to any negative balance which may exist in the General Partner's tax capital account. At December 31, 1998, the General Partner had a positive tax capital account balance. The future liquidity of the Partnership will be influenced by, among other factors, prospective market conditions, technological changes, the ability of EFG to manage and remarket the assets, and many other events and circumstances, that could enhance or detract from individual asset yields and the collective performance of the Partnership's equipment portfolio. However, the outcome of the Class Action Lawsuit described in Note 8 to the accompanying financial statements will be the principal factor in determining the future of the Partnership's operations 10 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, 1998 and 1997, and the related statements of operations, changes in partners' capital, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Income Fund I-E, a Massachusetts Limited Partnership at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Additional Financial Information identified in the Index to Annual Report to the Partners is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. ERNST & YOUNG LLP Boston, Massachusetts March 10, 1999 11 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF FINANCIAL POSITION DECEMBER 31, 1998 AND 1997
1998 1997 ------------- ------------- ASSETS Cash and cash equivalents.......................................................... $ 4,468,062 $ 3,530,868 Rents receivable................................................................... 301,563 301,473 Accounts receivable--affiliate..................................................... 112,684 809,443 Note receivable--affiliate......................................................... 938,718 938,718 Investment securities--affiliate................................................... 175,617 319,307 Equipment at cost, net of accumulated depreciation of $10,116,949 and $10,784,619 at December 31, 1998 and 1997, respectively...................................... 8,461,236 10,008,284 ------------- ------------- Total assets................................................................... $ 14,457,880 $ 15,908,093 ------------- ------------- ------------- ------------- LIABILITIES AND PARTNERS' CAPITAL Notes payable...................................................................... $ 3,688,947 $ 4,768,982 Accrued interest................................................................... 36,297 31,496 Accrued liabilities................................................................ 295,500 9,200 Accrued liabilities--affiliate..................................................... 17,592 50,770 Deferred rental income............................................................. 48,008 105,795 Cash distributions payable to partners............................................. 235,495 235,495 ------------- ------------- Total liabilities.............................................................. 4,321,839 5,201,738 ------------- ------------- Partners' capital (deficit): General Partner.................................................................. (467,548) (439,033) Limited Partnership Interests (883,829.31 Units; initial purchase price of $25 each).......................................................................... 10,603,589 11,145,388 ------------- ------------- Total partners' capital........................................................ 10,136,041 10,706,355 ------------- ------------- Total liabilities and partners' capital............................................ $ 14,457,880 $ 15,908,093 ------------- ------------- ------------- -------------
The accompanying notes are an integral part of these financial statements 12 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------ ------------ ------------ Income: Lease revenue......................................................... $ 2,430,065 $ 5,115,146 $ 5,328,237 Interest income....................................................... 213,048 134,481 140,049 Interest income--affiliate............................................ 93,872 18,514 18,553 Gain on sale of equipment............................................. 208,143 359,630 177,153 Loss on exchange of equipment......................................... -- (958,301) -- ------------ ------------ ------------ Total income........................................................ 2,945,128 4,669,470 5,663,992 ------------ ------------ ------------ Expenses: Depreciation.......................................................... 1,438,667 2,679,339 3,688,916 Interest expense...................................................... 338,932 355,277 595,554 Equipment management fees--affiliate.................................. 110,415 183,112 154,545 Write-down of investment securities--affiliate........................ 377,849 -- -- Operating expenses--affiliate......................................... 541,742 199,019 162,325 ------------ ------------ ------------ Total expenses...................................................... 2,807,605 3,416,747 4,601,340 ------------ ------------ ------------ Net income.............................................................. $ 137,523 $ 1,252,723 $ 1,062,652 ------------ ------------ ------------ ------------ ------------ ------------ Net income per limited partnership unit................................. $ 0.15 $ 1.35 $ 1.14 ------------ ------------ ------------ ------------ ------------ ------------ Cash distributions declared per limited partnership unit................ $ 1.01 $ 1.27 $ 2.40 ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements 13 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
GENERAL LIMITED PARTNERS PARTNER --------------------------- AMOUNT UNITS AMOUNT TOTAL ----------- ------------ ------------- ------------- Balance at December 31, 1995............................ $ (372,579) 883,829.31 $ 12,408,021 $ 12,035,442 Net income--1996...................................... 53,133 -- 1,009,519 1,062,652 ----------- ------------ ------------- ------------- Comprehensive income.................................... 53,133 -- 1,009,519 1,062,652 ----------- ------------ ------------- ------------- Cash distributions declared............................. (111,642) -- (2,121,191) (2,232,833) ----------- ------------ ------------- ------------- Balance at December 31, 1996............................ (431,088) 883,829.31 11,296,349 10,865,261 Net income--1997...................................... 62,636 -- 1,190,087 1,252,723 Unrealized loss on investment securities.............. (11,708) -- (222,451) (234,159) ----------- ------------ ------------- ------------- Comprehensive income.................................... 50,928 -- 967,636 1,018,564 ----------- ------------ ------------- ------------- Cash distributions declared............................. (58,873) -- (1,118,597) (1,177,470) ----------- ------------ ------------- ------------- 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.............. (7,184) -- (136,506) (143,690) Less: reclassification adjustment for write-down of investment securities............................... 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 ----------- ------------ ------------- ------------- ----------- ------------ ------------- -------------
The accompanying notes are an integral part of these financial statements 14 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP STATEMENT OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------- ------------ ------------ Cash flows from (used in) operating activities: Net income............................................................. $ 137,523 $ 1,252,723 $ 1,062,652 Adjustments to reconcile net income to net cash from operating activities: Depreciation....................................................... 1,438,667 2,679,339 3,688,916 Gain on sale of equipment.......................................... (208,143) (359,630) (177,153) Write-down of investment securities--affiliate..................... 377,849 -- -- Loss on exchange of equipment...................................... -- 958,301 -- Changes in assets and liabilities: Decrease (increase) in: Rents receivable................................................... (90) 563,486 222,102 Accounts receivable--affiliate..................................... 696,759 (570,057) (108,475) Note receivable--affiliate......................................... -- -- 210,377 Increase (decrease) in: Accrued interest................................................... 4,801 (64,627) 28,123 Accrued liabilities................................................ 286,300 (14,050) 1,480 Accrued liabilities--affiliate..................................... (33,178) 16,547 22,348 Deferred rental income............................................. (57,787) (49,213) 15,584 ------------- ------------ ------------ Net cash from operating activities............................... 2,642,701 4,412,819 4,965,954 ------------- ------------ ------------ Cash flows from (used in) investing activities: Dividend received.................................................... -- 85,149 -- Purchase of equipment................................................ -- -- (37,677) Proceeds from equipment sales........................................ 316,524 896,006 304,990 ------------- ------------ ------------ Net cash from investing activities............................... 316,524 981,155 267,313 ------------- ------------ ------------ Cash flows used in financing activities: Principal payments--notes payable.................................. (1,080,035) (2,446,034) (3,025,551) Distributions paid................................................. (941,996) (1,255,968) (2,558,453) ------------- ------------ ------------ Net cash used in financing activities............................ (2,022,031) (3,702,002) (5,584,004) ------------- ------------ ------------ Net increase (decrease) in cash and cash equivalents................... 937,194 1,691,972 (350,737) Cash and cash equivalents at beginning of year......................... 3,530,868 1,838,896 2,189,633 ------------- ------------ ------------ Cash and cash equivalents at end of year............................... $ 4,468,062 $ 3,530,868 $ 1,838,896 ------------- ------------ ------------ ------------- ------------ ------------ Supplemental disclosure of cash flow information: Cash paid during the year for interest................................. $ 334,131 $ 419,904 $ 567,431 ------------- ------------ ------------ ------------- ------------ ------------
Supplemental disclosure of non-cash investing and financing activities: See Note 4 to the financial statements regarding the reduction of the Partnership's carrying value of its investment securities--affiliate. Also, see Note 3 to the financial statements. The accompanying notes are an integral part of these financial statements 15 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1998 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 5). EFG is a Massachusetts limited partnership formerly known as American Finance Group ("AFG"). AFG was established in 1988 as a Massachusetts general partnership and succeeded American Finance Group, Inc., a Massachusetts corporation organized in 1980. EFG and its subsidiaries (collectively, the "Company") are engaged in various aspects of the equipment leasing business, including EFG's role as 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 16 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 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. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION As of January 1, 1998, the Company adopted Statement 130, Reporting Comprehensive Income. Statement 130 establishes new rules for the reporting and the display of comprehensive income and its components; however, the adoption of this statement had no impact on the Partnership's net income or partners' capital. Statement 130 requires unrealized gains or losses on the Partnership's available-for-sale securities, which prior to adoption were reported separately in partners' capital to be included in comprehensive income (loss). At December 31, 1997, the cumulative amount of other comprehensive losses was $234,159. STATEMENT OF CASH FLOWS The Partnership considers liquid investment instruments purchased with a maturity of three months or less to be cash equivalents. From time to time, the Partnership invests excess cash with large institutional banks in federal agency discount notes and in reverse repurchase agreements with overnight maturities. Under the terms of the agreements, title to the underlying securities passes to the Partnership. The securities underlying the agreements are book entry securities. At December 31, 1998, the Partnership had $4,358,050 invested in federal agency discount notes and in reverse repurchase agreements secured by U.S. Treasury Bills or interests in U.S. Government securities. REVENUE RECOGNITION Rents are payable to the Partnership monthly, quarterly or semi-annually and no significant amounts are calculated on factors other than the passage of time. The leases are accounted for as operating leases and are noncancellable. Rents received prior to their due dates are deferred. Future minimum rents of $5,113,204 are due as follows: For the year ending December 31, 1999 .................... $1,827,355 2000 .................... 1,072,124 2001 .................... 888,038 2002 .................... 836,068 2003 .................... 440,683 Thereafter .................... 48,936 ---------- Total .................... $5,113,204 ---------- ----------
In December 1998, the Partnership and the other affiliated leasing programs owning interests in two McDonnell Douglas MD-82 aircraft entered into lease extension agreements with Finnair OY. The lease extensions, effective upon the expiration of the existing primary lease terms on April 28, 1999, extended the leases for nine months and two years, respectively. In aggregate, these lease extensions will provide additional lease revenue of approximately $573,000 to the Partnership. 17 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, 1998, 1997 and 1996 is as follows:
1998 1997 1996 ---------- ------------ ------------ Finnair OY................................................................ $ 418,516 $ -- $ -- General Motors Corporation................................................ $ 363,440 $ -- $ -- Southwest Airlines........................................................ $ 338,112 $ -- $ -- Reno Air, Inc............................................................. $ 306,806 $ -- $ -- Trans Ocean Container Corp................................................ $ 279,105 $ -- $ -- Gearbulk Shipowning Ltd................................................... $ -- $ 1,148,884 $ 1,077,488 National Steel Corporation................................................ $ -- $ 729,633 $ 722,342
USE OF ESTIMATES The preparation of the financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. EQUIPMENT ON LEASE All equipment was acquired from EFG, one of its Affiliates or from third-party sellers. Equipment Cost means the actual cost paid by the Partnership to acquire the equipment, including acquisition fees. Where equipment was acquired from EFG or an Affiliate, Equipment Cost reflects the actual price paid for the equipment by EFG or the Affiliate plus all actual costs incurred by EFG or the Affiliate while carrying the equipment, including all liens and encumbrances, less the amount of all primary term rents earned by EFG or the Affiliate prior to selling the equipment. Where the seller of the equipment was a third party, Equipment Cost reflects the seller's invoice price. DEPRECIATION The Partnership's depreciation policy is intended to allocate the cost of equipment over the period during which it produces economic benefit. The principal period of economic benefit is considered to correspond to each asset's primary lease term, which term generally represents the period of greatest revenue potential for each asset. Accordingly, to the extent that an asset is held on primary lease term, the Partnership depreciates the difference between (i) the cost of the asset and (ii) the estimated residual value of the asset on a straight-line basis over such term. For purposes of this policy, estimated residual values represent estimates of equipment values at the date of primary lease expiration. To the extent that an asset is held beyond its primary lease term, the Partnership continues to depreciate the remaining net book value of the asset on a straight-line basis over the asset's remaining economic life. Periodically, the General Partner evaluates the net carrying value of equipment to determine whether it exceeds estimated net realizable value. Adjustments to reduce the net carrying value of equipment are recorded in those instances where estimated net realizable value is considered to be less than net carrying value. To the extent that such adjustments have been recorded, they are reflected separately on the accompanying Statement of Operations as Write-Down of Equipment The ultimate realization of residual value for any type of equipment is dependent upon many factors, including EFG's ability to sell and re-lease equipment. Changing market conditions, industry trends, 18 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) technological advances, and many other events can converge to enhance or detract from asset values at any given time. INVESTMENT SECURITIES--AFFILIATE The Partnership's investment in Semele Group, Inc. is considered to be available-for-sale and as such is carried at fair value with unrealized gains and losses reported as a separate component of Partner's Capital. Other-than-temporary declines in market value are recorded as write down of investment in the Statement of Operations (see Note 4). ACCRUED LIABILITIES--AFFILIATE Unpaid operating expenses paid by EFG on behalf of the Partnership and accrued but unpaid administrative charges and management fees are reported as Accrued Liabilities--Affiliate (see Note 5). ALLOCATION OF PROFITS AND LOSSES For financial statement purposes, net income or loss is allocated to each Partner according to their respective ownership percentages (95% to the Limited Partners and 5% to the General Partner). See Note 7 for allocation of income or loss for income tax purposes. NET INCOME AND CASH DISTRIBUTIONS PER UNIT Net income 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, 1998 and are computed after allocation of the General Partner's 5% share of net income and cash distributions. PROVISION FOR INCOME TAXES No provision or benefit from income taxes is included in the accompanying financial statements. The Partners are responsible for reporting their proportionate shares of the Partnership's taxable income or loss and other tax attributes on their tax returns. NOTE 3--EQUIPMENT The following is a summary of equipment owned by the Partnership at December 31, 1998. Remaining Lease Term (Months), as used below, represents the number of months remaining from December 31, 1998 under contracted lease terms and is presented as a range when more than one lease agreement is contained in the stated equipment category. A Remaining Lease Term equal to zero reflects equipment 19 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) either held for sale or re-lease or being leased on a month-to-month basis. In the opinion of EFG, the acquisition cost of the equipment did not exceed its fair market value.
REMAINING LEASE TERM EQUIPMENT EQUIPMENT TYPE (MONTHS) AT COST LOCATION - --------------------------------------------- ------------- --------------- ------------------------------------- Aircraft..................................... 13-48 $ 8,697,671 NV/TX/WA Materials handling........................... 12-60 2,319,365 AR/IL/MI/NJ/OH/PA/SC/TX/WV Trailers/intermodal containers............... 54 1,759,967 CA Railroad..................................... 63 1,522,810 NB Construction and mining...................... 24-72 1,342,849 IL/MI/WV General purpose plant/warehouse.............. 3-12 1,195,438 CA Tractors and heavy duty trucks............... 0 712,184 CA/IL/OR/WA Retail store fixtures........................ 3 687,947 FL Communications............................... 9 315,882 FL/NY/VA Photocopying................................. 0-10 24,072 CA/CT/IL/NJ --------------- Total equipment cost 18,578,185 Accumulated depreciation (10,116,949) --------------- Equipment, net of accumulated depreciation $ 8,461,236 --------------- ---------------
During August 1997, the Partnership and another EFG-sponsored investment program exchanged certain locomotives for a proportionate interest in certain other locomotives. The Partnership's original locomotives had a cost and net book value of $1,572,197 and $1,047,043, respectively, and had associated indebtedness of $411,997 at the time of the exchange. The replacement locomotives were recorded at their fair value of $1,524,829 and the Partnership assumed associated debt of $1,040,043. In 1996, the Partnership completed the replacement of its interest in a Boeing 747-SP aircraft which it sold in 1995 with the acquisitions of an 9.71% ownership interest in two aircraft leased to Finnair OY and a 17.43% ownership interest in an aircraft leased to Reno Air, Inc. at a total cost of $2,718,900 and $2,367,806, respectively. To acquire the ownership interest in the Finnair Aircraft, the Partnership paid $909,035 in cash and obtained financing of $1,809,865 from a third-party lender. To acquire the ownership interest in the Reno Aircraft, the Partnership paid $404,693 in cash and obtained financing of $1,963,113 from a third-party lender. The Partnership utilized $1,276,051 (classified ad Contractual Right for Equipment at December 31, 1995) which had been deposited into a special-purpose escrow account through a third-party exchange agent pending the completion of the aircraft exchange. The balance of $37,677 was expended from the Partnership's cash reserves. The remaining ownership interests of 90.29% and 82.57% in the Finnair Aircraft and the Reno Aircraft, respectively, are held by affiliated equipment leasing programs sponsored by EFG. In certain cases, the cost of the Partnership's equipment represents a proportionate ownership interest. The remaining interests are owned by EFG or an affiliated equipment leasing program sponsored by EFG. The Partnership and each affiliate individually report, in proportion to their respective ownership interests, their respective shares of assets, liabilities, revenues, and expenses associated with the equipment. Proportionate equipment ownership enabled the Partnership to further diversify its equipment portfolio at inception by participating in the ownership of selected assets, thereby reducing the general levels of risk which could have resulted from a concentration in any single equipment type, industry or 20 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) lessee. At December 31, 1998, the Partnership's equipment portfolio included equipment having a proportionate original cost of $12,034,761, representing approximately 65% 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 $8,328,000 and a net book value of approximately $6,361,000 at December 31, 1998 (see Note 6). Generally, the costs associated with maintaining, insuring and operating the Partnership's equipment are incurred by the respective lessees pursuant to terms specified in their individual lease agreements with the Partnership. As equipment is sold to third parties, or otherwise disposed of, the Partnership recognizes a gain or loss equal to the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition. The ultimate realization of estimated residual value in the equipment is dependent upon, among other things, EFG's ability to maximize proceeds from selling or re-leasing the equipment upon the expiration of the primary lease terms. The summary above includes equipment held for sale or re-lease with a cost and a net book value of $2,392,720 and $1,136,326, respectively. This equipment includes the Partnership's proportionate interest in a McDonnell Douglas MD-82 aircraft, formerly leased to Alaska Airlines, Inc., with a cost and net book value of $1,892,051 and $1,136,326, respectively, at December 31, 1998. This aircraft was sold in January 1999 (see Note 9, Subsequent Events). The General Partner is actively seeking the sale or re-lease of all other equipment not on lease. In addition, the summary above also includes equipment being leased on a month-to-month basis. NOTE 4--INVESTMENT SECURITIES--AFFILIATE/NOTE RECEIVABLE--AFFILIATE On April 30, 1997, the vessel partnerships, in which the Partnership and certain affiliated investment programs are limited partners and through which the Partnership and the affiliated investment programs shared economic interests in three cargo vessels (the "Vessels") leased by Gearbulk Shipowning Ltd (formerly Kristian Gerhard Jebsen Skipsrederi A/S) (the "Lessee"), exchanged their ownership interests in the Vessels for aggregate consideration of $11,565,375, consisting of 1,987,000 newly isssued shares (at $1.50 per share) of common stock in Semele Group, Inc. ("Semele") (formerly Banyan Strategic Land Fund II), a purchase money note of $8,219,500 (the "Note") and cash of $365,375. Semele is a Delaware corporation organized on April 14, 1987 and has its common stock listed on NASDAQ (NASDAQ Small Cap Market effective January 5, 1999). At the date of the exchange transaction, the common stock of Semele had a net book value of approximately $1.50 per share and closing market value of $1.00 per share. Semele has one principal real estate asset consisting of an undeveloped 274 acre parcel of land near Malibu, California ("Rancho Malibu"). The exchange was organized through an intermediary company (Equis Exchange LLC, 99% owned by Semele and 1% owned by EFG), which was established for the sole purpose of facilitating the exchange. There were no fees paid to EFG by Equis Exchange LLC or Semele or by any other party that otherwise would not have been paid to EFG had the Partnership sold its beneficial interest in the Vessels directly to the Lessee. The Lessee prepaid all of its remaining contracted rental obligations and purchased the Vessels in two closings occurring on May 6, 1997 and May 12, 1997. The Note was repaid with $3,800,000 of cash and delivery of a $4,419,500 note from Semele (the "Semele Note"). As a result of the exchange transaction and its original 67% beneficial ownership interest in Hato Arrow, one of the three Vessels, the Partnership received $879,195 in cash, became the beneficial owner of 21 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) 425,743 shares of Semele common stock (valued at $638,615 ($1.50 per share) at the time of the exchange transaction) and received a beneficial interest in the Semele Note of $938,718. The Semele Note bears an annual interest rate of 10% and will be amortized over three years with mandatory principal reductions, if and to the extent that net proceeds are received by Semele from the sale or refinancing of Rancho Malibu. The Partnership recognized interest income of $93,872 and $18,514 related to the Semele Note during 1998 and 1997, respectively. The Partnership's interest in the vessel had an original cost and net book value of $5,160,573 and $2,386,249, respectively. The proceeds realized by the Partnership of $1,578,208 resulted in a net loss, for financial statement purposes, of $808,041. In addition, as this vessel was disposed of prior to the expiration of the related lease term, the Partnership received a prepayment of the remaining contracted rent due under the vessel's lease agreement of $878,320. Cash equal to the amount of the Semele Note was placed in escrow for the benefit of Semele in a segregated account pending the outcome of certain shareholder proposals. Specifically, as part of the exchange, Semele agreed to seek consent ("Consent") from its shareholders to: (1) amend its certificate of incorporation and by-laws; (2) make additional amendments to restrict the acquisition of its common stock in a way to protect Semele's net operating loss carry-forwards, and (3) engage EFG to provide administrative services to Semele, which services EFG will provide at cost. On October 21, 1997, such Consent was obtained from Semele's shareholders. The Consent also allowed for (i) the election of a new Board of Directors nominated by EFG for terms of up to three years and an increase in the size of the Board to as many as nine members, provided a majority of the Board shall consist of members independent of Semele, EFG or any affiliate; and (ii) an amendment extending Semele's life to perpetual and changing its name from Banyan Strategic Land Fund II. Contemporaneously with the Consent being obtained, Semele declared a $0.20 per share dividend to be paid on all shares, including those beneficially owned by the Partnership. A dividend of $85,149 was paid to the Partnership on November 17, 1997. This dividend represented a return of equity to the Partnership, which proportionately reduced the Partnership's investment in Semele. Subsequent to the exchange transaction, Gary D. Engle, President and Chief Executive Officer of EFG, was elected to the Board of Directors and appointed Chief Executive Officer of Semele and James A. Coyne, Executive Vice President of EFG was appointed Semele's President and Chief Operating Officer, and was elected to the Board of Directors. On June 30, 1998, Semele effected a 1-for-300 reverse stock split followed by a 30-for-1 forward stock split resulting in a reduction of the number of shares of Semele common stock owned by the Partnership to 42,574 shares. In accordance with the Financial Accounting Standard Board's Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, marketable equity securities classified as available-for-sale are required to be carried at fair value. During the year ended December 31, 1998, the Partnership decreased the carrying value of its investment in Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) resulting in an unrealized loss in 1998 of $143,690. In 1997, the Partnership recorded an unrealized loss of $234,159 related to its Semele common stock. These losses were reported as components of comprehensive income, included in partners' capital. At December 31, 1998, the General Partner determined that the decline in market value of the Semele common stock was other-than-temporary. As a result, the Partnership wrote down the cost of the Semele common stock to $4.125 per share (the quoted price of the Semele stock on NASDAQ at December 31, 1998) for a total realized loss of $377,849 in 1998. 22 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 5--RELATED PARTY TRANSACTIONS All operating expenses incurred by the Partnership are paid by EFG on behalf of the Partnership and EFG is reimbursed at its actual cost for such expenditures. Fees and other costs incurred during the years ended December 31, 1998, 1997 and 1996, which were paid or accrued by the Partnership to EFG or its Affiliates, are as follows:
1998 1997 1996 ---------- ---------- ---------- Equipment management fees.................................................... $ 110,415 $ 183,112 $ 154,545 Administrative charges....................................................... 66,924 63,126 39,739 Reimbursable operating expenses due to third parties......................... 474,818 135,893 122,586 ---------- ---------- ---------- Total........................................................................ $ 652,157 $ 382,131 $ 316,870 ---------- ---------- ---------- ---------- ---------- ----------
As provided under the terms of the Management Agreement, EFG is compensated for its services to the Partnership. Such services include acquisition and management of equipment. For acquisition services, EFG is compensated by an amount equal to 2.23% of Equipment Base Price paid by the Partnership. For management services, EFG is compensated by an amount equal to 5% of gross operating lease rental 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 Purchase Price was determined by the method described in Note 2. All rents and proceeds from the sale of equipment are paid by the lessees directly to either EFG or to a lender. EFG temporarily deposits collected funds in a separate interest-bearing escrow account prior to remittance to the Partnership. At December 31, 1998, the Partnership was owed $112,684 by EFG for such funds and the interest thereon. These funds were remitted to the Partnership in January 1999. During 1996, the Partnership received payment in full from EFG of a note and accrued interest thereon which was beneficially assigned to the Partnership in 1994 by a former affiliate of AFG as partial consideration for the exchange of certain intermodal cargo containers. Certain affiliates of the General Partner own Units in the Partnership as follows:
NUMBER OF PERCENT OF TOTAL AFFILIATE UNITS OWNED OUTSTANDING UNITS - --------------------------------------------------------------------------------- ------------ ------------------- Atlantic Acquisition Limited Partnership......................................... 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 and affiliates of EFG. The general partners of AALP and ONC are controlled by Gary D. Engle. In addition, the limited partnership interests of ONC are owned by Semele Group, Inc. ("Semele"). Gary D. Engle is Chairman and CEO of Semele. 23 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 6--NOTES PAYABLE Notes payable at December 31, 1998 consisted of installment notes of $3,688,947 payable to banks and institutional lenders. The installment notes bear interest rates ranging between 6.76% and 8.9%, except for one note which bears a fluctuating interest rate based on LIBOR (5.54% at December 31, 1998) plus a margin. All of the installment notes are non-recourse and are collateralized by the equipment and assignment of the related lease payments. Generally, the installment notes will be fully amortized by noncancellable rents. However, the Partnership has balloon payment obligations at the expiration of the primary lease terms related to the Finnair Aircraft and the Reno Aircraft of $922,830 and $555,597, respectively. The carrying amount of notes payable approximates fair value at December 31, 1998. The annual maturities of the installment notes payable are as follows: For the year ending December 31, 1999... $1,691,093 2000...... 384,032 2001...... 413,481 2002...... 411,995 2003...... 740,223 Thereafter... 48,123 ---------- Total..... $3,688,947 ---------- ----------
NOTE 7--INCOME TAXES The Partnership is not a taxable entity for federal income tax purposes. Accordingly, no provision for income taxes has been recorded in the accounts of the Partnership. For financial statement purposes, the Partnership allocates net income 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, 1998, the General Partner had a positive tax capital account balance. The following is a reconciliation between net income reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 ---------- ------------ ------------ Net income................................................................ $ 137,523 $ 1,252,723 $ 1,062,652 Financial statement depreciation in excess of (less than) tax depreciation.......................................................... (586,707) (124,537) 360,011 Deferred rental income.................................................. (57,787) (49,213) 15,584 Other................................................................... 448,330 3,340 (35,287) ---------- ------------ ------------ Net income (loss) for federal income tax reporting purposes............... $ (58,641) $ 1,082,313 $ 1,402,960 ---------- ------------ ------------ ---------- ------------ ------------
24 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) The principal component of "Other" consists of the difference between the tax gain or loss on equipment disposals and the financial statement gain or loss on disposals. The following is a reconciliation between partners' capital reported for financial statement and federal income tax reporting purposes for the years ended December 31, 1998 and 1997:
1998 1997 ------------- ------------- Partners' capital.................................................................. $ 10,136,041 $ 10,706,355 Unrealized loss on investment securities......................................... -- 234,159 Add back selling commissions and organization and offering costs................. 2,466,957 2,466,957 Financial statement distributions in excess of tax distributions................. 11,775 11,775 Cumulative difference between federal income tax and financial statement income (loss)......................................................................... (2,704,182) (2,508,018) ------------- ------------- Partners' capital for federal income tax reporting purposes........................ $ 9,910,591 $ 10,911,228 ------------- ------------- ------------- -------------
Unrealized loss on investment securities, financial statement distributions in excess of tax distributions and cumulative difference between federal income tax and financial statement income (loss) represent timing differences. NOTE 8--LEGAL PROCEEDINGS In January 1998, certain plaintiffs (the "Plaintiffs") filed a class and derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the United States District Court for the Southern District of Florida (the "Court") on behalf of a proposed class of investors in 28 equipment leasing programs sponsored by EFG, including the Partnership (collectively, the "Nominal Defendants"), against EFG and a number of its affiliates, including the General Partner, as defendants (collectively, the "Defendants"). Certain of the Plaintiffs, on or about June 24, 1997, had filed an earlier derivative action, captioned LEONARD ROSENBLUM, ET AL. V. EQUIS FINANCIAL GROUP LIMITED PARTNERSHIP, ET AL., in the Superior Court of the Commonwealth of Massachusetts on behalf of the Nominal Defendants against the Defendants. Both actions are referred to herein collectively as the "Class Action Lawsuit". The Plaintiffs have asserted, among other things, claims against the Defendants on behalf of the Nominal Defendants for violations of the Securities Exchange Act of 1934, common law fraud, breach of contract, breach of fiduciary duty, and violations of the partnership or trust agreements that govern each of the Nominal Defendants. The Defendants have denied, and continue to deny, that any of them have committed or threatened to commit any violations of law or breached any fiduciary duties to the Plaintiffs or the Nominal Defendants. On July 16, 1998, counsel for the Defendants and the Plaintiffs executed a Stipulation of Settlement setting forth terms pursuant to which a settlement of the Class Action Lawsuit is intended to be achieved and which, among other things, is expected to reduce the burdens and expenses attendant to continuing litigation. The Stipulation of Settlement was based upon and superseded a Memorandum of Understanding between the parties dated March 9, 1998 which outlined the terms of a possible settlement. The Stipulation of Settlement was filed with the Court on July 23, 1998 and was preliminarily approved by the Court on August 20, 1998 when the Court issued its "Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing for Notice of, and Hearing on, the Proposed Settlement" (the "August 20 Order"). Prior to issuing a final order, the Court will hold a fairness hearing that will be open to all interested parties and permit any party to object to the settlement. The investors of the 25 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) Partnership and all other plaintiff class members in the Class Action Lawsuit will receive a Notice of Settlement and other information pertinent to the settlement of their claims that will be mailed to them in advance of the fairness hearing. Since first executing the Stipulation of Settlement, the Court has scheduled two fairness hearings, the first on December 11, 1998 and the second on March 19, 1999, each of which was postponed because of delays in finalizing certain information materials that are subject to regulatory review prior to being distributed to investors. On March 15, 1999, counsel for the Plaintiffs and the Defendants entered into an amended stipulation of settlement (the "Amended Stipulation") which was filed with the Court on March 15, 1999. The Amended Stipulation was preliminarily approved by the Court by its "Modified Order Preliminarily Approving Settlement, Conditionally Certifying Settlement Class and Providing For Notice of, and Hearing On, the Proposed Settlement" dated March 22, 1999 (the "March 22 Order"). The Amended Stipulation, among other things, divides the Class Action Lawsuit into two separate sub-classes that can be settled individually. This revision is expected to expedite the settlement of one sub-class by the middle of 1999. However, the second sub-class, involving the Partnership and 10 affiliated partnerships (collectively referred to as the "Exchange Partnerships"), is expected to remain pending for a longer period due, in part, to the complexity of the proposed settlement pertaining to this class. Specifically, the settlement of the second sub-class is premised on the consolidation of the Exchange Partnerships' net assets (the "Consolidation"), subject to certain conditions, into a single successor company ("Newco"). Under the proposed Consolidation, the partners of the Exchange Partnerships would receive both common stock in Newco and a cash distribution; and thereupon the Exchange Partnerships would be dissolved. In addition, EFG would contribute certain management contracts, operations personnel, and business opportunities to Newco and cancel its current management contracts with all of the Exchange Partnerships. Newco would operate as a finance company specializing in the acquisition, financing and servicing of equipment leases for its own account and for the account of others on a contract basis. Newco also would use its best efforts to list its shares on the Nasdaq National Market or another national exchange or market as soon after the Consolidation as Newco deems that market conditions and its business operations are suitable for listing its shares and Newco has satisfied all necessary regulatory and listing requirements. The potential benefits and risks of the Consolidation will be presented in a Solicitation Statement that will be mailed to all of the partners of the Exchange Partnerships as soon as the associated regulatory review process is completed and at least 60 days prior to the fairness hearing. A preliminary Solicitation Statement was filed with the Securities and Exchange Commission on August 24, 1998 and remains pending. Class members will be notified of the actual fairness hearing date when it is confirmed. One of the principal objectives of the Consolidation is to create a company that would have the potential to generate more value for the benefit of existing limited partners than other alternatives, including continuing the Partnership's customary business operations until all of its assets are disposed in the ordinary course of business. To facilitate the realization of this objective, the Amended Stipulation provides, among other things, that commencing March 22, 1999, the Exchange Partnerships may collectively invest up to 40% of the total aggregate net asset values of all of the Exchange Partnerships in any investment, including additional equipment and other business activities that the general partners of the Exchange Partnerships and EFG reasonably believe to be consistent with the anticipated business interests and objectives of Newco, subject to certain limitations, including that the Exchange Partnerships retain sufficient cash balances to pay their respective shares of the cash distribution referenced above in connection with the proposed Consolidation. 26 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) In the absence of the Court's authorization to enter into such activities, the Partnership's Restated Agreement, as amended, would not permit new investment activities without the approval of limited partners owning a majority of the Partnership's outstanding Units. Accordingly, to the extent that the Partnership invests in new equipment, the Manager (being EFG) will (i) defer, until the earlier of the effective date of the Consolidation or December 31, 1999, any acquisition fees resulting therefrom and (ii) limit its management fees on all such assets to 2% of rental income. In the event that the Consolidation is consummated, all such acquisition and management fees will be paid to Newco. To the extent that the Partnership invests in other business activities not consisting of equipment acquisitions, the Manager will forego any acquisition fees and management fees related to such investments. In the event that the Partnership has acquired new investments, but the Partnership does not participate in the Consolidation, Newco will acquire such new investments for an amount equal to the Partnership's net equity investment plus an annualized return thereon of 7.5%. Finally, in the event that the Partnership has acquired new investments and the Consolidation is not effected, the General Partner will use its best efforts to divest all such new investments in an orderly and timely fashion and the Manager will cancel or return to the Partnership any acquisition or management fees resulting from such new investments. The Amended Stipulation and previous Stipulation of Settlement prescribe certain conditions necessary to effecting final settlements, including providing the partners of the Exchange Partnerships with the opportunity to object to the participation of their partnership in the Consolidation. Assuming the proposed settlement is effected according to present terms, the Partnership's share of legal fees and expenses related to the Class Action Lawsuit is estimated to be approximately $115,600 all of which was accrued and expensed by the Partnership in 1998. In addition, the Partnership's share of fees and expenses related to the proposed Consolidation is estimated to be approximately $218,400, all of which was accrued and expensed by the Partnership in 1998. While the Court's August 20 Order enjoined certain class members, including all of the partners of the Partnership, from transferring, selling, assigning, giving, pledging, hypothecating, or otherwise disposing of any Units pending the Court's final determination of whether the settlement should be approved, the March 22 Order permits the partners to transfer Units to family members or as a result of the divorce, disability or death of the partner. No other transfers are permitted pending the Court's final determination of whether the settlement should be approved. The provision of the August 20 Order which enjoined the General Partners of the Exchange Partnerships from, among other things, recording any transfers not in accordance with the Court's order remains effective. There can be no assurance that settlement of either sub-class of the Class Action Lawsuit will receive final Court approval and be effected. There also can be no assurance that all or any of the Exchange Partnerships will participate in the Consolidation because if limited partners owning more than one-third of the outstanding Units of a partnership object to the Consolidation, then that partnership will be excluded from the Consolidation. The General Partner and its affiliates, in consultation with counsel, concur that there is a reasonable basis to believe that final settlements of each sub-class will be achieved. However, in the absence of final settlements approved by the Court, the Defendants intend to defend vigorously against the claims asserted in the Class Action Lawsuit. Neither the General Partner nor its affiliates can predict with any degree of certainty the cost of continuing litigation to the Partnership or the ultimate outcome. 27 AMERICAN INCOME FUND I-E, A MASSACHUSETTS LIMITED PARTNERSHIP NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) In addition to the foregoing, the Partnership is a party to other lawsuits that have arisen out of the conduct of its business, principally involving disputes or disagreements with lessees over lease terms and conditions. The following action had not been finally adjudicated at December 31, 1998: ACTION INVOLVING NATIONAL STEEL CORPORATION EFG, on behalf of the Partnership and certain affiliated investment programs (collectively, the "Plaintiffs"), filed an action in the Commonwealth of Massachusetts Superior Court, Department of the Trial Court in and for the County of Suffolk on July 27, 1995, for damages and declaratory relief against a lessee of the Partnership, National Steel Corporation ("National Steel"). The Complaint seeks reimbursement from National Steel of certain sales and/or use taxes paid to the State of Illinois in connection with equipment leased by National Steel from the Plaintiffs and other remedies provided under the Master Lease Agreement ("MLA"). On August 30, 1995, National Steel filed a Notice of Removal, which removed the case to United States District Court, District of Massachusetts. On September 7, 1995, National Steel filed its Answer to the Plaintiff's Complaint along with Affirmative Defenses and Counterclaims and sought declaratory relief, alleging breach of contract, implied covenant of good faith and fair dealing, and specific performance. The Plaintiffs filed an Answer to National Steel's Counterclaims on September 29, 1995. The parties discussed settlement with respect to this matter for some time; however, the negotiations were unsuccessful. The Plaintiffs filed an Amended and Supplemental Complaint alleging further default under the MLA and filed a motion for Summary Judgment on all claims and Counterclaims. The Court held a hearing on the Plaintiff's motion in December 1997 and later entered a decision dismissing certain of National Steel's Counterclaims, finding in favor of the Plaintiffs on certain issues and in favor of National Steel on other issues. In March 1999, the Plaintiffs obtained payment for certain of the disputed items and have resumed settlement discussions to resolve remaining issues. The General Partner does not believe that the resolution of the remaining claims will have a material adverse effect on the Partnership's financial position or results of operations. NOTE 9--SUBSEQUENT EVENT In January 1999, the Partnership sold its interest in a McDonnell Douglas MD-82 aircraft formerly leased to Alaska Airlines, Inc. for net sales proceeds of $1,262,860. The Partnership's interest in this aircraft had a cost and a net book value of $1,892,051 and $1,136,326 at December 31, 1998, respectively. 28 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, 1998, 1997 AND 1996 The Partnership classifies all rents from leasing equipment as lease revenue. Upon expiration of the primary lease terms, equipment may be sold, rented on a month-to-month basis or re-leased for a defined period under a new or extended lease agreement. The proceeds generated from selling or re-leasing the equipment, in addition to any month-to-month revenue, represent the total residual value realized for each item of equipment. Therefore, the financial statement gain or loss, which reflects the difference between the net book value of the equipment at the time of sale or disposition and the proceeds realized upon sale or disposition may not reflect the aggregate residual proceeds realized by the Partnership for such equipment. The following is a summary of cash excess associated with equipment dispositions occurring in the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996 ------------ ------------ ------------ Rents earned prior to disposal of equipment, net of interest charges.... $ 2,495,772 $ 3,493,529 $ 1,391,622 Sale proceeds realized upon disposition of equipment.................... 316,524 896,006 304,990 ------------ ------------ ------------ Total cash generated from rents and equipment sale proceeds............. 2,812,296 4,389,535 1,696,612 Original acquisition cost of equipment disposed......................... 2,214,718 3,181,390 1,261,267 ------------ ------------ ------------ Excess of total cash generated to cost of equipment disposed............ $ 597,578 $ 1,208,145 $ 435,345 ------------ ------------ ------------ ------------ ------------ ------------
29 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, 1998
SALES AND OPERATIONS REFINANCINGS TOTAL ----------- ------------ ----------- Net income.............................................................. $ (70,620) $ 208,143 $ 137,523 Add: Depreciation............................................................ 1,438,667 -- 1,438,667 Management fees....................................................... 110,415 -- 110,415 Write-down of investment securities--affiliate........................ 377,849 -- 377,849 Book value of disposed equipment...................................... -- 108,381 108,381 Less: Principal reduction of notes payable.................................. (1,080,035) -- (1,080,035) ----------- ------------ ----------- Cash from operations, sales and refinancings.......................... 776,276 316,524 1,092,800 Less: Management fees....................................................... (110,415) -- (110,415) ----------- ------------ ----------- Distributable cash from operations, sales and refinancings............ 665,861 316,524 982,385 Other sources and uses of cash: Cash at beginning of year............................................. 3,530,868 -- 3,530,868 Net change in receivables and accruals................................ 896,805 -- 896,805 Less: Cash distributions paid............................................... (625,472) (316,524) (941,996) ----------- ------------ ----------- Cash at end of year................................................... $ 4,468,062 $ -- $ 4,468,062 ----------- ------------ ----------- ----------- ------------ -----------
30 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 DECEMBER 31, 1998 For the year ended December 31, 1998, the Partnership reimbursed the General Partner and its Affiliates for the following costs: Operating expenses................................................ $ 263,432
31 EX-23 3 EX-23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of American Income Fund I-E, a Massachusetts Limited Partnership, of our report dated March 10, 1999, included in the 1998 Annual Report to the Partners of American Income Fund I-E, a Massachusetts Limited Partnership. ERNST & YOUNG LLP Boston, Massachusetts March 10, 1999 EX-99.D 4 EX-99.D Original AIRCRAFT LEASE AGREEMENT [49587] between OLIVIA CORP., LESSOR and RENO AIR, INC., LESSEE dated as of November 16, 1995 AIRCRAFT: McDonnell Douglas MD-87 MANUFACTURER'S SERIAL NO.: 49587 FAA REGISTRATION NO.: N753RA THE SINGLE EXECUTED ORIGINAL OF THIS LEASE, TOGETHER WITH ANY ORIGINAL LEASE SUPPLEMENT DELIVERED PURSUANT HERETO, EACH MARKED "ORIGINAL," SHALL BE THE "ORIGINAL" AND ALL OTHER COUNTERPARTS OF THIS LEASE AND ANY LEASE SUPPLEMENT SHALL BE MARKED "DUPLICATE ORIGINAL." TO THE EXTENT THAT THIS LEASE AND ANY LEASE SUPPLEMENT CONSTITUTES CHATTEL PAPER, AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION, NO SECURITY INTEREST MAY BE CREATED THROUGH TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE "ORIGINAL." TABLE OF CONTENTS SECTION 1 DEFINITIONS ................................................... -1- SECTION 2 LEASE OF AIRCRAFT ............................................ -13- SECTION 3 DELIVERY AND ACCEPTANCE; TERM ................................ -13- SECTION 4 LESSEE'S CONDITIONS PRECEDENT ................................ -15- SECTION 5 RENT, SECURITY DEPOSIT AND MAINTENANCE RESERVES............... -17- SECTION 6 REPRESENTATIONS AND WARRANTIES ............................... -20- SECTION 7 POSSESSION, USE, MAINTENANCE, TITLE AND REGISTRATION ....................................... -24- SECTION 8 REPLACEMENT OF PARTS: ALTERATIONS, MODIFICATIONS AND ADDITIONS .................................. -31- SECTION 9 INSPECTION; FINANCIAL INFORMATION ............................ -35- SECTION 10 COVENANTS OF LESSEE .......................................... -36- SECTION 11 TAXES ........................................................ -38- SECTION 12 EVENT OF LOSS ................................................ -40- SECTION 13 INSURANCE .................................................... -43- SECTION 14 INDEMNIFICATION .............................................. -47- SECTION 15 LIENS ........................................................ -49- SECTION 16 PERFECTION OF TITLE AND FURTHER ASSURANCES ................... -50- SECTION 17 REDELIVERY OF AIRCRAFT AND RECORDS ........................... -51- -i- SECTION 18 EVENTS OF DEFAULT ............................................ -54- SECTION 19 REMEDIES ..................................................... -57- SECTION 20 ALIENATION ................................................... -59- SECTION 21 MISCELLANEOUS ................................................ -60- SECTION 22 SUBLEASE; ASSIGNMENT; CRAF PROGRAM ........................... -63- SECTION 23 RIGHT OF FIRST REFUSAL ....................................... -66- SECTION 24 ENTIRE AGREEMENT ............................................. -66- SECTION 25 CONFIDENTIALITY .............................................. -67- EXHIBIT "A" AIRCRAFT SPECIFICATIONS ...................................... -69- EXHIBIT "B" AIRCRAFT DOCUMENTATION ....................................... -70- EXHIBIT "C" CERTIFICATE OF ACCEPTANCE .................................... -71- EXHIBIT "D" LEASE SUPPLEMENT [49587] NO. 1 ............................... -73- EXHIBIT "E" APPOINTMENT AS ATTORNEY-IN-FACT .............................. -78- EXHIBIT "F" REDELIVERY CERTIFICATE ....................................... -80- EXHIBIT "G" DELIVERY CONDITIONS .......................................... -82- EXHIBIT "H" LEASE IDENTIFICATION ......................................... -84- EXHIBIT "I" REDELIVERY CONDITIONS ........................................ -85- EXHIBIT "J" CREDIT STANDARDS ............................................. -90- EXHIBIT "K" ASSIGNMENT OF LEASE AND CONSENT .............................. -91- -ii- AIRCRAFT LEASE AGREEMENT [49587] THIS AIRCRAFT LEASE AGREEMENT [49587], made as of this 16th day of November, 1995 (the "Lease"), by and between OLIVIA CORP., a corporation formed under the laws of Delaware ("LESSOR"), and RENO AIR, INC., a corporation formed under the laws of Nevada ("LESSEE"). WHEREAS, LESSEE desires to lease the Aircraft (as hereinafter defined) from LESSOR and LESSOR is willing to lease the Aircraft to LESSEE, in accordance with and subject to the terms and conditions of this Lease. NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by the parties hereto, LESSOR and LESSEE agree as follows: SECTION I DEFINITIONS The following terms shall have the following respective meanings for all purposes of this Lease and shall be equally applicable to both the singular and the plural forms of the terms herein defined. Any agreement referred to below shall mean such agreement, as amended, supplemented and modified from time to time: "Act" shall mean Subtitle VII of Title 49 of the United States Code and the rules and regulations promulgated thereunder. "Affiliate" shall mean, with respect to any Person, any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person. "Agreed Value" shall mean Fourteen Million Dollars ($14,000,000.00) with respect to the Aircraft. "Air Authority" shall mean, as applicable, the DOT, the FAA and/or the Administrator of the FAA, or any predecessor or successor thereto. "Aircraft" shall mean the Airframe, together with the two (2) Engines (or any Replacement Engine substituted for either of such Engines hereunder), all as more particularly described on Exhibit "A" hereto, whether or not any of such initial or Replacement Engines may, from time to time, be installed on such Airframe or may be installed on any other airframe or any other aircraft. "Aircraft Documents" shall mean the items identified in Exhibit "B" hereto. "Airframe" means (i) the McDonnell Douglas model MD-87 aircraft (excluding Engines or engines from time to time installed thereon) bearing U.S. registration no. N753RA and manufacturer's serial no. 49587, and (ii) any and all Parts, so long as the same shall be incorporated in such Airframe, and any and all Parts removed from such Airframe, so long as title to such Parts shall remain vested in LESSOR in accordance with the terms of Section 8(A). "Airframe Reserve" shall have the meaning set forth in the Lease Supplement. "Approved Insure " shall mean any reputable insurance company or insurance broker, approved by LESSOR, for the purpose of providing or confirming the existence of any insurance required under this Lease. "APU" means (i) the auxiliary power unit listed in the Lease Supplement, (ii) any and all Parts, so long as such Parts are incorporated in, installed on or attached to such auxiliary power unit or so long as title to such Parts is vested in LESSOR in accordance with the terms of Section 8(A) after removal from such auxiliary power unit, and (iii) insofar as the same belong to LESSOR, all substitutions, replacements or renewals from time to time made in or to such auxiliary power unit or to any of the Parts referred to in clause (ii) above, as required or permitted under this Lease. "Authorized Maintenance Performer" shall mean any FAA authorized repair station or any authorized FAA Part 121 air carrier having the authority to perform maintenance and repairs to aircraft of the same type as the Aircraft. The identity of the Authorized Maintenance Performer and such other information about such party shall be disclosed by LESSEE to LESSOR upon LESSOR's reasonable request. -2- "Basic Rent" shall mean the amount payable for the period commencing on the First Basic Rent Date through the remaining period of the Term in accordance with Section 5(A)(2) hereof and the Lease Supplement. "Business Day" shall mean any day other than a Saturday, Sunday or day on which banks are required or authorized to close in the States of New York or Nevada. "Certificate of Acceptance" shall mean the written certificate of LESSEE, in substantially the form of Exhibit "C" hereto, pursuant to which LESSEE accepts delivery of the Aircraft from LESSOR and confirms that the Aircraft is in the condition required by this Lease. "Code" shall mean the United States Internal Revenue Code of 1986, as amended from time to time. "Compensation" shall have the meaning set forth in Section 12(D) hereof. "Covered Maintenance" shall have the meaning set forth in Section 7(D)(iii) hereof. "CRAF Program" shall mean the Civil Reserve Air Fleet Program authorized under 10 U.S.C. ss. 9511 et seq. "Credit Standards" shall have the meaning set forth on Exhibit "J" hereto. "Cycle" shall mean one takeoff and landing of the Aircraft, Airframe or, with respect to any Engine not installed on the Airframe, of the airframe on which such Engine is installed. "Default" means any event which, upon the giving of notice or the lapse of time would constitute an Event of Default. "Delivery Location" shall mean Will Rogers Airport, Oklahoma City, Oklahoma or such other location in the continental United States as may be mutually agreed to by the parties. "Dollars" or "$" shall mean the legal currency of the United States of America. -3- "DOT" shall mean the United States Department of Transportation or any governmental person, agency or authority succeeding to the functions of such Department of Transportation. "Effective Date" shall mean the date on which LESSEE signs and delivers to LESSOR Lease Supplement No. 1 to this Lease. "Engine" means (i) each of the two (2) Pratt & Whitney model JT8D-217C engines bearing manufacturer's serial numbers and otherwise as described in the Certificate of Acceptance and Lease Supplement No. 1, whether or not from time to time installed on the Airframe or installed on any other airframe or any other aircraft, and (ii) any Replacement Engine, whether or not from time to time installed on the Airframe or any other airframe or any other aircraft, together, in each case, with any and all Parts incorporated in such Engine and any and all Parts removed from such Engine, so long as title to such Parts shall remain vested in LESSOR in accordance with the terms of Section 8(A). At such time as a Replacement Engine shall be substituted hereunder and the Engine for which the substitution is made shall be released, such Replacement Engine shall constitute an Engine hereunder and such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means, as of any date of determination, all Engines leased hereunder. "Engine Manufacture" means United Technologies Corporation, Pratt & Whitney Group, Commercial Products Division, a Delaware corporation, in its capacity as manufacturer of the Engines, and its successors and assigns. "Engine Reserves" shall have the meaning set forth in the Lease Supplement. "Equipment Change" shall have the meaning set forth in Section 8(C) hereof. "Event of Default" shall have the meaning set forth in Section 18 hereof. "Event of Loss" shall mean, with respect to the Aircraft, Airframe or any Engine, any of the following events with respect to such property: (i) loss of such property due to destruction, damage beyond repair or rendition of such property unfit for normal use by LESSEE by any cause whatsoever, or any damage to such property which results in an insurance settlement with respect to such property on the basis of a total loss or a constructive total loss or a compromised total loss; (ii) the disappearance, loss, theft, -4- hijacking, condemnation, confiscation or seizure of, or requisition of use or title of, such property for a period in excess of sixty (60) days, other than a requisition for use by the U.S. Government, provided that such requisition of use does not extend beyond the end of the Term; (iii) any divestiture of title to an Engine treated as an Event of Loss pursuant to Section 12(B) or any other provision hereof; or (iv) the operation or location of such property, while under requisition for use by the U.S. Government, in any area excluded from coverage by any insurance policy in effect with respect thereto required by the terms of Section 13, if LESSEE shall be unable to obtain an indemnity in lieu thereof from the U.S. Government on the terms provided in Section 13. An Event of Loss with respect to the Aircraft shall be deemed to have occurred if an Event of Loss occurs with respect to the Airframe, as set forth in Lease Supplement No. 1. "Expiration Date" shall mean the originally scheduled last day of the Term, as set forth in Lease Supplement No. 1. "FAA" shall mean the Federal Aviation Administration of the DOT or any governmental person, agency or other authority succeeding to the functions of the Federal Aviation Administration. "FAR" shall mean the United States Federal Aviation Regulations currently in effect or as hereafter amended or modified. "First Basic Rent Date" shall mean January 15, 1996. "First Interim Rent Date" shall mean the earlier of (i) the date the Aircraft is placed in revenue service by the Lessee and (ii) fourteen (14) days from the Effective Date. "Flight Hour" shall mean each hour or fraction thereof elapsed from the moment the wheels of the Aircraft leave the ground through the moment the wheels of the Aircraft, Airframe or, with respect to any Engine not installed on the Airframe, of the airframe on which such Engine is installed, touch down upon the ground. "Governmental Entity" shall mean and include: (i) any national government and any political subdivision thereof or local jurisdiction therein; (ii) any board, commission, department, division, organ, instrumentality, court or agency of the foregoing, however constituted; and (iii) any association, organization or institution of which any of the foregoing is a member, or to whose jurisdiction any of the foregoing is subject, or in whose activities any of the foregoing is a participant, but only to the extent -5- that any such association, organization or institution has jurisdiction over the Aircraft or its operations. "Hourly Rent" shall mean Five Hundred ($500.00) Dollars for each Flight Hour or fraction thereof that the Aircraft is operated for any period in which Hourly Rent is required to be calculated hereunder. "Indebtedness" shall mean, with respect to any Person, all obligations of such Person for the payment or repayment of money, whether present or future, actual or contingent. "Indemnitee" means LESSOR, Mortgagee, their respective affiliated entities (and the successors, assigns, directors, officers, shareholders, employees and agents of such affiliated entities), successors and permitted assigns and their respective directors, officers, shareholders, employees and agents. "Interim Period" shall mean the period commencing on the First Interim Rent Date through and including January 14, 1996. "Interim Rent" shall mean the amount payable by LESSEE to LESSOR pursuant to Section 5(A)(1) hereof. "Landing Gear" means (i) each of the three landing gear listed in the Lease Supplement, (ii) any and all Parts, so long as such Parts are incorporated in, installed on, attached to or appurtenant to any such landing gear assemblies or so long as title to such Parts is vested in LESSOR in accordance with the terms of Section 8(A) after removal from any such landing gear, and (iii) all substitutions, replacements or renewals from time to time made in or to any such landing gear or to any of the Parts referred to in clause (ii) above as required or permitted under this Lease. "Landing Gear Reserves" shall have the meaning set forth in the Lease Supplement. "Law" shall mean and include: (i) any statute, decree, constitution, regulation, order or other directive of any Governmental Entity; (ii) any treaty, pact, compact or other agreement to which any Governmental Entity is a signatory or party; (iii) any judicial or administrative interpretation or application of any of the foregoing; and (iv) any amendment or revision of any of the foregoing. -6- "Lease," "this Lease," "this Agreement," "hereby," "herein," "hereof," "hereunder" or other like words shall mean this Aircraft Lease Agreement, as the same may be supplemented or amended, in writing, from time to time. "Lease Assignment" shall mean the Assignment of Lease and Consent between Lessor, Lessee and Mortgagee, substantially in the form of Exhibit "K" hereto. "Lease Documents" shall mean this Lease, each Lease Supplement, the Certificate of Acceptance, the Power of Attorney and the Lease Assignment. "Lease Supplement" means a supplement to this Lease, substantially in the form attached as Exhibit "D" hereto, subjecting the property described therein to this Lease. "LESSEE's Address" shall mean 220 Edison Way, Reno, Nevada 89502, Attention: Paul H. Tate, Vice President Finance, Treasurer and Chief Financial Officer; Telefax No.: +1-702-829-5754. "LESSOR's Address" shall mean c/o Interadvice Anstalt, Landstrasse 25, FL-9490, Vaduz, Liechtenstein, Attention: Georg Kieber; Telefax No.: +41-75-232-0542. "LESSOR's Liens" means the Liens of any Person claiming by, through, against or under LESSOR, which arise as a result of (i) claims by any such Person not related to, or expressly permitted by, the Lease, (ii) any act or omission of any Person claiming by, through, against or under LESSOR which is not expressly permitted by the Lease, (iii) taxes or expenses imposed against any such Person (or the consolidated group of taxpayers of which it is a member) for which LESSEE is not obligated to indemnify pursuant to Section 11, or (iv) claims against any such Person arising out of any transfer by such Person of its interest in the Aircraft, other than a transfer resulting from LESSOR's exercise of remedies, pursuant to Section 19, while an Event of Default has occurred and is continuing. "LIBID" means LIBOR minus 1/4%. "LIBOR" means the rate per annum at which deposits in Dollars are being offered to prime banks in the London interbank market at 11:00 a.m. in London by the British Bankers' Association designated banks which appears on the Telerate page 3750 on the second London Banking Day prior to any Rent Date for the period of one month (or such other page as may replace the Telerate page 3750 on that system for the purpose -7- of displaying London Interbank Offered Rates of leading reference banks). If the LESSOR shall be unable to ascertain LIBOR when LIBOR is required to be calculated hereunder, then LIBOR shall equal the rate per annum equal to Lender's actual cost of funds in Dollars for the time remaining during the Term measured from such Rent Date. "Lien" shall mean any mortgage, pledge, lien, encumbrance, security interest or other claim affecting the title to, or any interest in, property. "Loan Agreement" means the Secured Loan Agreement dated as of November __, 1995 between Lessor and Mortgagee pursuant to which the Mortgagee has provided financing for the Aircraft. "London Banking Day" shall mean any day (excluding a Saturday, a Sunday or a day on which banks are required to close in London, England) on which deposits in Dollars are being offered to prime banks in the London interbank market by the British Bankers' Association designated banks. "Maintenance Program" shall mean LESSEE's McDonnell Douglas MD-80 FAR Part 121 FAA-approved maintenance program encompassing scheduled maintenance, condition-monitored maintenance and on-condition maintenance of airframe, engines and components of the Aircraft, including, but not limited to, servicing, testing, preventive maintenance, repairs, structural inspections, system checks, overhauls, approved modifications, mandatory service bulletins, mandatory engineering orders, airworthiness directives, corrosion control inspections and treatments. "Maintenance Reserve Date" means the 10th day after each Rent Date (other than the First Interim Rent Date) and the date of the Return Occasion. "Manufacturer" shall mean McDonnell Douglas Corporation, a Maryland corporation, in its capacity as manufacturer of the Airframe, and its successors and assigns. "Minimum Basic Rent" shall have the meaning set forth in the Lease Supplement. "Minimum Liability Coverage" shall mean Three Hundred Fifty Million ($350,000,000.00) Dollars per occurrence. -8- "Mortgage" shall mean that certain Aircraft Chattel Mortgage and Security Agreement, dated as of the date of this Lease, made by LESSOR and delivered to Mortgagee. "Mortgagee" shall mean Credit Lyonnais/PK AIRFINANCE, New York Branch ("AIRFINANCE"), a corporation formed under the laws of the Grand Duchy of Luxembourg, or any transferee of AIRFINANCE in accordance with the terms of the Loan Agreement. "Officer's Certificate" shall mean a certificate signed by the chairman, the president, any vice president, the treasurer, any assistant treasurer, the secretary or any assistant secretary of the Person providing such certificate. "Overdue Rate" shall mean the rate of interest announced or published from time to time by Citibank, N.A., New York, New York as its base or prime lending rate plus three percent (3%) per annum. "Parts" means all appliances, parts, instruments, avionics, appurtenances, accessories, furnishings and other equipment or components, of whatever nature (other than complete Engines or Engines and other than removable Parts and any items owned by LESSEE or leased by LESSEE from a third party, other than LESSOR, in accordance with Section 8(C)), which are, from time to time, incorporated in the Airframe or any Engine, or so long as title to such Parts shall remain vested in LESSOR, in accordance with Section 8(A) hereof, after removal from the Airframe or any Engine. "Passenger Convenience Equipment" shall mean components or systems installed on, carried in or affixed to the Aircraft which are used to provide individual air-to-ground telephone communications for hire or electronic entertainment to passengers aboard the Aircraft and which were not originally incorporated or installed in or attached to the Aircraft at the time of delivery under this Lease. "Permitted Liens" shall mean, with respect to the Aircraft, the Airframe or any Engine (a) the respective rights of the parties under this Lease and each Lease Supplement; (b) LESSOR's Liens; (c) (i) liens for taxes, assessments or other governmental charges which are not yet due, or (ii) liens for taxes, assessments or other governmental charges which are due and are being contested in good faith by appropriate proceedings, so long as such proceedings do not involve any material danger of the sale, forfeiture or loss of the Aircraft, the Airframe or any Engine and so long as such liens, assessment or governmental charges do not exceed $500,000.00 in the aggregate; -9- provided, however, that in the event such liens, assessments or governmental charges exceed $500,000.00 in the aggregate, same shall constitute a Permitted Lien, provided that LESSEE posts a bond issued by a reputable surety or bonding company in an amount equal to at least one and one-half (1-1/2) times the amount of the lien, assessment or governmental charge claimed (including all penalties and interest thereon) or, alternatively, provides LESSOR with security in an amount and form reasonably acceptable to LESSOR; (d) (i) materialmen's, mechanic's, worker's, repairer's, employee's or other like liens for amounts the payment of which is not yet delinquent for more than thirty (30) days, or (ii) materialmen's, mechanic's, worker's, repairer's, employee's or other like liens which are being contested in good faith by appropriate proceedings, so long as such proceedings do not involve any material danger of the sale, forfeiture or loss of the Aircraft, the Airframe or any Engine and so long as such liens do not exceed $500,000.00 in the aggregate; provided, however, that in the event such liens exceed $500,000.00 in the aggregate, same shall constitute a Permitted Lien, provided that LESSEE posts a bond issued by a reputable surety or bonding company in an amount equal to at least one and one-half (1-1/2) times the amount of the lien claimed (including all penalties and interest thereon) or, alternatively, provides LESSOR with security in an amount and form reasonably acceptable to LESSOR; (e) liens arising out of any judgment or award, unless the judgment secured shall not, within thirty (30) days after entry thereof, have been discharged or vacated or execution thereof stayed pending appeal or shall not have been discharged, vacated or reversed within thirty (30) days after the execution of such stay, and provided such lien presents no material danger of the sale, forfeiture or loss of the Aircraft, the Airframe or any Engine or of LESSOR's interest therein and so long as such liens do not exceed $500,000.00 in the aggregate; provided, however, that in the event such liens exceed $500,000.00 in the aggregate, same shall constitute a Permitted Lien, provided that LESSEE posts a bond issued by a reputable surety or bonding company in an amount equal to at least one and one-half (1-1/2) times the amount of the lien claimed (including all penalties and interest thereon) or, alternatively, provides LESSOR with security in an amount and form reasonably acceptable to LESSOR; or (f) the Lien, created by the Mortgage and Lease Assignment. "Person" shall mean and include any individual, corporation, partnership, firm, joint venture, trust, unincorporated organization, association, Governmental Entity, or any organization or association of which any of the foregoing is a member or participant. "Power of Attorney" shall mean that certain power of attorney from LESSEE to LESSOR and Mortgagee, to be executed in the form attached hereto as Exhibit "E", pursuant to which LESSEE designates each of LESSOR and Mortgagee as -10- attorney-in-fact, upon the occurrence and continuation of an Event of Default, to do all things which LESSEE could do under this Lease in the event LESSEE fails to fulfill such obligations hereunder, including, but not limited to, executing and delivering such releases or terminations of this Lease upon the occurrence and continuation of an Event of Default or at the Expiration Date, as LESSOR or Mortgagee shall deem necessary or desirable. "Redelivery Certificate" shall mean the written certificate of LESSOR, in substantially the form of Exhibit "F" hereto, pursuant to which LESSOR accepts redelivery of the Aircraft from LESSEE and confirms that the Aircraft is in the condition required by this Lease on the Redelivery Occasion. "Redelivery Location" shall mean Reno/Tahoe International Airport, Reno, Nevada or such other location in the continental United States as may be mutually agreed to by the parties. "Redelivery Occasion" shall have the meaning set forth in Section 17(A) hereof. "Related Aircraft" shall mean any or all of the aircraft leased by LESSOR to LESSEE pursuant to the Related Lease Agreement. "Related Lease Agreement" means the Aircraft Lease Agreement [49641] to be entered into between Boxen Corp. and LESSEE with respect to the leasing by Boxen Corp. to LESSEE of one (1) McDonnell Douglas MD-87 aircraft bearing manufacturer's serial number 49641, as such aircraft is more particularly described in such agreement and as such agreement may, from time to time, be supplemented or amended pursuant to a written agreement entered into between Boxen Corp. and LESSEE. "Related Lease Default" shall mean a "Default," as defined in the Related Lease Agreement. "Related Lease Event of Default" shall mean an "Event of Default," as defined in the Related Lease Agreement, which shall occur and be continuing in accordance with the terms of such Related Lease Agreement. "Related Security Deposit" shall mean the "Security Deposit" payable by LESSEE to Boxen Corp. in the Related Lease Agreement. -11- "Rent" shall mean Interim Rent, Basic Rent and Supplemental Rent. "Rent Adjustment" shall have the meaning set forth on the Lease Supplement. "Rent Date" shall mean each date on which a payment of Interim Rent and Basic Rent, as the case may be, is due. The first Rent Date shall be the First Interim Rent Date. If a Rent Date shall in any month not be a Business Day, then the Rent Date shall be the immediately following Business Day. "Rent Period" means any period commencing on any given Rent Date and ending on the day immediately preceding the next succeeding Rent Date, provided, however, that the last Rent Period shall end on the Expiration Date. "Second Interim Rent Date" shall have the meaning set forth in Section 5(A)(1)(i) hereof. "Security Deposit" shall mean the amount set forth in the Lease Supplement. "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Interim Rent and Basic Rent) which LESSEE assumes or agrees to pay to LESSOR or any other Person hereunder, including, without limitation, all amounts required to be paid by LESSEE under its indemnification pursuant to Section 14 hereof. "Taxes" shall mean any and all sales, withholding, use, excise, personal property, ad valorem, value added, stamp, interest equalization or other taxes levied upon LESSOR's or LESSEE's gross levies, customs or other duties, or other charges of any nature, together with any penalties, fines or interest thereon, imposed, levied or assessed by, or otherwise payable to, U.S. Tax Authorities. "Term" means the period commencing on the Effective Date and expiring on the Expiration Date unless shortened in accordance with the provisions of this Lease. "U.S. Air Carrier" shall mean any air carrier operating under a certificate of convenience and necessity issued by the Air Authority or, in the event such certification is no longer issued to air carriers, an air carrier permitted to engage in air transportation of passengers to, from or within the United States. -12- "U.S. Government" shall mean and include: (i) the Federal Government of the United States of America and any political subdivision thereof or local jurisdiction therein; (ii) any board, commission, department, division, organ, instrumentality, court or agency of the foregoing, however constituted; and (iii) any association, organization or institution of which any of the foregoing is a member, or to whose jurisdiction any of the foregoing is subject, or in whose activities any of the foregoing is a participant, but only to the extent that any such association, organization or institution has jurisdiction over the Aircraft or its operations. "U.S. Tax Authorities" shall mean and include: (i) the Internal Revenue Service and any other taxing authority of the Federal Government of the United States of America; and (ii) any taxing authority of any state, county, city or local municipality of the United States of America. "Wet Lease" shall mean any arrangement whereby LESSEE agrees to furnish the Aircraft, Airframe or any Engine to a third party, pursuant to which such Aircraft, Airframe or Engine (i) shall remain in the exclusive possession and operational control of LESSEE's personnel, and (ii) shall be maintained exclusively by LESSEE or an Authorized Maintenance Performer in accordance with the maintenance provisions of this Lease. SECTION 2 LEASE OF AIRCRAFT LESSOR hereby agrees to lease the Aircraft to LESSEE, and LESSEE hereby agrees to lease the Aircraft from LESSOR, pursuant to the provisions of this Lease. SECTION 3 DELIVERY AND ACCEPTANCE; TERM (A) Date of Delivery. Subject to the Aircraft conforming to the conditions set forth in Exhibit "G", LESSEE shall take delivery of the Aircraft and Aircraft Documents on the Effective Date. Lessor shall deliver the Aircraft to Lessee on no later than November 20, 1995. In the event LESSOR is unable to deliver the Aircraft -13- to LESSEE on or before November 20, 1995, and no other provision of this Lease applies which would either excuse the delay or which would provide LESSOR with any additional time to cause delivery of the Aircraft, then, in such event, LESSEE may terminate this Lease without any liability or obligation to the other hereunder. (B) Place of Delivery and Acceptance. The Aircraft and Aircraft Documents shall be delivered to and accepted by LESSEE at the Delivery Location, unless LESSOR and LESSEE otherwise agree in writing upon another location subsequent to the execution of this Lease. The parties agree that the Delivery Location will be selected to minimize the possibility of taxes to be assessed against LESSEE and/or LESSOR. (C) Casualty to Aircraft Preceding Delivery. (i) In the event that any Event of Loss occurs with respect to the Aircraft prior to the Effective Date hereof, this Lease shall terminate and neither the LESSOR nor LESSEE shall have any liability or obligation to the other hereunder. (ii) In the event that on the proposed Effective Date the Aircraft fails to conform to the conditions set forth in Exhibit "G", LESSOR shall, within thirty (30) days from the date of the proposed Effective Date, take such reasonable action as shall be necessary to repair the Aircraft so that it conforms to the conditions set forth in Exhibit "G". If at the end of such thirty (30) day period of time the Aircraft fails to conform to the conditions set forth in Exhibit "G", notwithstanding LESSOR's reasonable actions pursuant to the foregoing sentence, either LESSOR or LESSEE shall have the right to terminate this Lease without any liability or obligation to the other hereunder. (D) Acceptance of Aircraft. The Aircraft to be leased hereunder shall be delivered to LESSEE in its "AS IS," "WHERE IS" condition, SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND REPRESENTATION AS SET FORTH IN SUBSECTION 6(A) HEREOF, except that the Aircraft shall comply with the conditions set forth on Exhibit "G". LESSEE shall indicate and confirm its acceptance of the Aircraft by delivery to LESSOR of a (i) Lease Supplement, and (ii) Certificate of Acceptance, dated on such Effective Date. -14- (E) Term of Lease. The term of this Lease, as to the Aircraft, shall be for the Term. (F) No LESSOR Liability. LESSOR will not be liable for any loss or expense, or any loss of profit, arising from any delay or failure in delivery to LESSEE unless such delay or failure arises as a direct consequence of the willful misconduct of LESSOR, and in no event will LESSOR be liable for any delay or failure which is caused by any breach or delay on the part of Manufacturer. SECTION 4 LESSEE'S CONDITIONS PRECEDENT LESSOR's obligation to lease the Aircraft hereunder to LESSEE shall be subject to the receipt by LESSOR, on or before the Effective Date (or such other date as provided for herein), of the following from LESSEE, all of which shall be satisfactory in form and substance to LESSOR: (1) Certified copy of a resolution of LESSEE's Board of Directors, authorizing the entering into and performance of this Lease together with an incumbency certificate as to the person or persons authorized to execute and deliver this Lease and the other Lease Documents on behalf of LESSEE; (2) LESSEE's articles or certificate of incorporation and by-laws certified by an officer of LESSEE; (3) A favorable opinion of counsel of LESSEE, addressed to LESSOR, dated the Effective Date, as to the matters set forth in clauses (1) through (5) and (7) of Subsection 6(D) hereof, provided however, the opinion shall be to the best of such counsel's knowledge as to primarily factual matters; (4) A favorable opinion of Daugherty, Fowler & Peregrin, special FAA counsel, addressed to LESSOR, opining on such matters as LESSOR shall reasonably require, including, but not limited to, that under the Act: (i) the Aircraft is eligible for registration in the name of LESSOR; (ii) that this Lease and the Lease Assignment are eligible for recording; and (iii) that this Lease and the Lease Assignment have been filed for recording; -15- (5) An Officer's Certificate of LESSEE, dated as of the Effective Date, stating that to the best of such officer's knowledge after due inquiry and investigation: (a) The representations and warranties contained in Subsection 6(D) hereof are true and accurate on and as of such date as though made on and at such time (except to the extent that such representations and warranties relate solely to an earlier date); and (b) No event has occurred and is continuing, or would result from the leasing of the Aircraft, which constitutes an Event of Default or would constitute an Event of Default with the giving of notice or the passage of time or both; (6) Not less than three (3) Business Days prior to the Effective Date, certificates signed by an Approved Insurer(s) as to due compliance with the insurance provisions of Section 13 hereof with respect to the Aircraft; (7) The Power of Attorney, fully signed, notarized and dated on the Effective Date, together with an original certified copy of the resolutions of LESSEE's Board of Directors (which resolutions shall be delivered on or before December 31, 1995), pursuant to which the entering into of the Power of Attorney by the holder thereof was authorized. LESSEE shall, on those dates which shall be the second, fourth, sixth and seventh anniversary dates of the Effective Date, deliver to LESSOR a currently dated replacement Power of Attorney and original certified copy of resolutions of LESSEE's Board of Directors, in form and substance satisfactory to LESSOR, whereupon LESSOR shall return to LESSEE any Powers of Attorney previously delivered by LESSEE to LESSOR; (8) Such UCC-1 financing statements as LESSOR shall reasonably request; (9) The Lease Assignment, as executed by LESSEE; and (10) Such other documents which LESSOR or its counsel may reasonably require. -16- SECTION 5 RENT, SECURITY DEPOSIT AND MAINTENANCE RESERVES (A) Rent. LESSEE covenants and agrees to pay to LESSOR, or to any of LESSOR's assigns designated to LESSEE in writing by LESSOR, the Rent. Time is of the essence with respect to each payment of Rent to be paid by LESSEE to LESSOR hereunder. (1) Interim Rent. (i) Interim Rent shall equal the Hourly Rent for each Rent Period during the Interim Period. Notwithstanding the foregoing, in no event shall the Interim Rent be less than the Minimum Basic Rent other than as set forth in paragraph (ii) of this Section. (ii) Minimum Basic Rent shall be paid by LESSEE to LESSOR in respect of the Aircraft, in advance, on the First Interim Rent Date. Thereafter, on the corresponding date in the immediately following month (the "Second Interim Rent Date"), LESSEE shall pay to LESSOR a pro rata portion of the Minimum Basic Rent based on the number of days remaining in the period from the Second Interim Rent Date through (but not including) the First Basic Rent Date. (iii) In addition to Minimum Basic Rent, LESSEE shall pay to LESSOR the following: (a) no later than five days after the Second Interim Rent Date, an amount equal to the difference, if positive, between (x) the Minimum Basic Rent and (y) Hourly Rent calculated for the period from the First Interim Rent Date through (but excluding) the Second Interim Rent Date; and (b) no later than five days after the First Basic Rent Date, an amount equal to the positive difference, if any, between: (x) the pro rated Minimum Basic Rent paid for the previous Rent Period and (y) Hourly Rent calculated for the period from the Second Interim Rent Date through (but excluding) the First Basic Rent Date. -17- (2) Basic Rent; Rent Adjustment. (i) Basic Rent shall be paid by LESSEE to LESSOR in respect of the Aircraft, in advance, commencing on the First Basic Rent Date and continuing on the corresponding date in each consecutive month during the remainder of the Term. Basic Rent shall be payable in the amount set forth on the Lease Supplement, subject to the Rent Adjustment as set forth therein. (3) Supplemental Rent. LESSEE agrees to pay to LESSOR, or to whomsoever shall be entitled thereto, any and all Supplemental Rent promptly as the same shall become due and owing, and in the event of any failure on the part of LESSEE to pay any Supplemental Rent, LESSOR shall have all rights, powers and remedies provided for in this Lease or by Law or equity or otherwise in the case of nonpayment of Interim Rent or Basic Rent. LESSEE will also pay to LESSOR, on demand, as Supplemental Rent, to the extent permitted by applicable Law, interest at the Overdue Rate on any part of any installment of Interim Rent or Basic Rent not paid within five Business Days when due for the period from and including the Rent Date to and including the date of actual payment in full, and on any Supplemental Rent not paid when due or demanded by LESSOR for any period for which the same shall be overdue. (B) Security Deposit. LESSEE shall deliver to LESSOR the Security Deposit, on the Effective Date, to secure LESSEE's obligations under the Lease. Upon the occurrence and continuation of an Event of Default hereunder or a Related Lease Event of Default, LESSOR may use all or any part of the Security Deposit, in addition to the Related Security Deposit, together with all interest accrued thereon, in the manner provided for in this Lease. (C) Form of Payment. Payment of Rent, the Security Deposit and any other payments due under this Lease, shall be made in Dollars by wire transfer of immediately available funds to LESSOR or its assignee at such address and account as LESSOR may specify in writing, provided that such address shall be an address in the continental United States. Payment shall be made on the Rent Date, or the Business Day thereafter if the Rent Date is not a Business Day, so as to reach LESSOR or its designated depository not later than 1:00 p.m. local time, New York, New York, on the Rent Date or the Business Day thereafter, as the case may be. (D) Rent Not Reduced by Taxes. LESSEE agrees that each payment of Rent pursuant to this Lease shall be free of all Taxes and, in the event that any such Taxes -18- are imposed, levied, assessed by, or otherwise payable with respect to or arising out of the leasing or operation of the Aircraft by LESSEE, LESSEE shall pay such amounts as are necessary to enable LESSOR and each assignee of LESSOR to whom payments of Rent are to be made by LESSEE, to receive each payment of Rent hereunder, under any circumstances and in any event, in the full amounts required hereunder on an after-tax basis, without any reduction whatsoever; provided, however, that this Section 5(D) shall not apply to Taxes not indemnified against pursuant to Section 11(B) hereof. (E) Maintenance Reserve. LESSEE shall pay to LESSOR, on each Maintenance Reserve Date, the Airframe Reserves, the Engine Reserves and the Landing Gear Reserves for the previous Rent Period (each a "Reserve" and collectively, the "Reserves"). Commencing on the first anniversary of the Effective Date and continuing on the anniversary of the Effective Date in each consecutive year during the Term, the per Cycle amount payable by LESSEE to LESSOR with respect to Engine Reserves shall be increased by three and one-half (3.5%) percent from the per Cycle amount of Engine Reserves payable in the preceding year. All Reserves paid by LESSEE to LESSOR will be held by LESSOR in separate accounts for each of the Airframe Reserves, Engine Reserves and Landing Gear Reserves, respectively, and shall be disbursed by LESSOR only to pay for Covered Maintenance pursuant to Section 7(D) hereof. Interest shall accrue on the Reserves at a rate equal to LIBID minus one-quarter percent per annum (the "Reserve Interest"). The Reserve Interest shall form a part of the Airframe Reserves, Engine Reserves and Landing Gear Reserves, respectively. Notwithstanding anything set forth herein to the contrary, if on any Maintenance Reserve Date (i)(a) the Flight Hours for the Airframe, (b) the aggregate Cycles with respect to the Engines, and (c) the aggregate Cycles for the Landing Gear, in each case, respectively, remaining to the next scheduled overhaul (assuming no change in intervals between checks under the Maintenance Program not approved by LESSOR, such approval not to be unreasonably withheld) are more than on the Effective Date, and (ii) LESSEE meets the Credit Standards, then LESSEE shall not be required to pay any Reserves for such Rent Period with respect to such category of Reserves. Time is of the essence with respect to the payment by LESSEE to LESSOR of Reserves. Upon the termination of the Lease with respect to the Aircraft, provided LESSEE has complied with Section 17 hereof and no Default or Related Lease Default has occurred and is continuing, all Reserves held by LESSOR and not used to reimburse LESSEE for Covered Maintenance shall become the property of LESSEE. (F) Net Lease, LESSEE's Obligations; No Set off or Counterclaim. This is a net lease. It is the intent of the parties hereto that this Lease be a "true lease" and an agreement treated as a "lease" under the provisions of the Code. Except as otherwise -19- provided herein (including, without limitation, in Section 5(C)), and without limiting LESSEE's rights in the event of a breach of Section 21(G), LESSEE's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any Set off, counterclaim, recoupment, defense or other right which LESSEE may have against LESSOR; (ii) any defect in the title, airworthiness, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, the Aircraft, Airframe or any Engine, or any interruption or cessation in the use or possession thereof by LESSEE for any reason whatsoever; (iii) any insolvency, bankruptcy, reorganization or similar proceedings by or against LESSEE; or (iv) any restriction, prevention or curtailment of, or interference with, any use of the Aircraft, Airframe or any Engine. SECTION 6 REPRESENTATIONS AND WARRANTIES (A) Disclaimer of Warranties. EXCEPT FOR THE EXPRESS REPRESENTATIONS OF LESSOR SET FORTH IN SECTION 6(B), NEITHER LESSOR NOR ANY OF ITS DIRECTORS, OFFICERS, EMPLOYEES OR REPRESENTATIVES HAS MADE OR WILL BE DEEMED TO HAVE MADE ANY TERM, CONDITION, REPRESENTATION, WARRANTY OR COVENANT EXPRESS OR IMPLIED (WHETHER STATUTORY OR OTHERWISE) AS TO (I) THE CAPACITY, AGE, AIRWORTHINESS, VALUE, QUALITY, DURABILITY, CONFORMITY TO THE PROVISIONS OF THIS LEASE, DESCRIPTION, CONDITION (WHETHER OF THE AIRCRAFT, ANY ENGINE, ANY PART THEREOF OR THE AIRCRAFT DOCUMENTATION), DESIGN, WORKMANSHIP, MATERIALS, MANUFACTURE, CONSTRUCTION, OPERATION, DESCRIPTION, STATE, MERCHANTABILITY, PERFORMANCE, FITNESS FOR ANY PARTICULAR USE OR PURPOSE (INCLUDING THE ABILITY TO OPERATE OR REGISTER THE AIRCRAFT OR USE THE AIRCRAFT DOCUMENTATION IN ANY OR ALL JURISDICTIONS) OR SUITABILITY OF THE AIRCRAFT OR ANY PART THEREOF, AS TO THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, KNOWN OR UNKNOWN, APPARENT OR CONCEALED, EXTERIOR OR INTERIOR, (II) THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK, COPYRIGHT OR OTHER INTELLECTUAL PROPERTY RIGHTS, (III) ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE OR (IV) ANY OTHER REPRESENTATION OR WARRANTY, EXPRESS OR -20- IMPLIED, WITH RESPECT TO THE AIRCRAFT OR ANY PART THEREOF, ALL OF WHICH ARE HEREBY EXPRESSLY EXCLUDED AND EXTINGUISHED. (B) LESSOR's Representations. As an exception to the foregoing, LESSOR represents, warrants and covenants as follows: (1) LESSOR has the lawful right to lease the Aircraft to LESSEE in accordance with the terms of this Lease; (2) LESSOR is a corporation duly organized and existing in good standing under the laws of Delaware and has the corporate power and authority to carry on its business as presently conducted and to execute, deliver and perform its obligations under this Lease and all other Lease Documents to which LESSOR is a party; (3) This Lease and all other Lease Documents to which LESSOR is a party have been duly authorized by all necessary corporate action on the part of LESSOR, do not require any approval of the stockholder of LESSOR (or if such approval is required, such approval has been obtained), and neither the execution and delivery hereof nor the consummation of the transactions contemplated hereby nor compliance by LESSOR with any of the terms and provisions hereof will contravene any Law applicable to LESSOR or result in any breach of, or constitute any default under, or result in the creation of any Lien other than to the Mortgagee upon any property of LESSOR under, any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement, corporate charter or by-law, or other agreement or instrument to which LESSOR is a party or by which LESSOR or its properties or assets may be bound or affected; (4) This Lease and all other Lease Documents to which LESSOR is a party have been duly entered into and delivered by LESSOR and constitute the valid, legal and binding obligations of LESSOR, enforceable in accordance with their terms, except as such enforceability may be limited by bankruptcy, moratorium, reorganization and similar Laws and by general principles of equity, whether considered in a proceeding at Law or in equity; and (5) LESSOR has good title to the Aircraft. -21- THE REPRESENTATIONS, WARRANTIES AND COVENANTS SET FORTH IN THIS SECTION 6(B) CONSTITUTE THE SOLE EXCEPTION TO SUBSECTION 6(A) AND ARE EXCLUSIVE AND IN LIEU OF ALL OTHER REPRESENTATIONS AND WARRANTIES OF LESSOR EXPRESS OR IMPLIED. (C) Manufacturer's Warranties. So long as LESSEE is not in default under this Lease, LESSOR agrees to assign or otherwise make available to LESSEE such rights as LESSOR may have under any warranty, express or implied, with respect to the Aircraft made by the Manufacturer, Engine Manufacturer, any subcontractor or supplier thereof, to the extent that the same may be assigned or otherwise made available to LESSEE and, to the extent that the same may not be assigned or otherwise made available to LESSEE, LESSOR agrees, upon the written request of LESSEE, to exert its efforts, at LESSEE's sole cost and expense, to enforce such rights as LESSOR may have with respect thereto for the benefit of LESSEE; provided, however, that upon an Event of Default all such rights shall, without further action or notice, immediately revert to LESSOR, including all claims thereunder, whether or not perfected. On the date of the Redelivery Occasion, the benefit of any warranty assigned by LESSOR to LESSEE pursuant hereto will be reassigned automatically to LESSOR or its designee. LESSEE's rights under such warranties (including LESSEE's claims and rights to payment thereunder) will revert to LESSOR during any period in which an Event of Default is continuing upon the provision of notice by LESSOR to LESSEE. LESSEE at its own cost and expense will do all such things and execute such documents as may be required for this purpose. LESSEE will diligently and promptly pursue any valid claims it may have against Manufacturer and others under such warranties with respect to the Aircraft and will provide notice of the same to LESSOR. (D) LESSEE's Representations and Warranties. LESSEE represents and warrants, as of the Effective Date, and all such representations and warranties being continuing, that: (1) LESSEE is a corporation duly organized and existing in good standing under the Laws of Nevada and has the corporate power and authority to carry on its business as presently conducted and to perform its obligations under this Lease; (2) This Lease and all other Lease Documents to which LESSEE is a party have been duly authorized by all necessary corporate action on the part of LESSEE, does not require any approval of the stockholders of LESSEE (or if such approval is required, such approval has been obtained), and neither the execution and -22- delivery hereof nor the consummation of the transactions contemplated hereby nor compliance by LESSEE with any of the terms and provisions hereof will contravene any Law applicable to LESSEE or result in any breach of, or constitute any default under, or result in the creation of, any lien, charge or encumbrance upon any property of LESSEE under any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement, corporate charter or by-law, or other agreement or instrument to which LESSEE is a party or by which LESSEE or its properties or assets may be bound or affected; (3) LESSEE has received or has complied with every required consent, approval, order, or authorization of, or registration with, or the giving of prior notice to, any Governmental Entity having jurisdiction with respect to the execution and delivery of this Lease and all other Lease Documents to which LESSEE is a party or the validity and enforceability hereof and thereof; (4) This Lease and all other Lease Documents to which LESSEE is a party have been duly entered into and delivered by LESSEE and constitutes a valid, legal and binding obligation of LESSEE, enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, reorganization, moratorium or other similar Laws and by general principles of equity, whether considered in a proceeding at Law or in equity; (5) There are no suits or proceedings pending, or to the knowledge of LESSEE, threatened against or affecting LESSEE, which are reasonably expected to have a material adverse effect on the financial condition or business of LESSEE or upon LESSEE's ability to perform its obligations hereunder; (6) LESSEE has filed or caused to be filed all material tax returns which are required to be filed by LESSEE and has paid or caused to be paid all Taxes shown to be due or payable on said returns or on any assessment received by LESSEE, except those the validity of which is contested by LESSEE in good faith by appropriate proceedings duly instituted and diligently prosecuted; (7) LESSEE is an "air carrier operating under a certificate of convenience and necessity," as such quoted language is used and defined under 11 U.S.C. ss. 1110 ("Section 1110"), and this Lease constitutes a "lease" under Section 1110 and LESSEE is a Certificated Air Carrier pursuant to chapter 447 of Title 49 of the United States Code; -23- (8) The obligations of LESSEE under the Lease Documents constitute direct, general and unconditional obligations of the LESSEE; and (9) No event has occurred which constitutes, or with the giving of notice or passage of time or both would constitute, an Event of Default under this Lease. (E) Notification. During the Term of this Lease, LESSEE shall notify LESSOR in writing of any condition that materially changes the content of the representations and warranties made as of the Effective Date under Section 6(D) hereof, within five (5) days of LESSEE's knowledge thereof. SECTION 7 POSSESSION, USE, MAINTENANCE, TITLE AND REGISTRATION (A) Possession. Except as expressly provided in Subsection 8(B) and Section 22, LESSEE shall not transfer possession of the Aircraft or any Engine or part thereof to any Person without the prior written consent of LESSOR, which consent shall not be unreasonably withheld, provided that, so long as no Default shall have occurred and be continuing and so long as LESSEE shall comply with the provisions of Section 13 hereof, LESSEE may, so long as the action to be taken shall not deprive LESSOR of its title to and interest in the Aircraft, the Airframe or any Engine and shall not adversely affect the registration of the Aircraft under the Laws of the U.S. Government, without the prior written consent of LESSOR, deliver possession of the Aircraft, the Airframe or any Engine or other Part thereof to the Manufacturer, the Engine Manufacturer or Authorized Maintenance Performer, as appropriate, for testing, service, repair, maintenance or overhaul work on the Aircraft, the Airframe, any Engine or Part, or for alterations, modifications, or additions thereto, to the extent required or permitted by the terms of Subsection 7(D) hereof. (B) Use. LESSEE shall use the Aircraft solely in commercial passenger carrying operations and normal training, maintenance, ferry and other such related operations in accordance with all Laws applicable to it and shall not use or permit the Aircraft to be used for any purpose for which the Aircraft is not designed or reasonably suited. (C) Lawful Insured Operations. LESSEE shall not permit the Aircraft to be maintained, used, or operated in violation of any Law of any Governmental Entity -24- having jurisdiction, or contrary to the Manufacturer's or Engine Manufacturer's operating manuals and instructions, or in violation of any airworthiness certificate, license, or registration relating to the Aircraft issued by the U.S. Government, unless the validity thereof is being contested in good faith and by appropriate proceedings duly instituted and diligently prosecuted, but only so long as such proceedings will not result in the sale, forfeiture, loss of valid insurance coverage upon, or loss of, the Aircraft, the Airframe, any Engine or any Part. LESSEE shall comply with the foregoing at its sole cost and expense and shall maintain the Aircraft in proper condition for operation under such Laws. LESSEE agrees not to operate the Aircraft, or to permit or suffer the Aircraft to be operated, within or into any geographic area: (1) unless the Aircraft is at all such times covered by insurance as required by the provisions of Section 13 hereof or the indemnity given by the United States Government pursuant to Section 22(F) hereof; (2) contrary to the terms of such insurance, as required by the provisions of Section 13 hereof or the indemnity given by the United States Government pursuant to Section 22(F) hereof; and (3) in violation of any Law, rule, order or regulation of any Governmental Entity. LESSEE shall deliver to LESSOR such documents and assurances as LESSOR may request under the provisions of Section 16 hereof to evidence compliance with the foregoing. (D) Maintenance. (i) LESSEE, at its own cost and expense shall: (a) service, repair, maintain, overhaul, test, or cause the same to be done to the Aircraft so as to keep the Aircraft in as good operating condition as when delivered to LESSEE hereunder, ordinary wear and tear excepted, in accordance with Manufacturer's type design and in such operating condition as required by the Maintenance Program and as may be necessary to enable the United States airworthiness certification of the Aircraft to be maintained in good standing at all times under FAR Part 121 standards and the applicable Laws of the U.S. Government; -25- (b) perform all routine and non-routine services, checks, inspections, including any structural inspections requirements (SSID's) and "A", "B", "C," "15,000 Hour" or "30,000 Hour" checks (or the equivalent thereof) required by the Maintenance Program or the FAA; (c) maintain all records, logs and other materials required by applicable Laws of any Governmental Entity and the FAA to be maintained in respect of the Aircraft, including, but not limited to, serviceable component tags required by the FAA; (d) throughout the Term of this Lease, provide LESSOR with not less than two weeks prior written notice of the scheduled commencement date of each "C", "15,000 Hour" or "30,000 Hour" check (or their equivalent) to be performed on the Aircraft and the location where such checks will be performed; (e) designate representatives to coordinate with LESSOR or LESSOR's representatives on maintenance and warranty matters; (f) incorporate in the Aircraft prior to the terminating or compliance date all applicable airworthiness directives or equivalent (referenced to in this Lease as "Airworthiness Directives") of the FAA, all alert service bulletins of the Manufacturer, Engine manufacturer and other vendors or manufacturers of Parts incorporated on the Aircraft and any service bulletins which must be performed in order to maintain the warranties on the Aircraft, Engines and Parts; (g) incorporate in the Aircraft all other service bulletins of the Manufacturer, the Engine manufacturer and other vendors which LESSEE schedules to adopt within the Term for the rest of its MD87 aircraft fleet. It is the intent of the parties that the Aircraft will not be discriminated from the rest of LESSEE's fleet in service bulletin compliance (including method of compliance) or other maintenance matters. LESSEE will not discriminate against the Engines with respect to overhaul build standards and life limited part replacements; (h) incorporate in the Maintenance Program for the Aircraft a corrosion prevention and control program as recommended by Manufacturer and approved by the FAA, and correct any discrepancies in -26- accordance with the recommendations of Manufacturer and the Structural Repair Manual. In addition, all inspected areas will be properly treated with corrosion inhibitor as recommended by Manufacturer; (i) provide LESSOR will written summaries of all sampling programs involving or affecting the Aircraft; (j) properly document all repairs, modifications and alterations and the addition, removal or replacement of equipment, systems or components in accordance with the rules and regulations of the FAA and reflecting such items in the Aircraft Documentation. In addition, all repairs to the Aircraft will be accomplished in accordance with Manufacturer's Structural Repair Manual (or FAA-approved data supported by FAA Form 8110-3 or equivalent). All modifications and alterations will also be accomplished in accordance with FAA-approved data supported by FAA Form 8110-3 or equivalent. (ii) All maintenance of the Aircraft and Engines shall be performed by an Authorized Maintenance Performer. (iii) (A) "Covered Maintenance" means, at any time, (1) the structural inspection portion (including CPCP) of the 15,000 Hour and 30,000 Hour (or their equivalent) maintenance checks under the Maintenance Program, (2) the performance restoration or replacement of life limited parts or permanent repair of on-condition parts in the bare Engine during completed shop visits and (3) the full refurbishment of the landing gear (excluding maintenance in respect of compliance with airworthiness directives and elective parts replacement), respectively, pursuant to the Maintenance Program including, in each case, without limitation, associated inspections, breakdown and assembly occurring during such overhauls. The cost of Covered Maintenance shall be limited to the actual cost of replacement parts plus the cost of the associated labor at LESSEE's in-house labor rates if the work is performed by LESSEE, excluding any LESSEE charges for handling, packaging and shipping, or at third-party cost charged to LESSEE if the work is performed by third parties, and shall in no event include late charges, interest or other similar amounts as a result of late payment. -27- (B) Unless a Default or a Related Lease Default shall have occurred and be continuing, the LESSOR shall pay to the LESSEE, within five Business Days after receipt of: (a) an invoice stating that Covered Maintenance has been performed on the Airframe, an Engine or a Landing Gear, respectively, and the cost thereof; and (b) appropriate documentation with respect to such work or payments, an amount equal to the actual cost of such work up to the then current balance of the Airframe Reserves for such Covered Maintenance on the Airframe, up to the then current balance of the Engine Reserves for such Covered Maintenance on any Engine and up to the then current balance of the Landing Gear Reserves for such Covered Maintenance on a Landing Gear; provided, however, that at no time shall the amount of any Reserve to be made available by LESSOR for Covered Maintenance exceed the amount remaining in such Reserve. (f) LESSEE agrees that it will not discriminate against the Aircraft (as compared to other aircraft of the same type owned or operated by LESSEE) in the performance of maintenance, including, but not limited to, in contemplation of the expiration or termination of this Lease with respect to the maintenance of the Aircraft. (E) Airworthiness Directives: Service Bulletins. If the FAA, the Manufacturer or the Engine Manufacturer, or the manufacturer of any Parts, publishes an airworthiness directive or mandatory service bulletin after the Effective Date of this Lease, which has a useful life beyond the Term, requiring completion or termination during the Term (a "Post-Effective Mandatory Modification"), LESSEE shall as required in Section 7(D)(i) above take all such action as is necessary to comply with such Post-Effective Mandatory Modification prior to the return of the Aircraft by LESSEE to LESSOR. To the extent the cost of completing or terminating any such Post-Effective Mandatory Modification exceeds $50,000.00, LESSOR shall pay to LESSEE a portion of such excess equal to the following: (LESSEE's Cost - $50,000) x A/240 Where: -28- A = 240 minus the number of months (rounded upward or downward, as the case may be, to the nearest month) from the date the relevant Post-Effective Mandatory Modification was completed or terminated by LESSEE to the Expiration Date. Any amounts payable by LESSOR to LESSEE pursuant to this Section 7(E) shall not be payable to the LESSEE until the later of (i) the Expiration Date, or (ii) the date on which the LESSEE has complied with all the terms of this Lease. (F) Title, Registration and Insignia. LESSEE acknowledges and agrees that title to the Aircraft shall remain vested in LESSOR during the Term in accordance with the terms of this Lease. The Aircraft shall, at all times during the Term, be registered in the United States in the name of LESSOR or such Person as LESSOR may designate, in accordance with the Laws of the U.S. Government. LESSEE agrees that it shall take no action which shall cause the Aircraft to cease to be so registered in the name of LESSOR with the FAA under the Act. Unless otherwise requested, within fifteen (15) days of the Effective Date, LESSEE shall fasten or cause to be fastened in the cockpit, in a location reasonably adjacent to and not less prominent than the airworthiness certificate for such Aircraft and on each Engine, an insignia plate supplied by LESSOR and in the form set forth in Exhibit "H" hereto or in any other form subsequently designated by LESSOR. LESSEE will not allow the name of any Person to be placed on the Aircraft or an Engine as a designation that might be interpreted as a claim of ownership; provided, however, that LESSEE may cause the Aircraft to be lettered in an appropriate manner for convenience of identification of the interest of LESSEE therein, including but not limited to, the customary livery of LESSEE. (G) Maintenance Reports and Records. (a) During the Term, LESSEE shall provide maintenance information and reporting requirements to LESSOR and any other party so designated by LESSOR including but not limited to: (i) written notification within thirty (30) days after issuance of any airworthiness directive or legal requirement affecting the Aircraft, Airframe, Engines or Parts; (ii) annual and quarterly written projections of scheduled Airframe, landing gear and Engine heavy maintenance; (iii) prompt written notification of damage to the Aircraft, Airframe, Engines or Parts where the estimated cost of repair is in excess of $250,000 (iv) prompt written notification of Engine removals, -29- exchanges or foreign object damage (said report to include details of circumstances and plan of action to repair); (v) reports of Flight Hours and Cycles on a monthly basis; (vi) reporting of all service bulletins completed; and (vii) copies of all material reports sent to the FAA or Air Authority concerning the Aircraft. (b) LESSEE will, during the Term, maintain all records, logs and other materials required to be maintained with respect to the Aircraft by Persons in operational control of the Aircraft under any applicable rules, Laws or regulations and shall supply all such records, logs and other materials to LESSOR or third parties as reasonably requested by LESSOR and as shall be necessary in order to implement the Maintenance Program and any and all warranties and guarantees that apply to the Aircraft. LESSEE will provide LESSOR with copies of all records of maintenance performed during the Term as requested by LESSOR. All such records shall be kept as required under FAR Part 121 and in English. (H) Passenger Convenience Equipment. Notwithstanding any other provision herein to the contrary, LESSEE may install or remove or permit to be installed or removed aboard the Aircraft, without the prior written consent of LESSOR, Passenger Convenience Equipment so long as the installation, use and removal of such Passenger Convenience Equipment does not impair the value, utility or airworthiness the Aircraft would have had at any time had the installation, use or removal not occurred. Without further action of LESSEE or LESSOR, title to such Passenger Convenience Equipment, upon installation, shall vest in LESSOR and shall become subject to this Lease, free of all liens, charges and encumbrances, provided, however, that so long as an Event of Default shall not have occurred and be continuing during the Term, LESSEE may, at any time prior to return of the Aircraft, remove such Passenger Convenience Equipment or component thereof, at which time title thereto shall, without further act, vest in LESSEE, and such Passenger Convenience Equipment or component thereof shall no longer be deemed part of the Aircraft from which it was removed. Notwithstanding the foregoing paragraph, if the Passenger Convenience Equipment is (i) owned by any third party and leased to LESSEE, (ii) sold to LESSEE subject to a conditional sales contract or other security interest, (iii) leased to LESSEE pursuant to a lease which is subject to a security interest in favor of any third party, or (iv) installed aboard the Aircraft subject to a license granted by LESSEE to a -30- Immediately upon any replacement Parts becoming incorporated or installed in or attached to the Aircraft as above provided, and without further act: (1) title to the removed Part shall vest in LESSEE, free and clear of all rights of LESSOR; (2) title to the replacement Parts shall vest in LESSOR, free and clear of all rights of third parties, including, but not limited to, LESSEE; and (3) such replacement Parts shall become subject to this Lease and shall be deemed part of the Aircraft into which such Parts were incorporated or with respect to which such Parts were required, for all purposes hereof to the same extent as the Parts originally incorporated or installed in, or attached or related to such Aircraft. (B) Pooling; Etc. (i) LESSEE may subject any Engine or APU to normal interchange agreements customary in the United States domestic commercial airline industry entered into by the LESSEE in the ordinary course of its business, and may subject any Engine to pooling arrangements customary in the United States domestic commercial airline industry and entered into by the LESSEE in the ordinary course of its business. (ii) LESSEE may install an Engine or APU on an airframe owned by the LESSEE provided such airframe is free and clear of all liens and encumbrances, except (a) Liens of the type or equivalent to those set forth in the definition of "Permitted Liens"; and (b) the rights of air carriers under normal interchange arrangements which are customary in the United States domestic commercial airline industry and which do not contemplate, permit or require the transfer of title to the airframe or Engines installed thereon. -32- (iii) LESSEE may install an Engine or APU on an airframe leased to, or purchased by the LESSEE, subject to a lease, conditional sale, trust indenture or other security agreement, but only if (a) such airframe is clear of all liens and encumbrances, except Permitted Liens or Liens of the type or equivalent to those set forth in the definition of "Permitted Liens" and the rights of the parties to the lease, conditional sale, trust indenture or other security agreement covering such airframe; and (b) LESSOR shall have received from the lessor, conditional seller, indenture trustee, or secured party of such airframe, a written agreement (which may be the lease, conditional sale, trust indenture or other security agreement covering such airframe), whereby such lessor, conditional seller, indenture trustee or secured party expressly agrees that neither it nor its successors or assigns will acquire or claim any right, title or interest in any Engine or APU by reason of such Engine or APU being incorporated in such airframe at any time while such Engine or APU is subject to this Lease. (iv) No permitted interchange or pooling agreement, transfer or other relinquishment of possession permitted hereunder shall affect the title to, or registration of or effect any transfer of the Aircraft, Airframe, Engines or APU or shall constitute consent to any action not permitted to the LESSEE in this Lease. (v) LESSOR hereby agrees for the benefit of LESSEE and any lessor, conditional vendor or secured party of any engine leased to LESSEE, purchased by LESSEE pursuant to a conditional sale agreement or owned by LESSEE subject to a security agreement that neither LESSOR nor its assignees will acquire or claim, as against LESSEE, such lessor, conditional vendor or secured party or any of their respective assignees any right, title or interest in any engine owned by such lessor under such lease, sold by such conditional vendor under such conditional sale agreement or subject to a security interest in favor of such secured party under such security agreement as a result of such engine being installed on the Airframe. -33- (C) Equipment Changes. LESSEE, at its own expense, shall make such alterations and modifications in and additions to ("Equipment Changes") the Aircraft as may be required from time to time to meet the standards of the FAA and the Air Authority and of the Governmental Entity in the jurisdiction of which LESSEE elects to fly the Aircraft and whose approval or consent is required to permit LESSEE to fly over and/or into any geographical area with respect to which the Governmental Entity exercises authority. In addition, the term "Equipment Changes" shall mean modifications to or additions to the Aircraft that LESSEE, at its own expense, may from time to time deem desirable in the proper conduct of its business, provided that no such Equipment Change diminishes the value, utility, condition or airworthiness of the Aircraft below the value, utility, condition and airworthiness thereof immediately prior to such Equipment Change, assuming the Aircraft was then in the condition required to be maintained by the terms of this Lease, and provided further that LESSEE shall not change the configuration of the Aircraft during the Term (except the passenger seating configuration) unless such configuration is approved by the LESSOR and the Air Authority. Any Equipment Change other than the Equipment Changes relating to the installation of TCAS, Windshear detection system and the upgrade of the Engines from model JT8D-217C to JT8D-219 with an estimated cost in excess of Two Hundred Fifty Thousand ($250,000.00) Dollars must be approved in advance by LESSOR, which approval will not be unreasonably withheld. Title to all Parts incorporated, installed in, attached or added to the Aircraft as the result of any such Equipment Change shall, without further act, vest in LESSOR; provided, however, that during the Term, LESSEE may remove any such Part if: (1) such Part is in addition to any Part originally incorporated or installed in or attached to such Aircraft at the time of delivery thereof hereunder; and (2) such Part is not required to be incorporated, installed in, attached or added to the Aircraft; and (3) such Part can be removed from the Aircraft or can be replaced with a part of equal value to the Part installed upon delivery without diminishing or impairing the value, utility or airworthiness which the Aircraft would have had at such time, had such Equipment Change not occurred. Upon the removal by LESSEE of any Part as above provided, title thereto shall, without further act, vest in LESSEE and such Part shall no longer be deemed part of the Aircraft from which it was removed. Any Part not removed from the Aircraft by LESSEE as provided above prior to a Redelivery Occasion shall remain the property of LESSOR. LESSOR shall bear no liability in respect of, or cost for, any Equipment Change, grounding of the Aircraft, suspension of certification thereof, or loss of revenue therefrom. -34- SECTION 9 INSPECTION; FINANCIAL INFORMATION (A) During the Term, LESSEE shall furnish to LESSOR and Mortgagee such information concerning the location, condition, use and operation of the Aircraft as LESSOR or Mortgagee may reasonably request. LESSEE shall also furnish to LESSOR and Mortgagee copies of its reports on Forms 10-K and 10-Q promptly upon same becoming available for public distribution. (B) The right of LESSOR and Mortgagee, or their designated representatives, at LESSOR's expense, to inspect the Aircraft during any "C", "15,000 Hour" or "30,000 Hour" check or equivalent (as defined in the Maintenance Program), performed by or on behalf of LESSEE during the Term shall be absolute. LESSEE shall also provide LESSOR and Mortgagee with maintenance schedules relating to the Aircraft upon the delivery of the Aircraft to LESSEE, and from time to time as such maintenance schedules are adjusted or updated. LESSEE further agrees to notify LESSOR and Mortgagee of any change in the date of scheduled "C," "15,000 Hour" and "30,000 Hour" checks, which notice shall be given within a reasonable time, to enable LESSOR and Mortgagee to inspect the Aircraft at the time and place such checks occur. During such checks, LESSEE agrees to allow LESSOR and Mortgagee, or their authorized representative, to inspect any area of the Aircraft which LESSOR or Mortgagee requests to inspect which would normally require inspection during such major checks. LESSEE also shall permit any Person designated by LESSOR or Mortgagee in writing to: (1) visit and inspect the Aircraft, its condition, use and operation, and the records maintained in connection therewith; (2) visit and inspect the properties of LESSEE; (3) discuss, to the extent reasonable, the finances and accounts of LESSEE with the principal officers of LESSEE, (4) obtain such other financial information as LESSOR or Mortgagee may reasonably request; in this regard, during the Term, LESSEE shall deliver to LESSOR and Mortgagee annual financial statements prepared in accordance with generally accepted accounting principles consistently applied and audited by recognized, independent -35- certified public accountants reasonably satisfactory to LESSOR and Mortgagee as soon as practicable and in any event within 120 days after the end of LESSEE's fiscal year, as well as quarterly unaudited financial statements, within 60 days following the close of each of LESSEE's fiscal quarters; and (5) inspect LESSEE's Maintenance Program for the Aircraft. all at such times and frequencies as LESSOR and Mortgagee, or the assignee of LESSOR or Mortgagee, may reasonably request without interfering with LESSEE's normal business operations; neither LESSOR nor Mortgagee shall have any duty to make any such inspection and neither LESSOR nor Mortgagee shall incur any liability or obligation by reason of not making any such inspection. LESSOR hereby agrees that if LESSOR or Mortgagee exercises any of the rights listed in clauses (1) through (5) above, it shall do so at LESSOR's sole cost and expense and in such a manner so as not to unreasonably interfere with the business and operations of LESSEE. Notwithstanding the foregoing, LESSOR and Mortgagee shall incur no liability nor be deemed to have waived any of their rights under this Lease by reason of LESSOR's or Mortgagee's failure to exercise any of its rights under this Section 9(B). (C) LESSEE shall also furnish any other information or records on the Aircraft that LESSOR or Mortgagee may reasonably request. SECTION 10 COVENANTS OF LESSEE LESSEE represents, warrants, covenants and agrees that: (A) Maintenance of Corporate Existence. LESSEE shall preserve and maintain its existence, valid legal status, and all of its rights, privileges, and franchises under the Laws of the U.S. Government necessary to the conduct of its business. (B) Payment of Taxes. LESSEE shall: -36- (1) Pay or cause to be paid all taxes upon LESSEE or its income or profits, or upon any property or assets belonging to or used by it, prior to the date on which penalties attach thereto; (2) Pay or otherwise discharge all lawful claims, which, if not paid, might become a Lien or charge upon the property of LESSEE (provided, however, that LESSEE shall not be required to pay any such Taxes or claims, the payment of which is being contested in good faith and by appropriate proceedings, except that LESSEE will pay or cause to be paid all such Taxes or claims forthwith in the event LESSEE is unable to stay or suspend enforcement or execution of a warrant of restraint or foreclosure of any Liens which attach as security therefor). (C) Sale of Assets, Merger, etc. Without the prior written consent of LESSOR, which consent shall not be unreasonably or arbitrarily withheld, LESSEE will not sell, lease, assign, transfer or otherwise dispose of substantially all of its assets, whether now owned or hereafter acquired, except in the ordinary course of its business as presently conducted and for a full and adequate consideration, and will not merge or consolidate with or into, or acquire substantially all of the assets and assume substantially all of the liabilities of, any corporation or other entity unless the surviving entity, as a result of such sale, purchase, merger or consolidation, is the LESSEE or the surviving entity (i) assumes this Lease; (ii) is a U.S. Air Carrier; and (iii) has and will have, immediately following any such sale, purchase, merger or consolidation, a tangible net worth (as determined in accordance with United States generally accepted accounting practices) equal to or greater than that which the LESSEE had immediately prior to such sale, merger or consolidation. (D) U.S. Air Carrier. Throughout the Term, LESSEE shall, at all times, be a U.S. Air Carrier. (E) Communications. (i) LESSEE shall promptly deliver to LESSOR any communications received by LESSEE from the Air Authority which materially affects the Aircraft and which are not applicable to all aircraft of the same make and model as the Aircraft; and (ii) LESSOR shall promptly deliver to LESSEE any communications received by LESSOR from the Manufacturer which -37- materially affects the maintenance, operation or airworthiness of the Aircraft and which are not applicable to all aircraft of the same make and model as the Aircraft. (F) No Security Interests. LESSEE will not create or agree or permit to arise any Lien (other than Permitted Liens) on or with respect to the Aircraft, title thereto or any interest therein. LESSEE will forthwith, at its own expense, take all action as may be necessary to discharge or remove any such Lien if it exists at any time. LESSEE will promptly, but in no event later than seventy-two (72) hours after becoming aware of the existence of any such Lien give written notice thereof to LESSOR. SECTION 11 TAXES (A) LESSEE agrees to pay and to indemnify and hold harmless the Indemnitees from all Taxes assessed against or upon any Indemnitee, LESSEE, the Aircraft, or any part thereof during the Term and arising out of this Lease, or upon the leasing, possession, use, operation, repair, maintenance, overhaul, settlement of any insurance claim, or return thereof, or upon any Rent, receipts or earnings arising from the operation thereof, or upon or with respect to this Lease unless, and to the extent only that, any such Tax is being contested by LESSEE in good faith and by appropriate proceedings duly instituted and diligently prosecuted and only so long as such proceedings do not involve any danger of the sale, forfeiture or loss of the Aircraft. Notwithstanding the foregoing, Lessee shall not be liable to pay (1) any Taxes based solely on or measured by the net income of any Indemnitee, (2) any Taxes imposed by any taxing authority other than the United States of America or any political subdivision thereof unless such Taxes would not have been imposed but for (a) the operation or presence in such jurisdiction of the Aircraft, (b) the presence in such jurisdiction of a permanent establishment or fixed place of business of Lessee or any user or Person in possession of the Aircraft, or (c) the payment from such jurisdiction of any amount due under this Lease. In case any report or return is required to be made with respect to any obligation of LESSEE under or arising out of this Section 11, LESSEE shall either make such report or return in such manner as will show the ownership of the Aircraft in LESSOR and send a copy of such report or return to LESSOR, or shall notify LESSOR of such requirement and make such report or return in such manner as shall be satisfactory to LESSOR. If claim is made against LESSOR for any Taxes arising during the term of this Lease, LESSOR shall promptly notify LESSEE. LESSOR shall, at LESSEE's expense, take such action as LESSEE may -38- reasonably request in writing with respect to such asserted liability, and if reasonably requested by LESSEE and upon the prior payment to LESSOR by LESSEE of an amount equal to such Tax, any payment by LESSOR of such Tax shall be made under protest. If payment is made, LESSOR shall, at LESSEE's expense, take such action as LESSEE may reasonably request to recover such payment and shall, if requested, permit LESSEE in LESSOR's name to file a claim or prosecute an action to recover such payment. All of the obligations of LESSEE in this Section 11 with respect to Taxes imposed or accrued before the expiration or other termination of this Lease shall continue in full force and effect notwithstanding such expiration or other termination, and are expressly made for the benefit of, and shall be enforceable by, LESSOR. LESSEE further agrees that, with respect to any payment or indemnity hereunder, such payment or indemnity shall include any amount necessary to hold the recipient of the payment or indemnity harmless on an after-tax basis from all Taxes required to be paid by such recipient with respect to such payment or indemnity under the Laws of any Governmental Entity. (B) In the event the LESSEE determines there is a substantial risk of a change in the Code, or the Regulations issued pursuant thereto, which clearly results in a Tax of the LESSOR indemnified against pursuant to this Section 11 being imposed against an Indemnitee (a "Change"), the LESSEE shall have the right to terminate this Lease and return the Aircraft to the LESSOR pursuant to the provisions of Section 17. LESSEE shall notify LESSOR of any Change and its intent to terminate the Lease in writing 270 days prior to the date that the Lease is to be terminated and the Aircraft returned to LESSOR. If LESSOR elects to waive any indemnification pursuant to this Section 11 in respect of any Taxes which are attributable to such Change within 30 days of such notice (a "LESSOR Waiver"), the Lease shall not be terminated but LESSEE shall have no obligation under this Section 11 in respect of such Taxes arising due to such Change. However, at any time subsequent to such LESSOR Waiver, LESSOR may, on 270 days' prior notice to LESSEE, elect to terminate this Lease and require the LESSEE to return the Aircraft to the LESSOR pursuant to the provisions of Section 17, in which event LESSEE may elect to irrevocably reinstate its indemnification pursuant to this Section 11 in respect of any Taxes which are attributable to such Change, within 30 days of such notice from LESSOR. (C) LESSOR will act in good faith to minimize the obligations of the LESSEE under this Section 11. -39- SECTION 12 EVENT OF LOSS (A) Event of Loss Regarding the Aircraft. In the event that an Event of Loss occurs with respect to the Aircraft (other than a requisition of use by the U.S. Government while the United States pays to LESSOR or LESSEE compensation for such requisition in an amount equal to or in excess of the Rent payable with respect to such Aircraft), LESSEE shall forthwith (and, in any event, not later than five (5) days after the occurrence of the Event of Loss) give LESSOR written notice of such Event of Loss and, not later than the earlier of: (a) the ninetieth (90th) day following the occurrence of such Event of Loss; or (b) the day of receipt of insurance proceeds in respect of such Event of Loss; pay to LESSOR or its assignees, in funds of the type specified in Subsection 5(B) hereof, the sum of all unpaid Rent and all other amounts due hereunder with respect to such Aircraft and which have accrued through and including the date of payment of the Agreed Value, plus an amount equal to the Agreed Value. In the event of payment in full of such Agreed Value, together with all such amounts due or accrued hereunder on or prior to the date of such payment, the obligation of LESSEE to pay Rent with respect to the Aircraft as to which such payments have been made shall terminate. LESSEE agrees that it shall promptly file all necessary claim forms or other documents required by any insurer in connection with any claim arising from an Event of Loss and shall diligently pursue such claim. Upon payment of all Rent due and the Agreed Value, LESSOR shall transfer to LESSEE (subject to the rights of the Insurers) all of LESSOR's right, title, and interest in and to: (i) the Aircraft which sustained such Event of Loss, as well as all of LESSOR's right, title, and interest in and to any Engines constituting part of such Aircraft; and (ii) all claims for damages to such Aircraft and/or Engines, if any, against third Persons arising from such Event of Loss (unless any insurance carrier requires that such claims be assigned to it), without any representation, warranty, or recourse of any kind whatsoever, express or implied, except a warranty that such Aircraft is free and clear of any LESSOR Liens. In the event of an Event of Loss involving the Aircraft wherein one or more of the Engines are not attached to the Airframe, the Aircraft, for purposes of this Section 12(A), shall be deemed to include all Engines on lease hereunder and LESSOR shall cooperate in transferring title to such non-attached Engines, free and clear of all LESSOR Liens, to the owner of the engine attached to the Airframe at the time of the Event of Loss. -40- (B) Event of Loss With Respect to an Engine. Upon any Event of Loss with respect to an Engine not then installed on the Aircraft, or an Event of Loss with respect to only an Engine installed on the Aircraft not involving an Event of Loss to the Aircraft, LESSEE shall give LESSOR prompt written notice thereof and LESSEE shall replace such Engine as soon as reasonably possible after such Event of Loss by duly conveying to LESSOR, as a replacement for such Engine, title to another engine owned by LESSEE of the same or an improved make and model, which engine shall be free and clear of all Liens and shall have a value and utility at least equal to, be in as good operating condition as (including time in service, hours and cycles since new and hours and cycles available to the next overhaul or scheduled removal), and be in equivalent or better service bulletin and modification status than the Engine which sustained such Event of Loss (assuming the Engine which sustained such Event of Loss was maintained in the condition in which LESSEE was required to maintain such Engine pursuant to this Lease). Such replacement engine, after approval and acceptance by LESSOR, shall be deemed an "Engine" as defined herein. If the replacement engine is in substantially better condition than the Engine which sustained such Event of Loss, Lessor will consider an appropriate adjustment to the Engine Reserves. LESSEE agrees to take such action as LESSOR may reasonably request in order that any such replacement engine shall be duly and properly leased hereunder to the same extent as the Engine subject to the Event of Loss and shall be titled in LESSOR. LESSEE's obligation to pay Rent hereunder shall continue in full force and effect regardless of the occurrence of an Event of Loss with respect to an Engine, but LESSEE shall be entitled to be reimbursed by LESSOR the amount of insurance or condemnation proceeds, if any, received by LESSOR with respect to such Engine. Upon receipt of title by LESSOR to the replacement engine as hereinabove provided, LESSOR shall convey to LESSEE, free and clear of all LESSOR Liens, title to the Engine which sustained such Event of Loss. (C) Damage or Requisition Not Constituting an Event of Loss. In the event of material damage or requisition of the Aircraft or any Engine not constituting an Event of Loss, LESSEE shall promptly notify LESSOR in writing of such damage or requisition and shall remain obligated to make all payments of Rent in respect to such Aircraft or Engine which may become due hereunder in the same manner as if such damage or requisition had not occurred. All payments at any time received by LESSEE, or by LESSOR from any Person other than LESSEE, with respect to any such damage or requisition shall be paid over to, or retained by, LESSOR, and shall be paid to LESSEE upon repair of the Aircraft or Engine. (D) Receipt and Application of Compensation. Following an Event of Loss with respect to which payments, including insurance proceeds, are made by or are -41- due from any Person (any such payments or proceeds being hereinafter referred to as "Compensation"), LESSOR shall be entitled to receive, and shall receive, and LESSEE hereby assigns to LESSOR any right or interest which LESSEE may have or may hereafter acquire, in such Compensation, in trust, to be applied as follows: (1) If such Compensation is received with respect to the Aircraft under the circumstances described in Subsection 12(A), so much thereof as shall not exceed the Agreed Value and other amounts due under Subsection 12(A) shall be retained by LESSOR, in reduction of LESSEE's obligation to pay such Agreed Value and other amounts due as was not theretofore paid by LESSEE, or, if such Agreed Value and other amounts have already been paid to LESSOR, such Compensation shall be applied to reimburse LESSEE for its payment of such Agreed Value, and may be paid to LESSEE. (2) If such Compensation is received with respect to an Engine under the circumstances described in Subsection 12(B), such Compensation shall be held in an account established for LESSOR with a bank or trust company as depository, as designated by LESSOR, such sums to be held, invested and distributed as provided below. All of LESSEE's interest in all monies and investments standing to the credit of such account are hereby pledged to LESSOR, and LESSOR is hereby granted a general lien upon and security interest in all of LESSEE's interest in all such monies and investments as security for the performance in full of all of LESSEE's covenants contained in this Lease. The bank or trust company holding such Compensation shall be deemed to be LESSOR's agent for the purpose of perfecting LESSOR's security interest in such sums. If LESSEE shall replace such Engine in accordance with the provisions of Subsection 12(B), LESSOR shall, so long as no Event of Default or Default shall have occurred and be continuing, return all monies and investments then held in such account to LESSEE. (E) Payments During Existence of an Event of Default. Any payment referred to in Subsection 12(A), (B), (C) or (D) hereof which is payable to LESSEE hereunder shall not be paid to LESSEE, or, if previously paid directly to LESSEE, shall not be retained by LESSEE, if at the time of such payment a Default or a Related Lease Default shall have occurred and be continuing, but shall be paid to and retained by LESSOR as security for the obligations of LESSEE under this Lease until such time as -42- such a Default or a Related Lease Default shall have been remedied, whereupon such payment shall be made to LESSEE. SECTION 13 INSURANCE (A) Public Liability and Property Damage Insurance. LESSEE will carry and maintain in effect, at its own expense, with Approved Insurers, public liability insurance (including, without limitation, contractual liability, and passenger legal liability), and property damage insurance with respect to the Aircraft, in amounts per occurrence of not less than the Minimum Liability Coverage, or such greater amounts as LESSEE may carry from time to time on other similar aircraft in its fleet. LESSEE shall not discriminate against the Aircraft in providing such insurance. Each and any policy of insurance carried in accordance with this Subsection (A), and each and any policy obtained in substitution or replacement for any of such policies, (i) shall designate each Indemnitee as additional insureds as their interests may appear (but without imposing upon any obligation imposed upon the insured, including, without limitation, the liability to pay any premiums for any such policies, but the Indemnitees shall have the right to pay such premiums if it shall so elect), and (ii) shall expressly provide that, in respect of the interests of the Indemnitees in such policies, the insurance shall not be invalidated by any action or inaction of the LESSEE or any other Person (other than the Indemnitees, each for their respective interests), and shall insure, regardless of any breach or violation by LESSEE or any other Person (other than the Indemnitees, each for their respective interests) of any warranty, declaration or condition contained in such policies, (iii) shall provide that if such insurance is canceled for any reason whatsoever, or is adversely changed in any way with respect to the interests of the Indemnitees, or if such insurance is allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to the Indemnitees for thirty (30) days (seven (7) days in the case of any war risks and allied perils coverage or such lesser time which may be standard in the insurance industry and ten (10) days in the event of nonpayment of premium), in each instance, after receipt by each of the Indemnitees of written notice by such insurer or insurers sent to the Indemnitees of such prospective cancellation, change or lapse, (iv) shall include coverage for any country in which the Aircraft is located, (v) shall provide that, as against the Indemnitees, the insurer shall waive any rights of set-off, counterclaim or any other deduction, whether by attachment or otherwise, and waives any rights it may have to be subrogated to any right of any insured against the Indemnitees, with respect to the Aircraft, (vi) shall provide war risk and allied perils coverage pursuant -43- to the AVN52 extended coverage endorsement or its equivalent, and (vii) shall insure (to the extent of the risks covered by the policies) the indemnity provisions of Section 14. Each liability policy shall be primary without right of contribution from any other insurance which may be carried by any Indemnitee, and shall expressly provide that all of the provisions thereof (except the limits of liability) shall operate in the same manner as if there were a separate policy covering each insured. No liability policy shall permit any deductible or self-insurance provision except for baggage as is customary in the industry and such other deductibles only with the consent of the LESSOR, which consent shall not be unreasonably withheld or delayed, which from time to time LESSEE can demonstrate are standard in comprehensive liability insurance and, in particular, public liability risks (including, inter alia, contractual liability and passenger liability coverage) for U.S. Air Carriers in the then current United States insurance market. (B) Aircraft Hull War Risks and Allied Perils Insurance. LESSEE will carry and maintain in effect with Approved Insurers, at its own expense, all risks hull war risks and allied perils insurance on the Aircraft (which shall include, but not be limited to, coverage for hijacking, declared or undeclared war, insurrections, strikes, riots, commotions or labor disturbances, malicious acts or acts of sabotage and unlawful seizure or wrongful exercise of control of the Aircraft in flight by a person on board such Aircraft acting without the consent of LESSEE) in an amount not less than the Agreed Value or such greater amounts as LESSOR or Mortgagee may reasonably request from time to time (and for which LESSOR shall reimburse LESSEE for its cost of increased premium, if any, for such greater amounts of insurance) and covering those perils which, from time to time, are customarily covered by similar insurance maintained by similar carriers in the U.S. airline industry operating aircraft on international routes. (C) All Risks Hull Insurance. LESSEE, at its own expense, will maintain in effect with Approved Insurers all risks ground and flight aircraft hull insurance covering the Aircraft, and fire, transit, extended coverage, spares and all risks war and allied perils insurance with respect to Engines and Parts while not installed on such Aircraft or an aircraft, which in each case is of the type maintained by U.S. Air Carriers similarly situated to LESSEE and operating similar aircraft and engines which comprise LESSEE's fleet. At all times while the Aircraft is subject to this Lease, such insurance shall be for an amount not less than the Agreed Value or such greater amounts as LESSOR may reasonably request from time to time (and for which LESSOR shall reimburse LESSEE at its own cost of increased premium, if any, for such greater amounts of insurance). -44- Notwithstanding anything above, each and any policy of insurance obtained and maintained pursuant to Subsection (B) and this Subsection (C), and each and any policy obtained in substitution or replacement for any such policies, (i) shall designate LESSOR as owner of the Aircraft covered thereby, and shall designate each Indemnitee as additional insureds and Mortgagee as sole loss payee, as their respective interests may appear (but without imposing upon any Indemnitee any obligation imposed upon the insured, including, without limitation, the liability to pay any premiums for any such policies, but any Indemnitee shall have the right to pay such premiums if they shall so elect), (ii) shall expressly provide that, in respect of the interests of any Indemnitee in such policies, the insurance shall not be invalidated by any action or inaction of LESSEE or any other Person (other than any Indemnitee, each for their respective interests) and shall insure the Indemnitees, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by LESSEE or any other Person (other than the Indemnitees, each for their respective interests), (iii) shall provide that if such insurance is cancelled for any reason whatsoever, or is adversely changed in any way with respect to the interest of any Indemnitee, or if such insurance is allowed to lapse for nonpayment of premium, such cancellation change or lapse shall not be effective as to the Indemnitees, for thirty (30) days (seven (7) days in the case of any war risks or allied perils coverage or such lesser time which may be standard in the insurance industry and ten (10) days in the event of nonpayment of premium) after receipt by the Indemnitees of written notice by such insurer or insurers to the Indemnitees; as the case may be, of such prospective cancellation, change or lapse, (iv) shall include coverage for the territorial limits or any country in which such Aircraft may at any time be located, (v) shall provide that, as against the Indemnitees, the insurer shall waive any rights of set-off, counterclaim or any other deduction, whether by attachment or otherwise, and waives any rights it may have to be subrogated to any right of any insured against the Indemnitees, with respect to such Aircraft, (vi) shall provide that in the event of any damage or loss which is an Event of Loss hereunder and which results in a payment, such payment shall be payable solely and directly to Mortgagee for the account of all interests, (vii) shall provide that in the event of any damage or loss which is not an Event of Loss hereunder and which results in a payment for any one occurrence in excess of $500,000.00, such payment shall be payable solely and directly to Mortgagee for the account of all interests, (viii) shall provide that payments for any one occurrence not in excess of $500,000.00 shall be payable directly to LESSEE provided there exists no Event of Default or Related Lease Event of Default by LESSEE, and (ix) shall provide for a standard 50/50 clause between the all risks hull and war risks underwriters. Each such policy shall be primary without right of contribution from any other insurance which may be carried by the Indemnitees. -45- LESSEE shall have the right to carry insurance in excess of the amounts required hereunder and the proceeds of such excess insurance shall be payable to LESSEE. Similarly, LESSOR shall have the right to carry additional and separate insurance for its own benefit at its own expense, without, however, thereby limiting LESSEE's obligations under this Section 13. LESSEE shall at all times maintain a deductible amount in its all risks hull insurance policies which is no more than Seven Hundred Fifty Thousand ($750,000.00) Dollars. There shall be no deductible under LESSEE's war risks insurance policies. (D) Application of Insurance Proceeds Not In Excess of $500,000.00. LESSEE shall be entitled to receive any hull insurance proceeds not in excess of Five Hundred Thousand ($500,000.00) Dollars as soon as such funds are paid by the insurance company and shall promptly receive such additional insurance proceeds, if any, upon presentation to Mortgagee of a vendor's invoice, provided that such repair work is complete. All insurance proceeds received by LESSEE pursuant to this Subsection 13(D) shall be used by the LESSEE for the repair of any damage to the Aircraft or Engines on account of which the insurance proceeds were paid. Any amount referred to in this Subsection 13(D) which is payable to LESSEE shall not be paid to LESSEE if at the time of such payment any Default or Related Lease Default shall have occurred and be continuing, but shall be held by Mortgagee as security for the obligations of LESSEE under this Lease and such amount shall be paid to LESSEE at such time as there shall not be continuing any such Default or Related Lease Default. (E) Application in Default. Any insurance proceeds referred to in this Lease which are otherwise payable to LESSEE, or, if it has been previously paid to LESSEE, and not yet applied by LESSEE as permitted or required hereunder, shall be delivered from LESSEE to Mortgagee, if at the time of such payment, a Default or Related Lease Default shall have occurred and be continuing. In such case, all such amounts shall be paid to and held by Mortgagee as security for the obligations of LESSEE hereunder. (F) Certificates. Not less than three (3) Business Days prior to the Effective Date, and thereafter on each renewal by the LESSEE of the insurance required hereby, LESSEE will furnish to the Indemnitees a certificate and a broker's letter of undertaking executed and delivered by the Approved Insurer, appointed by LESSEE, describing in reasonable detail, and in accordance with customary practice, insurance carried on the Aircraft and certifying that the insurance then maintained on the Aircraft -46- complies with the terms of this Lease. LESSEE will cause such Approved Insurer to agree to hold all insurance contracts and slips for the benefit of the Indemnitees and to advise the Indemnitees in writing at least thirty (30) days (seven (7) days in the case of any war risk and allied perils coverage and ten (10) days in the event of nonpayment of premium) prior to the non-renewal, termination, or cancellation for any reason (including, without limitation, failure to pay premiums therefor) of any such insurance. In the event LESSEE shall fail to maintain insurance as herein provided, LESSOR may at its option provide such insurance and, in such event, LESSEE shall, upon demand, reimburse LESSOR, as Supplemental Rent for the cost thereof. (G) Changes in Industry Practice. If there shall be a fundamental change in generally accepted industry-wide practice with respect to the insurance of aircraft (whether relating to all or any of the types of insurance required to be effected pursuant to the terms of this Section 13) and, as a consequence thereof, LESSOR shall be of the reasonable opinion that the insurance required pursuant to the provisions of this Section 13 shall be insufficient to protect the interests of LESSOR, the insurance requirements set forth in this Section 13 shall be varied as may be mutually agreed so as to include such additional or varied requirements to be effected pursuant to the terms of this Section 13, and as so varied, shall provide substantially the same protection to LESSOR as it would have done had such change in generally accepted industry-wide practice not occurred. If any such change in generally accepted industry-wide practice would enable LESSEE, but for the requirements in this Section 13, to reduce its expenditures in relation to all or any of the types of insurance required to be effected pursuant to the terms of this Section 13 without, in the reasonable opinion of LESSOR, prejudicing the interest of LESSOR, the insurance requirements in this Section 13 shall be amended to take account of such change in generally accepted industry-wide practice to the extent required to enable LESSEE to reduce such expenditures, provided, however, that in no event shall such public liability insurance coverage set forth in Section 13 be less than $350,000,000.00. SECTION 14 INDEMNIFICATION (A) LESSEE agrees to indemnify, reimburse, and hold harmless the Indemnitees from and against any and all claims, damages, losses, liabilities, demands, suits, judgments, causes of action, legal proceedings, whether civil or criminal, penalties, fines, other sanctions, and any reasonable costs and expenses in connection herewith, -47- including attorney's fees and expenses (any and all of which are hereafter referred to as "Claims") which in any way may result from, pertain to, or arise in any manner out of, or are in any manner related to the Aircraft or this Lease, arising out of events occurring on or subsequent to the Effective Date, or the breach of any representation, warranty or covenant made by LESSEE hereunder, including, but not limited to, (i) the condition, manufacture, delivery, lease, acceptance, rejection, possession, return, disposition, use, or operation of the Aircraft (including, but not limited to, latent and other defects whether or not discoverable by LESSEE or LESSOR) either in the air or on the ground; or (ii) any defect in the Aircraft arising from the material or any articles used therein or from the design, testing, or use thereof or from any maintenance, service, repair, overhaul, or testing of such Aircraft, regardless of when such defect shall be discovered, whether or not such Aircraft is at the time in the possession of LESSEE, and regardless of where such Aircraft may then be located; or (iii) this Lease or any other transaction, approval, or document contemplated hereby or given or entered into in connection herewith; provided, however, that LESSEE shall be subrogated to all rights and remedies which LESSOR may have against the Manufacturer or Engine Manufacturer. LESSEE hereby waives and releases any claim now or hereafter existing against any Indemnitee, on account of any Claims for or on account of or arising or in any way connected with injury to or death of personnel of LESSEE or loss or damage to property of LESSEE or the loss of use of any property which may result from or arise in any manner out of or in relation to the leasing, condition, use, or operation of the Aircraft, either in the air or on the ground during the Term, or which may be caused during the Term by any defect in such Aircraft from any material or any article used therein or from the design or testing thereof, or use thereof or from any maintenance, service, repair, overhaul, or testing of such Aircraft regardless of when such defect may be discovered, whether or not such Aircraft is at the time in the possession of LESSEE, and regardless of the location of such Aircraft at any such time. Without limitation upon LESSEE's liability under this Section 14, LESSEE hereby agrees to indemnify, reimburse, and hold each Indemnitee harmless from any Claims in any manner imposed upon or accruing against each Indemnitee because of the manufacture, use, or operation of the Aircraft, any design, article, or material therein or relating thereto, because of infringement of patent or any other right. LESSEE hereby agrees, and shall have the right, to assume and conduct promptly and diligently at its sole cost and expense, the entire defense of any Indemnitee against any such claim, and any claim, suit, or action for which any Indemnitee is required to assume liability and to settle such claims and pay any amounts in connection with such agreed upon settlement. -48- LESSOR agrees to give LESSEE prompt notice of any claims hereunder following LESSOR's actual knowledge of such Claims, but the failure of LESSOR to give the notice required by this Section 14 shall not constitute a release by LESSOR or the Indemnitees of any obligations of LESSEE to any Indemnitees in respect of any such Claim, unless LESSEE is materially adversely affected solely by such failure of LESSOR to give such notice. Without the prior consent of LESSEE, LESSOR shall not settle or compromise any Claims that LESSEE, within a reasonable time after notice from LESSOR, has either (i) confirmed to LESSOR are subject to indemnification pursuant to this Clause 14, or (ii) agreed to assume, and to conduct promptly and diligently at its sole cost and expense, the entire defense thereof. The indemnifications contained in this Section 14 shall continue in full force and effect notwithstanding any expiration or other termination of this Lease and are expressly made for the benefit of and shall be enforceable by each Indemnitee. (B) Exceptions. In no event shall the indemnity provided for in Section 14(A) extend to any Claim or disbursement of any Indemnitee resulting from, pertaining to or arising in any manner out of, or in any manner relating to the willful misconduct of any Indemnitee; or to the extent accruing either before the Effective Date or after the Aircraft has been returned to or repossessed by LESSOR; or which is a cost or expense required to be paid by LESSOR hereunder; or which would not have been incurred by LESSOR if LESSOR had not been in breach of its representations, warranties and covenants in this Lease; or which results from LESSOR's Liens or Taxes (without prejudice to LESSEE's obligations set forth in this Lease concerning Taxes). SECTION 15 LIENS LESSEE shall not directly or indirectly create, incur, assume, or suffer to exist any Lien on or with respect to the Aircraft, title thereto, or any interest therein, except Permitted Liens. LESSEE shall promptly, at its own expense, take such action as may be necessary to duly discharge any Lien (except for Permitted Liens) directly or indirectly created, incurred, assumed or suffered to exist by LESSEE if the same shall arise at any time with respect to the Aircraft, title thereto or any interest therein. -49- SECTION 16 PERFECTION OF TITLE AND FURTHER ASSURANCES (A) Except through the action or inaction of LESSOR, if, at any time, any filing or recording is reasonably necessary to protect the interest of Mortgagee or LESSOR, LESSEE shall, at its own cost and expense, cause this Lease, the Lease Assignment financing statements with respect hereto, and any and all additional instruments which shall be executed pursuant to the terms hereof, so far as permitted by applicable Law, to be kept, filed and recorded and to be re-executed, re-filed and re-recorded at all times in the appropriate office pursuant or in relation to any Laws of any Governmental Entity, as LESSOR or Mortgagee may request, to perfect, protect, and/or preserve the rights and interests of LESSOR or Mortgagee hereunder and in the Aircraft, and LESSEE shall furnish to LESSOR evidence satisfactory to LESSOR and Mortgagee of each such filing, re-filing, recordation and re-recordation. (B) Without limiting the foregoing, LESSEE shall do or cause to be done, at LESSEE's cost and expense, any and all acts and things which may be required under the terms of the Convention on the International Recognition of Rights in Aircraft ("Mortgage Convention") to perfect and preserve the title of LESSOR to the Aircraft within the jurisdiction of any signatory which has ratified the Mortgage Convention, as LESSOR may reasonably request. LESSEE shall also do or cause to be done, at its own expense, any and all acts and things which may be required under the terms of any other Law involving any jurisdictions in which LESSEE will operate, or any and all acts and things which LESSOR may reasonably request to perfect and preserve LESSOR's ownership rights regarding the Aircraft within any such jurisdiction and Mortgagee's first priority lien and security interest in and to the Aircraft and Lease as evidenced by the Mortgage and Lease Assignment. (C) LESSEE will not suffer any matter or thing whatsoever whereby the LESSOR's title in and to the Aircraft may be impaired on account of LESSEE's or any transferee's lease or operation of the Aircraft. -50- SECTION 17 REDELIVERY OF AIRCRAFT AND RECORDS (A) Redelivery. Upon termination of the Lease with respect to the Aircraft, or pursuant to Section 19 hereof (such event being hereinafter referred to as a "Redelivery Occasion"), LESSEE, at its own expense prior to the Redelivery Occasion, shall return such Aircraft to LESSOR at the Redelivery Location or such other location as may be mutually agreed upon by LESSOR and LESSEE, fully equipped as delivered or modified as provided hereunder with all required Engines installed thereon. (B) Records. Upon a Redelivery Occasion applicable to the Aircraft, LESSEE, at its own expense, shall deliver to LESSOR all Aircraft Documents listed in Exhibit "B", as updated, amended or supplemented along with such other records and documents in such form as are necessary to qualify the Aircraft for the issuance of a Certificate of Airworthiness by the FAA and to be eligible to operate under FAR Part 121 specifications issued by the FAA. Such records and manuals shall be current and shall constitute an accurate representation of the condition of the Aircraft. (C) Condition of Aircraft. Upon a Redelivery Occasion applicable to the Aircraft, LESSEE shall return the Aircraft to LESSOR in such condition that the Aircraft shall: (1) comply with each and every return condition requirement set forth in Exhibit "I" hereto; (2) have a valid certificate of airworthiness or, at LESSOR's request, a valid certificate of airworthiness for export to a jurisdiction designated by LESSOR; and (3) shall be free and clear of all Liens, except LESSOR's Liens. (D) Final Inspection. Upon or next preceding a Redelivery Occasion with respect to the Aircraft hereunder, LESSEE shall make such Aircraft available to LESSOR and Mortgagee not more than five (5) days or less than three (3) days prior to the date of the Redelivery Occasion for detailed inspection in order to verify that the condition of such Aircraft complies with the requirements set forth above (such inspection being hereinafter referred to as the "Final Inspection"). Such Final Inspection may be scheduled at an appropriate maintenance facility of the Authorized Maintenance Performer then performing maintenance of such Aircraft, pursuant to Subsection 7(D) hereof, and LESSEE shall give LESSOR and Mortgagee not less than ten (10) days' prior written notice of the location and commencement date of such Final Inspection. The last "C" Check (or the equivalent thereof under the Maintenance Program) and the period allowed for the Final Inspection shall have such duration as to permit LESSOR to inspect the Aircraft and the Aircraft Documents in accordance with this Section 17 and Exhibit "I". -51- (E) No more than three (3) of LESSOR's and Mortgagee's representatives shall be permitted to attend each phase of activity required to be conducted during the last "C" Check and the Final Inspection. The Final Inspection shall commence on the dates designated pursuant to Sections 17(D) and 17(G) with respect to the Aircraft and Aircraft Documents, respectively, and shall continue on consecutive days until all activity required above to be performed during the Final Inspection has been concluded. During the maintenance checks performed immediately prior to the Redelivery Occasion and at the actual return of the Aircraft, LESSOR, Mortgagee and/or their representatives will have an opportunity to conduct a complete inspection of the Aircraft's physical condition including a full operational inspection of the Aircraft systems, including the opening, in order to verify any aspect, of the condition of any area of the Aircraft which would normally be accessible during the maintenance check being performed, or at LESSOR's request and expense any other area, provided that the Final Inspection, excluding time to correct deficiencies, does not extend for more than seventy-two (72) hours beyond the Final Inspection. In addition, a maintenance record review may also be performed to evaluate the extent to which the Aircraft has been maintained in an airworthy condition in accordance with requirements of this Lease. Any deficiencies from the Aircraft return condition requirements set forth in this Section 17 and in Exhibit "I" will be corrected by LESSEE at its cost prior to the Acceptance Flight as hereinafter defined. Immediately prior to the proposed redelivery of the Aircraft, LESSEE will carry out for LESSOR, Mortgagee and/or LESSOR's representatives an Aircraft acceptance flight (the "Acceptance Flight") (which may be the ferry flight to the Return Location) in accordance with LESSEE's comprehensive test flights procedures or, if agreed to in writing by LESSOR, in accordance with an airline acceptance flight procedure, either of which will be for the duration necessary to perform such check flight procedures but in any event not more than one and one-half (1 1/2) hours. Flight costs and fuel will be furnished by and at the expense of LESSEE. Any deficiencies from the Aircraft return condition requirements set forth in this Section 17 and Exhibit "I" will be corrected by LESSEE at its cost prior to return of the Aircraft. (F) To the extent that any portion of the Final Inspection extends beyond the date of a Redelivery Occasion, the Term shall be deemed to be automatically extended, and the LESSEE shall be obligated to continue to insure the Aircraft, in accordance with the provisions of this Lease, and to pay Rent hereunder, on a daily basis, calculated at a daily rate equal to 100% of the per diem Basic Rent for the first five days and at a daily rate equal to 150% of the per diem Basic Rent thereafter until the Final Inspection shall have been concluded. All storage expenses attributable to any extension of the Term pursuant to the preceding sentence shall be payable by LESSEE. Notwithstanding the foregoing, in the event that the Final Inspection evidencing that the -52- Aircraft and Aircraft Documents are in conformity with the provisions of this Lease has not been or, in LESSOR's reasonable judgment, will not be concluded by the tenth (10th) day from the scheduled end of the Term, then, in such event, LESSOR shall have the right to elect to take possession of the Aircraft and Aircraft Documents and perform, or cause to be performed, such repairs as are necessary to bring the Aircraft and Aircraft Documents into conformity with the provisions of this Lease with respect to redelivery of the Aircraft and Aircraft Documents on a Redelivery Occasion. In the event LESSOR makes the election set forth in the immediately preceding sentence, then, in such event, (i) the Term shall be deemed extended until the Aircraft and Aircraft Documents are in conformity with the provisions of this Lease with respect to redelivery but the obligation of LESSEE to pay Rent hereunder shall terminate, except that LESSEE shall pay Supplemental Rent in an amount equal to the costs reasonably incurred by LESSOR to bring the Aircraft and Aircraft Documents into conformity with the provisions of this Lease; and (ii) the amount of Supplemental Rent payable by LESSEE to LESSOR may, at the election of LESSOR, be deducted from the Security Deposit or Related Security Deposit then held by LESSOR and, to the extent that such Security Deposit or Related Security Deposit is insufficient to pay such Supplemental Rent (or if LESSOR has not elected to apply such Security Deposit or Related Security Deposit as provided for herein), LESSEE shall, upon demand made by LESSOR, pay to LESSOR such additional amounts as shall be necessary to fully pay the Supplemental Rent. (G) Aircraft Documentation. In order to enable LESSOR to prepare for its Final Inspection of the Aircraft, (i) upon LESSOR's request, LESSEE will make copies available of (a) drawings of the interior configuration of the Aircraft both as it presently exists and as it will exist at return, (b) airworthiness directive status list, (c) service bulletin incorporation list, (d) rotable controlled, hard time and life limited component listings, (e) interior material burn certificates, (f) complete workscope for the checks, inspections and other work to be performed prior to return, and (g) current Engine disk sheets, and (ii) LESSEE agrees to make available at LESSEE's maintenance base to LESSOR, not later than ten (10) days prior to the commencement of such Final Inspection, the Aircraft Documents listed in Exhibit "B" hereto, together with such other documentation regarding the condition, use, maintenance, operation and history of the Aircraft as LESSOR may request. (H) LESSEE's Correction and Subsequent Corrections. To the extent that the Aircraft, any Engine or any of the Aircraft Documents fails upon a Redelivery Occasion to conform to any requirement imposed by Section 17 hereof, LESSOR may, at its option: -53- (1) continue the Lease in effect in the manner provided for in Subsection 17(F) above with regard to automatic extension with respect to such Aircraft until such time as the nonconforming items are corrected; or (2) request LESSEE to pay, and LESSEE shall pay to LESSOR, an amount equal to the amount required (labor and materials) by the then current Authorized Maintenance Performer or any other Person, as the case may be, agreed upon by LESSOR and LESSEE on the date of such Redelivery Occasion, to correct such nonconforming items. Any such amount payable by LESSEE to LESSOR for such correction shall become Supplemental Rent, payable by LESSEE within five (5) days following the submission of a written statement by LESSOR to LESSEE identifying the items corrected or to be corrected and setting forth the expense of such correction. LESSEE's obligation to pay such Supplemental Rent shall survive the passage of the early termination of the Term or other termination of this Lease. In addition to the preceding, and under the same payment terms, LESSEE, with regard to any time-limited component installed on such Aircraft which does not satisfy the return condition requirements of this Section 17 upon a Redelivery Occasion, LESSEE shall pay LESSOR, at the time of a Redelivery Occasion, an amount equal to the amount which would be required to be paid to the Person selected by the then current Authorized Maintenance Performer or any other person, as the case may be, agreed upon by Lessor and Lessee on the date of such Redelivery occasion, for putting such item in such condition. (I) Dispute as to Compliance with Return Conditions. Should there be any dispute as to whether the Aircraft meets the return conditions, the matter shall be resolved by an independent knowledgeable aviation maintenance expert reasonably acceptable to both parties. The standard to be applied in ascertaining compliance with the redelivery conditions set out in this Section 17 shall be that applied after taking into account the levels of tolerance set out in the Maintenance Program. SECTION 18 EVENTS OF DEFAULT Each of the following events shall constitute an Event of Default: -54- (A) LESSEE shall fail to make any payment of Rent when due under this Lease and such payment shall be overdue for a period of three (3) Business Days after written notice by Lessor to Lessee; (B) LESSEE shall fail to carry and maintain insurance on or with respect to the Aircraft and this Lease in accordance with the provisions of Section 13 hereof or shall operate the Aircraft or permit the Aircraft to be operated in violation of any insurance policy required to be provided pursuant to Section 13 hereof; (C) Except as otherwise expressly provided in this Section 18 and Subsection 18(B) above for which no notice is required, LESSEE shall fail to perform or observe any covenant, condition or agreement to be performed or observed by LESSEE under the Lease or any other Lease Document to which LESSEE is a party and such failure shall continue for a period of thirty (30) days after written notice thereof from LESSOR to LESSEE, provided that such right of remedy shall only exist in respect of not more than three (3) cumulative failures (not including any breach or default by the LESSEE of performance of its obligations under Subsection 18(L) after the date hereof); (D) Any representation or warranty made by LESSEE herein, or in any notice, certificate or other document furnished by or on behalf of LESSEE herein to LESSOR or its assigns, shall prove to have been incorrect in any material respect when made; (E) LESSEE shall consent to the appointment of a receiver, trustee or liquidator for itself or for a substantial part of its property, or LESSEE shall admit in writing its inability to pay its debts generally as they become due, or shall make a general assignment for the benefit of creditors, or LESSEE shall file a voluntary petition in bankruptcy or a voluntary petition or answer seeking reorganization in a proceeding under any Laws dealing with bankruptcy, insolvency, moratorium or creditors' rights generally (any or all of which are hereinafter referred to as "Bankruptcy Laws"), or an answer admitting the material allegations of a petition filed against LESSEE in any such proceeding, or LESSEE shall by voluntary petition, answer or consent to or seek relief under the provisions of any Bankruptcy Laws; (F) An order, judgment or decree shall be entered by any court of competent jurisdiction appointing, without the consent of LESSEE, a receiver, trustee or liquidator for LESSEE or any substantial part of its property, or any substantial part of the property of LESSEE shall be sequestered, and any such order, judgment, decree or -55- appointment, or sequestration, shall remain in force undismissed, unstayed or unvacated for a period of sixty (60) days after the date of entry thereof; (G) A petition against LESSEE in a proceeding under the Bankruptcy Laws of any Governmental Entity shall be filed and shall not be withdrawn or dismissed within sixty (60) days thereafter, or if, under the provisions of any Bankruptcy Laws which may apply to LESSEE, any court of competent jurisdiction shall assume jurisdiction, custody or control of LESSEE or of any substantial part of its property, and such jurisdiction, custody or control shall remain in force unrelinquished, unstayed or unterminated for a period of ninety (90) days; (H) LESSEE shall be dissolved or liquidated, shall terminate its existence or suspend its operations, shall lose any right, privilege or franchise necessary to maintain its corporate existence, or shall dispose of all or substantially all of its properties to any Person (in each case, except as otherwise permitted hereunder); (I) LESSEE shall make or permit any assignment or transfer of this Lease or of possession of the Aircraft other than as permitted hereunder; (J) Any license, permit, authorization, consent, approval, notification, registration or filing now or hereafter necessary to enable LESSEE to perform or comply with its obligations under the Lease shall fail to be timely issued, granted or made, or shall expire or lapse and shall not be forthwith renewed or extended or shall be revoked, withdrawn, withheld or adversely modified, or shall cease to be in full force and effect; (K) All or a substantial part of the properties of LESSEE shall be condemned, seized or otherwise appropriated for custody or control, or such property shall be assumed by any Governmental Entity or any court or other Person purporting to act under the authority of any Governmental Entity, or LESSEE shall be prevented from exercising normal control over all or a substantial part of its properties, if such events as set forth in this Subsection 18(K) are not remedied within sixty (60) days after they occur; (L) The LESSEE fails to pay any Indebtedness exceeding $500,000.00 individually or in the aggregate when due (giving affect to all applicable grace periods) or any Indebtedness exceeding $500,000.00 individually or in the aggregate of the LESSEE becomes or is declared to be due and is accelerated, unless LESSEE is contesting its liability in respect of such Indebtedness by proceedings being contested in good faith and diligently prosecuted and for which appropriate reserves have been made by the LESSEE, -56- all as evidenced to the reasonable satisfaction of the LESSOR, and the LESSOR is reasonably of the view that its interest in the Aircraft is not adversely prejudiced thereby; (M) This Lease or any Lease Document is or becomes wholly or partly invalid, ineffective or unenforceable and the LESSOR determines that such invalidity, ineffectiveness or unenforceability will or may have a material adverse effect upon the rights of the LESSOR or the ability of the LESSEE to perform its obligations under this Lease or such Lease Document and alternative arrangements satisfactory to the LESSOR are not entered into by the LESSEE; or (N) If any Related Lease Event of Default shall occur and be continuing. SECTION 19 REMEDIES Upon the occurrence of any Event of Default, and at any time thereafter so long as the same shall be continuing, LESSOR may, at its option, declare this Lease to be in default, and at any time thereafter, so long as LESSEE shall not have remedied any outstanding Event of Default, LESSOR may exercise one or more of the following remedies with respect to the Aircraft as LESSOR in its sole discretion shall elect, to the extent available and permitted by, and subject to compliance with, any mandatory requirements of applicable Law then in effect; provided, however, that upon the occurrence of any Event of Default specified in paragraphs (F), (G) or (H) of Section 18, LESSOR shall be entitled automatically, as of the day prior to such occurrence, to exercise any of the following remedies without declaring this Lease to be in default or making demand or giving notice or the taking of any other action: (A) Demand that LESSEE, and LESSEE shall, upon the written demand of LESSOR, at LESSEE's expense, return the Aircraft and Aircraft Documents promptly to LESSOR in the manner and condition required by, and otherwise in accordance with all of the provisions of, Section 17 hereof; or LESSOR, at its option and to the extent permitted by applicable Law, may enter upon the premises where all or any part of the Aircraft and Aircraft Documents are located and take immediate possession of and remove the same, by summary proceedings or otherwise, all without liability accruing to LESSOR for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise; -57- (B) Sell the Aircraft at public or private sale, as LESSOR may determine, or otherwise dispose of, hold, use, operate, lease to others, or keep idle the Aircraft, as LESSOR in its sole discretion may determine, all free and clear of any rights of LESSEE and without any duty to account to LESSEE with respect to such action or inaction, or for any proceeds with respect thereto; (C) Demand (whether or not LESSOR, pursuant to Subsection 19(B) hereof, may have sold the Aircraft) that LESSEE pay LESSOR, and LESSEE shall upon such demand pay to LESSOR, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Rent for such Aircraft due after such payment occurs), any accrued and unpaid Rent for such Aircraft due up to the time LESSOR demands such payment, plus the amount by which the Agreed Value of such Aircraft exceeds the net cash proceeds of any sale of such Aircraft, together with interest at the Overdue Rate on such Agreed Value or portion thereof and such unpaid Rent from the date of LESSOR's demand to the date such payment is made; (D) Proceed by appropriate court action or actions, either at Law or in equity, to enforce performance by LESSEE of the applicable covenants of this Lease (including, but not limited to, LESSEE's obligation to pay Rent for the Term) and to recover damages for the breach thereof, or to rescind this Lease as to the Aircraft (which rescission shall not release LESSEE from its financial obligations hereunder); (E) Terminate this Lease or any of LESSEE's rights hereunder by written notice, and repossess the Aircraft and Aircraft Documents, provided such termination shall not release LESSEE from its financial obligations hereunder; (F) Use and apply the Security Deposit or the Related Security Deposit to satisfy any of the obligations of LESSEE set forth in this Lease or in the Related Lease Agreement; (G) Should the LESSEE fail to return the Aircraft and Aircraft Documents upon termination of the Lease for any reason whatsoever except due to an Event of Loss and as set forth in Subsection 17(D)(3) without prejudice to LESSOR's rights hereunder to demand return of the Aircraft in the condition required by this Section, LESSEE shall continue to pay Rent to LESSOR for each day the Aircraft remains in LESSEE's possession at the rate of 1/ 15 of the monthly Basic Rent then in effect. -58- In addition, LESSEE shall be liable for any and all unpaid Rent due hereunder before or during the exercise of any of the foregoing remedies and for the time remaining in the Term without giving effect to any early termination of this Lease, together with interest thereon at the Overdue Rate from the date such Rent was due, and for all reasonable attorneys' fees, legal expenses and other costs and expenses incurred by reason of the occurrence of any Event of Default or the exercise of LESSOR's remedies with respect thereto, including all costs and expenses incurred in connection with the return of the Aircraft, in accordance with the terms of Section 17 hereof, or with placing such Aircraft in such condition. Except as otherwise expressly provided above, no remedy referred to in this Section 19 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to LESSOR under any applicable Law, and the exercise or commencement of exercising by LESSOR of any one or more of such remedies shall not preclude the simultaneous or later exercise by LESSOR of any or all such other remedies. No express or implied waiver by LESSOR of any Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. LESSEE hereby agrees that, except as provided in this Section 19, any financing profit or savings accruing to LESSOR by virtue of LESSEE's default and LESSOR's subsequent sale, re-letting, or award shall in no way reduce, offset or mitigate the damages for which LESSEE is liable hereunder. If the Lease is terminated in accordance with Subsection 19(E), LESSEE hereby appoints LESSOR as LESSEE's irrevocable agent and attorney-in-fact, as set forth in Exhibit "E", to execute all documents deemed necessary to release, terminate and void LESSEE's interest in the Aircraft leased hereunder, and to file said documents for recordation with the Air Authority and the appropriate Governmental Entity following the occurrence of an Event of Default, where LESSOR, at its sole discretion, may deem use of such agency necessary to effect any remedy which LESSOR chooses to exercise. SECTION 20 ALIENATION (A) There shall be no restriction upon LESSOR's right to assign, sell, transfer, pledge, hypothecate or encumber any interest of LESSOR (hereinafter referred to generally as "Alienation") to the Mortgagee in the Aircraft, this Lease, and or the -59- proceeds thereof and hereof, subject to rights of the LESSEE under the provisions of the Lease Assignment. Any other assignment by LESSOR hereunder shall be subject to the prior written consent of LESSEE which consent shall not be unreasonably withheld or delayed. To effect or facilitate any such assignment, sale, transfer, pledge, hypothecation or encumbrance, LESSEE agrees to provide LESSOR or LESSOR's designee or assignee with such agreements, consents, conveyances or documents as may be reasonably requested by LESSOR. The agreements, covenants, obligation and liabilities contained herein, including, but not limited to, all obligations to pay Rent and indemnify LESSOR, are made for the benefit of LESSOR, Mortgagee and their respective successors and assigns, notwithstanding the possibility that any such Person was not originally a party to this Lease or may, at the time such enforcement is sought, not be a party to this Lease. (B) In the case of any Alienation or assignment by LESSOR pursuant to the provisions of Section 20, LESSEE shall execute and deliver to LESSOR promptly (at LESSOR's cost except that LESSEE shall pay the cost of its attorney), upon request of LESSOR, any consents or agreements required for the perfection of such assignment provided that such consent or other documents does not affect LESSEE's rights under Subsection 21(G) below. SECTION 21 MISCELLANEOUS (A) Severability. Amendment and Construction. Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. No term or provision of this Lease may be changed, waived, discharged, or terminated orally, but only by an instrument in writing expressed to be a supplement to this Lease, signed by an officer of the party against which the enforcement of the change, waiver, discharge or termination is sought. This Lease shall constitute an agreement of lease for the Term of the Lease, and nothing herein shall be construed as conveying to LESSEE any right, title or interest in the Aircraft, the Airframe, any Engine or Part except as a LESSEE only, for such Term. The headings in this Lease are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Unless the context otherwise requires, all references in this instrument to designated Sections or other subdivisions hereof are to such designated Sections or subdivisions; and the words -60- "herein", "hereof', "hereto", "hereunder", and other words of similar import refer to this instrument as a whole and not to any particular Section or subdivision. In construing any provision of this Lease, no account shall be taken as to the party who drafted same and no presumption shall arise or result therefrom. (B) Governing Law. This Lease shall in all respects be governed by and construed in accordance with the Laws of the State of New York applicable to contracts entered into in such State by residents thereof and to be performed entirely within such State. (C) Waiver of Jury Trial. LESSEE AND LESSOR HEREBY WAIVE, TO THE FULLEST EXTENT PERMITTED UNDER APPLICABLE LAW, ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING BROUGHT BY EITHER PARTY HERETO WITH RESPECT TO THE CONSTRUCTION OR ENFORCEMENT OF THIS LEASE OR OF ANY PROVISION HEREOF. (D) Notice. Except as otherwise specified herein, notice, requests, demands, consents or other communications to, upon or by the respective parties hereto shall be in the English language and in writing, sent by express courier or telefax, and shall be deemed to have been duly given or made when received by the party if sent by telefax or when received by the party, if sent by express courier, addressed to the party to which such notice, request, demand or other communication is required or permitted to be given or made hereunder, at the LESSEE'S Address or LESSOR'S Address, as the case may be, or at such other address of which such Person shall have notified in writing the party giving such notice. Copies of all notices to the LESSOR shall also be sent to the Mortgagee pursuant to the Lease Assignment and to Feltman, Karesh, Major & Farbman, 152 West 57th Street, New York, New York 10019, Attn.: Loren M. Dollet, Esq., Telefax No.: (212) 586-0951. (E) LESSOR's Right to Perform for LESSEE. If LESSEE fails to make any payment of Supplemental Rent or fails to perform or comply with any covenant, agreement or obligation contained herein, LESSOR shall have the right, but not the obligation, to make such payment or perform or comply with such agreement, covenant or obligation, and the amount of such payment and the amount of the reasonable expenses of LESSOR incurred in connection with such payment or the performance thereof or compliance therewith, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by LESSEE upon demand. The taking of any such action by LESSOR pursuant to this Subsection 21(E) shall not constitute a waiver or release of any -61- obligation of LESSEE under the Lease, nor a waiver of any Event of Default which may arise out of LESSEE's nonperformance of such obligation, nor an election or waiver by LESSOR of any remedy or right available to LESSOR under or in relation to this Lease. (F) Counterparts. This Lease may be executed simultaneously in one or more counterparts, all of which together shall constitute one and the same Lease. To the extent that this Lease constitutes chattel paper in any jurisdiction, no security interest herein may be created through the transfer of possession of any counterpart other than the counterpart marked "Original." Other than the counterpart of this Lease marked "Original," all other original executed counterparts of this Lease shall be marked "Duplicate Original." (G) Quiet Enjoyment and Lessor Covenant. LESSOR covenants that if, and as long as, LESSEE keeps and performs each and every covenant and agreement to be performed or observed by it hereunder and/or no Event of Default has occurred and is continuing, LESSEE shall quietly enjoy the Aircraft without interference by LESSOR or by any Person claiming by, through or against LESSOR, including, but not limited to, Mortgagee and any other security assignee of LESSOR, and none of the LESSOR or any Person claiming by, through or against LESSOR, including, but not limited to, any assignee of LESSOR, will, as long as LESSEE keeps and performs each and every covenant to be performed or observed by it hereunder, take any action which adversely affect the registration of the Aircraft. LESSOR further covenants that it will maintain all legal right, power and authority, and all licenses and authorizations, necessary to lease the Aircraft for the Term. (H) Brokers. LESSOR and LESSEE each agree that there has been no third party as broker or finder involved in this Lease and each party hereby indemnifies the other party from liability for fees, commissions or other claims made upon such other party due to such claims arising through it. (I) Jurisdiction. Service of Process. The parties hereto hereby expressly submit to the non-exclusive jurisdiction of the United States District Court for the Southern District of New York or the Supreme Court of the State of New York in the Borough of Manhattan, City of New York with respect to any action arising out of or relating to this Lease. The parties hereto, to the fullest extent available under applicable Law, waive any claim that venue or jurisdiction is improper in such courts or that such courts constitute an inconvenient forum. Service of summons, complaint and other legal process on LESSOR or LESSEE with respect to any action arising out of or relating to this Lease may be made by mailing (registered mail, return receipt requested) a copy of -62- any summons or other legal process to said Party at the LESSEE's address or LESSOR's address, as the case may be, or by any other procedure permitted under the Laws of the United States of America. The mailing, as herein provided, of such summons or other legal process shall be deemed personal service and accepted by LESSEE or LESSOR as such, and shall be legal, effective and binding upon LESSEE or LESSOR for all the purposes of the suit. Nothing in this Subsection 21(I) shall in any way be deemed to limit the ability of LESSOR or LESSEE to serve any such summonses or legal process in any other manner permitted by applicable Law or to obtain jurisdiction over the other party in such other jurisdictions, and in such manner, as may be permitted by applicable Law. SECTION 22 SUBLEASE; ASSIGNMENT; CRAF PROGRAM (A) LESSEE shall not sublease the Aircraft or assign its rights in this Lease to any other party without the prior written consent of LESSOR which consent shall not be unreasonably withheld or delayed. LESSEE agrees that it will be reasonable for LESSOR to withhold its consent if such sublease or assignment will impair or adversely affect Mortgagee's security interest in the Aircraft. (B) Any sublease or assignment consented to by LESSOR shall contain, among other things, the following terms and conditions: (1) That such sublease or assignment is subject to and subordinate to this Lease; (2) The sublease or assignment shall not relieve the LESSEE of its obligations under this Lease and the LESSEE shall continue to be primarily liable hereunder; and (3) The rights of the LESSOR in any sublease shall be assigned to LESSOR as security for the performance of the obligations of LESSEE under this Lease and further assigned by LESSOR to Mortgagee. -63- (C) In connection with any request by LESSEE to LESSOR to sublease the Aircraft or assign its rights in this Lease to any other party, LESSEE agrees to pay on demand to LESSOR all reasonable costs and expenses incurred by LESSOR in connection with such request, including, but not limited to, legal fees and expenses of counsel to LESSOR (such legal fees for which LESSEE shall be responsible shall include, but not be limited to, the cost of counsel reviewing all documents which LESSEE proposes to enter into in connection with such sublease or assignment). (D) All of LESSEE's obligations hereunder may be performed by any approved sublessee or assignee, provided however that the LESSEE shall not be released from its obligations hereunder. (E) LESSEE may subject the Aircraft to a Wet Lease without LESSOR's prior written consent. (F) So long as no Default or Event of Default shall have occurred and be continuing under this Lease, LESSEE may transfer possession of the Aircraft to the U.S. Government pursuant to the CRAF Program. In the event of (i) a requisition for use by the U.S. Government of the Aircraft during the Term for the purpose of an Air Mobility Command Solicitation pursuant to the CRAF Program (a "CRAF Requisition") or (ii) notice to the LESSEE from the Government to the effect that the Aircraft may be subject to a CRAF Requisition (a "CRAF Activation"), LESSEE shall promptly notify LESSOR and Mortgagee and, except as otherwise specified herein, all of LESSEE's obligations under this Lease shall continue to the same extent as if such CRAF Requisition or CRAF Activation had not occurred. LESSEE agrees that no CRAF Requisition or CRAF Activation shall continue beyond the end of the Term and that, if the Airframe or any Engine is not returned by the U.S. Government prior to the end of the Term, then: (1) such failure shall constitute an Event of Loss, and LESSEE and LESSOR shall comply with the provisions of Section 12; and (2) the Term (including LESSEE's obligation to pay Basic Rent) shall be deemed extended to, and shall not expire until, the date LESSEE performs fully its obligations pursuant to Section 12. (G) Notwithstanding any provision in this Lease to the contrary, LESSOR and LESSEE hereby expressly acknowledge and agree that during any CRAF Requisition or CRAF Activation: -64- (1) the Aircraft shall be registered in the United States; (2) LESSEE may transfer possession of the Aircraft to the U.S. Government, provided that the rights of any transferee of the Aircraft shall be subject and subordinate to all of the terms of this Lease and the Mortgage, including the right of LESSOR and Mortgagee to terminate this Lease and immediately repossess the Aircraft following an Event of Default; (3) LESSEE shall have exclusive control of the Aircraft and shall remain primarily liable for the performance of all of the terms of this Lease to the same extent as if such CRAF Requisition or CRAF Activation had not occurred; (4) there shall be no limitation on the geographic area in which the Aircraft may be operated; and (5) LESSEE shall provide LESSOR and Mortgagee with the name and address of the Contracting Office Representative for the Military Airlift Command of the United States Air Force to whom notice must be given in connection with the enforcement of remedies under this Lease, and LESSOR shall give such representative prior written notice of its enforcement of any remedies under this Lease. (H) LESSOR shall accept U.S. Government indemnification in lieu of insurance during a CRAF Requisition or CRAF Activation, and LESSEE's failure to maintain insurance in accordance with Section 13 hereof during a CRAF Requisition or CRAF Activation shall not constitute an Event of Default, provided, however, that in the event that LESSEE is able to maintain existing insurance coverage on the Aircraft during a CRAF Requisition or CRAF Activation, as the case may be, and the maintenance of such existing insurance during a CRAF Requisition or CRAF Activation will not result in any additional cost to Lessee which is materially in excess of the cost for the existing insurance coverage on the Aircraft immediately prior to the CRAF Requisition or CRAF Activation, as the case may be, Lessee shall not take any action or inaction which results in the termination or cancellation of such insurance. LESSEE shall promptly notify LESSOR and Mortgagee as to the existence of such indemnification and promptly furnish to LESSOR and Mortgagee a copy of such indemnification agreement and a certificate of its independent aircraft insurance brokers certifying that such indemnification and other insurance maintained by LESSEE is in full compliance with all the requirements of -65- Section 13. All payments received by LESSOR or LESSEE from the U.S. Government for the use of the Aircraft during or after the Term shall be paid over to or retained by LESSEE unless (i) an Event of Default has occurred and is continuing hereunder, or (ii) a deemed Event of Loss has occurred hereunder and LESSEE has not complied with all of its obligations set forth in Section 12 hereof, in either of which cases such payments shall be paid over to or retained by LESSOR to be applied in satisfaction of LESSEE's obligations hereunder. SECTION 23 RIGHT OF FIRST REFUSAL If LESSOR proposes to sell the Aircraft, which LESSOR may choose to do or not to do in LESSOR's sole discretion, and LESSOR agrees on the terms of such sale with an unaffiliated third party, then LESSOR shall send LESSEE a written notice (the "LESSOR Notice") specifying the proposed terms of such sale. LESSEE shall have the option to purchase the Aircraft on the same terms as specified in the LESSOR Notice by exercising such option in a written notice to be delivered to LESSOR within fifteen (15) Business Days of receipt of the LESSOR Notice by LESSEE, including to post within such 15 days period any deposits for performance. If the LESSEE fails to accept the offer in accordance with this Section 23 within the 15 days period, the LESSEE shall conclusively be deemed to have rejected such offer and the LESSOR may, at any time within three months thereafter, sell the Aircraft on the terms of the offer. If the LESSEE accepts the offer, LESSOR and LESSEE shall negotiate in good faith to sell the Aircraft by not later than 30 days after the LESSEE's acceptance. SECTION 24 ENTIRE AGREEMENT This Lease (including all Exhibits hereto) embodies the entire agreement and understanding between LESSOR and LESSEE relating to the subject matter hereof and supersedes all prior agreements and understandings relating hereto and neither of the parties hereto shall be bound by or charged with any oral or written agreements, representations, warranties, statements, promises or understandings not specifically set forth herein. This Lease may not be changed and no right granted or obligation imposed -66- hereunder may be waived orally, but only by an instrument in writing signed by the party against whom enforcement of any waiver, change, modification or discharge is sought. SECTION 25 CONFIDENTIALITY LESSOR and LESSEE agree to keep this Lease and all Lease Documents and any and all documents of a financial or proprietary nature received pursuant to the provisions of this Lease confidential, and shall not disclose the existence or any portion of this Lease and any Lease Document and any and all documents of a financial or proprietary nature received pursuant to the provisions of this Lease to any person or entity, except in accordance with the terms hereof. LESSOR and LESSEE may disclose this Lease and any Lease Document on a need to know basis to: (i) its counsel, accountants, banks, financial institutions, maintenance providers, independent insurance advisors or other advisors or agents who are under a duty to or agree to hold such information confidential, (ii) if the document or information was filed as a matter of public record with a Governmental Entity or was generally available to the public at the time of disclosure (other than as a result of a disclosure by such person or entity), or (iii) as may be required by any statute, court or administrative order or decree or governmental rule or regulation or by any regulatory or supervisory governmental authority or agency or by generally accepted accounting principles. [signature page follows] -67- IN WITNESS WHEREOF, LESSOR and LESSEE, each pursuant to due corporate authority, have caused this Aircraft Lease Agreement [49587] to be executed by their duly authorized officers as of the day and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR, INC. By: /s/ Aaron Mendelsohn By: ------------------------- ---------------------------- Name: Aaron Mendelsohn Name: Title: President Title: -68- IN WITNESS WHEREOF, LESSOR and LESSEE, each pursuant to due corporate authority, have caused this Aircraft Lease Agreement [49587] to be executed by their duly authorized officers as of the day and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR, INC. By: By: /s/ Robert M. Rowen ------------------------- ---------------------------- Name: Name: Robert M. Rowen Title: Title: Vice President and General Counsel -68- EXHIBIT "A" AIRCRAFT SPECIFICATIONS Manufacturer: McDonnell Douglas Model MD-87 Serial No. 49587 Line No. N/A Reg. No. N753RA Date of Mfgr. 1988 AIRFRAME STATUS Time as of 11/16/95 Total Hours 14129 Total Cycles 7448 Time Since Last C Ck 13321 hours Time to Next Overhaul N/A hours/ ENGINE STATUS Model # Serial # REMAINING Limiter ------- -------- --------- ------- #1. Pratt & Whitney 708147 3155 cyc LPT Shaft JT8D-217C #2. Pratt & Whitney 708177 5704 cyc LPT Shaft JT8D-217C LANDING GEAR STATUS Hrs. Remaining Cycles Remaining -------------- ---------------- Nose N/A N/A Main N/A N/A -69- EXHIBIT "B" AIRCRAFT DOCUMENTATION Delivery of Manuals/Documents o AD Status o Present Certificate of Airworthiness o Copy of Original Certificate of Airworthiness or Export ex USA o Copy of Noise Certificate o Copy of Radio Lisence o Packing Sheet from MDC o Engine Records and Modification Status o Status Engine S.B., ASB, AD o Test Cell Run Sheets o Inventory of Loose Equipment at Date of Delivery o Weight and Balance Records (Status at Delivery) o Weight and Balance Manual o S.B., AOL, I.A. - Status o Time controlled Component Inventory List (PA 061 INVORT) o Historical records: o Log Books o OTI'S, OTA'S, EO's and AD's o None Routine Job Cards o Briefing Cards o HIL-Lists/Line Maintenance/Heavy Maintenance o FAA/FAO approved Flight Manual o Wiring Diagram Manual (Microfilm) o IPC (Microfilm) o MAI (Microfilm) o Last X-Ray Pictures o APU Log Book/Shop Findings ex UTA o AOM (Operational Manual) o Certificate of Airworthiness for Export issued by Swiss Federal Air Office -70- EXHIBIT "C" CERTIFICATE OF ACCEPTANCE This Certificate of Acceptance is delivered on and as of the date set forth below by RENO AIR, INC. (hereinafter referred to as "LESSEE") to OLIVIA CORP. (hereinafter referred to as "LESSOR") pursuant to that Aircraft Lease Agreement [49587] dated as of November _, 1995 between LESSOR and LESSEE (hereinafter referred to as the "Agreement"): A. Details of Acceptance LESSEE hereby indicates and confirms to LESSOR, its successors and assigns, that the LESSEE has at ______ o'clock _.M., at this __ day of November, 1995, at Zurich International Airport, Zurich, Switzerland, accepted the following in accordance with the provisions of the Agreement: 1. (a) McDonnell Douglas Model: NM-87 (b) Manufacturer's Serial No.: 49587 (c) U.S. FAA Registration Number: N753RA Manufacturer Engine Model Number Total Total Hours Cycles No. Serial Number Hours Cycles Remaining Remaining --- ------------- ----- ------ --------- --------- (1) Pratt & Whitney JT8D-217C 708147 (2) Pratt & Whitney JT8D-217C 708177 -71- Each of the above-described Engines having 750 or more rated take-off horsepower or the equivalent thereof. Airframe Total Time: ____ hrs. Total Cycles: ____ Cycles Fuel ____ lbs. B. Confirmation of Undertakings LESSEE confirms that the above described Aircraft and Engines have been examined by its duly appointed and authorized representative(s), that such Aircraft and Engines conform to the information set forth above, that there have been fixed to the Aircraft the markings required by the Agreement (or that such markings shall be affixed to the Aircraft within fifteen (15) days of the date hereof). LESSEE confirms and acknowledges that the date set forth above constitutes the Effective Date, as such term is defined in the Agreement, and that LESSEE's execution and delivery of this Certificate represents LESSEE's acceptance of the above described Aircraft and Engines for all purposes of the Agreement. IN WITNESS WHEREOF, LESSEE has caused this Certificate of Acceptance to be executed in its name, by its duly authorized officer(s) or representative(s), pursuant to due corporate authority, all as of the date written in Section A above. LESSEE: RENO AIR, INC. By:_________________________ Title:______________________ Date:_______________________ -72- EXHIBIT "D" LEASE SUPPLEMENT [49587] NO. 1 LEASE SUPPLEMENT [49587] NO. 1, dated November _, 1995, between OLIVIA CORP. ("LESSOR") and RENO AIR, INC. ("LESSEE"). LESSOR and LESSEE have heretofore entered into that certain Aircraft Lease Agreement [49587], dated as of November _, 1995, relating to one (1) McDonnell Douglas MD-87 Aircraft (herein called the "Lease" and the defined terms therein being hereinafter used with the same meanings). The Lease provides for the execution and delivery of a Lease Supplement for the purpose of subjecting the Aircraft and other property described in such Lease Supplement (collectively, the "Equipment"), as and when delivered by LESSOR to LESSEE, to the terms of the Lease. The Lease relates to the Equipment described below and a counterpart of the Lease is attached hereto and made a part hereof, and this Lease Supplement, together with such attachment, is being filed for recordation on the date hereof with the FAA as one document. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, LESSOR and LESSEE hereby agree as follows: 1. LESSOR hereby delivers and leases to LESSEE under the Lease, and LESSEE hereby accepts delivery of and leases from LESSOR under the Lease, the following described Equipment, which Equipment, as of the date hereof, is acknowledged and accepted by LESSEE: (i) Airframe: one (1) McDonnell Douglas MD-87 airframe, bearing FAA Registration No. N753RA and Manufacturer's Serial No. 49587; (ii) Engines: two (2) Pratt & Whitney Model JT8D-217C aircraft engines, each of which has 750 or more rated takeoff horsepower and bearing Manufacturer's Serial Nos. 708147 and 708177, respectively; and -73- (iii) The Aircraft Documents. 2. The Effective Date for the Equipment is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. The Term is from the date of this Lease Supplement through and including January 15, 2003. 4. LESSEE hereby confirms it has paid the Security Deposit to LESSOR in the amount set forth on Schedule "1" attached hereto and forming a part hereof. 5. LESSEE hereby confirms its agreement to pay LESSOR Interim Rent and Basic Rent, as applicable, for the Equipment throughout the Term, in the installments and in the amounts provided for on Schedule "1", on each Rent Date. 6. LESSEE hereby confirms its agreement to pay LESSOR Reserves on each Maintenance Reserve Date, subject to the provisions of 5(E) and in the amounts provided for on Schedule "1". 7. LESSEE hereby confirms to LESSOR that LESSEE has accepted the Equipment for all purposes hereof and of the Lease. 8. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 9. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute but one and the same instrument. -74- IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement [49587] No. 1 to be duly executed and delivered as of the date and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR, INC. By:_____________________________ By:_____________________________ Name: Name: Title: Title: -75- Schedule "1" 1. Security Deposit. The Security Deposit shall equal $300,000. 2. Interim Rent. Interim Rent shall be payable by LESSEE to LESSOR in the amount set forth in Section 5(A) of the Lease. The Minimum Basic Rent shall equal $40,000. 3. Basic Rent. (i) Basic Rent shall be paid by LESSEE to LESSOR, in advance, as set forth in Section 5(A)(ii) of the Lease. (ii) The monthly Basic Rent for each Rent Period during the periods set forth below shall equal the amounts set forth next to such periods assuming that LIBOR for such Rent Period is 5.8% per annum: January 15, 1996 - July 14, 1996 - $87,500 July 15, 1996 - Expiration Date - $150,000 To the extent LIBOR on any given Rent Date (provided, however, if such Rent Date is not a London Banking Day, then on the immediately following London Banking Day), on which Basic Rent is to be paid is less than or greater than 5.8% per annum, the Basic Rent payable by LESSEE to LESSOR on the next Rent Date shall be adjusted upward (in the event that LIBOR is greater than 5.8% per annum) or downward (in the event that LIBOR is less than 5.8% per annum) in accordance with the following formula (the "Rent Adjustment"): ((L-5.8) x A) + B L = the actual 30-day LIBOR rate for the preceding Rent Date, however, L shall never be greater than 8.0 nor less than 3.6 B = the Basic Rent A = an adjustment factor equal to the amount set forth below corresponding to the relevant Rent Period: -76- Rent Period A ----------- - Jan-15-1996 to Jan-14-1997 7,450 Jan-15-1997 to Jan-14-1998 6,700 Jan-15-1998 to Jan-14-1999 5,800 Jan-15-1999 to Jan-14-2000 4,900 Jan-15-2000 to Jan-14-2001 3,850 Jan-15-2001 to Jan-14-2002 2,750 Jan-15-2002 to Jan-15-2003 1,550 Notwithstanding anything set forth herein to the contrary, with respect to the Basic Rent payable for the last Rent Period, the Rent Adjustment shall be made on the Expiration Date. To the extent the Basic Rent is adjusted upward for such Rent Period, LESSEE shall pay the Rent Adjustment to LESSOR on the Expiration Date. To the extent the Basic Rent is adjusted downward for such period and provided no Default or Related Lease Default has occurred and is continuing, LESSOR shall pay LESSEE the Rent Adjustment on the later of the Expiration Date or the date on which LESSEE has complied with all provisions hereof. 4. Reserves. (i) The Airframe Reserves shall be payable in an amount equal to thirty ($30.00) Dollars for each Flight Hour incurred on the Airframe for the previous Rent Period; (ii) The Engine Reserves shall be payable in an amount equal to seventy ($70.00) Dollars per each Cycle incurred on each Engine for the previous Rent Period; and (iii) the Landing Gear Reserves shall be ten ($10.00) Dollars per each Cycle incurred on the Landing Gear for the previous Rent Period. -77- EXHIBIT "E" APPOINTMENT AS ATTORNEY-IN-FACT Pursuant to the terms of Subsection 19 of the Lease (as hereinafter defined), RENO AIR, INC. ("Reno") hereby irrevocably appoints OLIVIA CORP. ("LESSOR"), or its representatives, agents or assigns, as its true and lawful attorney-in-fact, to act in all respects, do such acts and take such actions as Reno could do or authorize itself under the Lease with respect to the use, operations, maintenance and possession of the McDonnell Douglas MD-87 Aircraft, Serial Number 49587, U.S. Registration No. N753RA (the "Aircraft"), which LESSOR has leased to Reno by Aircraft Lease Agreement [49587] dated as of November _, 1995 (the "Lease"). The appointment is made as part of and in consideration of the leasing of the Aircraft to Reno by LESSOR and shall remain in full force and effect until all obligations of Reno under the Lease shall be fully discharged or satisfied. The power given to LESSOR herein may only be exercised upon the occurrence and continuation of an Event of Default under the Lease but LESSOR shall not be required to deliver any evidence to any party as to the existence of such Event of Default in connection with the exercise of the power hereunder. Executed this ___ day of November, 1995. RENO AIR, INC. By:_______________________ Name: Title: Attested by: __________________________ (PLACE CORPORATE Secretary SEAL HERE) -78- STATE OF ) ) ss.: COUNTY OF ) On the __ day of _________, 199_, before me personally came __________________, to me known, who, being by me duly sworn, did depose and say that he resides at _____________________; that he is the ________ of _______________, the corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. ______________________________ Notary Public [Seal] -79- EXHIBIT "F" REDELIVERY CERTIFICATE This Redelivery Certificate is delivered on and as of the date set forth below by Olivia Corp. (hereinafter referred to as "LESSOR"), to Reno Air, Inc. (hereinafter referred to as "LESSEE") pursuant to the Aircraft Lease Agreement [49587], dated as of November __, 1995, between LESSOR and LESSEE (hereinafter referred to as the "Agreement"): A. Details of Redelivery. LESSOR hereby indicates and confirms to LESSEE, its successors and assigns, that the LESSOR has, at ____ o'clock _.M., on this __ day of _________, 199_, at ____________, accepted the following in accordance with the provisions of the Agreement: 1. (a) McDonnell Douglas Model: MD-87; (b) Manufacturer's Serial No.: 49587; and (c) U.S. FAA Registration No.: N753RA. Manufacturer Engine Model Number Total Total Hours Cycles No. Serial Number Hours Cycles Remaining Remaining --- ------------- ----- ------ --------- --------- (1) Pratt & Whitney JT8D-219 [_____] (2) Pratt & Whitney JT8D-219 [_____] Each of the above-described Engines having 750 or more rated take-off horsepower or the equivalent thereof. -80- Airframe Total Time: ____ hrs. Total Cycles: ____ Cycles Fuel _____ lbs. B. Confirmation of Acceptance. LESSOR confirms that the above-described Aircraft and Engines have been examined by its duly appointed and authorized representative(s) and that such Aircraft and Engines conform to the information set forth above. LESSOR's execution and delivery of this Redelivery Certificate represents LESSOR's acceptance of the above-described Aircraft and Engines for all purposes of this Agreement. IN WITNESS WHEREOF, LESSOR has caused this Redelivery Certificate to be executed in its name, by its duly authorized officer(s) or representative(s), pursuant to due corporate authority, all as of the date written in Section A above. LESSOR: OLIVIA CORP. By:___________________________ Name: Title: -81- EXHIBIT "G" DELIVERY CONDITIONS Upon delivery of the Aircraft to the LESSEE, the Aircraft shall comply with the following (except to the extent any such items are to be accomplished during the "C" check to be performed by LESSEE immediately following the delivery of the Aircraft): 1. The Aircraft shall be delivered in an airworthy condition and have a valid Swiss Aviation Authority certificate of airworthiness for export. 2. There shall be no deferred maintenance items on the Airframe or Engines. 3. All AD notes and mandatory service bulletins modifications due for compliance as of the Effective Date shall have been performed. 4. Immediately prior to delivery, LESSOR shall, at its cost, perform a test flight of the Aircraft, not to exceed one and one-half (1 1/2) hours in duration, for the purpose of demonstrating the serviceability of the Aircraft and its systems. To the extent that any of the systems of the Aircraft which affect the airworthiness thereof are not functioning in accordance with the standards of the Manufacturer, LESSOR shall, at its sole cost and expense, repair, or cause to be repaired, such systems. 5. As of the Effective Date, each Engine will have not less than 3,000 Cycles remaining until the next scheduled removal in accordance with Swissair's standard engine maintenance program and no discrepancies noted in a borescope inspection. In computing the time remaining with respect to the Engines, at any time when same is required to be calculated under the provisions of this Lease, the most time limited component shall be used as the measure. 6. All life limited components, other than Engine components, installed on the Aircraft shall have not less than 12 months or 2,000 Cycles remaining, as determined under the Swissair maintenance program. 7. All technical records and manuals will be up to date and complete and in English with no deferred maintenance items. -82- 8. Any modifications necessary to integrate the Aircraft into LESSEE's fleet shall be performed by LESSEE and LESSEE shall be solely responsible for all such costs. 9. All documents listed on Exhibit "B" hereof shall have been delivered to Lessee and any other documents necessary to obtain a United States Certificate of Airworthiness and to be operable in compliance with Part 121. 10. Lessee shall pay Lessor for all fuel on board the Aircraft at delivery of the Aircraft on the Effective Date. -83- EXHIBIT "H" LEASE IDENTIFICATION OWNER: Olivia Corp. LESSEE: Reno Air, Inc. MORTGAGEE: Credit Lyonnais/PK AIRFINANCE, New York Branch -84- LEASE SUPPLEMENT [49587] NO. 1 LEASE SUPPLEMENT [49587] NO. 1, dated November 16, 1995, between OLIVIA CORP. ("LESSOR") and RENO AIR, INC. ("LESSEE"). LESSOR and LESSEE have heretofore entered into that certain Aircraft Lease Agreement [49587], dated as of November 16, 1995, relating to one (1) McDonnell Douglas MD-87 Aircraft (herein called the "Lease" and the defined terms therein being hereinafter used with the same meanings). The Lease provides for the execution and delivery of a Lease Supplement for the purpose of subjecting the Aircraft and other property described in such Lease Supplement (collectively, the "Equipment"), as and when delivered by LESSOR to LESSEE, to the terms of the Lease. The Lease relates to the Equipment described below and a counterpart of the Lease is attached hereto and made a part hereof, and this Lease Supplement, together with such attachment, is being filed for recordation on the date hereof with the FAA as one document. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, LESSOR and LESSEE hereby agree as follows: 1. LESSOR hereby delivers and leases to LESSEE under the Lease, and LESSEE hereby accepts delivery of and leases from LESSOR under the Lease, the following described Equipment, which Equipment, as of the date hereof, is acknowledged and accepted by LESSEE: (i) Airframe: one (1) McDonnell Douglas MD-87 airframe, bearing FAA Registration No. N753RA and Manufacturer's Serial No. 49587; (ii) Engines: two (2) Pratt & Whitney Model JT8D-217C aircraft engines, each of which has 750 or more rated takeoff horsepower and bearing Manufacturer's Serial Nos. 708147 and 708177, respectively; and (iii) The Aircraft Documents. 2. The Effective Date for the Equipment is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. The Term is from the date of this Lease Supplement through and including January 15, 2003. 4. LESSEE hereby confirms it has paid the Security Deposit to LESSOR in the amount set forth on Schedule "1" attached hereto and forming a part hereof. 5. LESSEE hereby confirms its agreement to pay LESSOR Interim Rent and Basic Rent, as applicable, for the Equipment throughout the Term, in the installments and in the amounts provided for on Schedule "1", on each Rent Date. 6. LESSEE hereby confirms its agreement to pay LESSOR Reserves on each Maintenance Reserve Date, subject to the provisions of 5(E) and in the amounts provided for on Schedule "1". 7. LESSEE hereby confirms to LESSOR that LESSEE has accepted the Equipment for all purposes hereof and of the Lease. 8. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 9. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute but one and the same instrument. 2 IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement [49587] No. 1 to be duly executed and delivered as of the date and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR INC. By: /s/ Aaron Mendelsohn By: --------------------------- --------------------------- Name: Aaron Mendelsohn Name: Title: President Title: 3 IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement [49587] No. 1 to be duly executed and delivered as of the date and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR INC. By: By: /s/ Robert M. Rowen --------------------------- --------------------------- Name: Name: Robert M. Rowen Title: Title: Vice President and General Counsel 3 Schedule "1" 1. Security Deposit. The Security Deposit shall equal $300,000. 2. Interim Rent. Interim Rent shall be payable by LESSEE to LESSOR in the amount set forth in Section 5(A) of the Lease. The Minimum Basic Rent shall equal $40,000. 3. Basic Rent. (i) Basic Rent shall be paid by LESSEE to LESSOR, in advance, as set forth in Section 5(A)(ii) of the Lease. (ii) The monthly Basic Rent for each Rent Period during the periods set forth below shall equal the amounts set forth next to such periods assuming that LIBOR for such Rent Period is 5.8% per annum: January 15, 1996 - July 14, 1996 - $87,500 July 15, 1996 - Expiration Date - $150,000 To the extent LIBOR on any given Rent Date (provided, however, if such Rent Date is not a London Banking Day, then on the immediately following London Banking Day), on which Basic Rent is to be paid is less than or greater than 5.8% per annum, the Basic Rent payable by LESSEE to LESSOR on the next Rent Date shall be adjusted upward (in the event that LIBOR is greater than 5.8% per annum) or downward (in the event that LIBOR is less than 5.8% per annum) in accordance with the following formula (the "Rent Adjustment"): ((L-5.8) x A) + B L = the actual 30-day LIBOR rate for the preceding Rent Date, however, L shall never be greater than 8.0 nor less than 3.6 B = the Basic Rent A = an adjustment factor equal to the amount set forth below corresponding to the relevant Rent Period: 4 Rent Period A ----------- - Jan-15-1996 to Jan-14-1997 7,450 Jan-15-1997 to Jan-14-1998 6,700 Jan-15-1998 to Jan-14-1999 5,800 Jan-15-1999 to Jan-14-2000 4,900 Jan-15-2000 to Jan-14-2001 3,850 Jan-15-2001 to Jan-14-2002 2,750 Jan-15-2002 to Jan-15-2003 1,550 Notwithstanding anything set forth herein to the contrary, with respect to the Basic Rent payable for the last Rent Period, the Rent Adjustment shall be made on the Expiration Date. To the extent the Basic Rent is adjusted upward for such Rent Period, LESSEE shall pay the Rent Adjustment to LESSOR on the Expiration Date. To the extent the Basic Rent is adjusted downward for such period and provided no Default or Related Lease Default has occurred and is continuing, LESSOR shall pay LESSEE the Rent Adjustment on the later of the Expiration Date or the date on which LESSEE has complied with all provisions hereof. 4. Reserves. (i) The Airframe Reserves shall be payable in an amount equal to thirty ($30.00) Dollars for each Flight Hour incurred on the Airframe for the previous Rent Period; (ii) The Engine Reserves shall be payable in an amount equal to seventy ($70.00) Dollars per each Cycle incurred on each Engine for the previous Rent Period; and (iii) the Landing Gear Reserves shall be ten ($10.00) Dollars per each Cycle incurred on the Landing Gear for the previous Rent Period. 5 EXHIBIT "I" REDELIVERY CONDITIONS A. The Aircraft will be redelivered in accordance with Section 17 of the Lease and in accordance with the following provisions: 1) The Aircraft shall have a valid U.S. Certificate of Airworthiness or, at LESSOR's request, a valid U.S. Certificate of Airworthiness for Export to a jurisdiction designated by Lessor. If the Aircraft is to be registered in a country other than in the United States after return from LESSEE, LESSOR may in it's discretion require that LESSEE at its expense (to the extent such expense is no greater than that LESSEE would have incurred in connection with this subparagraph A(l), with any additional expense for LESSOR's account) put the Aircraft in a condition to meet the requirements for issuance of a certificate of airworthiness of the aviation authority of the next country of register, provided, however, in the event that the foregoing causes a delay in the redelivery of the Aircraft to Lessor, Lessee shall not be liable for any costs associated with the delay in redelivery. 2) The Aircraft shall be in good operating condition and airworthy in accordance with the Maintenance Program applicable to the Aircraft and the Manufacturer's structural repair manual. All of the Aircraft equipment, components, and systems shall be functioning in accordance with the Maintenance Program. 3) The Aircraft shall be in passenger cabin configuration with 12F and 105Y seats. 4) The Aircraft shall be clean by international commercial airline standards. 5) No special or unique Manufacturer, Engine manufacturer or FAA inspection or check requirements which are specific to the Aircraft or Engines (as opposed to all aircraft or engines of their types) will exist with respect to the Airframe, Engines and Aircraft equipment, components and systems unless there is no terminating action rectification available from any source. -85- 6) All Airworthiness Directives and other instructions of the FAA applicable to the Aircraft which are issued prior to the date of return of the Aircraft and require compliance (either by means of repetitive inspections, modifications or terminating action) prior to return of the Aircraft to LESSOR will have been complied with on the Aircraft on a terminating action basis. Airworthiness Directives and instructions which do not have a terminating action will be accomplished at the level of inspection or modification required to clear the Aircraft for the lesser of the longest available interval between inspections or one (1) year after the Expiration Date. If, after using best efforts, LESSEE is unable to acquire the material, parts or components necessary to accomplish such Airworthiness Directive, LESSEE will pay to LESSOR upon return of the Aircraft the estimated cost of terminating such Airworthiness Directive. If the estimated cost cannot be mutually agreed upon by LESSEE and LESSOR, LESSEE and LESSOR will each obtain a reasonable estimate from reputable FAA approved maintenance facility and the estimated cost will be the average of the two estimates. 7) The Aircraft will be in compliance with Manufacturer's Corrosion Prevention and Control Program (CPCP) specified for the model type by Manufacturer. 8) All no-charge vendor and Manufacturer's service bulletin kits received by LESSEE for the Aircraft but not installed thereon will be on board the Aircraft as cargo. At LESSOR's request, any other service bulletin kit which LESSEE paid for will also be delivered to LESSOR on board of the Aircraft, but LESSOR will reimburse LESSEE for its actual out-of-pocket costs for such kit. 9) The Aircraft will be free of any system-related leaks and any damage resulting therefrom. All repairs will have been performed on a permanent basis in accordance with the applicable manufacturer's instructions. 10) If any waivers, alternate means of compliance (unless there exists no permanent terminating action repair and such alternate means of compliance is transferrable to other operators of the Aircraft), dispensations, extensions or carry-overs with respect to Airworthiness Directives or operating or maintenance requirements are granted by the FAA or permitted by the Maintenance Program, LESSEE at its sole cost and expense will nonetheless perform such Airworthiness Directives and other operating or maintenance requirements on a terminating action basis as if such waivers, alternate means of compliance, dispensations or extensions did not exist, provided, however, if such waivers, alternative means of compliance, dispensations or extensions are generally available to operators of MD-87 aircraft, Lessee shall not be required to terminate such Airworthiness Directives and/or other operating or maintenance requirements but shall be -86- required to perform such maintenance and inspections as it is performing on its MD-87 fleet on a non-discriminatory basis. 11) At LESSOR's request, LESSEE will provide LESSOR with a written summary of all sampling programs involving or affecting the Aircraft. 12) Lessee's livery shall be removed and the Aircraft shall be painted over white. 13) At the time of redelivery of the Aircraft, the Aircraft shall: (a) have installed the full complement of Engines, which Engines shall be Pratt & Whitney JT8D-219 Engines, and Parts and other equipment, accessories and loose equipment as would remain installed in such Aircraft and shall be in a condition suitable for operation in commercial service; (b) have performed, within the last 500 Flight Hours, by an FAA-approved repair station, a full and complete zonal, systems and structural check ("C" or its equivalent), the corresponding lower checks ("A" and "B" or equivalent) and any other maintenance and inspections tasks, all in accordance with the Maintenance Program. LESSEE will also weigh the Aircraft. Any discrepancies revealed during such inspection will be corrected in accordance with Manufacturer's maintenance and repair manuals or FAA-approved data. LESSEE agrees to perform during such check any other work reasonably required by LESSOR (and not otherwise required under this Lease) and LESSOR will reimburse LESSEE for such work at LESSEE's preferred customer rates. LESSEE shall pay LESSOR $25.00 per Flight Hour incurred on the Aircraft since the last "C" check. (c) have had performed on it when required an internal and external corrosion inspection in accordance with the CPCP and correct any discrepancies in accordance with the recommendations of Manufacturer and the Structural Repair Manual. In addition, all inspected areas will be properly treated with corrosion inhibitor as recommended by Manufacturer; and (d) comply with the Manufacturer's and Engine Manufacturer's original specifications therefor and/or supported by relevant documentation approved by the Manufacturer and Engine Manufacturer, as the case may be. -87- 14) The Aircraft shall, on the Redelivery Occasion, meet the requirements of FAR Part 36, Appendix C, Stage 3 noise regulations without the need to obtain a waiver or exemption therefrom. 15) LESSEE shall, at its sole cost and expense, immediately prior to return of the Aircraft, perform a borescope inspection of the Engines (hot and cold sections). All items beyond the applicable Engine Manufacturer's maintenance manual limits will be rectified at LESSEE's sole cost and expense. No Engine will be "on watch" for any reason requiring special or out of sequence inspection. 16) In accordance with the applicable maintenance manual, accomplish a maximum power assurance run and condition, acceleration and bleed valve scheduling checks on the Engines. LESSEE will record and evaluate the Engine performance, with LESSOR and/or its representative entitled to be present. The performance and all operating parameters of each Engine will be within the limits specified in the Manufacturer's maintenance manual. 17) Each APU shall be delivered in a serviceable condition having completed a hot section inspection not earlier than during the last "C" check. 18) Each of the Engines shall have the same number of Cycles remaining until the next scheduled removal as when the Engines were delivered to LESSEE. The Aircraft shall be returned with the same Engines as installed at delivery (except as otherwise permitted by the Lease). To the extent that the number of Cycles remaining until the next scheduled removal of the Engines are either fewer than or greater than the amount of Cycles remaining on such Engines as existed on the Effective Date for same, a financial adjustment of $70.00 per Cycle difference will be made by the party receiving the benefit to the other party hereunder. Notwithstanding the foregoing, LESSOR shall not be obligated to pay compensation for more than 500 Cycles. In computing the time remaining with respect to the Engines, at any time when same is required to be calculated under the provisions of this Lease, the most time limited component shall be used as the measure. 19) Each Landing Gear will have not less than 6 months or 2,000 Cycles remaining to operate pursuant to the Maintenance Program. To the extent that the number of Cycles remaining to operate the Landing Gear are either fewer than or greater than the amount of Cycles remaining on the Landing Gear as existed on the Effective Date for same, a financial adjustment of $10.00 per Cycle difference will be made by the party receiving the benefit to the other party hereunder. -88- 20) Each component or Part of the Aircraft which has a hard time limit to overhaul and each life-limited component or Part will have not less than the lesser of (a) twelve (12) months or 2,000 Cycles remaining to operate pursuant to the Maintenance Program, or (b) 100% of its total approved life remaining to operate as of the "C" Check immediately preceding the Return Occasion. 21) Each component or Part which has a calendar limit will have remaining to operate as of the "C" check immediately preceding redelivery at least (i) one year from the date of return of the Aircraft to LESSOR or (ii) 100% of its total approved life, whichever is less, pursuant to the Maintenance Program, except that emergency equipment will have remaining to operate at least six (6) months from the date of return of the Aircraft or 100% of its total approved life as of the "C" check immediately preceding redelivery, whichever is less. 22) To the extent, on the Redelivery Occasion, the number of Flight Hours on the Aircraft until the next "15,000 Hour" and "30,000 Hour" (or their equivalent) heavy maintenance checks is either less than or greater than the number of Flight Hours on the Aircraft on the Effective Date until the next "15,000 Hour" and "30,000 Hour" heavy maintenance checks (assuming no change after the Effective Date in the intervals between such checks not approved by LESSOR), a financial adjustment of (i) $20.00 per Flight Hour difference with respect to the next "30,000 Hour" check, and (ii) $10.00 per Flight Hour difference with respect to the next "15,000 Hour" check, will be made by the party receiving the benefit to the other party hereunder. 23) The Aircraft fluid reservoirs (including oil, oxygen, hydraulic and water) will be serviced to full and the waste tank serviced in accordance with Manufacturer's instructions. Each fuel tank will be at least as full as at Delivery. Lessor will compensate Lessee for the fuel on board the Aircraft on the Redelivery Occasion. 24) All technical records and manuals shall be up to date, in English and with no deferred maintenance items outstanding unless normally deferred until the next heavy maintenance visit under the Maintenance Program. 25) The Aircraft shall be equipped with TCAS and windshear alert systems. -89- EXHIBIT "J" CREDIT STANDARDS LESSEE shall be deemed to have satisfied the Credit Standards provided LESSEE maintains (1) a Fixed Charge Coverage Ratio equal to not less than 1.05. The "Fixed Charge Coverage Ratio" shall be the ratio of net income (excluding any extraordinary or one-time items) before interest, taxes, depreciation, amortization and operating lease rentals divided by the sum of interest expense, operating lease rentals and mandatory principal payments on debt classified as long term, all determined in accordance with Generally Accepted Accounting Principles consistently applied and on a rolling twelve month basis, and (2) a minimum tangible net worth of $4,000,000 at the end of each month in the rolling twelve month period. -90- EXHIBIT "K" ASSIGNMENT OF LEASE AND CONSENT -91- ASSIGNMENT OF LEASE AND CONSENT This ASSIGNMENT OF LEASE AND CONSENT dated as of November 16, 1995 (this "Agreement") among OLIVIA CORP., a Delaware corporation (hereinafter "Lessor"), CREDIT LYONNAIS/PK AIRFINANCE, New York Branch, a Luxembourg corporation (hereinafter the "Lender"), and RENO AIR, INC., a Nevada corporation (hereinafter "Lessee"). RECITALS: (1) Pursuant to that certain Aircraft Lease Agreement [49587] dated as of November 16, 1995 between Lessor and Lessee (the "Lease"), which Lease is being filed with the Aircraft Registry of the Federal Aviation Administration simultaneously herewith, Lessor has agreed to lease to Lessee, among other things, the following: Airframe: One (1) McDonnell Douglas Model MD-87 Aircraft; Registration No.: N753RA Manufacturer's Serial No.: 49587; and Engines: Two (2) Pratt & Whitney JT8D-217C engines; Manufacturer's Serial Nos.: 708147 and 708177; (collectively, the "Aircraft"); and (2) Lessor has obtained financing from the Lender in connection with the Aircraft which is the subject of the Lease; and (3) In order to secure the performance by Lessor of its obligations under, among other things, that certain Secured Loan Agreement dated as of November 16, 1995 between the Lessor, as borrower, and the Lender, as lender (the "Loan Agreement") and the Promissory Note (the "Note") made by Lessor and delivered to the Lender in connection with the making of the loan pursuant to the Loan Agreement, the Lender has required Lessor to, among other things, assign to the Lender all of Lessor's right, title and interest in and to the Lease (but none of its obligations) including, but not limited to, all amounts payable by Lessee to Lessor under the Lease. Transaction No. RNO51 1 NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agree as follows: 1. Capitalized terms used but not defined in this Agreement shall have the meaning ascribed to such terms in the Lease. 2. To secure the payment of the principal of, all interest and other sums payable under the Loan Agreement, as from time to time amended or supplemented, the Note and that certain Aircraft Chattel Mortgage and Security Agreement dated as of November 16, 1995, between the Lender, as mortgagee, and Lessor, as mortgagor, as from time to time amended or supplemented (the "Mortgage"), and all other documents executed in connection therewith or contemplated thereby, and the performance of, and compliance with, all of the terms of the Loan Agreement and the Mortgage, Lessor hereby assigns, transfers, conveys and sets over to the Lender, all of the Lessor's right, title and interest in, to and under the Lease (but except as expressly set forth in Sections 6 and 7 below none of its obligations thereunder) except for Lessor's right, title and interest in Excluded Amounts (as defined in the Mortgage), including, without limitation, the right to collect all rental payments, Reserves, the Security Deposit, income, proceeds (including, but not limited to insurance proceeds), awards, revenues and other sums payable by Lessee to Lessor pursuant to the Lease and all of the Lessor's rights under Section 1110 of the U.S. Bankruptcy Code 11 U.S.C. ss.ss. et seq. or any subsequently enacted statute of similar import and, after an Event of Default (as defined in the Mortgage) has occurred and is continuing, to enforce all of Lessor's rights and remedies under the Lease. 3. The Lessee hereby acknowledges and consents, in accordance with the terms hereof, to the assignment as herein provided of Lessor's rights under the Lease to the Lender. 4. Lessor hereby directs Lessee and Lessee hereby agrees to pay directly to the Lender, until such time as the Lender otherwise directs in writing, to the account listed below all sums which are due and subsequently will become due and payable by the Lessee to Lessor in accordance with the terms of the Lease. All such payments shall be made by wire transfer in good, immediately available funds to: Credit Lyonnais, New York Federal Routing No.: 026008073 Account No.: 01-22403-0001-00 In Favor Of: CL/PK AIRFINANCE UID No.: 357771 Reference: RNO51 2 5. Lessee hereby represents, warrants and agrees as follows: (a) The Lease and the other Lease Documents (as defined in the Lease) constitute the entire agreement of lease with respect to the Aircraft and the Lease has not been amended, modified or supplemented; (b) the Lease is in full force and effect; (c) there is no Default or Event of Default under the Lease; (d) there has been no prepayment of any Rent (as defined in the Lease) payable under the Lease and the Rent is payable in the amounts set forth in the Lease; (e) Lessee will not permit any written amendments or waivers to the Lease or permit any material provisions thereof to be amended or waived without the prior, written consent of Lender, which will not be unreasonably withheld or delayed; (f) Lessee will promptly send to Lender all notices or demands which Lessee shall be permitted or required to send to Lessor under the provisions of the Lease or which Lessee receives from Lessor; (g) Lessee acknowledges that the Lender has not made any representations or warranties of any kind, nature or description in respect of the Aircraft and that the Lender has not assumed any of the Lessor's duties or obligations under the Lease and the Lessee shall continue to look solely to Lessor for the performance and fulfillment of the terms, covenants and conditions on Lessor's part to be performed under the Lease; (h) Lessee will make all of the payments required to be paid under the Lease in accordance with the terms of the Lease to the Lender as required in paragraph 4 hereof; (i) the Lender shall be entitled to the benefit of all representations, warranties, covenants, indemnities and obligations to be made or performed by Lessee pursuant to the Lease to the same extent as if the Lender was originally named as "Lessor" in the Lease; and (j) This Agreement has been duly authorized by all necessary action and constitutes a valid, legal and binding obligation of the Lessee enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, reorganization, 3 moratorium or other similar laws and by general principles of equity, whether considered in a proceeding at law or in equity. 6. Lender and Lessee agree as follows: (a) wherever in the Lease rights are granted to the Lender, whether as "Lender" or "Mortgagee" under the Lease, the Lender hereby shall be entitled directly to exercise such rights in accordance with the terms of the Lease and without relying on its rights as a third party beneficiary; and (b) wherever in the Lease the consent of the Lessor is required but is provided not to be unreasonably withheld by the Lessor, if the Lessor requires the consent of the Lender in such matter under the Loan Agreement, the Mortgage or any other document, such consent of the Lender shall not be unreasonably withheld. 7. The Lender confirms to and agrees with the Lessee that the Lender's rights and remedies as respects the Aircraft are subject in all respects to the rights of the Lessee under the Lease and that so long as no Event of Default (as defined in the Lease) has occurred and is continuing, neither the Lender nor any person claiming by, through or under the Lender will disturb Lessee in the quiet use, possession and enjoyment of the Aircraft in accordance with the Lease. The Lender agrees that the terms and conditions of the Lease shall apply to, and be binding upon, the Lender to the same extent as Lessor. The Lender shall not be deemed to have assumed any obligations of Lessor under the Lease and Lender's right to exercise any rights under the Lease shall not be adversely affected by any failure of Lessor to have fulfilled its obligations thereunder; provided, however, that in order for the Lender to exercise any right under the Lease, the Lender shall be required to comply with all of the terms of the Lease pertaining to the exercise of such right which would otherwise be binding on Lessor. 8. In the event that Lessor shall pay and discharge all of its obligations under the Loan Agreement, Note and Mortgage, then at the request of Lessor, Lender hereby agrees to send written notice to Lessee directing Lessee to make all payments due and payable under the Lease to Lessor or such other party as Lessor shall advise Lessee of in writing. 9. In the event that the Lender sends any notice to Lessor required to be sent in accordance with the terms of the Loan Agreement in connection with a Default or an Event of Default thereunder, Lender shall send a copy of any such notice to Lessee. 10. (a) Every notice or demand under this Agreement shall be in writing and may be given or made by telefax or by internationally recognized overnight courier service. (b) Every notice or demand under this Agreement or to the Lender under the Lease shall be sent, in the case of overnight courier, to the Lender, Lessor or Lessee, 4 at their respective addresses and in the case of telefax, to their respective telefax numbers, as follows: To Lender: Credit Lyonnais/PK AIRFINANCE, New York Branch 152 West 57th Street New York, NY 10019 Attention: Mr. Anders Hebrand Vice President Contracts Telephone No.: 212-245-2575 Telefax No.: 212-397-9393 To Lessor or Lessee: to their address, telephone number and telefax number as set forth in Section 21(D) of the Lease. (c) Every notice or demand shall, except so far as otherwise expressly provided by this Agreement, be deemed to have been received, in the case of a telefax, at the time of actual receipt thereof, and in the case of an internationally recognized overnight courier service, upon acknowledgment of receipt or as of the date on which receipt of such notice delivered by overnight courier is refused or such courier advises that such letter is not deliverable at the address set out in paragraph 9(b). (d) Lessor, Lessee or Lender may change its address by giving notice in accordance with this paragraph 9. A copy of every notice sent to Lender shall be sent to: Credit Lyonnais/PK AIRFINANCE 10 rue de la Greve L-1643 Luxembourg Attention: Vice President Contracts Telephone No.: 011-352-402-1721 Telefax No.: 011-352-482-544 Feltman, Karesh, Major & Farbman 152 West 57th Street New York, New York 10019 Attention: Loren M. Dollet, Esq. Telephone No.: 212-586-3800 Telefax No.: 212-586-0951 5 (e) Lessor and Lessee agree that where the Lease permits actions to be taken or notices to be given by the "Mortgagee", the Lessee shall be entitled to rely that any such action or notice taken or given by the "Mortgagee" is taken or given in accordance with the Loan Documents (as defined in the Loan Agreement) and may be treated by the Lessee as the action or notice of the Lessor. 11. This Agreement may be executed in one or more counterparts, each of which shall constitute an original and all of such counterparts shall constitute one and the same Agreement. 12. LENDER, LESSOR AND LESSEE HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE THE RIGHT ANY OF THEM MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON OR ARISING OUT OF OR IN CONNECTION WITH THE TRANSACTION CONTEMPLATED BY THIS AGREEMENT OR THE ACTIONS OF ANY OF THE PARTIES HERETO. 13. This Agreement and the rights and obligations evidenced hereby shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. Neither the Lessor nor Lessee may assign any of their rights or obligations hereunder without the express prior written consent of the Lender. 14. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS ENTERED INTO IN AND BY RESIDENTS OF THE STATE OF NEW YORK AND TO BE PERFORMED ENTIRELY WITHIN THE STATE OF NEW YORK. The Lessor, Lessee and Lender consent to the jurisdiction and venue of the New York State Supreme Court for the Borough of Manhattan, New York County, New York and the United States District Court for the Southern District of New York, in any action arising out of or connected in any way with this Agreement, and the parties hereto further agree that the service of process or of any other papers upon them or any of them by certified or registered mail, return receipt requested, at their respective addresses set forth herein shall be deemed good, proper and effective service upon them. The parties hereto expressly consent to the jurisdiction of and venue in each of the aforementioned courts and expressly waive any claim to lack of jurisdiction thereof or that either such court is an inconvenient forum or that venue therein is improper. 6 IN WITNESS WHEREOF, Lessor, Lessee and Lender have caused this Assignment Of Lease and Consent to be duly executed by their duly authorized officers as of the day and year first above written. CREDIT LYONNAIS/PK AIRFINANCE OLIVIA CORP. NEW YORK BRANCH By:__________________________ By:_______________________ Title:_______________________ Title:____________________ RENO AIR, INC. By:_______________________ Title:____________________ 7 LEASE SUPPLEMENT [49587] NO. 1 LEASE SUPPLEMENT [49587] NO. 1, dated November 16,1995, between OLIVIA CORP. ("LESSOR") and RENO AIR, INC. ("LESSEE"). LESSOR and LESSEE have heretofore entered into that certain Aircraft Lease Agreement [49587], dated as of November 16, 1995, relating to one (1) McDonnell Douglas MD-87 Aircraft (herein called the "Lease" and the defined terms therein being hereinafter used with the same meanings). The Lease provides for the execution and delivery of a Lease Supplement for the purpose of subjecting the Aircraft and other property described in such Lease Supplement (collectively, the "Equipment"), as and when delivered by LESSOR to LESSEE, to the terms of the Lease. The Lease relates to the Equipment described below and a counterpart of the Lease is attached hereto and made a part hereof, and this Lease Supplement, together with such attachment, is being filed for recordation on the date hereof with the FAA as one document. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, LESSOR and LESSEE hereby agree as follows: 1. LESSOR hereby delivers and leases to LESSEE under the Lease, and LESSEE hereby accepts delivery of and leases from LESSOR under the Lease, the following described Equipment, which Equipment, as of the date hereof, is acknowledged and accepted by LESSEE: (i) Airframe: one (1) McDonnell Douglas MD-87 airframe, bearing FAA Registration No. N753RA and Manufacturer's Serial No. 49587; (ii) Engines: two (2) Pratt & Whitney Model JT8D-217C aircraft engines, each of which has 750 or more rated takeoff horsepower and bearing Manufacturer's Serial Nos. 708147 and 708177, respectively; and (iii) The Aircraft Documents. 2. The Effective Date for the Equipment is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. The Term is from the date of this Lease Supplement through and including January 15, 2003. 4. LESSEE hereby confirms it has paid the Security Deposit to LESSOR in the amount set forth on Schedule "1" attached hereto and forming a part hereof. 5. LESSEE hereby confirms its agreement to pay LESSOR Interim Rent and Basic Rent, as applicable, for the Equipment throughout the Term, in the installments and in the amounts provided for on Schedule "1", on each Rent Date. 6. LESSEE hereby confirms its agreement to pay LESSOR Reserves on each Maintenance Reserve Date, subject to the provisions of 5(E) and in the amounts provided for on Schedule "1". 7. LESSEE hereby confirms to LESSOR that LESSEE has accepted the Equipment for all purposes hereof and of the Lease. 8. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 9. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute but one and the same instrument. 2 IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement [49587] No. 1 to be duly executed and delivered as of the date and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR INC. By: /s/ Aaron Mendelsohn By: --------------------------- --------------------------- Name: Aaron Mendelsohn Name: Title: President Title: 3 IN WITNESS WHEREOF, LESSOR and LESSEE have caused this Lease Supplement [49587] No. 1 to be duly executed and delivered as of the date and year first above written. LESSOR: LESSEE: OLIVIA CORP. RENO AIR INC. By: By: /s/ Robert M. Rowen --------------------------- --------------------------- Name: Name: Robert M. Rowen Title: Title: Vice President and General Counsel 3 Schedule "1" 1. Security Deposit. The Security Deposit shall equal $300,000. 2. Interim Rent. Interim Rent shall be payable by LESSEE to LESSOR in the amount set forth in Section 5(A) of the Lease. The Minimum Basic Rent shall equal $40,000. 3. Basic Rent. (i) Basic Rent shall be paid by LESSEE to LESSOR, in advance, as set forth in Section 5(A)(ii) of the Lease. (ii) The monthly Basic Rent for each Rent Period during the periods set forth below shall equal the amounts set forth next to such periods assuming that LIBOR for such Rent Period is 5.8% per annum: January 15, 1996 - July 14, 1996 - $87,500 July 15, 1996 - Expiration Date - $150,000 To the extent LIBOR on any given Rent Date (provided, however, if such Rent Date is not a London Banking Day, then on the immediately following London Banking Day), on which Basic Rent is to be paid is less than or greater than 5.8% per annum, the Basic Rent payable by LESSEE to LESSOR on the next Rent Date shall be adjusted upward (in the event that LIBOR is greater than 5.8% per annum) or downward (in the event that LIBOR is less than 5.8% per annum) in accordance with the following formula (the "Rent Adjustment"): ((L-5.8) x A) + B L = the actual 30-day LIBOR rate for the preceding Rent Date, however, L shall never be greater than 8.0 nor less than 3.6 B = the Basic Rent A = an adjustment factor equal to the amount set forth below corresponding to the relevant Rent Period: 4 Rent Period A ----------- - Jan-15-1996 to Jan-14-1997 7,450 Jan-15-1997 to Jan-14-1998 6,700 Jan-15-1998 to Jan-14-1999 5,800 Jan-15-1999 to Jan-14-2000 4,900 Jan-15-2000 to Jan-14-2001 3,850 Jan-15-2001 to Jan-14-2002 2,750 Jan-15-2002 to Jan-15-2003 1,550 Notwithstanding anything set forth herein to the contrary, with respect to the Basic Rent payable for the last Rent Period, the Rent Adjustment shall be made on the Expiration Date. To the extent the Basic Rent is adjusted upward for such Rent Period, LESSEE shall pay the Rent Adjustment to LESSOR on the Expiration Date. To the extent the Basic Rent is adjusted downward for such period and provided no Default or Related Lease Default has occurred and is continuing, LESSOR shall pay LESSEE the Rent Adjustment on the later of the Expiration Date or the date on which LESSEE has complied with all provisions hereof 4. Reserves. (i) The Airframe Reserves shall be payable in an amount equal to thirty ($30.00) Dollars for each Flight Hour incurred on the Airframe for the previous Rent Period; (ii) The Engine Reserves shall be payable in an amount equal to seventy ($70.00) Dollars per each Cycle incurred on each Engine for the previous Rent Period; and (iii) the Landing Gear Reserves shall be ten ($10.00) Dollars per each Cycle incurred on the Landing Gear for the previous Rent Period. 5 EX-99.E 5 EX-99.E PAPER NO. 02 THE SINGLE EXECUTED ORIGINAL OF THIS LEASE MARKED "ORIGINAL" SHALL BE THE "ORIGINAL" AND ALL OTHER COUNTERPARTS OF THIS LEASE SHALL BE DUPLICATES AND MARKED "DUPLICATE" OR "DUPLICATE ORIGINAL". TO THE EXTENT THAT THIS LEASE CONSTITUTES CHATTEL PAPER, AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION, NO SECURITY INTEREST MAY BE CREATED THROUGH TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE "ORIGINAL". ------------------------------------------------------------------- OPERATING LEASE AGREEMENT between TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as Owner Trustee under the Trust Agreement, dated as of April 30, 1992, Lessor, and FINNAIR OY, Lessee, Dated as of April 30, 1992 ------------------------------------------------------------------- covering one McDonnell Douglas MD82 Aircraft and its related Engines Finnish Registration Mark OH-LMN LEASE AGREEMENT TABLE OF CONTENTS Page ---- SECTION 1. Definitions ........................................... 1 SECTION 2. Lease and Delivery of the Aircraft .................... 9 SECTION 3. Term and Rent ......................................... 10 SECTION 4. Representations, Warranties and Covenants ............. 12 SECTION 5. Return of the Aircraft ................................ 22 SECTION 6. Maintenance, Operation, Etc. .......................... 27 SECTION 7. Liens ................................................. 28 SECTION 8. [Intentionally Omitted] ............................... 28 SECTION 9. Possession ............................................ 28 SECTION 10. Event of Loss; Requisition for Use .................... 31 SECTION 11. Insurance ............................................. 34 SECTION 12. Replacement and Pooling; Modifications and Additions ............................................. 38 SECTION 13. Insignia .............................................. 39 SECTION 14. Inspection/Information ................................ 40 SECTION 15. The Lessor's Right to Perform for the Lessee .......... 40 SECTION 16. Further Assurances .................................... 41 SECTION 17. Events of Default ..................................... 41 -i- Page ---- SECTION 18. Remedies .............................................. 42 SECTION 19. Expenses .............................................. 45 SECTION 20. Assignment; Owner Trustee ............................. 46 SECTION 21. Notices ............................................... 46 SECTION 22. Net Lease, No Set-Off, Counterclaim, Etc. ............. 47 SECTION 23. Jurisdiction; Governing Law ........................... 48 SECTION 24. Miscellaneous ......................................... 50 SECTION 25. Title and Ownership ................................... 53 SECTION 26. WAIVER OF JURY TRIAL .................................. 53 SCHEDULE 1 - Aircraft Documents to Be Delivered SCHEDULE 2 - Members of the OECD EXHIBIT A TO LEASE AGREEMENT Form of Lease Supplement (together with Schedule I to Lease Supplement, Basic Rent and Stipulated Loss Value tables) and Receipt EXHIBIT B TO LEASE AGREEMENT Form of Redelivery Receipt of Aircraft and Engines EXHIBIT C TO LEASE AGREEMENT Form of legal opinion of Lessee's Finnish counsel EXHIBIT D TO LEASE AGREEMENT Form of Guaranty -ii- OPERATING LEASE AGREEMENT This OPERATING LEASE AGREEMENT, dated as of April 30, 1992, between TRUST COMPANY FOR USL, INC., a trust company organized under the laws of the State of Illinois, with its principal place of business at San Francisco, California, not in its individual capacity, except as otherwise expressly provided herein, but solely as owner trustee under the Trust Agreement (as defined below) (the "Owner Trustee" or the "Lessor"), and FINNAIR OY, a corporation organized under the laws of the Republic of Finland (the "Lessee") (this "Lease" or "Agreement" or "Lease Agreement" (as it may be referred to in other document, certificate, opinion or letter) which terms shall include, after the delivery thereof, the Lease Supplement). WITNESSETH: WHEREAS, the Lessee desires to lease from the Lessor and the Lessor is willing to lease to the Lessee the aircraft described and referred to herein upon and subject to the terms and conditions of this Lease; NOW, THEREFORE, in consideration of the mutual promises herein contained, the Lessee and the Lessor agree as follows: SECTION 1. Definitions. The following terms shall have the following meanings for all purposes of this Lease: "Act" means the Applicable Law of Finland respecting the ownership, registration and operation of aircraft registered with the CAA, together with the regulations of the CAA, as each of the same may be in effect from time to time. "Additional Insureds" means the Lessor, the Guarantor, the Owner Participant, the Trust Company and their respective successors, permitted assigns (including any lender in connection with a permitted financing), directors, officers, employees, servants, and agents. "Affiliate", with respect to any Person, means any Person directly or indirectly controlling, controlled by or under common control with such Person, provided that, for purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any one Person, shall mean the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or partnership interests or by contract or otherwise. "Aircraft" means the Airframe and the Engines described in the Lease Supplement. Such Engines shall be deemed part of the "Aircraft" whether or not from time to time attached to the Airframe or to another airframe or on the ground. "Aircraft Documents" means the documents listed on Schedule 1 hereto. "Airframe" means the airframe described as the "Airframe" in the Lease Supplement, together with any and all Parts (including, but not limited to, landing gear and auxiliary power units but excluding Engines or engines) so long as such Parts shall be either incorporated or installed in or attached to the airframe or required to be subject to this Lease as provided in Sections 9(a)(iv) and 12 hereof, or so long as title thereto shall remain vested in the Lessor pursuant to this Lease. "Applicable Jurisdiction" means the country where, pursuant to this Lease, the Aircraft is registered from time to time. "Applicable Law" means, without limitation, all applicable laws and treaties, international agreements, judgments, decrees, injunctions, writs and orders of any court, arbitration or governmental agency or authority and rules, regulations, orders, directives, licenses, ordinances and permits of any governmental body, instrumentality, agency or authority. "Approved Maintenance Program" means a maintenance program certified by the Lessee to the Lessor as applicable to the Airframe, the Engines, any other engines installed on the Airframe from time to time or any components or Parts and approved by the appropriate aeronautical authorities of the Republic of Finland or of the Applicable Jurisdiction from time to time. "Base Rate" means the rate of interest per annum in effect from time to time as announced publicly by Citibank, N.A. in New York, New York from time to time as its base rate, computed on the basis of a year of 365 or 366 days, as the case may be, for the actual number of days elapsed, including the first day but excluding the last day. "Basic Rent" means the rent payable for the Aircraft pursuant to Section 3(b) hereof. "Bill of Sale" means a long form bill of sale, substantially in the form of Exhibit B to the Purchase Agreement, signed by the Lessee as "seller" and in favor of the Lessor as "buyer", covering the Aircraft. -2- "Business Day" means a day of the year in which banks are not authorized or required to close in New York City or Helsinki, Finland. "CAA" means the Finnish Civil Aviation Administration, or any successor thereto. "C Check" has the meaning set forth in the Approved Maintenance Program. "Consent to Assignment of Warranties" means the Consent to Assignment of Warranties obtained pursuant to Section 10 of the Purchase Agreement from the Manufacturer and in form and substance satisfactory to the Buyer. "D Check" has the meaning set forth in the Approved Maintenance Program. "Default" means an event or condition which with the passage of time or the giving of notice, or both, or the occurrence of any other event or condition, would constitute an Event of Default. "Delivery Date" has the meaning given such term in Section 2(a) hereof. "Delivery Location" means Helsinki-Vantaa Airport, Finland, or such other place as may be mutually agreed upon by the Lessor and the Lessee for the delivery of the Aircraft hereunder. "Dollars" or "$" means the lawful currency of the United States. "Engine" means each and all of the engines described as an "Engine" in the Lease Supplement, or any other engine which may from time to time replace an Engine leased hereunder in accordance with the terms of Sections 5(a) or 10(b) hereof, together with any and all Parts so long as the same shall be either incorporated or installed in or attached to such engine or required to be subject to this Lease as provided in Sections 9(a)(iv) and 12 hereof. An Engine shall remain leased hereunder whether or not from time to time attached to the Airframe or attached to any other airframe or on the ground. "Event of Default" has the meaning given such term in Section 17 hereof. "Event of Loss" means any of the following events with respect to any property: (i) loss of such property or of the use thereof due to theft or disappearance for a period exceeding one hundred eighty (180) days (or, if -3- earlier, either (a) the Lessee shall no longer be diligently attempting to locate and pursue the return of such property or (b) the Term shall have ended), or destruction, damage beyond repair or so as to render repair uneconomic or rendition of such property permanently unfit for normal use for any reason; (ii) any damage to such property which results in an insurance settlement with respect to such property on the basis of an actual, constructive or compromised total loss; (iii) the condemnation, confiscation or seizure of, or requisition of title to or use of, such property by private persons or by any other governmental or purported governmental authority (other than requisition for use by the government of the Republic of Finland or the United States of America not extending beyond the end of the Term except as provided in Section 3(f)); or (iv) as a result of any law, rule, regulation, proceeding, decree, order or other action by the government of the Applicable Jurisdiction for the time being, or any competent agency, authority or instrumentality of any such government, including, without limitation, any court of such Applicable Jurisdiction, the use of such property in the normal course of domestic and international air transportation shall have been prohibited for a period of twelve consecutive months, or, if earlier, a period extending beyond the last day of the Term as then in effect, except as provided in Section 3(f). An Event of Loss with respect to the Airframe shall be deemed to be an Event of Loss with respect to the Aircraft. "FAA" or "Federal Aviation Administration" means the United States Federal Aviation Administration or any successor agency. "FAR 121" means Part 121 of Subchapter G of Title 14 of the United States Code of Federal Regulations promulgated by the FAA, as in effect from time to time. "Fair Market Rental Value" of the Aircraft shall be determined on the basis of, and shall mean the amount which would be obtainable in, an arm's-length transaction between an informed and willing lessee (other than a lessee currently in possession) under no compulsion to lease and an informed and willing lessor under no compulsion to lease, in accordance with a lease on terms and conditions as herein provided. Such determination shall be made on the basis of the condition of the Aircraft assuming it was in the state of condition and repair required to be returned by the terms of this Lease, except that for purposes of Section 18, such determination shall be made on the basis of the then "as-is where-is" condition of the Aircraft, -4- except that such value shall be deemed to be zero in the event that so long as an Event of Default has occurred and is continuing, the Lessor does not have possession of the Aircraft. If the Lessor and the Lessee are unable to agree upon a determination of Fair Market Rental Value with respect to the Airframe or an Engine within thirty (30) Business Days after the Lessor's receipt of the Lessee's notice extending the initial Term pursuant to Section 3(e) hereof, then such Fair Market Rental Value shall be determined in accordance with the procedure for Independent Appraisal. "Fair Market Sales Value" of the Aircraft shall be determined on the basis of, and shall mean the amount which would be obtainable in, an arm's-length transaction between an informed and willing buyer or user under no compulsion to buy and an informed and willing seller under no compulsion to sell, and in such determination costs of removal from the location of current use shall not be a deduction from such value and all alternative uses in the hands of such buyer or user, including, without limitation, the further leasing of the Aircraft, shall be taken into consideration and it shall be assumed that the Aircraft is unencumbered by this Lease or the renewal option hereunder and that the Aircraft is in the state of condition and repair required to be returned by the terms of this Lease, except that for purposes of Section 18, such determination shall be made on the basis of its then "as-is where-is" condition, except that such value shall be deemed to be zero in the event that so long as an Event of Default has occurred and is continuing, the Lessor does not have possession of the Aircraft. If the Lessor and the Lessee are unable to agree upon a determination of Fair Market Sales Value of the Aircraft, then such Fair Market Sales Value shall be determined in accordance with the procedure for Independent Appraisal. "Finland" means the Republic of Finland. "Finnish Labor Index" means the Finnish Labor Index set forth in the Wages and Salaries Index Industrial Workers, Men, Table 52.22, published from time to time in the Bulletin of Statistics by the Central Statistical Office of Finland. "Guarantor" means United States Leasing International, Inc., a Delaware corporation, or any other issuer of a Guaranty from time to time, in each case so long as such Guaranty shall remain in full force and effect. "Guaranty" means the Guaranty Agreement delivered on the Delivery Date to the Lessee by the Guarantor, or any other such guaranty which may be issued pursuant to the Guaranty by a permitted transferee of the Guarantor, in each case as the same may be amended, supplemented or otherwise modified from time to time. -5- "Immunities Act" means the United States Foreign Sovereign Immunities Act of 1976, as amended from time to time, or any similar legislation of the United States enacted to supersede, amend or supplement such Immunities Act. "Independent Appraisal" means an appraisal mutually agreed to by two internationally recognized independent aircraft appraisers, one of whom shall be chosen by the Lessor and one by the Lessee, or, if such appraisers cannot agree on the amount of such appraisal, an amount equal to the average of such two appraisals and a third appraisal of a third internationally recognized independent aircraft appraiser chosen by the mutual consent of such two appraisers, and paid for by the Lessee, provided that, if either party shall fail to appoint an appraiser within ten (10) days after a written request to do so by the other party, or if such two appraisers cannot agree on the amount of such appraisal and fail to appoint a third appraiser within ten (10) days after the date of the appointment of the second of such two appraisers, then either party may, within ten (10) days after such event, apply to any court having jurisdiction to make such appointment; provided further, however, that in calculating such average any appraisal which has a greater than fifteen percent (15%) variance above or below the second highest of the three appraisals shall be disregarded. Such appraisers shall be directed and required to reach a determination within ten (10) days of the appointment of the third appraiser. "Lease", "this Lease", "this Agreement", "herein", "hereunder", "hereby" and other like words mean this Lease Agreement as originally executed and as amended, modified and supplemented from time to time in accordance with the applicable provisions hereof and of the other Operative Documents, including, without limitation, Lease Supplements and other supplements to this Lease. "Lease Supplement" means any Lease Supplement, substantially in the form of Exhibit A hereto, entered into or to be entered into between the Lessor and the Lessee for the purposes of leasing the Aircraft. The Lease Supplement shall be deemed to incorporate all of the terms and conditions of this Lease and such Lease Supplement shall constitute a complete and enforceable lease agreement. "Lessee" means Finnair Oy, a corporation organized under the laws of Finland, its successors and, to the extent permitted by this Lease, its assigns. "Lessor" means Trust Company for USL, Inc., a corporation organized under the laws of the State of Illinois, its successors and, to the extent permitted by this Lease, its assigns. "Lessor's Estate" means all estate, right, title and interest of the Lessor in, to or under the Aircraft, this Lease, any Lease Supplement or other supplement to the -6- Lease, the Purchase Agreement, the Bill of Sale, the Consent to Assignment of Warranties and any other Operative Document, including, without limitation, all amounts of Basic Rent, Supplemental Rent, insurance and requisition proceeds, condemnation awards, indemnity, guaranty or other payments of any kind for or with respect to any of the foregoing. "Lessor Liens" means Liens which result from or constitute claims by, through or under the Lessor not related to the Lease or any other Operative Document or the transactions contemplated by this Lease or any other Operative Document. "Lien" means any mortgage, security interest, lien, pledge, lease or other charge or encumbrance or claim or right of others, including, without limitation, rights of others under any airframe or engine interchange or pooling agreement. "Loss Payment Date" means each monthly date set forth in Schedule I to the Lease Supplement. "OECD" means any member nation of the Organization of Economic Cooperation and Development which is described on Schedule 2 hereto. "Operative Documents" means this Lease (including any Lease Supplement and any other supplement to this Lease), the Purchase Agreement, the Trust Agreement, the Bill of Sale and the Consent to Assignment of Warranties. "Overdue Payment Rate" means a rate per annum equal to one percent (1%) above the Base Rate. "Owner Participant" means United States Leasing International Inc., a Delaware corporation, its successors and, to the extent permitted by the Purchase Agreement, its assigns. "Owner Trustee" means Trust Company for USL, Inc., an Illinois trust company, in its trust capacity, and its successors and, to the extent permitted by the Trust Agreement, its assigns. "Parts" means all appliances, parts, instruments, appurtenances, accessories, furnishings, components or other equipment of whatever nature (other than complete Engines or engines) which may from time to time be incorporated or installed in or attached to the Airframe or any Engine or after removal thereof so long as title thereto remains vested in Lessor. -7- "Permitted Liens" means: (i) Lessor Liens; (ii) Liens for taxes of the Lessee either not yet due or being contested in good faith (and for the payment of which adequate reserves have been provided) by appropriate proceedings so long as such proceedings do not involve any danger of the sale, forfeiture or loss of the Airframe or any Engine or right, title or interest therein or thereto; (iii) materialmen's, mechanics', workmen's, repairmen's, employees' or other like Liens arising in the ordinary course of the Lessee's business for amounts the payment of which is either not yet delinquent or is being contested in good faith (and for the payment of which adequate reserves have been provided) by appropriate proceedings so long as such proceedings do not involve any danger of the sale, forfeiture or loss of the Airframe or any Engine or interest therein; and (iv) Liens (other than for taxes) arising out of judgments or awards against the Lessee with respect to which at the time an appeal or proceeding for review is being prosecuted in good faith and with respect to which there shall have been secured a stay of execution pending such appeal or proceeding for review. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign state or political subdivision thereof or any agency of such state or subdivision. "Purchase Agreement" means the Purchase Agreement dated as of the date hereof by and among the Lessor, as purchaser, and the Lessee, as seller, and the Trust Company, as the same may be amended, supplemented or otherwise modified from time to time. "Records" has the meaning given such term in Section 5(a) hereof. "Redelivery Date" has the meaning given such term in Section 5(a) hereof. "Redelivery Location" has the meaning given such term in Section 5(a) hereof. "Rent" means Basic Rent and Supplemental Rent. "Rent Payment Date" means the Delivery Date and the day in January, April, July and October which corresponds to the Delivery Date (or if there is no such corresponding day in any such month then the last day of such month), from and including the Delivery Date to and including the applicable date specified in the Lease Supplement (or in the Lessee's notice, if any, extending the Term pursuant to and in accordance with Section 3(e)) as the final Rent Payment Date. -8- "Responsible Officer" means, with respect to the subject matter of any covenant, agreement or obligation of any party contained in any Operative Document, the President, any Vice President, or the Treasurer, who in the normal performance of his or her operational responsibility would have knowledge of such matter and the requirements with respect thereto. "Stipulated Loss Value" of the Aircraft, as of any date during the initial Term and, if applicable, any extension thereof, means the amount set forth on Schedule I to the Lease Supplement as applicable for such date. "Supplemental Rent" means all amounts, liabilities, indemnifications and obligations of any kind whatsoever (other than Basic Rent but including any payment of Stipulated Loss Value or any amount calculated by reference thereto) which the Lessee assumes, agrees to or is obligated to pay hereunder or under any other Operative Document. "Term" has the meaning given such term in Section 3(a) hereof. "Trust Agreement" means the Trust Agreement dated as of the date hereof by and between the Trust Company and the Owner Participant, as the same may be amended, supplemented or otherwise modified from time to time. "Trust Company" means Trust Company for USL, Inc., an Illinois trust company, in its individual capacity, its successors and, to the extent permitted by the Trust Agreement, its assigns. "United States" means the United States of America. "Wet Lease" means any arrangement whereby the Lessee agrees to furnish the Airframe and Engines or engines installed thereon to a third party pursuant to which such Airframe and Engine or engines (i) shall be operated solely by regular employees of the Lessee possessing all current certificates and licenses required by Applicable Law (it being understood that cabin attendants need not be employees of the Lessee but that all members of the cockpit crew will be such employees), and (ii) shall be maintained in accordance with the maintenance provisions of this Lease. SECTION 2. Lease and Delivery of the Aircraft. (a) Lease. The Lessor agrees to lease to the Lessee, and the Lessee agrees to lease from the Lessor, the Aircraft, on the terms and subject to the conditions of this Agreement. Effective on such Business Day as the Lessee shall designate by at least two Business Days prior notice to the Lessor or such other date as the parties may agree in writing, but in any event not later than May 4, 1992 (the "Delivery Date"), the Lessor agrees to lease to the Lessee, and the Lessee agrees -9- to lease from the Lessor, the Aircraft, subject, however, to the satisfaction or waiver of each of the conditions precedent set forth in the Purchase Agreement on or before the Delivery Date. (b) Delivery. Delivery of the Aircraft under this Lease shall occur at the Delivery Location and on the Delivery Date. Delivery of the executed Lease Supplement by the Lessee to the Lessor shall constitute, without further act, unconditional and irrevocable acceptance by the Lessee of the Aircraft under, and for all purposes of, this Lease. SECTION 3. Term and Rent. (a) Term. The term for which the Aircraft is leased hereunder (the "Term") shall commence on the Delivery Date and shall continue until the expiry date set forth in the Lease Supplement dated the Delivery Date (said period being sometimes referred to herein as the "initial Term"), subject to extension at the Lessee's option in the manner provided in Section 3(e) below, and termination at the Lessee's option in the manner, and subject to the conditions, set forth in Section 4(c)(ii) below, and any other earlier termination as herein provided (including, without limitation, pursuant to Section 18). (b) Basic Rent. The Lessee shall pay to the Lessor quarterly rental for the Aircraft (the "Basic Rent"), payable in advance on each Rent Payment Date during the Term, in the Dollar amount set forth for such Rent Payment Date in Schedule I to the Lease Supplement corresponding to such Rent Payment Date. (c) Method of Payment. All Rent hereunder shall be paid by the Lessee not later than 12:00 noon, New York time, on the date due thereof in Dollars and in immediately available funds to the Lessor by deposit with Citibank, N.A., 399 Park Avenue, New York, New York, ABA No. 021-0000-89, for the account of US Leasing, Int'l., Account No. 4052-9099, or to such other account as the Lessor shall specify to the Lessee in writing. Any Rent due on a day which is not a Business Day shall be due on the next Business Day. (d) Supplemental Rent. The Lessee also agrees to pay or cause to be paid to the Lessor (or to whomsoever shall be entitled thereto) any and all Supplemental Rent (other than Supplemental Rent payable to Persons other than the Lessor, which shall be payable to such other Persons in accordance with instructions furnished to the Lessee by such Persons, as otherwise provided in any of the Operative Documents or as required by law) promptly as the same shall become due and owing or five (5) Business Days after demand therefor if no due date is specified, and in the event of any failure on the part of the Lessee to pay any Supplemental Rent, the Lessor shall have all rights, powers and remedies provided for herein or in any other Operative Document or by law or equity or otherwise in the case of nonpayment of Basic Rent. The Lessee will also pay, on demand, as Supplemental Rent, to the extent permitted by Applicable Law, an amount equal to interest at the Overdue Payment Rate on any part of any installment of Basic Rent not paid when due for any period for -10- which the same shall be overdue and on any payment of Supplemental Rent not paid when demanded or due for any period for which the same shall be overdue, in each case until the same shall have been paid in full. The expiration or other termination of this Lease shall not limit or modify the obligations of any party with respect to any indemnities contained in this Lease, all of which indemnities shall survive the termination of this Lease. (e) Renewal Options. Neither the Lessee nor the Lessor shall have the right to extend or renew the Term of this Lease except as otherwise provided in this Section 3(e). The Lessee, at its option, on two separate occasions, may extend the Term of the Lease beyond the expiry date set forth in the initial Lease Supplement by delivering not later than one hundred eighty (180) days prior to such expiry date, a written notice to the Lessor stating that the Term shall be extended for an additional period equal to one (1) year beyond the initial Term, or the extended Term, as the case may be, and specifying the final Rent Payment Date and the expiry date of the Term as extended. Any such notice given by the Lessee shall be irrevocable and shall be binding on the Lessee and the Lessor, and, thereupon, the Term shall be extended to such expiry date specified in the Lessee's notice, provided in each case that no Default of the type described in Sections 17(a), (b), (c)(i) or (e) or Default of the type described in Sections 17(c)(ii) or (d) (which, in the case of Sections 17(c)(ii) and (d), cannot be cured or the cure of which, if the same are capable of being cured within the relevant period described in such Section 17(c)(ii) or (d), the Lessee is not diligently pursuing) or Event of Default or Event of Loss shall have occurred and be continuing on any of (i) the date of any such notice of the Lessee, (ii) the last day of the initial Term or the Term as previously extended, as the case may be, and (iii) the first day of the Term as extended. (f) Extended Term. If an Event of Loss of the type described in paragraph (iii) or (iv) of the definition of Event of Loss shall extend beyond the end of the Term as then in effect, and, in the case of an Event of Loss of the type described in such paragraph (iv), if the Aircraft shall have been registered by the Lessee in the United States in the name of the Lessor, as owner, and the Lessee, as operator, and there shall be no restrictions on the use of the Aircraft, then, in the event there shall have occurred and be continuing no Default of the type described in Section 17(a), (b), (c)(i) or (e) or Default of the type described in Section 17(c)(ii) or (d) (which, in the case of Section 17(c)(ii) or (d), cannot be cured or the cure of which, if the same are capable of being cured within the relevant period described in such Section 17(c)(ii) or (d), the Lessee is not diligently pursuing) or Event of Default or other Event of Loss, the Lessee, at its option, by giving thirty (30) days' notice prior to the end of the Term as then in effect, may extend the Term for a period of up to one (1) year (unless the Lessor shall have given its prior written consent to any other period) so long as it shall continue to perform its obligations under this Lease including, without limitation, the payment of such Basic Rent as shall be in effect on the last day of the initial Term or the Term as previously extended. The provisions of Section 10(c) shall apply (i) in the case of an Event of Loss arising out of paragraph (iii) of the definition thereof, and (ii) in the case of -11- Event of Loss arising out of paragraph (iv) of the definition thereof, at the time that the prohibition shall no longer exist. SECTION 4. Representations, Warranties and Covenants. (a) The Lessee's Representations and Warranties. The Lessee represents and warrants to the Lessor as follows: (i) The Lessee is a corporation duly incorporated, validly existing and in good standing under the laws of the Republic of Finland, has full power, legal right and authority (corporate and otherwise) to sell the Aircraft to the Lessor, to own and hold under lease its properties and to execute, deliver and perform and observe the provisions of this Lease and the other Operative Documents, and holds all licenses, certificates, approvals, consents and permits from the governmental authorities of the Republic of Finland and of any other governmental authorities to use and operate, maintain, repair, overhaul and test the Aircraft in accordance with this Lease and Applicable Law. (ii) The sale of the Aircraft by the Lessee to the Lessor and the execution, delivery and performance by the Lessee of this Lease and the other Operative Documents (A) have been duly authorized by all necessary corporate action on behalf of the Lessee, (B) do not require the consent or approval of the Lessee's stockholders or of any trustee or of the holders of any indebtedness or obligations of the Lessee (except such as have been obtained, or shall have been obtained, and shall be in full force and effect on the Delivery Date, certified copies of which shall have been furnished to the Lessor on or before the Delivery Date), (C) do not require any notice to or approval (including exchange control approval) or other action by or filing with any governmental authority or regulatory body and (D) do not contravene, or result in the creation of any Lien (other than Permitted Liens) under the Lessee's charter or by-laws, or any Applicable Law, or any judgment or order relating to the Lessee or any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which the Lessee is a party or by which it or its properties is or are bound. (iii) This Lease is, and each other Operative Document, when executed and delivered shall constitute, the legal, valid and binding obligations of the Lessee enforceable against the Lessee in accordance with their respective terms. Without limitation of the foregoing, a court in Finland would recognize and give full force and effect to the Lessor's title to and ownership of the Aircraft, to the rights of the Lessor and the Owner Participant under this Lease and the other Operative Documents, and to the terms of Section 23(b) hereof and of Article 12 of the Purchase Agreement and of the Bill of Sale providing that this Lease, the Purchase Agreement and the Bill of Sale, respectively, will be governed by the laws of the State of New York. -12- Accordingly, to the extent that the remedies provided for in such Section 18, such Article 12 and the Bill of Sale are enforceable under New York law, a court in Finland would give effect to the terms of such Section 18, such Article 12 and the Bill of Sale and enable the Lessor to exercise the same remedies against the Lessee (however designated) and with respect to the Aircraft if the Aircraft were then in Finland (including the right to repossess the Aircraft and to export the Aircraft from Finland). (iv) There is no pending or, to the best of the Lessee's knowledge, threatened action or proceeding affecting the Lessee before or by any court, tribunal, governmental agency or arbitrator which might materially adversely affect the financial condition or operations of the Lessee or the ability of the Lessee to consummate the transactions contemplated by, and perform its obligations under, this Lease or any other Operative Document. (v) The execution and delivery of this Lease and each other Operative Document and the performance of the transactions contemplated hereby and thereby constitute (for purposes of the Immunities Act and otherwise) commercial activities of the Lessee, and the Lessee is subject to private commercial law and to suit with respect thereto; the Lessee is not entitled to any immunity whether on grounds of sovereign immunity or otherwise, from set-off or from any legal proceedings in the United States (by virtue of the waiver of immunity contained herein) or Finland to enforce or collect upon this Lease or any other Operative Document or any other liability or obligation of the Lessee related to or arising out of the transactions contemplated hereby or thereby (including, without limitation, immunity from service of process, immunity from jurisdiction or judgment of any court or tribunal, immunity from execution of a judgment, and immunity of any of its property from attachment prior to any entry of judgment, or from attachment in aid of execution upon the judgment). (vi) Under present laws and tax treaty provisions: (A) no taxes, levies, imposts, duties, charges or withholdings will be imposed by Finland or any governmental subdivision or other taxing authority thereof or therein upon or with respect to payments of Rent or other amounts payable pursuant to this Lease or any other Operative Document, provided that: (1) either the Lessor or the Owner Participant is a "resident" of the United States, as the term "resident" is used in Article 4 of the Convention Between the United States of America and the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, signed on September 21, 1989 (the "Convention"), and -13- (2) neither the Lessor nor the Owner Participant has a "permanent establishment" in Finland, as the term "permanent establishment" is defined in Article 5 of the Convention, with respect to which the transaction contemplated by the Operative Documents or the income from such transaction is attributable; and (B) the operation of the Aircraft by the Lessee on flights to or from Finland will not result in the Lessor or the Owner Participant being subjected to any additional taxes, levies, imposts, duties, charges or withholdings imposed by Finland or any governmental subdivision or other taxing authority thereof or therein upon or with respect to the Lessor's or the Owner Participant's other income, activities or properties, subject to provisos (1) and (2) set forth in clause (A) above. (vii) The qualification at any time of the Lessor to do business under the laws of Finland or any political subdivision thereof does not constitute a condition to, and the failure to so qualify does not affect, the purchase by the Lessor of the Aircraft or the exercise by the Lessor of any right, privilege or remedy accorded it in, under or in connection with this Lease or any other Operative Document or the enforcement of such right, privilege or remedy; the purchase by the Lessor of the Aircraft or the performance by the Lessor of any action required under, or contemplated by, this Lease or any other Operative Document or the exercise of the remedies hereunder or thereunder (other than the operation or other use (other than merely leasing from a place of business outside of Finland) of the Aircraft by the Lessor) will not violate any now-existing Applicable Law of Finland or any political subdivision thereof or require any Finnish governmental filing, approval, consent, or recordation (except as set forth in paragraph (viii) below) or result in any tax liability (other than taxes required to be paid by the Lessee pursuant to Article 9 of the Purchase Agreement) to the Lessor pursuant to the now-existing Applicable Law of Finland or any political subdivision or taxing authority thereof or any now-existing rule or regulation of any federation or organization or similar entity of which Finland is a member. (viii) Except for the registration of the Aircraft in Finland in the name of the Lessor as owner with the CAA, (A) it is not necessary to ensure the legality, validity, enforceability or admissibility in evidence of this Lease or any other Operative Document in Finland that this Lease or any other Operative Document or any other document be filed or recorded with any court or other authority in Finland or that any stamp or similar tax be paid on or in respect of this Lease or any other Operative Document unless court action is taken, and (B) no further action by the Lessee in Finland (including the giving or recording of any document) is necessary in order to establish and perfect, in Finland, such title to and interest in the Aircraft as against the Lessee or any third parties as shall be conveyed by the Lessee to the Lessor on the Delivery Date. -14- (ix) No default or Event of Default has occurred and is continuing. (b) Representations and Warranties of the Trust Company and the Lessor; Certain Agreements. The Trust Company makes the representations and warranties contained in clauses (i), (ii), (iii), (iv), (v), (vi) and (vii) hereof solely as to itself in its individual capacity, and the Lessor makes all the representations and warranties contained in this paragraph (b): (i) Due Organization. The Trust Company is a trust company duly organized and validly existing in good standing under the laws of the State of Illinois, and has the power and authority to enter into and perform its obligations under the Trust Agreement and, acting as trustee thereunder, under this Lease, the Lease Supplement and the Purchase Agreement. (ii) Duly Appointed Trustee. The Trust Company is the duly appointed trustee under the Trust Agreement. (iii) Trust Agreement. The Trust Agreement has been duly executed and delivered by one of the officers of the Trust Company who was duly authorized to execute and deliver the Trust Agreement on behalf of the Trust Company and, assuming due authorization, execution and delivery by the Owner Participant, is the valid and binding obligation of the Trust Company, enforceable in accordance with its terms, and the Trust Agreement creates under the laws of the State of California for the Owner Participant the beneficial interest in the Trust Estate (as such term is defined in the Trust Agreement) it purports to create. (iv) Lessor's Parent. The Trust company is a wholly-owned subsidiary of United States Leasing International, Inc. (v) Due Authorization; Enforceability. This Lease and the Purchase Agreement have been duly authorized, executed and delivered by the Lessor or the Trust Company, as the case may be, and the Lease Supplement has been duly authorized by the Lessor, and on the Delivery Date the Lease Supplement will be duly executed and delivered by the Lessor, and, assuming the due authorization, execution and delivery thereof by the Lessee and the other parties thereto, this Lease and the Purchase Agreement are, or in the case of the Lease Supplement will be, when delivered, valid and binding obligations of the Lessor or the Trust Company, as the case may be, enforceable in accordance with their respective terms. (vi) No Violation. The execution and delivery by the Lessor of this Lease and by the Trust Company of the Trust Agreement are not, and the execution and delivery by the Lessor of the Lease Supplement and the Purchase Agreement will not be, and the -15- performance by the Lessor or by the Trust Company, as the case may be, of its obligations under each of the foregoing documents will not be, inconsistent with its charter or by-laws, do not and will not contravene any material provision of any Applicable Law, any judgment or order applicable to it, and do not and will not contravene any provision of, or constitute a default under, any material indenture, mortgage, contract or other instrument to which it is a party or by which it or its properties is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any federal, state or local governmental authority or agency or other Person, except such as have been obtained, given or accomplished. (vii) Title to the Aircraft. The Aircraft is being leased by the Lessor to the Lessee hereunder ON A COMPLETELY "AS-IS" BASIS, AND THE LESSOR DOES NOT MAKE, NOR SHALL IT BE DEEMED TO HAVE MADE, AND IT HEREBY EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY EXPRESS OR IMPLIED, AS TO THE AIRCRAFT OR ANY PART THEREOF, INCLUDING, WITHOUT LIMITATION, TITLE, AIRWORTHINESS, VALUE, CONDITION, DESIGN, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OPERATION, MERCHANTABILITY, CONSTRUCTION, CONDITION OF THE AIRCRAFT OR FITNESS FOR A PARTICULAR USE OF THE AIRCRAFT OR ANY PART THEREOF OR AS TO THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, OR AS TO THE ABSENCE OF OBLIGATIONS BASED ON STRICT LIABILITY IN TORT, OR NEGLIGENCE, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE AIRCRAFT OR ANY PART THEREOF, OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT AND EVERY PART THEREOF, AND THE LESSEE HEREBY WAIVES, RELEASES AND RENOUNCES ANY WARRANTIES, REPRESENTATIONS OR GUARANTEES, LIABILITIES AND OBLIGATIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE AIRCRAFT, ANY PART, ANY DATA OR ANY OTHER THING DELIVERED, LEASED, SOLD OR TRANSFERRED HEREUNDER OR UNDER THE PURCHASE AGREEMENT (AND WHETHER OR NOT ARISING OUT OF THE DELIVERY, USE, NON-USE, OPERATION, LEASE, SUBLEASE, TRANSFER, POSSESSION, STORAGE, MANUFACTURE, MODIFICATION, ALTERATION, TESTING, MAINTENANCE, REPAIR, SALE OR OTHER DISPOSITION THEREOF), INCLUDING, WITHOUT LIMITATION, (I) ANY WARRANTIES, REPRESENTATIONS, GUARANTEES, LIABILITIES OR OBLIGATIONS RELATING TO THE AIRWORTHINESS, VALUE, CONDITION, DESIGN, OPERATION OF, OR THE QUALITY OF THE MATERIAL OR WORKMANSHIP IN, OR TITLE TO, OR ANY DEFECT IN, THE AIRCRAFT, ANY PART, ANY -16- DATA OR ANY OTHER THING DELIVERED, LEASED, SOLD OR TRANSFERRED HEREUNDER OR UNDER THE PURCHASE AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT, (II) ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR FOR A PARTICULAR PURPOSE, AGAINST INFRINGEMENT OR THE LIKE, OR ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, (III) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT WITH RESPECT TO THE AIRCRAFT, ANY PART, ANY DATA OR ANY OTHER THING DELIVERED, LEASED, SOLD OR TRANSFERRED HEREUNDER OR UNDER THE PURCHASE AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT, WHETHER OR NOT IN STRICT OR ABSOLUTE LIABILITY AND WHETHER OR NOT ARISING FROM THE NEGLIGENCE, ACTUAL OR IMPUTED, OF THE LESSOR, THE LESSEE OR THEIR RESPECTIVE ASSIGNS, OR (IV) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF, OR DAMAGE TO, THE AIRCRAFT, ANY PART, ANY DATA OR ANY OTHER THING, FOR ANY LOSS OF USE, REVENUE OR PROFIT, OR FOR ANY OTHER DIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, EXCEPT AS OTHERWISE PROVIDED IN SECTION 4(d)(iii), THE LESSEE HEREBY ACKNOWLEDGING AND AGREEING THAT, AS BETWEEN THE LESSEE, ON THE ONE HAND, AND THE LESSOR, EACH OWNER PARTICIPANT, THE TRUST COMPANY, THE OWNER TRUSTEE AND EACH INDEMNITEE, AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS, ON THE OTHER HAND, ALL RISKS, OBLIGATIONS AND LIABILITIES WITH RESPECT TO ALL AND ANY OF THE FOREGOING AND ALL AND ANY OF THE MATTERS REFERRED TO IN THE LAST SENTENCE OF THIS PARAGRAPH (vii) ARE SOLELY THOSE OF THE LESSEE, except that on the Delivery Date, the Lessor will have received whatever title to the Aircraft was conveyed to it by the Lessee, free of Lessor Liens. The Lessor shall have no responsibility or liability to the Lessee or any other Person, regardless of any negligence (other than gross negligence or willful misconduct) of the Lessor, with respect to (i) any liability, loss or damage caused or alleged to be caused directly or indirectly by the Aircraft or any Part or any part of either thereof or by any inadequacy thereof or deficiency or defect therein or by any other circumstances in connection therewith, (ii) the condition, use, operation, performance, non-use, repair, maintenance or testing of the Aircraft or any Part or any part of either thereof or any of the other matters previously referred to in this paragraph (vii), or any risks relating to any thereof, (iii) any interruption of service, loss of business or anticipated profits or consequential damages, or (iv) the delivery, operations, servicing, maintenance, repair, replacement or improvement of the Aircraft or any Part or any part of either thereof. -17- (viii) Trust Agreement. The Trust Agreement has been duly executed and delivered, constitutes the legal, valid and binding obligation of the parties thereto, enforceable in accordance with its terms, and the Trust Agreement creates under the laws of the State of California for the Owner Participant the beneficial interest in the Trust Estate (as such term is defined in the Trust Agreement) it purports to create. (c) Lessee's Covenants. (i) The Lessee will not operate, service, repair, maintain, overhaul or test, or permit to be operated, serviced, repaired, maintained, overhauled or tested, the Aircraft in any country wherein any thereof would violate Applicable Law. (ii) The Lessee agrees that if the Republic of Finland shall cease to be, directly or indirectly, the owner of at least fifty and one-tenth percent (50.1%) of the issued and outstanding shares of the Lessee's capital stock entitled to vote the election of the Lessee's directors, then at any time after the occurrence and continuance of such event, the Lessee will give the Lessor prompt written notice after knowledge thereof by a Responsible Officer of the Lessee, and the Lessee will, upon the Lessor's written request, provide, within forty-five (45) Business Days after the Lessee's receipt of such request, security for the obligations of the Lessee under the Lease that qualifies as Collateral Security in the manner provided in paragraph (iii) of this Section 4(c). At any time during the Term when the Lessee is obligated to provide, or has provided, Collateral Security (as defined below), the Lessee may, in its sole discretion, purchase the Aircraft by paying the Lessor, and the Lessor shall be obliged to transfer the Aircraft to the Lessee "as-is where-is", free and clear of all Lessor Liens but otherwise without recourse or warranty (all as described in the first sentence of paragraph (vii) of Section 4(b) except that appropriate changes shall be made to the references to the parties and to accommodate a sale and purchase rather than a lease) upon receipt of an amount (the "Option Price") equal to the higher of (y) the Fair Market Sales Value or (z) the Stipulated Loss Value of the Aircraft, as of the date the Lessee makes such payment, which Stipulated Loss Value shall be that Stipulated Loss Value set forth opposite the Rent Payment Date corresponding to the date on which payment is made of, if made on a Loss Payment Date which is other than a Rent Payment Date, as of the immediately succeeding Loss Payment Date provided, however, there shall be deducted from the amount payable by the Lessee an amount equal to interest at the rate of 9.4% per annum (computed on the basis of a 365 day year and actual days elapsed) on the amount of Stipulated Loss Value as of such Rent Payment Date or Loss Payment Date, as the case may be, computed on a daily basis, from and including the date such payment is made by the Lessee, to but not including such Rent Payment Date or Loss Payment Date, as the case may be, and provided further that if such payment is made on a Rent Payment Date, the Lessee shall not pay the scheduled amount of Basic Rent otherwise due on such Rent Payment Date. -18- The Lessor shall deliver a bill of sale for the Aircraft to the Lessee transferring to the Lessee title to the Aircraft on an "as-is where-is" basis, without recourse or warranty (all as described in the first sentence of paragraph (vii) of Section 4(b) except that appropriate changes shall be made to the references to the parties and to accommodate a sale and purchase rather than a lease) except that the Lessor shall warrant that the Aircraft is free and clear of all Lessor Liens. The Lessor shall cooperate reasonably with the Lessee, at the Lessee's sole cost and expense, in causing the Aircraft to be re-registered as the Lessee may require in connection with any such transfer of the Aircraft to the Lessee pursuant to this paragraph (iii). Upon payment of the Option Price this Lease and all Basic Rent, if any, to the date of receipt of such amount by the Lessor (prorated on a daily basis) and all accrued and unpaid Supplemental Rent to such date of receipt and the Lessee's obligation to pay Basic Rent accruing thereafter, shall terminate. (iii) (A) For purposes of Section 4(c)(ii) above, "Collateral Security" shall mean any one or more, at the Lessee's election, of (a) Dollar deposits in an interest-bearing account in the Lessee's name (the "Security Account") at a bank in Helsinki, Finland selected by the Lessee and reasonably satisfactory to the Lessor, (b) a guarantee of the Lessee's payment obligations under this Lease, issued by the Republic of Finland in favor of the Lessor, and in form and substance reasonably satisfactory to the Lessor, and (c) a letter of credit or letter of guarantee issued by a bank to the Lessor, securing the Lessee's payment obligations under this Lease, by a bank reasonably satisfactory to the Lessor and in form and substance reasonably satisfactory to the Lessor. When required, Collateral Security shall be provided in a cumulative amount equal to: 24.02% of the Stipulated Loss Value for Rent Payment Dates occurring in April 1992 through July 1995; 24.20% of the Stipulated Loss Value for Rent Payment Dates occurring in October 1995 through January 1999; 21.7% of Stipulated Loss Value for Rent Payment Dates occurring in April 1999 through January 2000 (if the Term is renewed as provided in Section 3(e)); and 19.20% of Stipulated Loss Value for Rent Payment Dates occurring in April 2000 through January 2001 (if the Term is renewed as provided in Section 3(e)). (B) It shall be a term and condition of the Security Account, any such governmental guarantee and any such letter of credit or letter of guarantee, that, upon the certification by the Lessor to the Lessee, the bank or the issuer, as the case may be, that with respect to an Event of Default (other than any Event of Default described below in paragraph (C) of this Section 4(c)(iii) in paragraph (e) of Section 17), if (1) such Event of Default has occurred and is continuing unremedied after expiry of all grace and cure periods under this Lease, (2) the Lessor has declared in writing to the Lessee that this Lease is in default and the Lessor has commenced to exercise one or more of the remedies available to it under Section 18 of this Lease and (3) a period of at least thirty (30) consecutive days has elapsed after such written -19- declaration to the Lessee by the Lessor, then the Lessor shall be entitled to claim such amounts of Collateral Security as it certifies are overdue and unpaid to it by the Lessee under this Lease. (C) It shall also be a term and condition of the Security Account, any such governmental guarantee and any such letter of credit or letter of guarantee, that, upon the certification by the Lessor to the Lessee, the bank or the issuer, as the case may be, with respect to any Event of Default described in paragraph (e) of Section 17, if (1) such Event of Default has occurred and is continuing unremedied after expiry of all the grace and cure periods provided for such Event of Default under this Lease and (2) a period of at least ninety (90) consecutive days has elapsed after such expiry, then the Lessor shall be entitled to claim such amounts of Collateral Security as it certifies are overdue and unpaid to it by the Lessee under this Lease. (D) All such amounts from the Collateral Security paid to the Lessor shall be applied by the Lessor in accordance with the terms of Section 18 of this Lease and any excess shall be paid by the Lessor to the Lessee. So long as no Event of Default has occurred and is continuing, upon request of the Lessee, all amounts of interest, if any, standing to the credit of the Security Account shall be paid to the Lessee quarterly on the first Business Day next succeeding the date on which each quarterly payment of Basic Rent has been received by the Lessor. (E) All amounts standing to the credit of the Security Account, including interest thereon, shall be paid to the Lessee, and all other items of Collateral Security shall be terminated immediately upon, as the case may be, (1) the indefeasible payment of the Option Price of the Aircraft and all other amounts required to be paid pursuant to paragraph (ii) of Section 4(c), (2) at such time as the Republic of Finland owns at least fifty and one-tenth percent (50.1 %) of the Lessee's issued and outstanding shares of capital stock entitled to vote the election of directors, or (3) at such time as this Lease has been terminated and all Rent then due and payable has been paid. (iv) The Lessee's agent for service of process designated pursuant to the requirements of the Federal Aviation Act of 1958, as amended, is Finnair, General Manager North America presently located at Finnair Executive Office, 10 East 40th St., New York, N.Y. 10016 and the Lessee shall provide prompt written notice to the Lessor of any change in the name or address of such agent. The Lessee, further, shall notify the Lessor promptly if the Lessee shall cease to be a "foreign air carrier" within the meaning of the Federal Aviation Act of 1958, as amended, and thereupon shall specify whether or not the Lessee maintains an office in the United States of America, its territories or possessions of the Commonwealth of Puerto Rico, and, the address or addresses, if any, of such office therein located. -20- (v) The Lessee shall not (without the prior written consent of the Lessor) consolidate with any Person or merge into or convey, transfer or lease all or substantially all its assets to any Person unless upon any such consolidation, merger, conveyance, transfer or lease the new or surviving entity, if not the Lessee, shall expressly or by operation of law assume all the obligations of the Lessee under this Agreement and the other Operative Documents. (vi) The Lessee, upon reasonable request, shall promptly furnish to the Lessor such information as may be reasonably required by the Lessor to enable the Lessor to file any reports required to be filed by the Lessor or the Owner Participant with any governmental authority because of the Lessor's ownership or leasing of the Aircraft or the Owner Participant's direct or indirect ownership of a beneficial interest in any part of the Lessor's Estate. (d) Lessor's Covenants. (i) The Lessor agrees that it will, at its own cost and expense, promptly take such action as may be necessary to duly discharge any Lessor Lien on the Aircraft. (ii) The Lessor agrees that, so long as no Event of Default shall have occurred and be continuing, the Lessor will not take any action or cause to be taken any action or fail to prevent any action arising by, through or under it, which causes interference with the Lessee's peaceful and quiet use, operation and possession of the Aircraft in accordance with the terms of this Lease. (iii) The Lessor agrees that it shall and hereby does indemnify and hold harmless the Lessee and its permitted assigns against any and all claims, losses, liabilities and damages (including attorney fees and disbursements) incurred in connection with any breach of the covenants of this Section 4(d), provided, however, that the foregoing indemnity and agreement to hold harmless shall be coextensive in scope with, and shall in no way expand, waive or limit, such covenants or agreements or any rights, remedies or defenses which are or would be available in connection therewith. (iv) Effective upon the execution and delivery of the Lease Supplement on the Delivery Date but only as long as no Event of Default shall have occurred and be continuing, the Lessor does hereby authorize the Lessee, on behalf of and to the exclusion of the Lessor, for the duration of the Term, to exercise in the Lessee's own name all existing warranties, service life policies and patent indemnities of manufacturers and maintenance and overhaul agencies of and for the Aircraft and Parts, if any, and upon the request, and at the cost, of the Lessee, the Lessor shall use its reasonable efforts to give the Lessee aid and assistance in enforcing the rights of the Lessee arising under such warranties, service life policies and patent indemnities. -21- SECTION 5. Return of the Aircraft. (a) On the last Business Day of the Term (or such earlier date as this Lease may be terminated pursuant to Section 18 hereof) (the "Redelivery Date") all of the terms of this Section 5 shall apply and the Lessee at its expense will return the Aircraft to the Lessor by delivering the same, at the Lessee's own risk and expense, to the Lessee's maintenance facilities at Helsinki-Vantaa Airport, Finland (the "Redelivery Location"), fully equipped with all Engines installed thereon. In the event that any engine not an Engine shall be delivered with the returned Airframe as set forth herein in connection with the termination of the Lease, all engines then installed on the Airframe shall be of the same or another manufacturer of the same or an improved model and suitable for use on the Airframe but all of the same make and model and the Lessee, concurrently with such delivery, will, at its own expense and at no cost or expense to the Lessor, furnish the Lessor with a full warranty bill of sale from the Lessee, in form and substance satisfactory to the Lessor, with respect to such engine, and with an opinion of the Lessee's in house counsel to the effect that, upon such return, the Lessor will acquire good and marketable title to such engine free and clear of all rights of third parties under pooling, interchange, overhaul, repair and other arrangements and all other Liens (other than Lessor Liens), and the Lessee shall take such other action as the Lessor shall reasonably request, and thereupon the Lessor shall transfer to the Lessee, "where-is", free and clear of all Lessor Liens, but otherwise without recourse or warranty (all as described in the first sentence of paragraph (vi) of Section 4(b), except that appropriate changes shall be made to the references to the parties and to accommodate a sale and purchase rather than a lease), its title, if any, to such Engine not installed on the Airframe at the time of its return. The Lessor shall, subject to the terms and on the conditions of this Section 5, accept return of the Aircraft from the Lessee by executing and delivering to the Lessee a Redelivery Receipt of Aircraft and Engines, substantially in the form of Exhibit B hereto, not later than 3:30 p.m. local time on the Redelivery Date. At the Lessor's direction, the Lessee will (1) store the Aircraft out-of doors at the Redelivery Location or out-of-doors at another location in Europe utilized for the storage and maintenance of the Lessee's aircraft, selected by the Lessee, in each case, at the Lessor's risk and the Lessee's expense for a period not to exceed ninety (90) days; or (2) on the Redelivery Date or at the end of the storage period referred to in the preceding clause (1), ferry the Aircraft at the Lessee's sole expense (including the cost of insurance of the type and in the amounts required during the Term under Section 11 hereof) to any airport in Europe selected by the Lessor, or to any other location selected by the Lessor at the Lessor's sole risk and expense, provided, however, that the Aircraft remains registered in Finland at all times during which it is under the Lessee's operational control. During such storage period, the Lessee will, during normal business hours, permit authorized representatives of the Lessor, each Owner Participant and any prospective purchaser or user of the Aircraft or any part thereof to inspect the same at all reasonable times and in any event without interfering with the Lessee's normal operations, it being understood and agreed that all such inspections shall be at the Lessor's risk and the Lessee shall have no obligation or liability whatsoever in any way relating to any such inspection other than the obligation to -22- permit inspection of the Aircraft as provided in this sentence. Upon such return, and at the Lessee's sole expense: (i) the Aircraft (A) shall, at the election of the Lessee, be registered in the Republic of Finland, except that the Aircraft shall be registered in Finland or the United States if and as so elected by the Lessee at any time in accordance with Section 6(c) (assuming the Lessor, or its designee, is then, or its designee by a transfer may then be, eligible to be the registered owner of the Aircraft); (B) shall be in compliance with the provisions of Section 6 hereof; (C) shall be in as good condition as when delivered to the Lessee hereunder, ordinary operating wear and tear excepted, or, in the case of any such engines owned by the Lessee or in substitution or replacement of the original Engines, assuming that such Engine or Engines have the remaining useful life required in Section 5(a)(vi), shall have a value, utility and useful life at least equal to, and shall be in as good operating condition as required by, the terms and provisions hereof with respect to the Engines; (D) shall be clean by international commercial passenger airline operating standards; (E) shall, except as otherwise provided herein or as otherwise agreed by the Lessor, be in the same configuration as when the Aircraft was originally delivered to the Lessee hereunder; and (F) shall be free and clear of all Liens other than Lessor Liens; (ii) the Aircraft shall (A) have a currently effective airworthiness certificate and, at the Lessor's request, an airworthiness certificate for export to the United States or to any member country of the OECD designated by the Lessor (or to any other location as may be designated by the Lessor and which is reasonably acceptable to the Lessee) issued by the CAA or the equivalent aviation authority of the Applicable Jurisdiction, as the case may be; (B) be duly certified as airworthy by the CAA or the equivalent aviation authority of the Applicable Jurisdiction, as the case may be; (C) be in compliance with all airworthiness directives and mandatory requirements of the CAA or the equivalent aviation authority of the Applicable Jurisdiction, as the case may be, and all applicable environmental, noise, air pollution and other similar standards of Finland and the International Civil Aviation Organization, in each case in existence on the date of such return and requiring terminating compliance within six (6) months (or the equivalent number of hours or cycles) of the Redelivery Date then applicable to the Airframe and each Engine, without regard to any waivers or exemptions delaying compliance with such directives or requirements applicable solely to the Lessee's use of the Aircraft but not applicable or available generally to any one or more other European operators; (D) have all components and systems operational; (E) have no deferred maintenance or inspection items, or placards and be free of corrosion in accordance with the limits of the Approved Maintenance Program; and (F) be configured and equipped as delivered for passenger use under regulations of the CAA or the equivalent aviation authority of the Applicable Jurisdiction, as the case may be; -23- (iii) the Airframe and each such Engine shall be in such condition as shall be required to meet (A) all manufacturer's mandatory service bulletins; and (B) all applicable airworthiness directives of the CAA or the equivalent aviation authority of the Applicable Jurisdiction, as the case may be and the Applicable Law thereof; (iv) the special exterior markings of the Lessee and any sublessee on the Airframe shall have been removed, or caused to have been removed, by the Lessee and shall be painted over in a good and workmanlike manner; (v) the Airframe shall have been maintained by the Lessee in accordance with the Approved Maintenance Program with respect thereto and (A) shall have not more than twenty (20) hours since having had a C Check and any portion of a D Check applicable to such C Check, with no deferred items under the Approved Maintenance Program; and (B) shall not have less than four (4) years remaining until the next scheduled D Check, or its equivalent, provided that in the event that (1) the Aircraft shall, on the Redelivery Date, have more than four (4) years or its equivalent remaining until the next D Check, the Lessor shall pay to the Lessee an amount equal to Five Hundred Twenty-Five Dollars ($525.00) (adjusted as provided in clause (3) of this subparagraph (v)) for each day or its equivalent by which the period remaining until the next D Check exceeds four (4) years or its equivalent except that the Lessor may offset such payment obligation against any payment obligation of the Lessee under the Operative Documents then due and unpaid; or (2) the Aircraft shall, on the Redelivery Date, have less than four (4) years or its equivalent, but more than two (2) years or its equivalent, remaining until the next D Check, the Lessee shall pay to the Lessor an amount equal to Five Hundred Twenty-Five Dollars ($525.00) (adjusted as provided in clause (3) of this subparagraph (v)) for each day or its equivalent by which the period remaining until the next D Check is less than four (4) years or its equivalent; and provided, further, that (3) all payments made pursuant to this subparagraph (v) will be adjusted by reference to the Finnish Labor Index (limited to the maximum inflation adjustment of five percent (5%) per annum) applied on an annual basis for each year and fraction thereof from the Delivery Date to the Redelivery Date; (vi) each Engine shall be "on condition" with "condition monitoring", and shall have a remaining life of at least 4,000 hours or 4,000 cycles, whichever is more limiting, to removal of the most limiting life-limited part or known scheduled repair visit under the Approved Maintenance Program; (vii) the Engines will have each undergone full hot and cold section boroscope and isotope inspections in the presence of the Lessor's representative at the Redelivery Location immediately prior to such redelivery and after the Aircraft has been removed from service, and if any Engine shall not have been certified to be within the then- -24- recommended manufacturer's maintenance manual limits and the limits of the Approved Maintenance Program for further operation, then the Lessee shall promptly cause such Engines to comply with such limits. The Lessee shall deliver to the Lessor, at no expense to the Lessor, all "no-charge kits" which have been offered to the Lessee by the manufacturer throughout the Term and which have not been installed on the Aircraft prior to redelivery to the Lessor; in addition, the Lessor may purchase from the Lessee at the Lessee's cost any service bulletin kits purchased by the Lessee for the Aircraft; (viii) the nose landing gear shall have no less than 8,250 cycles or 48 months, whichever is more limiting, remaining until the next scheduled overhaul or shop visit under the Approved Maintenance Program and the main landing gear shall have on average no less than 10,000 cycles or 48 months, whichever is the more limiting, remaining until the next scheduled overhaul or shop visit under the Approved Maintenance Program; and (ix) the Auxiliary Power Unit shall, on the Redelivery Date, have at least 2,400 cycles remaining until the next scheduled hot section inspection or overhaul under the Approved Maintenance Program. (b) On a date mutually agreed to by the Lessor and the Lessee at least four (4) days prior to the Redelivery Date, a ground inspection of the Aircraft shall be conducted, provided that any such inspection will not interfere with the Lessee's normal operation of the Aircraft. The Lessee will make the Aircraft and its Records (including historic and the most current engine performance monitoring data) available for such inspection at the Redelivery Location. At such inspection, the Aircraft will be inspected by either, as the Lessor shall elect, an employee or agent of the Owner Participant qualified to conduct such an inspection or an independent inspector, appointed by the Lessor, who will perform such tests as are customary and reasonable upon the return of used aircraft of the type leased hereunder, as are consistent with the Approved Maintenance Program and as may be necessary or advisable to determine whether the Aircraft complies with the terms of this Section 5(a); the Lessor will promptly notify the Lessee of the results of such inspection and will deliver a written report thereof in the event of any discrepancies for receipt by the Lessee not later than two (2) days prior to the Redelivery Date. Representatives of the Lessee and the Lessor will be present at such inspection. Unless the parties otherwise agree in writing, the inspector shall remain at the Redelivery Location until the Lessor has accepted redelivery of the Aircraft. In addition, prior to or upon the expiration or earlier termination of this Lease, the Lessee will conduct, at the request of the Lessor and at the Lessor's sole expense, a sixty (60) minute test flight for the purpose of verification of the operational conditions set forth herein of the Aircraft, its equipment and systems and will permit not more than three (3) individuals designated as observers by the Lessor to be on board such Aircraft during such flight. All reasonable requests of the Lessor's representatives shall be carried out by the Lessee's flight -25- crew during any such flight, provided that such requests do not endanger the Aircraft and can be performed during the sixty (60) minute test flight. If as a result of such inspection and test flight, the Aircraft is found not to comply with the terms of this Section 5(a), the Lessee, at its expense, will forthwith take or cause to be taken such action as may be required for such compliance and for compliance with any of the other terms of this Section 5. The Lessor shall compensate the Lessee for all fuel on board the Aircraft (at the price applicable to such fuel on the Redelivery Date, including any applicable into-plane charges) after completion of any test flight and the termination of the Lease, but all other fluids and the like remaining on board shall, without charge, together with such remaining fuel, become the property of the Lessor upon the Lessee's receipt of payment for fuel and into-plane charges, as aforesaid, and the Lessor's execution and delivery of the Redelivery Receipt. (c) The Lessee will, from the date hereof until the expiration of the Term, cooperate fully with the Lessor in permitting prospective purchasers or lessees of the Aircraft to inspect the Aircraft and its records, provided that any such inspection will not interfere with the Lessee's normal operation of the Aircraft. (d) Upon return of the Aircraft on the Redelivery Date to the Lessor under this Section 5, the Lessee shall deliver all logs, manuals, certificates, engineering and modification orders and data, records and data, and inspection, modification, overhaul, repair and maintenance records and reports, and all airworthiness directives of the CAA and other applicable authorities required to be maintained with respect thereto by the CAA or otherwise under the Applicable Laws of any Applicable Jurisdiction, and if any thereof shall not be in English, English translations thereof but only to the extent required for registration of the Aircraft with the FAA and copies (and, if and when permitted by the laws of Finland, the United States and any other Applicable Jurisdiction, originals) of any existing logs, manuals and records and data required by the FAA to permit registration of the Aircraft under FAR 121, and operation of the Aircraft in, the United States (collectively, together with such English translations, if any, "Records"). (e) Effective upon the Lessor's acceptance of return of the Aircraft on the Redelivery Date, the Lessee does hereby re-assign to the Lessor all existing warranties, service life policies and patent indemnities, which by their terms do not prohibit assignment by the Lessee, of manufacturers and maintenance and overhaul agencies of and for the Aircraft and the Parts, if any, which were acquired by the Lessee during the Term and upon the request of the Lessor, from time to time after the Redelivery Date, the Lessee shall use its reasonable efforts to give the Lessor aid and assistance in enforcing the rights of the Lessee arising under each thereof, provided that the Lessor shall indemnify the Lessee for all costs and expenses incurred by the Lessee in connection with such aid and assistance rendered. The parties' respective obligations under this paragraph (e) shall survive termination of this Lease. -26- (f) In the event of a dispute arising with respect to the condition of the Aircraft on the Redelivery Date, the parties shall obtain an appraisal by an internationally recognized independent appraiser mutually agreed to by the Lessor and Lessee. (g) The Lessor may assign its rights under Section 5 in accordance with the terms and subject to the conditions and provisions thereof to any Person who leases or purchases the Aircraft from the Lessor at or after the end of the Term. SECTION 6. Maintenance. Operation. Etc. (a) Registration. Maintenance and Operation. The Lessee, at its own cost and expense, will at all times during the Term: (i) cause the Aircraft to be in compliance with all CAA regulations applicable to McDonnell Douglas MD 82 aircraft, certificated for interstate and overseas operation under Finnish Applicable Law or such other Applicable Law of such other Applicable Jurisdiction, as the case may be, and to be and remain duly registered with the CAA in accordance with the Act in the name of the Lessor as owner; (ii) maintain, operate, service, repair, overhaul and test the Airframe and each Engine (including but not limited to all program monitoring, program reliability and program reporting requirements under the Approved Maintenance Program and the Act), so as to keep the same in as good operating condition as when originally leased hereunder, ordinary wear and tear excepted, in the same manner and with the same care as used by the Lessee with similar aircraft operated by the Lessee, and in such condition as may be necessary to enable the airworthiness certificate of the Aircraft to be maintained in good standing at all times under the Act, Finnish Applicable Law or such other Applicable Law of such other Applicable Jurisdiction as the case may be, and in accordance with all manufacturers' mandatory service bulletins with respect thereto, (iii) maintain all records, logs, manuals, manufacturer's service bulletins, CAA and FAA airworthiness directives, engineering and modification orders, and other Records and data required by Finnish Applicable Law or such other Applicable Law of such other Applicable Jurisdiction as the case may be, to be maintained in respect of the Airframe and each Engine; (iv) perform all obligations required to be performed by it under the terms of all applicable warranties, service life policies and patent indemnities of the manufacturer or supplier of the Aircraft or any Part thereof, in respect of the Aircraft or any part thereof. The Lessee shall comply with all (i) applicable requirements of Finnish Applicable Law or such other Applicable Law of such Applicable Jurisdiction, as the case may be, and all other applicable environmental, noise, air pollution and other similar standards of Finland or such other Applicable Jurisdiction, as the case may be, and the International Civil Aviation Organization in effect from time to time to the extent that such standards are required to be complied with (without regard to any exemption waiving or delaying compliance therewith applicable solely to the Lessee's use of the Aircraft but not applicable or available generally to any one or more other European operators) and (ii) the Lessee, at its own expense, forthwith upon the delivery thereof hereunder, shall cause the Aircraft to be duly registered (provided the Lessor or its designee is eligible to be the registered owner of the Aircraft) and at all times thereafter to remain duly registered in compliance (provided the Lessor or its designee is -27- eligible to be the registered owner of the Aircraft) with all Finnish registration and airworthiness requirements or those of any other Applicable Jurisdiction, as the case may be. The Lessee agrees that the Airframe and each Engine will not be maintained, serviced, repaired, overhauled, tested, used or operated: (A) in violation of any law or any rule, regulation or order of any government or governmental authority having jurisdiction (domestic or foreign) or other Applicable Law or in violation of the airworthiness certificates of the Aircraft; (B) in any area excluded from coverage by, or in any manner or for any purpose inconsistent with the terms of, any insurance required by the terms of Section 11 hereof; or (C) in any recognized or threatened area of hostilities unless fully covered to the Lessor's satisfaction by war risk insurance. (b) Mandatory Service Items. All airworthiness directives of the CAA and all manufacturer's mandatory service bulletins requiring inspections, repair, replacement or CAA-required terminating action during the Term, or, in the case of airworthiness directives requiring terminating action, within six (6) months of the Redelivery Date, with respect to the Airframe and each Engine, shall be complied with by the Lessee at the Lessee's expense. (c) Re-registration. The Lessee may from time to time require the Lessor, upon reasonable prior notice and at the Lessee's sole expense, to re-register the Aircraft in Finland or the United States, as the case may be, in the name of the Lessor, as owner, and of the Lessee, as lessee, if each is then in compliance with all applicable registration requirements. During the period the Aircraft is registered in the United States, all references in this Lease to the "CAA" and to "Finnish Applicable Law", shall be deemed to refer to the FAA and United States Applicable Law. The Lessor shall cooperate in connection with any re-registration permitted under this paragraph (c). SECTION 7. Liens. The Lessee will not, directly or indirectly, create, incur, assume or suffer to exist any Lien upon or with respect to the Aircraft, the Airframe or any Engine or any other portion of the Lessor's Estate, except for the rights of the Lessor and the Lessee hereunder and Permitted Liens. SECTION 8. [Intentionally omitted.] SECTION 9. Possession. (a) The Lessee will not, without the prior written consent of the Lessor (such consent not to be unreasonably delayed or withheld), assign any of its rights or obligations under this Lease or sublease or otherwise in any manner deliver, transfer or relinquish possession or control of, or transfer any estate, right, title or interest in or to, the Airframe or any Engine or Part (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, provided that, so long as no Default relating to an -28- Event of Default under Section 17(e) and no Event of Default shall have occurred and be continuing, the Lessee may, without the prior written consent of the Lessor: (i) deliver temporary possession and control of the Airframe or any Engine or Part to the manufacturer thereof for testing, service, maintenance, overhaul or repair or, to the extent permitted by Section 12 hereof, for modifications or additions; (ii) install an Engine on an airframe owned by the Lessee free and clear of all Liens except Permitted Liens; (iii) install an Engine on an airframe leased to the Lessee or owned by the Lessee and subject to a security agreement under which the Lessee is the debtor, provided that such airframe is free and clear of all Liens except the rights in and to the Airframe of the parties to such lease or security agreement and except Permitted Liens, and provided ~ that if the Lessor's title to any such Engine shall be divested under any such agreement or arrangement, such divestiture shall be deemed to be an Event of Loss with respect to such Engine and the Lessee shall comply with Section 10(b) in respect thereof; (iv) in the ordinary course of testing, servicing, maintenance, repair or overhaul, remove any Part from the Airframe or any Engine, provided that the Lessee replaces such Part as promptly as possible with a Part which has a value and utility at least equal to the Part being replaced (assuming it to be in the condition and state required by this Lease) and is owned by the Lessee free and clear of all liens except Permitted Liens; and any such replacement Part shall thereby become subject to this Lease without necessity of further act; provided, however, that any Part removed from the Airframe or any Engine for such purpose shall remain subject to this Lease until replaced by a replacement Part as provided in this clause (iv); (v) enter into a Wet Lease for the Airframe and the Engines or engines then installed thereon or for any Engine installed on any other airframe owned (in accordance with the foregoing provisions of this Section 9) or operated by the Lessee (or any permitted sublessee pursuant to subclause (vi) hereof) with any third party, provided, however, that the term of such Wet Lease shall not extend beyond the end of the Term; (vi) sublease the Airframe, any Engine or engines then installed on the Airframe (x) to any Affiliate of the Lessee with respect to which, were it the "Lessee" under this Lease, there shall have occurred and be continuing no Default or Event of Default of the type described in Section 17(e) hereof, (y) upon prior notice to the Lessor, to any air carrier with respect to which, were it the "Lessee" under this Lease, there shall have occurred and be continuing no Default or Event of Default of -29- the type described in Section 17(e) hereof, and which carrier is based in any member nation of the OECD, the Republic of Singapore, the Republic of South Korea, or the Kingdom of Thailand, or (z) to any other air carrier with respect to which, were it the "Lessee" under this Lease, there shall have occurred and be continuing no Default or Event of Default of the nature described in Section 17(e) hereof, in each case, on the date the sublease is entered into, which carrier has been approved in advance in writing by the Lessor, which approval the Lessor shall not unreasonably withhold or delay, provided that (A) such sublease shall provide that the sublessee will not transfer possession of or any other rights to the subleased property other than to the Lessee or the Lessor; (B) such sublease shall, by its terms, be made expressly subject and subordinate to all of the terms of this Lease, including, without limitation, the rights of any permitted assignee of the Lessor under Section 20 hereof and the right of the Lessor to enforce all of the remedies under Section 18 hereof upon the declaration of this Lease to be in default upon the occurrence of any Event of Default and to terminate all rights of the sublessee to possession of the subleased property irrespective of such sublessee not being in default; (C) the term of such sublease shall not extend beyond the end of the Term as then in effect; (D) such sublease shall contain provisions for the operation, maintenance and insurance of the Airframe or such Engine, as the case may be, which are substantially the same as such provisions of this Lease; and (E) the Lessee shall provide the Lessor with written notice of any sublease having a term greater than sixty (60) days within thirty (30) days after such sublease shall become effective and, promptly after the request of the Lessor, the Lessee shall provide a copy thereof to the Lessor, certified as true by the Lessee (provided that the Lessee may redact financial terms from such copy); and (vii) in accordance with this Lease (including, without limitation, Section 12) subject any Engine or Part to normal pooling agreements or arrangements in each case customary in the airline industry and entered into by the Lessee in the ordinary course of its business with one or more air carriers. (b) No pooling agreement, sublease or other relinquishment of possession of the Airframe or any Engine shall in any way discharge or diminish any of the Lessee's obligations to the Lessor hereunder or constitute a waiver of the Lessor's rights or remedies hereunder. Without limiting the preceding sentence and notwithstanding Section 9(a), the rights of any sublessee or other recipient of possession of the Aircraft, however characterized, pursuant to any arrangement permitted by Section 9(a) shall be subject and subordinate to, and any sublease permitted by clause (vi) thereof shall be made expressly subject and subordinate to, all the terms and provisions of this Lease, including, without limitation, the Lessor's right to repossession and to avoid such sublease upon such repossession or an Event of Default hereunder, and the Lessee shall remain primarily liable hereunder for the performance and observance of all the terms and provisions of this Lease and the other Operative Documents to the same extent as if such transfer or sublease had not -30- occurred, and all the terms and provisions of this Lease and the other Operative Documents shall remain in full force and effect notwithstanding such transfer or sublease. (c) In connection with any sublease permitted under this Section 9, so long as no Event of Default and no Default which would become an Event of Default of the type described in Section 17(e) has occurred and is continuing, the Lessee may from time to time prior to the Redelivery Date require the Lessor, upon reasonable prior notice and at the Lessee's sole expense, to re-register the Aircraft in a jurisdiction other than Finland or the United States, as the case may be, which shall be a nation described in clause (y) of Section 9(a)(vi) (such other jurisdiction, the "Other Jurisdiction"), provided that the Lessee shall deliver to the Lessor at the time of such registration an opinion of counsel (which counsel may be counsel to the sublessee) with respect to such Other Jurisdiction to the effect that (a) the Lessor's rights to repossession under this Lease and the sublease to be entered into pursuant to this Section 9 are valid, binding and enforceable and this Lease is valid and enforceable (subject to customary exceptions) under the laws of such Other Jurisdiction, (b) it is not necessary for the Lessor, or any Owner Participant, as a result of such sublease or change in registration, to register or qualify to do business in such Other Jurisdiction, (c) the ownership interest of the Lessor in the Aircraft has been preserved under the laws of such Other Jurisdiction and, to the extent required thereunder, such ownership interest has been duly registered under such laws, and (d) such registration will not result in the imposition by such Other Jurisdiction of any Taxes on the Lessor, the Owner Participant, the Aircraft (or any part thereof) or otherwise in connection with the transactions contemplated hereby or by any other Operative Document for which the Lessee is not required to indemnify the Lessor (provided that in lieu of the opinion referred to in this clause (d), the Lessee may indemnify the Lessor (in a manner reasonably acceptable to the Lessor) for any Taxes imposed by such Other Jurisdiction in connection with or relating to the transactions contemplated by the Operative Documents which would not have been imposed but for such registration). In addition, it shall be a condition to such registration that (i) the aircraft and engine maintenance program under the laws of such Other Jurisdiction shall be substantially similar to that required by the FAA or the CAA, and (ii) such registration shall not otherwise adversely affect the interests of the Lessor in the Aircraft. During the period the Aircraft is registered in such Other Jurisdiction, all references in this Lease to the "CAA" shall be deemed to refer to the equivalent aviation authority of such Other Jurisdiction, and all references to "Finnish Applicable Law", shall be deemed to refer to the Applicable Law of such Other Jurisdiction. The Lessor shall reasonably cooperate at the Lessee's request and expense in connection with any re-registration permitted under this paragraph (c). SECTION 10. Event of Loss; Requisition for Use. (a) If an Event of Loss shall occur with respect to the Airframe, the Lessee will within ten (10) days after actual knowledge by a Responsible Officer of the Lessee (and in any event within twenty (20) days) of the occurrence of such Event of Loss) notify the Lessor thereof in writing and will pay to the Lessor, in Dollars and in immediately available funds, not later than the earlier of one -31- hundred twenty (120) days after the date of the occurrence of such Event of Loss or five (5) Business Days after the date of the Lessee's receipt of insurance proceeds, an amount equal to the corresponding Stipulated Loss Value of the Aircraft for the Loss Payment Date on which such payment is made (if payment is made on a Loss Payment Date) or on the immediately succeeding Loss Payment Date set forth in Schedule I to the Lease Supplement (if payment is made on a date other than a Loss Payment Date); provided, however, that if the date such payment is made by the Lessee is not a Loss Payment Date, there shall be deducted from the Stipulated Loss Value amount payable by the Lessee an amount equal to the interest at a rate of 9.4% per annum on such Stipulated Loss Value (computed on the basis of a 365 day year and actual days elapsed) from and including the date such payment is made by the Lessee, to but not including the Loss Payment Date immediately following the date such payment is made by the Lessee; and provided further, that if such payment is made on a Rent Payment Date, the Lessee shall not pay the scheduled amount of Basic Rent otherwise due on such Rent Payment Date. The Lessee will pay in full when due, but without duplication, the Basic Rent for the Aircraft payable on each Rent Payment Date occurring prior to such Loss Payment Date. In addition to the foregoing amounts, the Lessee shall pay to the Lessor any Supplemental Rent then due and unpaid and required to be paid on or prior to the date on which payment in full of such Stipulated Loss Value and Basic Rent is required under this Section 10(a) to be paid to the Lessor. In addition, if any such payment of Stipulated Loss Value and Rent is not paid in full when due in accordance with the provisions of this Section 10(a), the Lessee shall pay on demand interest on such unpaid amount at the Overdue Payment Rate from and including the due date to but excluding the date on which payment in full is received by the Lessor. Upon payment in full by the Lessee of all amounts referred to above in this Section 10(a) and all other amounts, if any, due and payable by the Lessee hereunder, (i) the Lessee shall have no further obligation to pay Basic Rent due in respect of periods (or parts thereof) commencing thereafter, (ii) this Lease shall terminate and (iii) upon request of the insurers of the Aircraft, the Lessor will transfer to such insurers "as-is where-is" title to the Airframe and each Engine, without any recourse, representation or warranty (all as described in the first sentence of paragraph (vi) of Section 4(b), except that appropriate changes shall be made to the references to the parties and to accommodate a sale and purchase rather than a lease), except that the Airframe and Engines are free and clear of Lessor Liens. Notwithstanding the foregoing, such transfer shall not in any way affect or limit the obligations or liabilities of the Lessee hereunder or under any Operative Document not specifically discharged by such payment of Stipulated Loss Value and Rent. (b) If an Event of Loss shall occur with respect to an Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe, the Lessee will within twenty (20) days after a Responsible Officer of the Lessee has actual knowledge (and, in any event, within sixty (60) days) of the occurrence of such Event of Loss notify the Lessor thereof in writing and will, not later than one hundred twenty (120) days after the occurrence of such Event of Loss, at its sole cost and expense, duly convey to -32- the Lessor (or cause to be conveyed to the Lessor), as replacement for such Engine, title to another engine of the same or an improved make and model which shall be owned by the Lessee free of all Liens other than Permitted liens and shall, in the opinion of the Lessor, have a value and utility at least equal to, and in as good operating condition as, such Engine immediately prior to such Event of Loss, assuming compliance by the Lessee with all of the terms of this Lease with respect to such Engine. Prior to or at the time of such conveyance, at the Lessee's sole expense the Lessee and the Lessor will enter into a supplement to this Lease for purposes of subjecting such replacement engine to this Lease and the Lessee, at the Lessee's sole expense will (i) cause to be delivered to the Lessor evidence that the Lessor has acquired full warranty title to such replacement engine free and clear of all Liens except Permitted Liens and that such replacement engine is duly subjected to this Lease, such supplement to this Lease and all other documents and instruments required to effect or evidence the foregoing (including the bill of sale) to be in form and substance reasonably satisfactory to the Lessor and the Lessee; and (ii) cause to be delivered to the Lessor evidence satisfactory to the Lessor as to the due compliance by the Lessee with the insurance provisions of Section 11 hereof with respect to such replacement engine; and (iii) furnish to the Lessor an opinion of the Lessee's counsel to the effect that, upon such conveyance, the Lessor will acquire good and marketable title free and clear of all liens, other than Permitted Liens, to such replacement engine and that it will be leased hereunder to the same extent as the Engine replaced thereby, and as to the validity, binding effect and enforceability of such supplement to this Lease and other documents and instruments. Upon compliance by the Lessee with the foregoing terms of this subsection (b) within the 120-period referred to above, the Lessor will (A) upon request by the insurers of such Engine transfer title to such insurers of the Engine so replaced "as-is, where-is" without any recourse, representation or warranty (all as described in the first sentence of paragraph (vi) of Section 4(b), except that appropriate changes shall be made to the references to the parties and to accommodate a sale and purchase rather than a lease), except that such Engine is free and clear of any Lessor Liens and (B) execute and deliver to the Lessee a partial release, in recordable form, releasing such Engine from this Lease. Such replacement engine shall thereupon constitute an "Engine" for all purposes hereof. No such termination of this Lease with respect to any Engine as contemplated by this Section 10(b) shall result in any reduction of Rent. (c) In the event of the requisition for use by the Finnish Government or the government of any other Applicable Jurisdiction (including any governmental authority, agency or instrumentality, including any court, thereof) of the Airframe or any Engine during the Term, the Lessee shall promptly notify the Lessor of such requisition and all the Lessee's obligations under this Lease with respect to the Airframe or such Engine shall continue to the same extent as if such requisition had not occurred; provided, however, that if the Airframe or such Engine shall not be returned by the Finnish Government or such other government prior to the end of the Term and the Lessee has given notice and extended the Term in accordance with and as provided in Section 3(f), the Lessee shall be obligated to return the Airframe or such Engine to the Lessor pursuant to, and in all other respects to comply with -33- the provisions of, Section 5 promptly upon its return by the Finnish Government or such other government. All payments received by the Lessor or the Lessee from the Finnish Government or such other government for the use of the Airframe or such Engine during the Term shall be paid over to, or retained by, the Lessee unless an Event of Default or Default shall have occurred and be continuing in which event such amounts shall be paid over to or retained by the Lessor as security for the obligations of the Lessee under this Lease and applied against the Lessee's obligations hereunder, and upon the terms and conditions of Section 24(b)(ii) all such amounts and any gain thereon from Permitted Investments required to be made pursuant to Section 24(b)(ii) shall be paid over by the Lessor to the Lessee; and all payments received by the Lessor or the Lessee from the Finnish Government or such other government for use of the Airframe or such Engine after the Term shall be paid over to, or retained by, the Lessor. (d) At any time during the Term so long as no Event of Default shall have occurred and be continuing, the Lessee may, in its discretion, upon prior reasonable notice to the Lessor, terminate this Lease with respect to any Engine. In such event and on or before the date of such termination, the Lessee shall replace such Engine hereunder by complying with the terms of Section 10(b) hereof to the same extent as if an Event of Loss had occurred with respect to such Engine, and the Lessor shall concomitantly therewith, as provided in Sections 10(b) and 12, transfer all of its rights and interest in and to such Engine to the Lessee as provided therein, and thereupon such replacement engine shall constitute an "Engine" for all purposes hereof. Upon compliance by the Lessee with the foregoing terms of this paragraph (d), the Lessor will execute and deliver to the Lessee a partial release, in recordable form, releasing such Engine from this Lease. No termination of this Lease with respect of any Engine as contemplated by this Section 11(d) shall result in any reduction of Rent. SECTION 11. Insurance. (a) The Lessee at its expense shall carry public liability (including, without limitation, contractual, bodily damage and property damage liability and passenger products and completed operations liability and also war risk and allied perils liability in accordance with Lloyds of London aviation clause AVN.52 or its equivalent) and property damage insurance, payable in Dollars, with respect to the Airframe and the Engines (i) in an amount at least equal to the greater of that normally carried, from time to time, by the Lessee with respect to similar aircraft owned, leased or operated by it, or that carried, from time to time, with respect to similar aircraft by major commercial air carriers flying routes substantially similar to those flown by the Lessee but in no event less than U.S. $500,000,000 per occurrence, and (ii) with commercial insurers of internationally recognized standing. (b) The Lessee at its expense shall maintain in effect with insurers of internationally recognized standing, and payable in Dollars all-risk aircraft hull insurance for flight, taxiing and ground covering the Airframe and Engine and any other engines on the -34- Aircraft, and all-risk coverage with respect to any Engine while removed from the Airframe, which is of the type and in substantially the amount usually carried by corporations engaged in the same or similar business and similarly situated as the Lessee (but specifically including war risk, governmental confiscation (including the government of the Applicable Jurisdiction), appropriation, and hijacking insurance (political and non-political risks), except cover in respect of any hostile detonation of any weapon of war employing atomic or nuclear fission, fusion or other radioactive force or matter); provided that such insurance in respect of the Aircraft shall at any time not be less than the Stipulated Loss Value for the Aircraft as of the date of determination. The Lessee may self-insure, by way of deductible or premium adjustment provisions in insurance policies, the risks required to be insured against pursuant to this subsection (b), provided that such self-insurance shall not apply in the case of a total loss or constructive or arranged total loss of the Airframe and, in the case of any other loss, shall not exceed U.S. $3,000,000 with respect to the Airframe and the Engines or engines then installed thereon. Any policies of insurance required pursuant to this subsection (b) shall provide that any loss in excess of U.S. $3,000,000 payable with respect to the Airframe and the Engines or engines installed thereon or with respect to an Engine while on the ground shall be payable and paid to the Lessor. (c) Any policies of insurance required pursuant to either subsection (a) or subsection (b) above shall: (i) be amended to name the Lessor and the other Additional Insureds as additional insureds warranted no operational interest, but without the Lessor or the other Additional Insureds being liable for premiums in respect of such insurance (other than by way of set-off as mentioned in (vi) below), and in the case of each policy required pursuant to subsection (b) above, shall name the Lessor and the other Additional Insureds as loss payees; (ii) provide that, in respect of the interest of the Lessor and the other Additional Insureds, in such policies, the insurance shall not be invalidated by any action or inaction of the Lessee or any other Person (other than the Additional Insureds, each for their respective interests) and shall insure the interest of the Lessor and the other Additional Insureds, regardless of any breach or violation by the Lessee or any other Person (other than the Additional Insureds, each for their respective interests) of any warranty, declaration or condition contained in such policies; (iii) provide that if such insurance is cancelled for any reason whatsoever, or if any material change is made in the coverage (including the scope thereof) which affects the interest of the Lessor or the other Additional Insureds, or if such insurance is allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to the Lessor or the other Additional Insureds for thirty (30) days (seven (7) days or such lesser period as may be customarily available in the case of any war risk and allied perils coverage) after the giving of notice to the Lessor or such Additional Insured, as the case may be, of written notice from such insurers to the addresses provided hereunder to the Lessee of such cancellation, change or lapse; (iv) provide that as against the Lessor and the other Additional Insureds, the insurers shall waive, to the fullest extent permitted by Applicable Law, all rights of subrogation; (v) provide, in the case of liability insurance policies (A) that all of the provisions thereof shall operate in the same manner as if -35- there were a separate policy covering each insured (provided that such policies shall not operate to increase the insurer's limit of liability as set forth in such policies), and (B) that the insurance shall be primary and without right of contribution from any other insurance which may be available to the Lessor or any Additional Insured; (vi) shall waive any right of the insurers to set-off, counterclaim or any other deduction, whether by attachment or otherwise, against the interests of the Additional Insureds (other than in respect of unpaid premiums in respect of the Airframe and the Engines or engines installed thereon or with respect to an Engine which is on the ground); and (vii) shall contain with respect to hull all risks and hull war risks insurance a 50/50 clause per AVN.103 or its equivalent. In the event that the Lessee shall fail to maintain insurance as provided in this Section 11, the Lessor may at its sole option provide such insurance and, in such event, the Lessee shall, upon demand, reimburse the Lessor, as Supplemental Rent, for the reasonable market cost thereof, without waiver of any other rights or remedies the Lessor may have hereunder or under any other Operative Document. (d)(i) On or before the Delivery Date, and thereafter at the time of each renewal (but no less than annually), the Lessee, at its expense, will furnish to the Lessor and each other Additional Insured insurance certificates with respect to the Aircraft signed by a firm of independent aircraft insurance brokers reasonably acceptable to the Lessor, describing in reasonable detail the insurance then carried and maintained on or with respect to the Aircraft and noting any geographical limits to the coverage provided thereby. The Lessee will cause such firm (i) to dispatch the said insurance certificates to the Lessor and each other Additional Insured no later than fourteen (14) days after the renewal date of the relevant insurance policies, and (ii) to advise the Lessor and each other Additional Insured in writing promptly of any default in the payment of any premium and of any other act or omission on the part of the Lessee, of which such firm has knowledge and which might invalidate or render unenforceable, in whole or in part, any insurance on the Aircraft. The Lessee will, and will also cause such firm to, advise the Lessor in writing as promptly as practicable after a Responsible Officer of the Lessee or such firm, as the case may be, acquires knowledge that an interruption or reduction of any insurance carried and maintained on the Aircraft pursuant hereto will occur. (ii) The Lessee covenants and agrees that it shall provide all such notices and take all such actions as shall be necessary or advisable to prevent, and the Lessee shall not suffer to occur, the invalidation of any insurance benefit which may otherwise be available to any "Additional Insured" but for any action or inaction of any "Additional Insureds" that occurs or is a breach or violation of the insurance policy or any warranty, declaration or condition contained therein of which the Additional Insured has no actual knowledge or that results from any action or inaction of the Lessee (including, without limitation, the filing of any claims and the giving of appropriate notices so as to prevent any such invalidation). -36- (iii) The Lessee covenants and agrees that it will pay to the Lessor, or to whomever the same shall have experienced the set-off, as Supplemental Rent, promptly upon any set-off described in Sections 11(c) and 11(d), an amount equal to the amount of any set-off pursuant to such Sections. (e) All insurance payments received by the Lessor or the Lessee from insurance referred to in Section 11(b) and paid as the result of the occurrence of an Event of Loss with respect to the Airframe or an Engine (as well as any requisition or other payments received by the Lessor or the Lessee as the result of any such Event of Loss) shall be, if received by the Lessee, immediately paid to the Lessor and shall be held and applied by the Lessor as follows: (i) if such payment is received as the result of an Event of Loss referred to in Section 10(a), such payment shall be applied in reduction of the Lessee's obligation to make payment pursuant to Section 10(a) (and any excess shall be paid to the Lessee) or, if the Lessee shall have already made payment in full pursuant to said Section 10(a), all of such payment shall be paid to the Lessee, provided that no Event of Default or Default which would become an Event of Default of the type described in Section 17(a), (b) or (e) shall have occurred and then be continuing; and (ii) if such payment is received as the result of an Event of Loss referred to in Section 10(b), such payment shall be paid to the Lessee upon compliance by the Lessee with all of the terms of said subsection (b) provided that no Event of Default or Default which would become an Event of Default of the type described in Section 17(a), (b) or (e) shall have occurred and then be continuing. (f) All insurance payments received by the Lessor or the Lessee from insurance referred to in Section 11(b) and paid other than as the result of an Event of Loss with respect to the Airframe or an Engine shall be paid over to the Lessee (i) upon the completion of repairs satisfactory to the Lessor and, (ii) upon the Lessee's delivery of a certificate of a Responsible Officer of the Lessee describing necessary repairs and specifying the amount of funds required for making such repairs, and thereupon such funds shall be promptly applied by the Lessee to the extent necessary to repair the damage to the Airframe or such Engine, provided that the Lessee will make such payment to the Lessor, and the Lessor shall not be required to make any such payment to the Lessee, if an Event of Default or Default of the type referred to in Section 17(a), (b) or (e) has occurred and is continuing. Any amount which would be payable to the Lessee or any sublessee under any parallel provision pursuant to this subsection (f) or Section 11(e) if a Default of the type described in such sections or an Event of Default had not occurred and was not continuing shall be held by the Lessor as security for the obligations of the Lessee under the Lease and applied against the Lessee's obligations as and when due. If such Event of Default and no such Default shall be cured and no other Event of Default and no such Default shall have occurred -37- and be continuing, such amount shall be paid to the Lessee to the extent not previously applied in accordance with the terms hereof. (g) The Lessor and each Owner Participant and each Affiliate of any thereof may at its own expense carry insurance with respect to the Lessor's interest in the Aircraft and the Lessor's Estate, provided, however, that such insurance does not prevent the Lessee from carrying, or otherwise adversely affect the coverage of, the insurance required by this Section 11, or adversely affect such insurance or the coverage of any other insurance carried by the Lessee with respect to its interest in the Aircraft. Any insurance payments received with respect to any such insurance (including any residual value insurance) shall be retained by the Lessor or such other Person, to the absolute exclusion of the Lessee, without reducing or otherwise affecting the Lessee's obligations or liabilities hereunder or under any other Operative Document. SECTION 12. Replacement and Pooling; Modifications and Additions. (a) The Lessee, at its own cost and expense, will promptly replace or cause to be replaced all Parts which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever, except as otherwise provided by the provisions of this Section 12. All replacement Parts shall be free and clear of all Liens (except Permitted Liens), shall be in as good an operating condition as, and shall have the value and utility at least equal to, the Parts replaced (assuming the same to be in the condition and state required by this Lease). All Parts, at any time removed from the Airframe or any Engine, shall remain the property of the Lessor, no matter where located, until such time as such Parts shall be replaced by Parts which meet the requirements for replacement Parts specified above. Immediately upon any replacement Part becoming incorporated or installed in or attached to the Airframe or any Engine, without further act, title shall vest in and such replacement Part shall become the property of the Lessor, and shall become subject to this Agreement and be deemed a Part for all purposes hereof to the same extent as the Parts originally incorporated or installed in or attached to the Airframe or such Engine. (b) Any Part replacing a Part removed from the Airframe or any Engine pursuant to a pooling or similar arrangement in accordance with Section 9 shall be incorporated or installed in or attached to the Airframe or such Engine in accordance with Section 12(a) as promptly as possible after the removal of such removed Part. In addition, any replacement Part when incorporated or installed in or attached to the Airframe or any Engine in accordance with Section 12(a) may be owned by a third Person subject to such a normal pooling arrangement permitted by this Lease, provided that the Lessee, at its own expense, as promptly thereafter as possible, but in any event not more than 180 days thereafter, either (i) obtains and, by operation of Section 12(a) conveys to Lessor, title to such replacement Part to vest in the Lessor in accordance with Section 12(a) free and clear of all Liens (except Permitted liens), or (ii) replaces or procures the replacement of such -38- replacement Part by the incorporation or installation in or attachment to such Airframe or Engine of a further replacement Part free and clear of all Liens (except Permitted Liens) and by causing title to such further replacement Part to vest in the Lessor in accordance with Section 12(a) and such further replacement Part shall forthwith be deemed part of the Airframe or Engine to the same extent as the Part originally incorporated or installed in or attached to the Airframe or such Engine and become subject to this Lease. (c) The Lessee, at its expense, will make such modifications in and additions to the Airframe and each Engine as may be required from time to time in order to meet the standards of Applicable Law and in order for the Lessee to comply fully with the terms of this Lease, including Sections 5 and 6 hereof. In addition, so long as no Event of Default or Default which would become an Event of Default of the type described in Section 17(e) shall have occurred and be continuing, the Lessee, at its expense, may from time to time make such modifications in and additions to the Airframe or any Engine as the Lessee may deem desirable in the proper conduct of its business; provided, however, that no such modification or addition shall diminish the value or utility of the Airframe or such Engine, or impair the airworthiness or operating condition thereof, below the value, utility, airworthiness and condition thereof immediately prior to such modification or addition assuming the Airframe and such Engine were in the condition and repair state required by this Lease. Title to all Parts incorporated or installed in or attached or added to the Airframe or an Engine, as the result of such modification or addition shall, without further act, vest in the Lessor. Notwithstanding the foregoing terms of this Section 12, so long as no Event of Default or Default which would become an Event of Default of the type described in Section 17(e) shall have occurred and be continuing, the Lessee may remove any Part, provided that (i) such Part is in addition to, and not in replacement of or substitution for, any Part originally incorporated or installed in or attached to the Airframe or an Engine at the time originally leased by the Lessor or any Part in replacement of, or substitution for, any such Part, (ii) such Part is not required to be incorporated or installed in or attached or added to such Airframe or an Engine, pursuant to the terms of this Lease, and (iii) such Part can be removed from the Airframe or such Engine without causing material damage to the Airframe or such Engine and without diminishing or impairing the value, utility, condition or airworthiness required to be maintained by the terms of this Lease which the Airframe and such Engine would have had at such time had such modification or addition not occurred. Upon the removal by the Lessee of any Part as provided in the immediately preceding sentence, title thereto shall, without further act, vest in the Lessee and such Part shall no longer be deemed part of the Airframe or the Engine from which it was removed. Any Part not removed by the Lessee prior to the return of the Aircraft to the Lessor hereunder shall remain the property of the Lessor. SECTION 13. Insignia. On or prior to the Delivery Date, the Lessee agrees to affix and maintain in the cockpit of the Airframe, in a prominent position on the door, a metal nameplate bearing the following inscription: "TRUST COMPANY FOR USL, INC., -39- OWNER TRUSTEE/LESSOR." The Lessee further agrees not to affix, or suffer to be affixed, to or allow the name of any Person to be affixed to or placed on the Airframe or any Part any indicia of ownership thereof by any person other than the Lessor. SECTION 14. Inspection/Information. (a) The Lessee will permit the Lessor, at the Lessor's sole cost and expense (except if incurred in the Lessor's exercise of remedies under Section 18), by its officers or agents to inspect the Aircraft or any Parts or any part thereof and the Lessee's documents and records relating thereto, and at such reasonable times during normal business hours (or at any other time acceptable to the Lessee) as the Lessor may from time to time request, provided, however, that such inspections shall not interfere with the Lessee's normal operation of the Aircraft. The Lessor shall have no duty to make any such inspection and shall not incur any liability or obligation by reason of making or not making any such inspection. The Lessee shall provide the Lessor (i) as soon as available and in any event within (x) one hundred eighty (180) days after the end of each fiscal year of the Lessee, a copy of the published annual report to its shareholders (in the English language for the financial part) for such year for the Lessee, and (y) ninety (90) days after the end of each second fiscal quarter of the Lessee, a copy of the Lessee's published interim report to shareholders, and (ii) such other information respecting the Lessee's financial conditions (to the extent made available to the Lessee's shareholders and senior lenders) or operations or the maintenance status of the Aircraft as the Lessor may from time to time reasonably request. (b) The Lessee agrees to provide to the Lessor not less than thirty (30) days after the end of each fiscal quarter, a detailed report specifying the actual number of hours/cycles utilized on the Airframe and each Engine during the preceding fiscal quarter, the location of the Airframe and each Engine as of the end of such quarter, any unscheduled maintenance work at or exceeding the level of a C Check performed thereon during such quarter and any other such information relating to the Airframe and Engines as the Lessor may reasonably request. (c) The Lessee will give notice of an Event of Default or a Default which would become an Event of Default of the type described in Section 17(e) when a Responsible Officer of the Lessee has actual knowledge thereof. SECTION 15. The Lessor's Right to Perform for the Lessee. If the Lessee fails to pay any Rent hereunder or fails to perform or comply with any of its other agreements contained herein, the Lessor may, on behalf of the Lessee, make such payment or perform or comply with such agreement, and the amount of such payment and the amount of the reasonable costs and expenses incurred in connection with such payment, performance or compliance, as the case may be (together with an amount that is the equivalent of interest thereon at the Overdue Payment Rate), shall be payable by the Lessee on demand as Supplemental Rent (not as interest). -40- SECTION 16. Further Assurances. The Lessee at its expense will promptly and duly execute and deliver such documents and assurances and take such action as may be necessary or desirable, or as the Lessor may from time to time reasonably request, in order to more effectively carry out the intent and purpose of this Lease and the other Operative Documents and to establish and protect the Lessor's title to the Aircraft and its rights and remedies created or intended to be created under this Lease and the other Operative Documents, including, without limitation, the execution, delivery and filing of Uniform Commercial Code financing and continuation statements with respect to this Lease, in form and substance satisfactory to the Lessor, in such jurisdictions as the Lessor may reasonably request. SECTION 17. Events of Default. The following events shall constitute Events of Default (whether any such event shall be voluntary or involuntary or arise by operation of law or pursuant to or in compliance with any judgment, decree, order, rule or regulation of any court or any administrative or governmental body): (a) The Lessee shall fail to make any payment of Basic Rent or Stipulated Loss Value within seven (7) days after the earlier of (i) written notice to the Lessee and (ii) actual knowledge by a Responsible Officer of the Lessee that such payment shall not have been paid when due; or (b) The Lessee shall fail to make any other payment of Rent of any kind when due and such failure shall continue unremedied for a period of fifteen (15) days after the earlier of (i) written notice to the Lessee and (ii) actual knowledge by a Responsible Officer of the Lessee that such payment shall not have been paid when due; or (c)(i) The Lessee shall fail to carry and maintain insurance in accordance with Section 11 hereof, or the Lessee shall operate the Aircraft at a time when insurance required by the provisions of Section 11 shall not be in effect; or (ii) The Lessee shall fail in any material respect to perform or observe any other covenant or agreement to be performed or observed by it under this Lease or under any other Operative Document (other than such as are the subject of Section 17(c)(i)) and such failure to perform or observe such other covenant or agreement shall continue unremedied for a period of thirty (30) days after written notice thereof to the Lessee by the Lessor, except if such failure is curable and the Lessee is diligently proceeding to cure such failure for a period not longer than ninety (90) days after such notice; or (d) Any representation or warranty made by the Lessee in this Lease or in any other Operative Document or in any document or certificate furnished by the Lessee -41- in connection herewith or therewith shall have been incorrect in any material respect at the time made and such incorrectness materially adversely affects the rights of the Lessor under the Operative Documents and the Lessor has given written notice thereof to the Lessee, or, if such incorrectness is curable and the Lessee is diligently proceeding to cure same, such incorrectness shall continue for a period not longer than forty-five (45) days after the earlier of (i) such notice and (ii) actual knowledge of such incorrectness by a Responsible Officer of the Lessee; or (e) The Lessee shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding or petition (voluntary or involuntary) shall be instituted or commenced by or against the Lessee under the laws of any country, now or hereafter in effect, seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law of any country relating to bankruptcy, insolvency, moratorium or reorganization or relief of debtors, or seeking the entry of an order, judgment or decree for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and either such proceeding (in the case of an involuntary proceeding only) shall remain undismissed or unstayed for a period of ninety (90) days, or the Lessee shall take any corporate action to authorize any of the actions set forth above in this subsection (e), or if any competent court shall by final decision have declared the Lessee "en disastre", bankrupt or insolvent or if, under the provisions of the Applicable Law of Finland, any Finnish court of competent jurisdiction shall assume jurisdiction, custody or control of the Lessee or of any substantial part of its property and such jurisdiction, custody or control shall remain in force unrelinquished or unstayed for a period of ninety (90) days. SECTION 18. Remedies. Upon the occurrence of any Event of Default and at any time thereafter so long as the same shall be continuing, the Lessor may, at its option, declare in writing to the Lessee that this Lease is in default; and at any time thereafter, so long as the Lessee shall not have remedied all outstanding Events of Default, the Lessor may do one or more of the following with respect to the Airframe or any Engine, as the Lessor in its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, Applicable Law then in effect: (a) cause the Lessee, upon the written demand of the Lessor and at the Lessee's expense, to return promptly, and the Lessee hereby agrees that it shall return promptly, such of the Airframe and the Engines as the Lessor may so demand to the Lessor or such Person as the Lessor may designate pursuant to Applicable Law in the manner and condition required by, and otherwise in accordance with all the provisions of, Section 5 as if the Airframe or such Engine were being returned at the end of the Term, or the Lessor or the Lessor's agent, at its option, may, but shall be under no -42- obligation to, enter upon the premises where all or any part of the Airframe or any Engine is located and take immediate possession of and remove the same by summary proceedings or otherwise, all without liability accruing to the Lessor or the Lessor's agent for or by reason of such entry or taking of possession, removal or storage whether for the restoration of damage to property caused by any such action or otherwise; (b) sell all or part of the Airframe or any Engine at public or private sale, as the Lessor may determine, or otherwise dispose of, hold, use, operate, lease to others or keep idle the Airframe or any Engine as the Lessor may determine, all free and clear of any rights or claims of the Lessee and without any duty to account to the Lessee with respect to such action or inaction or for any proceeds with respect thereto; (c) whether or not the Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under Section 18(a) or (b) above with respect to all or part of the Airframe or any Engine, the Lessor, by written notice to the Lessee specifying a payment date not earlier than ten (10) days from the date of such notice, may cause the Lessee to pay to the Lessor, and the Lessee shall pay to the Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the scheduled Basic Rent for the Aircraft otherwise due on Rent Payment Dates occurring on and after the payment date specified for payment in such notice), any unpaid Basic Rent for the Aircraft due (or which would have been due in the absence of the termination of this Lease) prior to the payment date specified in such notice, any accrued, due and unpaid Supplemental Rent to and including such payment date, plus whichever of the following amounts the Lessor, in its sole discretion, shall specify in such notice (together with interest on all amounts payable by the Lessee under this subsection (c) at the Overdue Payment Rate from such specified payment date until the date of actual payment): (i) an amount equal to the excess, if any, of the Stipulated Loss Value for the Airframe or such Engine (computed as of the Loss Payment Date immediately succeeding the date specified in such notice), over the aggregate Fair Market Rental Value of the Airframe or such Engine for a period equal to the remainder of the Term (or what would have been the remainder of the Term in the absence of the termination of this Lease) after discounting such aggregate Fair Market Rental Value quarterly (effective on the dates which would have been Rent Payment Dates in the absence of the termination of this Lease) to present worth as of the payment date specified in such notice at the rate per annum equal to the Overdue Payment Rate; or (ii) an amount equal to the excess, if any, of the Stipulated Loss Value for the Airframe or such Engine (computed as of the Loss Payment Date immediately succeeding the date specified in such notice), over the Fair Market Sales Value of the Airframe or such Engine, as of the payment date specified in such notice; provided, however, that if such payment is not made on -43- a Loss Payment Date, there shall be deducted from the amount payable by the Lessee under this subsection (c) an amount equal to interest at the rate of 9.4% per annum (computed on the basis of a 365 day year and actual days elapsed) on the Stipulated Loss Value payable by the Lessee, from and including the date such payment is due under this subsection (c), to but not including the Loss Payment Date immediately following the date of such payment; (d) in the event the Lessor shall have sold the Airframe or any Engine, the Lessor, in lieu of exercising its rights under Section 18(c) with respect to the Airframe or such Engine, may, if it shall so elect, require the Lessee to pay to the Lessor, and the Lessee shall pay to the Lessor, on the date of such sale, as liquidated damages for loss of a bargain and all other losses to the Lessor and not as a penalty, all unpaid Basic Rent for the Aircraft due (or which would have been due in the absence of the termination of this Lease) on each Rent Payment Date occurring prior to the date of such sale, plus any Supplemental Rent that is accrued, due and unpaid to the date of such sale plus the amount of any deficiency between the net proceeds of such sale and the Stipulated Loss Value of the Airframe or such Engine (computed as of the Loss Payment Date occurring on (if payment is made on a Loss Payment Date) or immediately following (if payment is made on a date other than a Loss Payment Date) the date of such sale), together with interest at the Overdue Payment Rate on all amounts payable by the Lessee under this subsection (d) from the date of such sale until the date of actual payment; provided, however, that if payment in respect of such sale is made on a date which is not a Loss Payment Date, there shall be deducted from the amount payable by the Lessee pursuant to this subdivision (d) an amount equal to interest at 9.4% per annum (computed on the basis of a 365 day year and actual days elapsed) on the Stipulated Loss Value payable by the Lessee, from and including the date of such sale, to but not including the Loss Payment Date immediately following the date of such sale; and/or (e) the Lessor may rescind this Lease or may exercise any other right or remedy which may be available to it under Applicable Law, or to proceed by appropriate court action to enforce the terms hereof or to recover damages permitted by Applicable Law for breach hereof. In addition, the Lessee shall be liable, except as otherwise provided above, for any and all unpaid Rent due hereunder before, after or during the exercise of any of the foregoing remedies and for all legal fees and other costs and expenses incurred by reason of the occurrence of any Event of Default or the exercise of remedies with respect thereto, including all reasonable costs and expenses incurred in connection with any retaking of the Airframe or any Engine or in placing the Airframe or any Engine in the condition and airworthiness required by Section 5. At any sale of the Airframe or any Engine pursuant to this Section 18, the Owner Participant, the Lessor or the Lessee, or any Affiliate of any -44- thereof, may bid for and purchase such property. Except as otherwise expressly provided above, no remedy referred to in this Section 18 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to the Lessor at law or in equity; and the exercise or beginning of exercise by the Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by the Lessor of any or all of such other remedies. No express or implied waiver by the Lessor of any Event of Default or Default shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default or Default. To the extent permitted by Applicable Law, the Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may require the Lessor to sell, lease or otherwise use or keep idle the Airframe or any Engine in mitigation of the Lessor's damages except as set forth in this Section or which may otherwise limit or modify any of the Lessor's rights or remedies under this Section 18. For the purpose of this Section 18, the "Stipulated Loss Value" as of any date for the Airframe or any Engine means a portion of the Stipulated Loss Value of such Aircraft, computed as of such date, which bears the same ratio to such Stipulated Loss Value of the Aircraft as the original cost to the Lessor of the Airframe or such Engine (as the case may be), as reasonably computed by the Lessor, bears to the original cost to the Lessor of the Aircraft. SECTION 19. Expenses. (a) Each party shall pay all costs and expenses (including legal fees and expenses of counsel) it has incurred in connection with the preparation, execution, delivery, administration, modification and amendment of this Lease, any other Operative Document and the other documents to be delivered hereunder or thereunder, as the case may be, except as otherwise provided below in this Section 19, provided that in no event shall the Lessee pay any costs or fees or any amounts of any nature whatsoever relating to the Owner Trustee or any successor trustee or co-trustee under the Trust Agreement or administration of the Trust Estate. (b) The Lessor shall pay all the costs of any mortgage taxes or security filings incurred in connection with any financings or refinancing of the Aircraft, except as otherwise provided below in clause (d). (c) In connection with any financing or re-financing of the Aircraft occurring after the Delivery Date, the Lessor shall pay on demand all reasonable out-of-pocket costs and expenses (including reasonable legal fees and expenses of counsel) incurred by the Lessee in connection with any such financing or re-financing, except as otherwise provided below in clause (d). -45- (d) In connection with the amendment or modification to the Lease, or registration or deregistration of the Aircraft, in each case requested by the Lessee after the Delivery Date, or any amendment or modification to the Lease required in connection with an Event of Loss with respect to an Engine or a substitution of engines by the Lessee pursuant to Section 10(b) or 10(d), respectively, and in each other instance under this Lease or any other Operative Document where it is expressly stated that costs or expenses are to be borne by the Lessee, the Lessee shall pay on demand all reasonable out-of-pocket costs and expenses (including reasonable legal fees and expenses of counsel) incurred by the Lessor, including but not limited to, any reasonable costs incurred by the Lessor in connection with such registration or deregistration, or such Event of Loss or engine substitution under or pursuant to any financing or refinancing arrangement then in place. (e) Any party may, to the extent permitted by Applicable Law, seek payment by the other party of all its costs and expenses (including legal fees and expenses of counsel) incurred in connection with any legal suit, action, proceeding or arbitration arising out of or relating to this Lease or any of the Operative Documents, provided that in any such legal suit, action or proceeding or arbitration in which final judgment has been entered, the party against whom such judgment has been entered shall pay all such costs and expenses (including legal fees and expenses of counsel) incurred by the prevailing party. SECTION 20. Assignment; Owner Trustee. Except as otherwise provided in Section 13 of the Purchase Agreement or as the parties may otherwise agree in writing, the Lessor agrees that it will not, at any time after the execution and delivery of this Lease and prior to the expiry of the Term, assign or convey its right, title and interest in and to this Lease or the Aircraft without the written prior consent of the Lessee. SECTION 21. Notices. All notices required under the terms and provisions hereof shall be in writing or by telecommunication, in the English language, and any such notice shall become effective when received by the other party, by hand, by registered mail with proper postage for airmail prepaid, or, if in the form of a telegram, telex or telecopy, upon confirmation of receipt thereof, in each case addressed (i) if to the Lessee: FINNAIR OY Dagmarinkatu 4 00100 Helsinki Finland Attention: Group Treasurer Telex: 124946 Answerback: fnair sf Telecopier: 358-0-818-7457 Telephone: 358-0-818-81 -46- or to such other address as the Lessee shall from time to time designate in writing to the Lessor, or (ii) if to the Lessor: Trust Company for USL, Inc. 615 Battery Street San Francisco, California 94111 Attention: President Telecopy: 415-627-9420 or to such other address as the Lessor shall from time to time designate in writing to the Lessee. SECTION 22. Net Lease, No Set-Off, Counterclaim, Etc. All Rent shall be paid by the Lessee in the manner provided in Section 3(b). This Lease is a net lease, and the Lessee will pay all costs, charges, fees and expenses associated with the use, non-use, possession, control, operation, maintenance and repair of the Aircraft and the Parts, except as expressly provided herein. The Lessee's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or other right which the Lessee may have against the Lessor, any Owner Participant, the manufacturer of the Airframe or of any Engine or of any Part or any other Person for any reason whatsoever (whether in connection with the transactions contemplated hereby or in connection with any unrelated transaction), (ii) any defect in the title, airworthiness, eligibility for registration under Applicable Law, condition, design, operation, merchantability, or fitness for use of, any other matter referred to in the first sentence of paragraph (vii) of Section 4(b), or any damage to or loss or destruction of, or any Lien upon, the Airframe or any Engine, or any interruption or cessation in the use or possession thereof by the Lessee for any reason whatsoever, including by reason of governmental authority or action, (iii) any insolvency, bankruptcy, reorganization, "en disastre", moratorium or similar proceedings by or against the Lessee, the Lessor or any other Person, (iv) the invalidity or unenforceability of any of the Operative Documents, (v) any restriction on the exchange of any currency into any other currency, including, without limitation, an exchange of Finnish Marks into Dollars, or on the transfer of funds to the United States or from Finland, (vi) the Lessee at any time having immunity from suit or execution on the grounds of sovereignty, enforceability of judgment or otherwise, (vii) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If for any reason whatsoever this Lease shall be terminated as to the Airframe or any Engine in whole or in part by operation of Applicable Law, or otherwise, except as specifically provided herein, the Lessee nonetheless agrees to pay to the Lessor an amount equal to each Basic Rent payment for the Aircraft at the time such payment would have become due and payable in accordance with the terms hereof had this Lease not been so terminated in whole or in part. The Lessee hereby waives, and hereby -47- agrees to waive at any future time at the request of the Lessor, to the extent permitted by Applicable Law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease except in accordance with the express terms hereof and all rights of "set-off", notice and demand. Each payment of Rent made by or on behalf of the Lessee to the Lessor shall be final as to the Lessee and the Lessor. The Lessee will not seek to recover all or any part of any such payment of Rent made to the Lessor or any Indemnitee for any reason whatsoever and, to the extent permitted by Applicable Law, waives all rights to any such recovery and right to seek the same. The Lessor shall not be required to reimburse any portion of any payment of any Basic Rent by reason of any early termination of this Lease. Nothing in this Section 22 shall be construed to preclude the Lessee or the Lessor from bringing any suit at law or in equity against any Person which it would otherwise be entitled for breach of any representation, warranty, covenant or duty hereunder. SECTION 23. Jurisdiction: Governing Law. (a) Each of the Lessor and the Lessee hereby irrevocably agrees that, to the extent that it or any of its assets has or hereafter may acquire or become entitled to any right of immunity, as against the other party hereto or its respective successors and assigns, whether characterized as sovereign immunity or otherwise, from any legal proceedings, action or suit, from set-off or counterclaim, from the jurisdiction of any competent court, from service of process, from attachment prior to judgment, from attachment in aid of execution, or from execution prior to judgment, or other legal process, whether in the United States of America or the Republic of Finland or any other jurisdiction, but only to the extent required to enforce or collect upon this Lease or any other Operative Document or any other liability or obligation of it related to or arising from the transactions contemplated by this Lease or any other Operative Document, including, without limitation, immunity from service of process, immunity from jurisdiction or judgment of any court or tribunal, immunity from execution of a judgment, and immunity of any of its property from attachment prior to any entry of judgment or from attachment in aid of execution upon a judgment, it hereby expressly and irrevocably and unconditionally waives and agrees not to plead or claim any such immunity but only with respect to its obligations or liabilities or any other matter under or arising out of or in connection with this Lease or any other Operative Document or the subject matter hereof or thereof. Such agreement and waiver shall be irrevocable and not subject to withdrawal in any and all jurisdictions, including, without limitation, under the Foreign Sovereign Immunities Act of 1976 of the United States. (b) Each of the Lessor and the Lessee irrevocably agrees that any legal suit, action or proceeding arising out of or relating solely to this Lease or any other Operative Document, or any of the transactions contemplated hereby or thereby or any document referred to herein or therein, may be instituted in the State or Federal courts in the County of New York, State of New York, and it hereby irrevocably waives, to the fullest extent -48- permitted by law, any objection which it may have now or hereafter to the laying of the venue or the jurisdiction or the convenience of the forum of any such legal suit, action or proceeding and irrevocably submits generally and unconditionally to the non-exclusive jurisdiction of any such court but only in any such suit, action or proceeding. In the case of the said courts, the Lessee hereby designates, appoints and empowers Finnair, General Manager North America Finnair Executive Office, or any successor thereof, currently located at 10 East 40th Street, New York, New York 10016, as its authorized agent to accept, receive and acknowledge for and on behalf of it and its property service of any and all process which may be served but only in any action, suit or proceeding of the nature referred to above in the County of New York, State of New York. Each of the Lessor and the Lessee further agrees that such service of process may be made personally or by mailing or delivering a copy of the summons and complaint or other legal process in any such legal suit, action or proceeding to it in care of such agent at the aforesaid address, and, in the case of the Lessor, at the address set forth in Section 21, and such agent is hereby authorized to accept, receive and acknowledge the same for and on behalf of it and to admit service with respect thereto. Upon such service of process being made on such agent or the Lessor as aforesaid, a copy of the summons and complaint or other legal process served shall be mailed by the plaintiff to the Lessee or the Lessor, as the case may be, registered mail, return receipt requested, at its address specified in Section 21 hereof (as the same may be changed from time to time pursuant to said Section 21). Such service upon such agent shall be deemed to be personal service on the Lessee and shall be legal and binding upon it for all purposes notwithstanding any failure to mail copies of such legal process to it, or any failure on the part of it to receive the same, and shall be deemed completed upon the delivery thereof to such agent whether or not such agent shall give notice thereof to it or upon the earliest other date permitted by Applicable Law (including, without limitation, the Immunities Act). Each of the Lessor and the Lessee further irrevocably agrees to the service of process of any of the aforementioned courts but only in any suit, action or proceeding of the nature referred to above by the mailing of the copies thereof by certified air mail, postage prepaid, return receipt requested, to it at its address specified in Section 21 hereof (as the same may be changed from time to time pursuant to Section 21 hereof), such service to be effective upon the date of receipt indicated on the postal receipt returned from it. (c) The Lessee agrees that it will at all times continuously maintain an agent or an office to receive service of process in the County of New York, State of New York on behalf of itself and its property with respect to the parties to this Lease and any other Operative Document, and, in the event that for any reason the agent mentioned above or such office shall not serve as agent for it to receive service of process in the County of New York, State of New York on its behalf, it shall promptly appoint a successor satisfactory to the Lessee and the Lessor so to serve, advise the Lessee and deliver to the Lessee evidence thereof. -49- (d) Subject to any rights pursuant to Section 23(e), final judgment against the Lessee or the Lessor in any suit shall be conclusive in any court proceeding, and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy of which shall be conclusive evidence of the fact and of the amount of any indebtedness or liability of the Lessee or the Lessor, as the case may be, therein described. (e) Notwithstanding subsection (b) in this Section 23, and in addition to any of its rights to otherwise pursue remedies under or in respect of this Lease, each of the Lessor and the Lessee shall have the right, at its option, under all circumstances, to institute binding arbitration, and that if such arbitration is so elected, with respect to any matter governed by this Lease or any other Operative Document or in respect of any of the transactions contemplated hereby or thereby, or the breach, termination or invalidity thereof or in connection therewith, and any dispute, controversy and claim relating thereto, shall be settled by arbitration in accordance with the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, with the place of arbitration in Stockholm, Sweden, and each party hereby irrevocably agrees that, if either party shall elect to pursue such arbitration, the other party hereto shall submit thereto and will be bound thereby. The Arbitral Panel shall be composed of three (3) arbitrators. The language to be used in the arbitral proceedings shall be English. This agreement shall be governed by the internal laws of the State of New York (without regard to conflicts of laws principles). (f) THIS LEASE HAS BEEN NEGOTIATED AND DELIVERED IN THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO ANY CONFLICT OF LAWS RULE WHICH MIGHT RESULT IN THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. SECTION 24. Miscellaneous. (a) Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating or rendering unenforceable the remaining provisions hereof, and any such prohibitions or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by Applicable Law, each of the Lessor and the Lessee hereby waives any provision of Applicable Law which renders any provision hereof prohibited or unenforceable in any respect. No term or provision of this Lease may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. This Lease shall constitute an agreement of lease, and nothing herein shall be construed as conveying to the Lessee any right, title or interest in the Aircraft except as a lessee only. -50- (b) (i) This Lease constitutes an international transaction in which the specification of Dollars and the payment at the designated place of payment is of the essence, and Dollars shall be the currency of account in all events, including for all payments of Rent and any other amount payable hereunder or under any other Operative Document. The payment obligations of the Lessee under this Lease shall not be discharged by an amount paid in another currency or in another place, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on prompt conversion to Dollars (as quoted in New York, New York) and transfer to the designated place of payment under normal banking procedures does not yield the amount of Dollars due hereunder. If any expense required to be reimbursed pursuant to this Agreement or any other Operative Document is originally incurred in a currency other than Dollars, the Lessee or the Lessor, as the case may be, shall nonetheless make reimbursement of that expense in Dollars, in an amount equal to the amount in Dollars that would have been required for the Person that incurred that expense to have purchased, in accordance with normal banking procedures, at New York, New York the sum paid in such other currency (after any premium and costs of exchange) on the date of payment of such expenses. To the fullest extent permitted by Applicable Law, the obligation of the Lessee or the Lessor, as the case may be, in respect of any amount due under this Agreement or any other Operative Document shall, notwithstanding any payment in any other currency (whether pursuant to a judgment or otherwise), be discharged only to the extent of the amount in Dollars that the Person entitled to receive that payment may, in accordance with normal banking procedures, purchase [at,] and transfer to, New York, New York with the sum paid in that other currency (after any premium and costs of exchange) on the Business Day immediately following the day on which that Person receives that payment. If the amount in Dollars that may be so purchased for any reason falls short of the amount originally due, the Lessee or the Lessor, as the case may be, shall pay and indemnify for such additional amounts, in Dollars, as may be necessary to compensate for the shortfall. Any obligation of the Lessee or the Lessor, as the case may be, not discharged by that payment shall, to the fullest extent permitted by Applicable Law, be due as a separate and independent obligation and, until discharged as provided herein by the full payment of all outstanding amounts in Dollars as herein provided, shall continue in full force and effect. (ii) (A) Any monies (but excluding any Collateral Security described in Section 4(c)(iii) hereof) paid to or retained by the Lessor which are required to be paid to the Lessee or applied for the benefit of the Lessee (including, without limitation, amounts payable to the Lessee under Sections 10 and 11), but which the Lessor or any Person acting by or through the Lessor is entitled to hold under the terms hereof pending the occurrence of some event or the performance of some act (including, without limitation, the remedying of a Default or an Event of Default), shall, until paid to the Lessee or applied as provided herein, be invested by the Lessor from time to time at the direction, risk and expense of the Lessee in Permitted Investments (defined below). There shall be promptly remitted to the Lessee any gain (including interest received) realized as the result of any such investment (net of any fees, commissions and other expenses, if any, incurred in connection with such investment) -51- unless an Event of Default, or any Default described in paragraph (e) of Section 17, shall have occurred and be continuing, in which case such gains shall be held subject to the preceding sentence. The Lessee will promptly pay to the Lessor, on demand, as collateral security for its obligations hereunder, the amount of any loss realized as the result of any such investment (together with any fees, commissions and other expenses, if any, incurred in connection with such investment). (B) "Permitted Investments" means obligations of, or guaranteed by, the United States Government maturing within 91 days after such investment. (c) This Lease, including all agreements, covenants, representations and warranties, shall be binding upon and inure to the benefit of, and may be enforced by, (1) the Lessor and its successors and permitted assigns and (2) the Lessee and its successors and, to the extent permitted hereby, assigns. The obligations of the Lessee under Sections 8 and 19 of this Lease are expressly made for the benefit of, and shall be enforceable by, each Indemnitee entitled thereto, without declaring this Lease to be in default or taking action in respect of such declaration under Section 17 hereof. (d) The section and subsection headings in and the table of contents to this Lease are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof, and all references herein to numbered sections, unless otherwise indicated, are to sections of this Lease. (e) In the event of a discrepancy between the terms of this Lease and any of the other Operative Documents, the terms of this Lease shall govern. (f) This Lease may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. (g) This Lease represents the agreement of the Lessor and the Lessee with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Lessor relative to the subject matter hereof not expressly set forth or referred to herein or in the other Operative Documents or in the other agreements, documents and instruments referred to herein or therein delivered pursuant hereto or thereto. (h) Each of the Lessee and the Lessor agrees that it shall perform the agreements, covenants and indemnities to be performed by it set forth in the Purchase Agreement and the other Operative Documents, which agreements, covenants and documents are hereby incorporated herein by reference as fully and to the same extent and with the same force and effect as if set forth in full in this Section 24(h). -52- SECTION 25. Title and Ownership. The Lessee acknowledges that full legal title to the ownership of the Aircraft shall remain vested in the Lessor, subject to the rights of the Lessee under the Lease, notwithstanding the possession and use thereof by the Lessee. SECTION 26. WAIVER OF JURY TRIAL. BY ITS SIGNATURE BELOW WRITTEN EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL BY JURY OF ANY CLAIM, COUNTERCLAIM, ACTION OR PROCEEDING BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE OPERATIVE DOCUMENTS, OR RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, ANY OPERATIVE DOCUMENT, OR ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. [The remainder of this page has been left blank intentionally.] -53- IN WITNESS WHEREOF, the Lessor and the Lessee have each caused this Lease to be duly executed as of the date and year first above written. TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as Owner Trustee, Lessor By: /s/ Stanley E. Gutman ---------------------------- Stanley E. Gutman Vice President FINNAIR OY, Lessee By: --------------------------- Title: THE SINGLE EXECUTED ORIGINAL OF THIS LEASE MARKED "ORIGINAL" SHALL BE THE "ORIGINAL" AND ALL OTHER COUNTERPARTS OF THIS LEASE SHALL BE DUPLICATES AND MARKED "DUPLICATE" OR "DUPLICATE ORIGINAL". TO THE EXTENT THAT THIS LEASE CONSTITUTES CHATTEL PAPER, AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION, NO SECURITY INTEREST MAY BE CREATED THROUGH TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE "ORIGINAL". IN WITNESS WHEREOF, the Lessor and the Lessee have each caused this Lease to be duly executed as of the date and year first above written. TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as Owner Trustee, Lessor By: ---------------------------- Title FINNAIR OY, Lessee By: /s/ Kai Soveri --------------------------- Title: Legal Counsel THE SINGLE EXECUTED ORIGINAL OF THIS LEASE MARKED "ORIGINAL" SHALL BE THE "ORIGINAL" AND ALL OTHER COUNTERPARTS OF THIS LEASE SHALL BE DUPLICATES AND MARKED "DUPLICATE" OR "DUPLICATE ORIGINAL". TO THE EXTENT THAT THIS LEASE CONSTITUTES CHATTEL PAPER, AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION, NO SECURITY INTEREST MAY BE CREATED THROUGH TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE "ORIGINAL". SCHEDULE 1 TO LEASE AGREEMENT AIRCRAFT DOCUMENTS TO BE DELIVERED 1. TECHNICAL DOCUMENTS (ORIGINAL OF EACH) 1) Historical Brief - Aircraft 2) AD and SB Compliance List - Aircraft 3) AD and SB Compliance List - Engine 4) List of All Modifications Performed by Finnair 5) Time and Cycle Status - Aircraft and Engine 6) Original Export Certificate of Airworthiness (At Time of Purchase By Finnair) 7) Status of Aircraft in McDonnell Douglas Significant Structural Inspection Program (If Applicable) 8) Difference of McDonnell Douglas Readiness Log Master Equipment List Between Delivery and Present Configuration 9) List of Major Repairs and Alterations 10) Copy of STC's Incorporated and STC Supplements, With FAA Form 337's for Installation 2. MAINTENANCE RECORDS 1) Aircraft Log Book 2) Engine Records 3) APU Records 4) List of Components with Time Data 5) Engine Life Limited Parts with Time Data 6) Engine Historical Records - Latest EHM Work Book 7) Shop Maintenance Summary 8) Engine Test Cell Records 9) FAA Form 337 for Last EHM 10) Airframe Life Limited Parts 11) Aircraft Weighing Data 3. MANUALS 1) FAA Approved Airplane Flight Manual (AFM) [current and updated] 2) Manufacturers Flight Crew Operating Manager (FCOM) 3) Airline Flight Crew Operating Manual (FCOM) 4) Weight Balance Manual 5) Minimum Equipment List (MEL) 6) MEL Procedures Manual 7) Aircraft Maintenance Manual (AMM) 8) Aircraft Wiring Manual (AWM) 9) Aircraft Wiring Listings (AWL) 10) Systems Schematics (LAMMS) 11) Aircraft Maintenance and Inspection Program Manual -2- SCHEDULE 2 TO LEASE AGREEMENT ORGANIZATION OF ECONOMIC COOPERATION AND DEVELOPMENT For purposes of the definition of "OECD" set forth in the Operating Lease Agreement, the following are the member nations: 1. Australia 2. Austria 3. Belgium 4. Canada 5. Denmark 6. Finland 7. France 8. Federal Republic of Germany 9. Greece 10. Iceland 11. Ireland 12. Italy 13. Japan 14. Luxembourg 15. The Netherlands 16. New Zealand 17. Norway 18. Portugal 19. Spain 20. Sweden 21. Switzerland 22. Turkey 23. The United Kingdom 24. The United States of America EXHIBIT A TO LEASE AGREEMENT FORM OF LEASE SUPPLEMENT NO. 1 LEASE SUPPLEMENT NO. 1, dated April 30, 1992 between TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as owner trustee under the Trust Agreement dated as of April _, 1992 (the "Lessor"), and FINNAIR OY (the "Lessee"). The Lessor and the Lessee have heretofore entered into that certain Lease Agreement, dated as of April _, 1992, relating to one McDonnell Douglas MD82 aircraft (herein called the "Lease" and the defined terms therein being hereinafter used with the same meanings). The Lease provides for the execution and delivery of a Lease Supplement for the purpose of leasing the Aircraft under the Lease if agreed upon by the Lessor to the Lessee in accordance with the terms thereof. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, the Lessor and the Lessee hereby agree as follows: 1. The Lessor hereby delivers and leases to the Lessee under the Lease, and the Lessee hereby accepts and leases from the Lessor under the Lease, the following described McDonnell Douglas MD82 aircraft (the "Aircraft"), which as of the date hereof consists of the following components: (i) Airframe: Finnish Registration Mark OH-LMN; and manufacturer's serial number: 49150 (ii) Engines: two Pratt & Whitney Model JT8D-219 engines bearing, respectively, manufacturer's serial numbers 718072, and 709707 (each of which engines has 750 or more rated takeoff horsepower or the equivalent of such horsepower). 2. The Lessee hereby confirms its agreement to pay to the Lessor Basic Rent for the Aircraft throughout the Term on the dates and in the amounts specified in, and otherwise in accordance with all of the terms of, Section 3 of the Lease. 3. The parties confirm that the Delivery Date is April 30, 1992. 4. The parties confirm that the final Rent Payment Date is January 30, 1999, and the last day of the Term (without regard to renewals pursuant to Section 3(e) of the Lease) is April 30, 1999. 5. The parties confirm that the purchase price paid by the Lessor to the Lessee for the Aircraft under the Purchase Agreement is U.S. $16,800,000; and the Lessee confirms that it has received payment in full of such purchase price from the Lessor. 6. The Lessee hereby confirms to the Lessor that (i) the Lessee has accepted the Aircraft for all purposes hereof and of the Lease as being airworthy, in accordance with specifications, in good working order and repair and without defect or inherent vice in title, condition, design, operation or fitness for use, whether or not discoverable by the Lessee as of the date hereof, and as otherwise described in the Lease, and (ii) the Engines are delivered. 7. The Stipulated Loss Values for the Aircraft are the amounts as set forth on the Schedule I attached hereto. 8. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 9. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. -2- IN WITNESS WHEREOF, the Lessor and the Lessee have caused this Lease Supplement to be duly executed as of the date and year first above written. TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as Owner Trustee, Lessor By: ---------------------------- Stanley E. Gutman Vice President FINNAIR OY, Lessee By: --------------------------- Title: -3- SCHEDULE 1 TO LEASE SUPPLEMENT RENT PAYMENTS MD82 Aircraft M.S.N. 49150 Basic Rent Pay- Basic Rent ment Date Occur- Payment Due ring In/Loss (U.S. Dollars) - ------------ -------------- April 1992 $658,225.68 July 1992 $658,225.68 October 1992 $658,225.68 January 1993 $658,225.68 April 1993 $658,225.68 July 1993 $658,225.68 October 1993 $658,225.68 January 1994 $658,225.68 April 1994 $658,225.68 July 1994 $658,225.68 October 1994 $658,225.68 January 1995 $658,225.68 April 1995 $658,225.68 July 1995 $658,225.68 October 1995 $538,547.52 January 1996 $538,547.52 April 1996 $538,547.52 July 1996 $538,547.52 October 1996 $538,547.52 January 1997 $538,547.52 April 1997 $538,547.52 July 1997 $538,547.52 October 1997 $538,547.52 January 1998 $538,547.52 April 1998 $538,547.52 July 1998 $538,547.52 October 1998 $538,547.52 January 1999 $538,547.52 Basic Rent Pay- Basic Rent ment Date Occur- Payment Due ring In/Loss (U.S. Dollars) - ------------ -------------- April 1999 $538,547.52 July 1999 $538,547.52 October 1999 $538,547.52 January 2000 $538,547.52 April 2000 $538,547.52 July 2000 $538,547.52 October 2000 $538,547.52 January 2001 $538,547.52 April 2001 $538,547.52 SCHEDULE 2 TO LEASE SUPPLEMENT STIPULATED LOSS VALUE MD82 Aircraft M.S.N. 49150 Loss Payment Date Occurring In Stipulated Or Before Loss Value ----------------- ---------- 4/30/92 $17,377,000 5/30/92 $16,869,706 6/30/92 $17,021,475 7/30/92 $17,175,022 8/30/92 $16,665,291 9/30/92 $16,814,610 10/30/92 $16,965,694 11/30/92 $16,453,486 12/30/92 $16,600,314 1/30/93 $16,748,893 2/30/93 $16,234,167 3/30/93 $16,378,463 4/30/93 $16,523,976 5/30/93 $16,007,051 6/30/93 $16,149,136 7/30/93 $16,292,895 8/30/93 $15,773,322 9/30/93 $15,912,744 10/30/93 $16,053,825 11/30/93 $15,531,560 12/30/93 $15,668,274 1/30/94 $15,806,633 2/30/94 $15,281,629 3/30/94 $15,415,591 4/30/94 $15,550,689 5/30/94 $15,023,293 6/30/94 $15,154,847 7/30/94 $15,288,018 8/30/94 $14,757,797 9/30/94 $14,886,513 Loss Payment Date Occurring In Stipulated Or Before Loss Value ----------------- ---------- 10/30/94 $15,016,828 11/30/94 $14,483,736 12/30/94 $14,609,565 1/30/95 $14,736,977 2/30/95 $14,200,966 3/30/95 $14,323,859 4/30/95 $14,447,828 5/30/95 $13,909,147 6/30/95 $14,029,356 7/30/95 $14,151,025 8/30/95 $13,609,239 9/30/95 $13,726,325 10/30/95 $13,844,854 11/30/95 $13,420,662 12/30/95 $13,535,652 1/30/96 $13,652,074 2/30/96 $13,225,763 3/30/96 $13,338,624 4/30/96 $13,452,463 5/30/96 $13,024,072 6/30/96 $13,134,840 7/30/96 $13,246,741 8/30/96 $12,815,883 9/30/96 $12,924,171 10/30/96 $13,033,577 11/30/96 $12,600,211 12/30/96 $12,705,978 1/30/97 $12,812,848 2/30/97 $12,376,933 3/30/97 $12,480,135 4/30/97 $12,584,140 5/30/97 $12,145,860 6/30/97 $12,246,684 7/30/97 $12,348,585 8/30/97 $11,907,673 9/30/97 $12,005,850 10/30/97 $12,105,090 11/30/97 $11,661,501 -2- Loss Payment Date Occurring In Stipulated Or Before Loss Value ----------------- ---------- 12/30/97 $11,756,987 1/30/98 $11,853,520 2/30/98 $11,407,210 3/30/98 $11,499,960 4/30/98 $11,593,455 5/30/98 $11,144,606 6/30/98 $11,234,803 7/30/98 $11,326,018 8/30/98 $10,874,360 9/30/98 $10,961,732 10/30/98 $11,050,106 11/30/98 $10,595,592 12/30/98 $10,680,091 1/30/99 $10,765,577 2/30/99 $10,308,158 3/30/99 $10,389,738 4/30/99 $10,472,000 -3- EXHIBIT B TO LEASE AGREEMENT REDELIVERY RECEIPT OF AIRCRAFT AND ENGINES (1) Aircraft Manufacturer and Model McDonnell Douglas MD82 Finnish Registration OH-LMN Aircraft Manufacturer's Serial No. 49150 Engine Manufacturer and Model Pratt & Whitney JT8D-219 Engine Manufacturer's 1. Serial Nos.: 2. (2) Received at Helsinki-Vantaa Airport, Finland Date: April _, 1999. Local time: _________. (3) Reference is made to the Lease Agreement, dated as of April __, 1992, between Trust Company for USL, Inc., Lessor, and Finnair Oy, Lessee (the "Lease"). Receipt is hereby acknowledged on behalf of the Lessor of delivery to it by the Lessee, in accordance with the Lease, of the foregoing described aircraft together with all equipment and the Engines (as defined in the Lease) installed thereon. The Lessor hereby confirms that the Airframe and the two above described installed Engines (as defined in the Lease) and all equipment and components, documents and records have been examined by its duly appointed and authorized representative(s) to the Lessor's satisfaction. The Lessor hereby confirms that the Aircraft and its installed Engines (as defined in the Lease) were duly accepted by the Lessor and that the Lessee has performed its obligations under Section 5 of the said Lease Agreement. IN WITNESS WHEREOF, the Lessor has caused this Redelivery Receipt of Aircraft and Engines to be executed in its corporate name, by its representative thereunto duly authorized as of the day and year first above written. TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as Owner Trustee, Lessor By --------------------------- Title ------------------------ Dated: April __, 1999 -2- EXHIBIT C April 30, 1992 Trust Company for USL., Inc. as Owner Trustee for the Owner Participant below named c/o United States Leasing International, Inc. 615 Battery Street San Francisco, California 94111 United States Leasing International, Inc. 615 Battery Street San Francisco, California 94111 (For the appropriate transaction) Haight, Gardner, Poor & Havens 195 Broadway New York, New York 10007 Dear Sirs: I am assistant Secretary and in-house Counsel of Finnair Oy, a corporation organized under the laws of the Republic of Finland (the "Lessee"). As such, I am familiar with the sale, purchase and lease of one McDonnell Douglas MD82 Aircraft bearing Finnish Registration mark OH-LMN pursuant to (i) the Aircraft Purchase Agreement, dated as of April 30 1992 (the "Purchase Agreement"), among the Lessee, as the Seller, United States Leasing International, Inc. as an Owner Participant, and Trust Company for USL, Inc., and (ii) the Lease Agreement dated as of April 30, 1992 (the "Lease") between the Lessee and Trust Company for USL, Inc., not in its individual capacity except as expressly provided, but solely as owner Trustee under the Trust Agreement dated as of April 30, 1992 (the "Trust Agreement") with United States Leasing International, Inc. as Owner Participant, as Lessor. Terms defined in the Lease and not otherwise defined herein are used in this opinion with the meanings defined in the Lease. In connection with the foregoing, I have examined originals or photostatic or certified copies of all such corporate records, certificates, affidavits and of all such other documents as I have deemed relevant and necessary as the basis of my opinions hereinafter set forth. I have personal knowledge that Lessee originally acquired the Aircraft from McDonnell Douglas. For the purposes of the opinions expressed below, I have assumed (i) the authenticity of all documents submitted to me as originals (ii) the conformity to the originals of all documents submitted as certified or photostatic copies and the authenticity of the originals, (iii) the legal capacity of natural persons, and (iv) the due authorization, execution and delivery of all documents by all parties and the validity and binding effect thereof (other than the authorization, execution and delivery of the documents by the Lessee and the validity and binding effect thereof upon the Lessee). As to certain factual matters, I have relied upon representations included in the Purchase Agreement and the Lease, upon certificates of certain officers of the Lessee and upon certificates of public officials. Based upon the foregoing and such other information and documents as I have considered necessary for the purposes hereof, I am of the opinion that: 1. The Lessee has been duly incorporated and is validly existing and in good standing under the laws of the Republic of Finland, with the corporate power and authority to own, sell and lease its properties and conduct its business, as the same is presently being conducted and to own, operate and sell the Aircraft. 2. The Lessee has full corporate power and authority to enter into and carry out the terms of the Operative Documents. 3. Each of the Operative Documents has been authorized by all necessary corporate and shareholder action and has been duly executed and delivered by the Lessee. The Operative Documents constitute valid and legally binding obligations of the Lessee, enforceable against the Lessee in accordance with their terms. Without limiting the foregoing, a court in Finland would recognize and give full force and effect to the Lessor's title to and ownership of the Aircraft, to the rights of the Lessor and the Owner Participants under the Lease and other Operative Documents, and to the terms of Section 23(f) of the Lease, Article 12 of the Purchase Agreement and the Bill of Sale providing that the Lease, the Purchase Agreement and the Bill of Sale, respectively, will be governed by the laws of the State of New York subject to the proviso in paragraph 12 hereof. To the extent that the remedies provided for in Section 18 of the Lease are enforceable under New York law, a court in Finland would give effect to the terms thereof and enable the lessor and the Owner Participants to exercise the same remedies against the Lessee (however designated) and with respect to the Aircraft if the Aircraft were then in Finland (including the right to repossess the Aircraft and to export the Aircraft from Finland). 4. The execution and delivery of the Operative Documents by the Lessee, and the performance by the Lessee under the Operative Documents will not, (a) violate the Articles of Association of the Lessee or Lessee's Extract from the Finnish Trade Register, or (b) result in a breach of, or constitute a default under, or result in creation of any Lien upon any of the property of Lessee, any judgment, decree or order binding on the Lessee, or its respective properties, or any material indenture, mortgage, contract or other instrument to which either the Lessee is a party or by which it is bound, (c) require any stockholder approval or approval of any trustee or holders of any debt or other obligations of Lessee (except such as has been duly obtained), or (d) contravene any provision of any law, governmental rule, regulation or order binding on the Lessee. 5. No consent, approval, notice to, authorization or order, or other action of any court or governmental agency or body or official is required for the execution, delivery and performance (including without limitation, any foreign exchange control or any entity regulating exchange control) by the Lessee of any of the Operative Documents. 6. To the best of my knowledge after due inquiry, there is no action, suit, proceeding or investigation pending or threatened before or by any court, administrative agency, arbitrator or governmental body against, or which directly relates to, the Lessee which concerns any of the Operative Documents or the Aircraft or which, if adversely determined could adversely affect the financial condition of the Lessee or compliance by the Lessee with any of the Operative Documents. 7. Pursuant to Bill of Sale and Purchase Agreement the Lessee has conveyed to the Lessor good and marketable title to the Aircraft, free and clear of all liens other than Permitted Liens. 8. The execution and delivery of the Operative Documents and the performance of the transactions contemplated therein constitute commercial activities of the Lessee, and the Lessee is subject to private commercial law and to suit with respect thereto, and the Lessee is not entitled to any immunity whether on grounds of sovereign immunity or otherwise, from set-off or from any legal proceedings in Finland or any other liability or obligations of the Lessee related to or arising from the transactions contemplated hereby or thereby. 9. No taxes, levies, imposts, duties, charges or withholdings will be imposed by Finland or any governmental subdivision or other taxing authority with respect to any payments of amounts due under the Operative Documents provided that (1) the Lessor is a "resident" of the United States, as such term is defined in Article 4 of the Convention Between the United States of America and the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (the "Convention"); and (2) the Lessor does not have a "permanent establishment" in Finland, as such term is defined in Article 5 of the Convention, with respect to the transactions contemplated by the Operative Documents or the income from such transactions is attributable. The operation of the Aircraft by the Lessee on flights to or from Finland will not result in the Lessor being subjected to any additional taxes, levies, imposts, duties, charges or withholdings imposed by Finland or any other governmental subdivision or other taxing authority thereof or therein upon or with respect to the Lessor's other income, activities or properties, subject to provisos (1) and (2) set forth above. 10. The qualification at any time of the Lessor to do business under the laws of Finland or any political subdivision thereof or any federation or organization of similar entity of which Finland is a member does not constitute a condition to, and the failure to so qualify does not affect, the purchase by the Lessor of the Aircraft, the leasing of the Aircraft to and by the Lessee or the exercise by the Lessor of any right, privilege or remedy accorded it in, under or in connection with the Operative Documents or the enforcement of such right, privilege or remedy; the purchase by the Lessor of the Aircraft, the leasing of the Aircraft to and by the Lessee or the performance by the Lessor of any action required under, or contemplated by, any of the Operative Documents (other than the operation or other use (other than merely leasing from a business outside of Finland) of the Aircraft by the Lessor) will not violate any now-existing Applicable law of Finland or any political subdivision thereof or any federation or organization or similar entity of which Finland is a member or result in any tax liability (other than taxes required to be paid by the Lessee pursuant to Section 8 of the Lease) to the Lessor pursuant to the now-existing Applicable law of Finland or any political subdivision or taxing authority thereof or any now existing rule or regulation of any federation or organization or similar entity of which Finland is a member. 11. Except for the registration of the Aircraft in Finland in the name of the Lessor as owner with the CAA, it is not necessary to ensure the legality, validity, enforceability or admissibility in evidence of any of the Operative Documents in Finland, that the Operative Documents or any other document be filed or recorded with any court or other authority in Finland or that any stamp or similar tax be paid on or in respect of any of the Operative Documents unless court action is taken. With respect to registration of the Aircraft with the Civil Aviation Administration in Finland in the name of the Lessor, as owner, and the Lessee, as operator, none of the Operative Documents other than the Bill Of Sale, and no document other than a power of attorney, incumbency certificate and certified corporate documents of the Lessor, need be filed, recorded or registered with any court, public office or other governmental authority in Finland or any political subdivision thereof. The delivery of the Bill of Sale to the Lessor, title to the Aircraft solely vested in the Lessor as against all third parties and the Lessee's title will be recognized by all applicable governmental agencies, instrumentalities and courts in Finland. 12. The choice of New York law and the Lessee's submission to the jurisdiction of certain courts in New York set forth in Section 23 of the Lease are valid, legally binding and enforceable obligations of the Lessee, provided that, a court in Finland could refuse to enforce such obligations if it determined that such obligations were to conflict with, or violate, any law, decree, or the public policy of Finland; however, I know of no such law, decree or public policy that would conflict with such obligation as of the date hereof. 13. An arbitral award properly obtained by any of the parties to the Aircraft Purchase Agreement to the Lease Agreement pursuant to Section ____ of the Aircraft Purchase Agreement or to Section ____ of the Lease Agreement will in the Republic of Finland be subject to and enforceable under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards made in New York in 1958 and to the procedural rules existent in the Republic of Finland. My opinion is subject to the qualifications that (i) the enforcement of the Operative Documents may be limited by bankruptcy, insolvency, moratorium and other similar laws affecting the rights of creditors generally; and (ii) the fact the some of the remedial provisions of the instruments referred to herein may be limited or rendered unenforceable (but, nevertheless, on my opinion the laws involved and the instruments referred to contain reasonable remedies for the realization of the benefits of the security intended to be afforded by the instruments) or by the laws of other countries where enforcement may be sought. No opinion is expressed as to the availability of specific or equitable remedies as such for the enforcement of any of the Operative Documents. I do not purport to express an opinion on any laws other than those of the Republic of Finland. This opinion is furnished to you pursuant to Section 4(a)(ix) of the Purchase Agreement for your sole benefit, and no other person or entity shall be entitled to rely on this opinion without my express written consent. This opinion may not be published or reproduced in any manner or distributed or circulated to any person or entity without my express written consent. This opinion is limited to the matters stated herein, and no opinion is implied or may be inferred beyond the matters expressly stated herein. Very truly yours, Kai Soveri In-House Counsel EXHIBIT D ================================================================================ GUARANTY AGREEMENT Dated as of April 30, 1992 of UNITED STATES LEASING INTERNATIONAL, INC. as Guarantor for the benefit of FINNAIR OY, as Beneficiary ------------------------------- One McDonnell Douglas MD82 Aircraft Finnish Registration Mark OH-LMN ------------------------------- ================================================================================ Table of Contents Page ---- SECTION 1. Definitions ....................................................... SECTION 2. Guaranty .......................................................... SECTION 3. General Provisions Relating to this Agreement .................................................. SECTION 4. Guarantor's Waivers, Representations and Warranties ............... (a) Successive Transactions .......................................... (b) Obligations Joint and Several; Separate Actions; Waiver of Statute of Limitations ........................................... (c) Authorizations To Beneficiaries .................................. (d) Guarantor's Waivers .............................................. (e) Other Representations and Warranties ............................. SECTION 5. Miscellaneous ..................................................... (a) Amendment of Trust Agreement and the Operative Documents ........................................................ (b) Binding Effect ................................................... (c) Waivers; Cumulative Effect ....................................... (d) Amendments; Waivers .............................................. (e) Section Headings; Table of Contents .............................. (f) Severability ..................................................... (g) Notices .......................................................... (h) Counterparts ..................................................... -i- (i) Indemnity; Further Assurances .................................... (j) Jurisdiction; Governing Law ...................................... (k) Waiver of Jury Trial ............................................. -ii- GUARANTY AGREEMENT This GUARANTY AGREEMENT (this "Agreement"), dated as of April 30, 1992, by UNITED STATES LEASING INTERNATIONAL, INC., a Delaware corporation (the "Guarantor"), for the benefit of FINNAIR OY, a Finnish corporation (the "Beneficiary") (this "Agreement"). WITNESSETH: WHEREAS, a Purchase Agreement, dated as of the date hereof (as the same may be supplemented, amended or otherwise modified from time to time, the "Purchase Agreement"), has been or shall be entered into among the Beneficiary, as Seller, Trust Company for USL, Inc. (the "Trust Company"), not in its individual capacity, except as otherwise expressly provided therein, but solely as Owner Trustee under a Trust Agreement, dated as of the date hereof (as the same may be supplemented, amended, or otherwise modified from time to time, the "Trust Agreement"), for the benefit of United States Leasing International, Inc., in its capacity as the Owner Participant (the "Owner Trustee"), as Buyer, and United States Leasing International, Inc., in its capacity as the Owner Participant (the "Owner Participant"), relating to the sale and purchase of the McDonnell Douglas MD82 Aircraft therein described, upon the terms and conditions therein set forth; and WHEREAS, the Owner Trustee, as Lessor, and the Beneficiary, as Lessee, shall enter or have entered into a Lease Agreement, dated as of the date hereof (as the same may be supplemented, amended or otherwise modified from time to time, the "Lease"), relating to the Aircraft; and WHEREAS, it is a condition precedent to the obligations of the Beneficiary to sell the Aircraft to the Owner Trustee under the Purchase Agreement and to lease the Aircraft from the Owner Trustee under the Lease that the Guarantor shall have executed and delivered this Agreement to the Beneficiary; and WHEREAS, the Guarantor owns all of the outstanding voting stock of the Trust Company. NOW, THEREFORE, in order to induce the Beneficiary to enter into the Purchase Agreement and the Lease, and in consideration of the premises, the Guarantor hereby agrees as follows: SECTION 1. Definitions. Except as otherwise defined herein, all capitalized terms used herein shall have the meanings given or referred to in the Lease. SECTION 2. Guaranty. (a) The Guarantor hereby unconditionally (except as hereinafter set forth) and irrevocably guarantees as primary obligor and not merely as surety, without offset or deduction, to the Beneficiary (i) the performance by the Trust Company, in its individual capacity, of all its obligations undertaken in its individual capacity, whether direct or indirect, actual or contingent, now or hereinafter incurred, under the Purchase Agreement and the Lease, except such obligations of the Trust Company as arise after or relate solely to such time after the earlier to occur of (A) the time, if ever, that the Trust Company shall have assigned or transferred to one or more eligible transferees (but excluding any such assignment or transfer by way of security), in accordance with, and to the extent permitted by, Article XI or Article XIV of the Trust Agreement, all or a portion of the Trust Company's or the Owner Trustee's right, title and interest in and to the Trust Estate or the Lease Property, or there shall be a successor trustee in accordance with Article XI of the Trust Agreement, (B) the time, if ever, that an Owner Participant shall have (1) assigned or transferred to one or more eligible transferees (but excluding any such assignment or transfer by way of security), in accordance with, and to the extent permitted by, Article 13 of the Purchase Agreement, all or a portion of such Owner Participant's right, title and interest in and to the Trust Estate, and (2) delivered or caused to be delivered to the Beneficiary a guaranty, in form and substance substantially identical to this Agreement (except as to the portion of the obligations so guaranteed), by each of such transferees or by an entity meeting the qualifications of such Article 13 guaranteeing the obligations of the Trust Company, and (C) the termination of the Lease; and (ii) the performance by the Owner Trustee, in its capacities as the Buyer and the Lessor, and not in its individual capacity, of all its obligations undertaken in such capacities (except to the extent that such obligation or the event or circumstance giving rise to the same is attributable to an Owner Participant), whether direct or indirect, actual or contingent, now or hereinafter incurred, under the Purchase Agreement and the Lease, except such obligations of the Owner Trustee in either of such capacities as arise after or relate solely to such time after the earlier to occur of (A) the time, if ever, that an Owner Participant shall have (1) assigned or transferred to one or more eligible transferees (but excluding any such assignment or transfer by way of security), in accordance with, and to the extent permitted by, Article 13 of the Purchase Agreement, all or a portion of such Owner Participant's right, title and interest in and to the Trust Estate, and (2) delivered or caused to be delivered to the Beneficiary a guaranty, in form and substance substantially identical to this Agreement (except as to the portion of the obligations so guaranteed), by each of such assignees or transferees or by an entity meeting the qualifications of such Article 13 -2- guaranteeing the obligations of the Owner Trustee; and (B) the termination of the Lease. To the extent that the obligations of the Guarantor hereunder have been assumed or guaranteed by a subsequent Owner Participant or other qualified Person in accordance with either Section 2(a)(i) or 2(a)(ii), the obligations of the Guarantor hereunder shall be relieved and discharged to the extent of the obligations so assumed or guaranteed by such subsequent Owner Participant or other qualified Person. (b) THE GUARANTY PURSUANT TO SECTION 2(a) HEREOF IS A GUARANTY OF PAYMENT AND PERFORMANCE AND NOT OF COLLECTION AND IS IRREVOCABLE, ABSOLUTE, UNCONDITIONAL AND CONTINUING AND THE GUARANTOR WAIVES ANY RIGHT TO REQUIRE THAT ANY ACTION AGAINST THE TRUST COMPANY, THE OWNER TRUSTEE OR ANY OTHER PERSON BE TAKEN OR ADJUSTED PRIOR TO DEMAND BEING MADE ON OR ACTION BEING TAKEN AGAINST THE GUARANTOR. (c) The Guarantor hereby agrees that, to the extent of its guaranty pursuant to Section 2(a) hereof, in the event the Trust Company or the Owner Trustee fails to perform any guaranteed obligation for any reason (including, without limitation, the liquidation, dissolution, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar proceedings affecting the status, existence, assets or obligations of, the Trust Company or the Owner Trustee or the disaffirmance with respect to the Trust Company or the Owner Trustee of the Purchase Agreement or the Lease in any such proceeding) as promptly as practicable, but in any event not later than 5 Business Days after the date on which such guaranteed obligation is required to be performed, the Guarantor shall perform or cause such guaranteed obligation to be performed on first demand as promptly as practicable, but in any event not later than 5 Business Days following the Guarantor's receipt of notice from the Beneficiary (a copy of such notice to be sent to the Lessor to the extent the Beneficiary is not stayed or prevented from doing so by operation of law) stating that such guaranteed obligation was not performed when required. SECTION 3. General Provisions Relating to this Agreement. (a) The obligations of the Guarantor under this Agreement shall remain in full force and effect until each and all of such obligations shall have been fully discharged in accordance with the terms and provisions hereof. (b) This Agreement and the liability of the Guarantor hereunder, to the fullest extent permitted by Applicable Law, shall not be affected by and shall remain in full force and effect irrespective of: (i) the legality, validity, regularity, genuineness or enforceability, -3- in whole or in part, of any document or agreement, including, without limitation, the Trust Agreement, the Operative Documents or any of them, or of any assignment (other than as contemplated by Section 2(a) hereof), amendment, modification, waiver or termination of the Trust Agreement; (ii) the transfer, assignment, subletting or mortgaging or the purported transfer, assignment, subletting or mortgaging of all or any part of the interest of any Person in the Aircraft; (iii) any failure of title with respect to the Aircraft; (iv) any merger or consolidation of any Person into or with any other Person or any sale, lease or transfer of any of the assets of any Person to any other Person; (v) any change in the ownership of any partnership interest or shares of capital stock other than an assignment or transfer permitted by Article 13 of the Purchase Agreement or by the Trust Agreement; or (vi) any other occurrence or circumstance that might otherwise constitute a legal or equitable defense or discharge of the liabilities of a guarantor or surety or that might otherwise limit recourse against the Guarantor as a guarantor, including, without limitation, any defense arising out of any laws of the Republic of Finland or of the United States or any State thereof that would either exempt, modify or delay the due or punctual performance of the obligations of the Guarantor hereunder. (c) The obligations of the Guarantor set forth herein constitute the full recourse obligations of the Guarantor enforceable against it to the full extent of all its assets and properties. (d) The obligations and liabilities of the Guarantor hereunder shall not be impaired, diminished, abated or otherwise affected (i) by any setoff, defense or counterclaim that the Trust Company, the Owner Trustee or the Guarantor or any other Person may have or claim to have, at any time or from time to time (other than full payment or performance of the guaranteed obligations), or (ii) by the commencement by or against the Trust Company, the Owner Trustee or the Guarantor or any other Person of any proceedings under any bankruptcy or insolvency law or laws relating to fraudulent conveyance, the relief of debtors, readjustment of indebtedness, reorganizations, arrangements, compositions or extension or other similar laws. (e) Except as otherwise expressly set forth herein, no act or omission of any kind or at any time on the part of the Owner Trustee, any beneficiary under the Trust Agreement, the Lessee, or any other Person in respect of any matter whatsoever including, without limitation, any omission in performance of their respective obligations under any document or agreement, including, without limitation, the Trust Agreement or any of the Operative Documents, shall in any way affect or impair the guaranty hereunder, save for an express written waiver, release or discharge or the like or variation of its terms, which shall be effective only with respect to the Person granting the same, or performance by any thereof of the terms of any Operative Document. -4- (f) The guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if, at any time, payment, or any part thereof, of any of the obligations hereunder, under the Trust Agreement or under any of the Operative Documents is rescinded or must otherwise be restored or returned by the Beneficiary upon the insolvency, bankruptcy or reorganization of the Trust Company, the Owner Trustee or otherwise, all as though such payment had not been made. SECTION 4. Guarantor's Waivers, Representations and Warranties. (a) Successive Transactions. This is a continuing guaranty and all rights, powers and remedies hereunder shall apply to all the obligations of the Trust Company and the Owner Trustee to the Beneficiary guaranteed by the Guarantor pursuant to Section 2(a), including those arising under successive transactions, which shall either continue the Guarantor's obligations hereunder, or increase or decrease them, and notwithstanding the dissolution, liquidation or bankruptcy of the Trust Company, the Owner Trustee or the Guarantor or any other Person, or any other event or proceeding affecting the Trust Company, the Owner Trustee or the Guarantor or any other Person. (b) Obligations Joint And Several; Separate Actions; Waiver of Statute of Limitations. The obligations hereunder are joint and several and independent of the obligations of the Trust Company and the Owner Trustee and a separate action or actions may be brought and prosecuted against the Guarantor whether action is brought against the Trust Company, the Owner Trustee or any other Person, or whether the Trust Company, the Owner Trustee or any other Person is joined in any such action or actions. The Guarantor acknowledges that there are no conditions precedent to the effectiveness of this Guaranty, and that this Guaranty is in full force and effect and is binding on the Guarantor as of the date written below, regardless of whether the Beneficiary obtains collateral or any guaranties from others or take any other action contemplated by the Guarantor. The Guarantor waives the benefit of any statute of limitations affecting the Guarantor's liability hereunder or the enforcement thereof except to the extent that a statute of limitations shall affect the obligations of the Trust Company or the Owner Trustee, and the Guarantor agrees that any payment or performance of any obligation of the Trust Company or the Owner Trustee or other act which shall toll any statute of limitations applicable thereto shall similarly operate to toll such statute of limitations applicable to the Guarantor's liability hereunder. (c) Authorizations To Beneficiary. The Guarantor hereby authorizes the Beneficiary without notice to or demand on the Guarantor and without affecting the Guarantor's liability hereunder, from time to time, to the extent permitted by and in accordance with the terms and provisions of the Operative Documents, to: (i) alter, compromise, renew, extend, accelerate or otherwise change the time for payment or performance of, or otherwise change the terms of the obligations guaranteed hereunder or -5- any part thereof, including increase or decrease of any amount due or which may become due or is the rate of interest thereon; (ii) take and hold security for the payment of this Guaranty or the obligations guaranteed hereunder or any portion thereof, and exchange, enforce, waive and release any such security; (iii) apply such security and direct the order or manner of sale thereof, including, without limitation, a non-judicial sale permitted by the terms of the controlling agreement, as the Beneficiary in its discretion may determine; and (iv) release (without increasing the several obligations of any other party) or substitute any one or more of the endorsers or any other guarantors of the obligations guaranteed hereunder. The Beneficiary may not assign this Guaranty in whole or in part without the prior written consent of the Guarantor. The Guarantor agrees to provide to the Beneficiary upon request copies of the Guarantor's financial statements and a copy of any reports made available to shareholders by sending the same to such party's address as set forth in Section 5(g) hereof. (d) Guarantor's Waivers. The Guarantor waives any right to require the Beneficiary to: (i) make any claim or demand or proceed against any Person, including without limitation, the Trust Company, the Owner Trustee or any other guarantor of the guaranteed obligations; (ii) make any claim or demand or proceed against or exhaust any security held from the Trust Company, the Owner Trustee or any other guarantor of the guaranteed obligations or any other Person; (iii) pursue any other remedy in the Beneficiary's power; (iv) give notice of any default by the Trust Company or the Owner Trustee or to give notice of any matters affecting the Trust Company or the Owner Trustee (except to the extent provided in Section 2(c)); or (v) make any presentations or demands for performance, or give any notices of non-performance, protests, notices of protest or notices of dishonor in connection with any obligations or evidences of indebtedness held by the Beneficiary as security, in connection with any other obligations or evidences of indebtedness which constitute in whole or in part the obligations guaranteed hereunder, or in connection with the creation of new or additional obligations. The Guarantor waives notice of acceptance of this Agreement by any Beneficiary. The Guarantor waives to the fullest extent possible under Applicable Law any defense based upon or arising by reason of: (i) any disability or other defense (other than of payment or performance) of the Trust Company or the Owner Trustee or any other Person; (ii) the cessation or limitation from any cause whatsoever, other than final payment in full or performance, of all obligations of the Trust Company or the Owner Trustee guaranteed hereunder or of any other Person; (iii) any lack of authority of any officer, director, partner, agent or any other Person acting or purporting to act on behalf of the Trust Company or the Owner Trustee, or any defect in the creation or existence of the Trust, the Trust Estate, the Trust Company or the Owner Trustee; (iv) the use by the Trust Company of the Aircraft or of the proceeds therefrom; (v) any act or omission by any Owner Participant which, directly or indirectly, results in or aids the discharge of the Trust Company or the Owner Trustee or any of its obligations guaranteed hereunder by operation of law or otherwise (other than of -6- payment or performance); (vi) any act or omission of the Beneficiary which impairs any collateral for the obligations of the Trust Company or the Owner Trustee guaranteed hereunder including, without limitation, surrender, release, failure to perfect, or delay in perfection of, any security interest for such indebtedness, and the exchange, substitution, dealing with or taking additional collateral, or abstaining from taking advantage of or realizing upon any security interest or guaranty; (vii) any errors and omissions in connection with the administration by the Trust Company or the Owner Trustee guaranteed hereunder; or (viii) any modification of the Trust Agreement, in any form whatsoever, of the obligations of the Trust Company or the Owner Trustee guaranteed under Section 2(a), including any modification made after any attempted revocation hereof to any obligations incurred prior to any such attempted revocation, and including, without limitation, the renewal, extension, acceleration or other change in time for payment or performance of such obligations, or other change in the terms of the obligations of the Trust Company or the Owner Trustee guaranteed under Section 2(a) or any part thereof, including any increase or decrease in the amount of payment due or which may become due, or increase or decrease of the rate of interest thereon. Until all obligations of the Trust Company and the Owner Trustee guaranteed under Section 2(a) shall have been finally performed and paid in full, the Guarantor shall have no right of subrogation, and the Guarantor waives any defense the Guarantor may have based upon any election of remedies by the Beneficiary which impairs or destroys the Guarantor's subrogation rights or the Guarantor's right to proceed against the Trust Company or the Owner Trustee for reimbursement. Until all obligations of the Trust Company and the Owner Trustee guaranteed hereunder shall have been finally performed and paid in full, the Guarantor, for the benefit of the Beneficiary, further waives any right, and agrees it shall not take any action, to enforce any remedy which the Beneficiary now has or may hereafter have against the Trust Company, the Trust Estate, any other Owner Participant or the Owner Trustee, and waives, and agrees it shall refrain from seeking, any benefit of, or any right to participate in, any security whatsoever now or hereafter held by the Beneficiary. (e) Other Representations and Warranties. The Guarantor hereby further represents and covenants to the Beneficiary as follows: (i) The Guarantor is a corporation duly organized and validly existing pursuant to the laws of the State of Delaware and has the corporate power and authority to carry on its business as now conducted and to enter into and perform its obligations under this Agreement. (ii) The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Guarantor, do not require any approval or other action of any stockholder of the Guarantor or any approval or consent of any trustee or holders of any indebtedness or obligations of the Guarantor (or that any such approval or consent as is required has been obtained), and -7- neither the execution and delivery of this Agreement by the Guarantor nor the performance by the Guarantor of its obligations hereunder contravenes any material Applicable Law, or contravenes or results in any breach of, or constitutes any default under, any material term of any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement, or any material term of any other agreement or instrument, corporate charter, by-law or permit issued by any governmental authority under Applicable Law to which the Guarantor is a party or by which the Guarantor or its properties may be bound. (iii) Neither the execution and delivery by the Guarantor of this Agreement nor the performance by the Guarantor of the obligations undertaken hereunder requires the consent or approval of, or the giving of notice to, or the registration with, or the taking of any other action in respect of, any governmental authority under Applicable Law. (iv) This Agreement has been duly executed and delivered by the Guarantor and constitutes the valid and binding obligation of the Guarantor enforceable against the Guarantor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the enforcement of creditors' rights and remedies generally, and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 5. Miscellaneous. (a) Amendment of Trust Agreement and the Operative Documents. Each of the Trust Company, the Owner Trustee and the Beneficiary may, in their discretion, as permitted by and in accordance with the terms and provisions of the Operative Documents to which it is a party, agree to amendments of the Trust Agreement and the Operative Documents, give or withhold consents, approvals or waivers and exercise or refrain from exercising their respective rights under the Trust Agreement and the Operative Documents. (b) Binding Effect. This Agreement and every part hereof shall be binding upon the Guarantor and its successors and assigns, and shall inure to the benefit of, and shall be directly enforceable by, the Beneficiary and its successors and assigns. (c) Waivers; Cumulative Effect. A waiver by the Beneficiary of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Beneficiary would otherwise have had on any future occasion with regard to any subsequent breach. Neither a failure to exercise, nor any delay in exercising, on the part of the Beneficiary, any right, power or privilege it may have hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege -8- hereunder nor any course of dealing preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by Applicable Law. (d) Amendments; Waivers. None of the terms or provisions of this Agreement may be amended, waived, altered, modified or terminated except as contemplated hereby and except by an instrument in writing signed by a written consent of the Beneficiary and the Guarantor. The invalidity, illegality or unenforceability of any provision of this Agreement shall not affect the validity, legality or enforceability of any other provisions of this Agreement. (e) Section Headings; Table of Contents. The section headings in and the table of contents to this Agreement are for convenience of reference only and shall neither be deemed to be part of this Agreement nor modify, define, expand or limit any of the terms or provisions hereof. (f) Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or any provisions in the Trust Agreement or any Operative Document, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (g) Notices. All communications, notices, consents and waivers provided for herein or given in connection herewith shall be in writing and shall become effective when received by telecopy, international courier or registered United States mails, addressed, (i) if to Beneficiary: FINNAIR OY Dagmarinkatu 4 00100 Helsinki Finland Attention: Group Treasurer Telex:124946 Answerback: fnair sf Telecopier: 358-0-818-7457 Telephone: 358-0-818-81 or to such other address as the Beneficiary shall from time to time designate in writing to the Guarantor, or (ii) if to the Guarantor to: -9- United States Leasing International, Inc. 615 Battery Street San Francisco, California 94111 Attention: Executive Vice President, Transportation Financing Telex: 278031 Telecopy: 415-627-9240 or to such other address as the Guarantor shall from time to time designate in writing to the Beneficiary. (h) Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute but one and the same instrument. (i) Indemnity; Further Assurance. The Guarantor agrees to indemnify the Beneficiary from and against any and all liabilities and losses incurred by the Beneficiary in any way relating to or arising out of the breach by the Guarantor of any of its agreements contained herein, including all reasonable expenses, including attorney's fees and expenses, that may be incurred in enforcing such agreements against the Guarantor, provided, however, that the foregoing indemnity and agreement to hold harmless shall be coextensive in scope with, and shall in no way expand, waive or limit, such covenants or agreements or any rights, remedies or defenses which are or would be available in connection therewith. (j) Jurisdiction; Governing Law. (i) The Guarantor hereby irrevocably agrees that, to the extent that it or any of its assets has or hereafter may acquire any right of immunity, as against the other party hereto or its respective successors and assigns, whether characterized as sovereign immunity or otherwise, from any legal proceedings, whether in the United States of America or the Republic of Finland or any other jurisdiction, but only to the extent required to enforce or collect upon this Agreement or any other liability or obligation of it related to or arising solely from the transactions contemplated by this Agreement, including, without limitation, immunity from service of process, immunity from jurisdiction or judgment of any court or tribunal, immunity from execution of a judgment, and immunity of any of its property from attachment prior to any entry of judgment or from attachment in aid of execution upon a judgment, it hereby expressly and irrevocably waives any such immunity. -10- (ii) The Guarantor irrevocably agrees that any legal suit, action or proceeding arising out of or relating solely to this Agreement, the Trust Agreement or any Operative Document, or any of the transactions contemplated hereby or thereby or any document referred to herein or therein, may be instituted in the State or Federal courts in the County of New York, State of New York, or the Superior Court, City and County of San Francisco, San Francisco, California, and it hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may have now or hereafter to the laying of the venue or the jurisdiction or the convenience of the forum of any such legal suit, action or proceeding and irrevocably submits generally and unconditionally to the non-exclusive jurisdiction of any such court but only in any such suit, action or proceeding. The Guarantor further agrees that such service of process may be made personally or by mailing or delivering a copy of the summons and complaint or other legal process in any such legal suit, action or proceeding, registered mail, return receipt requested, at its address specified in Section 5 hereof (as the same may be changed from time to time pursuant to said Section 5). The Guarantor further irrevocably agrees to the service of process of any of the aforementioned courts but only in any suit, action or proceeding of the nature referred to above by the mailing of the copies thereof by certified air mail, postage prepaid, return receipt requested, to it at its address specified in Section 5 hereof (as the same may be changed from time to time pursuant to Section 5 hereof), such service to be effective upon the date of receipt indicated on the postal receipt returned from it. (iii) Final judgment against the Guarantor in any suit shall be conclusive, and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy of which shall be conclusive evidence of the fact and of the amount of any indebtedness or liability of the Guarantor as therein described. (iv) THIS AGREEMENT HAS BEEN NEGOTIATED AND DELIVERED IN THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO ANY CONFLICT OF LAWS RULE WHICH MIGHT RESULT IN THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. (k) WAIVER OF JURY TRIAL. BY ITS SIGNATURE BELOW WRITTEN THE GUARANTOR HEREBY IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL BY JURY OF ANY CLAIM, COUNTERCLAIM, ACTION OR PROCEEDING BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE TRUST AGREEMENT, THE OPERATIVE DOCUMENTS, OR RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THIS WAIVER SHALL APPLY TO ANY -11- SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, THE TRUST AGREEMENT, ANY OPERATIVE DOCUMENT, OR ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN WITNESS WHEREOF, the Guarantor has caused this Agreement to be duly executed as of the date first set forth above. UNITED STATES LEASING INTERNATIONAL, INC., as Guarantor By_______________________ Name: Title: -12- EX-99.F 6 EX-99.F PAPER NO. 02 THE SINGLE EXECUTED ORIGINAL OF THIS LEASE MARKED "ORIGINAL" SHALL BE THE "ORIGINAL" AND ALL OTHER COUNTERPARTS OF THIS LEASE SHALL BE DUPLICATES AND MARKED "DUPLICATE" OR "DUPLICATE ORIGINAL". TO THE EXTENT THAT THIS LEASE CONSTITUTES CHATTEL PAPER, AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION, NO SECURITY INTEREST MAY BE CREATED THROUGH TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE "ORIGINAL". ------------------------------------------------------------------- OPERATING LEASE AGREEMENT between TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as Owner Trustee under the Trust Agreement, dated as of April 30, 1992, Lessor, and FINNAIR OY, Lessee, Dated as of April 30, 1992 ------------------------------------------------------------------- covering one McDonnell Douglas MD82 Aircraft and its related Engines Finnish Registration Mark OH-LMO LEASE AGREEMENT TABLE OF CONTENTS Page ---- SECTION 1. Definitions ............................................. 1 SECTION 2. Lease and Delivery of the Aircraft ...................... 9 SECTION 3. Term and Rent ........................................... 10 SECTION 4. Representations, Warranties and Covenants ............... 12 SECTION 5. Return of the Aircraft .................................. 22 SECTION 6. Maintenance, Operation, Etc. ............................ 27 SECTION 7. Liens ................................................... 28 SECTION 8. [Intentionally Omitted] ................................. 28 SECTION 9. Possession .............................................. 28 SECTION 10. Event of Loss; Requisition for Use ...................... 31 SECTION 11. Insurance ............................................... 34 SECTION 12. Replacement and Pooling; Modifications and Additions ............................................... 38 SECTION 13. Insignia ................................................ 39 SECTION 14. Inspection/Information .................................. 40 SECTION 15. The Lessor's Right to Perform for the Lessee ............ 40 SECTION 16. Further Assurances ...................................... 41 SECTION 17. Events of Default ....................................... 41 -i- Page ---- SECTION 18. Remedies ................................................ 42 SECTION 19. Expenses ................................................ 45 SECTION 20. Assignment; Owner Trustee ............................... 46 SECTION 21. Notices ................................................. 46 SECTION 22. Net Lease, No Set-Off, Counterclaim, Etc. ............... 47 SECTION 23. Jurisdiction; Governing Law ............................. 48 SECTION 24. Miscellaneous ........................................... 50 SECTION 25. Title and Ownership ..................................... 53 SECTION 26. WAIVER OF JURY TRIAL .................................... 53 SCHEDULE 1 - Aircraft Documents to Be Delivered SCHEDULE 2 - Members of the OECD EXHIBIT A TO LEASE AGREEMENT Form of Lease Supplement (together with Schedule I to Lease Supplement, Basic Rent and Stipulated Loss Value tables) and Receipt EXHIBIT B TO LEASE AGREEMENT Form of Redelivery Receipt of Aircraft and Engines EXHIBIT C TO LEASE AGREEMENT Form of legal opinion of Lessee's Finnish counsel EXHIBIT D TO LEASE AGREEMENT Form of Guaranty -ii- OPERATING LEASE AGREEMENT This OPERATING LEASE AGREEMENT, dated as of April 30, 1992, between TRUST COMPANY FOR USL, INC., a trust company organized under the laws of the State of Illinois, with its principal place of business at San Francisco, California, not in its individual capacity, except as otherwise expressly provided herein, but solely as owner trustee under the Trust Agreement (as defined below) (the "Owner Trustee" or the "Lessor"), and FINNAIR OY, a corporation organized under the laws of the Republic of Finland (the "Lessee") (this "Lease" or "Agreement" or "Lease Agreement" (as it may be referred to in other document, certificate, opinion or letter) which terms shall include, after the delivery thereof, the Lease Supplement). WITNESSETH: WHEREAS, the Lessee desires to lease from the Lessor and the Lessor is willing to lease to the Lessee the aircraft described and referred to herein upon and subject to the terms and conditions of this Lease; NOW, THEREFORE, in consideration of the mutual promises herein contained, the Lessee and the Lessor agree as follows: SECTION 1. Definitions. The following terms shall have the following meanings for all purposes of this Lease: "Act" means the Applicable Law of Finland respecting the ownership, registration and operation of aircraft registered with the CAA, together with the regulations of the CAA, as each of the same may be in effect from time to time. "Additional Insureds" means the Lessor, the Guarantor, the Owner Participants, the Trust Company and their respective successors, permitted assigns (including any lender in connection with a permitted financing), directors, officers, employees, servants, and agents. "Affiliates", with respect to any Person, means any Person directly or indirectly controlling, controlled by or under common control with such Person, provided that, for purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any one Person, shall mean the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or partnership interests or by contract or otherwise. "Aircraft" means the Airframe and the Engines described in the Lease Supplement. Such Engines shall be deemed part of the "Aircraft" whether or not from time to time attached to the Airframe or to another airframe or on the ground. "Aircraft Documents" means the documents listed on Schedule 1 hereto. "Airframe" means the airframe described as the "Airframe" in the Lease Supplement, together with any and all Parts (including, but not limited to, landing gear and auxiliary power units but excluding Engines or engines) so long as such Parts shall be either incorporated or installed in or attached to the airframe or required to be subject to this Lease as provided in Sections 9(a)(iv) and 12 hereof, or so long as title thereto shall remain vested in the Lessor pursuant to this Lease. "Applicable Jurisdiction" means the country where, pursuant to this Lease, the Aircraft is registered from time to time. "Applicable Law" means, without limitation, all applicable laws and treaties, international agreements, judgments, decrees, injunctions, writs and orders of any court, arbitration or governmental agency or authority and rules, regulations, orders, directives, licenses, ordinances and permits of any governmental body, instrumentality, agency or authority. "Approved Maintenance Program" means a maintenance program certified by the Lessee to the Lessor as applicable to the Airframe, the Engines, any other engines installed on the Airframe from time to time or any components or Parts and approved by the appropriate aeronautical authorities of the Republic of Finland or of the Applicable Jurisdiction from time to time. "Base Rate" means the rate of interest per annum in effect from time to time as announced publicly by Citibank, N.A. in New York, New York from time to time as its base rate, computed on the basis of a year of 365 or 366 days, as the case may be, for the actual number of days elapsed, including the first day but excluding the last day. "Basic Rent" means the rent payable for the Aircraft pursuant to Section 3(b) hereof. "Bill of Sale" means a long form bill of sale, substantially in the form of Exhibit B to the Purchase Agreement, signed by the Lessee as "seller" and in favor of the Lessor as "buyer", covering the Aircraft. -2- "Business Day" means a day of the year in which banks are not authorized or required to close in New York City or Helsinki, Finland. "CAA" means the Finnish Civil Aviation Administration, or any successor thereto. "C Check" has the meaning set forth in the Approved Maintenance Program. "Consent to Assignment of Warranties" means the Consent to Assignment of Warranties obtained pursuant to Section 10 of the Purchase Agreement from the Manufacturer and in form and substance satisfactory to the Buyer. "D Check" has the meaning set forth in the Approved Maintenance Program. "Default" means an event or condition which with the passage of time or the giving of notice, or both, or the occurrence of any other event or condition, would constitute an Event of Default. "Delivery Date" has the meaning given such term in Section 2(a) hereof. "Delivery Location" means Helsinki-Vantaa Airport, Finland, or such other place as may be mutually agreed upon by the Lessor and the Lessee for the delivery of the Aircraft hereunder. "Dollars" or "$" means the lawful currency of the United States. "Engine" means each and all of the engines described as an "Engine" in the Lease Supplement, or any other engine which may from time to time replace an Engine leased hereunder in accordance with the terms of Sections 5(a) or 10(b) hereof, together with any and all Parts so long as the same shall be either incorporated or installed in or attached to such engine or required to be subject to this Lease as provided in Sections 9(a)(iv) and 12 hereof. An Engine shall remain leased hereunder whether or not from time to time attached to the Airframe or attached to any other airframe or on the ground. "Event of Default" has the meaning given such term in Section 17 hereof. "Event of Loss" means any of the following events with respect to any property: (i) loss of such property or of the use thereof due to theft or disappearance for a period exceeding one hundred eighty (180) days (or, if -3- earlier, either (a) the Lessee shall no longer be diligently attempting to locate and pursue the return of such property or (b) the Term shall have ended), or destruction, damage beyond repair or so as to render repair uneconomic or rendition of such property permanently unfit for normal use for any reason; (ii) any damage to such property which results in an insurance settlement with respect to such property on the basis of an actual, constructive or compromised total loss; (iii) the condemnation, confiscation or seizure of, or requisition of title to or use of, such property by private persons or by any other governmental or purported governmental authority (other than requisition for use by the government of the Republic of Finland or the United States of America not extending beyond the end of the Term except as provided in Section 3(f)); or (iv) as a result of any law, rule, regulation, proceeding, decree, order or other action by the government of the Applicable Jurisdiction for the time being, or any competent agency, authority or instrumentality of any such government, including, without limitation, any court of such Applicable Jurisdiction, the use of such property in the normal course of domestic and international air transportation shall have been prohibited for a period of twelve consecutive months, or, if earlier, a period extending beyond the last day of the Term as then in effect, except as provided in Section 3(f). An Event of Loss with respect to the Airframe shall be deemed to be an Event of Loss with respect to the Aircraft. "FAA" or "Federal Aviation Administration" means the United States Federal Aviation Administration or any successor agency. "FAR 121" means Part 121 of Subchapter G of Title 14 of the United States Code of Federal Regulations promulgated by the FAA, as in effect from time to time. "Fair Market Rental Value" of the Aircraft shall be determined on the basis of, and shall mean the amount which would be obtainable in, an arm's-length transaction between an informed and willing lessee (other than a lessee currently in possession) under no compulsion to lease and an informed and willing lessor under no compulsion to lease, in accordance with a lease on terms and conditions as herein provided. Such determination shall be made on the basis of the condition of the Aircraft assuming it was in the state of condition and repair required to be returned by the terms of this Lease, except that for purposes of Section 18, such determination shall be made on the basis of the then "as-is where-is" condition of the Aircraft, -4- except that such value shall be deemed to be zero in the event that so long as an Event of Default has occurred and is continuing, the Lessor does not have possession of the Aircraft. If the Lessor and the Lessee are unable to agree upon a determination of Fair Market Rental Value with respect to the Airframe or an Engine within thirty (30) Business Days after the Lessor's receipt of the Lessee's notice extending the initial Term pursuant to Section 3(e) hereof, then such Fair Market Rental Value shall be determined in accordance with the procedure for Independent Appraisal. "Fair Market Sales Value" of the Aircraft shall be determined on the basis of, and shall mean the amount which would be obtainable in, an arm's-length transaction between an informed and willing buyer or user under no compulsion to buy and an informed and willing seller under no compulsion to sell, and in such determination costs of removal from the location of current use shall not be a deduction from such value and all alternative uses in the hands of such buyer or user, including, without limitation, the further leasing of the Aircraft, shall be taken into consideration and it shall be assumed that the Aircraft is unencumbered by this Lease or the renewal option hereunder and that the Aircraft is in the state of condition and repair required to be returned by the terms of this Lease, except that for purposes of Section 18, such determination shall be made on the basis of its then "as-is where-is" condition, except that such value shall be deemed to be zero in the event that so long as an Event of Default has occurred and is continuing, the Lessor does not have possession of the Aircraft. If the Lessor and the Lessee are unable to agree upon a determination of Fair Market Sales Value of the Aircraft, then such Fair Market Sales Value shall be determined in accordance with the procedure for Independent Appraisal. "Finland" means the Republic of Finland. "Finnish Labor Index" means the Finnish Labor Index set forth in the Wages and Salaries Index Industrial Workers, Men, Table 52.22, published from time to time in the Bulletin of Statistics by the Central Statistical Office of Finland. "Guarantor" means United States Leasing International, Inc., a Delaware corporation, or any other issuer of a Guaranty from time to time, in each case so long as such Guaranty shall remain in full force and effect. "Guaranty" means the Guaranty Agreement delivered on the Delivery Date to the Lessee by the Guarantor, or any other such guaranty which may be issued pursuant to the Guaranty by a permitted transferee of the Guarantor, in each case as the same may be amended, supplemented or otherwise modified from time to time. -5- "Immunities Act" means the United States Foreign Sovereign Immunities Act of 1976, as amended from time to time, or any similar legislation of the United States enacted to supersede, amend or supplement such Immunities Act. "Indemnitee", for the purposes of Article 9 of the Purchase Agreement, has the meaning given in such Article 9, and, for all other purposes, has the meaning given in paragraph (a) of Article 8 of the Purchase Agreement. "Independent Appraisal" means an appraisal mutually agreed to by two internationally recognized independent aircraft appraisers, one of whom shall be chosen by the Lessor and one by the Lessee, or, if such appraisers cannot agree on the amount of such appraisal, an amount equal to the average of such two appraisals and a third appraisal of a third internationally recognized independent aircraft appraiser chosen by the mutual consent of such two appraisers, and paid for by the Lessee, provided that, if either party shall fail to appoint an appraiser within ten (10) days after a written request to do so by the other party, or if such two appraisers cannot agree on the amount of such appraisal and fail to appoint a third appraiser within ten (10) days after the date of the appointment of the second of such two appraisers, then either party may, within ten (10) days after such event, apply to any court having jurisdiction to make such appointment; provided further, however, that in calculating such average any appraisal which has a greater than fifteen percent (15%) variance above or below the second highest of the three appraisals shall be disregarded. Such appraisers shall be directed and required to reach a determination within ten (10) days of the appointment of the third appraiser. "Lease", "this Lease", "this Agreement", "herein", "hereunder", "hereby" and other like words mean this Lease Agreement as originally executed and as amended, modified and supplemented from time to time in accordance with the applicable provisions hereof and of the other Operative Documents, including, without limitation, Lease Supplements and other supplements to this Lease. "Lease Supplement" means any Lease Supplement, substantially in the form of Exhibit A hereto, entered into or to be entered into between the Lessor and the Lessee for the purposes of leasing the Aircraft. The Lease Supplement shall be deemed to incorporate all of the terms and conditions of this Lease and such Lease Supplement shall constitute a complete and enforceable lease agreement. "Lessee" means Finnair Oy, a corporation organized under the laws of Finland, its successors and, to the extent permitted by this Lease, its assigns. -6- "Lessor" means Trust Company for USL, Inc., a corporation organized under the laws of the State of Illinois, its successors and, to the extent permitted by this Lease, its assigns. "Lessor's Estate" means all estate, right, title and interest of the Lessor in, to or under the Aircraft, this Lease, any Lease Supplement or other supplement to the Lease, the Purchase Agreement, the Bill of Sale, the Consent to Assignment of Warranties and any other Operative Document, including, without limitation, all amounts of Basic Rent, Supplemental Rent, insurance and requisition proceeds, condemnation awards, indemnity, guaranty or other payments of any kind for or with respect to any of the foregoing. "Lessor Liens" means Liens which result from or constitute claims by, through or under the Lessor not related to the Lease or any other Operative Document or the transactions contemplated by this Lease or any other Operative Document. "Lien" means any mortgage, security interest, lien, pledge, lease or other charge or encumbrance or claim or right of others, including, without limitation, rights of others under any airframe or engine interchange or pooling agreement. "Loss Payment Date" means each monthly date set forth in Schedule I to the Lease Supplement. "OECD" means any member nation of the Organization of Economic Cooperation and Development which is described on Schedule 2 hereto. "Operative Documents" means this Lease (including any Lease Supplement and any other supplement to this Lease), the Purchase Agreement, the Trust Agreement, the Bill of Sale and the Consent to Assignment of Warranties. "Overdue Payment Rate" means a rate per annum equal to one percent (1%) above the Base Rate. "Owner Participants" means United States Leasing International Inc., a Delaware corporation, its successors and, to the extent permitted by the Purchase Agreement, its assigns, and Airlease Ltd., a California Limited Partnership, its successors and, to the extent permitted by the Purchase Agreement, its assigns, and "Owner Participant" means either thereof. "Owner Trustee" means Trust Company for USL, Inc., an Illinois trust company, in its trust capacity, and its successors and, to the extent permitted by the Trust Agreement, its assigns. -7- "Parts" means all appliances, parts, instruments, appurtenances, accessories, furnishings, components or other equipment of whatever nature (other than complete Engines or engines) which may from time to time be incorporated or installed in or attached to the Airframe or any Engine or after removal thereof so long as title thereto remains vested in Lessor. "Permitted Liens" means: (i) Lessor Liens; (ii) Liens for taxes of the Lessee either not yet due or being contested in good faith (and for the payment of which adequate reserves have been provided) by appropriate proceedings so long as such proceedings do not involve any danger of the sale, forfeiture or loss of the Airframe or any Engine or right, title or interest therein or thereto; (iii) materialmen's, mechanics', workmen's, repairmen's, employees' or other like Liens arising in the ordinary course of the Lessee's business for amounts the payment of which is either not yet delinquent or is being contested in good faith (and for the payment of which adequate reserves have been provided) by appropriate proceedings so long as such proceedings do not involve any danger of the sale, forfeiture or loss of the Airframe or any Engine or interest therein; and (iv) Liens (other than for taxes) arising out of judgments or awards against the Lessee with respect to which at the time an appeal or proceeding for review is being prosecuted in good faith and with respect to which there shall have been secured a stay of execution pending such appeal or proceeding for review. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a foreign state or political subdivision thereof or any agency of such state or subdivision. "Purchase Agreement" means the Purchase Agreement dated as of the date hereof by and among the Lessor, as purchaser, the Lessee, as seller, and the Owner Participants, as the same may be amended, supplemented or otherwise modified from time to time. "Records" has the meaning given such term in Section 5(a) hereof. "Redelivery Date" has the meaning given such term in Section 5(a) hereof. "Rent" means Basic Rent and Supplemental Rent. "Rent Payment Date" means the Delivery Date and the day in January, April, July and October which corresponds to the Delivery Date (or if there is no such -8- corresponding day in any such month then the last day of such month), from and including the Delivery Date to and including the applicable date specified in the Lease Supplement (or in the Lessee's notice, if any, extending the Term pursuant to and in accordance with Section 3(e)) as the final Rent Payment Date. "Responsible Officer" means, with respect to the subject matter of any covenant, agreement or obligation of any party contained in any Operative Document, the President, any Vice President, or the Treasurer, who in the normal performance of his or her operational responsibility would have knowledge of such matter and the requirements with respect thereto. "Stipulated Loss Value" of the Aircraft, as of any date during the initial Term and, if applicable, any extension thereof, means the amount set forth on Schedule I to the Lease Supplement as applicable for such date. "Supplemental Rent" means all amounts, liabilities, indemnifications and obligations of any kind whatsoever (other than Basic Rent but including any payment of Stipulated Loss Value or any amount calculated by reference thereto) which the Lessee assumes, agrees to or is obligated to pay hereunder or under any other Operative Document. "Term" has the meaning given such term in Section 3(a) hereof. "Trust Agreement" means the Trust Agreement dated as of the date hereof by and between the Trust Company and the Owner Participants, as the same may be amended, supplemented or otherwise modified from time to time. "Trust Company" means Trust Company for USL, Inc., an Illinois trust company, in its individual capacity, its successors and, to the extent permitted by the Trust Agreement, its assigns. "United States" means the United States of America. "Wet Lease" means any arrangement whereby the Lessee agrees to furnish the Airframe and Engines or engines installed thereon to a third party pursuant to which such Airframe and Engine or engines (i) shall be operated solely by regular employees of the Lessee possessing all current certificates and licenses required by Applicable Law (it being understood that cabin attendants need not be employees of the Lessee but that all members of the cockpit crew will be such employees), and (ii) shall be maintained in accordance with the maintenance provisions of this Lease. -9- SECTION 2. Lease and Delivery of the Aircraft. (a) Lease. The Lessor agrees to lease to the Lessee, and the Lessee agrees to lease from the Lessor, the Aircraft, on the terms and subject to the conditions of this Agreement. Effective on such Business Day as the Lessee shall designate by at least two Business Days prior notice to the Lessor or such other date as the parties may agree in writing, but in any event not later than May 4, 1992 (the "Delivery Date"), the Lessor agrees to lease to the Lessee, and the Lessee agrees to lease from the Lessor, the Aircraft, subject, however, to the satisfaction or waiver of each of the conditions precedent set forth in the Purchase Agreement on or before the Delivery Date. (b) Delivery. Delivery of the Aircraft under this Lease shall occur at the Delivery Location and on the Delivery Date. Delivery of the executed Lease Supplement by the Lessee to the Lessor shall constitute, without further act, unconditional and irrevocable acceptance by the Lessee of the Aircraft under, and for all purposes of, this Lease. SECTION 3. Term and Rent. (a) Term. The term for which the Aircraft is leased hereunder (the "Term") shall commence on the Delivery Date and shall continue until the expiry date set forth in the Lease Supplement dated the Delivery Date (said period being sometimes referred to herein as the "initial Term"), subject to extension at the Lessee's option in the manner provided in Section 3(e) below, and termination at the Lessee's option in the manner, and subject to the conditions, set forth in Section 4(c)(ii) below, and any other earlier termination as herein provided (including, without limitation, pursuant to Section 18). (b) Basic Rent. The Lessee shall pay to the Lessor quarterly rental for the Aircraft (the "Basic Rent"), payable in advance on each Rent Payment Date during the Term, in the Dollar amount set forth for such Rent Payment Date in Schedule I to the Lease Supplement corresponding to such Rent Payment Date. (c) Method of Payment. All Rent hereunder shall be paid by the Lessee not later than 12:00 noon, New York time, on the date due thereof in Dollars and in immediately available funds to the Lessor by deposit with Citibank, N.A., 399 Park Avenue, New York, New York, ABA No. 021-0000-89, for the account of US Leasing, Int'l., Account No. 4052-9099, or to such other account as the Lessor shall specify to the Lessee in writing. Any Rent due on a day which is not a Business Day shall be due on the next Business Day. (d) Supplemental Rent. The Lessee also agrees to pay or cause to be paid to the Lessor (or to whomsoever shall be entitled thereto) any and all Supplemental Rent (other than Supplemental Rent payable to Persons other than the Lessor, which shall be payable to such other Persons in accordance with instructions furnished to the Lessee by such Persons, as otherwise provided in any of the Operative Documents or as required by law) promptly as the same shall become due and owing or five (5) Business Days after demand therefor if no -10- due date is specified, and in the event of any failure on the part of the Lessee to pay any Supplemental Rent, the Lessor shall have all rights, powers and remedies provided for herein or in any other Operative Document or by law or equity or otherwise in the case of nonpayment of Basic Rent. The Lessee will also pay, on demand, as Supplemental Rent, to the extent permitted by Applicable Law, an amount equal to interest at the Overdue Payment Rate on any part of any installment of Basic Rent not paid when due for any period for which the same shall be overdue and on any payment of Supplemental Rent not paid when demanded or due for any period for which the same shall be overdue, in each case until the same shall have been paid in full. The expiration or other termination of this Lease shall not limit or modify the obligations of any party with respect to any indemnities contained in this Lease, all of which indemnities shall survive the termination of this Lease. (e) Renewal Options. Neither the Lessee nor the Lessor shall have the right to extend or renew the Term of this Lease except as otherwise provided in this Section 3(e). The Lessee, at its option, on two separate occasions, may extend the Term of the Lease beyond the expiry date set forth in the initial Lease Supplement by delivering not later than one hundred eighty (180) days prior to such expiry date, a written notice to the Lessor stating that the Term shall be extended for an additional period equal to one (1) year beyond the initial Term, or the extended Term, as the case may be, and specifying the final Rent Payment Date and the expiry date of the Term as extended. Any such notice given by the Lessee shall be irrevocable and shall be binding on the Lessee and the Lessor, and, thereupon, the Term shall be extended to such expiry date specified in the Lessee's notice, provided in each case that no Default of the type described in Sections 17(a), (b), (c)(i) or (e) or Default of the type described in Sections 17(c)(ii) or (d) (which, in the case of Sections 17(c)(ii) and (d), cannot be cured or the cure of which, if the same are capable of being cured within the relevant period described in such Section 17(c)(ii) or (d), the Lessee is not diligently pursuing) or Event of Default or Event of Loss shall have occurred and be continuing on any of (i) the date of any such notice of the Lessee, (ii) the last day of the initial Term or the Term as previously extended, as the case may be, and (iii) the first day of the Term as extended. (f) Extended Term. If an Event of Loss of the type described in paragraph (iii) or (iv) of the definition of Event of Loss shall extend beyond the end of the Term as then in effect, and, in the case of an Event of Loss of the type described in such paragraph (iv), if the Aircraft shall have been registered by the Lessee in the United States in the name of the Lessor, as owner, and the Lessee, as operator, and there shall be no restrictions on the use of the Aircraft, then, in the event there shall have occurred and be continuing no Default of the type described in Section 17(a), (b), (c)(i) or (e) or Default of the type described in Section 17(c)(ii) or (d) (which, in the case of Section 17(c)(ii) or (d), cannot be cured or the cure of which, if the same are capable of being cured within the relevant period described in such Section 17(c)(ii) or (d), the Lessee is not diligently pursuing) or Event of Default or other Event of Loss, the Lessee, at its option, by giving thirty (30) days' notice prior to the -11- end of the Term as then in effect, may extend the Term for a period of up to one (1) year (unless the Lessor shall have given its prior written consent to any other period) so long as it shall continue to perform its obligations under this Lease including, without limitation, the payment of such Basic Rent as shall be in effect on the last day of the initial Term or the Term as previously extended. The provisions of Section 10(c) shall apply (i) in the case of an Event of Loss arising out of paragraph (iii) of the definition thereof, and (ii) in the case of Event of Loss arising out of paragraph (iv) of the definition thereof, at the time that the prohibition shall no longer exist. SECTION 4. Representations, Warranties and Covenants. (a) The Lessee's Representations and Warranties. The Lessee represents and warrants to the Lessor as follows: (i) The Lessee is a corporation duly incorporated, validly existing and in good standing under the laws of the Republic of Finland, has full power, legal right and authority (corporate and otherwise) to sell the Aircraft to the Lessor, to own and hold under lease its properties and to execute, deliver and perform and observe the provisions of this Lease and the other Operative Documents, and holds all licenses, certificates, approvals, consents and permits from the governmental authorities of the Republic of Finland and of any other governmental authorities to use and operate, maintain, repair, overhaul and test the Aircraft in accordance with this Lease and Applicable Law. (ii) The sale of the Aircraft by the Lessee to the Lessor and the execution, delivery and performance by the Lessee of this Lease and the other Operative Documents (A) have been duly authorized by all necessary corporate action on behalf of the Lessee, (B) do not require the consent or approval of the Lessee's stockholders or of any trustee or of the holders of any indebtedness or obligations of the Lessee (except such as have been obtained, or shall have been obtained, and shall be in full force and effect on the Delivery Date, certified copies of which shall have been furnished to the Lessor on or before the Delivery Date), (C) do not require any notice to or approval (including exchange control approval) or other action by or filing with any governmental authority or regulatory body and (D) do not contravene, or result in the creation of any Lien (other than Permitted Liens) under the Lessee's charter or by-laws, or any Applicable Law, or any judgment or order relating to the Lessee or any provision of, or constitute a default under, any indenture, mortgage, contract or other instrument to which the Lessee is a party or by which it or its properties is or are bound. (iii) This Lease is, and each other Operative Document, when executed and delivered shall constitute, the legal, valid and binding obligations of the Lessee enforceable against the Lessee in accordance with their respective terms. Without -12- limitation of the foregoing, a court in Finland would recognize and give full force and effect to the Lessor's title to and ownership of the Aircraft, to the rights of the Lessor and the Owner Participants under this Lease and the other Operative Documents, and to the terms of Section 23(b) hereof and of Article 12 of the Purchase Agreement and of the Bill of Sale providing that this Lease, the Purchase Agreement and the Bill of Sale, respectively, will be governed by the laws of the State of New York. Accordingly, to the extent that the remedies provided for in such Section 18, such Article 12 and the Bill of Sale are enforceable under New York law, a court in Finland would give effect to the terms of such Section 18, such Article 12 and the Bill of Sale and enable the Lessor to exercise the same remedies against the Lessee (however designated) and with respect to the Aircraft if the Aircraft were then in Finland (including the right to repossess the Aircraft and to export the Aircraft from Finland). (iv) There is no pending or, to the best of the Lessee's knowledge, threatened action or proceeding affecting the Lessee before or by any court, tribunal, governmental agency or arbitrator which might materially adversely affect the financial condition or operations of the Lessee or the ability of the Lessee to consummate the transactions contemplated by, and perform its obligations under, this Lease or any other Operative Document. (v) The execution and delivery of this Lease and each other Operative Document and the performance of the transactions contemplated hereby and thereby constitute (for purposes of the Immunities Act and otherwise) commercial activities of the Lessee, and the Lessee is subject to private commercial law and to suit with respect thereto; the Lessee is not entitled to any immunity whether on grounds of sovereign immunity or otherwise, from set-off or from any legal proceedings in the United States (by virtue of the waiver of immunity contained herein) or Finland to enforce or collect upon this Lease or any other Operative Document or any other liability or obligation of the Lessee related to or arising out of the transactions contemplated hereby or thereby (including, without limitation, immunity from service of process, immunity from jurisdiction or judgment of any court or tribunal, immunity from execution of a judgment, and immunity of any of its property from attachment prior to any entry of judgment, or from attachment in aid of execution upon the judgment). (vi) Under present laws and tax treaty provisions: (A) no taxes, levies, imposts, duties, charges or withholdings will be imposed by Finland or any governmental subdivision or other taxing authority thereof or therein upon or with respect to payments of Rent or other amounts payable pursuant to this Lease or any other Operative Document, provided that: -13- (1) any of the Lessor or the Owner Participants is a "resident" of the United States, as the term "resident" is used in Article 4 of the Convention Between the United States of America and the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital, signed on September 21, 1989 (the "Convention"), and (2) neither the Lessor nor any Owner Participant has a "permanent establishment" in Finland, as the term "permanent establishment" is defined in Article 5 of the Convention, with respect to which the transaction contemplated by the Operative Documents or the income from such transaction is attributable; and (B) the operation of the Aircraft by the Lessee on flights to or from Finland will not result in the Lessor or any Owner Participant being subjected to any additional taxes, levies, imposts, duties, charges or withholdings imposed by Finland or any governmental subdivision or other taxing authority thereof or therein upon or with respect to the Lessor's or such Owner Participant's other income, activities or properties, subject to provisos (1) and (2) set forth in clause (A) above. (vii) The qualification at any time of the Lessor to do business under the laws of Finland or any political subdivision thereof does not constitute a condition to, and the failure to so qualify does not affect, the purchase by the Lessor of the Aircraft or the exercise by the Lessor of any right, privilege or remedy accorded it in, under or in connection with this Lease or any other Operative Document or the enforcement of such right, privilege or remedy; the purchase by the Lessor of the Aircraft or the performance by the Lessor of any action required under, or contemplated by, this Lease or any other Operative Document or the exercise of the remedies hereunder or thereunder (other than the operation or other use (other than merely leasing from a place of business outside of Finland) of the Aircraft by the Lessor) will not violate any now-existing Applicable Law of Finland or any political subdivision thereof or require any Finnish governmental filing, approval, consent, or recordation (except as set forth in paragraph (viii) below) or result in any tax liability (other than taxes required to be paid by the Lessee pursuant to Article 9 of the Purchase Agreement) to the Lessor pursuant to the now-existing Applicable Law of Finland or any political subdivision or taxing authority thereof or any now-existing rule or regulation of any federation or organization or similar entity of which Finland is a member. (viii) Except for the registration of the Aircraft in Finland in the name of the Lessor as owner with the CAA, (A) it is not necessary to ensure the legality, validity, enforceability or admissibility in evidence of this Lease or any other Operative Document in Finland that this Lease or any other Operative Document or any other -14- document be filed or recorded with any court or other authority in Finland or that any stamp or similar tax be paid on or in respect of this Lease or any other Operative Document unless court action is taken, and (B) no further action by the Lessee in Finland (including the giving or recording of any document) is necessary in order to establish and perfect, in Finland, such title to and interest in the Aircraft as against the Lessee or any third parties as shall be conveyed by the Lessee to the Lessor on the Delivery Date. (ix) No Default or Event of Default has occurred and is continuing. (b) Representations and Warranties of the Trust Company and the Lessor; Certain Agreements. The Trust Company makes the representations and warranties contained in clauses (i), (ii), (iii), (iv), (v), (vi) and (vii) hereof solely as to itself in its individual capacity, and the Lessor makes all the representations and warranties contained in this paragraph (b): (i) Due Organization. The Trust Company is a trust company duly organized and validly existing in good standing under the laws of the State of Illinois, and has the power and authority to enter into and perform its obligations under the Trust Agreement and, acting as trustee thereunder, under this Lease, the Lease Supplement and the Purchase Agreement. (ii) Duly Appointed Trustee. The Trust Company is the duly appointed trustee under the Trust Agreement. (iii) Trust Agreement. The Trust Agreement has been duly executed and delivered by one of the officers of the Trust Company who was duly authorized to execute and deliver the Trust Agreement on behalf of the Trust Company and, assuming due authorization, execution and delivery by the Owner Participants, is the valid and binding obligation of the Trust Company, enforceable in accordance with its terms, and the Trust Agreement creates under the laws of the State of California for the Owner Participants the beneficial interest in the Trust Estate (as such term is defined in the Trust Agreement) it purports to create. (iv) Lessor's Parent. The Trust Company is a wholly-owned subsidiary of United States Leasing International, Inc. (v) Due Authorization; Enforceability. This Lease and the Purchase Agreement have been duly authorized, executed and delivered by the Lessor or the Trust Company, as the case may be, and the Lease Supplement has been duly authorized by the Lessor, and on the Delivery Date the Lease Supplement will be duly executed and delivered by the Lessor, and, assuming the due authorization, execution and delivery -15- thereof by the Lessee and the other parties thereto, this Lease and the Purchase Agreement are, or in the case of the Lease Supplement will be, when delivered, valid and binding obligations of the Lessor or the Trust Company, as the case may be, enforceable in accordance with their respective terms. (vi) No Violation. The execution and delivery by the Lessor of this Lease and by the Trust Company of the Trust Agreement are not, and the execution and delivery by the Lessor of the Lease Supplement and the Purchase Agreement will not be, and the performance by the Lessor or by the Trust Company, as the case may be, of its obligations under each of the foregoing documents will not be, inconsistent with its charter or by-laws, do not and will not contravene any material provision of any Applicable Law, any judgment or order applicable to it, and do not and will not contravene any provision of, or constitute a default under, any material indenture, mortgage, contract or other instrument to which it is a party or by which it or its properties is bound or require the consent or approval of, the giving of notice to, the registration with or the taking of any action in respect of or by, any federal, state or local governmental authority or agency or other Person, except such as have been obtained, given or accomplished. (vii) Title to the Aircraft. The Aircraft is being leased by the Lessor to the Lessee hereunder ON A COMPLETELY "AS-IS" BASIS, AND THE LESSOR DOES NOT MAKE, NOR SHALL IT BE DEEMED TO HAVE MADE, AND IT HEREBY EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY EXPRESS OR IMPLIED, AS TO THE AIRCRAFT OR ANY PART THEREOF, INCLUDING, WITHOUT LIMITATION, TITLE, AIRWORTHINESS, VALUE, CONDITION, DESIGN, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OPERATION, MERCHANTABILITY, CONSTRUCTION, CONDITION OF THE AIRCRAFT OR FITNESS FOR A PARTICULAR USE OF THE AIRCRAFT OR ANY PART THEREOF OR AS TO THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, OR AS TO THE ABSENCE OF OBLIGATIONS BASED ON STRICT LIABILITY IN TORT, OR NEGLIGENCE, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE AIRCRAFT OR ANY PART THEREOF, OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT AND EVERY PART THEREOF, AND THE LESSEE HEREBY WAIVES, RELEASES AND RENOUNCES ANY WARRANTIES, REPRESENTATIONS OR GUARANTEES, LIABILITIES AND OBLIGATIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, STATUTORY OR OTHERWISE, WITH RESPECT TO THE AIRCRAFT, ANY PART, ANY DATA OR ANY OTHER THING DELIVERED, LEASED, SOLD OR TRANSFERRED HEREUNDER OR UNDER THE PURCHASE AGREEMENT (AND WHETHER OR NOT ARISING OUT OF THE DELIVERY, USE, NON- -16- USE, OPERATION, LEASE, SUBLEASE, TRANSFER, POSSESSION, STORAGE, MANUFACTURE, MODIFICATION, ALTERATION, TESTING, MAINTENANCE, REPAIR, SALE OR OTHER DISPOSITION THEREOF), INCLUDING, WITHOUT LIMITATION, (I) ANY WARRANTIES, REPRESENTATIONS, GUARANTEES, LIABILITIES OR OBLIGATIONS RELATING TO THE AIRWORTHINESS, VALUE, CONDITION, DESIGN, OPERATION OF, OR THE QUALITY OF THE MATERIAL OR WORKMANSHIP IN, OR TITLE TO, OR ANY DEFECT IN, THE AIRCRAFT, ANY PART, ANY DATA OR ANY OTHER THING DELIVERED, LEASED, SOLD OR TRANSFERRED HEREUNDER OR UNDER THE PURCHASE AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT, (II) ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR USE OR FOR A PARTICULAR PURPOSE, AGAINST INFRINGEMENT OR THE LIKE, OR ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, (III) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT WITH RESPECT TO THE AIRCRAFT, ANY PART, ANY DATA OR ANY OTHER THING DELIVERED, LEASED, SOLD OR TRANSFERRED HEREUNDER OR UNDER THE PURCHASE AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT, WHETHER OR NOT IN STRICT OR ABSOLUTE LIABILITY AND WHETHER OR NOT ARISING FROM THE NEGLIGENCE, ACTUAL OR IMPUTED, OF THE LESSOR, THE LESSEE OR THEIR RESPECTIVE ASSIGNS, OR (IV) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OF, OR DAMAGE TO, THE AIRCRAFT, ANY PART, ANY DATA OR ANY OTHER THING, FOR ANY LOSS OF USE, REVENUE OR PROFIT, OR FOR ANY OTHER DIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, EXCEPT AS OTHERWISE PROVIDED IN SECTION 4(d)(iii), THE LESSEE HEREBY ACKNOWLEDGING AND AGREEING THAT, AS BETWEEN THE LESSEE, ON THE ONE HAND, AND THE LESSOR, EACH OWNER PARTICIPANT, THE TRUST COMPANY, THE OWNER TRUSTEE AND EACH INDEMNITEE, AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS, ON THE OTHER HAND, ALL RISKS, OBLIGATIONS AND LIABILITIES WITH RESPECT TO ALL AND ANY OF THE FOREGOING AND ALL AND ANY OF THE MATTERS REFERRED TO IN THE LAST SENTENCE OF THIS PARAGRAPH (vii) ARE SOLELY THOSE OF THE LESSEE, except that on the Delivery Date, the Lessor will have received whatever title to the Aircraft was conveyed to it by the Lessee, free of Lessor Liens. The Lessor shall have no responsibility or liability to the Lessee or any other Person, regardless of any negligence (other than gross negligence or willful misconduct) of the Lessor, with respect to (i) any liability, loss or damage caused or alleged to be caused directly or indirectly by the Aircraft or any Part or any part of either thereof or by any inadequacy thereof or deficiency or defect therein or by any other circumstances in connection therewith, (ii) the condition, use, operation, performance, non-use, -17- repair, maintenance or testing of the Aircraft or any Part or any part of either thereof or any of the other matters previously referred to in this paragraph (vii), or any risks relating to any thereof, (iii) any interruption of service, loss of business or anticipated profits or consequential damages, or (iv) the delivery, operations, servicing, maintenance, repair, replacement or improvement of the Aircraft or any Part or any part of either thereof. (viii) Trust Agreement. The Trust Agreement has been duly executed and delivered, constitutes the legal, valid and binding obligation of the parties thereto, enforceable in accordance with its terms, and the Trust Agreement creates under the laws of the State of California for any Owner Participant the beneficial interest in the Trust Estate (as such term is defined in the Trust Agreement) it purports to create. (c) Lessee's Covenants. (i) The Lessee will not operate, service, repair, maintain, overhaul or test, or permit to be operated, serviced, repaired, maintained, overhauled or tested, the Aircraft in any country wherein any thereof would violate Applicable Law. (ii) The Lessee agrees that if the Republic of Finland shall cease to be, directly or indirectly, the owner of at least fifty and one-tenth percent (50.1%) of the issued and outstanding shares of the Lessee's capital stock entitled to vote the election of the Lessee's directors, then at any time after the occurrence and continuance of such event, the Lessee will give the Lessor prompt written notice after knowledge thereof by a Responsible Officer of the Lessee, and the Lessee will, upon the Lessor's written request, provide, within forty-five (45) Business Days after the Lessee's receipt of such request, security for the obligations of the Lessee under the Lease that qualifies as Collateral Security in the manner provided in paragraph (iii) of this Section 4(c). At any time during the Term when the Lessee is obligated to provide, or has provided, Collateral Security (as defined below), the Lessee may, in its sole discretion, purchase the Aircraft by paying the Lessor, and the Lessor shall be obliged to transfer the Aircraft to the Lessee "as-is where-is", free and clear of all Lessor Liens but otherwise without recourse or warranty (all as described in the first sentence of paragraph (vii) of Section 4(b) except that appropriate changes shall be made to the references to the parties and to accommodate a sale and purchase rather than a lease) upon receipt of an amount (the "Option Price") equal to the higher of (y) the Fair Market Sales Value or (z) the Stipulated Loss Value of the Aircraft, as of the date the Lessee makes such payment, which Stipulated Loss Value shall be that Stipulated Loss Value set forth opposite the Rent Payment Date corresponding to the date on which payment is made, or, if made on a Loss Payment Date which is other than a Rent Payment Date, as of the immediately succeeding Loss Payment Date provided, however, that if such payment date is other than a Rent Payment Date, there shall be -18- deducted from the amount payable by the Lessee an amount equal to interest at the rate of 9.4% per annum (computed on the basis of a 365 day year and actual days elapsed) on the amount of Stipulated Loss Value as of such Loss Payment Date, computed on a daily basis, from and including the date such payment is made by the Lessee, to but not including such Loss Payment Date, as the case may be, and provided further that if such payment is made on a Rent Payment Date, the Lessee shall not pay the scheduled amount of Basic Rent otherwise due on such Rent Payment Date. The Lessor shall deliver a bill of sale for the Aircraft to the Lessee transferring to the Lessee title to the Aircraft on an "as-is where-is" basis, without recourse or warranty (all as described in the first sentence of paragraph (vii) of Section 4(b) except that appropriate changes shall be made to the references to the parties and to accommodate a sale and purchase rather than a lease) except that the Lessor shall warrant that the Aircraft is free and clear of all Lessor Liens. The Lessor shall cooperate reasonably with the Lessee, at the Lessee's sole cost and expense, in causing the Aircraft to be re-registered as the Lessee may require in connection with any such transfer of the Aircraft to the Lessee pursuant to this paragraph (iii). Upon payment of the Option Price this Lease and all Basic Rent, if any, to the date of receipt of such amount by the Lessor (prorated on a daily basis) and all accrued and unpaid Supplemental Rent to such date of receipt and the Lessee's obligation to pay Basic Rent accruing thereafter, shall terminate. (iii) (A) For purposes of Section 4(c)(ii) above, "Collateral Security" shall mean any one or more, at the Lessee's election, of (a) Dollar deposits in an interest-bearing account in the Lessee's name (the "Security Account") at a bank in Helsinki, Finland selected by the Lessee and reasonably satisfactory to the Lessor, (b) a guarantee of the Lessee's payment obligations under this Lease, issued by the Republic of Finland in favor of the Lessor, and in form and substance reasonably satisfactory to the Lessor, and (c) a letter of credit or letter of guarantee issued by a bank to the Lessor, securing the Lessee's payment obligations under this Lease, by a bank reasonably satisfactory to the Lessor and in form and substance reasonably satisfactory to the Lessor. When required, Collateral Security shall be provided in a cumulative amount equal to: 24.02% of the Stipulated Loss Value for Rent Payment Dates occurring in April 1992 through July 1995; 24.20% of the Stipulated Loss Value for Rent Payment Dates occurring in October 1995 through January 1999; 21.70% of Stipulated Loss Value for Rent Payment Dates occurring in April 1999 through January 2000 (if the Term is renewed as provided in Section 3(e)); and 19.20% of Stipulated Loss Value for Rent Payment Dates occurring in April 2000 through January 2001 (if the Term is renewed as provided in Section 3(e)). (B) It shall be a term and condition of the Security Account, any such governmental guarantee and any such letter of credit or letter of guarantee, that, upon the certification by the Lessor to the Lessee, the bank or the issuer, as the case may -19- be, that with respect to an Event of Default (other than any Event of Default described below in paragraph (C) of this Section 4(c)(iii) in paragraph (e) of Section 17), if (1) such Event of Default has occurred and is continuing unremedied after expiry of all grace and cure periods under this Lease, (2) the Lessor has declared in writing to the Lessee that this Lease is in default and the Lessor has commenced to exercise one or more of the remedies available to it under Section 18 of this Lease and (3) a period of at least thirty (30) consecutive days has elapsed after such written declaration to the Lessee by the Lessor, then the Lessor shall be entitled to claim such amounts of Collateral Security as it certifies are overdue and unpaid to it by the Lessee under this Lease. (C) It shall also be a term and condition of the Security Account, any such governmental guarantee and any such letter of credit or letter of guarantee, that, upon the certification by the Lessor to the Lessee, the bank or the issuer, as the case may be, with respect to any Event of Default described in paragraph (e) of Section 17, if (1) such Event of Default has occurred and is continuing unremedied after expiry of all the grace and cure periods provided for such Event of Default under this Lease and (2) a period of at least ninety (90) consecutive days has elapsed after such expiry, then the Lessor shall be entitled to claim such amounts of Collateral Security as it certifies are overdue and unpaid to it by the Lessee under this Lease. (D) All such amounts from the Collateral Security paid to the Lessor shall be applied by the Lessor in accordance with the terms of Section 18 of this Lease and any excess shall be paid by the Lessor to the Lessee. So long as no Event of Default has occurred and is continuing, upon request of the Lessee, all amounts of interest, if any, standing to the credit of the Security Account shall be paid to the Lessee quarterly on the first Business Day next succeeding the date on which each quarterly payment of Basic Rent has been received by the Lessor. (E) All amounts standing to the credit of the Security Account, including interest thereon, shall be paid to the Lessee, and all other items of Collateral Security shall be terminated immediately upon, as the case may be, (1) the indefeasible payment of the Option Price of the Aircraft and all other amounts required to be paid pursuant to paragraph (ii) of Section 4(c), (2) at such time as the Republic of Finland owns at least fifty and one-tenth percent (50.1%) of the Lessee's issued and outstanding shares of capital stock entitled to vote the election of directors, or (3) at such time as this Lease has been terminated and all Rent then due and payable has been paid. (iv) The Lessee's agent for service of process designated pursuant to the requirements of the Federal Aviation Act of 1958, as amended, is Finnair, General Manager North America presently located at Finnair Executive Office, 10 East 40th -20- St., New York, N.Y. 10016 and the Lessee shall provide prompt written notice to the Lessor of any change in the name or address of such agent. The Lessee, further, shall notify the Lessor promptly if the Lessee shall cease to be a "foreign air carrier" within the meaning of the Federal Aviation Act of 1958, as amended, and thereupon shall specify whether or not the Lessee maintains an office in the United States of America, its territories or possessions of the Commonwealth of Puerto Rico, and, the address or addresses, if any, of such office therein located. (v) The Lessee shall not (without the prior written consent of the Lessor) consolidate with any Person or merge into or convey, transfer or lease all or substantially all its assets to any Person unless upon any such consolidation, merger, conveyance, transfer or lease the new or surviving entity, if not the Lessee, shall expressly or by operation of law assume all the obligations of the Lessee under this Agreement and the other Operative Documents. (vi) The Lessee, upon reasonable request, shall promptly furnish to the Lessor such information as may be reasonably required by the Lessor to enable the Lessor to file any reports required to be filed by the Lessor or the Owner Participants with any governmental authority because of the Lessor's ownership or leasing of the Aircraft or the Owner Participants' direct or indirect ownership of a beneficial interest in any part of the Lessor's Estate. (d) Lessor's Covenants. (i) The Lessor agrees that it will, at its own cost and expense, promptly take such action as may be necessary to duly discharge any Lessor Lien on the Aircraft. (ii) The Lessor agrees that, so long as no Event of Default shall have occurred and be continuing, the Lessor will not take any action or cause to be taken any action or fail to prevent any action arising by, through or under it, which causes interference with the Lessee's peaceful and quiet use, operation and possession of the Aircraft in accordance with the terms of this Lease. (iii) The Lessor agrees that it shall and hereby does indemnify and hold harmless the Lessee and its permitted assigns against any and all claims, losses, liabilities and damages (including attorney fees and disbursements) incurred in connection with any breach of the covenants of this Section 4(d), provided, however, that the foregoing indemnity and agreement to hold harmless shall be coextensive in scope with, and shall in no way expand, waive or limit, such covenants or agreements or any rights, remedies or defenses which are or would be available in connection therewith. (iv) Effective upon the execution and delivery of the Lease Supplement on the Delivery Date but only as long as no Event of Default shall have occurred and be -21- continuing, the Lessor does hereby authorize the Lessee, on behalf of and to the exclusion of the Lessor, for the duration of the Term, to exercise in the Lessee's own name all existing warranties, service life policies and patent indemnities of manufacturers and maintenance and overhaul agencies of and for the Aircraft and Parts, if any, and upon the request, and at the cost, of the Lessee, the Lessor shall use its reasonable efforts to give the Lessee aid and assistance in enforcing the rights of the Lessee arising under such warranties, service life policies and patent indemnities. SECTION 5. Return of the Aircraft. (a) On the last Business Day of the Term (or such earlier date as this Lease may be terminated pursuant to Section 18 hereof) (the "Redelivery Date") all of the terms of this Section 5 shall apply and the Lessee at its expense will return the Aircraft to the Lessor by delivering the same, at the Lessee's own risk and expense, to the Lessee's maintenance facilities at Helsinki-Vantaa Airport, Finland (the "Redelivery Location"), fully equipped with all Engines installed thereon. In the event that any engine not an Engine shall be delivered with the returned Airframe as set forth herein in connection with the termination of the Lease, all engines then installed on the Airframe shall be of the same or another manufacturer of the same or an improved model and suitable for use on the Airframe but all of the same make and model and the Lessee, concurrently with such delivery, will, at its own expense and at no cost or expense to the Lessor, furnish the Lessor with a full warranty bill of sale from the Lessee, in form and substance satisfactory to the Lessor, with respect to such engine, and with an opinion of the Lessee's in house counsel to the effect that, upon such return, the Lessor will acquire good and marketable title to such engine free and clear of all rights of third parties under pooling, interchange, overhaul, repair and other arrangements and all other Liens (other than Lessor Liens), and the Lessee shall take such other action as the Lessor shall reasonably request, and thereupon the Lessor shall transfer to the Lessee, "as-is", "where-is", free and clear of all Lessor Liens, but otherwise without recourse or warranty (all as described in the first sentence of paragraph (vi) of Section 4(b), except that appropriate changes shall be made to the references to the parties and to accommodate a sale and purchase rather than a lease), its title, if any, to such Engine not installed on the Airframe at the time of its return. The Lessor shall, subject to the terms and on the conditions of this Section 5, accept return of the Aircraft from the Lessee by executing and delivering to the Lessee a Redelivery Receipt of Aircraft and Engines, substantially in the form of Exhibit B hereto, not later than 3:30 p.m. local time on the Redelivery Date. At the Lessor's direction, the Lessee will (1) store the Aircraft out-of-doors at the Redelivery Location or out-of-doors at another location in Europe utilized for the storage and maintenance of the Lessee's aircraft, selected by the Lessee, in each case, at the Lessor's risk and the Lessee's expense for a period not to exceed ninety (90) days; or (2) on the Redelivery Date or at the end of the storage period referred to in the preceding clause (1), ferry the Aircraft at the Lessee's sole expense (including the cost of insurance of the type and in the amounts required during the Term under Section 11 hereof) to any airport in Europe selected by the Lessor, or to any other location selected by the -22- Lessor at the Lessor's sole risk and expense, provided, however, that the Aircraft remains registered in Finland at all times during which it is under the Lessee's operational control. During such storage period, the Lessee will, during normal business hours, permit authorized representatives of the Lessor, each Owner Participant and any prospective purchaser or user of the Aircraft or any part thereof to inspect the same at all reasonable times and in any event without interfering with the Lessee's normal operations, it being understood and agreed that all such inspections shall be at the Lessor's risk and the Lessee shall have no obligation or liability whatsoever in any way relating to any such inspection other than the obligation to permit inspection of the Aircraft as provided in this sentence. Upon such return, and at the Lessee's sole expense: (i) the Aircraft (A) shall, at the election of the Lessee, be registered in the Republic of Finland, except that the Aircraft shall be registered in Finland or the United States if and as so elected by the Lessee at any time in accordance with Section 6(c), (assuming the Lessor, or its designee, is then, or its designee by a transfer may then be, eligible to be the registered owner of the Aircraft); (B) shall be in compliance with the provisions of Section 6 hereof; (C) shall be in as good condition as when delivered to the Lessee hereunder, ordinary operating wear and tear excepted, or, in the case of any such engines owned by the Lessee or in substitution or replacement of the original Engines, assuming that such Engine or Engines have the remaining useful life required in Section 5(a)(vi), shall have a value, utility and useful life at least equal to, and shall be in as good operating condition as required by, the terms and provisions hereof with respect to the Engines; (D) shall be clean by international commercial passenger airline operating standards; (B) shall, except as otherwise provided herein or as otherwise agreed by the Lessor, be in the same configuration as when the Aircraft was originally delivered to the Lessee hereunder; and (F) shall be free and clear of all Liens other than Lessor Liens; (ii) the Aircraft shall (A) have a currently effective airworthiness certificate and, at the Lessor's request, an airworthiness certificate for export to the United States or to any member country of the OECD designated by the Lessor (or to any other location as may be designated by the Lessor and which is reasonably acceptable to the Lessee) issued by the CAA or the equivalent aviation authority of the Applicable Jurisdiction, as the case may be; (B) be duly certified as airworthy by the CAA or the equivalent aviation authority of the Applicable Jurisdiction, as the case may be; (C) be in compliance with all airworthiness directives and mandatory requirements of the CAA or the equivalent aviation authority of the Applicable Jurisdiction, as the case may be, and all applicable environmental, noise, air pollution and other similar standards of Finland and the International Civil Aviation Organization, in each case in existence on the date of such return and requiring terminating compliance within six (6) months (or the equivalent number of hours or cycles) of the Redelivery Date then applicable to the Airframe and each Engine, without regard to any waivers or -23- exemptions delaying compliance with such directives or requirements applicable solely to the Lessee's use of the Aircraft but not applicable or available generally to any one or more other European operators; (D) have all components and systems operational; (E) have no deferred maintenance or inspection items, or placards and be free of corrosion in accordance with the limits of the Approved Maintenance Program; and (F) be configured and equipped as delivered for passenger use under regulations of the CAA or the equivalent aviation authority of the Applicable Jurisdiction, as the case may be; (iii) the Airframe and each such Engine shall be in such condition as shall be required to meet (A) all manufacturer's mandatory service bulletins; and (B) all applicable airworthiness directives of the CAA or the equivalent aviation authority of the Applicable Jurisdiction, as the case may be and the Applicable Law thereof; (iv) the special exterior markings of the Lessee and any sublessee on the Airframe shall have been removed, or caused to have been removed, by the Lessee and shall be painted over in a good and workmanlike manner; (v) the Airframe shall have been maintained by the Lessee in accordance with the Approved Maintenance Program with respect thereto and (A) shall have not more than twenty (20) hours since having had a C Check and any portion of a D Check applicable to such C Check, with no deferred items under the Approved Maintenance Program; and (B) shall not have less than four (4) years remaining until the next scheduled D Check, or its equivalent, provided that in the event that (1) the Aircraft shall, on the Redelivery Date, have more than four (4) years or its equivalent remaining until the next D Check, the Lessor shall pay to the Lessee an amount equal to Five Hundred Twenty-Five Dollars ($525.00) (adjusted as provided in clause (3) of this subparagraph (v)) for each day or its equivalent by which the period remaining until the next D Check exceeds four (4) years or its equivalent except that the Lessor may offset such payment obligation against any payment obligation of the Lessee under the Operative Documents then due and unpaid; or (2) the Aircraft shall, on the Redelivery Date, have less than four (4) years or its equivalent, but more than two (2) years or its equivalent, remaining until the next D Check, the Lessee shall pay to the Lessor an amount equal to Five Hundred Twenty-Five Dollars ($525.00) (adjusted as provided in clause (3) of this subparagraph (v)) for each day or its equivalent by which the period remaining until the next D Check is less than four (4) years or its equivalent; and provided, further, that (3) all payments made pursuant to this subparagraph (v) will be adjusted by reference to the Finnish Labor Index (limited to the maximum inflation adjustment of five percent (5%) per annum) applied on an annual basis for each year and fraction thereof from the Delivery Date to the Redelivery Date; -24- (vi) each Engine shall be "on condition" with "condition monitoring", and shall have a remaining life of at least 4,000 hours or 4,000 cycles, whichever is more limiting, to removal of the most limiting life-limited part or known scheduled repair visit under the Approved Maintenance Program; (vii) the Engines will have each undergone full hot and cold section boroscope and isotope inspections in the presence of the Lessor's representative at the Redelivery Location immediately prior to such redelivery and after the Aircraft has been removed from service, and if any Engine shall not have been certified to be within the then-recommended manufacturer's maintenance manual limits and the limits of the Approved Maintenance Program for further operation, then the Lessee shall promptly cause such Engines to comply with such limits. The Lessee shall deliver to the Lessor, at no expense to the Lessor, all "no-charge kits" which have been offered to the Lessee by the manufacturer throughout the Term and which have not been installed on the Aircraft prior to redelivery to the Lessor; in addition, the Lessor may purchase from the Lessee at the Lessee's cost any service bulletin kits purchased by the Lessee for the Aircraft; (viii) the nose landing gear shall have no less than 8,250 cycles or 48 months, whichever is more limiting, remaining until the next scheduled overhaul or shop visit under the Approved Maintenance Program and the main landing gear shall have on average no less than 10,000 cycles or 48 months, whichever is the more limiting, remaining until the next scheduled overhaul or shop visit under the Approved Maintenance Program; and (ix) the Auxiliary Power Unit shall, on the Redelivery Date, have at least 2,400 cycles remaining until the next scheduled hot section inspection or overhaul under the Approved Maintenance Program. (b) On a date mutually agreed to by the Lessor and the Lessee at least four (4) days prior to the Redelivery Date, a ground inspection of the Aircraft shall be conducted, provided that any such inspection will not interfere with the Lessee's normal operation of the Aircraft. The Lessee will make the Aircraft and its Records (including historic and the most current engine performance monitoring data) available for such inspection at the Redelivery Location. At such inspection, the Aircraft will be inspected by either, as the Lessor shall elect, an employee or agent of any Owner Participant qualified to conduct such an inspection or an independent inspector, appointed by the Lessor, who will perform such tests as are customary and reasonable upon the return of used aircraft of the type leased hereunder, as are consistent with the Approved Maintenance Program and as may be necessary or advisable to determine whether the Aircraft complies with the terms of this Section 5(a); the Lessor will promptly notify the Lessee of the results of such inspection and will deliver a written report thereof in the event of any discrepancies for receipt by the Lessee not later than two -25- (2) days prior to the Redelivery Date. Representatives of the Lessee and the Lessor will be present at such inspection. Unless the parties otherwise agree in writing, the inspector shall remain at the Redelivery Location until the Lessor has accepted redelivery of the Aircraft. In addition, prior to or upon the expiration or earlier termination of this Lease, the Lessee will conduct, at the request of the Lessor and at the Lessor's sole expense, a sixty (60) minute test flight for the purpose of verification of the operational conditions set forth herein of the Aircraft, its equipment and systems and will permit not more than three (3) individuals designated as observers by the Lessor to be on board such Aircraft during such flight. All reasonable requests of the Lessor's representatives shall be carried out by the Lessee's flight crew during any such flight, provided that such requests do not endanger the Aircraft and can be performed during the sixty (60) minute test flight. If as a result of such inspection and test flight, the Aircraft is found not to comply with the terms of this Section 5(a), the Lessee, at its expense, will forthwith take or cause to be taken such action as may be required for such compliance and for compliance with any of the other terms of this Section 5. The Lessor shall compensate the Lessee for all fuel on board the Aircraft (at the price applicable to such fuel on the Redelivery Date, including any applicable into-plane charges) after completion of any test flight and the termination of the Lease, but all other fluids and the like remaining on board shall, without charge, together with such remaining fuel, become the property of the Lessor upon the Lessee's receipt of payment for fuel and into-plane charges, as aforesaid, and the Lessor's execution and delivery of the Redelivery Receipt. (c) The Lessee will, from the date hereof until the expiration of the Term, cooperate fully with the Lessor in permitting prospective purchasers or lessees of the Aircraft to inspect the Aircraft and its records, provided that any such inspection will not interfere with the Lessee's normal operation of the Aircraft. (d) Upon return of the Aircraft on the Redelivery Date to the Lessor under this Section 5, the Lessee shall deliver all logs, manuals, certificates, engineering and modification orders and data, records and data, and inspection, modification, overhaul, repair and maintenance records and reports, and all airworthiness directives of the CAA and other applicable authorities required to be maintained with respect thereto by the CAA or otherwise under the Applicable Laws of any Applicable Jurisdiction, and if any thereof shall not be in English, English translations thereof but only to the extent required for registration of the Aircraft with the FAA and copies (and, if and when permitted by the laws of Finland, the United States and any other Applicable Jurisdiction, originals) of any existing logs, manuals and records and data required by the FAA to permit registration of the Aircraft under FAR 121, and operation of the Aircraft in, the United States (collectively, together with such English translations, if any, "Records"). (e) Effective upon the Lessor's acceptance of return of the Aircraft on the Redelivery Date, the Lessee does hereby re-assign to the Lessor all existing warranties, service life policies and patent indemnities, which by their terms do not prohibit assignment -26- by the Lessee, of manufacturers and maintenance and overhaul agencies of and for the Aircraft and the Parts, if any, which were acquired by the Lessee during the Term and upon the request of the Lessor, from time to time after the Redelivery Date, the Lessee shall use its reasonable efforts to give the Lessor aid and assistance in enforcing the rights of the Lessee arising under each thereof, provided that the Lessor shall indemnify the Lessee for all costs and expenses incurred by the Lessee in connection with such aid and assistance rendered. The parties' respective obligations under this paragraph (e) shall survive termination of this Lease. (f) In the event of a dispute arising with respect to the condition of the Aircraft on the Redelivery Date, the parties shall obtain an appraisal by an internationally recognized independent appraiser mutually agreed to by the Lessor and Lessee. (g) The Lessor may assign its rights under Section in accordance with the terms and subject to the conditions and provisions thereof to any Person who leases or purchases the Aircraft from the Lessor at or after the end of the Term. SECTION 6. Maintenance. Operation, Etc. (a) Registration. Maintenance and Operation. The Lessee, at its own cost and expense, will at all times during the Term: (i) cause the Aircraft to be in compliance with all CAA regulations applicable to McDonnell Douglas MD 82 aircraft, certificated for interstate and overseas operation under Finnish Applicable Law or such other Applicable Law of such other Applicable Jurisdiction, as the case may be, and to be and remain duly registered with the CAA in accordance with the Act in the name of the Lessor as owner; (ii) maintain, operate, service, repair, overhaul and test the Airframe and each Engine (including but not limited to all program monitoring, program reliability and program reporting requirements under the Approved Maintenance Program and the Act), so as to keep the same in as good operating condition as when originally leased hereunder, ordinary wear and tear excepted, in the same manner and with the same care as used by the Lessee with similar aircraft operated by the Lessee, and in such condition as may be necessary to enable the airworthiness certificate of the Aircraft to be maintained in good standing at all times under the Act, Finnish Applicable Law or such other Applicable Law of such other Applicable Jurisdiction as the case may be, and in accordance with all manufacturers' mandatory service bulletins with respect thereto, (iii) maintain all records, logs, manuals, manufacturer's service bulletins, CAA and FAA airworthiness directives, engineering and modification orders, and other Records and data required by Finnish Applicable Law or such other Applicable Law of such other Applicable Jurisdiction as the case may be, to be maintained in respect of the Airframe and each Engine; (iv) perform all obligations required to be performed by it under the terms of all applicable warranties, service life policies and patent indemnities of the manufacturer or supplier of the Aircraft or any Part thereof, in respect of the Aircraft or any part thereof. The Lessee shall comply with all (i) applicable requirements of Finnish Applicable Law or such other Applicable Law of such Applicable Jurisdiction, as the case may be, and all other applicable environmental, -27- noise, air pollution and other similar standards of Finland or such other Applicable Jurisdiction, as the case may be, and the International Civil Aviation Organization in effect from time to time to the extent that such standards are required to be complied with (without regard to any exemption waiving or delaying compliance therewith applicable solely to the Lessee's use of the Aircraft but not applicable or available generally to any one or more other European operators) and (ii) the Lessee, at its own expense, forthwith upon the delivery thereof hereunder, shall cause the Aircraft to be duly registered (provided the Lessor or its designee is eligible to be the registered owner of the Aircraft) and at all times thereafter to remain duly registered in compliance (provided the Lessor or its designee is eligible to be the registered owner of the Aircraft) with all Finnish registration and airworthiness requirements or those of any other Applicable Jurisdiction, as the case may be. The Lessee agrees that the Airframe and each Engine will not be maintained, serviced, repaired, overhauled, tested, used or operated: (A) in violation of any law or any rule, regulation or order of any government or governmental authority having jurisdiction (domestic or foreign) or other Applicable Law or in violation of the airworthiness certificates of the Aircraft; (B) in any area excluded from coverage by, or in any manner or for any purpose inconsistent with the terms of, any insurance required by the terms of Section 11 hereof; or (C) in any recognized or threatened area of hostilities unless fully covered to the Lessor's satisfaction by war risk insurance. (b) Mandatory Service Items. All airworthiness directives of the CAA and all manufacturer's mandatory service bulletins requiring inspections, repair, replacement or CAA-required terminating action during the Term, or, in the case of airworthiness directives requiring terminating action, within six (6) months of the Redelivery Date, with respect to the Airframe and each Engine, shall be complied with by the Lessee at the Lessee's expense. (c) Re-registration. The Lessee may from time to time require the Lessor, upon reasonable prior notice and at the Lessee's sole expense, to re-register the Aircraft in Finland or the United States, as the case may be, in the name of the Lessor, as owner, and of the Lessee, as lessee, if each is then in compliance with all applicable registration requirements. During the period the Aircraft is registered in the United States, all references in this Lease to the "CAA" and to "Finnish Applicable Law", shall be deemed to refer to the FAA and United States Applicable Law. The Lessor shall cooperate in connection with any re-registration permitted under this paragraph (c). SECTION 7. Liens. The Lessee will not, directly or indirectly, create, incur, assume or suffer to exist any Lien upon or with respect to the Aircraft, the Airframe or any Engine or any other portion of the Lessor's Estate, except for the rights of the Lessor and the Lessee hereunder and Permitted Liens. SECTION 8. [Intentionally omitted.] -28- SECTION 9. Possession. (a) The Lessee will not, without the prior written consent of the Lessor (such consent not to be unreasonably delayed or withheld), assign any of its rights or obligations under this Lease or sublease or otherwise in any manner deliver, transfer or relinquish possession or control of, or transfer any estate, right, title or interest in or to, the Airframe or any Engine or Part (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, provided that, so long as no Default relating to an Event of Default under Section 17(e) and no Event of Default shall have occurred and be continuing, the Lessee may, without the prior written consent of the Lessor: (i) deliver temporary possession and control of the Airframe or any Engine or Part to the manufacturer thereof for testing, service, maintenance, overhaul or repair or, to the extent permitted by Section 12 hereof, for modifications or additions; (ii) install an Engine on an airframe owned by the Lessee free and clear of all Liens except Permitted Liens; (iii) install an Engine on an airframe leased to the Lessee or owned by the Lessee and subject to a security agreement under which the Lessee is the debtor, provided that such airframe is free and clear of all Liens except the rights in and to the Airframe of the parties to such lease or security agreement and except Permitted Liens, and provided further, that if the Lessor's title to any such Engine shall be divested under any such agreement or arrangement, such divestiture shall be deemed to be an Event of Loss with respect to such Engine and the Lessee shall comply with Section 10(b) in respect thereof; (iv) in the ordinary course of testing, servicing, maintenance, repair or overhaul, remove any Part from the Airframe or any Engine, provided that the Lessee replaces such Part as promptly as possible with a Part which has a value and utility at least equal to the Part being replaced (assuming it to be in the condition and state required by this Lease) and is owned by the Lessee free and clear of all Liens except Permitted Liens; and any such replacement Part shall thereby become subject to this Lease without necessity of further act; provided, however, that any Part removed from the Airframe or any Engine for such purpose shall remain subject to this Lease until replaced by a replacement Part as provided in this clause (iv); (v) enter into a Wet Lease for the Airframe and the Engines or engines then installed thereon or for any Engine installed on any other airframe owned (in accordance with the foregoing provisions of this Section 9) or operated by the Lessee (or any permitted sublessee pursuant to subclause (vi) hereof) with any third party, -29- provided, however, that the term of such Wet Lease shall not extend beyond the end of the Term; (vi) sublease the Airframe, any Engine or engines then installed on the Airframe (x) to any Affiliate of the Lessee with respect to which, were it the "Lessee" under this Lease, there shall have occurred and be continuing no Default or Event of Default of the type described in Section 17(e) hereof, (y) upon prior notice to the Lessor, to any air carrier with respect to which, were it the "Lessee" under this Lease, there shall have occurred and be continuing no Default or Event of Default of the type described in Section 17(e) hereof, and which carrier is based in any member nation of the OECD, the Republic of Singapore, the Republic of South Korea, or the Kingdom of Thailand, or (z) to any other air carrier with respect to which, were it the "Lessee" under this Lease, there shall have occurred and be continuing no Default or Event of Default of the nature described in Section 17(e) hereof, in each case, on the date the sublease is entered into, which carrier has been approved in advance in writing by the Lessor, which approval the Lessor shall not unreasonably withhold or delay, provided that (A) such sublease shall provide that the sublessee will not transfer possession of or any other rights to the subleased property other than to the Lessee or the Lessor; (B) such sublease shall, by its terms, be made expressly subject and subordinate to all of the terms of this Lease, including, without limitation, the rights of any permitted assignee of the Lessor under Section 20 hereof and the right of the Lessor to enforce all of the remedies under Section 18 hereof upon the declaration of this Lease to be in default upon the occurrence of any Event of Default and to terminate all rights of the sublessee to possession of the subleased property irrespective of such sublessee not being in default; (C) the term of such sublease shall not extend beyond the end of the Term as then in effect; (D) such sublease shall contain provisions for the operation, maintenance and insurance of the Airframe or such Engine, as the case may be, which are substantially the same as such provisions of this Lease; and (E) the Lessee shall provide the Lessor with written notice of any sublease having a term greater than sixty (60) days within thirty (30) days after such sublease shall become effective and, promptly after the request of the Lessor, the Lessee shall provide a copy thereof to the Lessor, certified as true by the Lessee (provided that the Lessee may redact financial terms from such copy); and (vii) in accordance with this Lease (including, without limitation, Section 12) subject any Engine or Part to normal pooling agreements or arrangements in each case customary in the airline industry and entered into by the Lessee in the ordinary course of its business with one or more air carriers. (b) No pooling agreement, sublease or other relinquishment of possession of the Airframe or any Engine shall in any way discharge or diminish any of the Lessee's obligations to the Lessor hereunder or constitute a waiver of the Lessor's rights or remedies -30- hereunder. Without limiting the preceding sentence and notwithstanding Section 9(a), the rights of any sublessee or other recipient of possession of the Aircraft, however characterized, pursuant to any arrangement permitted by Section 9(a) shall be subject and subordinate to, and any sublease permitted by clause (vi) thereof shall be made expressly subject and subordinate to, all the terms and provisions of this Lease, including, without limitation, the Lessor's right to repossession and to avoid such sublease upon such repossession or an Event of Default hereunder, and the Lessee shall remain primarily liable hereunder for the performance and observance of all the terms and provisions of this Lease and the other Operative Documents to the same extent as if such transfer or sublease had not occurred, and all the terms and provisions of this Lease and the other Operative Documents shall remain in full force and effect notwithstanding such transfer or sublease. (c) In connection with any sublease permitted under this Section 9, so long as no Event of Default and no Default which would become an Event of Default of the type described in Section 17(e) has occurred and is continuing, the Lessee may from time to time prior to the Redelivery Date require the Lessor, upon reasonable prior notice and at the Lessee's sole expense, to re-register the Aircraft in a jurisdiction other than Finland or the United States, as the case may be, which shall be a nation described in clause (y) of Section 9(a)(vi) (such other jurisdiction, the "Other Jurisdiction"), provided that the Lessee shall deliver to the Lessor at the time of such registration an opinion of counsel (which counsel may be counsel to the sublessee) with respect to such Other Jurisdiction to the effect that (a) the Lessor's rights to repossession under this Lease and the sublease to be entered into pursuant to this Section 9 are valid, binding and enforceable and this Lease is valid and enforceable (subject to customary exceptions) under the laws of such Other Jurisdiction, (b) it is not necessary for the Lessor, or any Owner Participant, as a result of such sublease or change in registration, to register or qualify to do business in such Other Jurisdiction, (c) the ownership interest of the Lessor in the Aircraft has been preserved under the laws of such Other Jurisdiction and, to the extent required thereunder, such ownership interest has been duly registered under such laws, and (d) such registration will not result in the imposition by such Other Jurisdiction of any Taxes on the Lessor, any Owner Participant, the Aircraft (or any part thereof) or otherwise in connection with the transactions contemplated hereby or by any other Operative Document for which the Lessee is not required to indemnify the Lessor (provided that in lieu of the opinion referred to in this clause (d), the Lessee may indemnify the Lessor (in a manner reasonably acceptable to the Lessor) for any Taxes imposed by such Other Jurisdiction in connection with or relating to the transactions contemplated by the Operative Documents which would not have been imposed but for such registration). In addition, it shall be a condition to such registration that (i) the aircraft and engine maintenance program under the laws of such Other Jurisdiction shall be substantially similar to that required by the FAA or the CAA, and (ii) such registration shall not otherwise adversely affect the interests of the Lessor in the Aircraft. During the period the Aircraft is registered in such Other Jurisdiction, all references in this Lease to the "CAA" shall be deemed to refer to the equivalent aviation authority of such Other Jurisdiction, and all -31- references to "Finnish Applicable Law", shall be deemed to refer to the Applicable Law of such Other Jurisdiction. The Lessor shall reasonably cooperate at the Lessee's request and expense in connection with any re-registration permitted under this paragraph (c). SECTION 10. Event of Loss; Requisition for Use. (a) If an Event of Loss shall occur with respect to the Airframe, the Lessee will within ten (10) days after actual knowledge by a Responsible Officer of the Lessee (and in any event within twenty (20) days) of the occurrence of such Event of Loss) notify the Lessor thereof in writing and will pay to the Lessor, in Dollars and in immediately available funds, not later than the earlier of one hundred twenty (120) days after the date of the occurrence of such Event of Loss or five (5) Business Days after the date of the Lessee's receipt of insurance proceeds, an amount equal to the corresponding Stipulated Loss Value of the Aircraft for the Loss Payment Date on which such payment is made (if payment is made on a Loss Payment Date) or on the immediately succeeding Loss Payment Date set forth in Schedule I to the Lease Supplement (if payment is made on a date other than a Loss Payment Date); provided, however, that if the date such payment is made by the Lessee is not a Loss Payment Date, there shall be deducted from the Stipulated Loss Value amount payable by the Lessee an amount equal to the interest at a rate of 9.4% per annum on such Stipulated Loss Value (computed on the basis of a 365 day year and actual days elapsed) from and including the date such payment is made by the Lessee, to but not including the Loss Payment Date immediately following the date such payment is made by the Lessee; and provided further, that if such payment is made on a Rent Payment Date, the Lessee shall not pay the scheduled amount of Basic Rent otherwise due on such Rent Payment Date. The Lessee will pay in full when due, but without duplication, the Basic Rent for the Aircraft payable on each Rent Payment Date occurring prior to such Loss Payment Date. In addition to the foregoing amounts, the Lessee shall pay to the Lessor any Supplemental Rent then due and unpaid and required to be paid on or prior to the date on which payment in full of such Stipulated Loss Value and Basic Rent is required under this Section 10(a) to be paid to the Lessor. In addition, if any such payment of Stipulated Loss Value and Rent is not paid in full when due in accordance with the provisions of this Section 10(a), the Lessee shall pay on demand interest on such unpaid amount at the Overdue Payment Rate from and including the due date to but excluding the date on which payment in full is received by the Lessor. Upon payment in full by the Lessee of all amounts referred to above in this Section 10(a) and all other amounts, if any, due and payable by the Lessee hereunder, (i) the Lessee shall have no further obligation to pay Basic Rent due in respect of periods (or parts thereof) commencing thereafter, (ii) this Lease shall terminate and (iii) upon request of the insurers of the Aircraft, the Lessor will transfer to such insurers "as-is where-is" title to the Airframe and each Engine, without any recourse, representation or warranty (all as described in the first sentence of paragraph (vi) of Section 4(b), except that appropriate changes shall be made to the references to the parties and to accommodate a sale and purchase rather than a lease), except that the Airframe and Engines are free and clear of Lessor Liens. Notwithstanding the foregoing, such transfer shall not in any way affect or limit the obligations or liabilities of the Lessee hereunder or -32- under any Operative Document not specifically discharged by such payment of Stipulated Loss Value and Rent. (b) If an Event of Loss shall occur with respect to an Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe, the Lessee will within twenty (20) days after a Responsible Officer of the Lessee has actual knowledge (and, in any event, within sixty (60) days) of the occurrence of such Event of Loss notify the Lessor thereof in writing and will, not later than one hundred twenty (120) days after the occurrence of such Event of Loss, at its sole cost and expense, duly convey to the Lessor (or cause to be conveyed to the Lessor), as replacement for such Engine, title to another engine of the same or an improved make and model which shall be owned by the Lessee free of all Liens other than Permitted Liens and shall, in the opinion of the Lessor, have a value and utility at least equal to, and in as good operating condition as, such Engine immediately prior to such Event of Loss, assuming compliance by the Lessee with all of the terms of this Lease with respect to such Engine. Prior to or at the time of such conveyance, at the Lessee's sole expense the Lessee and the Lessor will enter into a supplement to this Lease for purposes of subjecting such replacement engine to this Lease and the Lessee, at the Lessee's sole expense will (i) cause to be delivered to the Lessor evidence that the Lessor has acquired full warranty title to such replacement engine free and clear of all Liens except Permitted Liens and that such replacement engine is duly subjected to this Lease, such supplement to this Lease and all other documents and instruments required to effect or evidence the foregoing (including the bill of sale) to be in form and substance reasonably satisfactory to the Lessor and the Lessee; and (ii) cause to be delivered to the Lessor evidence satisfactory to the Lessor as to the due compliance by the Lessee with the insurance provisions of Section 11 hereof with respect to such replacement engine; and (iii) furnish to the Lessor an opinion of the Lessee's counsel to the effect that, upon such conveyance, the Lessor will acquire good and marketable title free and clear of all Liens, other than Permitted Liens, to such replacement engine and that it will be leased hereunder to the same extent as the Engine replaced thereby, and as to the validity, binding effect and enforceability of such supplement to this Lease and other documents and instruments. Upon compliance by the Lessee with the foregoing terms of this subsection (b) within the 120-period referred to above, the Lessor will (A) upon request by the insurers of such Engine transfer title to such insurers of the Engine so replaced "as-is, where-is" without any recourse, representation or warranty (all as described in the first sentence of paragraph (vi) of Section 4(b), except that appropriate changes shall be made to the references to the parties and to accommodate a sale and purchase rather than a lease), except that such Engine is free and clear of any Lessor Liens and (B) execute and deliver to the Lessee a partial release, in recordable form, releasing such Engine from this Lease. Such replacement engine shall thereupon constitute an "Engine" for all purposes hereof. No such termination of this Lease with respect to any Engine as contemplated by this Section 10(b) shall result in any reduction of Rent. -33- (c) In the event of the requisition for use by the Finnish Government or the government of any other Applicable Jurisdiction (including any governmental authority, agency or instrumentality, including any court, thereof) of the Airframe or any Engine during the Term, the Lessee shall promptly notify the Lessor of such requisition and all the Lessee's obligations under this Lease with respect to the Airframe or such Engine shall continue to the same extent as if such requisition had not occurred; provided, however, that if the Airframe or such Engine shall not be returned by the Finnish Government or such other government prior to the end of the Term and the Lessee has given notice and extended the Term in accordance with and as provided in Section 3(f), the Lessee shall be obligated to return the Airframe or such Engine to the Lessor pursuant to, and in all other respects to comply with the provisions of, Section 5 promptly upon its return by the Finnish Government or such other government. All payments received by the Lessor or the Lessee from the Finnish Government or such other government for the use of the Airframe or such Engine during the Term shall be paid over to, or retained by, the Lessee unless an Event of Default or Default shall have occurred and be continuing in which event such amounts shall be paid over to or retained by the Lessor as security for the obligations of the Lessee under this Lease and applied against the Lessee's obligations hereunder, and upon the terms and conditions of Section 24(b)(ii) all such amounts and any gain thereon from Permitted Investments required to be made pursuant to Section 24(b)(ii) shall be paid over by the Lessor to the Lessee; and all payments received by the Lessor or the Lessee from the Finnish Government or such other government for use of the Airframe or such Engine after the Term shall be paid over to, or retained by, the Lessor. (d) At any time during the Term so long as no Event of Default shall have occurred and be continuing, the Lessee may, in its discretion, upon prior reasonable notice to the Lessor, terminate this Lease with respect to any Engine. In such event and on or before the date of such termination, the Lessee shall replace such Engine hereunder by complying with the terms of Section 10(b) hereof to the same extent as if an Event of Loss had occurred with respect to such Engine, and the Lessor shall concomitantly therewith, as provided in Sections 10(b) and 12, transfer all of its rights and interest in and to such Engine to the Lessee as provided therein, and thereupon such replacement engine shall constitute an "Engine" for all purposes hereof. Upon compliance by the Lessee with the foregoing terms of this paragraph (d), the Lessor will execute and deliver to the Lessee a partial release, in recordable form, releasing such Engine from this Lease. No termination of this Lease with respect of any Engine as contemplated by this Section 11(d) shall result in any reduction of Rent. SECTION 11. Insurance. (a) The Lessee at its expense shall carry public liability (including, without limitation, contractual, bodily damage and property damage liability and passenger products and completed operations liability and also war risk and allied perils liability in accordance with Lloyds of London aviation clause AVN.52 or its equivalent) and property damage insurance, payable in Dollars, with respect to the Airframe -34- and the Engines (i) in an amount at least equal to the greater of that normally carried, from time to time, by the Lessee with respect to similar aircraft owned, leased or operated by it, or that carried, from time to time, with respect to similar aircraft by major commercial air carriers flying routes substantially similar to those flown by the Lessee but in no event less than U.S. $500,000,000 per occurrence, and (ii) with commercial insurers of internationally recognized standing. (b) The Lessee at its expense shall maintain in effect with insurers of internationally recognized standing, and payable in Dollars all-risk aircraft hull insurance for flight, taxiing and ground covering the Airframe and Engine and any other engines on the Aircraft, and all-risk coverage with respect to any Engine while removed from the Airframe, which is of the type and in substantially the amount usually carried by corporations engaged in the same or similar business and similarly situated as the Lessee (but specifically including war risk, governmental confiscation (including the government of the Applicable Jurisdiction), appropriation, and hijacking insurance (political and non-political risks), except cover in respect of any hostile detonation of any weapon of war employing atomic or nuclear fission, fusion or other radioactive force or matter), provided that such insurance in respect of the Aircraft shall at any time not be less than the Stipulated Loss Value for the Aircraft as of the date of determination. The Lessee may self-insure, by way of deductible or premium adjustment provisions in insurance policies, the risks required to be insured against pursuant to this subsection (b), provided that such self-insurance shall not apply in the case of a total loss or constructive or arranged total loss of the Airframe and, in the case of any other loss, shall not exceed U.S. $3,000,000 with respect to the Airframe and the Engines or engines then installed thereon. Any policies of insurance required pursuant to this subsection (b) shall provide that any loss in excess of U.S. $3,000,000 payable with respect to the Airframe and the Engines or engines installed thereon or with respect to an Engine while on the ground shall be payable and paid to the Lessor. (c) Any policies of insurance required pursuant to either subsection (a) or subsection (b) above shall: (i) be amended to name the Lessor and the other Additional Insureds as additional insureds warranted no operational interest, but without the Lessor or the other Additional Insureds being liable for premiums in respect of such insurance (other than by way of set-off as mentioned in (vi) below), and in the case of each policy required pursuant to subsection (b) above, shall name the Lessor and the other Additional Insureds as loss payees; (ii) provide that, in respect of the interest of the Lessor and the other Additional Insureds, in such policies, the insurance shall not be invalidated by any action or inaction of the Lessee or any other Person (other than the Additional Insureds, each for their respective interests) and shall insure the interest of the Lessor and the other Additional Insureds, regardless of any breach or violation by the Lessee or any other Person (other than the Additional Insureds, each for their respective interests) of any warranty, declaration or condition contained in such policies; (iii) provide that if such insurance is cancelled for any reason whatsoever, or if any material change is made in the coverage (including the scope -35- thereof) which affects the interest of the Lessor or the other Additional Insureds, or if such insurance is allowed to lapse for nonpayment of premium, such cancellation, change or lapse shall not be effective as to the Lessor or the other Additional Insureds for thirty (30) days (seven (7) days or such lesser period as may be customarily available in the case of any war risk and allied perils coverage) after the giving of notice to the Lessor or such Additional Insured, as the case may be, of written notice from such insurers to the addresses provided hereunder to the Lessee of such cancellation, change or lapse; (iv) provide that as against the Lessor and the other Additional Insureds, the insurers shall waive, to the fullest extent permitted by Applicable Law, all rights of subrogation; (v) provide, in the case of liability insurance policies (A) that all of the provisions thereof shall operate in the same manner as if there were a separate policy covering each insured (provided that such policies shall not operate to increase the insurer's limit of liability as set forth in such policies), and (B) that the insurance shall be primary and without right of contribution from any other insurance which may be available to the Lessor or any Additional Insured; (vi) shall waive any right of the insurers to set-off, counterclaim or any other deduction, whether by attachment or otherwise, against the interests of the Additional Insureds (other than in respect of unpaid premiums in respect of the Airframe and the Engines or engines installed thereon or with respect to an Engine which is on the ground); and (vii) shall contain with respect to hull all risks and hull war risks insurance a 50/50 clause per AVN. 103 or its equivalent. In the event that the Lessee shall fail to maintain insurance as provided in this Section 11, the Lessor may at its sole option provide such insurance and, in such event, the Lessee shall, upon demand, reimburse the Lessor, as Supplemental Rent, for the reasonable market cost thereof, without waiver of any other rights or remedies the Lessor may have hereunder or under any other Operative Document. (d) (i) On or before the Delivery Date, and thereafter at the time of each renewal (but no less than annually), the Lessee, at its expense, will furnish to the Lessor and each other Additional Insured insurance certificates with respect to the Aircraft signed by a firm of independent aircraft insurance brokers reasonably acceptable to the Lessor, describing in reasonable detail the insurance then carried and maintained on or with respect to the Aircraft and noting any geographical limits to the coverage provided thereby. The Lessee will cause such firm (i) to dispatch the said insurance certificates to the Lessor and each other Additional Insured no later than fourteen (14) days after the renewal date of the relevant insurance policies, and (ii) to advise the Lessor and each other Additional Insured in writing promptly of any default in the payment of any premium and of any other act or omission on the part of the Lessee, of which such firm has knowledge and which might invalidate or render unenforceable, in whole or in part, any insurance on the Aircraft. The Lessee will, and will also cause such firm to, advise the Lessor in writing as promptly as practicable after a Responsible Officer of the Lessee or such firm, as the case may be, acquires knowledge that an interruption or reduction of any insurance carried and maintained on the Aircraft pursuant hereto will occur. -36- (ii) The Lessee covenants and agrees that it shall provide all such notices and take all such actions as shall be necessary or advisable to prevent, and the Lessee shall not suffer to occur, the invalidation of any insurance benefit which may otherwise be available to any additional insured but for any action or inaction of any additional insureds that occurs or is a breach or violation of the insurance policy or any warranty, declaration or condition contained therein of which the Additional Insured has no actual knowledge or that results from any action or inaction of the Lessee (including, without limitation, the filing of any claims and the giving of appropriate notices so as to prevent any such invalidation). (iii) The Lessee covenants and agrees that it will pay to the Lessor, or to whomever the same shall have experienced the set-off, as Supplemental Rent, promptly upon any set-off described in Sections 11(c) and 11(d), an amount equal to the amount of any set-off pursuant to such Sections. (e) All insurance payments received by the Lessor or the Lessee from insurance referred to in Section 11(b) and paid as the result of the occurrence of an Event of Loss with respect to the Airframe or an Engine (as well as any requisition or other payments received by the Lessor or the Lessee as the result of any such Event of Loss) shall be, if received by the Lessee, immediately paid to the Lessor and shall be held and applied by the Lessor as follows: (i) if such payment is received as the result of an Event of Loss referred to in Section 10(a), such payment shall be applied in reduction of the Lessee's obligation to make payment pursuant to Section 10(a) (and any excess shall be paid to the Lessee) or, if the Lessee shall have already made payment in full pursuant to said Section 10(a), all of such payment shall be paid to the Lessee, provided that no Event of Default or Default which would become an Event of Default of the type described in Section 17(a), (b) or (e) shall have occurred and then be continuing; and (ii) if such payment is received as the result of an Event of Loss referred to in Section 10(b), such payment shall be paid to the Lessee upon compliance by the Lessee with all of the terms of said subsection (b) provided that no Event of Default or Default which would become an Event of Default of the type described in Section 17(a), (b) or (e) shall have occurred and then be continuing. (f) All insurance payments received by the Lessor or the Lessee from insurance referred to in Section 11(b) and paid other than as the result of an Event of Loss with respect to the Airframe or an Engine shall be paid over to the Lessee (i) upon the completion of repairs satisfactory to the Lessor and, (ii) upon the Lessee's delivery of a certificate of a Responsible Officer of the Lessee describing necessary repairs and specifying the amount of funds required for making such repairs, and thereupon such funds shall be promptly applied by the Lessee to the extent necessary to repair the damage to the Airframe -37- or such Engine, provided that the Lessee will make such payment to the Lessor, and the Lessor shall not be required to make any such payment to the Lessee, if an Event of Default or Default of the type referred to in Section 17(a), (b) or (e) has occurred and is continuing. Any amount which would be payable to the Lessee or any sublessee under any parallel provision pursuant to this subsection (f) or Section 11(e) if a Default of the type described in such sections or an Event of Default had not occurred and was not continuing shall be held by the Lessor as security for the obligations of the Lessee under the Lease and applied against the Lessee's obligations as and when due. If such Event of Default and no such Default shall be cured and no other Event of Default and no such Default shall have occurred and be continuing, such amount shall be paid to the Lessee to the extent not previously applied in accordance with the terms hereof. (g) The Lessor and each Owner Participant and each Affiliate of any thereof may at its own expense carry insurance with respect to the Lessor's interest in the Aircraft and the Lessor's Estate, provided, however, that such insurance does not prevent the Lessee from carrying, or otherwise adversely affect the coverage of, the insurance required by this Section 11, or adversely affect such insurance or the coverage of any other insurance carried by the Lessee with respect to its interest in the Aircraft. Any insurance payments received with respect to any such insurance (including any residual value insurance) shall be retained by the Lessor or such other Person, to the absolute exclusion of the Lessee, without reducing or otherwise affecting the Lessee's obligations or liabilities hereunder or under any other Operative Document. SECTION 12. Replacement and Pooling; Modifications and Additions. (a) The Lessee, at its own cost and expense, will promptly replace or cause to be replaced all Parts which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever, except as otherwise provided by the provisions of this Section 12. All replacement Parts shall be free and clear of all Liens (except Permitted Liens), shall be in as good an operating condition as, and shall have the value and utility at least equal to, the Parts replaced (assuming the same to be in the condition and state required by this Lease). All Parts, at any time removed from the Airframe or any Engine, shall remain the property of the Lessor, no matter where located, until such time as such Parts shall be replaced by Parts which meet the requirements for replacement Parts specified above. Immediately upon any replacement Part becoming incorporated or installed in or attached to the Airframe or any Engine, without further act, title shall vest in and such replacement Part shall become the property of the Lessor, and shall become subject to this Agreement and be deemed a Part for all purposes hereof to the same extent as the Parts originally incorporated or installed in or attached to the Airframe or such Engine. (b) Any Part replacing a Part removed from the Airframe or any Engine pursuant to a pooling or similar arrangement in accordance with Section 9 shall be -38- incorporated or installed in or attached to the Airframe or such Engine in accordance with Section 12(a) as promptly as possible after the removal of such removed Part. In addition, any replacement Part when incorporated or installed in or attached to the Airframe or any Engine in accordance with Section 12(a) may be owned by a third Person subject to such a normal pooling arrangement permitted by this Lease, provided that the Lessee, at its own expense, as promptly thereafter as possible, but in any event not more than 180 days thereafter, either (i) obtains and, by operation of Section 12(a) conveys to Lessor, title to such replacement Part to vest in the Lessor in accordance with Section 12(a) free and clear of all Liens (except Permitted Liens), or (ii) replaces or procures the replacement of such replacement Part by the incorporation or installation in or attachment to such Airframe or Engine of a further replacement Part free and clear of all Liens (except Permitted Liens) and by causing title to such further replacement Part to vest in the Lessor in accordance with Section 12(a) and such further replacement Part shall forthwith be deemed part of the Airframe or Engine to the same extent as the Part originally incorporated or installed in or attached to the Airframe or such Engine and become subject to this Lease. (c) The Lessee, at its expense, will make such modifications in and additions to the Airframe and each Engine as may be required from time to time in order to meet the standards of Applicable Law and in order for the Lessee to comply fully with the terms of this Lease, including Sections 5 and 6 hereof. In addition, so long as no Event of Default or Default which would become an Event of Default of the type described in Section 17(e) shall have occurred and be continuing, the Lessee, at its expense, may from time to time make such modifications in and additions to the Airframe or any Engine as the Lessee may deem desirable in the proper conduct of its business; provided, however, that no such modification or addition shall diminish the value or utility of the Airframe or such Engine, or impair the airworthiness or operating condition thereof, below the value, utility, airworthiness and condition thereof immediately prior to such modification or addition assuming the Airframe and such Engine were in the condition and repair state required by this Lease. Title to all Parts incorporated or installed in or attached or added to the Airframe or an Engine, as the result of such modification or addition shall, without further act, vest in the Lessor. Notwithstanding the foregoing terms of this Section 12, so long as no Event of Default or Default which would become an Event of Default of the type described in Section 17(e) shall have occurred and be continuing, the Lessee may remove any Part, provided that (i) such Part is in addition to, and not in replacement of or substitution for, any Part originally incorporated or installed in or attached to the Airframe or an Engine at the time originally leased by the Lessor or any Part in replacement of, or substitution for, any such Part, (ii) such Part is not required to be incorporated or installed in or attached or added to such Airframe or an Engine, pursuant to the terms of this Lease, and (iii) such Part can be removed from the Airframe or such Engine without causing material damage to the Airframe or such Engine and without diminishing or impairing the value, utility, condition or airworthiness required to be maintained by the terms of this Lease which the Airframe and such Engine would have had at such time had such modification or addition not occurred. -39- Upon the removal by the Lessee of any Part as provided in the immediately preceding sentence, title thereto shall, without further act, vest in the Lessee and such Part shall no longer be deemed part of the Airframe or the Engine from which it was removed. Any Part not removed by the Lessee prior to the return of the Aircraft to the Lessor hereunder shall remain the property of the Lessor. SECTION 13. Insignia. On or prior to the Delivery Date, the Lessee agrees to affix and maintain in the cockpit of the Airframe, in a prominent position on the door, a metal nameplate bearing the following inscription: "TRUST COMPANY FOR USL, INC., OWNER TRUSTEE/LESSOR". The Lessee further agrees not to affix, or suffer to be affixed, to or allow the name of any Person to be affixed to or placed on the Airframe or any Part any indicia of ownership thereof by any person other than the Lessor. SECTION 14. Inspection/Information. (a) The Lessee will permit the Lessor, at the Lessor's sole cost and expense (except if incurred in the Lessor's exercise of remedies under Section 18), by its officers or agents to inspect the Aircraft or any Parts or any part thereof and the Lessee's documents and records relating thereto, and at such reasonable times during normal business hours (or at any other time acceptable to the Lessee) as the Lessor may from time to time request, provided, however, that such inspections shall not interfere with the Lessee's normal operation of the Aircraft. The Lessor shall have no duty to make any such inspection and shall not incur any liability or obligation by reason of making or not making any such inspection. The Lessee shall provide the Lessor (i) as soon as available and in any event within (x) one hundred eighty (180) days after the end of each fiscal year of the Lessee, a copy of the published annual report to its shareholders (in the English language for the financial part) for such year for the Lessee, and (y) ninety (90) days after the end of each second fiscal quarter of the Lessee, a copy of the Lessee's published interim report to shareholders, and (ii) such other information respecting the Lessee's financial conditions (to the extent made available to the Lessee's shareholders and senior lenders) or operations or the maintenance status of the Aircraft as the Lessor may from time to time reasonably request. (b) The Lessee agrees to provide to the Lessor not less than thirty (30) days after the end of each fiscal quarter, a detailed report specifying the actual number of hours/cycles utilized on the Airframe and each Engine during the preceding fiscal quarter, the location of the Airframe and each Engine as of the end of such quarter, any unscheduled maintenance work at or exceeding the level of a C Check performed thereon during such quarter and any other such information relating to the Airframe and Engines as the Lessor may reasonably request. (c) The Lessee will give notice of an Event of Default or a Default which would become an Event of Default of the type described in Section 17(e) when a Responsible Officer of the Lessee has actual knowledge thereof. -40- SECTION 15. The Lessor's Right to Perform for the Lessee. If the Lessee fails to pay any Rent hereunder or fails to perform or comply with any of its other agreements contained herein, the Lessor may, on behalf of the Lessee, make such payment or perform or comply with such agreement, and the amount of such payment and the amount of the reasonable costs and expenses incurred in connection with such payment, performance or compliance, as the case may be (together with an amount that is the equivalent of interest thereon at the Overdue Payment Rate), shall be payable by the Lessee on demand as Supplemental Rent (not as interest). SECTION 16. Further Assurances. The Lessee at its expense will promptly and duly execute and deliver such documents and assurances and take such action as may be necessary or desirable, or as the Lessor may from time to time reasonably request, in order to more effectively carry out the intent and purpose of this Lease and the other Operative Documents and to establish and protect the Lessor's title to the Aircraft and its rights and remedies created or intended to be created under this Lease and the other Operative Documents, including, without limitation, the execution, delivery and filing of Uniform Commercial Code financing and continuation statements with respect to this Lease, in form and substance satisfactory to the Lessor, in such jurisdictions as the Lessor may reasonably request. SECTION 17. Events of Default. The following events shall constitute Events of Default (whether any such event shall be voluntary or involuntary or arise by operation of law or pursuant to or in compliance with any judgment, decree, order, rule or regulation of any court or any administrative or governmental body): (a) The Lessee shall fail to make any payment of Basic Rent or Stipulated Loss Value within seven (7) days after the earlier of (i) written notice to the Lessee and (ii) actual knowledge by a Responsible Officer of the Lessee that such payment shall not have been paid when due; or (b) The Lessee shall fail to make any other payment of Rent of any kind when due and such failure shall continue unremedied for a period of fifteen (15) days after the earlier of (i) written notice to the Lessee and (ii) actual knowledge by a Responsible Officer of the Lessee that such payment shall not have been paid when due; or (c)(i) The Lessee shall fail to carry and maintain insurance in accordance with Section 11 hereof, or the Lessee shall operate the Aircraft at a time when insurance required by the provisions of Section 11 shall not be in effect; or (ii) The Lessee shall fail in any material respect to perform or observe any other covenant or agreement to be performed or observed by it under this Lease or -41- under any other Operative Document (other than such as are the subject of Section 17(c)(i)) and such failure to perform or observe such other covenant or agreement shall continue unremedied for a period of thirty (30) days after written notice thereof to the Lessee by the Lessor, except if such failure is curable and the Lessee is diligently proceeding to cure such failure for a period not longer than ninety (90) days after such notice; or (d) Any representation or warranty made by the Lessee in this Lease or in any other Operative Document or in any document or certificate furnished by the Lessee in connection herewith or therewith shall have been incorrect in any material respect at the time made and such incorrectness materially adversely affects the rights of the Lessor under the Operative Documents and the Lessor has given written notice thereof to the Lessee, or, if such incorrectness is curable and the Lessee is diligently proceeding to cure same, such incorrectness shall continue for a period not longer than forty-five (45) days after the earlier of (i) such notice and (ii) actual knowledge of such incorrectness by a Responsible Officer of the Lessee; or (e) The Lessee shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding or petition (voluntary or involuntary) shall be instituted or commenced by or against the Lessee under the laws of any country, now or hereafter in effect, seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law of any country relating to bankruptcy, insolvency, moratorium or reorganization or relief of debtors, or seeking the entry of an order, judgment or decree for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and either such proceeding (in the case of an involuntary proceeding only) shall remain undismissed or unstayed for a period of ninety (90) days, or the Lessee shall take any corporate action to authorize any of the actions set forth above in this subsection (e), or if any competent court shall by final decision have declared the Lessee "en disastre", bankrupt or insolvent or if, under the provisions of the Applicable Law of Finland, any Finnish court of competent jurisdiction shall assume jurisdiction, custody or control of the Lessee or of any substantial part of its property and such jurisdiction, custody or control shall remain in force unrelinquished or unstayed for a period of ninety (90) days. SECTION 18. Remedies. Upon the occurrence of any Event of Default and at any time thereafter so long as the same shall be continuing, the Lessor may, at its option, declare in writing to the Lessee that this Lease is in default; and at any time thereafter, so long as the Lessee shall not have remedied all outstanding Events of Default, the Lessor may do one or more of the following with respect to the Airframe or any Engine, as the Lessor in -42- its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, Applicable Law then in effect: (a) cause the Lessee, upon the written demand of the Lessor and at the Lessee's expense, to return promptly, and the Lessee hereby agrees that it shall return promptly, such of the Airframe and the Engines as the Lessor may so demand to the Lessor or such Person as the Lessor may designate pursuant to Applicable Law in the manner and condition required by, and otherwise in accordance with all the provisions of, Section 5 as if the Airframe or such Engine were being returned at the end of the Term, or the Lessor or the Lessor's agent, at its option, may, but shall be under no obligation to, enter upon the premises where all or any part of the Airframe or any Engine is located and take immediate possession of and remove the same by summary proceedings or otherwise, all without liability accruing to the Lessor or the Lessor's agent for or by reason of such entry or taking of possession, removal or storage whether for the restoration of damage to property caused by any such action or otherwise; (b) sell all or part of the Airframe or any Engine at public or private sale, as the Lessor may determine, or otherwise dispose of, hold, use, operate, lease to others or keep idle the Airframe or any Engine as the Lessor may determine, all free and clear of any rights or claims of the Lessee and without any duty to account to the Lessee with respect to such action or inaction or for any proceeds with respect thereto; (c) whether or not the Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under Section 18(a) or (b) above with respect to all or part of the Airframe or any Engine, the Lessor, by written notice to the Lessee specifying a payment date not earlier than ten (10) days from the date of such notice, may cause the Lessee to pay to the Lessor, and the Lessee shall pay to the Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the scheduled Basic Rent for the Aircraft otherwise due on Rent Payment Dates occurring on and after the payment date specified for payment in such notice), any unpaid Basic Rent for the Aircraft due (or which would have been due in the absence of the termination of this Lease) prior to the payment date specified in such notice, any accrued, due and unpaid Supplemental Rent to and including such payment date, plus whichever of the following amounts the Lessor, in its sole discretion, shall specify in such notice (together with interest on all amounts payable by the Lessee under this subsection (c) at the Overdue Payment Rate from such specified payment date until the date of actual payment): (i) an amount equal to the excess, if any, of the Stipulated Loss Value for the Airframe or such Engine (computed as of the Loss Payment Date immediately succeeding the date specified in such notice), over the aggregate Fair Market Rental Value of the Airframe or such -43- Engine for a period equal to the remainder of the Term (or what would have been the remainder of the Term in the absence of the termination of this Lease) after discounting such aggregate Fair Market Rental Value quarterly (effective on the dates which would have been Rent Payment Dates in the absence of the termination of this Lease) to present worth as of the payment date specified in such notice at the rate per annum equal to the Overdue Payment Rate; or (ii) an amount equal to the excess, if any, of the Stipulated Loss Value for the Airframe or such Engine (computed as of the Loss Payment Date immediately succeeding the date specified in such notice), over the Fair Market Sales Value of the Airframe or such Engine, as of the payment date specified in such notice; provided, however, that if such payment is not made on a Loss Payment Date, there shall be deducted from the amount payable by the Lessee under this subsection (c) an amount equal to interest at the rate of 9.4% per annum (computed on the basis of a 365 day year and actual days elapsed) on the Stipulated Loss Value payable by the Lessee, from and including the date such payment is due under this subsection (c), to but not including the Loss Payment Date immediately following the date of such payment; (d) in the event the Lessor shall have sold the Airframe or any Engine, the Lessor, in lieu of exercising its rights under Section 18(c) with respect to the Airframe or such Engine, may, if it shall so elect, require the Lessee to pay to the Lessor, and the Lessee shall pay to the Lessor, on the date of such sale, as liquidated damages for loss of a bargain and all other losses to the Lessor and not as a penalty, all unpaid Basic Rent for the Aircraft due (or which would have been due in the absence of the termination of this Lease) on each Rent Payment Date occurring prior to the date of such sale, plus any Supplemental Rent that is accrued, due and unpaid to the date of such sale plus the amount of any deficiency between the net proceeds of such sale and the Stipulated Loss Value of the Airframe or such Engine (computed as of the Loss Payment Date occurring on (if payment is made on a Loss Payment Date) or immediately following (if payment is made on a date other than a Loss Payment Date) the date of such sale), together with interest at the Overdue Payment Rate on all amounts payable by the Lessee under this subsection (d) from the date of such sale until the date of actual payment; provided, however, that if payment in respect of such sale is made on a date which is not a Loss Payment Date, there shall be deducted from the amount payable by the Lessee pursuant to this subdivision (d) an amount equal to interest at 9.4% per annum (computed on the basis of a 365 day year and actual days elapsed) on the Stipulated Loss Value payable by the Lessee, from and including the date of such sale, to but not including the Loss Payment Date immediately following the date of such sale; and/or (e) the Lessor may rescind this Lease or may exercise any other right or remedy which may be available to it under Applicable Law, or to proceed by -44- appropriate court action to enforce the terms hereof or to recover damages permitted by Applicable Law for breach hereof. In addition, the Lessee shall be liable, except as otherwise provided above, for any and all unpaid Rent due hereunder before, after or during the exercise of any of the foregoing remedies and for all legal fees and other costs and expenses incurred by reason of the occurrence of any Event of Default or the exercise of remedies with respect thereto, including all reasonable costs and expenses incurred in connection with any retaking of the Airframe or any Engine or in placing the Airframe or any Engine in the condition and airworthiness required by Section 5. At any sale of the Airframe or any Engine pursuant to this Section 18, the Owner Participant, the Lessor or the Lessee, or any Affiliate of any thereof, may bid for and purchase such property. Except as otherwise expressly provided above, no remedy referred to in this Section 18 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to the Lessor at law or in equity; and the exercise or beginning of exercise by the Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by the Lessor of any or all of such other remedies. No express or implied waiver by the Lessor of any Event of Default or Default shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default or Default. To the extent permitted by Applicable Law, the Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may require the Lessor to sell, lease or otherwise use or keep idle the Airframe or any Engine in mitigation of the Lessor's damages except as set forth in this Section or which may otherwise limit or modify any of the Lessor's rights or remedies under this Section 18. For the purpose of this Section 18, the "Stipulated Loss Value" as of any date for the Airframe or any Engine means a portion of the Stipulated Loss Value of such Aircraft, computed as of such date, which bears the same ratio to such Stipulated Loss Value of the Aircraft as the original cost to the Lessor of the Airframe or such Engine (as the case may be), as reasonably computed by the Lessor, bears to the original cost to the Lessor of the Aircraft. SECTION 19. Expenses. (a) Each party shall pay all costs and expenses (including legal fees and expenses of counsel) it has incurred in connection with the preparation, execution, delivery, administration, modification and amendment of this Lease, any other Operative Document and the other documents to be delivered hereunder or thereunder, as the case may be, except as otherwise provided below in this Section 19, provided that in no event shall the Lessee pay any costs or fees or any amounts of any nature whatsoever relating to the Owner Trustee or any successor trustee or co-trustee under the Trust Agreement or administration of the Trust Estate. -45- (b) The Lessor shall pay all the costs of any mortgage taxes or security filings incurred in connection with any financings or refinancing of the Aircraft, except as otherwise provided below in clause (d). (c) In connection with any financing or re-financing of the Aircraft occurring after the Delivery Date, the Lessor shall pay on demand all reasonable out-of-pocket costs and expenses (including reasonable legal fees and expenses of counsel) incurred by the Lessee in connection with any such financing or re-financing, except as otherwise provided below in clause (d). (d) In connection with the amendment or modification to the Lease, or registration or deregistration of the Aircraft, in each case requested by the Lessee after the Delivery Date, or any amendment or modification to the Lease required in connection with an Event of Loss with respect to an Engine or a substitution of engines by the Lessee pursuant to Section 10(b) or 10(d), respectively, and in each other instance under this Lease or any other Operative Document where it is expressly stated that costs or expenses are to be borne by the Lessee, the Lessee shall pay on demand all reasonable out-of-pocket costs and expenses (including reasonable legal fees and expenses of counsel) incurred by the Lessor, including but not limited to, any reasonable costs incurred by the Lessor in connection with such registration or deregistration, or such Event of Loss or engine substitution under or pursuant to any financing or refinancing arrangement then in place. (e) Any party may, to the extent permitted by Applicable Law, seek payment by the other party of all its costs and expenses (including legal fees and expenses of counsel) incurred in connection with any legal suit, action, proceeding or arbitration arising out of or relating to this Lease or any of the Operative Documents, provided that in any such legal suit, action or proceeding or arbitration in which final judgment has been entered, the party against whom such judgment has been entered shall pay all such costs and expenses (including legal fees and expenses of counsel) incurred by the prevailing party. SECTION 20. Assignment; Owner Trustee. Except as otherwise provided in Section 13 of the Purchase Agreement or as the parties may otherwise agree in writing, the Lessor agrees that it will not, at any time after the execution and delivery of this Lease and prior to the expiry of the Term, assign or convey its right, title and interest in and to this Lease or the Aircraft without the written prior consent of the Lessee. SECTION 21. Notices. All notices required under the terms and provisions hereof shall be in writing or by telecommunication, in the English language, and any such notice shall become effective when received by the other party, by hand, by registered mail with proper postage for airmail prepaid, or, if in the form of a telegram, telex or telecopy, upon confirmation of receipt thereof, in each case addressed (i) if to the Lessee: -46- FINNAIR OY Dagmarinkatu 4 00100 Helsinki Finland Attention: Group Treasurer Telex:124946 Answerback: fnair sf Telecopier: 358-0-818-7457 Telephone: 358-0-818-81 or to such other address as the Lessee shall from time to time designate in writing to the Lessor, or (ii) if to the Lessor: Trust Company for USL, Inc. 615 Battery Street San Francisco, California 94111 Attention: President Telecopy: 415-627-9420 or to such other address as the Lessor shall from time to time designate in writing to the Lessee. SECTION 22. Net Lease. No Set-Off. Counterclaim. Etc. All Rent shall be paid by the Lessee in the manner provided in Section 3(b). This Lease is a net lease, and the Lessee will pay all costs, charges, fees and expenses associated with the use, non-use, possession, control, operation, maintenance and repair of the Aircraft and the Parts, except as expressly provided herein. The Lessee's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or other right which the Lessee may have against the Lessor, any Owner Participant, the manufacturer of the Airframe or of any Engine or of any Part or any other Person for any reason whatsoever (whether in connection with the transactions contemplated hereby or in connection with any unrelated transaction), (ii) any defect in the title, airworthiness, eligibility for registration under Applicable Law, condition, design, operation, merchantability, or fitness for use of, any other matter referred to in the first sentence of paragraph (vii) of Section 4(b), or any damage to or loss or destruction of, or any Lien upon, the Airframe or any Engine, or any interruption or cessation in the use or possession thereof by the Lessee for any reason whatsoever, including by reason of governmental authority or action, (iii) any insolvency, bankruptcy, reorganization, "en disastre", moratorium or similar proceedings by or against the Lessee, the Lessor or any other Person, (iv) the invalidity or unenforceability of any of the Operative Documents, (v) any restriction on the exchange of any currency into any other -47- currency, including, without limitation, an exchange of Finnish Marks into Dollars, or on the transfer of funds to the United States or from Finland, (vi) the Lessee at any time having immunity from suit or execution on the grounds of sovereignty, enforceability of judgment or otherwise, (vii) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If for any reason whatsoever this Lease shall be terminated as to the Airframe or any Engine in whole or in part by operation of Applicable Law, or otherwise, except as specifically provided herein, the Lessee nonetheless agrees to pay to the Lessor an amount equal to each Basic Rent payment for the Aircraft at the time such payment would have become due and payable in accordance with the terms hereof had this Lease not been so terminated in whole or in part. The Lessee hereby waives, and hereby agrees to waive at any future time at the request of the Lessor, to the extent permitted by Applicable Law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease except in accordance with the express terms hereof and all rights of "set-off', notice and demand. Each payment of Rent made by or on behalf of the Lessee to the Lessor shall be final as to the Lessee and the Lessor. The Lessee will not seek to recover all or any part of any such payment of Rent made to the Lessor or any Indemnitee for any reason whatsoever and, to the extent permitted by Applicable Law, waives all rights to any such recovery and right to seek the same. The Lessor shall not be required to reimburse any portion of any payment of any Basic Rent by reason of any early termination of this Lease. Nothing in this Section 22 shall be construed to preclude the Lessee or the Lessor from bringing any suit at law or in equity against any Person which it would otherwise be entitled for breach of any representation, warranty, covenant or duty hereunder. SECTION 23. Jurisdiction; Governing Law. (a) Each of the Lessor and the Lessee hereby irrevocably agrees that, to the extent that it or any of its assets has or hereafter may acquire or become entitled to any right of immunity, as against the other party hereto or its respective successors and assigns, whether characterized as sovereign immunity or otherwise, from any legal proceedings, action or suit, from set-off or counterclaim, from the jurisdiction of any competent court, from service of process, from attachment prior to judgment, from attachment in aid of execution, or from execution prior to judgment, or other legal process, whether in the United States of America or the Republic of Finland or any other jurisdiction, but only to the extent required to enforce or collect upon this Lease or any other Operative Document or any other liability or obligation of it related to or arising from the transactions contemplated by this Lease or any other Operative Document, including, without limitation, immunity from service of process, immunity from jurisdiction or judgment of any court or tribunal, immunity from execution of a judgment, and immunity of any of its property from attachment prior to any entry of judgment or from attachment in aid of execution upon a judgment, it hereby expressly and irrevocably and unconditionally waives and agrees not to plead or claim any such immunity but only with respect to its obligations or liabilities or any -48- other matter under or arising out of or in connection with this Lease or any other Operative Document or the subject matter hereof or thereof. Such agreement and waiver shall be irrevocable and not subject to withdrawal in any and all jurisdictions, including, without limitation, under the Foreign Sovereign Immunities Act of 1976 of the United States. (b) Each of the Lessor and the Lessee irrevocably agrees that any legal suit, action or proceeding arising out of or relating solely to this Lease or any other Operative Document, or any of the transactions contemplated hereby or thereby or any document referred to herein or therein, may be instituted in the State or Federal courts in the County of New York, State of New York, and it hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may have now or hereafter to the laying of the venue or the jurisdiction or the convenience of the forum of any such legal suit, action or proceeding and irrevocably submits generally and unconditionally to the non-exclusive jurisdiction of any such court but only in any such suit, action or proceeding. In the case of the said courts, the Lessee hereby designates, appoints and empowers Finnair, General Manager North America Finnair Executive Office, or any successor thereof, currently located at 10 East 40th Street, New York, New York 10016, as its authorized agent to accept, receive and acknowledge for and on behalf of it and its property service of any and all process which may be served but only in any action, suit or proceeding of the nature referred to above in the County of New York, State of New York. Each of the Lessor and the Lessee further agrees that such service of process may be made personally or by mailing or delivering a copy of the summons and complaint or other legal process in any such legal suit, action or proceeding to it in care of such agent at the aforesaid address, and, in the case of the Lessor, at the address set forth in Section 21, and such agent is hereby authorized to accept, receive and acknowledge the same for and on behalf of it and to admit service with respect thereto. Upon such service of process being made on such agent or the Lessor as aforesaid, a copy of the summons and complaint or other legal process served shall be mailed by the plaintiff to the Lessee or the Lessor, as the case may be, registered mail, return receipt requested, at its address specified in Section 21 hereof (as the same may be changed from time to time pursuant to said Section 21). Such service upon such agent shall be deemed to be personal service on the Lessee and shall be legal and binding upon it for all purposes notwithstanding any failure to mail copies of such legal process to it, or any failure on the part of it to receive the same, and shall be deemed completed upon the delivery thereof to such agent whether or not such agent shall give notice thereof to it or upon the earliest other date permitted by Applicable Law (including, without limitation, the Immunities Act). Each of the Lessor and the Lessee further irrevocably agrees to the service of process of any of the aforementioned courts but only in any suit, action or proceeding of the nature referred to above by the mailing of the copies thereof by certified air mail, postage prepaid, return receipt requested, to it at its address specified in Section 21 hereof (as the same may be changed from time to time pursuant to Section 21 hereof), such service to be effective upon the date of receipt indicated on the postal receipt returned from it. -49- (c) The Lessee agrees that it will at all times continuously maintain an agent or an office to receive service of process in the County of New York, State of New York on behalf of itself and its property with respect to the parties to this Lease and any other Operative Document, and, in the event that for any reason the agent mentioned above or such office shall not serve as agent for it to receive service of process in the County of New York, State of New York on its behalf, it shall promptly appoint a successor satisfactory to the Lessee and the Lessor so to serve, advise the Lessee and deliver to the Lessee evidence thereof. (d) Subject to any rights pursuant to Section 23(e), final judgment against the Lessee or the Lessor in any suit shall be conclusive in any court proceeding, and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy of which shall be conclusive evidence of the fact and of the amount of any indebtedness or liability of the Lessee or the Lessor, as the case may be, therein described. (e) Notwithstanding subsection (b) in this Section 23, and in addition to any of its rights to otherwise pursue remedies under or in respect of this Lease, each of the Lessor and the Lessee shall have the right, at its option, under all circumstances, to institute binding arbitration, and that if such arbitration is so elected, with respect to any matter governed by this Lease or any other Operative Document or in respect of any of the transactions contemplated hereby or thereby, or the breach, termination or invalidity thereof or in connection therewith, and any dispute, controversy and claim relating thereto, shall be settled by arbitration in accordance with the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, with the place of arbitration in Stockholm, Sweden, and each party hereby irrevocably agrees that, if either party shall elect to pursue such arbitration, the other party hereto shall submit thereto and will be bound thereby. The Arbitral Panel shall be composed of three (3) arbitrators. The language to be used in the arbitral proceedings shall be English. This agreement shall be governed by the internal laws of the State of New York (without regard to conflicts of laws principles). (f) THIS LEASE HAS BEEN NEGOTIATED AND DELIVERED IN THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO ANY CONFLICT OF LAWS RULE WHICH MIGHT RESULT IN THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. SECTION 24. Miscellaneous. (a) Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating or rendering unenforceable the remaining provisions hereof, and any such prohibitions or unenforceability -50- in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by Applicable Law, each of the Lessor and the Lessee hereby waives any provision of Applicable Law which renders any provision hereof prohibited or unenforceable in any respect. No term or provision of this Lease may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. This Lease shall constitute an agreement of lease, and nothing herein shall be construed as conveying to the Lessee any right, title or interest in the Aircraft except as a lessee only. (b)(i) This Lease constitutes an international transaction in which the specification of Dollars and the payment at the designated place of payment is of the essence, and Dollars shall be the currency of account in all events, including for all payments of Rent and any other amount payable hereunder or under any other Operative Document. The payment obligations of the Lessee under this Lease shall not be discharged by an amount paid in another currency or in another place, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on prompt conversion to Dollars (as quoted in New York, New York) and transfer to the designated place of payment under normal banking procedures does not yield the amount of Dollars due hereunder. If any expense required to be reimbursed pursuant to this Agreement or any other Operative Document is originally incurred in a currency other than Dollars, the Lessee or the Lessor, as the case may be, shall nonetheless make reimbursement of that expense in Dollars, in an amount equal to the amount in Dollars that would have been required for the Person that incurred that expense to have purchased, in accordance with normal banking procedures, at New York, New York the sum paid in such other currency (after any premium and costs of exchange) on the date of payment of such expenses. To the fullest extent permitted by Applicable Law, the obligation of the Lessee or the Lessor, as the case may be, in respect of any amount due under this Agreement or any other Operative Document shall, notwithstanding any payment in any other currency (whether pursuant to a judgment or otherwise), be discharged only to the extent of the amount in Dollars that the Person entitled to receive that payment may, in accordance with normal banking procedures, purchase and transfer to, New York, New York with the sum paid in that other currency (after any premium and costs of exchange) on the Business Day immediately following the day on which that Person receives that payment. If the amount in Dollars that may be so purchased for any reason falls short of the amount originally due, the Lessee or the Lessor, as the case may be, shall pay and indemnify for such additional amounts, in Dollars, as may be necessary to compensate for the shortfall. Any obligation of the Lessee or the Lessor, as the case may be, not discharged by that payment shall, to the fullest extent permitted by Applicable Law, be due as a separate and independent obligation and, until discharged as provided herein by the full payment of all outstanding amounts in Dollars as herein provided, shall continue in full force and effect. -51- (ii) (A) Any monies (but excluding any Collateral Security described in Section 4(c)(iii) hereof) paid to or retained by the Lessor which are required to be paid to the Lessee or applied for the benefit of the Lessee (including, without limitation, amounts payable to the Lessee under Sections 10 and 11), but which the Lessor or any Person acting by or through the Lessor is entitled to hold under the terms hereof pending the occurrence of some event or the performance of some act (including, without limitation, the remedying of a Default or an Event of Default), shall, until paid to the Lessee or applied as provided herein, be invested by the Lessor from time to time at the direction, risk and expense of the Lessee in Permitted Investments (defined below). There shall be promptly remitted to the Lessee any gain (including interest received) realized as the result of any such investment (net of any fees, commissions and other expenses, if any, incurred in connection with such investment) unless an Event of Default, or any Default described in paragraph (e) of Section 17, shall have occurred and be continuing, in which case such gains shall be held subject to the preceding sentence. The Lessee will promptly pay to the Lessor, on demand, as collateral security for its obligations hereunder, the amount of any loss realized as the result of any such investment (together with any fees, commissions and other expenses, if any, incurred in connection with such investment). (B) "Permitted Investments" means obligations of, or guaranteed by, the United States Government maturing within 91 days after such investment. (c) This Lease, including all agreements, covenants, representations and warranties, shall be binding upon and inure to the benefit of, and may be enforced by, (1) the Lessor and its successors and permitted assigns and (2) the Lessee and its successors and, to the extent permitted hereby, assigns. The obligations of the Lessee under Sections 8 and 19 of this Lease are expressly made for the benefit of, and shall be enforceable by, each Indemnitee entitled thereto, without declaring this Lease to be in default or taking action in respect of such declaration under Section 17 hereof. (d) The section and subsection headings in and the table of contents to this Lease are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof, and all references herein to numbered sections, unless otherwise indicated, are to sections of this Lease. (e) In the event of a discrepancy between the terms of this Lease and any of the other Operative Documents, the terms of this Lease shall govern. (f) This Lease may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. -52- (g) This Lease represents the agreement of the Lessor and the Lessee with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Lessor relative to the subject matter hereof not expressly set forth or referred to herein or in the other Operative Documents or in the other agreements, documents and instruments referred to herein or therein delivered pursuant hereto or thereto. (h) Each of the Lessee and the Lessor agrees that it shall perform the agreements, covenants and indemnities to be performed by it set forth in the Purchase Agreement and the other Operative Documents, which agreements, covenants and documents are hereby incorporated herein by reference as fully and to the same extent and with the same force and effect as if set forth in full in this Section 24(h). SECTION 25. Title and Ownership. The Lessee acknowledges that full legal title to the ownership of the Aircraft shall remain vested in the Lessor, subject to the rights of the Lessee under the Lease, notwithstanding the possession and use thereof by the Lessee. SECTION 26. WAIVER OF JURY TRIAL. BY ITS SIGNATURE BELOW WRITTEN EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL BY JURY OF ANY CLAIM, COUNTERCLAIM, ACTION OR PROCEEDING BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE OPERATIVE DOCUMENTS, OR RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, ANY OPERATIVE DOCUMENT, OR ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. [The remainder of this page has been left blank intentionally.] -53- IN WITNESS WHEREOF, the Lessor and the Lessee have each caused this Lease to be duly executed as of the date and year first above written. TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as Owner Trustee, Lessor By: /s/ Stanley E. Gutman ----------------------------------- Stanley E. Gutman Vice President FINNAIR OY, Lessee By: ----------------------------------- Title: THE SINGLE EXECUTED ORIGINAL OF THIS LEASE MARKED "ORIGINAL" SHALL BE THE "ORIGINAL" AND ALL OTHER COUNTERPARTS OF THIS LEASE SHALL BE DUPLICATES AND MARKED "DUPLICATE" OR "DUPLICATE ORIGINAL". TO THE EXTENT THAT THIS LEASE CONSTITUTES CHATTEL PAPER, AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION, NO SECURITY INTEREST MAY BE CREATED THROUGH TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE "ORIGINAL". IN WITNESS WHEREOF, the Lessor and the Lessee have each caused this Lease to be duly executed as of the date and year first above written. TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as Owner Trustee, Lessor By: ----------------------------------- Title: FINNAIR OY, Lessee By: /s/ [ILLEGIBLE] ----------------------------------- Title: Legal Counsel THE SINGLE EXECUTED ORIGINAL OF THIS LEASE MARKED "ORIGINAL" SHALL BE THE "ORIGINAL" AND ALL OTHER COUNTERPARTS OF THIS LEASE SHALL BE DUPLICATES AND MARKED "DUPLICATE" OR "DUPLICATE ORIGINAL". TO THE EXTENT THAT THIS LEASE CONSTITUTES CHATTEL PAPER, AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE AS IN EFFECT IN ANY APPLICABLE JURISDICTION, NO SECURITY INTEREST MAY BE CREATED THROUGH TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN THE "ORIGINAL". SCHEDULE 1 TO LEASE AGREEMENT AIRCRAFT DOCUMENTS TO BE DELIVERED 1. TECHNICAL DOCUMENTS (ORIGINAL OF EACH) 1) Historical Brief - Aircraft 2) AD and SB Compliance List - Aircraft 3) AD and SB Compliance List - Engine 4) List of All Modifications Performed by Finnair 5) Time and Cycle Status - Aircraft and Engine 6) Original Export Certificate of Airworthiness (At Time of Purchase By Finnair) 7) Status of Aircraft in McDonnell Douglas Significant Structural Inspection Program (If Applicable) 8) Difference of McDonnell Douglas Readiness Log Master Equipment List Between Delivery and Present Configuration 9) List of Major Repairs and Alterations 10) Copy of STC's Incorporated and STC Supplements, With FAA Form 337's for Installation 2. MAINTENANCE RECORDS 1) Aircraft Log Book 2) Engine Records 3) APU Records 4) List of Components with Time Data 5) Engine Life Limited Parts with Time Data 6) Engine Historical Records - Latest EHM Work Book 7) Shop Maintenance Summary 8) Engine Test Cell Records 9) FAA Form 337 for Last EHM 10) Airframe Life Limited Parts 11) Aircraft Weighing Data 3. MANUALS 1) FAA Approved Airplane Flight Manual (AFM) [current and updated] 2) Manufacturers Flight Crew Operating Manager (FCOM) 3) Airline Flight Crew Operating Manual (FCOM) 4) Weight Balance Manual 5) Minimum Equipment List (MEL) 6) MEL Procedures Manual 7) Aircraft Maintenance Manual (AMM) 8) Aircraft Wiring Manual (AWM) 9) Aircraft Wiring Listings (AWL) 10) Systems Schematics (LAMMS) 11) Aircraft Maintenance and Inspection Program Manual -2- SCHEDULE 2 TO LEASE AGREEMENT ORGANIZATION OF ECONOMIC COOPERATION AND DEVELOPMENT For purposes of the definition of "OECD" set forth in the Operating Lease Agreement, the following are the member nations: 1. Australia 2. Austria 3. Belgium 4. Canada 5. Denmark 6. Finland 7. France 8. Federal Republic of Germany 9. Greece 10. Iceland 11. Ireland 12. Italy 13. Japan 14. Luxembourg 15. The Netherlands 16. New Zealand 17. Norway 18. Portugal 19. Spain 20. Sweden 21. Switzerland 22. Turkey 23. The United Kingdom 24. The United States of America EXHIBIT A TO LEASE AGREEMENT FORM OF LEASE SUPPLEMENT NO. 1 LEASE SUPPLEMENT NO. 1, dated April 30, 1992 between TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as owner trustee under the Trust Agreement dated as of April 30, 1992 (the "Lessor"), and FINNAIR OY (the "Lessee"). The Lessor and the Lessee have heretofore entered into that certain Lease Agreement, dated as of April 30, 1992, relating to one McDonnell Douglas MD82 aircraft (herein called the "Lease" and the defined terms therein being hereinafter used with the same meanings). The Lease provides for the execution and delivery of a Lease Supplement for the purpose of leasing the Aircraft under the Lease if agreed upon by the Lessor to the Lessee in accordance with the terms thereof. NOW, THEREFORE, in consideration of the premises and other good and sufficient consideration, the Lessor and the Lessee hereby agree as follows: 1. The Lessor hereby delivers and leases to the Lessee under the Lease, and the Lessee hereby accepts and leases from the Lessor under the Lease, the following described McDonnell Douglas MD82 aircraft (the "Aircraft"), which as of the date hereof consists of the following components: (i) Airframe: Finnish Registration Mark OH-LMO; and manufacturer's serial number: 49151 (ii) Engines: two Pratt & Whitney Model JT8D-219 engines bearing, respectively, manufacturer's serial numbers 709730, and 718110 (each of which engines has 750 or more rated takeoff horsepower or the equivalent of such horsepower). 2. The Lessee hereby confirms its agreement to pay to the Lessor Basic Rent for the Aircraft throughout the Term on the dates and in the amounts specified in, and otherwise in accordance with all of the terms of, Section 3 of the Lease. 3. The parties confirm that the Delivery Date is April 30, 1992. 4. The parties confirm that the final Rent Payment Date is January 30, 1999, and the last day of the Term (without regard to renewals pursuant to Section 3(e) of the Lease) is April 30, 1999. 5. The parties confirm that the purchase price paid by the Lessor to the Lessee for the Aircraft under the Purchase Agreement is U.S. $16,800,000; and the Lessee confirms that it has received payment in full of such purchase price from the Lessor. 6. The Lessee hereby confirms to the Lessor that (i) the Lessee has accepted the Aircraft for all purposes hereof and of the Lease as being airworthy, in accordance with specifications, in good working order and repair and without defect or inherent vice in title, condition, design, operation or fitness for use, whether or not discoverable by the Lessee as of the date hereof, and as otherwise described in the Lease, and (ii) the Engines are delivered. 7. The Stipulated Loss Values for the Aircraft are the amounts as set forth on the Schedule I attached hereto. 8. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 9. This Lease Supplement may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument. -2- IN WITNESS WHEREOF, the Lessor and the Lessee have caused this Lease Supplement to be duly executed as of the date and year first above written. TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as Owner Trustee, Lessor By: ------------------------------- Stanley E. Gutman Vice President FINNAIR OY, Lessee By: ------------------------------- Title: -3- SCHEDULE I TO LEASE SUPPLEMENT RENT PAYMENTS MD82 Aircraft M.S.N. 49151 Basic Rent Pay- Basic Rent ment Date Occur- Payment Due ring In/Loss (U.S. Dollars) ---------------- -------------- April 1992 $658,225.68 July 1992 $658,225.68 October 1992 $658,225.68 January 1993 $658,225.68 April 1993 $658,225.68 July 1993 $658,225.68 October 1993 $658,225.68 January 1994 $658,225.68 April 1994 $658,225.68 July 1994 $658,225.68 October 1994 $658,225.68 January 1995 $658,225.68 April 1995 $658,225.68 July 1995 $658,225.68 October 1995 $538,547.52 January 1996 $538,547.52 April 1996 $538,547.52 July 1996 $538,547.52 October 1996 $538,547.52 January 1997 $538,547.52 April 1997 $538,547.52 July 1997 $538,547.52 October 1997 $538,547.52 January 1998 $538,547.52 April 1998 $538,547.52 July 1998 $538,547.52 October 1998 $538,547.52 January 1999 $538,547.52 Basic Rent Pay- Basic Rent ment Date Occur- Payment Due ring In/Loss (U.S. Dollars) ---------------- -------------- April 1999 $538,547.52 July 1999 $538,547.52 October 1999 $538,547.52 January 2000 $538,547.52 April 2000 $538,547.52 July 2000 $538,547.52 October 2000 $538,547.52 January 2001 $538,547.52 April 2001 $538,547.52 -2- SCHEDULE 2 TO LEASE SUPPLEMENT STIPULATED LOSS VALUE MD82 Aircraft M.S.N. 49151 Loss Payment Date Occurring In Stipulated Or Before Loss Value ----------------- ----------- 4/30/92 $17,377,000 5/30/92 $16,869,706 6/30/92 $17,021,475 7/30/92 $17,175,022 8/30/92 $16,665,291 9/30/92 $16,814,610 10/30/92 $16,965,694 11/30/92 $16,453,486 12/30/92 $16,600,314 1/30/93 $16,748,893 2/30/93 $16,234,167 3/30/93 $16,378,463 4/30/93 $16,523,976 5/30/93 $16,007,051 6/30/93 $16,149,136 7/30/93 $16,292,895 8/30/93 $15,773,322 9/30/93 $15,912,744 10/30/93 $16,053,825 11/30/93 $15,531,560 12/30/93 $15,668,274 1/30/94 $15,806,633 2/30/94 $15,281,629 3/30/94 $15,415,591 4/30/94 $15,550,689 5/30/94 $15,023,293 6/30/94 $15,154,847 7/30/94 $15,288,018 8/30/94 $14,757,797 9/30/94 $14,886,513 Loss Payment Date Occurring In Stipulated Or Before Loss Value ----------------- ----------- 10/30/94 $15,016,828 11/30/94 $14,483,736 12/30/94 $14,609,565 1/30/95 $14,736,977 2/30/95 $14,200,966 3/30/95 $14,323,859 4/30/95 $14,447,828 5/30/95 $13,909,147 6/30/95 $14,029,356 7/30/95 $14,151,025 8/30/95 $13,609,239 9/30/95 $13,726,325 10/30/95 $13,844,854 11/30/95 $13,420,662 12/30/95 $13,535,652 1/30/96 $13,652,074 2/30/96 $13,225,763 3/30/96 $13,338,624 4/30/96 $13,452,463 5/30/96 $13,024,072 6/30/96 $13,134,840 7/30/96 $13,246,741 8/30/96 $12,815,883 9/30/96 $12,924,171 10/30/96 $13,033,577 11/30/96 $12,600,211 12/30/96 $12,705,978 1/30/97 $12,812,848 2/30/97 $12,376,933 3/30/97 $12,480,135 4/30/97 $12,584,140 5/30/97 $12,145,860 6/30/97 $12,246,684 7/30/97 $12,348,585 8/30/97 $11,907,673 9/30/97 $12,005,850 10/30/97 $12,105,090 11/30/97 $11,661,501 -2- Loss Payment Date Occurring In Stipulated Or Before Loss Value ----------------- ----------- 12/30/97 $11,756,987 1/30/98 $11,853,520 2/30/98 $11,407,210 3/30/98 $11,499,960 4/30/98 $11,593,455 5/30/98 $11,144,606 6/30/98 $11,234,803 7/30/98 $11,326,018 8/30/98 $10,874,360 9/30/98 $10,961,732 10/30/98 $11,050,106 11/30/98 $10,595,592 12/30/98 $10,680,091 1/30/99 $10,765,577 2/30/99 $10,308,158 3/30/99 $10,389,738 4/30/99 $10,472,000 -3- EXHIBIT B TO LEASE AGREEMENT REDELIVERY RECEIPT OF AIRCRAFT AND ENGINES (1) Aircraft Manufacturer and Model McDonnell Douglas MD82 Finnish Registration OH-LMO Aircraft Manufacturer's Serial No. 49151 Engine Manufacturer and Model Pratt & Whitney JT8D-219 Engine Manufacturer's 1. Serial Nos.: 2. (2) Received at Helsinki-Vantaa Airport, Finland Date: April __, 1999. Local time:_____________. (3) Reference is made to the Lease Agreement, dated as of April 30, 1992, between Trust Company for USL, Inc., Lessor, and Finnair Oy, Lessee (the "Lease"). Receipt is hereby acknowledged on behalf of the Lessor of delivery to it by the Lessee, in accordance with the Lease, of the foregoing described aircraft together with all equipment and the Engines (as defined in the Lease) installed thereon. The Lessor hereby confirms that the Airframe and the two above described installed Engines (as defined in the Lease) and all equipment and components, documents and records have been examined by its duly appointed and authorized representative(s) to the Lessor's satisfaction. The Lessor hereby confirms that the Aircraft and its installed Engines (as defined in the Lease) were duly accepted by the Lessor and that the Lessee has performed its obligations under Section 5 of the said Lease Agreement. IN WITNESS WHEREOF, the Lessor has caused this Redelivery Receipt of Aircraft and Engines to be executed in its corporate name, by its representative thereunto duly authorized as of the day and year first above written. TRUST COMPANY FOR USL, INC., not in its individual capacity, except as otherwise expressly provided herein, but solely as Owner Trustee, Lessor By --------------------------- Title ------------------------ Dated: April __,1999 -2- EXHIBIT C April 30, 1992 Trust Company for USL., Inc. as Owner Trustee for the Owner Participants below named c/o United States Leasing International, Inc. 615 Battery Street San Francisco, California 94111 United States Leasing International, Inc. 615 Battery Street San Francisco, California 94111 (For the appropriate transaction) Airlease Ltd., A California limited partnership do United States Leasing International, Inc. 615 Battery Street San Francisco, California 94111 Haight, Gardner, Poor & Havens 195 Broadway New York, New York 10007 Dear Sirs: I am assistant Secretary and in-house Counsel of Finnair Oy, a corporation organized under the laws of the Republic of Finland (the "Lessee"). As such, I am familiar with the sale, purchase and lease of one McDonnell Douglas MD82 Aircraft bearing Finnish Registration mark OH-LMO pursuant to (i) the Aircraft Purchase Agreement, dated as of April 30 1992 (the "Purchase Agreement"), among the Lessee, as the Seller, United States Leasing International, Inc. as an Owner Participant, Airlease Ltd., A California limited partnership, as an Owner Participant and Trust Company for USL, Inc., and (ii) the Lease Agreement dated as of April 30, 1992 (the "Lease") between the Lessee and Trust Company for USL, Inc., not in its individual capacity except as expressly provided, but solely as owner Trustee under the Trust Agreement dated as of April 30, 1992 (the "Trust Agreement") with United States Leasing International, Inc. and Airlease, Ltd., A California Limited Partnership, as Owner Participants, as Lessor. Terms defined in the Lease and not otherwise defined herein are used in this opinion with the meanings defined in the Lease. In connection with the foregoing, I have examined originals or photostatic or certified copies of all such corporate records, certificates, affidavits and of all such other documents as I have deemed relevant and necessary as the basis of my opinions hereinafter set forth. I have personal knowledge that Lessee originally acquired the Aircraft from McDonnell Douglas. For the purposes of the opinions expressed below, I have assumed (i) the authenticity of all documents submitted to me as originals (ii) the conformity to the originals of all documents submitted as certified or photostatic copies and the authenticity of the originals, (iii) the legal capacity of natural persons, and (iv) the due authorization, execution and delivery of all documents by all parties and the validity and binding effect thereof (other than the authorization, execution and delivery of the documents by the Lessee and the validity and binding effect thereof upon the Lessee). As to certain factual matters, I have relied upon representations included in the Purchase Agreement and the Lease, upon certificates of certain officers of the Lessee and upon certificates of public officials. Based upon the foregoing and such other information and documents as I have considered necessary for the purposes hereof, I am of the opinion that: 1. The Lessee has been duly incorporated and is validly existing and in good standing under the laws of the Republic of Finland, with the corporate power and authority to own, sell and lease its properties and conduct its business, as the same is presently being conducted and to own, operate and sell the Aircraft. 2. The Lessee has full corporate power and authority to enter into and carry out the terms of the Operative Documents. 3. Each of the Operative Documents has been authorized by all necessary corporate and shareholder action and has been duly executed and delivered by the Lessee. The Operative Documents constitute valid and legally binding obligations of the Lessee, enforceable against the Lessee in accordance with their terms. Without limiting the foregoing, a court in Finland would recognize and give full force and effect to the Lessor's title to and ownership of the Aircraft, to the rights of the Lessor and the Owner Participants under the Lease and other Operative Documents, and to the terms of Section 23(f) of the Lease, Article 12 of the Purchase Agreement and the Bill of Sale providing that the Lease, the Purchase Agreement and the Bill of Sale, respectively, will be governed by the laws of the State of New York subject to the proviso in paragraph 12 hereof. To the extent that the remedies provided for in Section 18 of the Lease are enforceable under New York law, a court in Finland would give effect to the terms thereof and enable the lessor and the Owner Participants to exercise the same remedies against the Lessee (however designated) and with respect to the Aircraft if the Aircraft were then in Finland (including the right to repossess the Aircraft and to export the Aircraft from Finland). 4. The execution and delivery of the Operative Documents by the Lessee, and the performance by the Lessee under the Operative Documents will not, (a) violate the Articles of Association of the Lessee or Lessee's Extract from the Finnish Trade Register, or (b) result in a breach of, or constitute a default under, or result in creation of any Lien upon any of the property of Lessee, any judgment, decree or order binding on the Lessee, or its respective properties, or any material indenture, mortgage, contract or other instrument to which either the Lessee is a party or by which it is bound, (c) require any stockholder approval or approval of any trustee or holders of any debt or other obligations of Lessee (except such as has been duly obtained), or (d) contravene any provision of any law, governmental rule, regulation or order binding on the Lessee. 5. No consent, approval, notice to, authorization or order, or other action of any court or governmental agency or body or official is required for the execution, delivery and performance (including without limitation, any foreign exchange control or any entity regulating exchange control) by the Lessee of any of the Operative Documents. 6. To the best of my knowledge after due inquiry, there is no action, suit, proceeding or investigation pending or threatened before or by any court, administrative agency, arbitrator or governmental body against, or which directly relates to, the Lessee which concerns any of the Operative Documents or the Aircraft or which, if adversely determined could adversely affect the financial condition of the Lessee or compliance by the Lessee with any of the Operative Documents. 7. Pursuant to Bill of Sale and Purchase Agreement the Lessee has conveyed to the Lessor good and marketable title to the Aircraft, free and clear of all liens other than Permitted Liens. 8. The execution and delivery of the Operative Documents and the performance of the transactions contemplated therein constitute commercial activities of the Lessee, and the Lessee is subject to private commercial law and to suit with respect thereto, and the Lessee is not entitled to any immunity whether on grounds of sovereign immunity or otherwise, from set-off or from any legal proceedings in Finland or any other liability or obligations of the Lessee related to or arising from the transactions contemplated hereby or thereby. 9. No taxes, levies, imposts, duties, charges or withholdings will be imposed by Finland or any governmental subdivision or other taxing authority with respect to any payments of amounts due under the Operative Documents provided that (1) the Lessor is a "resident" of the United States, as such term is defined in Article 4 of the Convention Between the United States of America and the Republic of Finland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (the "Convention"); and (2) the Lessor does not have a "permanent establishment" in Finland, as such term is defined in Article 5 of the Convention, with respect to the transactions contemplated by the Operative Documents or the income from such transactions is attributable. The operation of the Aircraft by the Lessee on flights to or from Finland will not result in the Lessor being subjected to any additional taxes, levies, imposts, duties, charges or withholdings imposed by Finland or any other governmental subdivision or other taxing authority thereof or therein upon or with respect to the Lessor's other income, activities or properties, subject to provisos (1) and (2) set forth above. 10. The qualification at any time of the Lessor to do business under the laws of Finland or any political subdivision thereof or any federation or organization of similar entity of which Finland is a member does not constitute a condition to, and the failure to so qualify does not affect, the purchase by the Lessor of the Aircraft, the leasing of the Aircraft to and by the Lessee or the exercise by the Lessor of any right, privilege or remedy accorded it in, under or in connection with the Operative Documents or the enforcement of such right, privilege or remedy; the purchase by the Lessor of the Aircraft, the leasing of the Aircraft to and by the Lessee or the performance by the Lessor of any action required under, or contemplated by, any of the Operative Documents (other than the operation or other use (other than merely leasing from a business outside of Finland) of the Aircraft by the Lessor) will not violate any now-existing Applicable law of Finland or any political subdivision thereof or any federation or organization or similar entity of which Finland is a member or result in any tax liability (other than taxes required to be paid by the Lessee pursuant to Section 8 of the Lease) to the Lessor pursuant to the now-existing Applicable law of Finland or any political subdivision or taxing authority thereof or any now existing rule or regulation of any federation or organization or similar entity of which Finland is a member. 11. Except for the registration of the Aircraft in Finland in the name of the Lessor as owner with the CAA, it is not necessary to ensure the legality, validity, enforceability or admissibility in evidence of any of the Operative Documents in Finland, that the Operative Documents or any other document be filed or recorded with any court or other authority in Finland or that any stamp or similar tax be paid on or in respect of any of the Operative Documents unless court action is taken. With respect to registration of the Aircraft with the Civil Aviation Administration in Finland in the name of the Lessor, as owner, and the Lessee, as operator, none of the Operative Documents other than the Bill Of Sale, and no document other than a power of attorney, incumbency certificate and certified corporate documents of the Lessor, need be filed, recorded or registered with any court, public office or other governmental authority in Finland or any political subdivision thereof. The delivery of the Bill of Sale to the Lessor, title to the Aircraft solely vested in the Lessor as against all third parties and the Lessee's title will be recognized by all applicable governmental agencies, instrumentalities and courts in Finland. 12. The choice of New York law and the Lessee's submission to the jurisdiction of certain courts in New York set forth in Section 23 of the Lease are valid, legally binding and enforceable obligations of the Lessee, provided that, a court in Finland could refuse to enforce such obligations if it determined that such obligations were to conflict with, or violate, any law, decree, or the public policy of Finland; however, I know of no such law, decree or public policy that would conflict with such obligation as of the date hereof. 13. An arbitral award properly obtained by any of the parties to the Aircraft Purchase Agreement to the Lease Agreement pursuant to Section of the Aircraft Purchase Agreement or to Section of the Lease Agreement will in the Republic of Finland be subject to and enforceable under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards made in New York in 1958 and to the procedural rules existent in the Republic of Finland. My opinion is subject to the qualifications that (i) the enforcement of the Operative Documents may be limited by bankruptcy, insolvency, moratorium and other similar laws affecting the rights of creditors generally; and (ii) the fact the some of the remedial provisions of the instruments referred to herein may be limited or rendered unenforceable (but, nevertheless, on my opinion the laws involved and the instruments referred to contain reasonable remedies for the realization of the benefits of the security intended to be afforded by the instruments) or by the laws of other countries where enforcement may be sought. No opinion is expressed as to the availability of specific or equitable remedies as such for the enforcement of any of the Operative Documents. I do not purport to express an opinion on any laws other than those of the Republic of Finland. This opinion is furnished to you pursuant to Section 4(a)(ix) of the Purchase Agreement for your sole benefit, and no other person or entity shall be entitled to rely on this opinion without my express written consent. This opinion may not be published or reproduced in any manner or distributed or circulated to any person or entity without my express written consent. This opinion is limited to the matters stated herein, and no opinion is implied or may be inferred beyond the matters expressly stated herein. Very truly yours, Kai Soveri In-House Counsel EXHIBIT D ================================================================================ GUARANTY AGREEMENT Dated as of April 30, 1992 of UNITED STATES LEASING INTERNATIONAL, INC. as Guarantor for the benefit of FINNAIR OY, as Beneficiary -------------------------------- One McDonnell Douglas MD82 Aircraft Finnish Registration Mark OH-LMO -------------------------------- ================================================================================ Table of Contents Page ---- SECTION 1. Definitions .................................................... 2 SECTION 2. Guaranty ....................................................... 2 SECTION 3. General Provisions Relating to this Agreement ............................................... 3 SECTION 4. Guarantor's Waivers, Representations and Warranties ............ 5 (a) Successive Transactions ........................................ 5 (b) Obligations Joint and Several; Separate Actions; Waiver of Statute of Limitations ......................................... 5 (c) Authorizations To Beneficiaries ................................ 5 (d) Guarantor's Waivers ............................................ 6 (e) Other Representations and Warranties ........................... 7 SECTION 5. Miscellaneous .................................................. 8 (a) Amendment of Trust Agreement and the Operative Documents ...................................................... 8 (b) Binding Effect ................................................. 8 (c) Waivers; Cumulative Effect ..................................... 8 (d) Amendments; Waivers ............................................ 9 (e) Section Headings; Table of Contents ............................ 9 (f) Severability ................................................... 9 (g) Notices ........................................................ 9 (h) Counterparts ................................................... 10 -i- (i) Indemnity; Further Assurances .................................. 10 (j) Jurisdiction; Governing Law .................................... 10 (k) Waiver of Jury Trial ........................................... 11 -ii- GUARANTY AGREEMENT This GUARANTY AGREEMENT (this "Agreement"), dated as of April 30, 1992, by UNITED STATES LEASING INTERNATIONAL, INC., a Delaware corporation (the "Guarantor"), for the benefit of FINNAIR OY, a Finnish corporation (the "Beneficiary") (this "Agreement"). WITNESSETH: WHEREAS, a Purchase Agreement, dated as of the date hereof (as the same may be supplemented, amended or otherwise modified from time to time, the "Purchase Agreement"), has been or shall be entered into among the Beneficiary, as Seller, Trust Company for USL, Inc. (the "Trust Company"), not in its individual capacity, except as otherwise expressly provided therein, but solely as Owner Trustee under a Trust Agreement, dated as of the date hereof (as the same may be supplemented, amended, or otherwise modified from time to time, the "Trust Agreement"), for the benefit of United States Leasing International, Inc., in its capacity as the Owner Participant (the "Owner Trustee"), as Buyer, Airlease Ltd., a California Limited Partnership, in its capacity as an Owner Participant, and United States Leasing International, Inc., in its capacity as the Owner Participant (each an "Owner Participant" and collectively the "Owner Participants"), relating to the sale and purchase of the McDonnell Douglas MD82 Aircraft therein described, upon the terms and conditions therein set forth; and WHEREAS, the Owner Trustee, as Lessor, and the Beneficiary, as Lessee, shall enter or have entered into a Lease Agreement, dated as of the date hereof (as the same may be supplemented, amended or otherwise modified from time to time, the "Lease"), relating to the Aircraft; and WHEREAS, it is a condition precedent to the obligations of the Beneficiary to sell the Aircraft to the Owner Trustee under the Purchase Agreement and to lease the Aircraft from the Owner Trustee under the Lease that the Guarantor shall have executed and delivered this Agreement to the Beneficiary; and WHEREAS, the Guarantor owns all of the outstanding voting stock of the Trust Company. NOW, THEREFORE, in order to induce the Beneficiary to enter into the Purchase Agreement and the Lease, and in consideration of the premises, the Guarantor hereby agrees as follows: SECTION 1. Definitions. Except as otherwise defined herein, all capitalized terms used herein shall have the meanings given or referred to in the Lease. SECTION 2. Guaranty. (a) The Guarantor hereby unconditionally (except as hereinafter set forth) and irrevocably guarantees as primary obligor and not merely as surety, without offset or deduction, to the Beneficiary (i) the performance by the Trust Company, in its individual capacity, of all its obligations undertaken in its individual capacity, whether direct or indirect, actual or contingent, now or hereinafter incurred, under the Purchase Agreement and the Lease, except such obligations of the Trust Company as arise after or relate solely to such time after the earlier to occur of (A) the time, if ever, that the Trust Company shall have assigned or transferred to one or more eligible transferees (but excluding any such assignment or transfer by way of security), in accordance with, and to the extent permitted by, Article XI or Article XIV of the Trust Agreement, all or a portion of the Trust Company's or the Owner Trustee's right, title and interest in and to the Trust Estate or the Lease Property, or there shall be a successor trustee in accordance with Article XI of the Trust Agreement, (B) the time, if ever, that an Owner Participant shall have (1) assigned or transferred to one or more eligible transferees (but excluding any such assignment or transfer by way of security), in accordance with, and to the extent permitted by, Article 13 of the Purchase Agreement, all or a portion of such Owner Participant's right, title and interest in and to the Trust Estate, and (2) delivered or caused to be delivered to the Beneficiary a guaranty, in form and substance substantially identical to this Agreement (except as to the portion of the obligations so guaranteed), by each of such transferees or by an entity meeting the qualifications of such Article 13 guaranteeing the obligations of the Trust Company, and (C) the termination of the Lease; and (ii) the performance by the Owner Trustee, in its capacities as the Buyer and the Lessor, and not in its individual capacity, of all its obligations undertaken in such capacities (except to the extent that such obligation or the event or circumstance giving rise to the same is attributable to an Owner Participant), whether direct or indirect, actual or contingent, now or hereinafter incurred, under the Purchase Agreement and the Lease, except such obligations of the Owner Trustee in either of such capacities as arise after or relate solely to such time after the earlier to occur of (A) the time, if ever, that an Owner Participant shall have (1) assigned or transferred to one or more eligible transferees (but excluding any such assignment or transfer by way of security), in accordance with, and to the extent permitted by, Article 13 of the Purchase Agreement, all or a portion of such Owner Participant's right, title and interest in and to the Trust Estate, and (2) delivered or caused to be delivered to the -2- Beneficiary a guaranty, in form and substance substantially identical to this Agreement (except as to the portion of the obligations so guaranteed), by each of such assignees or transferees or by an entity meeting the qualifications of such Article 13 guaranteeing the obligations of the Owner Trustee; and (B) the termination of the Lease. To the extent that the obligations of the Guarantor hereunder have been assumed or guaranteed by a subsequent Owner Participant or other qualified Person in accordance with either Section 2(a)(i) or 2(a)(ii), the obligations of the Guarantor hereunder shall be relieved and discharged to the extent of the obligations so assumed or guaranteed by such subsequent Owner Participant or other qualified Person. (b) THE GUARANTY PURSUANT TO SECTION 2(a) HEREOF IS A GUARANTY OF PAYMENT AND PERFORMANCE AND NOT OF COLLECTION AND IS IRREVOCABLE, ABSOLUTE, UNCONDITIONAL AND CONTINUING AND THE GUARANTOR WANES ANY RIGHT TO REQUIRE THAT ANY ACTION AGAINST THE TRUST COMPANY, THE OWNER TRUSTEE OR ANY OTHER PERSON BE TAKEN OR ADJUSTED PRIOR TO DEMAND BEING MADE ON OR ACTION BEING TAKEN AGAINST THE GUARANTOR. (c) The Guarantor hereby agrees that, to the extent of its guaranty pursuant to Section 2(a) hereof, in the event the Trust Company or the Owner Trustee fails to perform any guaranteed obligation for any reason (including, without limitation, the liquidation, dissolution, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of, or other similar proceedings affecting the status, existence, assets or obligations of, the Trust Company or the Owner Trustee or the disaffirmance with respect to the Trust Company or the Owner Trustee of the Purchase Agreement or the Lease in any such proceeding) as promptly as practicable, but in any event not later than 5 Business Days after the date on which such guaranteed obligation is required to be performed, the Guarantor shall perform or cause such guaranteed obligation to be performed on first demand as promptly as practicable, but in any event not later than 5 Business Days following the Guarantor's receipt of notice from the Beneficiary (a copy of such notice to be sent to the Lessor to the extent the Beneficiary is not stayed or prevented from doing so by operation of law) stating that such guaranteed obligation was not performed when required. SECTION 3. General Provisions Relating to this Agreement. (a) The obligations of the Guarantor under this Agreement shall remain in full force and effect until each and all of such obligations shall have been fully discharged in accordance with the terms and provisions hereof. -3- (b) This Agreement and the liability of the Guarantor hereunder, to the fullest extent permitted by Applicable Law, shall not be affected by and shall remain in full force and effect irrespective of: (i) the legality, validity, regularity, genuineness or enforceability, in whole or in part, of any document or agreement, including, without limitation, the Trust Agreement, the Operative Documents or any of them, or of any assignment (other than as contemplated by Section 2(a) hereof), amendment, modification, waiver or termination of the Trust Agreement; (ii) the transfer, assignment, subletting or mortgaging or the purported transfer, assignment, subletting or mortgaging of all or any part of the interest of any Person in the Aircraft; (iii) any failure of title with respect to the Aircraft; (iv) any merger or consolidation of any Person into or with any other Person or any sale, lease or transfer of any of the assets of any Person to any other Person; (v) an assignment or any change in the ownership of any partnership interest or shares of capital stock other than transfer permitted by Article 13 of the Purchase Agreement or by the Trust Agreement; or (vi) any other occurrence or circumstance that might otherwise constitute a legal or equitable defense or discharge of the liabilities of a guarantor or surety or that might otherwise limit recourse against the Guarantor as a guarantor, including, without limitation, any defense arising out of any laws of the Republic of Finland or of the United States or any State thereof that would either exempt, modify or delay the due or punctual performance of the obligations of the Guarantor hereunder. (c) The obligations of the Guarantor set forth herein constitute the full recourse obligations of the Guarantor enforceable against it to the full extent of all its assets and properties. (d) The obligations and liabilities of the Guarantor hereunder shall not be impaired, diminished, abated or otherwise affected (i) by any setoff, defense or counterclaim that the Trust Company, the Owner Trustee or the Guarantor or any other Person may have or claim to have, at any time or from time to time (other than full payment or performance of the guaranteed obligations), or (ii) by the commencement by or against the Trust Company, the Owner Trustee or the Guarantor or any other Person of any proceedings under any bankruptcy or insolvency law or laws relating to fraudulent conveyance, the relief of debtors, readjustment of indebtedness, reorganizations, arrangements, compositions or extension or other similar laws. (e) Except as otherwise expressly set forth herein, no act or omission of any kind or at any time on the part of the Owner Trustee, any beneficiary under the Trust Agreement, the Lessee, or any other Person in respect of any matter whatsoever including, without limitation, any omission in performance of their respective obligations under any document or agreement, including, without limitation, the Trust Agreement or any of the Operative Documents, shall in any way affect or impair the guaranty hereunder, save for an express written waiver, release or discharge or the like or variation of its terms, which shall -4- be effective only with respect to the Person granting the same, or performance by any thereof of the terms of any Operative Document. (f) The guaranty hereunder shall continue to be effective or be reinstated, as the case may be, if, at any time, payment, or any part thereof, of any of the obligations hereunder, under the Trust Agreement or under any of the Operative Documents is rescinded or must otherwise be restored or returned by the Beneficiary upon the insolvency, bankruptcy or reorganization of the Trust Company, the Owner Trustee or otherwise, all as though such payment had not been made. SECTION 4. Guarantor's Waivers, Representations and Warranties. (a) Successive Transactions. This is a continuing guaranty and all rights, powers and remedies hereunder shall apply to all the obligations of the Trust Company and the Owner Trustee to the Beneficiary guaranteed by the Guarantor pursuant to Section 2(a), including those arising under successive transactions, which shall either continue the Guarantor's obligations hereunder, or increase or decrease them, and notwithstanding the dissolution, liquidation or bankruptcy of the Trust Company, the Owner Trustee or the Guarantor or any other Person, or any other event or proceeding affecting the Trust Company, the Owner Trustee or the Guarantor or any other Person. (b) Obligations Joint And Several; Separate Actions; Waiver of Statute of Limitations. The obligations hereunder are joint and several and independent of the obligations of the Trust Company and the Owner Trustee and a separate action or actions may be brought and prosecuted against the Guarantor whether action is brought against the Trust Company, the Owner Trustee or any other Person, or whether the Trust Company, the Owner Trustee or any other Person is joined in any such action or actions. The Guarantor acknowledges that there are no conditions precedent to the effectiveness of this Guaranty, and that this Guaranty is in full force and effect and is binding on the Guarantor as of the date written below, regardless of whether the Beneficiary obtains collateral or any guaranties from others or take any other action contemplated by the Guarantor. The Guarantor waives the benefit of any statute of limitations affecting the Guarantor's liability hereunder or the enforcement thereof except to the extent that a statute of limitations shall affect the obligations of the Trust Company or the Owner Trustee, and the Guarantor agrees that any payment or performance of any obligation of the Trust Company or the Owner Trustee or other act which shall toll any state of limitations applicable thereto shall similarly operate to toll such statute of limitations applicable to the Guarantor's liability hereunder. (c) Authorizations To Beneficiary. The Guarantor hereby authorizes the Beneficiary without notice to or demand on the Guarantor and without affecting the Guarantor's liability hereunder, from time to time, to the extent permitted by and in -5- accordance with the terms and provisions of the Operative Documents, to: (i) alter, compromise, renew, extend, accelerate or otherwise change the time for payment or performance of, or otherwise change the terms of the obligations guaranteed hereunder or any part thereof, including increase or decrease of any amount due or which may become due or is the rate of interest thereon; (ii) take and hold security for the payment of this Guaranty or the obligations guaranteed hereunder or any portion thereof, and exchange, enforce, waive and release any such security; (iii) apply such security and direct the order or manner of sale thereof, including, without limitation, a non-judicial sale permitted by the terms of the controlling agreement, as the Beneficiary in its discretion may determine; and (iv) release (without increasing the several obligations of any other party) or substitute any one or more of the endorsers or any other guarantors of the obligations guaranteed hereunder. The Beneficiary may not assign this Guaranty in whole or in part without the prior written consent of the Guarantor. The Guarantor agrees to provide to the Beneficiary upon request copies of the Guarantor's financial statements and a copy of any reports made available to shareholders by sending the same to such party's address as set forth in Section 5(g) hereof. (d) Guarantor's Waivers. The Guarantor waives any right to require the Beneficiary to: (i) make any claim or demand or proceed against any Person, including without limitation, the Trust Company, the Owner Trustee or any other guarantor of the guaranteed obligations; (ii) make any claim or demand or proceed against or exhaust any security held from the Trust Company, the Owner Trustee or any other guarantor of the guaranteed obligations or any other Person; (iii) pursue any other remedy in the Beneficiary's power; (iv) give notice of any default by the Trust Company or the Owner Trustee or to give notice of any matters affecting the Trust Company or the Owner Trustee (except to the extent provided in Section 2(c)); or (v) make any presentations or demands for performance, or give any notices of non-performance, protests, notices of protest or notices of dishonor in connection with any obligations or evidences of indebtedness held by the Beneficiary as security, in connection with any other obligations or evidences of indebtedness which constitute in whole or in part the obligations guaranteed hereunder, or in connection with the creation of new or additional obligations. The Guarantor waives notice of acceptance of this Agreement by any Beneficiary. The Guarantor waives to the fullest extent possible under Applicable Law any defense based upon or arising by reason of: (i) any disability or other defense (other than of payment or performance) of the Trust Company or the Owner Trustee or any other Person; (ii) the cessation or limitation from any cause whatsoever, other than final payment in full or performance, of all obligations of the Trust Company or the Owner Trustee guaranteed hereunder or of any other Person; (iii) any lack of authority of any officer, director, partner, agent or any other Person acting or purporting to act on behalf of the Trust Company or the Owner Trustee, or any defect in the creation or existence of the Trust, the Trust Estate, the Trust Company or the Owner Trustee; (iv) the use by the Trust Company of the Aircraft or -6- of the proceeds therefrom; (v) any act or omission by any Owner Participant which, directly or indirectly, results in or aids the discharge of the Trust Company or the Owner Trustee or any of its obligations guaranteed hereunder by operation of law or otherwise (other than of payment or performance); (vi) any act or omission of the Beneficiary which impairs any collateral for the obligations of the Trust Company or the Owner Trustee guaranteed hereunder including, without limitation, surrender, release, failure to perfect, or delay in perfection of, any security interest for such indebtedness, and the exchange, substitution, dealing with or taking additional collateral, or abstaining from taking advantage of or realizing upon any security interest or guaranty; (vii) any errors and omissions in connection with the administration by the Trust Company or the Owner Trustee guaranteed hereunder; or (viii) any modification of the Trust Agreement, in any form whatsoever, of the obligations of the Trust Company or the Owner Trustee guaranteed under Section 2(a), including any modification made after any attempted revocation hereof to any obligations incurred prior to any such attempted revocation, and including, without limitation, the renewal, extension, acceleration or other change in time for payment or performance of such obligations, or other change in the terms of the obligations of the Trust Company or the Owner Trustee guaranteed under Section 2(a) or any part thereof, including any increase or decrease in the amount of payment due or which may become due, or increase or decrease of the rate of interest thereon. Until all obligations of the Trust Company and the Owner Trustee guaranteed under Section 2(a) shall have been finally performed and paid in full, the Guarantor shall have no right of subrogation, and the Guarantor waives any defense the Guarantor may have based upon any election of remedies by the Beneficiary which impairs or destroys the Guarantor's subrogation rights or the Guarantor's right to proceed against the Trust Company or the Owner Trustee for reimbursement. Until all obligations of the Trust Company and the Owner Trustee guaranteed hereunder shall have been finally performed and paid in full, the Guarantor, for the benefit of the Beneficiary, further waives any right, and agrees it shall not take any action, to enforce any remedy which the Beneficiary now has or may hereafter have against the Trust Company, the Trust Estate, any Owner Participant or the Owner Trustee, and waives, and agrees it shall refrain from seeking, any benefit of, or any right to participate in, any security whatsoever now or hereafter held by the Beneficiary. (e) Other Representations and Warranties. The Guarantor hereby further represents and covenants to the Beneficiary as follows: (i) The Guarantor is a corporation duly organized and validly existing pursuant to the laws of the State of Delaware and has the corporate power and authority to carry on its business as now conducted and to enter into and perform its obligations under this Agreement. (ii) The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Guarantor, do not require any approval or other action of any stockholder of the Guarantor or any -7- approval or consent of any trustee or holders of any indebtedness or obligations of the Guarantor (or that any such approval or consent as is required has been obtained), and neither the execution and delivery of this Agreement by the Guarantor nor the performance by the Guarantor of its obligations hereunder contravenes any material Applicable Law, or contravenes or results in any breach of, or constitutes any default under, any material term of any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement, or any material term of any other agreement or instrument, corporate charter, by-law or permit issued by any governmental authority under Applicable Law to which the Guarantor is a party or by which the Guarantor or its properties may be bound. (iii) Neither the execution and delivery by the Guarantor of this Agreement nor the performance by the Guarantor of the obligations undertaken hereunder requires the consent or approval of, or the giving of notice to, or the registration with, or the taking of any other action in respect of, any governmental authority under Applicable Law. (iv) This Agreement has been duly executed and delivered by the Guarantor and constitutes the valid and binding obligation of the Guarantor enforceable against the Guarantor in accordance with its terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the enforcement of creditors' rights and remedies generally, and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). SECTION 5. Miscellaneous. (a) Amendment of Trust Agreement and the Operative Documents. Each of the Trust Company, the Owner Trustee and the Beneficiary may, in their discretion, as permitted by and in accordance with the terms and provisions of the Operative Documents to which it is a party, agree to amendments of the Trust Agreement and the Operative Documents, give or withhold consents, approvals or waivers and exercise or refrain from exercising their respective rights under the Trust Agreement and the Operative Documents. (b) Binding Effect. This Agreement and every part hereof shall be binding upon the Guarantor and its successors and assigns, and shall inure to the benefit of and shall be directly enforceable by, the Beneficiary and its successors and assigns. (c) Waivers; Cumulative Effect. A waiver by the Beneficiary of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Beneficiary would otherwise have had on any future occasion with regard to any subsequent breach. Neither a failure to exercise, nor any delay in exercising, on the part of -8- the Beneficiary, any right, power or privilege it may have hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder nor any course of dealing preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and may be exercised singly or concurrently, and are not exclusive of any rights and remedies provided by Applicable Law. (d) Amendments; Waivers. None of the terms or provisions of this Agreement may be amended, waived, altered, modified or terminated except as contemplated hereby and except by an instrument in writing signed by a written consent of the Beneficiary and the Guarantor. The invalidity, illegality or unenforceability of any provision of this Agreement shall not affect the validity, legality or enforceability of any other provisions of this Agreement. (e) Section Headings; Table of Contents. The section headings in and the table of contents to this Agreement are for convenience of reference only and shall neither be deemed to be part of this Agreement nor modify, define, expand or limit any of the terms or provisions hereof. (f) Severability. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or any provisions in the Trust Agreement or any Operative Document, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. (g) Notices. All communications, notices, consents and waivers provided for herein or given in connection herewith shall be in writing and shall become effective when received by telecopy, international courier or registered United States mails, addressed, (i) if to Beneficiary: FINNAIR OY Dagmarinkatu 4 00100 Helsinki Finland Attention: Group Treasurer Telex: 124946 Answerback: fnair sf Telecopier: 358-0-818-7457 Telephone: 358-0-818-81 -9- or to such other address as the Beneficiary shall from time to time designate in writing to the Guarantor, or (ii) if to the Guarantor to: United States Leasing International, Inc. 615 Battery Street San Francisco, California 94111 Attention: Executive Vice President, Transportation Financing Telex: 278031 Telecopy: 415-627-9240 or to such other address as the Guarantor shall from time to time designate in writing to the Beneficiary. (h) Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute but one and the same instrument. (i) Indemnity; Further Assurance. The Guarantor agrees to indemnify the Beneficiary from and against any and all liabilities and losses incurred by the Beneficiary in any way relating to or arising out of the breach by the Guarantor of any of its agreements contained herein, including all reasonable expenses, including attorney's fees and expenses, that may be incurred in enforcing such agreements against the Guarantor, provided, however, that the foregoing indemnity and agreement to hold harmless shall be coextensive in scope with, and shall in no way expand, waive or limit, such covenants or agreements or any rights, remedies or defenses which are or would be available in connection therewith. (j) Jurisdiction; Governing Law. (i) The Guarantor hereby irrevocably agrees that, to the extent that it or any of its assets has or hereafter may acquire any right of immunity, as against the other party hereto or its respective successors and assigns, whether characterized as sovereign immunity or otherwise, from any legal proceedings, whether in the United States of America or the Republic of Finland or any other jurisdiction, but only to the extent required to enforce or collect upon this Agreement or any other liability or obligation of it related to or arising solely from the transactions contemplated by this Agreement, including, without limitation, immunity from service of process, immunity from jurisdiction or judgment of any court or tribunal, immunity from execution of a judgment, and immunity of any of its property from attachment prior -10- to any entry of judgment or from attachment in aid of execution upon a judgment, it hereby expressly and irrevocably waives any such immunity. (ii) The Guarantor irrevocably agrees that any legal suit, action or proceeding arising out of or relating solely to this Agreement, the Trust Agreement or any Operative Document, or any of the transactions contemplated hereby or thereby or any document referred to herein or therein, may be instituted in the State or Federal courts in the County of New York, State of New York, or the Superior Court, City and County of San Francisco, San Francisco, California, and it hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may have now or hereafter to the laying of the venue or the jurisdiction or the convenience of the forum of any such legal suit, action or proceeding and irrevocably submits generally and unconditionally to the non-exclusive jurisdiction of any such court but only in any such suit, action or proceeding. The Guarantor further agrees that such service of process may be made personally or by mailing or delivering a copy of the summons and complaint or other legal process in any such legal suit, action or proceeding, registered mail, return receipt requested, at its address specified in Section 5 hereof (as the same may be changed from time to time pursuant to said Section 5). The Guarantor further irrevocably agrees to the service of process of any of the aforementioned courts but only in any suit, action or proceeding of the nature referred to above by the mailing of the copies thereof by certified air mail, postage prepaid, return receipt requested, to it at its address specified in Section 5 hereof (as the same may be changed from time to time pursuant to Section 5 hereof), such service to be effective upon the date of receipt indicated on the postal receipt returned from it. (iii) Final judgment against the Guarantor in any suit shall be conclusive, and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy of which shall be conclusive evidence of the fact and of the amount of any indebtedness or liability of the Guarantor as therein described. (iv) THIS AGREEMENT HAS BEEN NEGOTIATED AND DELIVERED IN THE STATE OF NEW YORK AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO ANY CONFLICT OF LAWS RULE WHICH MIGHT RESULT IN THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION), INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. (k) WAIVER OF JURY TRIAL. BY ITS SIGNATURE BELOW WRITTEN THE GUARANTOR HEREBY IRREVOCABLY WAIVES ITS RIGHT TO A TRIAL BY JURY OF ANY CLAIM, COUNTERCLAIM, ACTION OR PROCEEDING BASED UPON OR ARISING OUT OF THIS AGREEMENT, THE TRUST AGREEMENT, THE OPERATIVE DOCUMENTS, OR RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. THIS WAIVER SHALL APPLY TO ANY -11- SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT, THE TRUST AGREEMENT, ANY OPERATIVE DOCUMENT, OR ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS TRANSACTION. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. IN WITNESS WHEREOF, the Guarantor has caused this Agreement to be duly executed as of the date first set forth above. UNITED STATES LEASING INTERNATIONAL, INC., as Guarantor By ---------------------------- Name: Title: -12- EX-99.G 7 EX-99.G Document No. 3 - -------------------------------------------------------------------------------- SALE AND LEASE AGREEMENT dated as of September 1, 1990 between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION as Owner Trustee, Lessor and SOUTHWEST AIRLINES CO., Lessee ------------------------ One Boeing Model 737-2H4 Aircraft (N56SW) SOUTHWEST AIRLINES 1990 TRUST III - -------------------------------------------------------------------------------- The rights of Lessor under this Sale and Lease Agreement have been assigned to, and are subject to a security interest in favor of, Progress Credit Corporation as Lender under a Security Agreement and Assignment of Leases 56SW dated as of September 1, 1990. This Sale and Lease Agreement has been executed in counterparts. To the extent that this Sale and 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 Sale and Lease Agreement may be created through the transfer or possession of any counterpart other than the counterpart that states on its cover that it is the original counterpart. This is not the original counterpart. TABLE OF CONTENTS Section Page - ------- ---- Section 1. Definitions ..................................................... 1 Section 2. Sale, Lease and Acceptance ...................................... 9 Section 3. Term and Rent ................................................... 9 3.1 General ................................................... 9 3.2 Lease Term ................................................ 9 3.3 Basic Rent ................................................ 9 3.4 Supplemental Rent ......................................... 10 3.5 Payments .................................................. 10 Section 4. Lessor's Representations and Warranties; DISCLAIMER; Certain Agreements of Lessee ................................. 11 4.1 Lessor's Representations and Warranties; DISCLAIMER ....... 11 4.2 Certain Agreements of Lessee .............................. 11 Section 5. Return of Aircraft ............................................... 12 5.1 General Condition upon Return ............................. 12 5.1.1 Airworthiness ...................................... 12 5.1.2 Free of Liens ...................................... 12 5.1.3 Operating Configuration and Condition .............. 12 5.1.4 Cleanliness and Operability ........................ 12 5.1.5 Parts and Equipment ................................ 12 5.1.6 Corrosion Treatment ................................ 12 5.1.7 Hush Kits ........................................ 13 5.1.8 Other Conditions ................................... 13 5.2 Return of Other Engines ................................... 13 5.3 Return at End of Base Lease Term or Renewal Lease Term .... 13 5.3.1 Airframe ........................................... 14 5.3.2 Engines ............................................ 14 SALE AND LEASE AGREEMENT i Section Page - ------- ---- 5.3.3 Boroscope .......................................... 15 5.3.4 Landing Gears ...................................... 15 5.3.5 APU ................................................ 15 5.3.6 Other Components ................................... 15 5.4 Financial Adjustments ..................................... 15 5.4.1 Airframe ........................................... 15 5.4.2 [Intentionally omitted.] ........................... 15 5.4.3 Landing Gears ...................................... 16 5.5 Manuals; Service Bulletins, Etc. .......................... 16 5.6 Storage upon Return ....................................... 16 5.7 Failure to Return Aircraft or Engines ..................... 16 5.8 Aid in Disposition ........................................ 17 Section 6. Liens ............................................................ 17 Section 7. Registration, Operation, Possession, Subleasing and Records ...... 17 7.1 Registration and Operation ................................ 17 7.1.1 Registration ....................................... 17 7.1.2 Nameplate .......................................... 18 7.1.3 Compliance with Laws ............................... 18 7.1.4 Insurance Requirements; Government Requisition; Indemnity ........................... 18 7.2 Possession ................................................ 19 7.2.1 Interchange and Pooling ............................ 19 7.2.2 Testing and Service ................................ 19 7.2.3 Civil Reserve Air Fleet Program .................... 19 7.2.4 Installation of Engines ............................ 20 7.2.5 Installation of Engines on Other Airframes ......... 20 7.2.6 Pooling of Parts ................................... 20 7.2.7 Wet Lease .......................................... 20 7.2.8 Sublease to Permitted Air Carriers ................. 20 SALE AND LEASE AGREEMENT ii Section Page - ------- ---- 7.3 Records and Reports ....................................... 22 7.3.1 Records ............................................ 22 7.3.2 Information and Reports ............................ 22 7.3.3 Financial Information .............................. 23 Section 8. Maintenance; Replacement and Pooling of Parts; Alterations, Modifications and Additions ................................. 23 8.1 Maintenance ............................................... 23 8.1.1 Maintenance Program ................................ 23 8.1.2 Compliance with Government Requirements ............ 24 8.2 Replacement of Parts ...................................... 24 8.3 Pooling of Parts .......................................... 24 8.4 Alterations, Modifications and Additions .................. 25 Section 9. [Intentionally Omitted] ......................................... 26 Section 10. Loss, Destruction, Requisition, Etc. ............................ 26 10.1 Event of Loss with Respect to Aircraft ................... 26 10.2 Event of Loss with Respect to an Engine .................. 26 10.2.1 Event of Loss .................................... 26 10.2.2 Conditions; Lessee's Obligations ................. 27 10.2.3 Recordation and Opinions ......................... 28 10.2.4 Conveyance; Replacement Engine ................... 28 10.2.5 No Reduction of Rent ............................. 28 10.3 Application of Certain Payments .......................... 28 10.3.1 Replacement of Engine ............................ 28 10.3.2 Nonreplacement ................................... 28 10.4 Requisition of Aircraft for Use by Governmental Authorities ............................... 29 10.5 Requisition of an Engine for Use by Governmental Authorities ............................... 29 SALE AND LEASE AGREEMENT iii Section Page - ------- ---- 10.6 Application of Payments During Existence of Default ...... 29 Section 11. Insurance ....................................................... 29 11.1 Public Liability and Property Damage Insurance ........... 29 11.1.1 Type, Form and Amount ............................ 30 11.1.2 Coverage ......................................... 30 11.1.3 Additional Insureds .............................. 30 11.2 Insurance Against Loss of or Damage to Aircraft and Engines ............................................ 30 11.2.1 Type, Form and Amount ............................ 30 11.2.2 War-Risk Insurance ............................... 30 11.2.3 Certain Requirements ............................. 31 11.2.3.1 Additional Insureds .................... 31 11.2.3.2 Payment of Proceeds .................... 31 11.2.3.3 Waiver of Subrogation .................. 31 11.2.4 Deductibles ...................................... 31 11.2.5 Government Indemnity ............................. 32 11.3 General Policy Provisions ................................ 32 11.3.1 Primary Insurance ................................ 32 11.3.2 Coverage for Each Insured ........................ 32 11.3.3 Waiver of Certain Rights ......................... 32 11.3.4 Breach of Warranty ............................... 32 11.3.5 Notice of Termination or Changes ................. 32 11.3.6 Nonliability for Premiums ........................ 33 11.3.7 Identity of Insurers ............................. 33 11.4 Application of Insurance Proceeds ........................ 33 11.5 Certificates; Reports, Etc ............................... 33 11.6 Lessor's Right to Maintain Insurance ..................... 34 11.7 Insurance for Own Account ................................ 34 11.8 Self-Insurance ........................................... 34 SALE AND LEASE AGREEMENT iv Section Page - ------- ---- Section 12. Inspection ...................................................... 35 Section 13. Assignment ...................................................... 35 13.1 General .................................................. 35 13.2 Security for Lessor's Obligations ........................ 35 Section 14. Events of Default ............................................... 36 14.1 Failure To Pay Rent ...................................... 36 14.2 Specific Defaults ........................................ 36 14.3 General Default .......................................... 36 14.4 Misrepresentation and Breach of Warranty ................. 36 14.5 Bankruptcy, Etc. ......................................... 36 14.6 Cross Default ............................................ 37 Section 15. Remedies ........................................................ 37 15.1 Default; Remedies ........................................ 37 15.1.1 Return; Repossession ............................. 37 15.1.2 Sale, Use, Etc. .................................. 38 15.1.3 Certain Liquidated Damages ....................... 38 15.1.3.1 Liquidated Damages-- Fair Market Rental Value ........... 38 15.1.3.2 Liquidated Damages-- Fair Market Sales Value ............ 38 15.1.4 Liquidated Damages upon Sale ..................... 39 15.1.5 Rescission and Other Remedies .................... 39 15.2 Determination of Fair Market Rental Value and Fair Market Sales Value ................................ 40 15.3 No Waiver, Etc. .......................................... 40 Section 16. Notices ......................................................... 40 Section 17. Net Lease; Lessee's Obligations; No Setoff, Counterclaim, Etc. ............................................ 41 SALE AND LEASE AGREEMENT v Section Page - ------- ---- Section 18. Renewal Options; Early Termination .............................. 42 18.1 Renewal Options .......................................... 42 18.2 Early Termination ........................................ 43 18.3 Default Purchase Option .................................. 43 Section 19. Successor Owner Trustee ......................................... 43 Section 20. Right to Perform for Lessee ..................................... 44 Section 21. Quiet Enjoyment ................................................. 44 Section 22. Investment of Security Funds; Miscellaneous; Amendment .......... 44 22.1 Investment of Security Funds ............................. 44 22.2 Miscellaneous; Amendment ................................. 45 Section 23. Permitted Foreign Air Carriers .................................. 46 Signatures EXHIBIT A FORM OF LEASE SUPPLEMENT EXHIBIT B PERMITTED FOREIGN AIR CARRIERS EXHIBIT C OTHER RETURN CONDITIONS EXHIBIT D TERMINATION VALUE SCHEDULE SCHEDULE 1 LESSOR'S COST SALE AND LEASE AGREEMENT vi THIS SALE AND LEASE AGREEMENT is dated as of September 1, 1990, between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under the Trust Agreement hereinafter referred to ("Lessor"), and SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee"). Recitals 1. Lessee owns the Aircraft. 2. The parties hereto desire that Lessor purchase the Aircraft from and lease it back to Lessee as hereinbelow provided. In consideration of the premises and the mutual agreements herein contained, Lessor and Lessee agree as follows: Section 1. Definitions. Unless the context otherwise requires, the following terms shall have the following meanings for all purposes of this Lease and shall be equally applicable to both the singular and the plural forms of the terms herein defined. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time, to the extent permitted by, and in accordance with, the terms thereof. For all purposes of this Lease the capitalized terms used but not defined herein are used as defined in the Participation Agreement. "Act" means the Federal Aviation Act of 1958, as amended from time to time. "Affiliate" of any Person means any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person. "Aircraft" means the Airframe, together with the two Engines (or any Replacement Engine substituted for either of such Engines hereunder), whether or not any of such initial or Replacement Engines may on the Delivery Date or from time to time thereafter be installed on the Airframe or may be installed on any other airframe or on any other aircraft. "Airframe" means (i) the Boeing Model 737-2H4 aircraft (excluding Engines or engines from time to time installed thereon) specified in the initial Lease Supplement sold hereunder by Lessee to Lessor, and leased back by Lessor to Lessee, all hereunder and under the initial Lease Supplement, and (ii) any and all Parts so long as the same shall be incorporated in such aircraft and any and all Parts removed from such aircraft so long as title thereto shall remain vested in Lessor in accordance with the terms of Section 8. SALE AND LEASE AGREEMENT 1 "Base Lease Term" means the period commencing on the Base Lease Term Commencement Date and expiring on December 31, 1995. "Base Lease Term Commencement Date" means October 1, 1990. "Basic Rent" means the rent identified as Basic Rent in and payable pursuant to Section 3.3. "Bills of Sale" means the FAA Bill of Sale and the Warranty Bill of Sale. "Business Day" means a day on which banks are not required or authorized to close in any of New York City, Dallas, Texas, the State of Florida or Salt Lake City, Utah, or such other city as shall be the situs of the principal office of Owner Participant, Lender, Lessee or Lessor at the time in question. "Cards" is defined in Section 5.3.1. "Code" means the United States Internal Revenue Code of 1986, as amended from time to time. "Delivery Date" means the date of the initial Lease Supplement, which date shall be the date on which the Aircraft is delivered by Lessee to, and accepted by, Lessor hereunder and in turn leased back by Lessor to Lessee hereunder, which date shall be a Business Day. "DOT" means the United States Department of Transportation or any governmental person, agency or authority succeeding to the functions of such Department of Transportation. "Engine" means (i) each of the Pratt & Whitney JT8D-9A engines identified by manufacturer's serial number in the initial Lease Supplement subjecting the Aircraft to this Lease, whether or not on the Delivery Date or from time to time thereafter installed on such Airframe or installed on any other airframe or on any other aircraft, and (ii) any Replacement Engine, whether or not from time to time thereafter installed on the Airframe or any other airframe or on any other aircraft, together in each case with any and all Parts incorporated in such Engine and any and all Parts removed from such Engine so long as title thereto shall remain vested in Lessor in accordance with the terms of Section 8. Except as otherwise set forth herein, at such time as a Replacement Engine shall be substituted hereunder such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means, as of any date of determination, all Engines then leased hereunder. SALE AND LEASE AGREEMENT 2 "Event of Loss" means, with respect to the Aircraft, Airframe or any Engine, any of the following events with respect to such property: (i) disappearance or theft of such property or the loss of the use thereof for any reason not covered by any other clause of this definition, including hijacking, for a period of 180 consecutive days or more (unless the location of the property is known and Lessee is diligently pursuing recovery of the property, but in no event beyond the expiration of the Term) or destruction, damage beyond economic repair or rendition of such property permanently unfit for normal use for any reason whatsoever; (ii) any damage to such property which results in an insurance settlement with respect to such property, on the basis of a total loss, or a constructive or compromised total loss; (iii) the confiscation or requisition of use of such property by the Government or any foreign government or any instrumentality or agency thereof for a period in excess of twelve consecutive months or for a period continuing beyond the Term, whichever first occurs; (iv) as a result of any rule, regulation, order or other action by the FAA or other governmental body (including any court) having jurisdiction, the use of such property in the normal course of interstate air transportation of persons or cargo shall have been prohibited for a period of more than six consecutive months, unless Lessee, prior to the expiration of such six-month period, shall have undertaken and shall be diligently carrying forward all steps which are necessary or desirable to permit normal use by Lessee, and, (A) in the case in which such prohibition shall apply generally to all similar Boeing Model 737-200 series aircraft, if such prohibition is continuing on the last day of the Term, or (B) in all other cases, if such prohibition is continuing on the earlier of the first anniversary of such prohibition and the last day of the Term; (v) the condemnation or requisition of title to such property by the Government or any foreign government or any instrumentality or agency thereof; or (vi) respecting any Engine, any divestiture of title to an Engine treated as an Event of Loss pursuant to Section 7.2.1 or any other provision hereof. 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. The date of an Event of Loss shall be deemed to be the date of such insurance settlement, loss of use, theft, disappearance, condemnation, confiscation, divestiture, taking or requisition of title or use or prohibition, except that, for the purposes of clauses (i), (iii) and (iv) above, no Event of Loss shall be deemed to have occurred until the expiration of the applicable period referred to therein. "FAA" means the Federal Aviation Administration or any governmental person, agency or other authority succeeding to the functions of the Federal Aviation Administration. "FAA Regulations" means the Federal Aviation Regulations issued pursuant to the Act from time to time, or any successor regulations thereto. SALE AND LEASE AGREEMENT 3 "Government" means the federal government of the United States of America or any instrumentality or agency thereof. "Guarantor" means Cauff, Lippman & Co., Inc., a Florida corporation. The term "incorporated in" means incorporated or installed in or attached to or otherwise made a part of. "Indemnified Parties" means (i) First Security Bank of Utah, National Association, in its individual capacity and as Owner Trustee, (ii) Owner Participant, (iii) Lender, (iv) the Trust Estate, (v) the respective successors and assigns of the foregoing and (vi) the respective officers and directors of the foregoing. "Interim Lease Term" means the period from the Delivery Date to and including September 30, 1990. "Lease", "this Lease", "this Agreement", "hereby", "herein", "hereof", "hereunder" or other like words mean this Sale and Lease Agreement, including without limitation supplementation hereof by one or more Lease Supplements. "Lease Default" means any event or condition which, with notice or lapse of time or both, would constitute a Lease Event of Default. "Lease Event of Default" is defined in Section 14. "Lease Period" means each three-month period commencing on October 1, January 1, April 1 and July 1, as the case may be, during the Term. "Lease Supplement" means a supplement to this Lease, in the case of the initial such supplement substantially in the form attached as Exhibit A hereto, subjecting the Aircraft or other property to this Lease. "Lender" means Progress Credit Corporation, a Florida corporation, and its successors and assigns. "Lessee" means Southwest Airlines Co., a Texas corporation, and its permitted successors or assigns. "Lessor" means Owner Trustee. "Lessor's Cost" for the Aircraft means the amount identified as such in Schedule I hereto. SALE AND LEASE AGREEMENT 4 "Lessor Liens" means Liens of any Person claiming by, through or under Lessor, First Security Bank of Utah, National Association, in its individual capacity, or Owner Participant which arise as a result of (i) claims against any such Person not related to the transactions contemplated by the Operative Agreements (it being understood that, for purposes of this clause (i), incurrence of any Successor Indebtedness to refund or refinance debt represented by the Note is deemed to be a transaction contemplated by the Operative Agreements), (ii) any act or omission of any such Person which is not related to the transactions contemplated by the Operative Agreements, or is in violation of any of the express terms of any of the Operative Agreements, (iii) Taxes or Losses imposed against or incurred by any such Person for which Lessee is not obligated to indemnify pursuant to the Participation Agreement, or (iv) claims against any such Person arising out of any transfer by such Person in violation of the express terms of the Operative Agreements. "Lien" means any mortgage, pledge, lien, charge, encumbrance, lease or security interest, or any claim or exercise of rights, affecting the title to or any interest in property. "Maintenance Program" is defined in Section 8.1.1. "Manufacturer" means The Boeing Company, a Delaware corporation, or any Affiliate thereof whose obligations are guaranteed by The Boeing Company, and their respective successors and assigns. "Officer's Certificate" means a certificate signed by the Chairman, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Assistant Secretary of the Person providing such certificate. "Operative Agreements" means this Agreement, the Guaranty, each Lease Supplement, the Participation Agreement, the Mortgage, the Loan Agreement, the Note, the Trust Agreement, the Bills of Sale, and the Tax Indemnification Agreement, including any consents included in or attached to any thereof. "Overdue Rate" means 3% in excess of the interest rate publicly announced in New York City from time to time by Citibank, N.A. as its prime or base lending rate, but in no event to exceed the maximum rate permitted by applicable law. Any interest payable hereunder at the Overdue Rate shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. "Owner Participant" means CL Aircraft XXXII, Inc., a Florida corporation, and its successors and permitted assigns. SALE AND LEASE AGREEMENT 5 "Owner Trustee" means First Security Bank of Utah, National Association, not in its individual capacity but solely as trustee under the Trust Agreement, and any successor, separate or additional Owner Trustee thereunder. "Participants" means Owner Participant and Lender and their respective successors and permitted assigns. "Participation Agreement" means the Participation Agreement, dated as of September 1, 1990, among Lessee, Lender, Guarantor, Owner Participant, and Lessor. "Parts" means all appliances, parts, components, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature (other than (a) complete Engines or engines and (b) any severable items leased by Lessee from a third party (other than Lessor)) which may from time to time be incorporated in the Airframe or any Engine (and "Part" means any of the foregoing) or, so long as title thereto shall remain vested in Lessor in accordance with Section 8.2, after removal therefrom. "Permitted Foreign Air Carrier" means any "foreign air carrier" (as defined in the Act) listed on Exhibit B hereto (as the same may be modified from time to time in accordance with Section 23) or any successor of any such air carrier, which carrier or successor is not in any case, at the time a Permitted Sublease is (or is proposed to be) entered into, the subject of bankruptcy, reorganization or similar proceedings. "Permitted Lien" means any Lien referred to in clauses (a) through (g) of Section 6. "Permitted Sublease" means a sublease permitted under Section 7.2.8. "Permitted Sublessee" means the sublessee under a Permitted Sublease. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Renewal Rent" means the rent payable in respect of a Renewal Term determined pursuant to Section 18.1. SALE AND LEASE AGREEMENT 6 "Renewal Term" means any of the successive periods of integral multiples of two years each but not more than six years in the aggregate which follow the end of the Base Lease Term with respect to which Lessee shall have exercised its option pursuant to Section 18. "Rent" means Basic Rent, Renewal Rent and Supplemental Rent. "Rent Payment Date" means each December 31, March 31, June 30 and September 30 during the Term, commencing September 30, 1990. "Replacement Engine" means a Pratt & Whitney JT8D-9A engine (or an improved model engine suitable for installation and use on the Airframe and fully compatible with the other Engine or engine installed thereon) which shall have been substituted for an Engine leased hereunder pursuant to Section 5.2 or 10.2. "Securities Act" means the Securities Act of 1933, as amended. "Stipulated Loss Value" means (i) $12,100,000.00 during the Base Lease Term and (ii), during any Renewal Lease Term, such amount as shall be calculated in accordance with Section 18.1, in each case as adjusted pursuant to Section 13 of the Participation Agreement. "Supplemental Rent" means, without duplication, all amounts, liabilities and obligations (other than Basic Rent or Renewal Rent) which Lessee assumes or agrees to pay to Lessor or any other Person hereunder, under the Participation Agreement or any of the other Operative Agreements, including, without limitation (i) Stipulated Loss Value and Termination Value payments, (ii) all amounts required to be paid by Lessee under the agreements, covenants and indemnities contained in the Participation Agreement and (iii) all amounts required to be paid pursuant to Section 3.4. "Tax Indemnification Agreement" means the Tax Indemnification Agreement, dated as of September 1, 1990, between Owner Participant and Lessee. "Term" means the term for which the Aircraft is leased pursuant to Section 3 hereof and shall include the Interim Lease Term, Base Lease Term and any Renewal Term. "Termination Value" means the greater of (i) the sum of (A) the amount set forth in Exhibit D hereto opposite the Rent Payment Date as of which Termination Value is being determined and paid plus (B) such amount of Lessee's Actual Cost and the Purchase Price as Owner Participant shall have paid pursuant to Section 13 of the Participation Agreement, or (ii) the amount of indebtedness represented by the Note or SALE AND LEASE AGREEMENT 7 any Successor Indebtedness (including interest accrued thereon) on such Rent Payment Date plus any other amount due and payable to Lender under any Operative Agreement. "Transfer" means, with respect to any Person, to transfer, by bill of sale or otherwise, all such Person's right, title and interest in and to the Aircraft, Airframe or any Engine, as the case may be, to another Person on an "as is, where is" basis, free and clear of any Lessor Lien but otherwise without recourse, representation or warranty, express or implied, and including an express disclaimer of warranties, representations and guarantees in a manner comparable to that set forth in Section 4.1. "Trust Agreement" means the Trust Agreement, dated as of September 1, 1990, between Owner Participant and First Security Bank of Utah, National Association, in its individual capacity. "Trust Estate" means the Trust Estate as that term is defined in the Trust Agreement. "UCC" means the Uniform Commercial Code as in effect in any applicable jurisdiction. "U.S. Air Carrier" means any United States air carrier (i) as to which there is in force a certificate issued pursuant to Section 401 of the Act, (ii) as to which there is in force an air carrier operating certificate issued pursuant to Part 121 of the FAA Regulations, or which may operate as a United States air carrier by certification or otherwise under any successor or substitute provisions therefor or in the absence thereof and (iii) which, in any case, at the time a Permitted Sublease is (or proposed to be) entered into, is not the subject of proceedings under the Federal Bankruptcy Code of 1978, as amended. "Wet Lease" means any arrangement whereby Lessee agrees to furnish the Airframe and Engines or engines installed thereon to a third party pursuant to which the Airframe and Engines or engines (i) shall be operated solely by regular employees of Lessee possessing all current certificates and licenses that would be required under the Act for the performance by such employees of similar functions within the United States of America (it being understood that cabin attendants need not be regular employees of Lessee), (ii) shall be maintained by Lessee in accordance with its Maintenance Program and (iii) shall be and remain, in the hands of such third party, subject to all other terms and conditions of this Lease. SALE AND LEASE AGREEMENT 8 Section 2. Sale, Lease and Acceptance. (a) Lessor, subject to satisfaction or waiver of the conditions set forth in Section 5 of the Participation Agreement and the concurrent acceptance hereunder by Lessee of the Aircraft, hereby agrees, to the extent that the funds received by it pursuant to Section 2 of the Participation Agreement are adequate for the purpose, to purchase at a purchase price equal to Lessor's Cost and to accept delivery on the Delivery Date from Lessee hereunder and to lease back to Lessee hereunder, and Lessee hereby agrees, expressly for the direct benefit of Lessor and Owner Participant to sell to Lessor and to lease back from Lessor hereunder on the Delivery Date, the Aircraft, which shall have been accepted by Lessor and Lessee hereunder as evidenced by the execution by Lessor and Lessee of the Lease Supplement conveying to Lessor and leasing to Lessee the Aircraft hereunder; provided, however, that Lessor and Lessee shall have no further obligation hereunder with respect to the Aircraft if the Delivery Date shall not have occurred on or before September 28, 1990. The purchase price of the Aircraft shall be paid by Lessor to Lessee on the Delivery Date in the manner specified in Section 3 of the Participation Agreement. (b) Lessor hereby authorizes each of Gary C. Kelly, John D. Owen and Laura Wright, all of whom are employees of Lessee, as the authorized representative or representatives of Lessor to accept delivery of the Aircraft from Lessee pursuant hereto. Lessee hereby agrees that in the event delivery of the Aircraft shall be accepted by an employee or employees of Lessee pursuant to such authorization by Lessor, such acceptance of delivery by such employee or employees on behalf of Lessor shall, without further act, also irrevocably constitute acceptance by Lessee of the Aircraft for all purposes of this Agreement. Section 3. Term and Rent. 3.1 General. Except as otherwise provided herein, the Term for the Aircraft shall commence on the Delivery Date specified in the initial Lease Supplement and shall terminate as herein provided. 3.2 Lease Term. Except as provided herein, the Aircraft shall be leased hereunder for the Interim Lease Term, the Base Lease Term and the Renewal Terms, if any. 3.3 Basic Rent. Lessee hereby agrees to pay to Lessor Basic Rent with respect to the Aircraft, in arrears, on each Rent Payment Date, in the amount of $432,000; provided that (i) on the first Rent Payment Date (September 30, 1990), only Basic Rent in the amount of $4,800 per each day elapsed during the Interim Lease Term shall be due and (ii), if Lessee shall exercise its option under Section 18.2 or 18.3, then the installment SALE AND LEASE AGREEMENT 9 of Basic Rent (or Rent, as the case may be) due on such early termination date shall be reduced by $4,800 per day (or in the case of Renewal Rent, by the quotient of the quarterly installment thereof divided by 90) for each day the final Lease Period has been foreshortened. 3.4 Supplemental Rent. Lessee also agrees to pay (or cause to be paid) to Lessor, or to whomsoever shall be entitled thereto, all Supplemental Rent with respect to Stipulated Loss Value when and as the same shall become due and owing and all other amounts of Supplemental Rent within five days after demand or such other relevant period as may be provided in any Operative Agreement. Lessee will also pay to Lessor, or to whomsoever shall be entitled thereto, as Supplemental Rent, to the extent permitted by applicable law, interest at the Overdue Rate on any part of any installment of Basic Rent or Renewal Rent not paid when due for any period from and including the date on which the same was due to but excluding the date of payment in full and (to the extent permitted by applicable law) on any payment of Supplemental Rent not paid when due to Lessor, or to whomsoever shall be entitled thereto, as the case may be, for the period from the date on which the same was due to but excluding the date of payment in full. The expiration or other termination of Lessee's obligation to pay Basic Rent or Renewal Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. 3.5 Payments. Payments of Rent and any and all other payments payable to Lessor hereunder shall be paid in funds of the United States of America which shall be immediately available not later than noon, New York City time, on the date due, to Owner Participant's account set forth in Schedule I to the Participation Agreement, or as otherwise directed by Owner Participant in writing at least five Business Days prior to the date such payment is due; provided, however, that so long as Lessee shall not have received such five Business Days' prior written notice of the fact that the Mortgage shall have been terminated, Lessor hereby directs and Lessee agrees, that, unless Lender shall otherwise direct in writing, all Rent payable to Lessor and assigned to Lender pursuant to the Mortgage shall be paid prior to noon, New York City time, on the due date thereof directly to Lender by wire transfer to First Union National Bank of Florida, Jacksonville, Florida (ABA No. 063-000-021), for the account of Progress Credit Corporation (account no. 175-003-956-35), with reference to Southwest N56SW Interest. Except as otherwise expressly provided herein, whenever any payment of Rent or other payment to be made hereunder shall be due on a day which is not a Business Day, such payment shall be made on the next succeeding day which is a Business Day and (provided such payment is made on such next succeeding Business Day) no interest shall accrue on the amount of such payment from and after such scheduled date. SALE AND LEASE AGREEMENT 10 Section 4. Lessor's Representations and Warranties; DISCLAIMER; Certain Agreements of Lessee. 4.1 Lessor's Representations and Warranties; DISCLAIMER. LESSEE EXPRESSLY AGREES TO TAKE THE AIRCRAFT "AS IS". NEITHER LESSOR (INDIVIDUALLY OR AS OWNER TRUSTEE) NOR OWNER PARTICIPANT MAKES, HAS MADE OR SHALL BE DEEMED TO HAVE MADE, AND EACH HEREBY EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, AIRWORTHINESS, VALUE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF THE AIRCRAFT OR ANY PART THEREOF, AS TO THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, AS TO THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT, AS TO THE ABSENCE OF OBLIGATIONS BASED ON STRICT LIABILITY IN TORT, OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT OR ANY PART THEREOF, except that First Security Bank of Utah, National Association, in its individual capacity (i) represents and warrants that on the Delivery Date Lessor shall have received whatever title thereto as was conveyed to it by Lessee, (ii) represents and warrants that on the Delivery Date the Aircraft shall be free of Lessor Liens attributable to it, (iii) agrees that it will not directly or indirectly create, incur, assume or suffer to exist any Lessor Lien attributable to it on or with respect to the Airframe or any Engine or any other portion of the Trust Estate, and (iv) represents and warrants that it is a "citizen of the United States" as defined in Section 101(16) of the Act and agrees that if at any time a responsible officer in its Corporate Trust Department shall obtain actual knowledge that it has ceased to be a "citizen of the United States" within the meaning of Section 101(16) of the Act it will promptly resign as Owner Trustee, effective upon the appointment of a successor Owner Trustee in accordance with Section 9.01 of the Trust Agreement. Lessor covenants that during the Term (so long as no Lease Event of Default shall have occurred and be continuing) it will not, through its own actions or breaches of any of its obligations under the Operative Agreements, interfere or cause any interference in the quiet enjoyment of the Aircraft by Lessee or any Permitted Sublessee and agrees that it will not directly or indirectly create, incur, assume or suffer to exist any Lessor Lien attributable to it on or with respect to the Airframe or any Engine. 4.2 Certain Agreements of Lessee. All obligations of Lessee in this Lease shall be done, performed or complied with at Lessee's cost and expense, whether or not so expressed, unless otherwise expressly stated. Lessee hereby agrees with Lessor for the benefit of Owner Participant that it shall perform the agreements, covenants and indemnities set forth in the Participation Agreement (including, without limitation, Sections 8.1 and 8.2 of the Participation Agreement) which are incorporated herein, and hereby restates Lessee's representations and warranties set forth in the Participation Agreement, SALE AND LEASE AGREEMENT 11 as fully and to the same extent and with the same force and effect as if set forth in full in this Section 4.2. Section 5. Return of Aircraft. 5.1 General Condition upon Return. Subject to Section 10, upon the expiration or termination of this Lease, Lessee will cause the Aircraft, if then not registered in the name of Lessor with the FAA for any reason, to be reregistered in the name of Lessor with the FAA and will return the Aircraft to Lessor by delivering the same at any location in the continental United States selected by Lessee at which Lessee has maintenance facilities (and Section 5.6 shall apply). All costs associated with the return flight shall be for the account of Lessee. At the time of such return, the Airframe and Engines or engines installed thereon: 5.1.1 Airworthiness. Subject to the exception described in clause (iii) of Section 8.1.1, shall be duly certificated as an airworthy aircraft by the FAA under Part 121 of the Federal Aviation Regulations or any successor provision; 5.1.2 Free of Liens. Shall be free and clear of all Liens except Lessor Liens and Liens arising by, through or under Lender; 5.1.3 Operating Configuration and Condition. Shall be in a configuration suitable for operation in regularly scheduled commercial airline passenger service in the United States and in the same configuration as a majority of the remainder of all 737-200 series aircraft operated by Lessee, shall be in compliance with the Maintenance Program and shall be in as good operating condition as on the Delivery Date, ordinary wear and tear and changes and alterations made by Lessee as permitted under Section 8.4 hereof or Section 13 of the Participation Agreement excepted. All Lessee or Permitted Sublessee exterior or interior insignia, logos or markings, as the case may be, shall have been painted over in matching colors in a workmanlike manner; 5.1.4 Cleanliness and Operability. Shall be clean by United States commercial airline operating standards with all systems and components operable; 5.1.5 Parts and Equipment. Shall have installed thereon the Engines identified in the initial Lease Supplement, as well as all Parts installed thereon at the commencement of the Term, or replacements therefor made in accordance with the terms of this Lease; 5.1.6 Corrosion Treatment. Shall comply with the corrosion prevention procedures to the extent set forth in the Maintenance Program; SALE AND LEASE AGREEMENT 12 5.1.7 Hush Kits. Shall be fitted with a hush kit, if a Stage III Upgrade shall have occurred and the Owner Participant shall have financed such upgrade pursuant to the provisions of Section 13.4 of the Participation Agreement; and 5.1.8 Other Conditions. Shall otherwise be in the condition set forth in Exhibit C hereto. 5.2 Return of Other Engines. In the event that any engine not owned by Lessor shall be installed on the Airframe returned in accordance with Section 5.1, such engine shall be a Pratt & Whitney JT8D-9A engine (or an improved model engine fully compatible with the other Engine or engine installed on the Airframe). At the time of such replacement, such engine shall have performance and durability characteristics and a value, condition and utility at least equal to the Engine it replaced hereunder, assuming such Engine was maintained in accordance with the requirements of this Lease, and at the time the Airframe is returned shall fully comply with all the requirements of this Lease, including this Section 5, which are applicable to Engines. Upon return of the Aircraft, Lessee shall duly convey to Lessor good title to any such replacement engine, free and clear of all Liens except Lessor Liens and Liens arising by, through or under Lender; and, upon such conveyance and as a condition thereto, Lessee will (a) furnish Lessor with a full warranty (as to title) bill of sale, in form and substance reasonably satisfactory to Lessor, with respect to each such replacement engine, together with an opinion of counsel to the effect that such bill of sale has been duly authorized and delivered and is enforceable in accordance with its terms and that each such replacement engine is free and clear of all Liens except Lessor Liens and Liens arising by, through or under Lender, and (b) take such other action as Lessor may reasonably request in order that title to such replacement engine may be duly and properly vested in Lessor to the same extent as the Engine replaced thereby. Upon compliance by Lessee with the foregoing, Lessor will, so long as no Lease Event of Default has occurred and is continuing, Transfer to Lessee any Engine not installed on the Airframe at the time of return, free and clear of all Liens, including Lessor Liens. 5.3 Return at End of Base Lease Term or Renewal Lease Term. Upon return of the Aircraft at the expiration or termination of this Lease, Lessee shall have caused all FAA Airworthiness Directives applicable to the Aircraft and all mandatory service bulletins from Manufacturer and the manufacturer of the Engines or any engine then installed on the Airframe (in compliance with Section 5.2) applicable to the Aircraft to have been complied with (except for any such FAA Airworthiness Directives and bulletins that permit compliance after the return date and would not, in the normal course of the Maintenance Program, be complied with on or prior to the return date). Lessee shall have treated the Aircraft, including without limitation, with respect to maintenance, additions and modifications, during the Term, similarly to all other Boeing 737-200 aircraft in its fleet. SALE AND LEASE AGREEMENT 13 At the request of Lessor delivered to Lessee not more than 30 days prior to the end of the Term, the Aircraft shall be check flown by Lessee (or any Permitted Sublessee) at Lessee's expense using qualified flight personnel, for not more than two hours, on a non-commercial flight, for the purpose of demonstrating to Lessor the satisfactory operation of the Aircraft and its equipment and systems; provided, however, that such check flight shall not interfere with the normal operation or maintenance of the Aircraft by, or the business of, Lessee (or any Permitted Sublessee). Up to five of Owner Participant's designees or representatives may participate in such flight as observers. The form of test flight procedure to be followed shall be in accordance with Lessee's normal test flight procedure, and the test flight may be a return delivery flight. The Aircraft shall be check flown only once pursuant to the provisions of this Section 5.3, unless further check flights are required in order to verify the correction of any discrepancy or malfunction detected in such first check flight, in which case a second check flight shall be performed in accordance with the procedures set forth herein solely in order to verify such correction. At redelivery of the Aircraft to Lessor hereunder, the following specific requirements shall be met by Lessee or, in lieu thereof, Lessee shall compensate Lessor therefor, as specifically provided for in this Section: 5.3.1 Airframe. (I) At least 40% of the time (or cycles, if applicable) shall remain before the next required performance of each structural work task card (the "Cards") (or the then equivalent under Lessee's Maintenance Program) (it being understood that, as used herein, "Cards" refers to the heaviest airframe check currently used under Lessee's Maintenance Program), and all Cards currently performed on a sampling basis under the Maintenance Program shall have been fully accomplished without regard to any sampling then permitted under the Maintenance Program, (II) Lessee shall have performed a complete "C" check or its equivalent (all phases) on the Airframe no more than 200 flight hours prior to its return to Lessor (and Lessee shall have corrected to the Lessor's reasonable satisfaction any deficiencies discovered during such check, and will not have deferred any maintenance discrepancies), and (III) Lessee shall have completed a complete "B" ("B1" and "B2") check immediately prior to redelivery; 5.3.2 Engines. Every ESV-1 Engine shall have no more than 4,000 hours or cycles since its last ESV-1. Each ESV-2 Engine shall have no more than 6,000 hours or cycles since its last ESV-2. No life limited component of an Engine shall have less than 3,000 hours or cycles remaining until its next required replacement. For the purposes of this Section, an ESV-1 Engine shall be an Engine or engine installed on the Airframe (in compliance with Section 5.2) whose last engine service visit (or the equivalent under the Maintenance Program) was an ESV-1, and an ESV-2 Engine shall be an Engine SALE AND LEASE AGREEMENT 14 or engine installed on the Airframe (in compliance with Section 5.2) whose last engine service visit (or the equivalent under the Maintenance Program) was an ESV-2; 5.3.3 Boroscope. The hot section of each Engine or engine installed on the Airframe (in compliance with Section 5.2) shall be inspected by boroscope at Lessee's expense and any defects which are outside the manufacturer's recommended limitations shall be corrected such that they are brought within such limitations; 5.3.4 Landing Gears. The landing gears shall have a minimum of 40% of the time remaining on each of the main and nose gears until the next scheduled shop visit or retirement, as the case may be; 5.3.5 APU. The auxiliary power unit shall not have more than 2,500 hours since the last "hot section" inspection; and 5.3.6 Other Components. All time-controlled components and life-limited components, other than engines, landing gear and auxiliary power units, shall have a minimum of 3,000 hours or twelve months (unless one-half of the allowable hours or months, as the case may be, permitted between shop visits or replacements is actually less than 3,000 hours or twelve months, in which case one-half of such allowable hours or months) remaining to the next scheduled shop visit or replacement. 5.4 Financial Adjustments. In the event that the conditions described in Sections 5.3.1 and 5.3.4 are not met, Lessee may elect, as to any or all of such conditions (a) to perform the work necessary to conform the Aircraft to the required condition or (b) to make a financial adjustment between Lessee and Lessor pursuant to this provision, provided that in no event shall the Aircraft or any landing gear be returned with less than 25% of the allowable hours or cycles, as appropriate, remaining between Cards (with respect to the Aircraft) or until the next scheduled shop visit (with respect to the landing gears): 5.4.1 Airframe. In the event that the Airframe is returned to Lessor with less than 40% but more than 25% of the allowable hours (or cycles, if applicable) between Cards as provided in Section 5.3.1, then Lessee shall pay to Lessor on the date the Term ends an amount determined by multiplying the difference between the actual number of hours (or cycles, if applicable) remaining to the next Cards and 40% of the allowable hours (or cycles, if applicable) between Cards times the cost to Lessee of having another Person perform such Cards. 5.4.2 [Intentionally omitted.] SALE AND LEASE AGREEMENT 15 5.4.3 Landing Gears. In the event that any of the landing gears is returned to Lessor with less than 40% but more than 25% of the cycles remaining until the next scheduled shop visit as provided in Section 5.3.4 above, then Lessee shall pay to Lessor on the date the term ends an amount computed by multiplying the difference between the actual number of cycles remaining to the next scheduled shop visit for such gear and 40% of the allowable cycles between shop visits times the cycle rate for the nose gear or the main gear, as the case may be. For purposes of this Section 5.4.3, the term "cycle rate" shall be deemed to be the cost that Lessee is paying to third parties at the time the Aircraft is returned under Section 5.3 for overhauling a nose gear or a main gear, as the case may be, divided by the number of cycles permissible between such overhauls under the Maintenance Program. At the end of the Term the Lessee shall furnish Lessor with an Officer's Certificate setting forth the hours and cycles remaining on the Engines or engines installed on the Airframe (in compliance with Section 5.2), the landing gear and the Airframe. 5.5 Manuals; Service Bulletins, Etc. Upon return of the Aircraft at the expiration or termination of this Lease, Lessee shall deliver or cause to be delivered to Lessor (in English) all logs, manuals, drawings and data and inspection, modification and overhaul records in respect of the Aircraft required to be maintained under applicable rules and regulations of the FAA, updated through the date of return. All "no-charge" service bulletin kits received by or on behalf of Lessee from Manufacturer, engine manufacturer or vendors for the Aircraft and Engines or engines and not incorporated therein shall be returned at no charge to Lessor as cargo on board the Aircraft at the time of its return. At the time the Aircraft is returned, Lessor shall have the option to purchase from Lessee, at Lessee's cost therefor, any "charge" service bulletin kits purchased by Lessee which have not been incorporated in the Aircraft. All such items shall thereupon become the property of Lessor. 5.6 Storage upon Return. Upon written request of Lessor received by Lessee at least 10 days prior to its return of the Aircraft at the expiration or termination of this Lease, Lessee will provide free parking facilities for the Aircraft for a period not exceeding 30 days following return thereof by Lessee at the location of return pursuant to Section 5.1; provided that such storage shall be at Lessor's risk and any expenses in connection with such storage (other than parking charges) shall be paid by Lessor, including the cost of any insurance therefor. 5.7 Failure to Return Aircraft or Engines. If Lessee shall, for any reason whatsoever, fail to return the Aircraft or any Engine at the time specified herein, the obligations of Lessee as provided in this Lease (including the obligation to pay Rent on the same basis as that applicable immediately prior to such failure) shall continue in effect with respect to the Aircraft or such Engine until the Aircraft or such Engine is returned SALE AND LEASE AGREEMENT 16 to Lessor; but this Section 5.7 shall not be construed as permitting Lessee to fail to meet its obligation to return the Aircraft or such Engine in accordance with the requirements of this Lease or constitute a waiver of a Lease Default or Lease Event of Default. 5.8 Aid in Disposition. Lessee agrees that, during the Term (and during any storage period) it will cooperate in all reasonable respects with any efforts of Lessor to lease or sell the Aircraft, including without limitation (subject to the provisions of Section 12) permitting potential lessees or purchasers to inspect the Aircraft and the records relating thereto. Section 6. Liens. Lessee will not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Aircraft, the Airframe or any Engine, title thereto or any interest therein or in this Lease except: (a) the respective rights of the parties to the Operative Agreements; (b) the rights of others under agreements or arrangements to the extent expressly permitted by the terms of Sections 7.2 and 8.3; (c) Lessor Liens; (d) liens for taxes, assessments or other governmental charges either not yet due or being contested in good faith (and for the payment of which adequate reserves have been provided in accordance with generally accepted accounting principles) by appropriate proceedings so long as such proceedings do not involve any material danger of the sale, forfeiture, loss or loss of use of the Aircraft, the Airframe or any Engine or any interest therein; (e) materialmen's, mechanics', workers', repairers', employees' or other like Liens arising in the ordinary course of business for amounts the payment of which is either not yet due or not overdue for a period of more than 30 days or is being contested in good faith (and for the payment of which adequate reserves have been provided in accordance with generally accepted accounting principles) by appropriate proceedings so long as such Liens do not involve any material danger of the sale, forfeiture, loss or loss of use of the Aircraft, the Airframe or any Engine or any interest therein; (f) Liens arising out of any judgment or award against Lessee, unless the judgment secured shall not, within 45 days after entry thereof, have been discharged or vacated or execution thereof stayed pending appeal or shall not have been discharged, vacated or reversed within 45 days after the execution of such stay; and (g) any other Lien with respect to which Lessee shall have provided a bond or other security adequate in the reasonable judgment of Lessor. Lessee will promptly take (or cause to be taken) such action at its own expense as may be necessary duly to discharge any such Lien not excepted above if the same shall arise at any time. Section 7. Registration, Operation, Possession, Subleasing and Records. 7.1 Registration and Operation. 7.1.1 Registration. Lessee shall forthwith upon the delivery of the Aircraft hereunder cause the Aircraft to be duly registered and at all times thereafter to SALE AND LEASE AGREEMENT 17 remain duly registered in the name of Lessor with the FAA pursuant to and as permitted by the Act (it being understood that Lessee shall not be required to comply with this covenant to the extent that First Security Bank of Utah, National Association's or Owner Participant's failure to comply with its covenant set forth in Section 6.3.1.5 or Section 6.2.5, respectively, of the Participation Agreement with regard to its citizenship makes such compliance by Lessee impossible). 7.1.2 Nameplate. As soon as practicable after the Delivery Date, Lessee agrees to affix and thereafter to maintain in the cockpit of the Airframe adjacent to the airworthiness certificate and on each Engine a nameplate bearing the inscription "OWNED BY AND LEASED FROM FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, AS OWNER TRUSTEE, OWNER AND LESSOR" and, so long as the Mortgage shall remain in effect, "SUBJECT TO A SECURITY INTEREST IN FAVOR OF PROGRESS CREDIT CORPORATION, MORTGAGEE" (such nameplate to be replaced, if necessary, with a nameplate reflecting the name of any successor Lessor or Lender, upon receipt of written notice from Lessor to such effect). Except as above provided, Lessee will not allow the name of any person, association or corporation to be placed on the Airframe or on any Engine as a designation that might be interpreted as a claim of ownership or Lien; provided that nothing herein contained shall prohibit Lessee (or any Permitted Sublessee) from placing its customary colors and insignia on the Airframe or any Engine or displaying information concerning the registration or manufacture of the Aircraft, the Airframe, any Engine or Part. 7.1.3 Compliance with Laws. Lessee agrees that it will not use or operate the Aircraft, the Airframe or any Engine in violation of any law or any rule, regulation or order of any government or governmental authority having jurisdiction (domestic or foreign) or in violation of any airworthiness certificate, license or registration relating to the Aircraft, the Airframe or any Engine issued by any such authority, except to the extent Lessee is contesting in good faith the validity or application of any such law, rule, regulation or order in any reasonable manner which does not materially adversely affect Lessor's interest in the Aircraft. 7.1.4 Insurance Requirements; Government Requisition; Indemnity. Lessee agrees not to operate, use or locate the Aircraft, the Airframe or any Engine, or permit any Permitted Sublessee to operate, use or locate the Aircraft, the Airframe or any Engine, (i) in any area excluded from coverage by any insurance required by the terms of Section 11, except in the case of a requisition by the Government where Lessee obtains indemnity (backed by the full faith and credit of the United States of America) in lieu of such insurance from the Government against the risks and in the amounts required by Section 11 covering such area, or (ii) in any area where maintenance of war-risk insurance is required by Section 11 unless fully covered by war-risk insurance satisfying the terms of Section 11, or unless the Aircraft, the Airframe or such Engine is operated or used under SALE AND LEASE AGREEMENT 18 contract with the Government under which contract the Government assumes liability (backed by the full faith and credit of the United States of America) in an amount not less than the amount of insurance otherwise required by Section 11 for any damage, loss, destruction or failure to return possession of the Aircraft, the Airframe or such Engine at the end of the term of such contract or for injury to persons or damage to property of others, or (iii) with respect to any sublease to a Permitted Foreign Air Carrier, in any area referred to in subclause (3)(iv) of Section 7.2. 7.2 Possession. Lessee will not, without the prior written consent of Lessor, sublease or otherwise in any manner deliver, transfer or relinquish possession of the Aircraft, the Airframe or any Engine or install any Engine, or permit any Engine to be installed, on any airframe other than the Airframe; provided, however, that, so long as no Lease Event of Default shall have occurred and be continuing, and so long as Lessee shall comply with the provisions of Section 11, and all FAA approvals required for such purposes have been obtained, Lessee may, without such prior written consent: 7.2.1 Interchange and Pooling. Subject or permit any Permitted Sublessee to subject (i) the Aircraft, Airframe or any Engine to normal interchange agreements customary in the United States domestic airline industry and entered into by Lessee or such Permitted Sublessee in the ordinary course of its business, and (ii) any Engine to pooling agreements or arrangements customary in the airline industry and entered into by Lessee or such Permitted Sublessee in the ordinary course of its business; but in either case (A) no transfer of the registration of the Airframe or any Engine shall be effected in connection therewith and the terms of this Lease and the Participation Agreement shall be observed, and (B) no such agreement or arrangement shall contemplate or require the transfer of title to the Aircraft, Airframe or any Engine and if Lessor's title to any Engine shall be divested under any such agreement or arrangement, such divestiture shall be deemed to be an Event of Loss with respect thereto and Lessee shall comply with Section 10.2 hereof; 7.2.2 Testing and Service. Deliver or permit any Permitted Sublessee to deliver possession of the Aircraft, Airframe or any Engine or Part, to the manufacturer thereof for testing or other similar purposes, or to any organization for service, repair, maintenance or overhaul work on the Aircraft, Airframe or any Engine or Part, or for alterations or modifications in or additions to the Aircraft, Airframe or any Engine to the extent required or permitted by the terms of Section 8.4; 7.2.3 Civil Reserve Air Fleet Program. Transfer or permit any Permitted Sublessee, if required by law to do so, to transfer possession of the Aircraft, Airframe or any Engine to the Government pursuant to the Civil Reserve Air Fleet Program administered pursuant to Executive Order No. 10999, as amended, or any similar or substitute programs, so long as such transfer of possession does not continue beyond SALE AND LEASE AGREEMENT 19 the end of the Term and so long as Lessee shall (A) promptly notify Lessor upon subjecting the Airframe or any Engine to such program and provide Lessor with the name and address of the appropriate party to whom notice must be given pursuant to Section 16 hereof, and (B) promptly notify Lessor upon transferring possession of the Airframe or any Engine to the Government pursuant to such program; 7.2.4 Installation of Engines. Install or permit any Permitted Sublessee to install an Engine on an airframe owned by Lessee or such Permitted Sublessee, as the case may be, free and clear of all Liens, except (A) Permitted Liens and those which apply only to the engines (other than Engines), appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment (other than Parts) installed on such airframe (but not to the airframe as an entirety), (B) the rights of air carriers under normal interchange agreements which are customary in the airline industry and do not contemplate, permit or require the transfer of title to the airframe or engines installed thereon and (C) mortgage liens or other security interests, provided that (as regards this clause (C)) such mortgage liens or other security interests effectively provide that such Engine shall not become subject to the lien of such mortgage or security interest, notwithstanding the installation thereof on such airframe, unless and until Lessee shall become the owner of such Engine; 7.2.5 Installation of Engines on Other Airframes. Install or permit any Permitted Sublessee to install an Engine on an airframe leased to, or purchased by, Lessee or any Permitted Sublessee subject to a lease, conditional sale, or other security agreement, but only if (A) such airframe is free and clear of all Liens, except the rights of the parties to the lease, conditional sale, or other security agreement covering such airframe, or their successors or assigns, and except Liens of the type permitted by clauses (A) and (B) of Section 7.2.4, and (B) the lease, conditional sale, or other security agreement covering such airframe effectively provides that such Engine shall not become subject to the Lien thereof at any time while such Engine is subject to this Lease, notwithstanding the installation thereof on such airframe; 7.2.6 Pooling of Parts. To the extent permitted by Section 8.3, subject any Parts owned by Lessor and removed from the Airframe or any Engine to any pooling arrangement referred to in Section 8.3; 7.2.7 Wet Lease. Enter into a Wet Lease for the Airframe and Engines or engines then installed thereon with any third party for a term not to continue beyond the Term; 7.2.8 Sublease to Permitted Air Carriers. Enter into a sublease of the Aircraft or the Airframe and Engines or engines then installed on the Airframe or any Engine, for use on the sublessee's regularly scheduled or charter routes, with (a) any SALE AND LEASE AGREEMENT 20 U.S. Air Carrier or (b) any Permitted Foreign Air Carrier, in any such case for a term not to continue beyond the remaining Term. Provided, further, with respect to this Section 7.2. that: (1) the rights of any transferee who receives possession by reason of a transfer permitted by this Section 7.2 (other than the transfer of an Engine which is deemed an Event of Loss) shall be effectively subject and subordinate to, and any sublease permitted by this Section 7.2 shall be made expressly subject and subordinate to, all the terms of this Lease, and to Lessor's rights, powers and remedies under this Lease, including the rights to repossession pursuant to Section 15 and to terminate and avoid such sublease upon such repossession and to require such sublessee to forthwith deliver the Aircraft, Airframe and Engines subject to such sublease upon such repossession; (2) Lessee shall remain primarily liable hereunder for the performance of all the terms of this Lease to the same extent as if such sublease or transfer had not occurred, provided that performance of any such terms by any Permitted Sublessee shall be as effective, for purposes of this Lease, as performance thereof directly by Lessee; (3) any such sublease shall (i) be consistent with the requirements of this Lease and the applicable requirements of the Participation Agreement, (ii) include appropriate provisions for the continued registration, maintenance in accordance with applicable maintenance standards in the appropriate jurisdiction, operation, insurance (appropriate certificates as to which shall be furnished to Lessor and Lender prior to Lessee's entry into any such sublease with any Permitted Foreign Air Carrier or within 10 days thereafter) and return of the subleased property as required hereunder, (iii) provide that the sublessee may not assign or further sublease the Aircraft, and (iv) provide that the Aircraft may not be operated in a country with which the United States does not maintain diplomatic relations or in which there is open warfare, whether or not declared; (4) no interchange agreement, transfer, sublease or other relinquishment of possession permitted hereunder shall affect the registration of the Aircraft or shall permit any action not permitted to Lessee in this Lease; and (5) no such interchange agreement, sublease, transfer or other relinquishment of possession of the Aircraft, Airframe or any Engine shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder or under any other Operative Agreement or constitute a waiver of Lessor's rights or remedies hereunder or under any other Operative Agreement. SALE AND LEASE AGREEMENT 21 Lessee shall notify Lessor within 10 days after the commencement of any sublease permitted hereunder and shall deliver to Lessor within such period a duly executed copy of any sublease or interchange or pooling agreement permitted hereunder together with any certification required by Section 7.2.8. Upon request of Lessor, Lessee shall promptly and duly execute and deliver to Lessor an assignment of any such sublease having a term in excess of 12 months in favor of Lessor in form and substance reasonably satisfactory to Lessor. Lessor hereby agrees, for the benefit of Lessee (and any Permitted Sublessee) and for the benefit of each lessor, conditional seller, or secured party of any airframe or engine leased to or purchased by Lessee (or any Permitted Sublessee) subject to a lease, conditional sale, or other security agreement, that Lessor will not acquire or claim, as against such lessor, conditional seller, or secured party, or any successor or assign thereof, any right, title or interest in any engine as the result of such engine being installed on the Airframe at any time while such engine is subject to such lease, conditional sale, or other security agreement and owned by such lessor or conditional seller or subject to a security interest in favor of such secured party; provided, however, that such agreement of Lessor shall not be for the benefit of any lessor or secured party of any airframe (other than the Airframe) leased to Lessee (or any Permitted Sublessee) or purchased by Lessee (or any Permitted Sublessee) subject to a conditional sale or other security agreement or for the benefit of any mortgagee of or any other holder of a security interest in an airframe owned by Lessee (or any Permitted Sublessee), unless such lessor, conditional vendor, other secured party or mortgagee has expressly agreed (which agreement may be contained in such lease, conditional sale or other security agreement or mortgage) that neither it nor its successors or assigns will acquire, as against Lessor, any right, title or interest in an Engine as a result of such Engine being installed on such airframe. A consolidation, merger, conveyance, transfer, or lease permitted by Section 7.4 of the Participation Agreement shall not be deemed to be a transaction to which this Section 7.2 shall apply. 7.3 Records and Reports. Lessee shall: 7.3.1 Records. Maintain or cause to be maintained all records, logs and other materials required by the FAA or any other governmental authority having jurisdiction to be maintained in respect of the Aircraft, the Airframe and each Engine; 7.3.2 Information and Reports. Upon request, promptly furnish or cause to be furnished to Lessor (in sufficient number) such information as may be required to enable Lessor or any Participant to file any reports, including tax returns, required to be filed by Lessor or such Participant with any governmental authority because of Lessor's ownership of, or Lender's security interest in, the Aircraft, Airframe or any Engine or because of receipt of Rent or because of the interest of any Participant in the Trust Estate; provided, however, that with respect to any such information which Lessee SALE AND LEASE AGREEMENT 22 deems commercially sensitive or confidential, if reasonably feasible, Lessor shall afford Lessee a reasonable opportunity to seek from any such governmental authority a waiver of Lessor's or such Participant's obligation to file any such information or consent to the filing of such information directly by Lessee in lieu of filing by Lessor or such Participant and if any such waiver or consent is evidenced to the reasonable satisfaction of Lessor, then Lessee shall not be required to furnish such information to Lessor; and 7.3.3 Financial Information. Promptly provide Lessor and each Participant with (i) such financial information concerning Lessee as is provided from time to time to the public shareholders of Lessee, (ii) within 60 days after the end of each of the first three quarterly periods of each fiscal year of Lessee, a consolidated balance sheet of Lessee and its subsidiaries prepared by it as of the close of such period, together with the related consolidated statements of income for such period, (iii) within 120 days after the close of each fiscal year of Lessee, a consolidated balance sheet of Lessee and its subsidiaries as of the close of such fiscal year, together with the related consolidated statements of income for such fiscal year, as certified by independent public accountants, and (iv) from time to time such other information as to its financial condition as Lessor or any Participant may reasonably request. Section 8. Maintenance; Replacement and Pooling of Parts; Alterations, Modifications and Additions. 8.1 Maintenance. 8.1.1 Maintenance Program. Lessee shall maintain, service, repair, overhaul, alter, modify, add to and test (or cause to be maintained, serviced, repaired, overhauled, altered, modified, added to and tested) the Aircraft, the Airframe and each Engine, and each other engine installed from time to time on the Airframe, in accordance with Lessee's FAA-approved maintenance program for the Aircraft, Airframe and Engines (the "Maintenance Program"), (i) so as to keep the Aircraft, the Airframe and each Engine in as good operating condition as on the Delivery Date, ordinary wear and tear excepted, (ii) in the same manner and with the same care as used by Lessee with similar aircraft owned or operated by Lessee, and (iii) so as to keep the Aircraft, the Airframe and each Engine in such condition as required to enable the FAA certificate of airworthiness for the Aircraft to be maintained in good standing at all times under the Act, except when all comparable Boeing Model 737-200 series aircraft registered in the United States of America have been grounded by the FAA other than as a result of actions taken or omitted to be taken by Lessee (or, if a sublease is then in effect, any Permitted Sublessee). SALE AND LEASE AGREEMENT 23 8.1.2 Compliance with Government Requirements. Lessee will comply with all service, inspection, maintenance, repair and overhaul regulations, directives and instructions which are made mandatory by the FAA or other Government authority upon United States operators of Boeing Model 737-200 series aircraft and Pratt & Whitney JT8D-9A engines and which require compliance during the Term and prior to return of the Aircraft under this Lease. 8.2 Replacement of Parts. Lessee, at its own cost and expense, will promptly replace (or cause to be replaced) all Parts which may from time to time be incorporated in the Aircraft, Airframe or any Engine and which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever, except as otherwise provided in Section 8.4. In addition, Lessee may, at its own cost and expense, remove in the ordinary course of maintenance, service, repair, overhaul or testing any Parts, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use; provided, however, Lessee, except as otherwise provided in Section 8.4, at its own cost and expense, will replace such Parts as promptly as possible. All replacement Parts shall be free and clear of all Liens (except for Permitted Liens and except in the case of replacement property temporarily installed on an emergency basis) and shall be in as good operating condition as, and shall have a value and utility at least equal to, the Parts replaced assuming such replaced Parts were in the condition and repair required to be maintained by the terms hereof. All Parts at any time removed from the Aircraft, Airframe or any Engine shall remain the property of Lessor, no matter where located, until such time as such Parts shall be replaced by Parts which have been incorporated in the Aircraft, Airframe or such Engine and which meet the requirements for replacement Parts specified above. Immediately upon any replacement Part becoming incorporated in the Aircraft, Airframe or such Engine as above provided, without further act, (i) title to the replaced Part shall thereupon vest in Lessee free and clear of all rights of Lessor, and the replaced Part shall no longer be deemed a Part hereunder, (ii) title to such replacement Part shall thereupon vest in Lessor (subject only to Permitted Liens and except in the case of replacement property temporarily installed on an emergency basis), and (iii) such replacement Part shall become subject to this Lease and be deemed part of the Aircraft, Airframe or such Engine for all purposes hereof to the same extent as the Parts originally incorporated in such Aircraft, Airframe or Engine. 8.3 Pooling of Parts. Any Part removed from the Aircraft, Airframe or any Engine as provided in Section 8.2 may be subjected by Lessee (or a Permitted Sublessee) to a normal pooling arrangement customary in the airline industry entered into in the ordinary course of business of Lessee or such Permitted Sublessee, so long as a Part replacing such removed Part shall be incorporated in the Aircraft, Airframe or such Engine in accordance with Section 8.2 as promptly as practicable after the removal of such removed Part. In addition, any replacement Part when incorporated in the Aircraft, SALE AND LEASE AGREEMENT 24 Airframe or any Engine in accordance with Section 8.2 may be owned by any third party subject to such a normal pooling arrangement, so long as Lessee (or any Permitted Sublessee), at its own cost and expense, as promptly thereafter as practicable either (i) causes title to such replacement Part to vest in Lessor in accordance with Section 8.2 by Lessee (or any Permitted Sublessee) acquiring title thereto for the benefit of, and transferring such title to, Lessor free and clear of all Liens (except Permitted Liens), or (ii) replaces such replacement Part by incorporating in the Aircraft, Airframe or such Engine a further replacement Part owned by Lessee (or any Permitted Sublessee) free and clear of all Liens (except Permitted Liens) and by causing title to such further replacement Part to vest in Lessor in accordance with Section 8.2. 8.4 Alterations; Modifications and Additions. Lessee, at its own cost and expense, shall make (or cause to be made) such alterations and modifications in and additions to the Aircraft, Airframe and each Engine as may be required from time to time to meet the standards of the FAA or other governmental authority having jurisdiction and to maintain the FAA certificate of airworthiness for the Aircraft; provided, however, that Lessee may contest in good faith the validity or application of any such law, rule, regulation or order in any reasonable manner which does not materially adversely affect Lessor's interest in the Aircraft; and provided, further, that Lessee's failure to make (or cause to be made) any such alterations or modifications shall not constitute noncompliance with the requirements of this Section 8.4 or a breach of Lessee's undertaking hereunder for so long a period as may be necessary to remedy such failure, if such failure can be remedied, so long as during such period Lessee is using due diligence and reasonable efforts to remedy such failure. In addition, Lessee, at its own cost and expense, may, from time to time make (or cause to be made) such alterations and modifications in and additions to the Aircraft, Airframe or any Engine as Lessee may deem desirable in the proper conduct of its business, including, without limitation, removal of Parts which Lessee deems obsolete or no longer suitable or appropriate for use in the Aircraft, Airframe or such Engine; provided, however, that no such alteration, modification or addition shall, in Lessee's reasonable judgment, materially diminish the value or utility of the Aircraft, Airframe or such Engine, or materially impair the condition or airworthiness thereof, below the value, utility, condition and airworthiness thereof immediately prior to such alteration, modification or addition assuming the Aircraft, Airframe or such Engine was then of the value and utility and in the condition and airworthiness required to be maintained by the terms of this Lease. Title to all Parts incorporated in the Aircraft, Airframe or such Engine as the result of such alteration, modification or addition shall, without further act, vest in Lessor. Notwithstanding the foregoing sentence of this Section 8.4, so long as no Lease Event of Default or Lease Default shall have occurred and be continuing, Lessee may, at any time during the Term, remove any Part if (i) such Part is in addition to, and not in replacement of or substitution for, any Part originally incorporated (or required by the provisions of this Lease to be incorporated) in the Aircraft, Airframe or such Engine at the time of delivery thereof hereunder or any Part in replacement of or substitution for SALE AND LEASE AGREEMENT 25 any such Part, (ii) such Part is not required to be incorporated in the Aircraft, Airframe or such Engine pursuant to the terms of this Section 8, and (iii) such Part can be removed from the Aircraft, Airframe or such Engine without diminishing or impairing the value, utility, condition or airworthiness required to be maintained by the terms of this Lease which the Aircraft, Airframe or such Engine would have had at such time had such alteration, modification or addition not occurred. Upon the removal by Lessee of any Part as above provided, title thereto shall, without further act, vest in Lessee and such Part shall no longer be deemed part of the Aircraft, Airframe or such Engine from which it was removed. Any Part not removed by Lessee as above provided prior to the return of the Aircraft, Airframe or such Engine to Lessor hereunder shall remain the property of Lessor. Section 9. [Intentionally Omitted] Section 10. Loss, Destruction, Requisition, Etc. 10.1 Event of Loss with Respect to Aircraft. Upon the occurrence of an Event of Loss with respect to the Aircraft, Lessee shall forthwith (and in any event within 15 days after such occurrence) give Lessor and each Participant written notice of such Event of Loss. On or before the Business Day next preceding the earlier of (i) the 180th day following the date of the occurrence of such Event of Loss, or (ii) 15 days following the receipt of insurance proceeds with respect to such occurrence, Lessee shall pay to Lessor, in the manner and in funds of the type specified in Section 3.5, (A) the Stipulated Loss Value for the Aircraft, (B) all unpaid Basic Rent or Renewal Rent accrued through and including the date of payment of Stipulated Loss Value and (C) (without duplication) any other Rent which is due and payable through and including the date of such payment. Upon payment in full of Stipulated Loss Value and all such accrued Basic or Renewal Rent pursuant hereto, (A) the obligation of Lessee to pay Basic or Renewal Rent due after the date of such payment shall terminate (but Lessee shall remain liable for all payments of Supplemental Rent due through and including the date of such payment of Stipulated Loss Value), (B) the Term for the Aircraft shall end, and (C) Lessor will Transfer to Lessee the Aircraft. Upon compliance by Lessee with all of the terms of this Section 10.1, Lessee will be subrogated to all claims of Lessor, if any, against third parties for damage to or loss of such Airframe and Engines to the extent of the then insured value thereof. 10.2 Event of Loss with Respect to an Engine. 10.2.1 Event of Loss. Upon the occurrence of an Event of Loss with respect to an Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe, Lessee shall give Lessor and each Participant prompt written notice (and in any event within 15 days after such occurrence) thereof and shall, SALE AND LEASE AGREEMENT 26 as promptly as possible and in any event within 60 days after the occurrence of such Event of Loss, convey or cause to be conveyed to Lessor, as replacement for the Engine with respect to which such Event of Loss occurred, title to a Replacement Engine free and clear of all Liens, other than Permitted Liens, and having a value and utility at least equal to, and being in as good operating condition as, the Engine with respect to which such Event of Loss occurred, assuming such Engine was of the value and utility and in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of Loss. 10.2.2 Conditions; Lessee's Obligations. Prior to or at the time of any such conveyance, Lessee will promptly: (a) furnish Lessor with a full warranty (as to title) bill of sale duly conveying to Lessor such Replacement Engine; (b) cooperate with any reasonable request of Lender to subject such Replacement Engine to the Lien of the Mortgage; and cause a Lease Supplement subjecting such Replacement Engine to this Lease, duly executed by Lessee, to be delivered to Lessor for execution and, upon execution, to be filed for recordation with the FAA pursuant to the Act; (c) furnish Lessor and Lender with such evidence of compliance with the insurance provisions of Section 11 hereof with respect to such Replacement Engine and the payment of all premiums then due with respect to such insurance, as Lessor or Lender may reasonably request; (d) furnish Lessor and Lender with an opinion or opinions of Lessee's counsel, in form, substance and scope reasonably satisfactory to Lessor and Lender, to the effect that, upon such conveyance, Lessor will acquire good title to such Replacement Engine free and clear of all Liens other than Permitted Liens (including Lender's interests), and that such Replacement Engine will be leased hereunder and will be subject to the Lien of the Mortgage to the same extent as the Engine replaced thereby and to such further effect as Lessor or Lender may reasonably request; (e) furnish Lessor and Lender with an Officer's Certificate certifying that, upon consummation of such replacement, no Lease Event of Default or Lease Default will exist hereunder; and (f) furnish such other certificates or documents (including appropriate UCC-3 amendments to the financing statements filed on or before the Delivery Date) as Lessor or any Participant may reasonably request to effect such replacement. SALE AND LEASE AGREEMENT 27 10.2.3 Recordation and Opinions. In the case of any Replacement Engine conveyed to Lessor under this Section 10.2, promptly upon the recordation of the Lease Supplement and any supplement or amendment to the Mortgage covering such Replacement Engine pursuant to the Act, Lessee will cause to be delivered to Lessor and Lender an opinion of William C. Boston & Associates or other FAA counsel satisfactory to Lessor as to the due recordation of such Lease Supplement and any such supplement or amendment to the Mortgage. 10.2.4 Conveyance; Replacement Engine. Upon compliance by Lessee with the terms of this Section 10.2, Lessor will Transfer to Lessee the Engine with respect to which such Event of Loss occurred, and Lessee will be subrogated to all claims of Lessor, if any, against third parties for damage to or loss of such Engine to the extent of the insured value thereof. 10.2.5 No Reduction of Rent. No Event of Loss with respect to an Engine under the circumstances contemplated by the terms of this Section 10.2 shall result in any changes of Basic Rent or Renewal Rent. 10.3 Application of Certain Payments. Any payments (other than insurance proceeds, the application of which is provided for in Section 11) received at any time by Lessor, Lessee or any Permitted Sublessee from any governmental authority or other Person with respect to any Event of Loss, will be applied as follows: 10.3.1 Replacement of Engine. If such payments are received with respect to an Engine that has been or is being replaced by Lessee pursuant to Section 10.2, so much of such payments remaining after reimbursement of Lessor and Owner Participant for costs and expenses shall be paid over to, or retained by, Lessee, provided Lessee shall have fully performed or, concurrently therewith, will fully perform the terms of Section 10.2 with respect to the Event of Loss for which such payments are made. 10.3.2 Nonreplacement. If such payments are received with respect to the Airframe and/or Engines that have not been and will not be replaced pursuant to Section 10.2, so much of such payments remaining after reimbursement of Lessor and Owner Participant for costs and expenses as shall not exceed the Stipulated Loss Value and other amounts required to be paid by Lessee hereunder shall be applied in reduction of Lessee's obligation to pay such Stipulated Loss Value and other amounts if not already paid by Lessee, or, if already paid by Lessee, shall be applied to reimburse Lessee for its payment of such Stipulated Loss Value and other amounts. The balance, if any, of such payment remaining thereafter shall be divided between Lessor and Lessee in proportion to their interests in the Aircraft. SALE AND LEASE AGREEMENT 28 10.4 Requisition of Aircraft for Use by Governmental Authorities. In the event of the requisition, unless and until such requisition becomes an Event of Loss, for use of the Airframe and the Engines or engines installed on such Airframe during the Term by any governmental authority, Lessee shall notify Lessor of such requisition, and, unless and until such requisition becomes an Event of Loss, all of Lessee's obligations under this Lease with respect to the Aircraft shall continue to the same extent as if such requisition had not occurred. All payments received by Lessor or Lessee from such governmental authority for the use of such Airframe and Engines or engines prior to the time such requisition becomes an Event of Loss shall be paid over to, or retained by, Lessee (or, if directed by Lessee, any Permitted Sublessee); and all payments received by Lessor or Lessee from such governmental authority for the use of such Airframe and Engines or engines after such time shall be paid over to, or retained by, Lessor unless Lessee shall have fully performed or, concurrently therewith, will fully perform the terms of Section 10.1 with respect to such Event of Loss. 10.5 Requisition of an Engine for Use by Governmental Authorities. In the event of the requisition for use by any governmental authority (other than in circumstances contemplated by Section 10.4) of any Engine but not the Airframe, Lessee will replace such Engine hereunder by complying with the terms of Section 10.2 to the same extent as if an Event of Loss had occurred with respect to such Engine, and any payments received by Lessor or Lessee from such governmental authority with respect to such requisition shall be paid over to, or retained by, Lessee (subject to performance by Lessee of the terms of Section 10.2 to the same extent as if an Event of Loss had occurred with respect to such requisitioned Engine). 10.6 Application of Payments During Existence of Default. Any amount referred to in this Section 10 which is payable or creditable to or retainable by Lessee shall not be paid or credited to or retained by Lessee if, at the time of such payment, credit or retention, (A) a Lease Event of Default or (B) a Lease Default under Section 14.1 or 14.5 shall have occurred and be continuing hereunder, but shall be paid to and held by Lessor as security for the obligations of Lessee under this Lease and applied against Lessee's obligations hereunder as and when due; at such time as there shall not be continuing any such Lease Event of Default or Lease Default, or at such earlier time as Lessee shall have paid in full all Rent and other amounts due and payable hereunder and under the other Operative Agreements by Lessee, any remaining balance of such amount shall be paid to Lessee to the extent not previously applied in accordance with the preceding clause of this sentence. Section 11. Insurance. 11.1 Public Liability and Property Damage Insurance. Lessee shall at all times maintain, or cause to be maintained, at its or any Permitted Sublessee's expense, SALE AND LEASE AGREEMENT 29 public liability (including without limitation contractual liability, passenger legal liability and property damage but excluding manufacturer's product liability coverage) insurance which shall: 11.1.1 Type, Form and Amount. Be of a type and form carried by similarly situated United States commercial air carriers generally, and carried in amounts not less than $350,000,000 (per occurrence) combined single limit (or such greater amount as Lessee may carry from time to time on other 737-200 series aircraft in its fleet); 11.1.2 Coverage. Include, but not be limited to, public liability insurance, contractual liability insurance, passenger liability insurance and property damage liability insurance (including cargo and baggage liability insurance); and 11.1.3 Additional Insureds. Name as additional insureds Lessor (in its individual and trust capacities), Lender and Owner Participant, as their interests may appear. 11.2 Insurance Against Loss of or Damage to Aircraft and Engines. Lessee shall at all times maintain, or cause to be maintained, at its or any Permitted Sublessee's expense insurance against loss of or damage to the Aircraft, Airframe and Engines as follows: 11.2.1 Type, Form and Amount. "All-risk" insurance on the Aircraft and "all-risk" coverage on each Engine and on Parts while removed from the Aircraft or Engines, which is of the type, form and in an amount in compliance with the last sentence of this Section 11.2.1, not less than that carried by Lessee on similar equipment owned or leased by Lessee and not less than that usually carried by similarly situated United States commercial air carriers; and, to the extent so usually carried, at all times that the Aircraft or any Engine is not covered by the insurance described in Section 11.2.2, coverage against the perils of (i) strikes, riots, civil commotions or labor disturbances, (ii) any malicious act or act of sabotage and (iii) hijacking, or any unlawful seizure or wrongful exercise of control, of the Aircraft or crew in flight (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 other than hijacking committed by persons engaged in a program of irregular warfare for terrorist purposes. Such insurance shall at all times be for an amount not less than Stipulated Loss Value for the Aircraft. 11.2.2 War-Risk Insurance. If at any time (a) war-risk insurance is maintained by Lessee or any Permitted Sublessee subleasing the Aircraft or any Engine with respect to other aircraft operated by Lessee or such Permitted Sublessee on the same or similar routes, or (b) the Aircraft is operated on routes where the custom in the SALE AND LEASE AGREEMENT 30 commercial airline industry is to carry war-risk insurance, then war-risk insurance of the type carried by similarly situated United States commercial air carriers operating the same or comparable models of aircraft on the same or similar routes shall be maintained on the Aircraft in an amount not less than that specified in Section 11.2.1. 11.2.3 Certain Requirements. The insurance policies required by this Section 11.2 shall: 11.2.3.1 Additional Insureds. Be endorsed to name Lessor (in its individual and trust capacities), Lender and Owner Participant as additional insureds, as their interests may appear. 11.2.3.2 Payment of Proceeds. Provide that proceeds thereunder shall be paid directly to Lender, so long as the Aircraft is subject to the Lien of the Mortgage and thereafter to Lessor, in either case as exclusive loss payee; provided, however, that any proceeds payable as a result of any property damage to the Airframe or any Engine, which property damage does not exceed $1,500,000 and does not constitute an Event of Loss with respect to the Aircraft or such Engine, shall be paid to Lessee, unless Lessor or Lender, prior to such payment, shall have notified the insurer making such payment that a Lease Event of Default or a Lease Default specified in Section 14.1 or 14.5 has occurred and is continuing. 11.2.3.3 Waiver of Subrogation. Provide that the insurers shall waive any rights of subrogation against Lessor, Lender and Owner Participant except for claims arising out of gross negligence or willful misconduct of such Persons; provided that the exercise by insurers of rights of subrogation, if any, permitted by this Section 11.2 shall not, in any way, delay payment of any claim that would otherwise be payable by such insurers but for the existence of such rights of subrogation or entitle such insurers to exercise or to assert any setoff, recoupment, counterclaim or any other deduction in respect of any amounts payable under such policies. 11.2.4 Deductibles. The insurance required by this Section 11.2 may, subject to Section 11.8, provide for standard deductibles which are from time to time in effect in the aviation insurance industry generally and which are customarily maintained by similarly situated United States commercial air carriers; provided, however, such deductibles shall not be more than the deductibles generally maintained by Lessee (and which Lessee is under no compulsion to maintain pursuant to any mortgage, lease or other agreement) with respect to its fleet of Boeing Model 737-200 series aircraft and Pratt & Whitney JT8D-9A engines generally. SALE AND LEASE AGREEMENT 31 11.2.5 Government Indemnity. In the case of a contract with the Government in respect of the Aircraft or Engines, a valid agreement by the Government to indemnify Lessee, Lessor, Lender and Owner Participant against the same risks which are required hereunder to be insured against in amounts at least equal to the amounts required hereunder from time to time (such indemnity to be backed by the full faith and credit of the United States of America), shall be considered adequate insurance with respect to the Aircraft, Airframe and any Engine subject to such contract to the extent of the risks and in the amounts that are the subject of any such agreement to indemnify. 11.3 General Policy Provisions. Each insurance policy to be procured and maintained hereunder shall: 11.3.1 Primary Insurance. Be primary and without right of contribution from other insurance which may provide coverage to Lessor, Lender or Owner Participant with respect to its interest in the Aircraft, Airframe or any Engine or its liabilities with respect to or arising out of the transactions contemplated by the Operative Agreements; 11.3.2 Coverage for Each Insured. Expressly provide that all the provisions thereof, except the agreed values and the limits of the liability of the insurer under such policy, shall operate in the same manner as if there were a separate policy covering each insured; 11.3.3 Waiver of Certain Rights. Waive any right of the insurers to any setoff, recoupment, counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of Lessee, Lender, Lessor or Owner Participant; 11.3.4 Breach of Warranty. Provide that, in respect of Lessor, Lender and Owner Participant, such insurance shall not be invalidated by any action or inaction by Lessee or any additional insured (other than such additional insured, as to such additional insured) and shall insure the interests of Lessor, Lender and Owner Participant regardless of any breach or violation by Lessee or any additional insured (other than such additional insured, as to such additional insured) of any representation, warranty, declaration or condition contained in such policy; 11.3.5 Notice of Termination or Changes. Provide for not less than 30 days' prior written notice to be received by Lessor, Lender and Owner Participant before any lapse, alteration, termination or cancellation of the insurance evidenced thereby shall be effective as to Lessor, Lender and Owner Participant, except that war-risk and allied perils policies may provide for not less than seven days' prior written notice or such lesser or greater notice as shall at the time be customary in the aviation insurance SALE AND LEASE AGREEMENT 32 industry generally, and which are customarily in effect with respect to major United States commercial air carriers generally from time to time; 11.3.6 Nonliability for Premiums. Provide that neither Lessor, Lender nor Owner Participant shall be liable for any insurance premium; and 11.3.7 Identity of Insurers. Be with insurance companies, underwriters or funds of recognized responsibility. 11.4 Application of Insurance Proceeds. As between Lessor and Lessee, all insurance proceeds received under policies required to be maintained (or to be caused to be maintained) by Lessee pursuant to Section 11.2 as a result of the occurrence of an Event of Loss with respect to the Aircraft, Airframe or any Engine will be applied in accordance with Section 10.3.1 or 10.3.2, as the case may be (except that the balance referred to in Section 10.3.2 shall be paid over to, or retained by, Lessee). All insurance proceeds in respect of any property damage loss not constituting an Event of Loss with respect to the Airframe or an Engine will be applied in payment for repairs or for replacement property in accordance with the terms of Section 8, if not already paid for by Lessee, and any balance remaining after compliance with such Section with respect to such loss shall be paid to Lessee. In the case of a loss with respect to an engine (other than an Engine) installed on the Airframe, Lessor shall hold any payment to it of any insurance proceeds in respect of such loss for the account of Lessee or any other third party that is entitled to receive such proceeds. The provisions of Section 10.6 shall apply to amounts referred to in this Section 11.4. 11.5 Certificates; Reports, Etc. With respect to any policy required hereunder, Lessee shall cause to be furnished to Lessor and each Participant on or prior to the Delivery Date of the Aircraft and on or prior to expiration of such policy, certificates of the insurer or insurers (or their authorized representatives) providing insurance pursuant to the requirements of this Section 11, as to hull and liability insurance. On or before the Delivery Date of the Aircraft, and annually thereafter on or before such expiration date, Lessee shall cause to be furnished to Lessor and each Participant a report signed by Frank B. Hall & Co. (or any other firm of independent aircraft insurance brokers, appointed by Lessee, reasonably satisfactory to the Participants) describing in reasonable detail the insurance then carried and maintained with respect to the Aircraft and stating the opinion of such firm that the insurance then carried and maintained on the Aircraft complies with the terms hereof as to hull and liability insurance. Lessee agrees that it will cause such firm to advise Lessor and each Participant in writing promptly of any default in the payment of any premium or any other act or omission on the part of Lessee or any Permitted Sublessee of which they have knowledge and which might invalidate or render unenforceable, in whole or in part, the insurance on the Aircraft. To the extent such agreement is reasonably obtainable, Lessee further agrees to cause such SALE AND LEASE AGREEMENT 33 firm to advise Lessor and each Participant in writing at least 30 days (seven days in the case of war-risk and allied perils coverage) prior to the expiration or termination date of any insurance carried and maintained on the Aircraft pursuant to this Section 11. 11.6 Lessor's Right to Maintain Insurance. In the event that Lessee shall fail to maintain or cause to be maintained insurance as herein provided, Lessor or any Participant may at its option (but shall not be obligated to) provide such insurance and in such event, Lessee shall, upon demand, reimburse such Person, as Supplemental Rent, for the cost thereof. No such payment, performance or compliance shall be deemed to cure any Lease Event of Default or Lease Default or otherwise relieve Lessee of its obligations with respect thereto. At Lessor's or Lender's request and expense, and subject to the permission of Lessee's insurance carriers, Lessee will increase the amount of coverage under any insurance policy that Lessee maintains pursuant to Section 11.2.1 or 11.2.2, and notwithstanding the provisions of Section 11.4, the proceeds of any such additional insurance shall be payable to Lessor or Lender, as the case may be; provided, however, that no such insurance may be obtained which would limit or otherwise adversely affect the availability or coverage or cost of any insurance required to be obtained or maintained pursuant to this Section 11. 11.7 Insurance for Own Account. Nothing in this Section 11 shall limit or prohibit Owner Participant (directly or through Lessor) from obtaining insurance for its own account, and any proceeds payable thereunder shall be payable as provided in the insurance policy relating thereto; provided, however, that no such insurance may be obtained which would limit or otherwise adversely affect the availability or coverage or cost of any insurance required to be obtained or maintained pursuant to this Section 1. Nothing in this Section 11 shall limit or prohibit Lessor or Lender from obtaining insurance for its own account, and any proceeds payable thereunder shall be payable as provided in the insurance policy relating thereto; provided, however, that no such insurance may be obtained which would limit or otherwise adversely affect the availability or coverage or cost of any insurance required to be obtained or maintained pursuant to this Section 11 or obtained by Owner Participant pursuant to the preceding sentence. 11.8 Self-Insurance. Notwithstanding the foregoing provisions of this Section 11, Lessee may, from time to time, self-insure with respect to the Aircraft to the same extent as it does with respect to, or maintain policies with deductibles or premium adjustment provisions consistent with similar provisions applicable to, other comparable aircraft operated by Lessee; provided, however, that if at any time Lessee's unsecured senior long-term debt securities are not rated "Investment Grade", in the case of hull insurance such self-insurance shall in no case be in an amount greater than 4% of Lessee's tangible net worth (as defined in accordance with accepted financial practice); and provided, further that, in the case of public liability insurance, such self-insurance shall in no event exceed $50,000,000. As used in this Section 11.8, the term "Investment Grade" SALE AND LEASE AGREEMENT 34 means a rating of "Baa3" or higher from Moody's Investors Service, Inc. or a rating from any other nationally recognized bond rating service equivalent to or better than such a rating. Section 12. Inspection. At all reasonable times, and upon reasonable notices, Lessor or any Participant or its authorized representatives or designees may inspect the Aircraft and inspect and copy (subject to any confidentiality agreements, copyright restrictions and the like) the books and records of Lessee relative thereto. Any such inspection of the Aircraft shall be without out-of-pocket expense or risk to Lessee; provided that no exercise of such inspection right shall interfere with the normal operation or maintenance of the Aircraft by, or the business of, Lessee (or any Permitted Sublessee). Subject to the proviso to the preceding sentence of this Section 12, Owner Participant may observe the "C" check (or its equivalent) referred to in clause (I) of Section 5.3.1 and any Card inspection during the Term. Neither Lessor nor any Participant shall have any duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. Section 13. Assignment. 13.1 General. Except as otherwise expressly permitted in Section 7.2 hereof or Section 12.5.1 of the Participation Agreement, or as required in the case of any requisition by the Government referred to in Section 7.1.4, Lessee will not, without the prior written consent of Lessor, assign or transfer any of its rights or obligations under this Lease. Lessor may assign or convey any of its right, title and interest in and to this Lease or the Aircraft in accordance with the Participation Agreement, the Trust Agreement or the express provisions of this Lease. The terms and provisions of the Lease shall be binding upon and inure to the benefit of Lessor and Lessee and their respective permitted successors and assigns. 13.2 Security for Lessor's Obligations. In order to secure the indebtedness evidenced by the Note, the Mortgage provides, among other things, for the assignment by Lessor to Lender of its right, title and interest in, to and under this Lease and any Permitted Sublease, to the extent set forth in the Mortgage, and for the creation of a first mortgage lien on and perfected security interest in the Aircraft in favor of Lender. Lessee hereby consents to such assignment and to the creation of such mortgage and security interest. Except as may otherwise be provided in the Mortgage, all rights of Lessor and Owner Participant with respect to the Lease, the Aircraft, the Airframe or any Engine (or any part thereof) shall be exercisable by Lender. SALE AND LEASE AGREEMENT 35 Section 14. Events of Default. The following events shall constitute Lease Events of Default (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), and each such Lease Event of Default shall continue so long as, but only so long as, it shall not have been remedied or waived: 14.1 Failure To Pay Rent. Lessee shall fail to make any payment of Basic Rent or Renewal Rent within 5 Business Days from the due date thereof; or any other payments required under the Operative Agreements within 10 Business Days after the receipt of written notice of such default to Lessee from Lessor. 14.2 Specific Defaults. Lessee shall fail to carry and maintain (or cause to be carried and maintained) insurance on or with respect to the Aircraft in accordance with the provisions of Section 11, provided that any such failure shall not constitute a Lease Event of Default so long as such failure is for a period of not more than 30 days, Lessee shall not operate the Aircraft at a time when such insurance is not in effect and the Aircraft continues to be covered by such insurance as is required when the Aircraft is on the ground; or 14.3 General Default. Lessee shall fail to perform or observe any other material covenant, condition or agreement to be performed or observed by it hereunder or under any other Operative Agreement (except the Tax Indemnification Agreement), and such failure shall continue unremedied for a period of 30 days after Lessee's receipt of written notice thereof from Lessor or Lender, unless Lessee shall be diligently proceeding to correct such failure and such failure is cured within 180 days after receipt of such notice or the end of the Term, whichever shall first occur; or 14.4 Misrepresentation and Breach of Warranty. Any representation or warranty made by Lessee herein or in the Participation Agreement or in any other Operative Agreement (other than the Tax Indemnification Agreement) or in any document or certificate furnished by Lessee in connection with any thereof, shall prove to have been incorrect in any material respect at the time made and shall remain incorrect in any material respect 30 days after Lessee's receipt of written notice thereof from Lessor or Lender; or 14.5 Bankruptcy, Etc. Lessee shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official or agency in an involuntary case SALE AND LEASE AGREEMENT 36 or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due unless the subject of a bona fide dispute, within the meaning of Title 11 of the United States Code, or shall take any corporate action to authorize any of the foregoing; or an involuntary case or other proceeding shall be commenced against Lessee seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official or agency of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 90 days; or 14.6 Cross Default. A Lease Event of Default shall have occurred and be continuing under either of the other two Sale and Lease Agreements of even date herewith, each relating to a Boeing 737-200 series aircraft having FAA registration number N55SW or N57SW; provided, that Lender (or lender of any Successor Indebtedness) shall then be Lender (or lender of any Successor Indebtedness) (as such terms are defined therein) under such other Sale and Lease Agreement. Section 15. Remedies. 15.1 Default; Remedies. Upon the occurrence of a Lease Event of Default and at any time thereafter so long as the same shall be continuing, Lessor may, at its option, declare by written notice to Lessee this Lease to be in default (provided, however, that any Lease Event of Default specified in Section 14.5 shall be automatic and shall not require any such declaration or notice) and at any time thereafter, so long as any such Lease Event of Default shall be continuing, Lessor may exercise one or more of the following remedies as Lessor in its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, applicable law then in effect which have not been effectively waived by Lessee: 15.1.1 Return; Repossession. Lessor may cause Lessee, upon written demand by Lessor and at Lessee's expense, to return promptly, and Lessee shall return promptly, all or any part of the Aircraft, Airframe or Engines as Lessor may so demand to Lessor or its order in the manner and condition required by, and otherwise in accordance with all the provisions of, Section 5 as if the Aircraft, Airframe or Engines were being returned at the end of the Term; or Lessor, at its option, may enter upon the premises where the Aircraft, Airframe or any Engine, or part thereof is located and take immediate possession of and remove the same by summary proceedings or otherwise, all without liability accruing to Lessor for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise, and Lessee expressly waives any right it may have under applicable law to a hearing prior to repossession of the Aircraft, Airframe or any Engine or part thereof; or SALE AND LEASE AGREEMENT 37 15.1.2 Sale, Use, Etc. Lessor may sell all or any part of the Aircraft, Airframe or any Engine, at public or private sale, at such times and places, to such Persons (including Lessor or any Participant) as Lessor may determine, or otherwise dispose of, hold, use, operate, lease to others or keep idle the Aircraft, Airframe or any Engine or part thereof, as Lessor, in its sole discretion, may determine, all free and clear of any rights of Lessee except as hereinafter set forth in this Section 15 and without any duty to account to Lessee with respect to such action or inaction or for any proceeds with respect thereto; or 15.1.3 Certain Liquidated Damages. 15.1.3.1 Liquidated Damages--Fair Market Rental Value. Whether or not Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under Section 15.1.1 or 15.1.2 with respect to the Aircraft, Airframe or any Engine or part thereof, Lessor, by written notice to Lessee specifying a payment date not earlier than ten days from the date of such notice, may cause Lessee to pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent or Renewal Rent, as the case may be, due on or after the date specified for payment in such notice), any unpaid Basic Rent or Renewal Rent, as the case may be, due prior to such date plus an amount equal to the excess, if any, of the Stipulated Loss Value for the Aircraft, computed as of such date over the fair market rental value (determined as hereafter provided in this Section 15) of the Aircraft for the remainder of the Term, after discounting such fair market rental value semiannually (effective on each Rent Payment Date) by a rate equal to the Overdue Rate to present worth as of the date specified for payment in such notice, together with interest, if any, on such amount and unpaid Basic Rent or Renewal Rent, as the case may be, at the Overdue Rate from the date specified for payment in such notice to the date of payment in full; or 15.1.3.2 Liquidated Damages--Fair Market Sales Value. If Lessor shall not have sold the Aircraft, Lessor, by written notice to Lessee specifying a payment date not earlier than ten days from the date of such notice, may cause Lessee to pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent or Renewal Rent, as the case may be, due on or after the date specified for payment in such notice), any unpaid Basic Rent or Renewal Rent, as the case may be, due prior to such date plus an amount equal to the excess, if any, of the Stipulated Loss Value for the Aircraft, computed as of such date over the fair market sales value of the Aircraft (determined as hereafter provided in this Section 15 as of the date specified for payment in such notice), together with interest, if any, on such amount and unpaid Basic Rent or SALE AND LEASE AGREEMENT 38 Renewal Rent, as the case may be, at the Overdue Rate from the date specified for payment in such notice to the date of payment in full; or 15.1.4 Liquidated Damages upon Sale. If Lessor, pursuant to Section 15.1.2 or applicable law, shall have sold the Aircraft, Lessor, in lieu of exercising its rights under Section 15.1.3 with respect to the Aircraft, may, if Lessor shall so elect, upon giving written notice to Lessee, cause Lessee to pay Lessor, and Lessee shall pay to Lessor, on the date of such sale, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent or Renewal Rent, as the case may be, due on or after the date of such sale), any unpaid Basic Rent or Renewal Rent, as the case may be, due prior to such date of sale plus the amount of any deficiency between the net proceeds of such sale or (if such sale is a private sale and is made to Lessor, a Participant or any Affiliate thereof) between the fair market sales value of the Aircraft, determined as of the date of such sale as hereinafter provided in this Section 15, and the Stipulated Loss Value of the Aircraft, computed as of the date of such sale, together with interest, if any, on such amount and such unpaid Basic Rent or Renewal Rent at the Overdue Rate from the date of such sale to the date of payment in full; or 15.1.5 Rescission and Other Remedies. Lessor may terminate or rescind this Lease as to the Aircraft, or may exercise any other right or remedy which may be available to it under applicable law or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof, including without limitation Lessee's agreement to lease the Aircraft for the Term and to pay Rent. In addition to the foregoing remedies, Lessee shall be liable (except as otherwise provided above and without duplication of amounts otherwise payable hereunder) for any and all unpaid Rent due hereunder before, during or after the exercise of any of the foregoing remedies and for all reasonable and actual legal fees and other costs and expenses (including the fees and expenses of all appraisers required by this Section 15) of Lessor and Participants, incurred by reason of the occurrence of any Lease Event of Default or the exercise of Lessor's remedies with respect thereto, including all insurance and storage costs and all costs and expenses incurred in connection with the return of the Aircraft, Airframe or any Engine or part thereof, in accordance with the terms of Section 5 or in placing the Aircraft, Airframe or any Engine or part thereof, in the condition and airworthiness required by Section 5. Lessor agrees to give Lessee at least 15 days' prior written notice of the date fixed for any public sale of the Aircraft, the Airframe or any Engine or part thereof, and of the date on or after which will occur the execution of any contract providing for any private sale, and any such public sale shall be conducted in general so as to afford Lessee a reasonable opportunity to bid. SALE AND LEASE AGREEMENT 39 15.2 Determination of Fair Market Rental Value and Fair Market Sales Value. For the purpose of this Section 15, the "fair market rental value" or the "fair market sales value" of the Aircraft shall be the rental value or sales value, as the case may be, which would be obtained in an arm's-length transaction between an informed and willing lessee or purchaser, as the case may be, under no compulsion to lease or purchase, as the case may be, and an informed and willing lessor or seller in possession, as the case may be, and in each case shall be determined on an "as is, where is" basis pursuant to an appraisal by a recognized independent aircraft appraiser chosen by Lessor and approved by Lessee, which approval shall not be unreasonably withheld or delayed and shall be deemed granted if such choice is not rejected within 10 days after Lessee's receipt of notice of Lessor's choice. 15.3 No Waiver, Etc. No remedy referred to in this Section 15 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity; and the exercise or beginning of exercise by Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Lessor of any or all of such other remedies. No express or implied waiver by Lessor of any Lease Event of Default shall in any way be, or be construed to be, a waiver of any earlier or subsequent Lease Event of Default. To the extent permitted by applicable law, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use the Aircraft, Airframe or any Engine, or part thereof, in mitigation of Lessor's damages as set forth in this Section 15 or which may otherwise limit or modify any of Lessor's rights or remedies under this Section 15. Section 16. Notices. All notices required under the terms and provisions hereof shall be in writing and shall be given by certified mail, telecopy or any other customary means of written communication, addressed: If to Lessee, at 2702 Love Field Dr., P.O. Box 36611, Dallas, Texas 75235-1611 (telecopy no. 214/904-4022), Attention: Treasurer, or at such other address as Lessee shall from time to time designate in writing; If to Lessor, at 79 Main Street, P. 0. Box 30007, Salt Lake City, Utah 84130-0007 (telecopy no. 801/350-5053), Attention: Corporate Trust Department, or at such other address as Lessor shall from time to time designate in writing; If to any Participant, at its address set forth in the signature pages of the Participation Agreement, or at such other address as such Participant shall from time to time designate in writing. SALE AND LEASE AGREEMENT 40 The effective date of any such notice shall be the date on which it is received by the addressee. Lessee shall furnish to Lessor for transmission to Owner Participant and Lender a sufficient number of copies of all reports, notices, requests, demands, certificates, financial statements and other instruments furnished hereunder, except in any case where Lessee shall have transmitted the same directly to any such person. Section 17. Net Lease; Lessee's Obligations; No Setoff, Counterclaim, Etc. This is a net lease and it is hereby recognized that Lessor is the owner of the Aircraft (except that Owner Participant will be the owner for income tax purposes) and Lessee is the lessee thereof. It is the intent of the parties hereto that this Lease be a "true lease". Lessee's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including without limitation: (a) any setoff, counterclaim, recoupment, defense or other right which Lessee may have against Lessor (in its individual or trust capacity), any Participant, any Indemnified Party or any other Person for any reason whatsoever (except as expressly provided in Section 13.5.2 of the Participation Agreement or in Sections 6 and 7 of the Tax Indemnification Agreement); (b) any defect in the title, airworthiness, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, the Aircraft, Airframe or any Engine, or any interruption or cessation in the use or possession thereof by Lessee for any reason whatsoever; (c) any insolvency, bankruptcy, reorganization or similar proceedings by or against Lessee; (d) any restriction, prevention or curtailment of or interference with any use of the Aircraft or part thereof; (e) any invalidity or unenforceability or disaffirmance of this Lease or any provision hereof or any of the other Operative Agreements or any provision thereof, in each case whether against or by Lessee or otherwise; or (f) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise except as specifically provided herein, Lessee nonetheless agrees to pay an amount equal to each Basic Rent, Renewal Rent and Supplemental Rent payment at the time such payment would have become due and payable in accordance with the terms hereof had this Lease not been terminated in whole or in part. All Rent payable by Lessee shall be paid without notice or demand (except as otherwise expressly provided) and without abatement, suspension, deferment, deduction, diminution or proration by reason of any circumstance or occurrence whatsoever (except as expressly provided in Section 13.5.2 of the Participation Agreement or in Sections 6 and 7 of the Tax Indemnification Agreement). Lessee hereby waives, to the extent permitted by applicable law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease or any part hereof, or to any abatement, suppression, deferment, diminution, reduction or proration of Rent except in accordance with the express terms hereof. Each SALE AND LEASE AGREEMENT 41 payment of Rent made by Lessee shall be final as to Lessor and Lessee. Lessee will not seek to recover all or any part of any such payment of Rent for any reason whatsoever. Section 18. Renewal Options; Early Termination. 18.1 Renewal Options. At the end of the Base Lease Term or any Renewal Term, so long as no Lease Event of Default or Lease Default has occurred and is continuing and the aggregate of all Renewal Terms shall not exceed six years, Lessee shall have the option to renew this Lease for a Renewal Term; provided, that if, at the time of exercise by Lessee of any of its renewal rights set forth in this Section 18.1, Owner Participant and its Affiliates shall be the owner of all of the beneficial interest in one or more other Boeing Model 737-200 series aircraft then subject to a lease under which the lessee is Lessee (all of such aircraft, together with the Aircraft, referred to as the "Owner Group Aircraft"), then Lessee shall be obligated to exercise such renewal rights (or to have exercised such renewal rights for a Renewal Term which shall be then continuing) with respect to at least three of such Owner Group Aircraft (or such lesser number of Owner Group Aircraft as shall exist at such time). In order to exercise the option to renew, except as otherwise provided in Section 13.4.1 of the Participation Agreement, Lessee shall notify Lessor thereof in writing not more than 360 days nor less than 180 days prior to the commencement of the applicable Renewal Term (which notice shall be irrevocable). The Renewal Rent payable for such Renewal Term hereunder shall be the fair market rental value of the Aircraft calculated as of the commencement of such Renewal Term; provided, that if a Stage III Upgrade shall have occurred and (i) Owner Participant shall have performed its obligations set forth in Section 13.4 of the Participation Agreement, upon proper request by Lessee, then such fair market value shall be determined taking into account the value of the hush kit installed pursuant to such upgrade, and (ii) if Owner Participant shall not have so performed or shall not have been requested to do so by Lessee, then such fair market value shall be determined without taking into account the value of the hush kit installed pursuant to such upgrade, i.e., as if no Stage III Upgrade had occurred. Such fair market rental value shall be determined not later than three months prior to the commencement of such Renewal Term by mutual consent of Owner Participant and Lessee or, if they shall be unable so to agree, by three recognized independent aircraft appraisers, one chosen and paid for by Owner Participant, one chosen and paid for by Lessee and the third appraiser chosen by the mutual consent of the first two appraisers and paid for equally by Owner Participant and Lessee, the appraisals of which three appraisers shall be averaged and such average shall be deemed to be the fair market rental value of the Aircraft for all purposes hereof; provided, however, that if the appraisal of one appraiser is more disparate from the average of all three appraisals than each of the other two appraisals, then the appraisal of such appraiser shall be excluded, the remaining appraisals shall be averaged and such average shall be deemed to be the fair market rental value of the Aircraft for all purposes hereof. If either Owner Participant or Lessee shall fail to appoint an appraiser by the date which is two months SALE AND LEASE AGREEMENT 42 prior to the commencement of such Renewal Term or if such two appraisers cannot agree on the amount of such appraisal and fail to appoint a third appraiser by the date which is one month before the commencement of such Renewal Term, then either Owner Participant or Lessee may apply to any court having jurisdiction to make such appointment. Fair market rental value shall be the cash rental obtainable in an arm's-length lease between an informed and willing lessee (under no compulsion to lease) and an informed and willing lessor (under no compulsion to lease) and shall be determined on the assumptions that the Aircraft is in the United States of America, available for use by the lessee and in the return condition required by Section 5 of this Lease and otherwise in compliance with the requirements of this Lease. Stipulated Loss Value amounts that are payable during each such Renewal Term shall be calculated as of the date of commencement of such Renewal Term and shall be determined by multiplying 1.1 times the appraised value of the Aircraft at such time; provided, however, that no such amount shall be less than the principal amount of any indebtedness then secured by a Lien on the Aircraft. 18.2 Early Termination. Provided that this Lease has not been terminated and provided that no Lease Default or Lease Event of Default shall have occurred and be continuing hereunder, Lessee shall have the option to terminate this Lease with respect to the Aircraft not more than 42 days prior to the expiration of the Base Lease Term or the applicable Renewal Term. Lessee may exercise such option of termination by delivering irrevocable written notice of such exercise to Lessor not less than six months' prior written notice of such advanced date of termination. Such notice shall provide the date elected by Lessee for such early termination and a calculation of the final payment of Rent, which shall be due on such early termination date and shall be calculated as provided in clause (ii) of Section 3.3. 18.3 Default Purchase Option. In the event of Owner Participant's failure to satisfy its obligations specified in Section 13.4 of the Participation Agreement, Lessee shall have the option to purchase the Aircraft. In order to exercise such option, Lessee shall notify Lessor (and, if the Mortgage is then in effect, Lender) thereof in writing, specifying a Rent Payment Date on which such purchase is to occur. In such case, Lessee shall purchase the Aircraft on such Rent Purchase Date at a purchase price equal to Termination Value. Upon receipt of such purchase price from Lessee and all Rent and other amounts due hereunder and under any other Operative Agreement, Lessor shall Transfer to Lessee the Aircraft. Section 19. Successor Owner Trustee. Lessee agrees that in the case of the appointment of any successor Owner Trustee pursuant to the terms of the Trust Agreement, such successor Owner Trustee shall, upon written notice by such successor Owner Trustee to Lessee, succeed to all the rights, powers and title of Lessor hereunder and shall be deemed to be Lessor and the owner of the Aircraft for all purposes hereof SALE AND LEASE AGREEMENT 43 without the necessity of any consent or approval by Lessee (but such successor Owner Trustee shall qualify under the terms of Section 10.2 of the Participation Agreement) and without in any way altering the terms of this Lease or Lessee's obligations hereunder. One such appointment and designation of a successor Owner Trustee shall not exhaust the right to appoint and designate further successor or additional Owner Trustees pursuant to the Trust Agreement, and such right may be exercised repeatedly as long as this Lease shall be in effect. Section 20. Right to Perform for Lessee. If Lessee fails to make any payment of Rent required to be made by it hereunder or fails to perform or comply with any of its agreements contained herein, Lessor may (but shall not be obligated to) make such payment or perform or comply with such agreement, and the amount of such payment and the amount of the expenses of Lessor incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by Lessee upon demand. Section 21. Quiet Enjoyment. So long as this Lease shall not have been declared to be in default pursuant to Section 15, during the Term Lessor will not, through its own actions or inactions, interfere in the quiet enjoyment of the Aircraft by Lessee or any Permitted Sublessee. Section 22. Investment of Security Funds; Miscellaneous; Amendment. 22.1 Investment of Security Funds. Any moneys required to be paid to or retained by Lessor which are not required to be paid to Lessee pursuant to Section 10.6 or 11.4 solely because a Lease Event of Default or Lease Default under Section 14.1 or 14.5 shall have occurred and be continuing, or which are held by Lessor pending payment to Lessee pursuant to Section 11.4 or which are required to be paid to Lessee pursuant to Section 10.3 or 11.4 after completion of a replacement to be made pursuant to Section 10.2, shall, until paid to Lessee as provided in Section 10 or 11 or applied as provided herein or in the Trust Agreement, be invested by Lessor from time to time as directed in writing by Lessee and at the expense and risk of Lessee in the following securities (which, except in the case of the shares described in clause (e) below, shall mature within 91 days of the date of purchase thereof): (a) direct obligations of the Government; (b) obligations fully guaranteed by the Government; (c) open market commercial paper of any corporation incorporated under the laws of the United States of America or any State thereof rated P-1 or its equivalent by Moody's Investors Service, Inc. and A-1 or its equivalent by Standard & Poor's Corporation; or (d) certificates of deposit issued by, or bankers' acceptances of, or time deposits or a deposit account with any bank, trust company or national banking association incorporated or doing business under the laws of the United States of America or any state thereof having a combined capital and SALE AND LEASE AGREEMENT 44 surplus of at least $50,000,000; or (e) shares of a money market fund registered under the Investment Company Act of 1940, as amended, the sole assets of which are direct obligations of the Government. There shall be promptly remitted to Lessee or its order any gain (including interest received) realized as the result of any such investment (net of any fees, commissions and other expenses, if any, incurred in connection with such investment) unless a Lease Event of Default of a Lease Default under Section 14.1 or 14.5 shall have occurred and be continuing. Lessee will promptly pay to Lessor, on demand, the amount of any loss realized as the result of any such investment (together with any fees, commissions and other expenses, if any, incurred in connection with such investment), such amount to be disposed of in accordance with the terms of the Trust Agreement. 22.2 Miscellaneous; Amendment. Lessee shall do, execute, acknowledge and deliver, or shall cause to be done, executed, acknowledged and delivered, all such further acts, conveyances and assurances as Lessor or any Participant shall reasonably require for accomplishing the purposes of this Agreement and the other Operative Agreements. Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, Lessee hereby waives any provision of law which renders any provision hereof prohibited or unenforceable in any respect. No term or provision of this Lease may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. This Lease shall constitute an agreement of lease, and nothing herein shall be construed as conveying to Lessee any right, title or interest in or to the Aircraft, Airframe or Engines except as a lessee only. The section and paragraph headings in this Lease and the table of contents are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof and all references herein to numbered sections, unless otherwise indicated, are to sections of this Lease. THIS LEASE HAS BEEN, AND EACH LEASE SUPPLEMENT AND AMENDMENT HERETO IS INTENDED TO BE, DELIVERED IN THE STATE OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE IN SUCH STATE BY RESIDENTS THEREOF AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. This Lease and each Lease Supplement and amendment hereto may be executed in several counterparts, each of which shall be deemed an original, and all such counterparts shall constitute one and the same instrument. SALE AND LEASE AGREEMENT 45 Section 23. Permitted Foreign Air Carriers. Lessor may, in the exercise of its reasonable business judgment, by written notice to Lessee, remove any foreign air carrier from Exhibit B and Lessee may, by written notice to Lessor, request that any foreign air carrier be added to Exhibit B, subject to Lessor's prior written consent, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, no deletion of an airline from the list of Permitted Foreign Air Carriers pursuant hereto shall (i) reduce the number of Permitted Foreign Air Carriers below 35, (ii) affect any existing sublease or other agreement providing for transfer of possession of the Aircraft, Airframe, any Engine or Part which was permitted hereunder at the time entered into, or (iii) preclude any subsequent renewal or extension of such sublease or other agreement to which the Permitted Foreign Air Carrier under a sublease is entitled by the terms thereof as originally in effect. SALE AND LEASE AGREEMENT 46 IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be duly executed and delivered as of the day and year first above written. Lessor: FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity except as expressly stated herein, but solely as Owner Trustee under the Trust Agreement By: /s/ Dorian Light Shaw --------------------------- Title: ASSISTANT VICE PRESIDENT ------------------------ Lessee: SOUTHWEST AIRLINES CO. By: /s/ John D. Owen --------------------------- John D. Owen Treasurer SALE AND LEASE AGREEMENT EXHIBIT A TO LEASE AGREEMENT SALE AND LEASE AGREEMENT SUPPLEMENT NO._______ THIS SALE AND LEASE AGREEMENT SUPPLEMENT NO._________ dated ___________, ____ is between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under that certain Trust Agreement, dated as of September 1, 1990 (the "Trust Agreement"), between the Owner Participant named therein and such Bank ("Lessor"), and SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee"). RECITALS. A. Lessor and Lessee have heretofore entered into that certain Sale and Lease Agreement dated as of September 1, 1990, as supplemented and amended from time to time (herein called the "Lease Agreement" and the defined terms therein being herein used with the same meaning), which Lease Agreement provides in Section 2 for the execution of a Lease Supplement substantially in the form hereof for the purpose of Lessee's selling to Lessor, and Lessor's leasing back to Lessee, the Aircraft under the Lease Agreement as and when delivered by Lessor to Lessee in accordance with the terms thereof; and B. The Lease Agreement relates to the airframe and engines described below, and a counterpart of the Lease Agreement is attached hereto and made a part hereof and this Lease Supplement, together with such attachment, is being filed for recordation with the FAA on the date hereof as one document. In consideration of the premises and other good and sufficient consideration, and pursuant to Section 2 of the Lease Agreement, Lessor and Lessee hereby agree as follows: 1. Lessee hereby delivers and sells to Lessor and Lessor hereby accepts and purchases from Lessee and in turn delivers and leases back to Lessee, and Lessee hereby accepts and leases back from Lessor, under the Lease Agreement, as herein supplemented, the following-described Boeing Model 737-2H4 Aircraft (the "Delivered Aircraft"), which Delivered Aircraft as of the date hereof consists of the following: SALE AND LEASE AGREEMENT A-1 Airframe: U.S. Registration Number N ________SW; Manufacturer's Serial No. ___; and Engines: Two Pratt & Whitney JT8D-9A Engines bearing Engine Manufacturer's Serial Numbers as follows: __________ and ________________. Each of the Engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 2. The Delivery Date of the Delivered Aircraft is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. Lessee hereby confirms to Lessor that the Delivered Aircraft has been or will be duly marked in accordance with the terms of Section 7.1.2 of the Lease and that Lessee has accepted the Delivered Aircraft for all purposes hereof and of the Lease Agreement, including its being airworthy, in accordance with specifications, in good working order and repair and without defect or inherent vice in title, condition, design, operation or fitness for use, whether or not discoverable by Lessee as of the date hereof, and free and clear of all Liens except Permitted Liens. 4. All the provisions of the Lease Agreement are hereby incorporated by reference in this Lease Supplement, on and as of the date of this Lease Supplement, to the same extent as if fully set forth herein. 5. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. SALE AND LEASE AGREEMENT A-2 IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed and delivered as of the date and year first above written. Lessor: FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By: --------------------------- Title: Lessee: SOUTHWEST AIRLINES CO. By: --------------------------- John D. Owen Treasurer SALE AND LEASE AGREEMENT A-3 EXHIBIT B TO LEASE AGREEMENT PERMITTED FOREIGN AIR CARRIERS Aer Lingus Interflug Aerolineas Argentinas Japan Air Lines Aeromexico Japan Air System Air Canada KLM Air Europa Korean Air Air Europe Lan Chile Air France Lauda Air Air Inter Linjeflyg Air Jamaica Lufthansa Air New Zealand Luxair Alitalia Maersk All Nippon Airways Malaysian Airline System ALM Martinair Ansett Airlines of Australia Mexicana Asiana Airlines Monarch Airlines Australian Airlines Olympic Airlines Austrian Airlines Qantas Airways AVENSA Ryanair Bahamasair Sabena Bavaria SAS Braathens S.A.F.E. Saudi Arabia Airlines Britannia Singapore Airlines British Airways SouthWest Airlines British Midland Swissair CAAC TAP Canadian Airlines International Thai Airways Cathay Pacific Airways Transavia Holland Cayman Airways Transbrasil China Airlines TransEuropean Condor Flugdienst UTA Dan-Air Varig Finnair Viasa Garuda Viva Air Hapag Lloyd Iberia Icelandair SALE AND LEASE AGREEMENT B-1 EXHIBIT C TO LEASE AGREEMENT OTHER RETURN CONDITIONS At the time of the return of the Aircraft upon the expiration or earlier termination of the Term, the Aircraft shall be in the following condition: 1. General Condition (a) The Aircraft shall be clean and free of leaks, in each case in accordance with United States commercial airline operating standards. (b) All decals shall be clean, secure and legible. 2. Fuselage. Windows and Doors (a) The fuselage shall be free of loose or pulled or missing rivets. (b) The doors shall be free moving, correctly rigged and be fitted with serviceable seals. 3. Wings and Empennage (a) The wings shall be free of fuel leaks. 4. Interior (a) The ceilings, sidewalls and bulkhead panels shall be clean and free of cracks and stains. (b) All carpet and seat covers shall be in good condition, clean and stain free and meet FAR fire resistance regulations. (c) All seats shall meet FAA fire retardant regulations and be serviceable, in good condition and repainted as necessary. (d) All signs and decals shall be in English and be clean and legible. SALE AND LEASE AGREEMENT C-1 (e) All emergency equipment having a calendar life shall have a minimum of one year or one hundred per cent of its total approved life, whichever is less, remaining. 5. Cockpit (a) All decals shall be in English and be clean, secure and legible. (b) All seat covers shall be in good condition, clean and shall conform to FAR fire resistance regulation. (c) All seats shall be fully serviceable and shall be repainted as necessary. 6. Cargo Compartment (a) All panels shall be in good condition. (b) All nets shall be in good condition. 7. Fuel Tanks (a) The fuel tanks shall be substantially free of bacteria growth and water. SALE AND LEASE AGREEMENT C-2 EXHIBIT D TO LEASE AGREEMENT TERMINATION VALUE SCHEDULE Rent Payment Date Termination Date - ----------------- ---------------- December 31, 1990 ....................................... $ 11,150,500 March 31, 1991 .......................................... 10,997,263 June 30, 1991 ........................................... 10,840,194 September 30, 1991 ...................................... 10,679,199 December 31, 1991 ....................................... 10,514,179 March 31, 1992 .......................................... 10,345,033 June 30, 1992 ........................................... 10,171,659 September 30, 1992 ...................................... 9,993,951 December 31, 1992 ....................................... 9,811,799 March 31, 1993 .......................................... 9,625,094 June 30, 1993 ........................................... 9,433,722 September 30, 1993 ...................................... 9,237,565 December 31, 1993 ....................................... 9,036,504 March 31, 1994 .......................................... 8,830,417 June 30, 1994 ........................................... 8,619,177 September 30, 1994 ...................................... 8,402,656 December 31, 1994 ....................................... 8,180,723 March 31, 1995 .......................................... 7,953,241 June 30, 1995 ........................................... 7,720,072 September 30, 1995 ...................................... 7,481,074 December 31, 1995 ....................................... 7,236,101 March 31, 1996 .......................................... 6,985,003 June 30, 1996 ........................................... 6,727,628 September 30, 1996 ...................................... 6,463,819 December 31, 1996 ....................................... 6,193,414 March 31, 1997 .......................................... 5,916,250 June 30, 1997 ........................................... 5,632,156 September 30, 1997 ...................................... 5,340,960 December 31, 1997 ....................................... 5,042,484 March 31, 1998 .......................................... 4,736,546 June 30, 1998 ........................................... 4,422,960 September 30, 1998 ...................................... 4,101,533 December 31, 1998 ....................................... 3,772,072 SALE AND LEASE AGREEMENT D-1 SCHEDULE I TO LEASE AGREEMENT The Lessor's Cost for the Aircraft is $11,000,000. SALE AND LEASE AGREEMENT SALE AND LEASE AGREEMENT SUPPLEMENT NO. 1 THIS SALE AND LEASE AGREEMENT SUPPLEMENT NO. 1 dated September 27, 1990 is between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under that certain Trust Agreement, dated as of September 1, 1990 (the "Trust Agreement"), between the Owner Participant named therein and such Bank ("Lessor"), and SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee"). RECITALS. A. Lessor and Lessee have heretofore entered into that certain Sale and Lease Agreement dated as of September 1, 1990, as supplemented and amended from time to time (herein called the "Lease Agreement" and the defined terms therein being herein used with the same meaning), which Lease Agreement provides in Section 2 for the execution of a Lease Supplement substantially in the form hereof for the purpose of Lessee's selling to Lessor, and Lessor's leasing back to Lessee, the Aircraft under the Lease Agreement as and when delivered by Lessor to Lessee in accordance with the terms thereof; and B. The Lease Agreement relates to the airframe and engines described below, and a counterpart of the Lease Agreement is attached hereto and made a part hereof and this Lease Supplement, together with such attachment, is being filed for recordation with the FAA on the date hereof as one document. In consideration of the premises and other good and sufficient consideration, and pursuant to Section 2 of the Lease Agreement, Lessor and Lessee hereby agree as follows: 1. Lessee hereby delivers and sells to Lessor and Lessor hereby accepts and purchases from Lessee and in turn delivers and leases back to Lessee, and Lessee hereby accepts and leases back from Lessor, under the Lease Agreement, as herein supplemented, the following-described Boeing Model 737-2H4 Aircraft (the "Delivered Aircraft"), which Delivered Aircraft as of the date hereof consists of the following: Airframe: U.S. Registration Number N56SW; Manufacturer's Serial No. 21721; and Engines: Two Pratt & Whitney JT8D-9A Engines bearing Engine Manufacturer's Serial Numbers as follows: P674648B and P707371B. Each of the Engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 2. The Delivery Date of the Delivered Aircraft is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. Lessee hereby confirms to Lessor that the Delivered Aircraft has been or will be duly marked in accordance with the terms of Section 7.1.2 of the Lease and that Lessee has accepted the Delivered Aircraft for all purposes hereof and of the Lease Agreement, including its being airworthy, in accordance with specifications, in good working order and repair and without defect or inherent vice in title, condition, design, operation or fitness for use, whether or not discoverable by Lessee as of the date hereof, and free and clear of all Liens except Permitted Liens. 4. All the provisions of the Lease Agreement are hereby incorporated by reference in this Lease Supplement, on and as of the date of this Lease Supplement, to the same extent as if fully set forth herein. 5. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. -2- IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed and delivered as of the date and year first above written. Lessor: FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By: /s/ Dorian Light Shaw --------------------------- Title: ASSISTANT VICE PRESIDENT Lessee: SOUTHWEST AIRLINES CO. By: /s/ John D. Owen --------------------------- John D. Owen Treasurer SALE AND LEASE AGREEMENT 3 EX-99.H 8 EX-99.H Document No. 3 - -------------------------------------------------------------------------------- SALE AND LEASE AGREEMENT dated as of September 1, 1990 between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION as Owner Trustee, Lessor and SOUTHWEST AIRLINES CO., Lessee -------------------------------- One Boeing Model 737-2H4 Aircraft (N55SW) SOUTHWEST AIRLINES 1990 TRUST II - -------------------------------------------------------------------------------- The rights of Lessor under this Sale and Lease Agreement have been assigned to, and are subject to a security interest in favor of, Progress Credit Corporation as Lender under a Security Agreement and Assignment of Leases 55SW dated as of September 1, 1990. This Sale and Lease Agreement has been executed in counterparts. To the extent that this Sale and 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 Sale and Lease Agreement may be created through the transfer or possession of any counterpart other than the counterpart that states on its cover that it is the original counterpart. This is not the original counterpart. TABLE OF CONTENTS Section Page - ------- ---- Section 1. Definitions ..................................................... 1 Section 2. Sale, Lease and Acceptance ...................................... 9 Section 3. Term and Rent ................................................... 9 3.1 General ................................................... 9 3.2 Lease Term ................................................ 9 3.3 Basic Rent ................................................ 9 3.4 Supplemental Rent ......................................... 10 3.5 Payments .................................................. 10 Section 4. Lessor's Representations and Warranties; DISCLAIMER; Certain Agreements of Lessee ................................. 11 4.1 Lessor's Representations and Warranties; DISCLAIMER ....... 11 4.2 Certain Agreements of Lessee .............................. 11 Section 5. Return of Aircraft .............................................. 12 5.1 General Condition upon Return ............................. 12 5.1.1 Airworthiness ...................................... 12 5.1.2 Free of Liens ...................................... 12 5.1.3 Operating Configuration and Condition .............. 12 5.1.4 Cleanliness and Operability ........................ 12 5.1.5 Parts and Equipment ................................ 12 5.1.6 Corrosion Treatment ................................ 12 5.1.7 Hush Kits ......................................... 13 5.1.8 Other Conditions ................................... 13 5.2 Return of Other Engines ................................... 13 5.3 Return at End of Base Lease Term or Renewal Lease Term .... 13 5.3.1 Airframe ........................................... 14 5.3.2 Engines ............................................ 14 SALE AND LEASE AGREEMENT i Section Page - ------- ---- 5.3.3 Boroscope .......................................... 15 5.3.4 Landing Gears ...................................... 15 5.3.5 APU ................................................ 15 5.3.6 Other Components ................................... 15 5.4 Financial Adjustments .................................... 15 5.4.1 Airframe ........................................... 15 5.4.2 [Intentionally omitted.] ........................... 15 5.4.3 Landing Gears ...................................... 16 5.5 Manuals; Service Bulletins, Etc ........................... 16 5.6 Storage upon Return ....................................... 16 5.7 Failure to Return Aircraft or Engines ..................... 16 5.8 Aid in Disposition ........................................ 17 Section 6. Liens ........................................................... 17 Section 7. Registration, Operation, Possession, Subleasing and Records ..... 17 7.1 Registration and Operation ................................ 17 7.1.1 Registration ....................................... 17 7.1.2 Nameplate .......................................... 18 7.1.3 Compliance with Laws ............................... 18 7.1.4 Insurance Requirements; Government Requisition; Indemnity ........................... 18 7.2 Possession ................................................ 19 7.2.1 Interchange and Pooling ............................ 19 7.2.2 Testing and Service ................................ 19 7.2.3 Civil Reserve Air Fleet Program .................... 19 7.2.4 Installation of Engines ............................ 20 7.2.5 Installation of Engines on Other Airframes ......... 20 7.2.6 Pooling of Parts ................................... 20 7.2.7 Wet Lease .......................................... 20 7.2.8 Sublease to Permitted Air Carriers ................. 20 SALE AND LEASE AGREEMENT ii Section Page - ------- ---- 7.3 Records and Reports ....................................... 22 7.3.1 Records ............................................ 22 7.3.2 Information and Reports ............................ 22 7.3.3 Financial Information .............................. 23 Section 8. Maintenance; Replacement and Pooling of Parts; Alterations, Modifications and Additions .................................. 23 8.1 Maintenance ............................................... 23 8.1.1 Maintenance Program ............................... 23 8.1.2 Compliance with Government Requirements ........... 24 8.2 Replacement of Parts ...................................... 24 8.3 Pooling of Parts .......................................... 24 8.4 Alterations, Modifications and Additions .................. 25 Section 9. [Intentionally Omitted] ......................................... 26 Section 10. Loss, Destruction, Requisition, Etc ............................ 26 10.1 Event of Loss with Respect to Aircraft .................... 26 10.2 Event of Loss with Respect to an Engine ................... 26 10.2.1 Event of Loss ..................................... 26 10.2.2 Conditions; Lessee's Obligations .................. 27 10.2.3 Recordation and Opinions .......................... 28 10.2.4 Conveyance; Replacement Engine .................... 28 10.2.5 No Reduction of Rent .............................. 28 10.3 Application of Certain Payments ........................... 28 10.3.1 Replacement of Engine ............................. 28 10.3.2 Nonreplacement .................................... 28 10.4 Requisition of Aircraft for Use by Governmental Authorities ................................ 29 10.5 Requisition of an Engine for Use by Governmental Authorities ................................ 29 SALE AND LEASE AGREEMENT iii Section Page - ------- ---- 10.6 Application of Payments During Existence of Default ...... 29 Section 11. Insurance ...................................................... 29 11.1 Public Liability and Property Damage Insurance ........... 29 11.1.1 Type, Form and Amount ............................. 30 11.1.2 Coverage .......................................... 30 11.1.3 Additional Insureds ............................... 30 11.2 Insurance Against Loss of or Damage to Aircraft and Engines ............................................. 30 11.2.1 Type, Form and Amount ............................. 30 11.2.2 War-Risk Insurance ................................ 30 11.2.3 Certain Requirements .............................. 31 11.2.3.1 Additional Insureds ....................... 31 11.2.3.2 Payment of Proceeds ....................... 31 11.2.3.3 Waiver of Subrogation ..................... 31 11.2.4 Deductibles ....................................... 31 11.2.5 Government Indemnity .............................. 32 11.3 General Policy Provisions ................................. 32 11.3.1 Primary Insurance ................................. 32 11.3.2 Coverage for Each Insured ......................... 32 11.3.3 Waiver of Certain Rights .......................... 32 11.3.4 Breach of Warranty ................................ 32 11.3.5 Notice of Termination or Changes .................. 32 11.3.6 Nonliability for Premiums ......................... 33 11.3.7 Identity of Insurers .............................. 33 11.4 Application of Insurance Proceeds ......................... 33 11.5 Certificates; Reports, Etc. ............................... 33 11.6 Lessor's Right to Maintain Insurance ...................... 34 11.7 Insurance for Own Account ................................. 34 11.8 Self-Insurance ............................................ 34 SALE AND LEASE AGREEMENT iv Section Page - ------- ---- Section 12. Inspection ..................................................... 35 Section 13. Assignment ..................................................... 35 13.1 General .................................................. 35 13.2 Security for Lessor's Obligations ........................ 35 Section 14. Events of Default .............................................. 36 14.1 Failure To Pay Rent ...................................... 36 14.2 Specific Defaults ........................................ 36 14.3 General Default .......................................... 36 14.4 Misrepresentation and Breach of Warranty ................. 36 14.5 Bankruptcy, Etc. ......................................... 36 14.6 Cross Default ............................................ 37 Section 15. Remedies ....................................................... 37 15.1 Default; Remedies ......................................... 37 15.1.1 Return; Repossession .............................. 37 15.1.2 Sale, Use, Etc. ................................... 38 15.1.3 Certain Liquidated Damages ........................ 38 15.1.3.1 Liquidated Damages-- Fair Market Rental Value .............. 38 15.1.3.2 Liquidated Damages-- Fair Market Sales Value ............... 38 15.1.4 Liquidated Damages upon Sale ...................... 39 15.1.5 Rescission and Other Remedies ..................... 39 15.2 Determination of Fair Market Rental Value and Fair Market Sales Value ................................ 40 15.3 No Waiver, Etc. .......................................... 40 Section 16. Notices ........................................................ 40 Section 17. Net Lease; Lessee's Obligations; No Setoff, Counterclaim, Etc. . 41 SALE AND LEASE AGREEMENT v Section Page - ------- ---- Section 18. Renewal Options; Early Termination ............................. 42 18.1 Renewal Options .......................................... 42 18.2 Early Termination ........................................ 43 18.3 Default Purchase Option .................................. 43 Section 19. Successor Owner Trustee ........................................ 43 Section 20. Right to Perform for Lessee .................................... 44 Section 21. Quiet Enjoyment ................................................ 44 Section 22. Investment of Security Funds; Miscellaneous; Amendment ......... 44 22.1 Investment of Security Funds ............................. 44 22.2 Miscellaneous; Amendment ................................. 45 Section 23. Permitted Foreign Air Carriers ................................. 46 Signatures EXHIBIT A FORM OF LEASE SUPPLEMENT EXHIBIT B PERMITTED FOREIGN AIR CARRIERS EXHIBIT C OTHER RETURN CONDITIONS EXHIBIT D TERMINATION VALUE SCHEDULE SCHEDULE I LESSOR'S COST SALE AND LEASE AGREEMENT vi THIS SALE AND LEASE AGREEMENT is dated as of September 1, 1990, between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under the Trust Agreement hereinafter referred to ("Lessor"), and SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee"). Recitals 1. Lessee owns the Aircraft. 2. The parties hereto desire that Lessor purchase the Aircraft from and lease it back to Lessee as hereinbelow provided. In consideration of the premises and the mutual agreements herein contained, Lessor and Lessee agree as follows: Section 1. Definitions. Unless the context otherwise requires, the following terms shall have the following meanings for all purposes of this Lease and shall be equally applicable to both the singular and the plural forms of the terms herein defined. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time, to the extent permitted by, and in accordance with, the terms thereof. For all purposes of this Lease the capitalized terms used but not defined herein are used as defined in the Participation Agreement. "Act" means the Federal Aviation Act of 1958, as amended from time to time. "Affiliate" of any Person means any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person. "Aircraft" means the Airframe, together with the two Engines (or any Replacement Engine substituted for either of such Engines hereunder), whether or not any of such initial or Replacement Engines may on the Delivery Date or from time to time thereafter be installed on the Airframe or may be installed on any other airframe or on any other aircraft. "Airframe" means (i) the Boeing Model 737-2H4 aircraft (excluding Engines or engines from time to time installed thereon) specified in the initial Lease Supplement sold hereunder by Lessee to Lessor, and leased back by Lessor to Lessee, all hereunder and under the initial Lease Supplement, and (ii) any and all Parts so long as the same shall be incorporated in such aircraft and any and all Parts removed from such aircraft so long as title thereto shall remain vested in Lessor in accordance with the terms of Section 8. SALE AND LEASE AGREEMENT 1 "Base Lease Term" means the period commencing on the Base Lease Term Commencement Date and expiring on December 31, 1995. "Base Lease Term Commencement Date" means October 1, 1990. "Basic Rent" means the rent identified as Basic Rent in and payable pursuant to Section 3.3. "Bills of Sale" means the FAA Bill of Sale and the Warranty Bill of Sale. "Business Day" means a day on which banks are not required or authorized to close in any of New York City, Dallas, Texas, the State of Florida or Salt Lake City, Utah, or such other city as shall be the situs of the principal office of Owner Participant, Lender, Lessee or Lessor at the time in question. "Cards" is defined in Section 5.3.1. "Code" means the United States Internal Revenue Code of 1986, as amended from time to time. "Delivery Date" means the date of the initial Lease Supplement, which date shall be the date on which the Aircraft is delivered by Lessee to, and accepted by, Lessor hereunder and in turn leased back by Lessor to Lessee hereunder, which date shall be a Business Day. "DOT" means the United States Department of Transportation or any governmental person, agency or authority succeeding to the functions of such Department of Transportation. "Engine" means (i) each of the Pratt & Whitney JT8D-9A engines identified by manufacturer's serial number in the initial Lease Supplement subjecting the Aircraft to this Lease, whether or not on the Delivery Date or from time to time thereafter installed on such Airframe or installed on any other airframe or on any other aircraft, and (ii) any Replacement Engine, whether or not from time to time thereafter installed on the Airframe or any other airframe or on any other aircraft, together in each case with any and all Parts incorporated in such Engine and any and all Parts removed from such Engine so long as title thereto shall remain vested in Lessor in accordance with the terms of Section 8. Except as otherwise set forth herein, at such time as a Replacement Engine shall be substituted hereunder such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means, as of any date of determination, all Engines then leased hereunder. SALE AND LEASE AGREEMENT 2 "Event of Loss" means, with respect to the Aircraft, Airframe or any Engine, any of the following events with respect to such property: (i) disappearance or theft of such property or the loss of the use thereof for any reason not covered by any other clause of this definition, including hijacking, for a period of 180 consecutive days or more (unless the location of the property is known and Lessee is diligently pursuing recovery of the property, but in no event beyond the expiration of the Term) or destruction, damage beyond economic repair or rendition of such property permanently unfit for normal use for any reason whatsoever; (ii) any damage to such property which results in an insurance settlement with respect to such property, on the basis of a total loss, or a constructive or compromised total loss; (iii) the confiscation or requisition of use of such property by the Government or any foreign government or any instrumentality or agency thereof for a period in excess of twelve consecutive months or for a period continuing beyond the Term, whichever first occurs; (iv) as a result of any rule, regulation, order or other action by the FAA or other governmental body (including any court) having jurisdiction, the use of such property in the normal course of interstate air transportation of persons or cargo shall have been prohibited for a period of more than six consecutive months, unless Lessee, prior to the expiration of such six-month period, shall have undertaken and shall be diligently carrying forward all steps which are necessary or desirable to permit normal use by Lessee, and, (A) in the case in which such prohibition shall apply generally to all similar Boeing Model 737-200 series aircraft, if such prohibition is continuing on the last day of the Term, or (B) in all other cases, if such prohibition is continuing on the earlier of the first anniversary of such prohibition and the last day of the Term; (v) the condemnation or requisition of title to such property by the Government or any foreign government or any instrumentality or agency thereof; or (vi) respecting any Engine, any divestiture of title to an Engine treated as an Event of Loss pursuant to Section 7.2.1 or any other provision hereof. 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. The date of an Event of Loss shall be deemed to be the date of such insurance settlement, loss of use, theft, disappearance, condemnation, confiscation, divestiture, taking or requisition of title or use or prohibition, except that, for the purposes of clauses (i), (iii) and (iv) above, no Event of Loss shall be deemed to have occurred until the expiration of the applicable period referred to therein. "FAA" means the Federal Aviation Administration or any governmental person, agency or other authority succeeding to the functions of the Federal Aviation Administration. "FAA Regulations" means the Federal Aviation Regulations issued pursuant to the Act from time to time, or any successor regulations thereto. SALE AND LEASE AGREEMENT 3 "Government" means the federal government of the United States of America or any instrumentality or agency thereof. "Guarantor" means Cauff, Lippman & Co., Inc., a Florida corporation. The term "incorporated in" means incorporated or installed in or attached to or otherwise made a part of. "Indemnified Parties" means (i) First Security Bank of Utah, National Association, in its individual capacity and as Owner Trustee, (ii) Owner Participant, (iii) Lender, (iv) the Trust Estate, (v) the respective successors and assigns of the foregoing and (vi) the respective officers and directors of the foregoing. "Interim Lease Term" means the period from the Delivery Date to and including September 30, 1990. "Lease", "this Lease", "this Agreement", "hereby", "herein", "hereof", "hereunder" or other like words mean this Sale and Lease Agreement, including without limitation supplementation hereof by one or more Lease Supplements. "Lease Default" means any event or condition which, with notice or lapse of time or both, would constitute a Lease Event of Default. "Lease Event of Default" is defined in Section 14. "Lease Period" means each three-month period commencing on October 1, January 1, April 1 and July 1, as the case may be, during the Term. "Lease Supplement" means a supplement to this Lease, in the case of the initial such supplement substantially in the form attached as Exhibit A hereto, subjecting the Aircraft or other property to this Lease. "Lender" means Progress Credit Corporation, a Florida corporation, and its successors and assigns. "Lessee" means Southwest Airlines Co., a Texas corporation, and its permitted successors or assigns. "Lessor" means Owner Trustee. "Lessor's Cost" for the Aircraft means the amount identified as such in Schedule I hereto. SALE AND LEASE AGREEMENT 4 "Lessor Liens" means Liens of any Person claiming by, through or under Lessor, First Security Bank of Utah, National Association, in its individual capacity, or Owner Participant which arise as a result of (i) claims against any such Person not related to the transactions contemplated by the Operative Agreements (it being understood that, for purposes of this clause (i), incurrence of any Successor Indebtedness to refund or refinance debt represented by the Note is deemed to be a transaction contemplated by the Operative Agreements), (ii) any act or omission of any such Person which is not related to the transactions contemplated by the Operative Agreements, or is in violation of any of the express terms of any of the Operative Agreements, (iii) Taxes or Losses imposed against or incurred by any such Person for which Lessee is not obligated to indemnify pursuant to the Participation Agreement, or (iv) claims against any such Person arising out of any transfer by such Person in violation of the express terms of the Operative Agreements. "Lien" means any mortgage, pledge, lien, charge, encumbrance, lease or security interest, or any claim or exercise of rights, affecting the title to or any interest in property. "Maintenance Program" is defined in Section 8.1.1. "Manufacturer" means The Boeing Company, a Delaware corporation, or any Affiliate thereof whose obligations are guaranteed by The Boeing Company, and their respective successors and assigns. "Officer's Certificate" means a certificate signed by the Chairman, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Assistant Secretary of the Person providing such certificate. "Operative Agreements" means this Agreement, the Guaranty, each Lease Supplement, the Participation Agreement, the Mortgage, the Loan Agreement, the Note, the Trust Agreement, the Bills of Sale, and the Tax Indemnification Agreement, including any consents included in or attached to any thereof. "Overdue Rate" means 3% in excess of the interest rate publicly announced in New York City from time to time by Citibank, N.A. as its prime or base lending rate, but in no event to exceed the maximum rate permitted by applicable law. Any interest payable hereunder at the Overdue Rate shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. "Owner Participant" means CL Aircraft XXXI, Inc., a Florida corporation, and its successors and permitted assigns. SALE AND LEASE AGREEMENT 5 "Owner Trustee" means First Security Bank of Utah, National Association, not in its individual capacity but solely as trustee under the Trust Agreement, and any successor, separate or additional Owner Trustee thereunder. "Participants" means Owner Participant and Lender and their respective successors and permitted assigns. "Participation Agreement" means the Participation Agreement, dated as of September 1, 1990, among Lessee, Lender, Guarantor, Owner Participant, and Lessor. "Parts" means all appliances, parts, components, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature (other than (a) complete Engines or engines and (b) any severable items leased by Lessee from a third party (other than Lessor)) which may from time to time be incorporated in the Airframe or any Engine (and "Part" means any of the foregoing) or, so long as title thereto shall remain vested in Lessor in accordance with Section 8.2, after removal therefrom. "Permitted Foreign Air Carrier" means any "foreign air carrier" (as defined in the Act) listed on Exhibit B hereto (as the same may be modified from time to time in accordance with Section 23) or any successor of any such air carrier, which carrier or successor is not in any case, at the time a Permitted Sublease is (or is proposed to be) entered into, the subject of bankruptcy, reorganization or similar proceedings. "Permitted Lien" means any Lien referred to in clauses (a) through (g) of Section 6. "Permitted Sublease" means a sublease permitted under Section 7.2.8. "Permitted Sublessee" means the sublessee under a Permitted Sublease. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Renewal Rent" means the rent payable in respect of a Renewal Term determined pursuant to Section 18.1. SALE AND LEASE AGREEMENT 6 "Renewal Term" means any of the successive periods of integral multiples of two years each but not more than six years in the aggregate which follow the end of the Base Lease Term with respect to which Lessee shall have exercised its option pursuant to Section 18. "Rent" means Basic Rent, Renewal Rent and Supplemental Rent. "Rent Payment Date" means each December 31, March 31, June 30 and September 30 during the Term commencing September 30, 1990. "Replacement Engine" means a Pratt & Whitney JT8D-9A engine (or an improved model engine suitable for installation and use on the Airframe and fully compatible with the other Engine or engine installed thereon) which shall have been substituted for an Engine leased hereunder pursuant to Section 5.2 or 10.2. "Securities Act" means the Securities Act of 1933, as amended. "Stipulated Loss Value" means (i) $12,100,000.00 during the Base Lease Term and (ii), during any Renewal Lease Term, such amount as shall be calculated in accordance with Section 18.1, in each case as adjusted pursuant to Section 13 of the Participation Agreement. "Supplemental Rent" means, without duplication, all amounts, liabilities and obligations (other than Basic Rent or Renewal Rent) which Lessee assumes or agrees to pay to Lessor or any other Person hereunder, under the Participation Agreement or any of the other Operative Agreements, including, without limitation (i) Stipulated Loss Value and Termination Value payments, (ii) all amounts required to be paid by Lessee under the agreements, covenants and indemnities contained in the Participation Agreement and (iii) all amounts required to be paid pursuant to Section 3.4. "Tax Indemnification Agreement" means the Tax Indemnification Agreement, dated as of September 1, 1990, between Owner Participant and Lessee. "Term" means the term for which the Aircraft is leased pursuant to Section 3 hereof and shall include the Interim Lease Term, Base Lease Term and any Renewal Term. "Termination Value" means the greater of (i) the sum of (A) the amount set forth in Exhibit D hereto opposite the Rent Payment Date as of which Termination Value is being determined and paid plus (B) such amount of Lessee's Actual Cost and the Purchase Price as Owner Participant shall have paid pursuant to Section 13 of the Participation Agreement, or (ii) the amount of indebtedness represented by the Note or SALE AND LEASE AGREEMENT 7 any Successor Indebtedness (including interest accrued thereon) on such Rent Payment Date plus any other amount due and payable to Lender under any Operative Agreement. "Transfer" means, with respect to any Person, to transfer, by bill of sale or otherwise, all such Person's right, title and interest in and to the Aircraft, Airframe or any Engine, as the case may be, to another Person on an "as is, where is" basis, free and clear of any Lessor Lien but otherwise without recourse, representation or warranty, express or implied, and including an express disclaimer of warranties, representations and guarantees in a manner comparable to that set forth in Section 4.1. "Trust Agreement" means the Trust Agreement, dated as of September 1, 1990, between Owner Participant and First Security Bank of Utah, National Association, in its individual capacity. "Trust Estate" means the Trust Estate as that term is defined in the Trust Agreement. "UCC" means the Uniform Commercial Code as in effect in any applicable jurisdiction. "U.S. Air Carrier" means any United States air carrier (i) as to which there is in force a certificate issued pursuant to Section 401 of the Act, (ii) as to which there is in force an air carrier operating certificate issued pursuant to Part 121 of the FAA Regulations, or which may operate as a United States air carrier by certification or otherwise under any successor or substitute provisions therefor or in the absence thereof and (iii) which, in any case, at the time a Permitted Sublease is (or proposed to be) entered into, is not the subject of proceedings under the Federal Bankruptcy Code of 1978, as amended. "Wet Lease" means any arrangement whereby Lessee agrees to furnish the Airframe and Engines or engines installed thereon to a third party pursuant to which the Airframe and Engines or engines (i) shall be operated solely by regular employees of Lessee possessing all current certificates and licenses that would be required under the Act for the performance by such employees of similar functions within the United States of America (it being understood that cabin attendants need not be regular employees of Lessee), (ii) shall be maintained by Lessee in accordance with its Maintenance Program and (iii) shall be and remain, in the hands of such third party, subject to all other terms and conditions of this Lease. SALE AND LEASE AGREEMENT 8 Section 2. Sale, Lease and Acceptance. (a) Lessor, subject to satisfaction or waiver of the conditions set forth in Section 5 of the Participation Agreement and the concurrent acceptance hereunder by Lessee of the Aircraft, hereby agrees, to the extent that the funds received by it pursuant to Section 2 of the Participation Agreement are adequate for the purpose, to purchase at a purchase price equal to Lessor's Cost and to accept delivery on the Delivery Date from Lessee hereunder and to lease back to Lessee hereunder, and Lessee hereby agrees, expressly for the direct benefit of Lessor and Owner Participant to sell to Lessor and to lease back from Lessor hereunder on the Delivery Date, the Aircraft, which shall have been accepted by Lessor and Lessee hereunder as evidenced by the execution by Lessor and Lessee of the Lease Supplement conveying to Lessor and leasing to Lessee the Aircraft hereunder; provided, however, that Lessor and Lessee shall have no further obligation hereunder with respect to the Aircraft if the Delivery Date shall not have occurred on or before September 28, 1990. The purchase price of the Aircraft shall be paid by Lessor to Lessee on the Delivery Date in the manner specified in Section 3 of the Participation Agreement. (b) Lessor hereby authorizes each of Gary C. Kelly, John D. Owen and Laura Wright, all of whom are employees of Lessee, as the authorized representative or representatives of Lessor to accept delivery of the Aircraft from Lessee pursuant hereto. Lessee hereby agrees that in the event delivery of the Aircraft shall be accepted by an employee or employees of Lessee pursuant to such authorization by Lessor, such acceptance of delivery by such employee or employees on behalf of Lessor shall, without further act, also irrevocably constitute acceptance by Lessee of the Aircraft for all purposes of this Agreement. Section 3. Term and Rent. 3.1 General. Except as otherwise provided herein, the Term for the Aircraft shall commence on the Delivery Date specified in the initial Lease Supplement and shall terminate as herein provided. 3.2 Lease Term. Except as provided herein, the Aircraft shall be leased hereunder for the Interim Lease Term, the Base Lease Term and the Renewal Terms, if any. 3.3 Basic Rent. Lessee hereby agrees to pay to Lessor Basic Rent with respect to the Aircraft, in arrears, on each Rent Payment Date, in the amount of $432,000; provided that (i) on the first Rent Payment Date (September 30, 1990), only Basic Rent in the amount of $4,800 per each day elapsed during the Interim Lease Term shall be due and (ii), if Lessee shall exercise its option under Section 18.2 or 18.3, then the installment SALE AND LEASE AGREEMENT 9 of Basic Rent (or Rent, as the case may be) due on such early termination date shall be reduced by $4,800 per day (or in the case of Renewal Rent, by the quotient of the quarterly installment thereof divided by 90) for each day the final Lease Period has been foreshortened. 3.4 Supplemental Rent. Lessee also agrees to pay (or cause to be paid) to Lessor, or to whomsoever shall be entitled thereto, all Supplemental Rent with respect to Stipulated Loss Value when and as the same shall become due and owing and all other amounts of Supplemental Rent within five days after demand or such other relevant period as may be provided in any Operative Agreement. Lessee will also pay to Lessor, or to whomsoever shall be entitled thereto, as Supplemental Rent, to the extent permitted by applicable law, interest at the Overdue Rate on any part of any installment of Basic Rent or Renewal Rent not paid when due for any period from and including the date on which the same was due to but excluding the date of payment in full and (to the extent permitted by applicable law) on any payment of Supplemental Rent not paid when due to Lessor, or to whomsoever shall be entitled thereto, as the case may be, for the period from the date on which the same was due to but excluding the date of payment in full. The expiration or other termination of Lessee's obligation to pay Basic Rent or Renewal Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. 3.5 Payments. Payments of Rent and any and all other payments payable to Lessor hereunder shall be paid in funds of the United States of America which shall be immediately available not later than noon, New York City time, on the date due, to Owner Participant's account set forth in Schedule I to the Participation Agreement, or as otherwise directed by Owner Participant in writing at least five Business Days prior to the date such payment is due; provided, however, that so long as Lessee shall not have received such five Business Days' prior written notice of the fact that the Mortgage shall have been terminated, Lessor hereby directs and Lessee agrees, that, unless Lender shall otherwise direct in writing, all Rent payable to Lessor and assigned to Lender pursuant to the Mortgage shall be paid prior to noon, New York City time, on the due date thereof directly to Lender by wire transfer to * (ABA No. 063-000-021),for the account of Progress Credit Corporation (account no. 175-003-956-35), with reference to Southwest N55SW Interest. Except as otherwise expressly provided herein, whenever any payment of Rent or other payment to be made hereunder shall be due on a day which is not a Business Day, such payment shall be made on the next succeeding day which is a Business Day and (provided such payment is made on such next succeeding Business Day) no interest shall accrue on the amount of such payment from and after such scheduled date. * First Union National Bank of Florida, Jacksonville, Florida SALE AND LEASE AGREEMENT 10 Section 4. Lessor's Representations and Warranties; DISCLAIMER; Certain Agreements of Lessee. 4.1 Lessor's Representations and Warranties; DISCLAIMER. LESSEE EXPRESSLY AGREES TO TAKE THE AIRCRAFT "AS IS". NEITHER LESSOR (INDIVIDUALLY OR AS OWNER TRUSTEE) NOR OWNER PARTICIPANT MAKES, HAS MADE OR SHALL BE DEEMED TO HAVE MADE, AND EACH HEREBY EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, AIRWORTHINESS, VALUE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF THE AIRCRAFT OR ANY PART THEREOF, AS TO THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, AS TO THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT, AS TO THE ABSENCE OF OBLIGATIONS BASED ON STRICT LIABILITY IN TORT, OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT OR ANY PART THEREOF, except that First Security Bank of Utah, National Association, in its individual capacity (i) represents and warrants that on the Delivery Date Lessor shall have received whatever title thereto as was conveyed to it by Lessee, (ii) represents and warrants that on the Delivery Date the Aircraft shall be free of Lessor Liens attributable to it, (iii) agrees that it will not directly or indirectly create, incur, assume or suffer to exist any Lessor Lien attributable to it on or with respect to the Airframe or any Engine or any other portion of the Trust Estate, and (iv) represents and warrants that it is a "citizen of the United States" as defined in Section 101(16) of the Act and agrees that if at any time a responsible officer in its Corporate Trust Department shall obtain actual knowledge that it has ceased to be a "citizen of the United States" within the meaning of Section 101(16) of the Act it will promptly resign as Owner Trustee, effective upon the appointment of a successor Owner Trustee in accordance with Section 9.01 of the Trust Agreement. Lessor covenants that during the Term (so long as no Lease Event of Default shall have occurred and be continuing) it will not, through its own actions or breaches of any of its obligations under the Operative Agreements, interfere or cause any interference in the quiet enjoyment of the Aircraft by Lessee or any Permitted Sublessee and agrees that it will not directly or indirectly create, incur, assume or suffer to exist any Lessor Lien attributable to it on or with respect to the Airframe or any Engine. 4.2 Certain Agreements of Lessee. All obligations of Lessee in this Lease shall be done, performed or complied with at Lessee's cost and expense, whether or not so expressed, unless otherwise expressly stated. Lessee hereby agrees with Lessor for the benefit of Owner Participant that it shall perform the agreements, covenants and indemnities set forth in the Participation Agreement (including, without limitation, Sections 8.1 and 8.2 of the Participation Agreement) which are incorporated herein, and hereby restates Lessee's representations and warranties set forth in the Participation Agreement, SALE AND LEASE AGREEMENT 11 as fully and to the same extent and with the same force and effect as if set forth in full in this Section 4.2. Section 5. Return of Aircraft. 5.1 General Condition upon Return. Subject to Section 10, upon the expiration or termination of this Lease, Lessee will cause the Aircraft, if then not registered in the name of Lessor with the FAA for any reason, to be reregistered in the name of Lessor with the FAA and will return the Aircraft to Lessor by delivering the same at any location in the continental United States selected by Lessee at which Lessee has maintenance facilities (and Section 5.6 shall apply). All costs associated with the return flight shall be for the account of Lessee. At the time of such return, the Airframe and Engines or engines installed thereon: 5.1.1 Airworthiness. Subject to the exception described in clause (iii) of Section 8.1.1, shall be duly certificated as an airworthy aircraft by the FAA under Part 121 of the Federal Aviation Regulations or any successor provision; 5.1.2 Free of Liens. Shall be free and clear of all Liens except Lessor Liens and Liens arising by, through or under Lender; 5.1.3 Operating Configuration and Condition. Shall be in a configuration suitable for operation in regularly scheduled commercial airline passenger service in the United States and in the same configuration as a majority of the remainder of all 737-200 series aircraft operated by Lessee, shall be in compliance with the Maintenance Program and shall be in as good operating condition as on the Delivery Date, ordinary wear and tear and changes and alterations made by Lessee as permitted under Section 8.4 hereof or Section 13 of the Participation Agreement excepted. All Lessee or Permitted Sublessee exterior or interior insignia, logos or markings, as the case may be, shall have been painted over in matching colors in a workmanlike manner; 5.1.4 Cleanliness and Operability. Shall be clean by United States commercial airline operating standards with all systems and components operable; 5.1.5 Parts and Equipment. Shall have installed thereon the Engines identified in the initial Lease Supplement, as well as all Parts installed thereon at the commencement of the Term, or replacements therefor made in accordance with the terms of this Lease; 5.1.6 Corrosion Treatment. Shall comply with the corrosion prevention procedures to the extent set forth in the Maintenance Program; SALE AND LEASE AGREEMENT 12 5.1.7 Hush Kits. Shall be fitted with a hush kit, if a Stage III Upgrade shall have occurred and the Owner Participant shall have financed such upgrade pursuant to the provisions of Section 13.4 of the Participation Agreement; and 5.1.8 Other Conditions. Shall otherwise be in the condition set forth in Exhibit C hereto. 5.2 Return of Other Engines. In the event that any engine not owned by Lessor shall be installed on the Airframe returned in accordance with Section 5.1, such engine shall be a Pratt & Whitney JT8D-9A engine (or an improved model engine fully compatible with the other Engine or engine installed on the Airframe). At the time of such replacement, such engine shall have performance and durability characteristics and a value, condition and utility at least equal to the Engine it replaced hereunder, assuming such Engine was maintained in accordance with the requirements of this Lease, and at the time the Airframe is returned shall fully comply with all the requirements of this Lease, including this Section 5, which are applicable to Engines. Upon return of the Aircraft, Lessee shall duly convey to Lessor good title to any such replacement engine, free and clear of all Liens except Lessor Liens and Liens arising by, through or under Lender; and, upon such conveyance and as a condition thereto, Lessee will (a) furnish Lessor with a full warranty (as to title) bill of sale, in form and substance reasonably satisfactory to Lessor, with respect to each such replacement engine, together with an opinion of counsel to the effect that such bill of sale has been duly authorized and delivered and is enforceable in accordance with its terms and that each such replacement engine is free and clear of all Liens except Lessor Liens and Liens arising by, through or under Lender, and (b) take such other action as Lessor may reasonably request in order that title to such replacement engine may be duly and properly vested in Lessor to the same extent as the Engine replaced thereby. Upon compliance by Lessee with the foregoing, Lessor will, so long as no Lease Event of Default has occurred and is continuing, Transfer to Lessee any Engine not installed on the Airframe at the time of return, free and clear of all Liens, including Lessor Liens. 5.3. Return at End of Base Lease Term or Renewal Lease Term. Upon return of the Aircraft at the expiration or termination of this Lease, Lessee shall have caused all FAA Airworthiness Directives applicable to the Aircraft and all mandatory service bulletins from Manufacturer and the manufacturer of the Engines or any engine then installed on the Airframe (in compliance with Section 5.2) applicable to the Aircraft to have been complied with (except for any such FAA Airworthiness Directives and bulletins that permit compliance after the return date and would not, in the normal course of the Maintenance Program, be complied with on or prior to the return date). Lessee shall have treated the Aircraft, including without limitation, with respect to maintenance, additions and modifications, during the Term, similarly to all other Boeing 737-200 aircraft in its fleet. SALE AND LEASE AGREEMENT 13 At the request of Lessor delivered to Lessee not more than 30 days prior to the end of the Term, the Aircraft shall be check flown by Lessee (or any Permitted Sublessee) at Lessee's expense using qualified flight personnel, for not more than two hours, on a non-commercial flight, for the purpose of demonstrating to Lessor the satisfactory operation of the Aircraft and its equipment and systems; provided, however, that such check flight shall not interfere with the normal operation or maintenance of the Aircraft by, or the business of, Lessee (or any Permitted Sublessee). Up to five of Owner Participant's designees or representatives may participate in such flight as observers. The form of test flight procedure to be followed shall be in accordance with Lessee's normal test flight procedure, and the test flight may be a return delivery flight. The Aircraft shall be check flown only once pursuant to the provisions of this Section 5.3, unless further check flights are required in order to verify the correction of any discrepancy or malfunction detected in such first check flight, in which case a second check flight shall be performed in accordance with the procedures set forth herein solely in order to verify such correction. At redelivery of the Aircraft to Lessor hereunder, the following specific requirements shall be met by Lessee or, in lieu thereof, Lessee shall compensate Lessor therefor, as specifically provided for in this Section: 5.3.1 Airframe. (I) At least 40% of the time (or cycles, if applicable) shall remain before the next required performance of each structural work task card (the "Cards") (or the then equivalent under Lessee's Maintenance Program) (it being understood that, as used herein, "Cards" refers to the heaviest airframe check currently used under Lessee's Maintenance Program), and all Cards currently performed on a sampling basis under the Maintenance Program shall have been fully accomplished without regard to any sampling then permitted under the Maintenance Program, (II) Lessee shall have performed a complete "C" check or its equivalent (all phases) on the Airframe no more than 200 flight hours prior to its return to Lessor (and Lessee shall have corrected to the Lessor's reasonable satisfaction any deficiencies discovered during such check, and will not have deferred any maintenance discrepancies), and (III) Lessee shall have completed a complete "B" ("B1" and "B2") check immediately prior to redelivery; 5.3.2 Engines. Every ESV-1 Engine shall have no more than 4,000 hours or cycles since its last ESV-1. Each ESV-2 Engine shall have no more than 6,000 hours or cycles since its last ESV-2. No life limited component of an Engine shall have less than 3,000 hours or cycles remaining until its next required replacement. For the purposes of this Section, an ESV-1 Engine shall be an Engine or engine installed on the Airframe (in compliance with Section 5.2) whose last engine service visit (or the equivalent under the Maintenance Program) was an ESV-1, and an ESV-2 Engine shall be an Engine SALE AND LEASE AGREEMENT 14 or engine installed on the Airframe (in compliance with Section 5.2) whose last engine service visit (or the equivalent under the Maintenance Program) was an ESV-2; 5.3.3 Boroscope. The hot section of each Engine or engine installed on the Airframe (in compliance with Section 5.2) shall be inspected by boroscope at Lessee's expense and any defects which are outside the manufacturer's recommended limitations shall be corrected such that they are brought within such limitations; 5.3.4 Landing Gears. The landing gears shall have a minimum of 40% of the time remaining on each of the main and nose gears until the next scheduled shop visit or retirement, as the case may be; 5.3.5 APU. The auxiliary power unit shall not have more than 2,500 hours since the last "hot section" inspection; and 5.3.6 Other Components. All time-controlled components and life-limited components, other than engines, landing gear and auxiliary power units, shall have a minimum of 3,000 hours or twelve months (unless one-half of the allowable hours or months, as the case may be, permitted between shop visits or replacements is actually less than 3,000 hours or twelve months, in which case one-half of such allowable hours or months) remaining to the next scheduled shop visit or replacement. 5.4 Financial Adjustments. In the event that the conditions described in Sections 5.3.1 and 5.3.4 are not met, Lessee may elect, as to any or all of such conditions (a) to perform the work necessary to conform the Aircraft to the required condition or (b) to make a financial adjustment between Lessee and Lessor pursuant to this provision, provided that in no event shall the Aircraft or any landing gear be returned with less than 25% of the allowable hours or cycles, as appropriate, remaining between Cards (with respect to the Aircraft) or until the next scheduled shop visit (with respect to the landing gears): 5.4.1 Airframe. In the event that the Airframe is returned to Lessor with less than 40% but more than 25% of the allowable hours (or cycles, if applicable) between Cards as provided in Section 5.3.1, then Lessee shall pay to Lessor on the date the Term ends an amount determined by multiplying the difference between the actual number of hours (or cycles, if applicable) remaining to the next Cards and 40% of the allowable hours (or cycles, if applicable) between Cards times the cost to Lessee of having another Person perform such Cards. 5.4.2 [Intentionally omitted.] SALE AND LEASE AGREEMENT 15 5.4.3 Landing Gears. In the event that any of the landing gears is returned to Lessor with less than 40% but more than 25% of the cycles remaining until the next scheduled shop visit as provided in Section 5.3.4 above, then Lessee shall pay to Lessor on the date the term ends an amount computed by multiplying the difference between the actual number of cycles remaining to the next scheduled shop visit for such gear and 40% of the allowable cycles between shop visits times the cycle rate for the nose gear or the main gear, as the case may be. For purposes of this Section 5.4.3, the term cycle rate" shall be deemed to be the cost that Lessee is paying to third parties at the time the Aircraft is returned under Section 5.3 for overhauling a nose gear or a main gear. as the case may be, divided by the number of cycles permissible between such overhauls under the Maintenance Program. At the end of the Term the Lessee shall furnish Lessor with an Officer's Certificate setting forth the hours and cycles remaining on the Engines or engines installed on the Airframe (in compliance with Section 5.2), the landing gear and the Airframe. 5.5 Manuals; Service Bulletins, Etc. Upon return of the Aircraft at the expiration or termination of this Lease, Lessee shall deliver or cause to be delivered to Lessor (in English) all logs, manuals, drawings and data and inspection, modification and overhaul records in respect of the Aircraft required to be maintained under applicable rules and regulations of the FAA, updated through the date of return. All "no-charge" service bulletin kits received by or on behalf of Lessee from Manufacturer, engine manufacturer or vendors for the Aircraft and Engines or engines and not incorporated therein shall be returned at no charge to Lessor as cargo on board the Aircraft at the time of its return. At the time the Aircraft is returned, Lessor shall have the option to purchase from Lessee, at Lessee's cost therefor, any "charge" service bulletin kits purchased by Lessee which have not been incorporated in the Aircraft. All such items shall thereupon become the property of Lessor. 5.6 Storage upon Return. Upon written request of Lessor received by Lessee at least 10 days prior to its return of the Aircraft at the expiration or termination of this Lease, Lessee will provide free parking facilities for the Aircraft for a period not exceeding 30 days following return thereof by Lessee at the location of return pursuant to Section 5.1; provided that such storage shall be at Lessor's risk and any expenses in connection with such storage (other than parking charges) shall be paid by Lessor, including the cost of any insurance therefor. 5.7 Failure to Return Aircraft or Engines. If Lessee shall, for any reason whatsoever, fail to return the Aircraft or any Engine at the time specified herein, the obligations of Lessee as provided in this Lease (including the obligation to pay Rent on the same basis as that applicable immediately prior to such failure) shall continue in effect with respect to the Aircraft or such Engine until the Aircraft or such Engine is returned SALE AND LEASE AGREEMENT 16 to Lessor; but this Section 5.7 shall not be construed as permitting Lessee to fail to meet its obligation to return the Aircraft or such Engine in accordance with the requirements of this Lease or constitute a waiver of a Lease Default or Lease Event of Default. 5.8 Aid in Disposition. Lessee agrees that, during the Term (and during any storage period) it will cooperate in all reasonable respects with any efforts of Lessor to lease or sell the Aircraft, including without limitation (subject to the provisions of Section 12) permitting potential lessees or purchasers to inspect the Aircraft and the records relating thereto. Section 6. Liens. Lessee will not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Aircraft, the Airframe or any Engine, title thereto or any interest therein or in this Lease except: (a) the respective rights of the parties to the Operative Agreements; (b) the rights of others under agreements or arrangements to the extent expressly permitted by the terms of Sections 7.2 and 8.3; (c) Lessor Liens; (d) liens for taxes, assessments or other governmental charges either not yet due or being contested in good faith (and for the payment of which adequate reserves have been provided in accordance with generally accepted accounting principles) by appropriate proceedings so long as such proceedings do not involve any material danger of the sale, forfeiture, loss or loss of use of the Aircraft, the Airframe or any Engine or any interest therein; (e) materialmen's, mechanics', workers', repairers', employees' or other like Liens arising in the ordinary course of business for amounts the payment of which is either not yet due or not overdue for a period of more than 30 days or is being contested in good faith (and for the payment of which adequate reserves have been provided in accordance with generally accepted accounting principles) by appropriate proceedings so long as such Liens do not involve any material danger of the sale, forfeiture, loss or loss of use of the Aircraft, the Airframe or any Engine or any interest therein; (f) Liens arising out of any judgment or award against Lessee, unless the judgment secured shall not, within 45 days after entry thereof, have been discharged or vacated or execution thereof stayed pending appeal or shall not have been discharged, vacated or reversed within 45 days after the execution of such stay; and (g) any other Lien with respect to which Lessee shall have provided a bond or other security adequate in the reasonable judgment of Lessor. Lessee will promptly take (or cause to be taken) such action at its own expense as may be necessary duly to discharge any such Lien not excepted above if the same shall arise at any time. Section 7. Registration. Operation. Possession. Subleasing and Records. 7.1 Registration and Operation. 7.1.1 Registration. Lessee shall forthwith upon the delivery of the Aircraft hereunder cause the Aircraft to be duly registered and at all times thereafter to SALE AND LEASE AGREEMENT 17 remain duly registered in the name of Lessor with the FAA pursuant to and as permitted by the Act (it being understood that Lessee shall not be required to comply with this covenant to the extent that First Security Bank of Utah, National Association's or Owner Participant's failure to comply with its covenant set forth in Section 6.3.1.5 or Section 6.2.5, respectively, of the Participation Agreement with regard to its citizenship makes such compliance by Lessee impossible). 7.1.2 Nameplate. As soon as practicable after the Delivery Date, Lessee agrees to affix and thereafter to maintain in the cockpit of the Airframe adjacent to the airworthiness certificate and on each Engine a nameplate bearing the inscription "OWNED BY AND LEASED FROM FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, AS OWNER TRUSTEE, OWNER AND LESSOR" and, so long as the Mortgage shall remain in effect, "SUBJECT TO A SECURITY INTEREST IN FAVOR OF PROGRESS CREDIT CORPORATION, MORTGAGEE" (such nameplate to be replaced, if necessary, with a nameplate reflecting the name of any successor Lessor or Lender, upon receipt of written notice from Lessor to such effect). Except as above provided, Lessee will not allow the name of any person, association or corporation to be placed on the Airframe or on any Engine as a designation that might be interpreted as a claim of ownership or Lien; provided that nothing herein contained shall prohibit Lessee (or any Permitted Sublessee) from placing its customary colors and insignia on the Airframe or any Engine or displaying information concerning the registration or manufacture of the Aircraft, the Airframe, any Engine or Part. 7.1.3 Compliance with Laws. Lessee agrees that it will not use or operate the Aircraft, the Airframe or any Engine in violation of any law or any rule, regulation or order of any government or governmental authority having jurisdiction (domestic or foreign) or in violation of any airworthiness certificate, license or registration relating to the Aircraft, the Airframe or any Engine issued by any such authority, except to the extent Lessee is contesting in good faith the validity or application of any such law, rule, regulation or order in any reasonable manner which does not materially adversely affect Lessor's interest in the Aircraft. 7.1.4 Insurance Requirements; Government Requisition; Indemnity. Lessee agrees not to operate, use or locate the Aircraft, the Airframe or any Engine, or permit any Permitted Sublessee to operate, use or locate the Aircraft, the Airframe or any Engine, (i) in any area excluded from coverage by any insurance required by the terms of Section 11, except in the case of a requisition by the Government where Lessee obtains indemnity (backed by the full faith and credit of the United States of America) in lieu of such insurance from the Government against the risks and in the amounts required by Section 11 covering such area, or (ii) in any area where maintenance of war-risk insurance is required by Section 11 unless fully covered by war-risk insurance satisfying the terms of Section 11, or unless the Aircraft, the Airframe or such Engine is operated or used under SALE AND LEASE AGREEMENT 18 contract with the Government under which contract the Government assumes liability (backed by the full faith and credit of the United States of America) in an amount not less than the amount of insurance otherwise required by Section 11 for any damage, loss, destruction or failure to return possession of the Aircraft, the Airframe or such Engine at the end of the term of such contract or for injury to persons or damage to property of others, or (iii) with respect to any sublease to a Permitted Foreign Air Carrier, in any area referred to in subclause (3)(iv) of Section 7.2. 7.2 Possession. Lessee will not, without the prior written consent of Lessor, sublease or otherwise in any manner deliver, transfer or relinquish possession of the Aircraft, the Airframe or any Engine or install any Engine, or permit any Engine to be installed, on any airframe other than the Airframe; provided, however, that, so long as no Lease Event of Default shall have occurred and be continuing, and so long as Lessee shall comply with the provisions of Section 11, and all FAA approvals required for such purposes have been obtained, Lessee may, without such prior written consent: 7.2.1 Interchange and Pooling. Subject or permit any Permitted Sublessee to subject (i) the Aircraft, Airframe or any Engine to normal interchange agreements customary in the United States domestic airline industry and entered into by Lessee or such Permitted Sublessee in the ordinary course of its business, and (ii) any Engine to pooling agreements or arrangements customary in the airline industry and entered into by Lessee or such Permitted Sublessee in the ordinary course of its business; but in either case (A) no transfer of the registration of the Airframe or any Engine shall be effected in connection therewith and the terms of this Lease and the Participation Agreement shall be observed, and (B) no such agreement or arrangement shall contemplate or require the transfer of title to the Aircraft, Airframe or any Engine and if Lessor's title to any Engine shall be divested under any such agreement or arrangement, such divestiture shall be deemed to be an Event of Loss with respect thereto and Lessee shall comply with Section 10.2 hereof; 7.2.2 Testing and Service. Deliver or permit any Permitted Sublessee to deliver possession of the Aircraft, Airframe or any Engine or Part, to the manufacturer thereof for testing or other similar purposes, or to any organization for service, repair, maintenance or overhaul work on the Aircraft, Airframe or any Engine or Part, or for alterations or modifications in or additions to the Aircraft, Airframe or any Engine to the extent required or permitted by the terms of Section 8.4; 7.2.3 Civil Reserve Air Fleet Program. Transfer or permit any Permitted Sublessee, if required by law to do so, to transfer possession of the Aircraft, Airframe or any Engine to the Government pursuant to the Civil Reserve Air Fleet Program administered pursuant to Executive Order No. 10999, as amended, or any similar or substitute programs, so long as such transfer of possession does not continue beyond SALE AND LEASE AGREEMENT 19 the end of the Term and so long as Lessee shall (A) promptly notify Lessor upon subjecting the Airframe or any Engine to such program and provide Lessor with the name and address of the appropriate party to whom notice must be given pursuant to Section 16 hereof, and (B) promptly notify Lessor upon transferring possession of the Airframe or any Engine to the Government pursuant to such program; 7.2.4 Installation of Engines. Install or permit any Permitted Sublessee to install an Engine on an airframe owned by Lessee or such Permitted Sublessee, as the case may be, free and clear of all Liens, except (A) Permitted Liens and those which apply only to the engines (other than Engines), appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment (other than Parts) installed on such airframe (but not to the airframe as an entirety), (B) the rights of air carriers under normal interchange agreements which are customary in the airline industry and do not contemplate, permit or require the transfer of title to the airframe or engines installed thereon and (C) mortgage liens or other security interests, provided that (as regards this clause (C)) such mortgage liens or other security interests effectively provide that such Engine shall not become subject to the lien of such mortgage or security interest, notwithstanding the installation thereof on such airframe, unless and until Lessee shall become the owner of such Engine; 7.2.5 Installation of Engines on Other Airframes. Install or permit any Permitted Sublessee to install an Engine on an airframe leased to, or purchased by, Lessee or any Permitted Sublessee subject to a lease, conditional sale, or other security agreement, but only if (A) such airframe is free and clear of all Liens, except the rights of the parties to the lease, conditional sale, or other security agreement covering such airframe, or their successors or assigns, and except Liens of the type permitted by clauses (A) and (B) of Section 7.2.4, and (B) the lease, conditional sale, or other security agreement covering such airframe effectively provides that such Engine shall not become subject to the Lien thereof at any time while such Engine is subject to this Lease, notwithstanding the installation thereof on such airframe; 7.2.6 Pooling of Parts. To the extent permitted by Section 8.3, subject any Pans owned by Lessor and removed from the Airframe or any Engine to any pooling arrangement referred to in Section 8.3; 7.2.7 Wet Lease. Enter into a Wet Lease for the Airframe and Engines or engines then installed thereon with any third party for a term not to continue beyond the Term; 7.2.8 Sublease to Permitted Air Carriers. Enter into a sublease of the Aircraft or the Airframe and Engines or engines then installed on the Airframe or any Engine, for use on the sublessee's regularly scheduled or charter routes, with (a) any SALE AND LEASE AGREEMENT 20 U.S. Air Carrier or (b) any Permitted Foreign Air Carrier, in any such case for a term not to continue beyond the remaining Term. Provided, further, with respect to this Section 7.2, that: (1) the rights of any transferee who receives possession by reason of a transfer permitted by this Section 7.2 (other than the transfer of an Engine which is deemed an Event of Loss) shall be effectively subject and subordinate to, and any sublease permitted by this Section 7.2 shall be made expressly subject and subordinate to, all the terms of this Lease, and to Lessor's rights, powers and remedies under this Lease, including the rights to repossession pursuant to Section 15 and to terminate and avoid such sublease upon such repossession and to require such sublessee to forthwith deliver the Aircraft, Airframe and Engines subject to such sublease upon such repossession; (2) Lessee shall remain primarily liable hereunder for the performance of all the terms of this Lease to the same extent as if such sublease or transfer had not occurred, provided that performance of any such terms by any Permitted Sublessee shall be as effective, for purposes of this Lease, as performance thereof directly by Lessee; (3) any such sublease shall (i) be consistent with the requirements of this Lease and the applicable requirements of the Participation Agreement, (ii) include appropriate provisions for the continued registration, maintenance in accordance with applicable maintenance standards in the appropriate jurisdiction, operation, insurance (appropriate certificates as to which shall be furnished to Lessor and Lender prior to Lessee's entry into any such sublease with any Permitted Foreign Air Carrier or within 10 days thereafter) and return of the subleased property as required hereunder, (iii) provide that the sublessee may not assign or further sublease the Aircraft, and (iv) provide that the Aircraft may not be operated in a country with which the United States does not maintain diplomatic relations or in which there is open warfare, whether or not declared; (4) no interchange agreement, transfer, sublease or other relinquishment of possession permitted hereunder shall affect the registration of the Aircraft or shall permit any action not permitted to Lessee in this Lease; and (5) no such interchange agreement, sublease, transfer or other relinquishment of possession of the Aircraft, Airframe or any Engine shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder or under any other Operative Agreement or constitute a waiver of Lessor's rights or remedies hereunder or under any other Operative Agreement. SALE AND LEASE AGREEMENT 21 Lessee shall notify Lessor within 10 days after the commencement of any sublease permitted hereunder and shall deliver to Lessor within such period a duly executed copy of any sublease or interchange or pooling agreement permitted hereunder together with any certification required by Section 7.2.8. Upon request of Lessor, Lessee shall promptly and duly execute and deliver to Lessor an assignment of any such sublease having a term in excess of 12 months in favor of Lessor in form and substance reasonably satisfactory to Lessor. Lessor hereby agrees, for the benefit of Lessee (and any Permitted Sublessee) and for the benefit of each lessor, conditional seller, or secured party of any airframe or engine leased to or purchased by Lessee (or any Permitted Sublessee) subject to a lease, conditional sale, or other security agreement, that Lessor will not acquire or claim, as against such lessor, conditional seller, or secured party, or any successor or assign thereof, any right, title or interest in any engine as the result of such engine being installed on the Airframe at any time while such engine is subject to such lease, conditional sale, or other security agreement and owned by such lessor or conditional seller or subject to a security interest in favor of such secured party; provided, however, that such agreement of Lessor shall not be for the benefit of any lessor or secured party of any airframe (other than the Airframe) leased to Lessee (or any Permitted Sublessee) or purchased by Lessee (or any Permitted Sublessee) subject to a conditional sale or other security agreement or for the benefit of any mortgagee of or any other holder of a security interest in an airframe owned by Lessee (or any Permitted Sublessee), unless such lessor, conditional vendor, other secured party or mortgagee has expressly agreed (which agreement may be contained in such lease, conditional sale or other security agreement or mortgage) that neither it nor its successors or assigns will acquire, as against Lessor, any right, title or interest in an Engine as a result of such Engine being installed on such airframe. A consolidation, merger, conveyance, transfer, or lease permitted by Section 7.4 of the Participation Agreement shall not be deemed to be a transaction to which this Section 7.2 shall apply. 7.3 Records and Reports. Lessee shall: 7.3.1 Records. Maintain or cause to be maintained all records, logs and other materials required by the FAA or any other governmental authority having jurisdiction to be maintained in respect of the Aircraft, the Airframe and each Engine; 7.3.2 Information and Reports. Upon request, promptly furnish or cause to be furnished to Lessor (in sufficient number) such information as may be required to enable Lessor or any Participant to file any reports, including tax returns, required to be filed by Lessor or such Participant with any governmental authority because of Lessor's ownership of, or Lender's security interest in, the Aircraft, Airframe or any Engine or because of receipt of Rent or because of the interest of any Participant in the Trust Estate; provided, however, that with respect to any such information which Lessee SALE AND LEASE AGREEMENT 22 deems commercially sensitive or confidential, if reasonably feasible, Lessor shall afford Lessee a reasonable opportunity to seek from any such governmental authority a waiver of Lessor's or such Participant's obligation to file any such information or consent to the filing of such information directly by Lessee in lieu of filing by Lessor or such Participant and if any such waiver or consent is evidenced to the reasonable satisfaction of Lessor, then Lessee shall not be required to furnish such information to Lessor; and 7.3.3 Financial Information. Promptly provide Lessor and each Participant with (i) such financial information concerning Lessee as is provided from time to time to the public shareholders of Lessee, (ii) within 60 days after the end of each of the first three quarterly periods of each fiscal year of Lessee, a consolidated balance sheet of Lessee and its subsidiaries prepared by it as of the close of such period, together with the related consolidated statements of income for such period, (iii) within 120 days after the close of each fiscal year of Lessee, a consolidated balance sheet of Lessee and its subsidiaries as of the close of such fiscal year, together with the related consolidated statements of income for such fiscal year, as certified by independent public accountants, and (iv) from time to time such other information as to its financial condition as Lessor or any Participant may reasonably request. Section 8. Maintenance; Replacement and Pooling of Parts; Alterations, Modifications and Additions. 8.1 Maintenance. 8.1.1 Maintenance Program. Lessee shall maintain, service, repair, overhaul, alter, modify, add to and test (or cause to be maintained, serviced, repaired, overhauled, altered, modified, added to and tested) the Aircraft, the Airframe and each Engine, and each other engine installed from time to time on the Airframe, in accordance with Lessee's FAA-approved maintenance program for the Aircraft, Airframe and Engines (the "Maintenance Program"), (i) so as to keep the Aircraft, the Airframe and each Engine in as good operating condition as on the Delivery Date, ordinary wear and tear excepted, (ii) in the same manner and with the same care as used by Lessee with similar aircraft owned or operated by Lessee, and (iii) so as to keep the Aircraft, the Airframe and each Engine in such condition as required to enable the FAA certificate of airworthiness for the Aircraft to be maintained in good standing at all times under the Act, except when all comparable Boeing Model 737-200 series aircraft registered in the United States of America have been grounded by the FAA other than as a result of actions taken or omitted to be taken by Lessee (or, if a sublease is then in effect, any Permitted Sublessee). SALE AND LEASE AGREEMENT 23 8.1.2 Compliance with Government Requirements. Lessee will comply with all service, inspection, maintenance, repair and overhaul regulations, directives and instructions which are made mandatory by the FAA or other Government authority upon United States operators of Boeing Model 737-200 series aircraft and Pratt & Whitney JT8D-9A engines and which require compliance during the Term and prior to return of the Aircraft under this Lease. 8.2 Replacement of Parts. Lessee, at its own cost and expense, will promptly replace (or cause to be replaced) all Parts which may from time to time be incorporated in the Aircraft, Airframe or any Engine and which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever, except as otherwise provided in Section 8.4. In addition, Lessee may, at its own cost and expense, remove in the ordinary course of maintenance, service, repair, overhaul or testing any Parts, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use; provided, however, Lessee, except as otherwise provided in Section 8.4, at its own cost and expense, will replace such Parts as promptly as possible. All replacement Parts shall be free and clear of all Liens (except for Permitted Liens and except in the case of replacement property temporarily installed on an emergency basis) and shall be in as good operating condition as, and shall have a value and utility at least equal to, the Parts replaced assuming such replaced Parts were in the condition and repair required to be maintained by the terms hereof. All Parts at any time removed from the Aircraft, Airframe or any Engine shall remain the property of Lessor, no matter where located, until such time as such Parts shall be replaced by Parts which have been incorporated in the Aircraft, Airframe or such Engine and which meet the requirements for replacement Parts specified above. Immediately upon any replacement Part becoming incorporated in the Aircraft, Airframe or such Engine as above provided, without further act, (i) title to the replaced Part shall thereupon vest in Lessee free and clear of all rights of Lessor, and the replaced Part shall no longer be deemed a Part hereunder, (ii) title to such replacement Part shall thereupon vest in Lessor (subject only to Permitted Liens and except in the case of replacement property temporarily installed on an emergency basis), and (iii) such replacement Part shall become subject to this Lease and be deemed part of the Aircraft, Airframe or such Engine for all purposes hereof to the same extent as the Parts originally incorporated in such Aircraft, Airframe or Engine. 8.3 Pooling of Parts. Any Part removed from the Aircraft, Airframe or any Engine as provided in Section 8.2 may be subjected by Lessee (or a Permitted Sublessee) to a normal pooling arrangement customary in the airline industry entered into in the ordinary course of business of Lessee or such Permitted Sublessee, so long as a Part replacing such removed Part shall be incorporated in the Aircraft, Airframe or such Engine in accordance with Section 8.2 as promptly as practicable after the removal of such removed Part. In addition, any replacement Part when incorporated in the Aircraft, SALE AND LEASE AGREEMENT 24 Airframe or any Engine in accordance with Section 8.2 may be owned by any third party subject to such a normal pooling arrangement, so long as Lessee (or any Permitted Sublessee), at its own cost and expense, as promptly thereafter as practicable either (i) causes title to such replacement Part to vest in Lessor in accordance with Section 8.2 by Lessee (or any Permitted Sublessee) acquiring title thereto for the benefit of, and transferring such title to, Lessor free and clear of all Liens (except Permitted Liens), or (ii) replaces such replacement Part by incorporating in the Aircraft, Airframe or such Engine a further replacement Part owned by Lessee (or any Permitted Sublessee) free and clear of all Liens (except Permitted Liens) and by causing title to such further replacement Part to vest in Lessor in accordance with Section 8.2. 8.4 Alterations, Modifications and Additions. Lessee, at its own cost and expense, shall make (or cause to be made) such alterations and modifications in and additions to the Aircraft, Airframe and each Engine as may be required from time to time to meet the standards of the FAA or other governmental authority having jurisdiction and to maintain the FAA certificate of airworthiness for the Aircraft; provided, however, that Lessee may contest in good faith the validity or application of any such law, rule, regulation or order in any reasonable manner which does not materially adversely affect Lessor's interest in the Aircraft; and provided, further, that Lessee's failure to make (or cause to be made) any such alterations or modifications shall not constitute noncompliance with the requirements of this Section 8.4 or a breach of Lessee's undertaking hereunder for so long a period as may be necessary to remedy such failure, if such failure can be remedied, so long as during such period Lessee is using due diligence and reasonable efforts to remedy such failure. In addition, Lessee, at its own cost and expense, may, from time to time make (or cause to be made) such alterations and modifications in and additions to the Aircraft, Airframe or any Engine as Lessee may deem desirable in the proper conduct of its business, including, without limitation, removal of Parts which Lessee deems obsolete or no longer suitable or appropriate for use in the Aircraft, Airframe or such Engine; provided, however, that no such alteration, modification or addition shall, in Lessee's reasonable judgment, materially diminish the value or utility of the Aircraft, Airframe or such Engine, or materially impair the condition or airworthiness thereof, below the value, utility, condition and airworthiness thereof immediately prior to such alteration, modification or addition assuming the Aircraft, Airframe or such Engine was then of the value and utility and in the condition and airworthiness required to be maintained by the terms of this Lease. Title to all Parts incorporated in the Aircraft, Airframe or such Engine as the result of such alteration, modification or addition shall, without further act, vest in Lessor. Notwithstanding the foregoing sentence of this Section 8.4, so long as no Lease Event of Default or Lease Default shall have occurred and be continuing, Lessee may, at any time during the Term, remove any Part if (i) such Part is in addition to, and not in replacement of or substitution for, any Part originally incorporated (or required by the provisions of this Lease to be incorporated) in the Aircraft, Airframe or such Engine at the time of delivery thereof hereunder or any Part in replacement of or substitution for SALE AND LEASE AGREEMENT 25 any such Part, (ii) such Part is not required to be incorporated in the Aircraft, Airframe or such Engine pursuant to the terms of this Section 8, and (iii) such Part can be removed from the Aircraft, Airframe or such Engine without diminishing or impairing the value, utility, condition or airworthiness required to be maintained by the terms of this Lease which the Aircraft, Airframe or such Engine would have had at such time had such alteration, modification or addition not occurred. Upon the removal by Lessee of any Part as above provided, title thereto shall, without further act, vest in Lessee and such Part shall no longer be deemed part of the Aircraft, Airframe or such Engine from which it was removed. Any Part not removed by Lessee as above provided prior to the return of the Aircraft, Airframe or such Engine to Lessor hereunder shall remain the property of Lessor. Section 9. [Intentionally Omitted] Section 10. Loss, Destruction, Requisition, Etc. 10.1 Event of Loss with Respect to Aircraft. Upon the occurrence of an Event of Loss with respect to the Aircraft, Lessee shall forthwith (and in any event within 15 days after such occurrence) give Lessor and each Participant written notice of such Event of Loss. On or before the Business Day next preceding the earlier of (i) the 180th day following the date of the occurrence of such Event of Loss, or (ii) 15 days following the receipt of insurance proceeds with respect to such occurrence, Lessee shall pay to Lessor, in the manner and in funds of the type specified in Section 3.5, (A) the Stipulated Loss Value for the Aircraft, (B) all unpaid Basic Rent or Renewal Rent accrued through and including the date of payment of Stipulated Loss Value and (C) (without duplication) any other Rent which is due and payable through and including the date of such payment. Upon payment in full of Stipulated Loss Value and all such accrued Basic or Renewal Rent pursuant hereto, (A) the obligation of Lessee to pay Basic or Renewal Rent due after the date of such payment shall terminate (but Lessee shall remain liable for all payments of Supplemental Rent due through and including the date of such payment of Stipulated Loss Value), (B) the Term for the Aircraft shall end, and (C) Lessor will Transfer to Lessee the Aircraft. Upon compliance by Lessee with all of the terms of this Section 10.1, Lessee will be subrogated to all claims of Lessor, if any, against third parties for damage to or loss of such Airframe and Engines to the extent of the then insured value thereof. 10.2 Event of Loss with Respect to an Engine. 10.2.1 Event of Loss. Upon the occurrence of an Event of Loss with respect to an Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe, Lessee shall give Lessor and each Participant prompt written notice (and in any event within 15 days after such occurrence) thereof and shall, SALE AND LEASE AGREEMENT 26 as promptly as possible and in any event within 60 days after the occurrence of such Event of Loss, convey or cause to be conveyed to Lessor, as replacement for the Engine with respect to which such Event of Loss occurred, title to a Replacement Engine free and clear of all Liens, other than Permitted Liens, and having a value and utility at least equal to, and being in as good operating condition as, the Engine with respect to which such Event of Loss occurred, assuming such Engine was of the value and utility and in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of Loss. 10.2.2 Conditions; Lessee's Obligations. Prior to or at the time of any such conveyance, Lessee will promptly: (a) furnish Lessor with a full warranty (as to title) bill of sale duly conveying to Lessor such Replacement Engine; (b) cooperate with any reasonable request of Lender to subject such Replacement Engine to the Lien of the Mortgage; and cause a Lease Supplement subjecting such Replacement Engine to this Lease, duly executed by Lessee, to be delivered to Lessor for execution and, upon execution, to be filed for recordation with the FAA pursuant to the Act; (c) furnish Lessor and Lender with such evidence of compliance with the insurance provisions of Section 11 hereof with respect to such Replacement Engine and the payment of all premiums then due with respect to such insurance, as Lessor or Lender may reasonably request; (d) furnish Lessor and Lender with an opinion or opinions of Lessee's counsel, in form, substance and scope reasonably satisfactory to Lessor and Lender, to the effect that, upon such conveyance, Lessor will acquire good title to such Replacement Engine free and clear of all Liens other than Permitted Liens (including Lender's interests), and that such Replacement Engine will be leased hereunder and will be subject to the Lien of the Mortgage to the same extent as the Engine replaced thereby and to such further effect as Lessor or Lender may reasonably request; (e) furnish Lessor and Lender with an Officer's Certificate certifying that, upon consummation of such replacement, no Lease Event of Default or Lease Default will exist hereunder; and (f) furnish such other certificates or documents (including appropriate UCC-3 amendments to the financing statements filed on or before the Delivery Date) as Lessor or any Participant may reasonably request to effect such replacement. SALE AND LEASE AGREEMENT 27 10.2.3 Recordation and Opinions. In the case of any Replacement Engine conveyed to Lessor under this Section 10.2, promptly upon the recordation of the Lease Supplement and any supplement or amendment to the Mortgage covering such Replacement Engine pursuant to the Act, Lessee will cause to be delivered to Lessor and Lender an opinion of William C. Boston & Associates or other FAA counsel satisfactory to Lessor as to the due recordation of such Lease Supplement and any such supplement or amendment to the Mortgage. 10.2.4 Conveyance; Replacement Engine. Upon compliance by Lessee with the terms of this Section 10.2, Lessor will Transfer to Lessee the Engine with respect to which such Event of Loss occurred, and Lessee will be subrogated to all claims of Lessor, if any, against third parties for damage to or loss of such Engine to the extent of the insured value thereof. 10.2.5 No Reduction of Rent. No Event of Loss with respect to an Engine under the circumstances contemplated by the terms of this Section 10.2 shall result in any changes of Basic Rent or Renewal Rent. 10.3 Application of Certain Payments. Any payments (other than insurance proceeds, the application of which is provided for in Section 11) received at any time by Lessor, Lessee or any Permitted Sublessee from any governmental authority or other Person with respect to any Event of Loss, will be applied as follows: 10.3.1 Replacement of Engine. If such payments are received with respect to an Engine that has been or is being replaced by Lessee pursuant to Section 10.2, so much of such payments remaining after reimbursement of Lessor and Owner Participant for costs and expenses shall be paid over to, or retained by, Lessee, provided Lessee shall have fully performed or, concurrently therewith, will fully perform the terms of Section 10.2 with respect to the Event of Loss for which such payments are made. 10.3.2 Nonreplacement. If such payments are received with respect to the Airframe and/or Engines that have not been and will not be replaced pursuant to Section 10.2, so much of such payments remaining after reimbursement of Lessor and Owner Participant for costs and expenses as shall not exceed the Stipulated Loss Value and other amounts required to be paid by Lessee hereunder shall be applied in reduction of Lessee's obligation to pay such Stipulated Loss Value and other amounts if not already paid by Lessee, or, if already paid by Lessee, shall be applied to reimburse Lessee for its payment of such Stipulated Loss Value and other amounts. The balance, if any, of such payment remaining thereafter shall be divided between Lessor and Lessee in proportion to their interests in the Aircraft. SALE AND LEASE AGREEMENT 28 10.4 Requisition of Aircraft for Use by Governmental Authorities. In the event of the requisition, unless and until such requisition becomes an Event of Loss, for use of the Airframe and the Engines or engines installed on such Airframe during the Term by any governmental authority, Lessee shall notify Lessor of such requisition, and, unless and until such requisition becomes an Event of Loss, all of Lessee's obligations under this Lease with respect to the Aircraft shall continue to the same extent as if such requisition had not occurred. All payments received by Lessor or Lessee from such governmental authority for the use of such Airframe and Engines or engines prior to the time such requisition becomes an Event of Loss shall be paid over to, or retained by, Lessee (or, if directed by Lessee, any Permitted Sublessee); and all payments received by Lessor or Lessee from such governmental authority for the use of such Airframe and Engines or engines after such time shall be paid over to, or retained by, Lessor unless Lessee shall have fully performed or, concurrently therewith, will fully perform the terms of Section 10.1 with respect to such Event of Loss. 10.5 Requisition of an Engine for Use by Governmental Authorities. In the event of the requisition for use by any governmental authority (other than in circumstances contemplated by Section 10.4) of any Engine but not the Airframe, Lessee will replace such Engine hereunder by complying with the terms of Section 10.2 to the same extent as if an Event of Loss had occurred with respect to such Engine, and any payments received by Lessor or Lessee from such governmental authority with respect to such requisition shall be paid over to, or retained by, Lessee (subject to performance by Lessee of the terms of Section 10.2 to the same extent as if an Event of Loss had occurred with respect to such requisitioned Engine). 10.6 Application of Payments During Existence of Default. Any amount referred to in this Section 10 which is payable or creditable to or retainable by Lessee shall not be paid or credited to or retained by Lessee if, at the time of such payment, credit or retention, (A) a Lease Event of Default or (B) a Lease Default under Section 14.1 or 14.5 shall have occurred and be continuing hereunder, but shall be paid to and held by Lessor as security for the obligations of Lessee under this Lease and applied against Lessee's obligations hereunder as and when due; at such time as there shall not be continuing any such Lease Event of Default or Lease Default, or at such earlier time as Lessee shall have paid in full all Rent and other amounts due and payable hereunder and under the other Operative Agreements by Lessee, any remaining balance of such amount shall be paid to Lessee to the extent not previously applied in accordance with the preceding clause of this sentence. Section 11. Insurance. 11.1 Public Liability and Property Damage Insurance. Lessee shall at all times maintain, or cause to be maintained, at its or any Permitted Sublessee's expense, SALE AND LEASE AGREEMENT 29 public liability (including without limitation contractual liability, passenger legal liability and property damage but excluding manufacturer's product liability coverage) insurance which shall: 11.1.1 Type, Form and Amount. Be of a type and form carried by similarly situated United States commercial air carriers generally, and carried in amounts not less than $350,000,000 (per occurrence) combined single limit (or such greater amount as Lessee may carry from time to time on other 737-200 series aircraft in its fleet); 11.1.2 Coverage. Include, but not be limited to, public liability insurance, contractual liability insurance, passenger liability insurance and property damage liability insurance (including cargo and baggage liability insurance); and 11.1.3 Additional Insureds. Name as additional insureds Lessor (in its individual and trust capacities), Lender and Owner Participant, as their interests may appear. 11.2 Insurance Against Loss of or Damage to Aircraft and Engines. Lessee shall at all times maintain, or cause to be maintained, at its or any Permitted Sublessee's expense insurance against loss of or damage to the Aircraft, Airframe and Engines as follows: 11.2.1 Type, Form and Amount. "All-risk" insurance on the Aircraft and "all-risk" coverage on each Engine and on Parts while removed from the Aircraft or Engines, which is of the type, form and in an amount in compliance with the last sentence of this Section 11.2.1, not less than that carried by Lessee on similar equipment owned or leased by Lessee and not less than that usually carried by similarly situated United States commercial air carriers; and, to the extent so usually carried, at all times that the Aircraft or any Engine is not covered by the insurance described in Section 11.2.2, coverage against the perils of (i) strikes, riots, civil commotions or labor disturbances, (ii) any malicious act or act of sabotage and (iii) hijacking, or any unlawful seizure or wrongful exercise of control, of the Aircraft or crew in flight (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 other than hijacking committed by persons engaged in a program of irregular warfare for terrorist purposes. Such insurance shall at all times be for an amount not less than Stipulated Loss Value for the Aircraft. 11.2.2 War-Risk Insurance. If at any time (a) war-risk insurance is maintained by Lessee or any Permitted Sublessee subleasing the Aircraft or any Engine with respect to other aircraft operated by Lessee or such Permitted Sublessee on the same or similar routes, or (b) the Aircraft is operated on routes where the custom in the SALE AND LEASE AGREEMENT 30 commercial airline industry is to carry war-risk insurance, then war-risk insurance of the type carried by similarly situated United States commercial air carriers operating the same or comparable models of aircraft on the same or similar routes shall be maintained on the Aircraft in an amount not less than that specified in Section 11.2.1. 11.2.3 Certain Requirements. The insurance policies required by this Section 11.2 shall: 11.2.3.1 Additional Insureds. Be endorsed to name Lessor (in its individual and trust capacities), Lender and Owner Participant as additional insureds, as their interests may appear. 11.2.3.2 Payment of Proceeds. Provide that proceeds thereunder shall be paid directly to Lender, so long as the Aircraft is subject to the Lien of the Mortgage and thereafter to Lessor, in either case as exclusive loss payee; provided, however, that any proceeds payable as a result of any property damage to the Airframe or any Engine, which property damage does not exceed $1,500,000 and does not constitute an Event of Loss with respect to the Aircraft or such Engine, shall be paid to Lessee, unless Lessor or Lender, prior to such payment, shall have notified the insurer making such payment that a Lease Event of Default or a Lease Default specified in Section 14.1 or 14.5 has occurred and is continuing. 11.2.3.3 Waiver of Subrogation. Provide that the insurers shall waive any rights of subrogation against Lessor, Lender and Owner Participant except for claims arising out of gross negligence or willful misconduct of such Persons; provided that the exercise by insurers of rights of subrogation, if any, permitted by this Section 11.2 shall not, in any way, delay payment of any claim that would otherwise be payable by such insurers but for the existence of such rights of subrogation or entitle such insurers to exercise or to assert any setoff, recoupment, counterclaim or any other deduction in respect of any amounts payable under such policies. 11.2.4 Deductibles. The insurance required by this Section 11.2 may, subject to Section 11.8, provide for standard deductibles which are from time to time in effect in the aviation insurance industry generally and which are customarily maintained by similarly situated United States commercial air carriers; provided, however, such deductibles shall not be more than the deductibles generally maintained by Lessee (and which Lessee is under no compulsion to maintain pursuant to any mortgage, lease or other agreement) with respect to its fleet of Boeing Model 737-200 series aircraft and Pratt & Whitney JT8D-9A engines generally. SALE AND LEASE AGREEMENT 31 11.2.5 Government Indemnity. In the case of a contract with the Government in respect of the Aircraft or Engines, a valid agreement by the Government to indemnify Lessee, Lessor, Lender and Owner Participant against the same risks which are required hereunder to be insured against in amounts at least equal to the amounts required hereunder from time to time (such indemnity to be backed by the full faith and credit of the United States of America), shall be considered adequate insurance with respect to the Aircraft, Airframe and any Engine subject to such contract to the extent of the risks and in the amounts that are the subject of any such agreement to indemnify. 11.3 General Policy Provisions. Each insurance policy to be procured and maintained hereunder shall: 11.3.1 Primary Insurance. Be primary and without right of contribution from other insurance which may provide coverage to Lessor, Lender or Owner Participant with respect to its interest in the Aircraft, Airframe or any Engine or its liabilities with respect to or arising out of the transactions contemplated by the Operative Agreements; 11.3.2 Coverage for Each Insured. Expressly provide that all the provisions thereof, except the agreed values and the limits of the liability of the insurer under such policy, shall operate in the same manner as if there were a separate policy covering each insured; 11.3.3 Waiver of Certain Rights. Waive any right of the insurers to any setoff, recoupment, counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of Lessee, Lender, Lessor or Owner Participant; 11.3.4 Breach of Warranty. Provide that, in respect of Lessor, Lender and Owner Participant, such insurance shall not be invalidated by any action or inaction by Lessee or any additional insured (other than such additional insured, as to such additional insured) and shall insure the interests of Lessor, Lender and Owner Participant regardless of any breach or violation by Lessee or any additional insured (other than such additional insured, as to such additional insured) of any representation, warranty, declaration or condition contained in such policy; 11.3.5 Notice of Termination or Changes. Provide for not less than 30 days' prior written notice to be received by Lessor, Lender and Owner Participant before any lapse, alteration, termination or cancellation of the insurance evidenced thereby shall be effective as to Lessor, Lender and Owner Participant, except that war-risk and allied perils policies may provide for not less than seven days' prior written notice or such lesser or greater notice as shall at the time be customary in the aviation insurance SALE AND LEASE AGREEMENT 32 industry generally, and which are customarily in effect with respect to major United States commercial air carriers generally from time to time; 11.3.6 Nonliability for Premiums. Provide that neither Lessor, Lender nor Owner Participant shall be liable for any insurance premium; and 11.3.7 Identity of Insurers. Be with insurance companies. underwriters or funds of recognized responsibility. 11.4 Application of Insurance Proceeds. As between Lessor and Lessee, all insurance proceeds received under policies required to be maintained (or to be caused to be maintained) by Lessee pursuant to Section 11.2 as a result of the occurrence of an Event of Loss with respect to the Aircraft, Airframe or any Engine will be applied in accordance with Section 10.3.1 or 10.3.2, as the case may be (except that the balance referred to in Section 10.3.2 shall be paid over to, or retained by, Lessee). All insurance proceeds in respect of any property damage loss not constituting an Event of Loss with respect to the Airframe or an Engine will be applied in payment for repairs or for replacement property in accordance with the terms of Section 8, if not already paid for by Lessee, and any balance remaining after compliance with such Section with respect to such loss shall be paid to Lessee. In the case of a loss with respect to an engine (other than an Engine) installed on the Airframe, Lessor shall hold any payment to it of any insurance proceeds in respect of such loss for the account of Lessee or any other third party that is entitled to receive such proceeds. The provisions of Section 10.6 shall apply to amounts referred to in this Section 11.4. 11.5 Certificates; Reports, Etc. With respect to any policy required hereunder, Lessee shall cause to be furnished to Lessor and each Participant on or prior to the Delivery Date of the Aircraft and on or prior to expiration of such policy, certificates of the insurer or insurers (or their authorized representatives) providing insurance pursuant to the requirements of this Section 11, as to hull and liability insurance. On or before the Delivery Date of the Aircraft, and annually thereafter on or before such expiration date, Lessee shall cause to be furnished to Lessor and each Participant a report signed by Frank B. Hall & Co. (or any other firm of independent aircraft insurance brokers, appointed by Lessee, reasonably satisfactory to the Participants) describing in reasonable detail the insurance then carried and maintained with respect to the Aircraft and stating the opinion of such firm that the insurance then carried and maintained on the Aircraft complies with the terms hereof as to hull and liability insurance. Lessee agrees that it will cause such firm to advise Lessor and each Participant in writing promptly of any default in the payment of any premium or any other act or omission on the part of Lessee or any Permitted Sublessee of which they have knowledge and which might invalidate or render unenforceable, in whole or in part, the insurance on the Aircraft. To the extent such agreement is reasonably obtainable, Lessee further agrees to cause such SALE AND LEASE AGREEMENT 33 firm to advise Lessor and each Participant in writing at least 30 days (seven days in the case of war-risk and allied perils coverage) prior to the expiration or termination date of any insurance carried and maintained on the Aircraft pursuant to this Section 11. 11.6 Lessor's Right to Maintain Insurance. In the event that Lessee shall fail to maintain or cause to be maintained insurance as herein provided, Lessor or any Participant may at its option (but shall not be obligated to) provide such insurance and in such event, Lessee shall, upon demand, reimburse such Person, as Supplemental Rent, for the cost thereof. No such payment, performance or compliance shall be deemed to cure any Lease Event of Default or Lease Default or otherwise relieve Lessee of its obligations with respect thereto. At Lessor's or Lender's request and expense, and subject to the permission of Lessee's insurance carriers, Lessee will increase the amount of coverage under any insurance policy that Lessee maintains pursuant to Section 11.2.1 or 11.2.2, and notwithstanding the provisions of Section 11.4, the proceeds of any such additional insurance shall be payable to Lessor or Lender, as the case may be; provided, however, that no such insurance may be obtained which would limit or otherwise adversely affect the availability or coverage or cost of any insurance required to be obtained or maintained pursuant to this Section 11. 11.7 Insurance for Own Account. Nothing in this Section 11 shall limit or prohibit Owner Participant (directly or through Lessor) from obtaining insurance for its own account, and any proceeds payable thereunder shall be payable as provided in the insurance policy relating thereto; provided, however, that no such insurance may be obtained which would limit or otherwise adversely affect the availability or coverage or cost of any insurance required to be obtained or maintained pursuant to this Section 11. Nothing in this Section 11 shall limit or prohibit Lessor or Lender from obtaining insurance for its own account, and any proceeds payable thereunder shall be payable as provided in the insurance policy relating thereto; provided, however, that no such insurance may be obtained which would limit or otherwise adversely affect the availability or coverage or cost of any insurance required to be obtained or maintained pursuant to this Section 11 or obtained by Owner Participant pursuant to the preceding sentence. 11.8 Self-Insurance. Notwithstanding the foregoing provisions of this Section 11, Lessee may, from time to time, self-insure with respect to the Aircraft to the same extent as it does with respect to, or maintain policies with deductibles or premium adjustment provisions consistent with similar provisions applicable to, other comparable aircraft operated by Lessee; provided, however, that if at any time Lessee's unsecured senior long-term debt securities are not rated "Investment Grade", in the case of hull insurance such self-insurance shall in no case be in an amount greater than 4% of Lessee's tangible net worth (as defined in accordance with accepted financial practice); and provided, further that, in the case of public liability insurance, such self-insurance shall in no event exceed $50,000,000. As used in this Section 11.8, the term "Investment Grade" SALE AND LEASE AGREEMENT 34 means a rating of "Baa3" or higher from Moody's Investors Service, Inc. or a rating from any other nationally recognized bond rating service equivalent to or better than such a rating. Section 12. Inspection. At all reasonable times, and upon reasonable notice, Lessor or any Participant or its authorized representatives or designees may inspect the Aircraft and inspect and copy (subject to any confidentiality agreements, copyright restrictions and the like) the books and records of Lessee relative thereto. Any such inspection of the Aircraft shall be without out-of-pocket expense or risk to Lessee; provided that no exercise of such inspection right shall interfere with the normal operation or maintenance of the Aircraft by, or the business of, Lessee (or any Permitted Sublessee). Subject to the proviso to the preceding sentence of this Section 12, Owner Participant may observe the "C" check (or its equivalent) referred to in clause (I) of Section 5.3.1 and any Card inspection during the Term. Neither Lessor nor any Participant shall have any duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. Section 13. Assignment. 13.1 General. Except as otherwise expressly permitted in Section 7.2 hereof or Section 12.5.1 of the Participation Agreement, or as required in the case of any requisition by the Government referred to in Section 7.1.4, Lessee will not, without the prior written consent of Lessor, assign or transfer any of its rights or obligations under this Lease. Lessor may assign or convey any of its right, title and interest in and to this Lease or the Aircraft in accordance with the Participation Agreement, the Trust Agreement or the express provisions of this Lease. The terms and provisions of the Lease shall be binding upon and inure to the benefit of Lessor and Lessee and their respective permitted successors and assigns. 13.2 Security for Lessor's Obligations. In order to secure the indebtedness evidenced by the Note, the Mortgage provides, among other things, for the assignment by Lessor to Lender of its right, title and interest in, to and under this Lease and any Permitted Sublease, to the extent set forth in the Mortgage, and for the creation of a first mortgage lien on and perfected security interest in the Aircraft in favor of Lender. Lessee hereby consents to such assignment and to the creation of such mortgage and security interest. Except as may otherwise be provided in the Mortgage, all rights of Lessor and Owner Participant with respect to the Lease, the Aircraft, the Airframe or any Engine (or any part thereof) shall be exercisable by Lender. SALE AND LEASE AGREEMENT 35 Section 14. Events of Default. The following events shall constitute Lease Events of Default (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), and each such Lease Event of Default shall continue so long as, but only so long as, it shall not have been remedied or waived: 14.1 Failure To Pay Rent. Lessee shall fail to make any payment of Basic Rent or Renewal Rent within 5 Business Days from the due date thereof; or any other payments required under the Operative Agreements within 10 Business Days after the receipt of written notice of such default to Lessee from Lessor. 14.2 Specific Defaults. Lessee shall fail to carry and maintain (or cause to be carried and maintained) insurance on or with respect to the Aircraft in accordance with the provisions of Section 11, provided that any such failure shall not constitute a Lease Event of Default so long as such failure is for a period of not more than 30 days, Lessee shall not operate the Aircraft at a time when such insurance is not in effect and the Aircraft continues to be covered by such insurance as is required when the Aircraft is on the ground; or 14.3 General Default. Lessee shall fail to perform or observe any other material covenant, condition or agreement to be performed or observed by it hereunder or under any other Operative Agreement (except the Tax Indemnification Agreement), and such failure shall continue unremedied for a period of 30 days after Lessee's receipt of written notice thereof from Lessor or Lender, unless Lessee shall be diligently proceeding to correct such failure and such failure is cured within 180 days after receipt of such notice or the end of the Term, whichever shall first occur; or 14.4 Misrepresentation and Breach of Warranty. Any representation or warranty made by Lessee herein or in the Participation Agreement or in any other Operative Agreement (other than the Tax Indemnification Agreement) or in any document or certificate furnished by Lessee in connection with any thereof, shall prove to have been incorrect in any material respect at the time made and shall remain incorrect in any material respect 30 days after Lessee's receipt of written notice thereof from Lessor or Lender; or 14.5 Bankruptcy, Etc. Lessee shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official or agency in an involuntary case SALE AND LEASE AGREEMENT 36 or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due unless the subject of a bona fide dispute, within the meaning of Title 11 of the United States Code, or shall take any corporate action to authorize any of the foregoing; or an involuntary case or other proceeding shall be commenced against Lessee seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official or agency of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 90 days; or 14.6 Cross Default. A Lease Event of Default shall have occurred and be continuing under either of the other two Sale and Lease Agreements of even date herewith, each relating to a Boeing 737-200 series aircraft having FAA registration number N56SW or N57SW; provided, that Lender (or lender of any Successor Indebtedness) shall then be Lender (or lender of any Successor Indebtedness) (as such terms are defined therein) under such other Sale and Lease Agreement. Section 15. Remedies. 15.1 Default; Remedies. Upon the occurrence of a Lease Event of Default and at any time thereafter so long as the same shall be continuing, Lessor may, at its option, declare by written notice to Lessee this Lease to be in default (provided, however, that any Lease Event of Default specified in Section 14.5 shall be automatic and shall not require any such declaration or notice) and at any time thereafter, so long as any such Lease Event of Default shall be continuing, Lessor may exercise one or more of the following remedies as Lessor in its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, applicable law then in effect which have not been effectively waived by Lessee: 15.1.1 Return; Repossession. Lessor may cause Lessee, upon written demand by Lessor and at Lessee's expense, to return promptly, and Lessee shall return promptly, all or any part of the Aircraft, Airframe or Engines as Lessor may so demand to Lessor or its order in the manner and condition required by, and otherwise in accordance with all the provisions of, Section 5 as if the Aircraft, Airframe or Engines were being returned at the end of the Term; or Lessor, at its option, may enter upon the premises where the Aircraft, Airframe or any Engine, or part thereof is located and take immediate possession of and remove the same by summary proceedings or otherwise, all without liability accruing to Lessor for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise, and Lessee expressly waives any right it may have under applicable law to a hearing prior to repossession of the Aircraft, Airframe or any Engine or part thereof; or SALE AND LEASE AGREEMENT 37 15.1.2 Sale, Use, Etc. Lessor may sell all or any part of the Aircraft, Airframe or any Engine, at public or private sale, at such times and places, to such Persons (including Lessor or any Participant) as Lessor may determine, or otherwise dispose of, hold, use, operate, lease to others or keep idle the Aircraft, Airframe or any Engine or part thereof, as Lessor, in its sole discretion, may determine, all free and clear of any rights of Lessee except as hereinafter set forth in this Section 15 and without any duty to account to Lessee with respect to such action or inaction or for any proceeds with respect thereto; or 15.1.3 Certain Liquidated Damages. 15.1.3.1 Liquidated Damages-Fair Market Rental Value. Whether or not Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under Section 15.1.1 or 15.1.2 with respect to the Aircraft, Airframe or any Engine or part thereof, Lessor, by written notice to Lessee specifying a payment date not earlier than ten days from the date of such notice, may cause Lessee to pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent or Renewal Rent, as the case may be, due on or after the date specified for payment in such notice), any unpaid Basic Rent or Renewal Rent, as the case may be, due prior to such date plus an amount equal to the excess, if any, of the Stipulated Loss Value for the Aircraft, computed as of such date over the fair market rental value (determined as hereafter provided in this Section 15) of the Aircraft for the remainder of the Term, after discounting such fair market rental value semiannually (effective on each Rent Payment Date) by a rate equal to the Overdue Rate to present worth as of the date specified for payment in such notice, together with interest, if any, on such amount and unpaid Basic Rent or Renewal Rent, as the case may be, at the Overdue Rate from the date specified for payment in such notice to the date of payment in full; or 15.1.3.2 Liquidated Damages-Fair Market Sales Value. If Lessor shall not have sold the Aircraft, Lessor, by written notice to Lessee specifying a payment date not earlier than ten days from the date of such notice, may cause Lessee to pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent or Renewal Rent, as the case may be, due on or after the date specified for payment in such notice), any unpaid Basic Rent or Renewal Rent, as the case may be, due prior to such date plus an amount equal to the excess, if any, of the Stipulated Loss Value for the Aircraft, computed as of such date over the fair market sales value of the Aircraft (determined as hereafter provided in this Section 15 as of the date specified for payment in such notice), together with interest, if any, on such amount and unpaid Basic Rent or SALE AND LEASE AGREEMENT 38 Renewal Rent, as the case may be, at the Overdue Rate from the date specified for payment in such notice to the date of payment in full; or 15.1.4 Liquidated Damages upon Sale. If Lessor, pursuant to Section 15.1.2 or applicable law, shall have sold the Aircraft, Lessor, in lieu of exercising its rights under Section 15.1.3 with respect to the Aircraft, may, if Lessor shall so elect, upon giving written notice to Lessee, cause Lessee to pay Lessor, and Lessee shall pay to Lessor, on the date of such sale, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent or Renewal Rent, as the case may be, due on or after the date of such sale), any unpaid Basic Rent or Renewal Rent, as the case may be, due prior to such date of sale plus the amount of any deficiency between the net proceeds of such sale or (if such sale is a private sale and is made to Lessor, a Participant or any Affiliate thereof) between the fair market sales value of the Aircraft, determined as of the date of such sale as hereinafter provided in this Section 15, and the Stipulated Loss Value of the Aircraft, computed as of the date of such sale, together with interest, if any, on such amount and such unpaid Basic Rent or Renewal Rent at the Overdue Rate from the date of such sale to the date of payment in full; or 15.1.5 Rescission and Other Remedies. Lessor may terminate or rescind this Lease as to the Aircraft, or may exercise any other right or remedy which may be available to it under applicable law or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof, including without limitation Lessee's agreement to lease the Aircraft for the Term and to pay Rent. In addition to the foregoing remedies, Lessee shall be liable (except as otherwise provided above and without duplication of amounts otherwise payable hereunder) for any and all unpaid Rent due hereunder before, during or after the exercise of any of the foregoing remedies and for all reasonable and actual legal fees and other costs and expenses (including the fees and expenses of all appraisers required by this Section 15) of Lessor and Participants, incurred by reason of the occurrence of any Lease Event of Default or the exercise of Lessor's remedies with respect thereto, including all insurance and storage costs and all costs and expenses incurred in connection with the return of the Aircraft, Airframe or any Engine or part thereof, in accordance with the terms of Section 5 or in placing the Aircraft, Airframe or any Engine or part thereof, in the condition and airworthiness required by Section 5. Lessor agrees to give Lessee at least 15 days' prior written notice of the date fixed for any public sale of the Aircraft, the Airframe or any Engine or part thereof, and of the date on or after which will occur the execution of any contract providing for any private sale, and any such public sale shall be conducted in general so as to afford Lessee a reasonable opportunity to bid. SALE AND LEASE AGREEMENT 39 15.2 Determination of Fair Market Rental Value and Fair Market Sales Value. For the purpose of this Section 15, the "fair market rental value" or the "fair market sales value" of the Aircraft shall be the rental value or sales value, as the case may be, which would be obtained in an arm's-length transaction between an informed and willing lessee or purchaser, as the case may be, under no compulsion to lease or purchase, as the case may be, and an informed and willing lessor or seller in possession, as the case may be, and in each case shall be determined on an "as is, where is" basis pursuant to an appraisal by a recognized independent aircraft appraiser chosen by Lessor and approved by Lessee, which approval shall not be unreasonably withheld or delayed and shall be deemed granted if such choice is not rejected within 10 days after Lessee's receipt of notice of Lessor's choice. 15.3 No Waiver, Etc. No remedy referred to in this Section 15 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity; and the exercise or beginning of exercise by Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Lessor of any or all of such other remedies. No express or implied waiver by Lessor of any Lease Event of Default shall in any way be, or be construed to be, a waiver of any earlier or subsequent Lease Event of Default. To the extent permitted by applicable law, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use the Aircraft, Airframe or any Engine, or part thereof, in mitigation of Lessor's damages as set forth in this Section 15 or which may otherwise limit or modify any of Lessor's rights or remedies under this Section 15. Section 16. Notices. All notices required under the terms and provisions hereof shall be in writing and shall be given by certified mail, telecopy or any other customary means of written communication, addressed: If to Lessee, at 2702 Love Field Dr., P.O. Box 36611, Dallas, Texas 75235-1611 (telecopy no. 214/904-4022), Attention: Treasurer, or at such other address as Lessee shall from time to time designate in writing; If to Lessor, at 79 Main Street, P.O. Box 30007, Salt Lake City, Utah 84130-0007 (telecopy no. 801/350-5053), Attention: Corporate Trust Department, or at such other address as Lessor shall from time to time designate in writing; If to any Participant, at its address set forth in the signature pages of the Participation Agreement, or at such other address as such Participant shall from time to time designate in writing. SALE AND LEASE AGREEMENT 40 The effective date of any such notice shall be the date on which it is received by the addressee. Lessee shall furnish to Lessor for transmission to Owner Participant and Lender a sufficient number of copies of all reports, notices, requests, demands, certificates, financial statements and other instruments furnished hereunder, except in any case where Lessee shall have transmitted the same directly to any such person. Section 17. Net Lease; Lessee's Obligations; No Setoff, Counterclaim, Etc. This is a net lease and it is hereby recognized that Lessor is the owner of the Aircraft (except that Owner Participant will be the owner for income tax purposes) and Lessee is the lessee thereof. It is the intent of the parties hereto that this Lease be a "true lease". Lessee's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including without limitation: (a) any setoff, counterclaim, recoupment, defense or other right which Lessee may have against Lessor (in its individual or trust capacity), any Participant, any Indemnified Party or any other Person for any reason whatsoever (except as expressly provided in Section 13.5.2 of the Participation Agreement or in Sections 6 and 7 of the Tax Indemnification Agreement); (b) any defect in the title, airworthiness, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, the Aircraft, Airframe or any Engine, or any interruption or cessation in the use or possession thereof by Lessee for any reason whatsoever; (c) any insolvency, bankruptcy, reorganization or similar proceedings by or against Lessee; (d) any restriction, prevention or curtailment of or interference with any use of the Aircraft or part thereof; (e) any invalidity or unenforceability or disaffirmance of this Lease or any provision hereof or any of the other Operative Agreements or any provision thereof, in each case whether against or by Lessee or otherwise; or (f) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise except as specifically provided herein, Lessee nonetheless agrees to pay an amount equal to each Basic Rent, Renewal Rent and Supplemental Rent payment at the time such payment would have become due and payable in accordance with the terms hereof had this Lease not been terminated in whole or in part. All Rent payable by Lessee shall be paid without notice or demand (except as otherwise expressly provided) and without abatement, suspension, deferment, deduction, diminution or proration by reason of any circumstance or occurrence whatsoever (except as expressly provided in Section 13.5.2 of the Participation Agreement or in Sections 6 and 7 of the Tax Indemnification Agreement). Lessee hereby waives, to the extent permitted by applicable law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease or any part hereof, or to any abatement, suppression, deferment, diminution, reduction or proration of Rent except in accordance with the express terms hereof. Each SALE AND LEASE AGREEMENT 41 payment of Rent made by Lessee shall be final as to Lessor and Lessee. Lessee will not seek to recover all or any part of any such payment of Rent for any reason whatsoever. Section 18. Renewal Options; Early Termination. 18.1 Renewal Options. At the end of the Base Lease Term or any Renewal Term, so long as no Lease Event of Default or Lease Default has occurred and is continuing and the aggregate of all Renewal Terms shall not exceed six years, Lessee shall have the option to renew this Lease for a Renewal Term; provided, that if, at the time of exercise by Lessee of any of its renewal rights set forth in this Section 18.1, Owner Participant and its Affiliates shall be the owner of all of the beneficial interest in one or more other Boeing Model 737-200 series aircraft then subject to a lease under which the lessee is Lessee (all of such aircraft, together with the Aircraft, referred to as the "Owner Group Aircraft"), then Lessee shall be obligated to exercise such renewal rights (or to have exercised such renewal rights for a Renewal Term which shall be then continuing) with respect to at least three of such Owner Group Aircraft (or such lesser number of Owner Group Aircraft as shall exist at such time). In order to exercise the option to renew, except as otherwise provided in Section 13.4.1 of the Participation Agreement, Lessee shall notify Lessor thereof in writing not more than 360 days nor less than 180 days prior to the commencement of the applicable Renewal Term (which notice shall be irrevocable). The Renewal Rent payable for such Renewal Term hereunder shall be the fair market rental value of the Aircraft calculated as of the commencement of such Renewal Term; provided, that if a Stage III Upgrade shall have occurred and (i) Owner Participant shall have performed its obligations set forth in Section 13.4 of the Participation Agreement, upon proper request by Lessee, then such fair market value shall be determined taking into account the value of the hush kit installed pursuant to such upgrade, and (ii) if Owner Participant shall not have so performed or shall not have been requested to do so by Lessee, then such fair market value shall be determined without taking into account the value of the hush kit installed pursuant to such upgrade, i.e., as if no Stage III Upgrade had occurred. Such fair market rental value shall be determined not later than three months prior to the commencement of such Renewal Term by mutual consent of Owner Participant and Lessee or, if they shall be unable so to agree, by three recognized independent aircraft appraisers, one chosen and paid for by Owner Participant, one chosen and paid for by Lessee and the third appraiser chosen by the mutual consent of the first two appraisers and paid for equally by Owner Participant and Lessee, the appraisals of which three appraisers shall be averaged and such average shall be deemed to be the fair market rental value of the Aircraft for all purposes hereof; provided, however, that if the appraisal of one appraiser is more disparate from the average of all three appraisals than each of the other two appraisals, then the appraisal of such appraiser shall be excluded, the remaining appraisals shall be averaged and such average shall be deemed to be the fair market rental value of the Aircraft for all purposes hereof. If either Owner Participant or Lessee shall fail to appoint an appraiser by the date which is two months SALE AND LEASE AGREEMENT 42 prior to the commencement of such Renewal Term or if such two appraisers cannot agree on the amount of such appraisal and fail to appoint a third appraiser by the date which is one month before the commencement of such Renewal Term, then either Owner Participant or Lessee may apply to any court having jurisdiction to make such appointment. Fair market rental value shall be the cash rental obtainable in an arm's-length lease between an informed and willing lessee (under no compulsion to lease) and an informed and willing lessor (under no compulsion to lease) and shall be determined on the assumptions that the Aircraft is in the United States of America, available for use by the lessee and in the return condition required by Section 5 of this Lease and otherwise in compliance with the requirements of this Lease. Stipulated Loss Value amounts that are payable during each such Renewal Term shall be calculated as of the date of commencement of such Renewal Term and shall be determined by multiplying 1.1 times the appraised value of the Aircraft at such time; provided, however, that no such amount shall be less than the principal amount of any indebtedness then secured by a Lien on the Aircraft. 18.2 Early Termination. Provided that this Lease has not been terminated and provided that no Lease Default or Lease Event of Default shall have occurred and be continuing hereunder, Lessee shall have the option to terminate this Lease with respect to the Aircraft not more than 42 days prior to the expiration of the Base Lease Term or the applicable Renewal Term. Lessee may exercise such option of termination by delivering irrevocable written notice of such exercise to Lessor not less than six months' prior written notice of such advanced date of termination. Such notice shall provide the date elected by Lessee for such early termination and a calculation of the final payment of Rent, which shall be due on such early termination date and shall be calculated as provided in clause (ii) of Section 3.3. 18.3 Default Purchase Option. In the event of Owner Participant's failure to satisfy its obligations specified in Section 13.4 of the Participation Agreement, Lessee shall have the option to purchase the Aircraft. In order to exercise such option, Lessee shall notify Lessor (and, if the Mortgage is then in effect, Lender) thereof in writing, specifying a Rent Payment Date on which such purchase is to occur. In such case, Lessee shall purchase the Aircraft on such Rent Purchase Date at a purchase price equal to Termination Value. Upon receipt of such purchase price from Lessee and all Rent and other amounts due hereunder and under any other Operative Agreement, Lessor shall Transfer to Lessee the Aircraft. Section 19. Successor Owner Trustee. Lessee agrees that in the case of the appointment of any successor Owner Trustee pursuant to the terms of the Trust Agreement, such successor Owner Trustee shall, upon written notice by such successor Owner Trustee to Lessee, succeed to all the rights, powers and title of Lessor hereunder and shall be deemed to be Lessor and the owner of the Aircraft for all purposes hereof SALE AND LEASE AGREEMENT 43 without the necessity of any consent or approval by Lessee (but such successor Owner Trustee shall qualify under the terms of Section 10.2 of the Participation Agreement) and without in any way altering the terms of this Lease or Lessee's obligations hereunder. One such appointment and designation of a successor Owner Trustee shall not exhaust the right to appoint and designate further successor or additional Owner Trustees pursuant to the Trust Agreement, and such right may be exercised repeatedly as long as this Lease shall be in effect. Section 20. Right to Perform for Lessee. If Lessee fails to make any payment of Rent required to be made by it hereunder or fails to perform or comply with any of its agreements contained herein, Lessor may (but shall not be obligated to) make such payment or perform or comply with such agreement, and the amount of such payment and the amount of the expenses of Lessor incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by Lessee upon demand. Section 21. Quiet Enjoyment. So long as this Lease shall not have been declared to be in default pursuant to Section 15, during the Term Lessor will not, through its own actions or inactions, interfere in the quiet enjoyment of the Aircraft by Lessee or any Permitted Sublessee. Section 22. Investment of Security Funds; Miscellaneous; Amendment. 22.1 Investment of Security Funds. Any moneys required to be paid to or retained by Lessor which are not required to be paid to Lessee pursuant to Section 10.6 or 11.4 solely because a Lease Event of Default or Lease Default under Section 14.1 or 14.5 shall have occurred and be continuing, or which are held by Lessor pending payment to Lessee pursuant to Section 11.4 or which are required to be paid to Lessee pursuant to Section 10.3 or 11.4 after completion of a replacement to be made pursuant to Section 10.2, shall, until paid to Lessee as provided in Section 10 or 11 or applied as provided herein or in the Trust Agreement, be invested by Lessor from time to time as directed in writing by Lessee and at the expense and risk of Lessee in the following securities (which, except in the case of the shares described in clause (e) below, shall mature within 91 days of the date of purchase thereof): (a) direct obligations of the Government; (b) obligations fully guaranteed by the Government; (c) open market commercial paper of any corporation incorporated under the laws of the United States of America or any State thereof rated P-1 or its equivalent by Moody's Investors Service, Inc. and A-1 or its equivalent by Standard & Poor's Corporation; or (d) certificates of deposit issued by, or bankers' acceptances of, or time deposits or a deposit account with any bank, trust company or national banking association incorporated or doing business under the laws of the United States of America or any state thereof having a combined capital and SALE AND LEASE AGREEMENT 44 surplus of at least $50,000,000; or (e) shares of a money market fund registered under the Investment Company Act of 1940, as amended, the sole assets of which are direct obligations of the Government. There shall be promptly remitted to Lessee or its order any gain (including interest received) realized as the result of any such investment (net of any fees, commissions and other expenses, if any, incurred in connection with such investment) unless a Lease Event of Default of a Lease Default under Section 14.1 or 14.5 shall have occurred and be continuing. Lessee will promptly pay to Lessor, on demand, the amount of any loss realized as the result of any such investment (together with any fees, commissions and other expenses, if any, incurred in connection with such investment), such amount to be disposed of in accordance with the terms of the Trust Agreement. 22.2 Miscellaneous; Amendment. Lessee shall do, execute, acknowledge and deliver, or shall cause to be done, executed, acknowledged and delivered, all such further acts, conveyances and assurances as Lessor or any Participant shall reasonably require for accomplishing the purposes of this Agreement and the other Operative Agreements. Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, Lessee hereby waives any provision of law which renders any provision hereof prohibited or unenforceable in any respect. No term or provision of this Lease may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. This Lease shall constitute an agreement of lease, and nothing herein shall be construed as conveying to Lessee any right, title or interest in or to the Aircraft, Airframe or Engines except as a lessee only. The section and paragraph headings in this Lease and the table of contents are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof and all references herein to numbered sections, unless otherwise indicated, are to sections of this Lease. THIS LEASE HAS BEEN, AND EACH LEASE SUPPLEMENT AND AMENDMENT HERETO IS INTENDED TO BE, DELIVERED IN THE STATE OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE IN SUCH STATE BY RESIDENTS THEREOF AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. This Lease and each Lease Supplement and amendment hereto may be executed in several counterparts, each of which shall be deemed an original, and all such counterparts shall constitute one and the same instrument. SALE AND LEASE AGREEMENT 45 Section 23. Permitted Foreign Air Carriers. Lessor may, in the exercise of its reasonable business judgment, by written notice to Lessee, remove any foreign air carrier from Exhibit B and Lessee may, by written notice to Lessor, request that any foreign air carrier be added to Exhibit B, subject to Lessor's prior written consent, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, no deletion of an airline from the list of Permitted Foreign Air Carriers pursuant hereto shall (i) reduce the number of Permitted Foreign Air Carriers below 35, (ii) affect any existing sublease or other agreement providing for transfer of possession of the Aircraft, Airframe, any Engine or Part which was permitted hereunder at the time entered into, or (iii) preclude any subsequent renewal or extension of such sublease or other agreement to which the Permitted Foreign Air Carrier under a sublease is entitled by the terms thereof as originally in effect. SALE AND LEASE AGREEMENT 46 IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be duly executed and delivered as of the day and year first above written. Lessor: FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity except as expressly stated herein, but solely as Owner Trustee under the Trust Agreement By /s/ [Illegible] ----------------------------- Title: ASSISTANT VICE PRESIDENT Lessee: SOUTHWEST AIRLINES CO. By /s/ John D. Owen ----------------------------- John D. Owen Treasurer SALE AND LEASE AGREEMENT EXHIBIT A TO LEASE AGREEMENT SALE AND LEASE AGREEMENT SUPPLEMENT NO. ______ THIS SALE AND LEASE AGREEMENT SUPPLEMENT NO. _________ dated ___________, ____ is between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under that certain Trust Agreement, dated as of September 1, 1990 (the "Trust Agreement"), between the Owner Participant named therein and such Bank ("Lessor"), and SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee"). RECITALS. A. Lessor and Lessee have heretofore entered into that certain Sale and Lease Agreement dated as of September 1, 1990, as supplemented and amended from time to time (herein called the "Lease Agreement" and the defined terms therein being herein used with the same meaning), which Lease Agreement provides in Section 2 for the execution of a Lease Supplement substantially in the form hereof for the purpose of Lessee's selling to Lessor, and Lessor's leasing back to Lessee, the Aircraft under the Lease Agreement as and when delivered by Lessor to Lessee in accordance with the terms thereof; and B. The Lease Agreement relates to the airframe and engines described below, and a counterpart of the Lease Agreement is attached hereto and made a part hereof and this Lease Supplement, together with such attachment, is being filed for recordation with the FAA on the date hereof as one document. In consideration of the premises and other good and sufficient consideration, and pursuant to Section 2 of the Lease Agreement, Lessor and Lessee hereby agree as follows: 1. Lessee hereby delivers and sells to Lessor and Lessor hereby accepts and purchases from Lessee and in turn delivers and leases back to Lessee, and Lessee hereby accepts and leases back from Lessor, under the Lease Agreement, as herein supplemented, the following-described Boeing Model 737-2H4 Aircraft (the "Delivered Aircraft"), which Delivered Aircraft as of the date hereof consists of the following: SALE AND LEASE AGREEMENT A-1 Airframe: U.S Registration Number N _________ SW; Manufacturer's Serial No._____; and Engines: Two Pratt & Whitney JT8D-9A Engines bearing Engine Manufacturer's Serial Numbers as follows: __________ and _______________. Each of the Engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 2. The Delivery Date of the Delivered Aircraft is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. Lessee hereby confirms to Lessor that the Delivered Aircraft has been or will be duly marked in accordance with the terms of Section 7.1.2 of the Lease and that Lessee has accepted the Delivered Aircraft for all purposes hereof and of the Lease Agreement, including its being airworthy, in accordance with specifications, in good working order and repair and without defect or inherent vice in title, condition, design, operation or fitness for use, whether or not discoverable by Lessee as of the date hereof, and free and clear of all Liens except Permitted Liens. 4. All the provisions of the Lease Agreement are hereby incorporated by reference in this Lease Supplement, on and as of the date of this Lease Supplement, to the same extent as if fully set forth herein. 5. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. SALE AND LEASE AGREEMENT A-2 IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed and delivered as of the date and year first above written. Lessor: FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By ----------------------------- Title: Lessee: SOUTHWEST AIRLINES CO. By ----------------------------- John D. Owen Treasurer SALE AND LEASE AGREEMENT A-3 EXHIBIT B TO LEASE AGREEMENT PERMITTED FOREIGN AIR CARRIERS Aer Lingus Interflug Aerolineas Argentinas Japan Air Lines Aeromexico Japan Air System Air Canada KLM Air Europa Korean Air Air Europe Lan Chile Air France Lauda Air Air Inter Linjeflyg Air Jamaica Lufthansa Air New Zealand Luxair Alitalia Maersk All Nippon Airways Malaysian Airline System ALM Martinair Ansett Airlines of Australia Mexicana Asiana Airlines Monarch Airlines Australian Airlines Olympic Airlines Austrian Airlines Qantas Airways AVENSA Ryanair Bahamasair Sabena Bavaria SAS Braathens S.A.F.E. Saudi Arabia Airlines Britannia Singapore Airlines British Airways SouthWest Airlines British Midland Swissair CAAC TAP Canadian Airlines International Thai Airways Cathay Pacific Airways Transavia Holland Cayman Airways Transbrasil China Airlines TransEuropean Condor Flugdienst UTA Dan-Air Varig Finnair Viasa Garuda Viva Air Hapag Lloyd Iberia Icelandair SALE AND LEASE AGREEMENT B-1 EXHIBIT C TO LEASE AGREEMENT OTHER RETURN CONDITIONS At the time of the return of the Aircraft upon the expiration or earlier termination of the Term, the Aircraft shall be in the following condition: 1. General Condition (a) The Aircraft shall be clean and free of leaks, in each case in accordance with United States commercial airline operating standards. (b) All decals shall be clean, secure and legible. 2. Fuselage, Windows and Doors (a) The fuselage shall be free of loose or pulled or missing rivets. (b) The doors shall be free moving, correctly rigged and be fitted with serviceable seals. 3. Wings and Empennage (a) The wings shall be free of fuel leaks. 4. Interior (a) The ceilings, sidewalls and bulkhead panels shall be clean and free of cracks and stains. (b) All carpet and seat covers shall be in good condition, clean and stain free and meet FAR fire resistance regulations. (c) All seats shall meet FAA fire retardant regulations and be serviceable, in good condition and repainted as necessary. (d) All signs and decals shall be in English and be clean and legible. SALE AND LEASE AGREEMENT C-1 (e) All emergency equipment having a calendar life shall have a minimum of one year or one hundred per cent of its total approved life, whichever is less, remaining. 5. Cockpit (a) All decals shall be in English and be clean, secure and legible. (b) All seat covers shall be in good condition, clean and shall conform to FAR fire resistance regulation. (c) All seats shall be fully serviceable and shall be repainted as necessary. 6. Cargo Compartment (a) All panels shall be in good condition. (b) All nets shall be in good condition. 7. Fuel Tanks (a) The fuel tanks shall be substantially free of bacteria growth and water. SALE AND LEASE AGREEMENT C-2 EXHIBIT D TO LEASE AGREEMENT TERMINATION VALUE SCHEDULE Rent Payment Date Termination Date - ----------------- ---------------- December 31, 1990 ..................................... $ 11,150,500 March 31, 1991 ........................................ 10,997,263 June 30, 1991 ......................................... 10,840,194 September 30, 1991 .................................... 10,679,199 December 31, 1991 ..................................... 10,514,179 March 31, 1992 ........................................ 10,345,033 June 30, 1992 ......................................... 10,171,659 September 30, 1992 .................................... 9,993,951 December 31, 1992 ..................................... 9,811,799 March 31, 1993 ........................................ 9,625,094 June 30, 1993 ......................................... 9,433,722 September 30, 1993 .................................... 9,237,565 December 31, 1993 ..................................... 9,036,504 March 31, 1994 ........................................ 8,830,417 June 30, 1994 ......................................... 8,619,177 September 30, 1994 .................................... 8,402,656 December 31, 1994 ..................................... 8,180,723 March 31, 1995 ........................................ 7,953,241 June 30, 1995 ......................................... 7,720,072 September 30, 1995 .................................... 7,481,074 December 31, 1995 ..................................... 7,236,101 March 31, 1996 ........................................ 6,985,003 June 30, 1996 ......................................... 6,727,628 September 30, 1996 .................................... 6,463,819 December 31, 1996 ..................................... 6,193,414 March 31, 1997 ........................................ 5,916,250 June 30, 1997 ......................................... 5,632,156 September 30, 1997 .................................... 5,340,960 December 31, 1997 ..................................... 5,042,484 March 31, 1998 ........................................ 4,736,546 June 30, 1998 ......................................... 4,422,960 September 30, 1998 .................................... 4,101,533 December 31, 1998 ..................................... 3,772,072 SALE AND LEASE AGREEMENT D-1 SCHEDULE I TO LEASE AGREEMENT The Lessor's Cost for the Aircraft is $11,000,000. SALE AND LEASE AGREEMENT SALE AND LEASE AGREEMENT SUPPLEMENT NO. 1 THIS SALE AND LEASE AGREEMENT SUPPLEMENT NO. 1 dated September 27, 1990 is between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under that certain Trust Agreement, dated as of September 1, 1990 (the "Trust Agreement"), between the Owner Participant named therein and such Bank ("Lessor"), and SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee"). RECITALS. A. Lessor and Lessee have heretofore entered into that certain Sale and Lease Agreement dated as of September 1, 1990, as supplemented and amended from time to time (herein called the "Lease Agreement" and the defined terms therein being herein used with the same meaning), which Lease Agreement provides in Section 2 for the execution of a Lease Supplement substantially in the form hereof for the purpose of Lessee's selling to Lessor, and Lessor's leasing back to Lessee, the Aircraft under the Lease Agreement as and when delivered by Lessor to Lessee in accordance with the terms thereof; and B. The Lease Agreement relates to the airframe and engines described below, and a counterpart of the Lease Agreement is attached hereto and made a part hereof and this Lease Supplement, together with such attachment, is being filed for recordation with the FAA on the date hereof as one document. In consideration of the premises and other good and sufficient consideration, and pursuant to Section 2 of the Lease Agreement, Lessor and Lessee hereby agree as follows: 1. Lessee hereby delivers and sells to Lessor and Lessor hereby accepts and purchases from Lessee and in turn delivers and leases back to Lessee, and Lessee hereby accepts and leases back from Lessor, under the Lease Agreement, as herein supplemented, the following-described Boeing Model 737-2H4 Aircraft (the "Delivered Aircraft"), which Delivered Aircraft as of the date hereof consists of the following: Airframe: U.S Registration Number N55SW; Manufacturer's Serial No. 21593; and Engines: Two Pratt & Whitney JT8D-9A Engines bearing Engine Manufacturer's Serial Numbers as follows: P707374B and P707334B. Each of the Engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 2. The Delivery Date of the Delivered Aircraft is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. Lessee hereby confirms to Lessor that the Delivered Aircraft has been or will be duly marked in accordance with the terms of Section 7.1.2 of the Lease and that Lessee has accepted the Delivered Aircraft for all purposes hereof and of the Lease Agreement, including its being airworthy, in accordance with specifications, in good working order and repair and without defect or inherent vice in title, condition, design, operation or fitness for use, whether or not discoverable by Lessee as of the date hereof, and free and clear of all Liens except Permitted Liens. 4. All the provisions of the Lease Agreement are hereby incorporated by reference in this Lease Supplement, on and as of the date of this Lease Supplement, to the same extent as if fully set forth herein. 5. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. -2- IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed and delivered as of the date and year first above written. Lessor: FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By /s/ [Illegible] -------------------------------------- Title: ASSISTANT VICE PRESIDENT Lessee: SOUTHWEST AIRLINES CO. By /s/ John D. Owen -------------------------------------- John D. Owen Treasurer SALE AND LEASE AGREEMENT 3 SALE AND LEASE AGREEMENT SUPPLEMENT NO. 1 THIS SALE AND LEASE AGREEMENT SUPPLEMENT NO. 1 dated September 27, 1990 is between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under that certain Trust Agreement, dated as of September 1, 1990 (the "Trust Agreement"), between the Owner Participant named therein and such Bank ("Lessor"), and SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee"). RECITALS. A. Lessor and Lessee have heretofore entered into that certain Sale and Lease Agreement dated as of September 1, 1990, as supplemented and amended from time to time (herein called the "Lease Agreement" and the defined terms therein being herein used with the same meaning), which Lease Agreement provides in Section 2 for the execution of a Lease Supplement substantially in the form hereof for the purpose of Lessee's selling to Lessor, and Lessor's leasing back to Lessee, the Aircraft under the Lease Agreement as and when delivered by Lessor to Lessee in accordance with the terms thereof; and B. The Lease Agreement relates to the airframe and engines described below and a counterpart of the Lease Agreement is attached hereto and made a part hereof and this Lease Supplement, together with such attachment, is being filed for recordation with the FAA on the date hereof as one document. In consideration of the premises and other good and sufficient consideration, and pursuant to Section 2 of the Lease Agreement, Lessor and Lessee hereby agree as follows: 1. Lessee hereby delivers and sells to Lessor and Lessor hereby accepts and purchases from Lessee and in turn delivers and leases back to Lessee, and Lessee hereby accepts and leases back from Lessor, under the Lease Agreement, as herein supplemented, the following-described Boeing Model 737-2H4 Aircraft (the "Delivered Aircraft"), which Delivered Aircraft as of the date hereof consists of the following: Airframe: U.S Registration Number N55SW; Manufacturer's Serial No. 21593; and Engines: Two Pratt & Whitney JT8D-9A Engines bearing Engine Manufacturer's Serial Numbers as follows: P707374B and P707334B. Each of the Engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 2. The Delivery Date of the Delivered Aircraft is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. Lessee hereby confirms to Lessor that the Delivered Aircraft has been or will be duly marked in accordance with the terms of Section 7.1.2 of the Lease and that Lessee has accepted the Delivered Aircraft for all purposes hereof and of the Lease Agreement, including its being airworthy, in accordance with specifications, in good working order and repair and without defect or inherent vice in title, condition, design, operation or fitness for use, whether or not discoverable by Lessee as of the date hereof, and free and clear of all Liens except Permitted Liens. 4. All the provisions of the Lease Agreement are hereby incorporated by reference in this Lease Supplement, on and as of the date of this Lease Supplement, to the same extent as if fully set forth herein. 5. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. -2- IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed and delivered as of the date and year first above written. Lessor: FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By /s/ [Illegible] ------------------------------------ Title: ASSISTANT VICE PRESIDENT Lessee: SOUTHWEST AIRLINES CO. By /s/ John D. Owen ------------------------------------ John D. Owen Treasurer SALE AND LEASE AGREEMENT 3 EX-99.I 9 EX-99.I Document No. 3 - -------------------------------------------------------------------------------- SALE AND LEASE AGREEMENT dated as of September 1, 1990 between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION as Owner Trustee, Lessor and SOUTHWEST AIRLINES CO., Lessee ------------------------------- One Boeing Model 737-2H4 Aircraft (N57SW) SOUTHWEST AIRLINES 1990 TRUST IV - -------------------------------------------------------------------------------- The rights of Lessor under this Sale and Lease Agreement have been assigned to, and are subject to a security interest in favor of, Progress Credit Corporation as Lender under an Aircraft Security Agreement and Assignment of Leases 57SW dated as of September 1, 1990. This Sale and Lease Agreement has been executed in counterparts. To the extent that this Sale and 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 Sale and Lease Agreement may be created through the transfer or possession of any counterpart other than the counterpart that states on its cover that it is the original counterpart. This is not the original counterpart. TABLE OF CONTENTS Section Page - ------- ---- Section 1. Definitions ..................................................... 1 Section 2. Sale, Lease and Acceptance ...................................... 9 Section 3. Term and Rent ................................................... 9 3.1 General .................................................... 9 3.2 Lease Term ................................................. 9 3.3 Basic Rent ................................................. 9 3.4 Supplemental Rent .......................................... 10 3.5 Payments ................................................... 10 Section 4. Lessor's Representations and Warranties; DISCLAIMER; Certain Agreements of Lessee ................................ 11 4.1 Lessor's Representations and Warranties; DISCLAIMER ........ 11 4.2 Certain Agreements of Lessee ............................... 11 Section 5. Return of Aircraft .............................................. 12 5.1 General Condition upon Return .............................. 12 5.1.1 Airworthiness ...................................... 12 5.1.2 Free of Liens ...................................... 12 5.1.3 Operating Configuration and Condition .............. 12 5.1.4 Cleanliness and Operability ........................ 12 5.1.5 Parts and Equipment ................................ 12 5.1.6 Corrosion Treatment ................................ 12 5.1.7 Hush Kits ......................................... 13 5.1.8 Other Conditions ................................... 13 5.2 Return of Other Engines .................................... 13 5.3 Return at End of Base Lease Term or Renewal Lease Term ..... 13 5.3.1 Airframe ........................................... 14 5.3.2 Engines ............................................ 14 SALE AND LEASE AGREEMENT i Section Page - ------- ---- 5.3.3 Boroscope .......................................... 15 5.3.4 Landing Gears ...................................... 15 5.3.5 APU ................................................ 15 5.3.6 Other Components ................................... 15 5.4 Financial Adjustments ...................................... 15 5.4.1 Airframe .......................................... 15 5.4.2 [Intentionally omitted.] .......................... 15 5.4.3 Landing Gears ..................................... 16 5.5 Manuals; Service Bulletins, Etc ............................ 16 5.6 Storage upon Return ........................................ 16 5.7 Failure to Return Aircraft or Engines ...................... 16 5.8 Aid in Disposition ......................................... 17 Section 6. Liens ........................................................... 17 Section 7. Registration, Operation, Possession, Subleasing and Records ..... 17 7.1 Registration and Operation ................................. 17 7.1.1 Registration ....................................... 17 7.1.2 Nameplate .......................................... 18 7.1.3 Compliance with Laws ............................... 18 7.1.4 Insurance Requirements; Government Requisition; Indemnity ........................... 18 7.2 Possession ................................................. 19 7.2.1 Interchange and Pooling ............................ 19 7.2.2 Testing and Service ................................ 19 7.2.3 Civil Reserve Air Fleet Program .................... 19 7.2.4 Installation of Engines ............................ 20 7.2.5 Installation of Engines on Other Airframes ......... 20 7.2.6 Pooling of Parts ................................... 20 7.2.7 Wet Lease .......................................... 20 7.2.8 Sublease to Permitted Air Carriers ................. 20 SALE AND LEASE AGREEMENT ii Section Page - ------- ---- 7.3 Records and Reports ........................................ 22 7.3.1 Records ............................................ 22 7.3.2 Information and Reports ............................ 22 7.3.3 Financial Information .............................. 23 Section 8. Maintenance; Replacement and Pooling of Parts; Alterations, Modifications and Additions ................................. 23 8.1 Maintenance ................................................ 23 8.1.1 Maintenance Program ................................ 23 8.1.2 Compliance with Government Requirements ............ 24 8.2 Replacement of Parts ....................................... 24 8.3 Pooling of Parts ........................................... 24 8.4 Alterations, Modifications and Additions ................... 25 Section 9. [Intentionally Omitted] ......................................... 26 Section 10. Loss, Destruction, Requisition, Etc ............................ 26 10.1 Event of Loss with Respect to Aircraft .................... 26 10.2 Event of Loss with Respect to an Engine ................... 26 10.2.1 Event of Loss ..................................... 26 10.2.2 Conditions; Lessee's Obligations .................. 27 10.2.3 Recordation and Opinions .......................... 28 10.2.4 Conveyance; Replacement Engine .................... 28 10.2.5 No Reduction of Rent .............................. 28 10.3 Application of Certain Payments ........................... 28 10.3.1 Replacement of Engine ............................. 28 10.3.2 Nonreplacement .................................... 28 10.4 Requisition of Aircraft for Use by Governmental Authorities ............................... 29 10.5 Requisition of an Engine for Use by Governmental Authorities ............................... 29 SALE AND LEASE AGREEMENT iii Section Page - ------- ---- 10.6 Application of Payments During Existence of Default ....... 29 Section 11. Insurance ...................................................... 29 11.1 Public Liability and Property Damage Insurance ............ 29 11.1.1 Type, Form and Amount ............................. 30 11.1.2 Coverage .......................................... 30 11.1.3 Additional Insureds ............................... 30 11.2 Insurance Against Loss of or Damage to Aircraft and Engines ............................................. 30 11.2.1 Type, Form and Amount ............................. 30 11.2.2 War-Risk Insurance ................................ 30 11.2.3 Certain Requirements .............................. 31 11.2.3.1 Additional Insureds ........................ 31 11.2.3.2 Payment of Proceeds ........................ 31 11.2.3.3 Waiver of Subrogation ...................... 31 11.2.4 Deductibles ....................................... 31 11.2.5 Government Indemnity .............................. 32 11.3 General Policy Provisions ................................. 32 11.3.1 Primary Insurance ................................. 32 11.3.2 Coverage for Each Insured ......................... 32 11.3.3 Waiver of Certain Rights .......................... 32 11.3.4 Breach of Warranty ................................ 32 11.3.5 Notice of Termination or Changes .................. 32 11.3.6 Nonliability for Premiums ......................... 33 11.3.7 Identity of Insurers .............................. 33 11.4 Application of Insurance Proceeds ......................... 33 11.5 Certificates; Reports, Etc. ............................... 33 11.6 Lessor's Right to Maintain Insurance ...................... 34 11.7 Insurance for Own Account ................................. 34 11.8 Self-Insurance ............................................ 34 SALE AND LEASE AGREEMENT iv Section Page - ------- ---- Section 12. Inspection ..................................................... 35 Section 13. Assignment ..................................................... 35 13.1 General ................................................... 35 13.2 Security for Lessor's Obligations ......................... 35 Section 14. Events of Default .............................................. 36 14.1 Failure To Pay Rent ....................................... 36 14.2 Specific Defaults ......................................... 36 14.3 General Default ........................................... 36 14.4 Misrepresentation and Breach of Warranty .................. 36 14.5 Bankruptcy, Etc ........................................... 36 14.6 Cross Default ............................................. 37 Section 15. Remedies ....................................................... 37 15.1 Default; Remedies ......................................... 37 15.1.1 Return; Repossession .............................. 37 15.1.2 Sale, Use, Etc. ................................... 38 15.1.3 Certain Liquidated Damages ........................ 38 15.1.3.1 Liquidated Damages-- Fair Market Rental Value ................. 38 15.1.3.2 Liquidated Damages-- Fair Market Sales Value .................. 38 15.1.4 Liquidated Damages upon Sale ...................... 39 15.1.5 Rescission and Other Remedies ..................... 39 15.2 Determination of Fair Market Rental Value and Fair Market Sales Value ............................... 40 15.3 No Waiver, Etc ............................................ 40 Section 16. Notices ........................................................ 40 Section 17. Net Lease; Lessee's Obligations; No Setoff, Counterclaim, Etc. . 41 SALE AND LEASE AGREEMENT v Section Page - ------- ---- Section 18. Renewal Options; Early Termination ............................. 42 18.1 Renewal Options ........................................... 42 18.2 Early Termination ......................................... 43 18.3 Default Purchase Option ................................... 43 Section 19. Successor Owner Trustee ........................................ 43 Section 20. Right to Perform for Lessee .................................... 44 Section 21. Quiet Enjoyment ................................................ 44 Section 22. Investment of Security Funds; Miscellaneous; Amendment ......... 44 22.1 Investment of Security Funds .............................. 44 22.2 Miscellaneous; Amendment .................................. 45 Section 23. Permitted Foreign Air Carriers ................................. 46 Signatures EXHIBIT A FORM OF LEASE SUPPLEMENT EXHIBIT B PERMITTED FOREIGN AIR CARRIERS EXHIBIT C OTHER RETURN CONDITIONS EXHIBIT D TERMINATION VALUE SCHEDULE SCHEDULE I LESSOR'S COST SALE AND LEASE AGREEMENT vi THIS SALE AND LEASE AGREEMENT is dated as of September 1, 1990, between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under the Trust Agreement hereinafter referred to ("Lessor"), and SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee"). Recitals 1. Lessee owns the Aircraft. 2. The parties hereto desire that Lessor purchase the Aircraft from and lease it back to Lessee as hereinbelow provided. In consideration of the premises and the mutual agreements herein contained, Lessor and Lessee agree as follows: Section 1. Definitions. Unless the context otherwise requires, the following terms shall have the following meanings for all purposes of this Lease and shall be equally applicable to both the singular and the plural forms of the terms herein defined. Any agreement referred to below shall mean such agreement as amended, supplemented and modified from time to time, to the extent permitted by, and in accordance with, the terms thereof. For all purposes of this Lease the capitalized terms used but not defined herein are used as defined in the Participation Agreement. "Act" means the Federal Aviation Act of 1958, as amended from time to time. "Affiliate" of any Person means any other Person which, directly or indirectly, controls or is controlled by or is under common control with such Person. "Aircraft" means the Airframe, together with the two Engines (or any Replacement Engine substituted for either of such Engines hereunder), whether or not any of such initial or Replacement Engines may on the Delivery Date or from time to time thereafter be installed on the Airframe or may be installed on any other airframe or on any other aircraft. "Airframe" means (i) the Boeing Model 737-2H4 aircraft (excluding Engines or engines from time to time installed thereon) specified in the initial Lease Supplement sold hereunder by Lessee to Lessor, and leased back by Lessor to Lessee, all hereunder and under the initial Lease Supplement, and (ii) any and all Parts so long as the same shall be incorporated in such aircraft and any and all Parts removed from such aircraft so long as title thereto shall remain vested in Lessor in accordance with the terms of Section 8. SALE AND LEASE AGREEMENT 1 "Base Lease Term" means the period commencing on the Base Lease Term Commencement Date and expiring on December 31, 1995. "Base Lease Term Commencement Date" means October 1, 1990. "Basic Rent" means the rent identified as Basic Rent in and payable pursuant to Section 3.3. "Bills of Sale" means the FAA Bill of Sale and the Warranty Bill of Sale. "Business Day" means a day on which banks are not required or authorized to close in any of New York City, Dallas, Texas, the State of Florida or Salt Lake City, Utah, or such other city as shall be the situs of the principal office of Owner Participant, Lender, Lessee or Lessor at the time in question. "Cards" is defined in Section 5.3.1. "Code" means the United States Internal Revenue Code of 1986, as amended from time to time. "Delivery Date" means the date of the initial Lease Supplement, which date shall be the date on which the Aircraft is delivered by Lessee to, and accepted by, Lessor hereunder and in turn leased back by Lessor to Lessee hereunder, which date shall be a Business Day. "DOT" means the United States Department of Transportation or any governmental person, agency or authority succeeding to the functions of such Department of Transportation. "Engine" means (i) each of the Pratt & Whitney JT8D-9A engines identified by manufacturer's serial number in the initial Lease Supplement subjecting the Aircraft to this Lease, whether or not on the Delivery Date or from time to time thereafter installed on such Airframe or installed on any other airframe or on any other aircraft, and (ii) any Replacement Engine, whether or not from time to time thereafter installed on the Airframe or any other airframe or on any other aircraft, together in each case with any and all Parts incorporated in such Engine and any and all Parts removed from such Engine so long as title thereto shall remain vested in Lessor in accordance with the terms of Section 8. Except as otherwise set forth herein, at such time as a Replacement Engine shall be substituted hereunder such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means, as of any date of determination, all Engines then leased hereunder. SALE AND LEASE AGREEMENT 2 "Event of Loss" means, with respect to the Aircraft, Airframe or any Engine, any of the following events with respect to such property: (i) disappearance or theft of such property or the loss of the use thereof for any reason not covered by any other clause of this definition, including hijacking, for a period of 180 consecutive days or more (unless the location of the property is known and Lessee is diligently pursuing recovery of the property, but in no event beyond the expiration of the Term) or destruction, damage beyond economic repair or rendition of such property permanently unfit for normal use for any reason whatsoever; (ii) any damage to such property which results in an insurance settlement with respect to such property, on the basis of a total loss, or a constructive or compromised total loss; (iii) the confiscation or requisition of use of such property by the Government or any foreign government or any instrumentality or agency thereof for a period in excess of twelve consecutive months or for a period continuing beyond the Term, whichever first occurs; (iv) as a result of any rule, regulation, order or other action by the FAA or other governmental body (including any court) having jurisdiction, the use of such property in the normal course of interstate air transportation of persons or cargo shall have been prohibited for a period of more than six consecutive months, unless Lessee, prior to the expiration of such six-month period, shall have undertaken and shall be diligently carrying forward all steps which are necessary or desirable to permit normal use by Lessee, and, (A) in the case in which such prohibition shall apply generally to all similar Boeing Model 737-200 series aircraft, if such prohibition is continuing on the last day of the Term, or (B) in all other cases, if such prohibition is continuing on the earlier of the first anniversary of such prohibition and the last day of the Term; (v) the condemnation or requisition of title to such property by the Government or any foreign government or any instrumentality or agency thereof; or (vi) respecting any Engine, any divestiture of title to an Engine treated as an Event of Loss pursuant to Section 7.2.1 or any other provision hereof. 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. The date of an Event of Loss shall be deemed to be the date of such insurance settlement, loss of use, theft, disappearance, condemnation, confiscation, divestiture, taking or requisition of title or use or prohibition, except that, for the purposes of clauses (i), (iii) and (iv) above, no Event of Loss shall be deemed to have occurred until the expiration of the applicable period referred to therein. "FAA" means the Federal Aviation Administration or any governmental person, agency or other authority succeeding to the functions of the Federal Aviation Administration. "FAA Regulations" means the Federal Aviation Regulations issued pursuant to the Act from time to time, or any successor regulations thereto. SALE AND LEASE AGREEMENT 3 "Government" means the federal government of the United States of America or any instrumentality or agency thereof. "Guarantor" means Cauff, Lippman & Co., Inc., a Florida corporation. The term "incorporated in" means incorporated or installed in or attached to or otherwise made a part of. "Indemnified Parties" means (i) First Security Bank of Utah, National Association, in its individual capacity and as Owner Trustee, (ii) Owner Participant, (iii) Lender, (iv) the Trust Estate, (v) the respective successors and assigns of the foregoing and (vi) the respective officers and directors of the foregoing. "Interim Lease Term" means the period from the Delivery Date to and including September 30, 1990. "Lease", "this Lease", "this Agreement", "hereby", "herein", "hereof", "hereunder" or other like words mean this Sale and Lease Agreement, including without limitation supplementation hereof by one or more Lease Supplements. "Lease Default" means any event or condition which, with notice or lapse of time or both, would constitute a Lease Event of Default. "Lease Event of Default" is defined in Section 14. "Lease Period" means each three-month period commencing on October 1, January 1, April 1 and July 1, as the case may be, during the Term. "Lease Supplement" means a supplement to this Lease, in the case of the initial such supplement substantially in the form attached as Exhibit A hereto, subjecting the Aircraft or other property to this Lease. "Lender" means Progress Credit Corporation, a Florida corporation, and its successors and assigns. "Lessee" means Southwest Airlines Co., a Texas corporation, and its permitted successors or assigns. "Lessor" means Owner Trustee. "Lessor's Cost" for the Aircraft means the amount identified as such in Schedule I hereto. SALE AND LEASE AGREEMENT 4 "Lessor Liens" means Liens of any Person claiming by, through or under Lessor, First Security Bank of Utah, National Association, in its individual capacity, or Owner Participant which arise as a result of (i) claims against any such Person not related to the transactions contemplated by the Operative Agreements (it being understood that, for purposes of this clause (i), incurrence of any Successor Indebtedness to refund or refinance debt represented by the Note is deemed to be a transaction contemplated by the Operative Agreements), (ii) any act or omission of any such Person which is not related to the transactions contemplated by the Operative Agreements, or is in violation of any of the express terms of any of the Operative Agreements, (iii) Taxes or Losses imposed against or incurred by any such Person for which Lessee is not obligated to indemnify pursuant to the Participation Agreement, or (iv) claims against any such Person arising out of any transfer by such Person in violation of the express terms of the Operative Agreements. "Lien" means any mortgage, pledge, lien, charge, encumbrance, lease or security interest, or any claim or exercise of rights, affecting the title to or any interest in property. "Maintenance Program" is defined in Section 8.1.1. "Manufacturer" means The Boeing Company, a Delaware corporation, or any Affiliate thereof whose obligations are guaranteed by The Boeing Company, and their respective successors and assigns. "Officer's Certificate" means a certificate signed by the Chairman, the President, any Vice President, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Assistant Secretary of the Person providing such certificate. "Operative Agreements" means this Agreement, the Guaranty, each Lease Supplement, the Participation Agreement, the Mortgage, the Loan Agreement, the Note, the Trust Agreement, the Bills of Sale, and the Tax Indemnification Agreement, including any consents included in or attached to any thereof. "Overdue Rate" means 3% in excess of the interest rate publicly announced in New York City from time to time by Citibank, N.A. as its prime or base lending rate, but in no event to exceed the maximum rate permitted by applicable law. Any interest payable hereunder at the Overdue Rate shall be computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. "Owner Participant" means CL Aircraft XXXIII, Inc., a Florida corporation, and its successors and permitted assigns. SALE AND LEASE AGREEMENT 5 "Owner Trustee" means First Security Bank of Utah, National Association, not in its individual capacity but solely as trustee under the Trust Agreement, and any successor, separate or additional Owner Trustee thereunder. "Participants" means Owner Participant and Lender and their respective successors and permitted assigns. "Participation Agreement" means the Participation Agreement, dated as of September 1, 1990, among Lessee, Lender, Guarantor, Owner Participant, and Lessor. "Parts" means all appliances, parts, components, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature (other than (a) complete Engines or engines and (b) any severable items leased by Lessee from a third party (other than Lessor)) which may from time to time be incorporated in the Airframe or any Engine (and "Part" means any of the foregoing) or, so long as title thereto shall remain vested in Lessor in accordance with Section 8.2, after removal therefrom. "Permitted Foreign Air Carrier" means any "foreign air carrier" (as defined in the Act) listed on Exhibit B hereto (as the same may be modified from time to time in accordance with Section 23) or any successor of any such air carrier, which carrier or successor is not in any case, at the time a Permitted Sublease is (or is proposed to be) entered into, the subject of bankruptcy, reorganization or similar proceedings. "Permitted Lien" means any Lien referred to in clauses (a) through (g) of Section 6. "Permitted Sublease" means a sublease permitted under Section 7.2.8. "Permitted Sublessee" means the sublessee under a Permitted Sublease. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Renewal Rent" means the rent payable in respect of a Renewal Term determined pursuant to Section 18.1. SALE AND LEASE AGREEMENT 6 "Renewal Term" means any of the successive periods of integral multiples of two years each but not more than six years in the aggregate which follow the end of the Base Lease Term with respect to which Lessee shall have exercised its option pursuant to Section 18. "Rent" means Basic Rent, Renewal Rent and Supplemental Rent. "Rent Payment Date" means each December 31, March 31, June 30 and September 30 during the Term, commencing September 30, 1990. "Replacement Engine" means a Pratt & Whitney JT8D-9A engine (or an improved model engine suitable for installation and use on the Airframe and fully compatible with the other Engine or engine installed thereon) which shall have been substituted for an Engine leased hereunder pursuant to Section 5.2 or 10.2. "Securities Act" means the Securities Act of 1933, as amended. "Stipulated Loss Value" means (i) $12,100,000.00 during the Base Lease Term and (ii), during any Renewal Lease Term, such amount as shall be calculated in accordance with Section 18.1, in each case as adjusted pursuant to Section 13 of the Participation Agreement. "Supplemental Rent" means, without duplication, all amounts, liabilities and obligations (other than Basic Rent or Renewal Rent) which Lessee assumes or agrees to pay to Lessor or any other Person hereunder, under the Participation Agreement or any of the other Operative Agreements, including, without limitation (i) Stipulated Loss Value and Termination Value payments, (ii) all amounts required to be paid by Lessee under the agreements, covenants and indemnities contained in the Participation Agreement and (iii) all amounts required to be paid pursuant to Section 3.4. "Tax Indemnification Agreement" means the Tax Indemnification Agreement, dated as of September 1, 1990, between Owner Participant and Lessee. "Term" means the term for which the Aircraft is leased pursuant to Section 3 hereof and shall include the Interim Lease Term, Base Lease Term and any Renewal Term. "Termination Value" means the greater of (i) the sum of (A) the amount set forth in Exhibit D hereto opposite the Rent Payment Date as of which Termination Value is being determined and paid plus (B) such amount of Lessee's Actual Cost and the Purchase Price as Owner Participant shall have paid pursuant to Section 13 of the Participation Agreement, or (ii) the amount of indebtedness represented by the Note or SALE AND LEASE AGREEMENT 7 any Successor Indebtedness (including interest accrued thereon) on such Rent Payment Date plus any other amount due and payable to Lender under any Operative Agreement. "Transfer" means, with respect to any Person, to transfer, by bill of sale or otherwise, all such Person's right, title and interest in and to the Aircraft, Airframe or any Engine, as the case may be, to another Person on an "as is, where is" basis, free and clear of any Lessor Lien but otherwise without recourse, representation or warranty, express or implied, and including an express disclaimer of warranties, representations and guarantees in a manner comparable to that set forth in Section 4.1. "Trust Agreement" means the Trust Agreement, dated as of September 1, 1990, between Owner Participant and First Security Bank of Utah, National Association, in its individual capacity. "Trust Estate" means the Trust Estate as that term is defined in the Trust Agreement. "UCC" means the Uniform Commercial Code as in effect in any applicable jurisdiction. "U.S. Air Carrier" means any United States air carrier (i) as to which there is in force a certificate issued pursuant to Section 401 of the Act, (ii) as to which there is in force an air carrier operating certificate issued pursuant to Part 121 of the FAA Regulations, or which may operate as a United States air carrier by certification or otherwise under any successor or substitute provisions therefor or in the absence thereof and (iii) which, in any case, at the time a Permitted Sublease is (or proposed to be) entered into, is not the subject of proceedings under the Federal Bankruptcy Code of 1978, as amended. "Wet Lease" means any arrangement whereby Lessee agrees to furnish the Airframe and Engines or engines installed thereon to a third party pursuant to which the Airframe and Engines or engines (i) shall be operated solely by regular employees of Lessee possessing all current certificates and licenses that would be required under the Act for the performance by such employees of similar functions within the United States of America (it being understood that cabin attendants need not be regular employees of Lessee), (ii) shall be maintained by Lessee in accordance with its Maintenance Program and (iii) shall be and remain, in the hands of such third party, subject to all other terms and conditions of this Lease. SALE AND LEASE AGREEMENT 8 Section 2. Sale, Lease and Acceptance. (a) Lessor, subject to satisfaction or waiver of the conditions set forth in Section 5 of the Participation Agreement and the concurrent acceptance hereunder by Lessee of the Aircraft, hereby agrees, to the extent that the funds received by it pursuant to Section 2 of the Participation Agreement are adequate for the purpose, to purchase at a purchase price equal to Lessor's Cost and to accept delivery on the Delivery Date from Lessee hereunder and to lease back to Lessee hereunder, and Lessee hereby agrees, expressly for the direct benefit of Lessor and Owner Participant to sell to Lessor and to lease back from Lessor hereunder on the Delivery Date, the Aircraft, which shall have been accepted by Lessor and Lessee hereunder as evidenced by the execution by Lessor and Lessee of the Lease Supplement conveying to Lessor and leasing to Lessee the Aircraft hereunder; provided, however, that Lessor and Lessee shall have no further obligation hereunder with respect to the Aircraft if the Delivery Date shall not have occurred on or before September 28, 1990. The purchase price of the Aircraft shall be paid by Lessor to Lessee on the Delivery Date in the manner specified in Section 3 of the Participation Agreement. (b) Lessor hereby authorizes each of Gary C. Kelly, John D. Owen and Laura Wright, all of whom are employees of Lessee, as the authorized representative or representatives of Lessor to accept delivery of the Aircraft from Lessee pursuant hereto. Lessee hereby agrees that in the event delivery of the Aircraft shall be accepted by an employee or employees of Lessee pursuant to such authorization by Lessor, such acceptance of delivery by such employee or employees on behalf of Lessor shall, without further act, also irrevocably constitute acceptance by Lessee of the Aircraft for all purposes of this Agreement. Section 3. Term and Rent. 3.1 General. Except as otherwise provided herein, the Term for the Aircraft shall commence on the Delivery Date specified in the initial Lease Supplement and shall terminate as herein provided. 3.2 Lease Term. Except as provided herein, the Aircraft shall be leased hereunder for the Interim Lease Term, the Base Lease Term and the Renewal Terms, if any. 3.3 Basic Rent. Lessee hereby agrees to pay to Lessor Basic Rent with respect to the Aircraft, in arrears, on each Rent Payment Date, in the amount of $432,000; provided that (i) on the first Rent Payment Date (September 30, 1990), only Basic Rent in the amount of $4,800 per each day elapsed during the Interim Lease Term shall be due and (ii), if Lessee shall exercise its option under Section 18.2 or 18.3, then the installment SALE AND LEASE AGREEMENT 9 of Basic Rent (or Rent, as the case may be) due on such early termination date shall be reduced by $4,800 per day (or in the case of Renewal Rent, by the quotient of the quarterly installment thereof divided by 90) for each day the final Lease Period has been foreshortened. 3.4 Supplemental Rent. Lessee also agrees to pay (or cause to be paid) to Lessor, or to whomsoever shall be entitled thereto, all Supplemental Rent with respect to Stipulated Loss Value when and as the same shall become due and owing and all other amounts of Supplemental Rent within five days after demand or such other relevant period as may be provided in any Operative Agreement. Lessee will also pay to Lessor, or to whomsoever shall be entitled thereto, as Supplemental Rent, to the extent permitted by applicable law, interest at the Overdue Rate on any part of any installment of Basic Rent or Renewal Rent not paid when due for any period from and including the date on which the same was due to but excluding the date of payment in full and (to the extent permitted by applicable law) on any payment of Supplemental Rent not paid when due to Lessor, or to whomsoever shall be entitled thereto, as the case may be, for the period from the date on which the same was due to but excluding the date of payment in full. The expiration or other termination of Lessee's obligation to pay Basic Rent or Renewal Rent hereunder shall not limit or modify the obligations of Lessee with respect to Supplemental Rent. 3.5 Payments. Payments of Rent and any and all other payments payable to Lessor hereunder shall be paid in funds of the United States of America which shall be immediately available not later than noon, New York City time, on the date due, to Owner Participant's account set forth in Schedule I to the Participation Agreement, or as otherwise directed by Owner Participant in writing at least five Business Days prior to the date such payment is due; provided, however, that so long as Lessee shall not have received such five Business Days' prior written notice of the fact that the Mortgage shall have been terminated, Lessor hereby directs and Lessee agrees, that, unless Lender shall otherwise direct in writing, all Rent payable to Lessor and assigned to Lender pursuant to the Mortgage shall be paid prior to noon, New York City time, on the due date thereof directly to Lender by wire transfer to First Union National Bank of Florida, Jacksonville, Florida (ABA No. 063-000-021), for the account of Progress Credit Corporation (account no. 175-003-956-35), with reference to Southwest N57SW Interest. Except as otherwise expressly provided herein, whenever any payment of Rent or other payment to be made hereunder shall be due on a day which is not a Business Day, such payment shall be made on the next succeeding day which is a Business Day and (provided such payment is made on such next succeeding Business Day) no interest shall accrue on the amount of such payment from and after such scheduled date. SALE AND LEASE AGREEMENT 10 Section 4. Lessor's Representations and Warranties; DISCLAIMER; Certain Agreements of Lessee. 4.1 Lessor's Representations and Warranties; DISCLAIMER. LESSEE EXPRESSLY AGREES TO TAKE THE AIRCRAFT "AS IS". NEITHER LESSOR (INDIVIDUALLY OR AS OWNER TRUSTEE) NOR OWNER PARTICIPANT MAKES, HAS MADE OR SHALL BE DEEMED TO HAVE MADE, AND EACH HEREBY EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, AIRWORTHINESS, VALUE, CONDITION, DESIGN, OPERATION, MERCHANTABILITY OR FITNESS FOR USE OF THE AIRCRAFT OR ANY PART THEREOF, AS TO THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, AS TO THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK OR COPYRIGHT, AS TO THE ABSENCE OF OBLIGATIONS BASED ON STRICT LIABILITY IN TORT, OR ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED, WITH RESPECT TO THE AIRCRAFT OR ANY PART THEREOF, except that First Security Bank of Utah, National Association, in its individual capacity (i) represents and warrants that on the Delivery Date Lessor shall have received whatever title thereto as was conveyed to it by Lessee, (ii) represents and warrants that on the Delivery Date the Aircraft shall be free of Lessor Liens attributable to it, (iii) agrees that it will not directly or indirectly create, incur, assume or suffer to exist any Lessor Lien attributable to it on or with respect to the Airframe or any Engine or any other portion of the Trust Estate, and (iv) represents and warrants that it is a "citizen of the United States" as defined in Section 101(16) of the Act and agrees that if at any time a responsible officer in its Corporate Trust Department shall obtain actual knowledge that it has ceased to be a "citizen of the United States" within the meaning of Section 101(16) of the Act it will promptly resign as Owner Trustee, effective upon the appointment of a successor Owner Trustee in accordance with Section 9.01 of the Trust Agreement. Lessor covenants that during the Term (so long as no Lease Event of Default shall have occurred and be continuing) it will not, through its own actions or breaches of any of its obligations under the Operative Agreements, interfere or cause any interference in the quiet enjoyment of the Aircraft by Lessee or any Permitted Sublessee and agrees that it will not directly or indirectly create, incur, assume or suffer to exist any Lessor Lien attributable to it on or with respect to the Airframe or any Engine. 4.2 Certain Agreements of Lessee. All obligations of Lessee in this Lease shall be done, performed or complied with at Lessee's cost and expense, whether or not so expressed, unless otherwise expressly stated. Lessee hereby agrees with Lessor for the benefit of Owner Participant that it shall perform the agreements, covenants and indemnities set forth in the Participation Agreement (including, without limitation, Sections 8.1 and 8.2 of the Participation Agreement) which are incorporated herein, and hereby restates Lessee's representations and warranties set forth in the Participation Agreement, SALE AND LEASE AGREEMENT 11 as fully and to the same extent and with the same force and effect as if set forth in full in this Section 4.2. Section 5. Return of Aircraft. 5.1 General Condition upon Return. Subject to Section 10, upon the expiration or termination of this Lease, Lessee will cause the Aircraft, if then not registered in the name of Lessor with the FAA for any reason, to be reregistered in the name of Lessor with the FAA and will return the Aircraft to Lessor by delivering the same at any location in the continental United States selected by Lessee at which Lessee has maintenance facilities (and Section 5.6 shall apply). All costs associated with the return flight shall be for the account of Lessee. At the time of such return, the Airframe and Engines or engines installed thereon: 5.1.1 Airworthiness. Subject to the exception described in clause (iii) of Section 8.1.1, shall be duly certificated as an airworthy aircraft by the FAA under Part 121 of the Federal Aviation Regulations or any successor provision; 5.1.2 Free of Liens. Shall be free and clear of all Liens except Lessor Liens and Liens arising by, through or under Lender; 5.1.3 Operating Configuration and Condition. Shall be in a configuration suitable for operation in regularly scheduled commercial airline passenger service in the United States and in the same configuration as a majority of the remainder of all 737-200 series aircraft operated by Lessee, shall be in compliance with the Maintenance Program and shall be in as good operating condition as on the Delivery Date, ordinary wear and tear and changes and alterations made by Lessee as permitted under Section 8.4 hereof or Section 13 of the Participation Agreement excepted. All Lessee or Permitted Sublessee exterior or interior insignia, logos or markings, as the case may be, shall have been painted over in matching colors in a workmanlike manner; 5.1.4 Cleanliness and Operability. Shall be clean by United States commercial airline operating standards with all systems and components operable; 5.1.5 Parts and Equipment. Shall have installed thereon the Engines identified in the initial Lease Supplement, as well as all Parts installed thereon at the commencement of the Term, or replacements therefor made in accordance with the terms of this Lease; 5.1.6 Corrosion Treatment. Shall comply with the corrosion prevention procedures to the extent set forth in the Maintenance Program; SALE AND LEASE AGREEMENT 12 5.1.7 Hush Kits. Shall be fitted with a hush kit, if a Stage III Upgrade shall have occurred and the Owner Participant shall have financed such upgrade pursuant to the provisions of Section 13.4 of the Participation Agreement; and 5.1.8 Other Conditions. Shall otherwise be in the condition set forth in Exhibit C hereto. 5.2 Return of Other Engines, In the event that any engine not owned by Lessor shall be installed on the Airframe returned in accordance with Section 5.1, such engine shall be a Pratt & Whitney JT8D-9A engine (or an improved model engine fully compatible with the other Engine or engine installed on the Airframe). At the time of such replacement, such engine shall have performance and durability characteristics and a value, condition and utility at least equal to the Engine it replaced hereunder, assuming such Engine was maintained in accordance with the requirements of this Lease, and at the time the Airframe is returned shall fully comply with all the requirements of this Lease, including this Section 5, which are applicable to Engines. Upon return of the Aircraft, Lessee shall duly convey to Lessor good title to any such replacement engine, free and clear of all Liens except Lessor Liens and Liens arising by, through or under Lender; and, upon such conveyance and as a condition thereto, Lessee will (a) furnish Lessor with a full warranty (as to title) bill of sale, in form and substance reasonably satisfactory to Lessor, with respect to each such replacement engine, together with an opinion of counsel to the effect that such bill of sale has been duly authorized and delivered and is enforceable in accordance with its terms and that each such replacement engine is free and clear of all Liens except Lessor Liens and Liens arising by, through or under Lender, and (b) take such other action as Lessor may reasonably request in order that title to such replacement engine may be duly and properly vested in Lessor to the same extent as the Engine replaced thereby. Upon compliance by Lessee with the foregoing, Lessor will, so long as no Lease Event of Default has occurred and is continuing, Transfer to Lessee any Engine not installed on the Airframe at the time of return, free and clear of all Liens, including Lessor Liens. 5.3 Return at End of Base Lease Term or Renewal Lease Term. Upon return of the Aircraft at the expiration or termination of this Lease, Lessee shall have caused all FAA Airworthiness Directives applicable to the Aircraft and all mandatory service bulletins from Manufacturer and the manufacturer of the Engines or any engine then installed on the Airframe (in compliance with Section 5.2) applicable to the Aircraft to have been complied with (except for any such FAA Airworthiness Directives and bulletins that permit compliance after the return date and would not, in the normal course of the Maintenance Program, be complied with on or prior to the return date). Lessee shall have treated the Aircraft, including without limitation, with respect to maintenance, additions and modifications, during the Term, similarly to all other Boeing 737-200 aircraft in its fleet. SALE AND LEASE AGREEMENT 13 At the request of Lessor delivered to Lessee not more than 30 days prior to the end of the Term, the Aircraft shall be check flown by Lessee (or any Permitted Sublessee) at Lessee's expense using qualified flight personnel, for not more than two hours, on a non-commercial flight, for the purpose of demonstrating to Lessor the satisfactory operation of the Aircraft and its equipment and systems; provided, however, that such check flight shall not interfere with the normal operation or maintenance of the Aircraft by, or the business of, Lessee (or any Permitted Sublessee). Up to five of Owner Participant's designees or representatives may participate in such flight as observers. The form of test flight procedure to be followed shall be in accordance with Lessee's normal test flight procedure, and the test flight may be a return delivery flight. The Aircraft shall be check flown only once pursuant to the provisions of this Section 5.3, unless further check flights are required in order to verify the correction of any discrepancy or malfunction detected in such first check flight, in which case a second check flight shall be performed in accordance with the procedures set forth herein solely in order to verify such correction. At redelivery of the Aircraft to Lessor hereunder, the following specific requirements shall be met by Lessee or, in lieu thereof, Lessee shall compensate Lessor therefor, as specifically provided for in this Section: 5.3.1 Airframe. (I) At least 40% of the time (or cycles, if applicable) shall remain before the next required performance of each structural work task card (the "Cards") (or the then equivalent under Lessee's Maintenance Program) (it being understood that, as used herein, "Cards" refers to the heaviest airframe check currently used under Lessee's Maintenance Program), and all Cards currently performed on a sampling basis under the Maintenance Program shall have been fully accomplished without regard to any sampling then permitted under the Maintenance Program, (II) Lessee shall have performed a complete "C" check or its equivalent (all phases) on the Airframe no more than 200 flight hours prior to its return to Lessor (and Lessee shall have corrected to the Lessor's reasonable satisfaction any deficiencies discovered during such check, and will not have deferred any maintenance discrepancies), and (III) Lessee shall have completed a complete "B" ("B1" and "B2") check immediately prior to redelivery; 5.3.2 Engines. Every ESV-1 Engine shall have no more than 4,000 hours or cycles since its last ESV-1. Each ESV-2 Engine shall have no more than 6,000 hours or cycles since its last ESV-2. No life limited component of an Engine shall have less than 3,000 hours or cycles remaining until its next required replacement. For the purposes of this Section, an ESV-1 Engine shall be an Engine or engine installed on the Airframe (in compliance with Section 5.2) whose last engine service visit (or the equivalent under the Maintenance Program) was an ESV-1, and an ESV-2 Engine shall be an Engine SALE AND LEASE AGREEMENT 14 or engine installed on the Airframe (in compliance with Section 5.2) whose last engine service visit (or the equivalent under the Maintenance Program) was an ESV-2; 5.3.3 Boroscope. The hot section of each Engine or engine installed on the Airframe (in compliance with Section 5.2) shall be inspected by boroscope at Lessee's expense and any defects which are outside the manufacturer's recommended limitations shall be corrected such that they are brought within such limitations; 5.3.4 Landing Gears. The landing gears shall have a minimum of 40% of the time remaining on each of the main and nose gears until the next scheduled shop visit or retirement, as the case may be; 5.3.5 APU. The auxiliary power unit shall not have more than 2,500 hours since the last "hot section" inspection; and 5.3.6 Other Components. All time-controlled components and life-limited components, other than engines, landing gear and auxiliary power units, shall have a minimum of 3,000 hours or twelve months (unless one-half of the allowable hours or months, as the case may be, permitted between shop visits or replacements is actually less than 3,000 hours or twelve months, in which case one-half of such allowable hours or months) remaining to the next scheduled shop visit or replacement. 5.4 Financial Adjustments. In the event that the conditions described in Sections 5.3.1 and 5.3.4 are not met, Lessee may elect, as to any or all of such conditions (a) to perform the work necessary to conform the Aircraft to the required condition or (b) to make a financial adjustment between Lessee and Lessor pursuant to this provision, provided that in no event shall the Aircraft or any landing gear be returned with less than 25% of the allowable hours or cycles, as appropriate, remaining between Cards (with respect to the Aircraft) or until the next scheduled shop visit (with respect to the landing gears): 5.4.1 Airframe, In the event that the Airframe is returned to Lessor with less than 40% but more than 25% of the allowable hours (or cycles, if applicable) between Cards as provided in Section 5.3.1, then Lessee shall pay to Lessor on the date the Term ends an amount determined by multiplying the difference between the actual number of hours (or cycles, if applicable) remaining to the next Cards and 40% of the allowable hours (or cycles, if applicable) between Cards times the cost to Lessee of having another Person perform such Cards. 5.4.2 [Intentionally omitted.] SALE AND LEASE AGREEMENT 15 5.4.3 Landing Gears, In the event that any of the landing gears is returned to Lessor with less than 40% but more than 25% of the cycles remaining until the next scheduled shop visit as provided in Section 5.3.4 above, then Lessee shall pay to Lessor on the date the term ends an amount computed by multiplying the difference between the actual number of cycles remaining to the next scheduled shop visit for such gear and 40% of the allowable cycles between shop visits times the cycle rate for the nose gear or the main gear, as the case may be. For purposes of this Section 5.4.3, the term "cycle rate" shall be deemed to be the cost that Lessee is paying to third parties at the time the Aircraft is returned under Section 5.3 for overhauling a nose gear or a main gear, as the case may be, divided by the number of cycles permissible between such overhauls under the Maintenance Program. At the end of the Term the Lessee shall furnish Lessor with an Officer's Certificate setting forth the hours and cycles remaining on the Engines or engines installed on the Airframe (in compliance with Section 5.2), the landing gear and the Airframe. 5.5 Manuals; Service Bulletins. Etc. Upon return of the Aircraft at the expiration or termination of this Lease, Lessee shall deliver or cause to be delivered to Lessor (in English) all logs, manuals, drawings and data and inspection, modification and overhaul records in respect of the Aircraft required to be maintained under applicable rules and regulations of the FAA, updated through the date of return. All "no-charge" service bulletin kits received by or on behalf of Lessee from Manufacturer, engine manufacturer or vendors for the Aircraft and Engines or engines and not incorporated therein shall be returned at no charge to Lessor as cargo on board the Aircraft at the time of its return. At the time the Aircraft is returned, Lessor shall have the option to purchase from Lessee, at Lessee's cost therefor, any "charge" service bulletin kits purchased by Lessee which have not been incorporated in the Aircraft. All such items shall thereupon become the property of Lessor. 5.6 Storage upon Return. Upon written request of Lessor received by Lessee at least 10 days prior to its return of the Aircraft at the expiration or termination of this Lease, Lessee will provide free parking facilities for the Aircraft for a period not exceeding 30 days following return thereof by Lessee at the location of return pursuant to Section 5.1; provided that such storage shall be at Lessor's risk and any expenses in connection with such storage (other than parking charges) shall be paid by Lessor, including the cost of any insurance therefor. 5.7 Failure to Return Aircraft or Engines. If Lessee shall, for any reason whatsoever, fail to return the Aircraft or any Engine at the time specified herein, the obligations of Lessee as provided in this Lease (including the obligation to pay Rent on the same basis as that applicable immediately prior to such failure) shall continue in effect with respect to the Aircraft or such Engine until the Aircraft or such Engine is returned SALE AND LEASE AGREEMENT 16 to Lessor; but this Section 5.7 shall not be construed as permitting Lessee to fail to meet its obligation to return the Aircraft or such Engine in accordance with the requirements of this Lease or constitute a waiver of a Lease Default or Lease Event of Default. 5.8 Aid in Disposition. Lessee agrees that, during the Term (and during any storage period) it will cooperate in all reasonable respects with any efforts of Lessor to lease or sell the Aircraft, including without limitation (subject to the provisions of Section 12) permitting potential lessees or purchasers to inspect the Aircraft and the records relating thereto. Section 6. Liens. Lessee will not directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to the Aircraft, the Airframe or any Engine, title thereto or any interest therein or in this Lease except: (a) the respective rights of the parties to the Operative Agreements; (b) the rights of others under agreements or arrangements to the extent expressly permitted by the terms of Sections 7.2 and 8.3; (c) Lessor Liens; (d) liens for taxes, assessments or other governmental charges either not yet due or being contested in good faith (and for the payment of which adequate reserves have been provided in accordance with generally accepted accounting principles) by appropriate proceedings so long as such proceedings do not involve any material danger of the sale, forfeiture, loss or loss of use of the Aircraft, the Airframe or any Engine or any interest therein; (e) materialmen's, mechanics', workers', repairers', employees' or other like Liens arising in the ordinary course of business for amounts the payment of which is either not yet due or not overdue for a period of more than 30 days or is being contested in good faith (and for the payment of which adequate reserves have been provided in accordance with generally accepted accounting principles) by appropriate proceedings so long as such Liens do not involve any material danger of the sale, forfeiture, loss or loss of use of the Aircraft, the Airframe or any Engine or any interest therein; (f) Liens arising out of any judgment or award against Lessee, unless the judgment secured shall not, within 45 days after entry thereof, have been discharged or vacated or execution thereof stayed pending appeal or shall not have been discharged, vacated or reversed within 45 days after the execution of such stay; and (g) any other Lien with respect to which Lessee shall have provided a bond or other security adequate in the reasonable judgment of Lessor. Lessee will promptly take (or cause to be taken) such action at its own expense as may be necessary duly to discharge any such Lien not excepted above if the same shall arise at any time. Section 7. Registration, Operation, Possession, Subleasing and Records. 7.1 Registration and Operation. 7.1.1 Registration. Lessee shall forthwith upon the delivery of the Aircraft hereunder cause the Aircraft to be duly registered and at all times thereafter to SALE AND LEASE AGREEMENT 17 remain duly registered in the name of Lessor with the FAA pursuant to and as permitted by the Act (it being understood that Lessee shall not be required to comply with this covenant to the extent that First Security Bank of Utah, National Association's or Owner Participant's failure to comply with its covenant set forth in Section 6.3.1.5 or Section 6.2.5, respectively, of the Participation Agreement with regard to its citizenship makes such compliance by Lessee impossible). 7.1.2 Nameplate. As soon as practicable after the Delivery Date, Lessee agrees to affix and thereafter to maintain in the cockpit of the Airframe adjacent to the airworthiness certificate and on each Engine a nameplate bearing the inscription "OWNED BY AND LEASED FROM FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, AS OWNER TRUSTEE, OWNER AND LESSOR" and, so long as the Mortgage shall remain in effect, "SUBJECT TO A SECURITY INTEREST IN FAVOR OF PROGRESS CREDIT CORPORATION, MORTGAGEE" (such nameplate to be replaced, if necessary, with a nameplate reflecting the name of any successor Lessor or Lender, upon receipt of written notice from Lessor to such effect). Except as above provided, Lessee will not allow the name of any person, association or corporation to be placed on the Airframe or on any Engine as a designation that might be interpreted as a claim of ownership or Lien; provided that nothing herein contained shall prohibit Lessee (or any Permitted Sublessee) from placing its customary colors and insignia on the Airframe or any Engine or displaying information concerning the registration or manufacture of the Aircraft, the Airframe, any Engine or Part. 7.1.3 Compliance with Laws. Lessee agrees that it will not use or operate the Aircraft, the Airframe or any Engine in violation of any law or any rule, regulation or order of any government or governmental authority having jurisdiction (domestic or foreign) or in violation of any airworthiness certificate, license or registration relating to the Aircraft, the Airframe or any Engine issued by any such authority, except to the extent Lessee is contesting in good faith the validity or application of any such law, rule, regulation or order in any reasonable manner which does not materially adversely affect Lessor's interest in the Aircraft. 7.1.4 Insurance Requirements; Government Requisition; Indemnity. Lessee agrees not to operate, use or locate the Aircraft, the Airframe or any Engine, or permit any Permitted Sublessee to operate, use or locate the Aircraft, the Airframe or any Engine, (i) in any area excluded from coverage by any insurance required by the terms of Section 11, except in the case of a requisition by the Government where Lessee obtains indemnity (backed by the full faith and credit of the United States of America) in lieu of such insurance from the Government against the risks and in the amounts required by Section 11 covering such area, or (ii) in any area where maintenance of war-risk insurance is required by Section 11 unless fully covered by war-risk insurance satisfying the terms of Section 11, or unless the Aircraft, the Airframe or such Engine is operated or used under SALE AND LEASE AGREEMENT 18 contract with the Government under which contract the Government assumes liability (backed by the full faith and credit of the United States of America) in an amount not less than the amount of insurance otherwise required by Section 11 for any damage, loss, destruction or failure to return possession of the Aircraft, the Airframe or such Engine at the end of the term of such contract or for injury to persons or damage to property of others, or (iii) with respect to any sublease to a Permitted Foreign Air Carrier, in any area referred to in subclause (3)(iv) of Section 7.2. 7.2 Possession. Lessee will not, without the prior written consent of Lessor, sublease or otherwise in any manner deliver, transfer or relinquish possession of the Aircraft, the Airframe or any Engine or install any Engine, or permit any Engine to be installed, on any airframe other than the Airframe; provided, however, that, so long as no Lease Event of Default shall have occurred and be continuing, and so long as Lessee shall comply with the provisions of Section 11, and all FAA approvals required for such purposes have been obtained, Lessee may, without such prior written consent: 7.2.1 Interchange and Pooling. Subject or permit any Permitted Sublessee to subject (i) the Aircraft, Airframe or any Engine to normal interchange agreements customary in the United States domestic airline industry and entered into by Lessee or such Permitted Sublessee in the ordinary course of its business, and (ii) any Engine to pooling agreements or arrangements customary in the airline industry and entered into by Lessee or such Permitted Sublessee in the ordinary course of its business; but in either case (A) no transfer of the registration of the Airframe or any Engine shall be effected in connection therewith and the terms of this Lease and the Participation Agreement shall be observed, and (B) no such agreement or arrangement shall contemplate or require the transfer of title to the Aircraft, Airframe or any Engine and if Lessor's title to any Engine shall be divested under any such agreement or arrangement, such divestiture shall be deemed to be an Event of Loss with respect thereto and Lessee shall comply with Section 10.2 hereof; 7.2.2 Testing and Service. Deliver or permit any Permitted Sublessee to deliver possession of the Aircraft, Airframe or any Engine or Part, to the manufacturer thereof for testing or other similar purposes, or to any organization for service, repair, maintenance or overhaul work on the Aircraft, Airframe or any Engine or Part, or for alterations or modifications in or additions to the Aircraft, Airframe or any Engine to the extent required or permitted by the terms of Section 8.4; 7.2.3 Civil Reserve Air Fleet Program. Transfer or permit any Permitted Sublessee, if required by law to do so, to transfer possession of the Aircraft, Airframe or any Engine to the Government pursuant to the Civil Reserve Air Fleet Program administered pursuant to Executive Order No. 10999, as amended, or any similar or substitute programs, so long as such transfer of possession does not continue beyond SALE AND LEASE AGREEMENT 19 the end of the Term and so long as Lessee shall (A) promptly notify Lessor upon subjecting the Airframe or any Engine to such program and provide Lessor with the name and address of the appropriate party to whom notice must be given pursuant to Section 16 hereof, and (B) promptly notify Lessor upon transferring possession of the Airframe or any Engine to the Government pursuant to such program; 7.2.4 Installation of Engines. Install or permit any Permitted Sublessee to install an Engine on an airframe owned by Lessee or such Permitted Sublessee, as the case may be, free and clear of all Liens, except (A) Permitted Liens and those which apply only to the engines (other than Engines), appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment (other than Parts) installed on such airframe (but not to the airframe as an entirety), (B) the rights of air carriers under normal interchange agreements which are customary in the airline industry and do not contemplate, permit or require the transfer of title to the airframe or engines installed thereon and (C) mortgage liens or other security interests, provided that (as regards this clause (C)) such mortgage liens or other security interests effectively provide that such Engine shall not become subject to the lien of such mortgage or security interest, notwithstanding the installation thereof on such airframe, unless and until Lessee shall become the owner of such Engine; 7.2.5 Installation of Engines on Other Airframes. Install or permit any Permitted Sublessee to install an Engine on an airframe leased to, or purchased by, Lessee or any Permitted Sublessee subject to a lease, conditional sale, or other security agreement, but only if (A) such airframe is free and clear of all Liens, except the rights of the parties to the lease, conditional sale, or other security agreement covering such airframe, or their successors or assigns, and except Liens of the type permitted by clauses (A) and (B) of Section 7.2.4, and (B) the lease, conditional sale, or other security agreement covering such airframe effectively provides that such Engine shall not become subject to the Lien thereof at any time while such Engine is subject to this Lease, notwithstanding the installation thereof on such airframe; 7.2.6 Pooling of Parts. To the extent permitted by Section 8.3, subject any Parts owned by Lessor and removed from the Airframe or any Engine to any pooling arrangement referred to in Section 8.3; 7.2.7 Wet Lease. Enter into a Wet Lease for the Airframe and Engines or engines then installed thereon with any third party for a term not to continue beyond the Term; 7.2.8 Sublease to Permitted Air Carriers. Enter into a sublease of the Aircraft or the Airframe and Engines or engines then installed on the Airframe or any Engine, for use on the sublessee's regularly scheduled or charter routes, with (a) any SALE AND LEASE AGREEMENT 20 U.S. Air Carrier or (b) any Permitted Foreign Air Carrier, in any such case for a term not to continue beyond the remaining Term. Provided, further, with respect to this Section 7.2, that: (1) the rights of any transferee who receives possession by reason of a transfer permitted by this Section 7.2 (other than the transfer of an Engine which is deemed an Event of Loss) shall be effectively subject and subordinate to, and any sublease permitted by this Section 7.2 shall be made expressly subject and subordinate to, all the terms of this Lease, and to Lessor's rights, powers and remedies under this Lease, including the rights to repossession pursuant to Section 15 and to terminate and avoid such sublease upon such repossession and to require such sublessee to forthwith deliver the Aircraft, Airframe and Engines subject to such sublease upon such repossession; (2) Lessee shall remain primarily liable hereunder for the performance of all the terms of this Lease to the same extent as if such sublease or transfer had not occurred, provided that performance of any such terms by any Permitted Sublessee shall be as effective, for purposes of this Lease, as performance thereof directly by Lessee; (3) any such sublease shall (i) be consistent with the requirements of this Lease and the applicable requirements of the Participation Agreement, (ii) include appropriate provisions for the continued registration, maintenance in accordance with applicable maintenance standards in the appropriate jurisdiction, operation, insurance (appropriate certificates as to which shall be furnished to Lessor and Lender prior to Lessee's entry into any such sublease with any Permitted Foreign Air Carrier or within 10 days thereafter) and return of the subleased property as required hereunder, (iii) provide that the sublessee may not assign or further sublease the Aircraft, and (iv) provide that the Aircraft may not be operated in a country with which the United States does not maintain diplomatic relations or in which there is open warfare, whether or not declared; (4) no interchange agreement, transfer, sublease or other relinquishment of possession permitted hereunder shall affect the registration of the Aircraft or shall permit any action not permitted to Lessee in this Lease; and (5) no such interchange agreement, sublease, transfer or other relinquishment of possession of the Aircraft, Airframe or any Engine shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder or under any other Operative Agreement or constitute a waiver of Lessor's rights or remedies hereunder or under any other Operative Agreement. SALE AND LEASE AGREEMENT 21 Lessee shall notify Lessor within 10 days after the commencement of any sublease permitted hereunder and shall deliver to Lessor within such period a duly executed copy of any sublease or interchange or pooling agreement permitted hereunder together with any certification required by Section 7.2.8. Upon request of Lessor, Lessee shall promptly and duly execute and deliver to Lessor an assignment of any such sublease having a term in excess of 12 months in favor of Lessor in form and substance reasonably satisfactory to Lessor. Lessor hereby agrees, for the benefit of Lessee (and any Permitted Sublessee) and for the benefit of each lessor, conditional seller, or secured party of any airframe or engine leased to or purchased by Lessee (or any Permitted Sublessee) subject to a lease, conditional sale, or other security agreement, that Lessor will not acquire or claim, as against such lessor, conditional seller, or secured party, or any successor or assign thereof, any right, title or interest in any engine as the result of such engine being installed on the Airframe at any time while such engine is subject to such lease, conditional sale, or other security agreement and owned by such lessor or conditional seller or subject to a security interest in favor of such secured party; provided, however, that such agreement of Lessor shall not be for the benefit of any lessor or secured party of any airframe (other than the Airframe) leased to Lessee (or any Permitted Sublessee) or purchased by Lessee (or any Permitted Sublessee) subject to a conditional sale or other security agreement or for the benefit of any mortgagee of or any other holder of a security interest in an airframe owned by Lessee (or any Permitted Sublessee), unless such lessor, conditional vendor, other secured party or mortgagee has expressly agreed (which agreement may be contained in such lease, conditional sale or other security agreement or mortgage) that neither it nor its successors or assigns will acquire, as against Lessor, any right, title or interest in an Engine as a result of such Engine being installed on such airframe. A consolidation, merger, conveyance, transfer, or lease permitted by Section 7.4 of the Participation Agreement shall not be deemed to be a transaction to which this Section 7.2 shall apply. 7.3 Records and Reports. Lessee shall: 7.3.1 Records. Maintain or cause to be maintained all records, logs and other materials required by the FAA or any other governmental authority having jurisdiction to be maintained in respect of the Aircraft, the Airframe and each Engine; 7.3.2 Information and Reports. Upon request, promptly furnish or cause to be furnished to Lessor (in sufficient number) such information as may be required to enable Lessor or any Participant to file any reports, including tax returns, required to be filed by Lessor or such Participant with any governmental authority because of Lessor's ownership of, or Lender's security interest in, the Aircraft, Airframe or any Engine or because of receipt of Rent or because of the interest of any Participant in the Trust Estate; provided, however, that with respect to any such information which Lessee SALE AND LEASE AGREEMENT 22 deems commercially sensitive or confidential, if reasonably feasible, Lessor shall afford Lessee a reasonable opportunity to seek from any such governmental authority a waiver of Lessor's or such Participant's obligation to file any such information or consent to the filing of such information directly by Lessee in lieu of filing by Lessor or such Participant and if any such waiver or consent is evidenced to the reasonable satisfaction of Lessor, then Lessee shall not be required to furnish such information to Lessor; and 7.3.3 Financial Information. Promptly provide Lessor and each Participant with (i) such financial information concerning Lessee as is provided from time to time to the public shareholders of Lessee, (ii) within 60 days after the end of each of the first three quarterly periods of each fiscal year of Lessee, a consolidated balance sheet of Lessee and its subsidiaries prepared by it as of the close of such period, together with the related consolidated statements of income for such period, (iii) within 120 days after the close of each fiscal year of Lessee, a consolidated balance sheet of Lessee and its subsidiaries as of the close of such fiscal year, together with the related consolidated statements of income for such fiscal year, as certified by independent public accountants, and (iv) from time to time such other information as to its financial condition as Lessor or any Participant may reasonably request. Section 8. Maintenance; Replacement and Pooling of Parts; Alterations, Modifications and Additions. 8.1 Maintenance. 8.1.1 Maintenance Program. Lessee shall maintain, service, repair, overhaul, alter, modify, add to and test (or cause to be maintained, serviced, repaired, overhauled, altered, modified, added to and tested) the Aircraft, the Airframe and each Engine, and each other engine installed from time to time on the Airframe, in accordance with Lessee's FAA-approved maintenance program for the Aircraft, Airframe and Engines (the "Maintenance Program"), (i) so as to keep the Aircraft, the Airframe and each Engine in as good operating condition as on the Delivery Date, ordinary wear and tear excepted, (ii) in the same manner and with the same care as used by Lessee with similar aircraft owned or operated by Lessee, and (iii) so as to keep the Aircraft, the Airframe and each Engine in such condition as required to enable the FAA certificate of airworthiness for the Aircraft to be maintained in good standing at all times under the Act, except when all comparable Boeing Model 737-200 series aircraft registered in the United States of America have been grounded by the FAA other than as a result of actions taken or omitted to be taken by Lessee (or, if a sublease is then in effect, any Permitted Sublessee). SALE AND LEASE AGREEMENT 23 8.1.2 Compliance with Government Requirements. Lessee will comply with all service, inspection, maintenance, repair and overhaul regulations, directives and instructions which are made mandatory by the FAA or other Government authority upon United States operators of Boeing Model 737-200 series aircraft and Pratt & Whitney JT8D-9A engines and which require compliance during the Term and prior to return of the Aircraft under this Lease. 8.2 Replacement of Parts. Lessee, at its own cost and expense, will promptly replace (or cause to be replaced) all Parts which may from time to time be incorporated in the Aircraft, Airframe or any Engine and which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever, except as otherwise provided in Section 8.4. In addition, Lessee may, at its own cost and expense, remove in the ordinary course of maintenance, service, repair, overhaul or testing any Parts, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use; provided, however, Lessee, except as otherwise provided in Section 8.4, at its own cost and expense, will replace such Parts as promptly as possible. All replacement Parts shall be free and clear of all Liens (except for Permitted Liens and except in the case of replacement property temporarily installed on an emergency basis) and shall be in as good operating condition as, and shall have a value and utility at least equal to, the Parts replaced assuming such replaced Parts were in the condition and repair required to be maintained by the terms hereof. All Parts at any time removed from the Aircraft, Airframe or any Engine shall remain the property of Lessor, no matter where located, until such time as such Parts shall be replaced by Parts which have been incorporated in the Aircraft, Airframe or such Engine and which meet the requirements for replacement Parts specified above. Immediately upon any replacement Part becoming incorporated in the Aircraft, Airframe or such Engine as above provided, without further act, (i) title to the replaced Part shall thereupon vest in Lessee free and clear of all rights of Lessor, and the replaced Part shall no longer be deemed a Part hereunder, (ii) title to such replacement Part shall thereupon vest in Lessor (subject only to Permitted Liens and except in the case of replacement property temporarily installed on an emergency basis), and (iii) such replacement Part shall become subject to this Lease and be deemed part of the Aircraft, Airframe or such Engine for all purposes hereof to the same extent as the Parts originally incorporated in such Aircraft, Airframe or Engine. 8.3 Pooling of Parts. Any Part removed from the Aircraft, Airframe or any Engine as provided in Section 8.2 may be subjected by Lessee (or a Permitted Sublessee) to a normal pooling arrangement customary in the airline industry entered into in the ordinary course of business of Lessee or such Permitted Sublessee, so long as a Part replacing such removed Part shall be incorporated in the Aircraft, Airframe or such Engine in accordance with Section 8.2 as promptly as practicable after the removal of such removed Part. In addition, any replacement Part when incorporated in the Aircraft, SALE AND LEASE AGREEMENT 24 Airframe or any Engine in accordance with Section 8.2 may be owned by any third party subject to such a normal pooling arrangement, so long as Lessee (or any Permitted Sublessee), at its own cost and expense, as promptly thereafter as practicable either (i) causes title to such replacement Part to vest in Lessor in accordance with Section 8.2 by Lessee (or any Permitted Sublessee) acquiring title thereto for the benefit of, and transferring such title to, Lessor free and clear of all Liens (except Permitted Liens), or (ii) replaces such replacement Part by incorporating in the Aircraft, Airframe or such Engine a further replacement Part owned by Lessee (or any Permitted Sublessee) free and clear of all Liens (except Permitted Liens) and by causing title to such further replacement Part to vest in Lessor in accordance with Section 8.2. 8.4 Alterations, Modifications and Additions. Lessee, at its own cost and expense, shall make (or cause to be made) such alterations and modifications in and additions to the Aircraft, Airframe and each Engine as may be required from time to time to meet the standards of the FAA or other governmental authority having jurisdiction and to maintain the FAA certificate of airworthiness for the Aircraft; provided, however, that Lessee may contest in good faith the validity or application of any such law, rule, regulation or order in any reasonable manner which does not materially adversely affect Lessor's interest in the Aircraft; and provided, further, that Lessee's failure to make (or cause to be made) any such alterations or modifications shall not constitute noncompliance with the requirements of this Section 8.4 or a breach of Lessee's undertaking hereunder for so long a period as may be necessary to remedy such failure, if such failure can be remedied, so long as during such period Lessee is using due diligence and reasonable efforts to remedy such failure. In addition, Lessee, at its own cost and expense, may, from time to time make (or cause to be made) such alterations and modifications in and additions to the Aircraft, Airframe or any Engine as Lessee may deem desirable in the proper conduct of its business, including, without limitation, removal of Parts which Lessee deems obsolete or no longer suitable or appropriate for use in the Aircraft, Airframe or such Engine; provided, however, that no such alteration, modification or addition shall, in Lessee's reasonable judgment, materially diminish the value or utility of the Aircraft, Airframe or such Engine, or materially impair the condition or airworthiness thereof, below the value, utility, condition and airworthiness thereof immediately prior to such alteration, modification or addition assuming the Aircraft, Airframe or such Engine was then of the value and utility and in the condition and airworthiness required to be maintained by the terms of this Lease. Title to all Parts incorporated in the Aircraft, Airframe or such Engine as the result of such alteration, modification or addition shall, without further act, vest in Lessor. Notwithstanding the foregoing sentence of this Section 8.4, so long as no Lease Event of Default or Lease Default shall have occurred and be continuing, Lessee may, at any time during the Term, remove any Part if (i) such Part is in addition to, and not in replacement of or substitution for, any Part originally incorporated (or required by the provisions of this Lease to be incorporated) in the Aircraft, Airframe or such Engine at the time of delivery thereof hereunder or any Part in replacement of or substitution for SALE AND LEASE AGREEMENT 25 any such Part, (ii) such Part is not required to be incorporated in the Aircraft, Airframe or such Engine pursuant to the terms of this Section 8, and (iii) such Part can be removed from the Aircraft, Airframe or such Engine without diminishing or impairing the value, utility, condition or airworthiness required to be maintained by the terms of this Lease which the Aircraft, Airframe or such Engine would have had at such time had such alteration, modification or addition not occurred. Upon the removal by Lessee of any Part as above provided, title thereto shall, without further act, vest in Lessee and such Part shall no longer be deemed part of the Aircraft, Airframe or such Engine from which it was removed. Any Part not removed by Lessee as above provided prior to the return of the Aircraft, Airframe or such Engine to Lessor hereunder shall remain the property of Lessor. Section 9. [Intentionally Omitted] Section 10. Loss, Destruction, Requisition, Etc. 10.1 Event of Loss with Respect to Aircraft. Upon the occurrence of an Event of Loss with respect to the Aircraft, Lessee shall forthwith (and in any event within 15 days after such occurrence) give Lessor and each Participant written notice of such Event of Loss. On or before the Business Day next preceding the earlier of (i) the 180th day following the date of the occurrence of such Event of Loss, or (ii) 15 days following the receipt of insurance proceeds with respect to such occurrence, Lessee shall pay to Lessor, in the manner and in funds of the type specified in Section 3.5, (A) the Stipulated Loss Value for the Aircraft, (B) all unpaid Basic Rent or Renewal Rent accrued through and including the date of payment of Stipulated Loss Value and (C) (without duplication) any other Rent which is due and payable through and including the date of such payment. Upon payment in full of Stipulated Loss Value and all such accrued Basic or Renewal Rent pursuant hereto, (A) the obligation of Lessee to pay Basic or Renewal Rent due after the date of such payment shall terminate (but Lessee shall remain liable for all payments of Supplemental Rent due through and including the date of such payment of Stipulated Loss Value), (B) the Term for the Aircraft shall end, and (C) Lessor will Transfer to Lessee the Aircraft. Upon compliance by Lessee with all of the terms of this Section 10.1, Lessee will be subrogated to all claims of Lessor, if any, against third parties for damage to or loss of such Airframe and Engines to the extent of the then insured value thereof. 10.2 Event of Loss with Respect to an Engine. 10.2.1 Event of Loss. Upon the occurrence of an Event of Loss with respect to an Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe, Lessee shall give Lessor and each Participant prompt written notice (and in any event within 15 days after such occurrence) thereof and shall, SALE AND LEASE AGREEMENT 26 as promptly as possible and in any event within 60 days after the occurrence of such Event of Loss, convey or cause to be conveyed to Lessor, as replacement for the Engine with respect to which such Event of Loss occurred, title to a Replacement Engine free and clear of all Liens, other than Permitted Liens, and having a value and utility at least equal to, and being in as good operating condition as, the Engine with respect to which such Event of Loss occurred, assuming such Engine was of the value and utility and in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of Loss. 10.2.2 Conditions; Lessee's Obligations. Prior to or at the time of any such conveyance, Lessee will promptly: (a) furnish Lessor with a full warranty (as to title) bill of sale duly conveying to Lessor such Replacement Engine; (b) cooperate with any reasonable request of Lender to subject such Replacement Engine to the Lien of the Mortgage; and cause a Lease Supplement subjecting such Replacement Engine to this Lease, duly executed by Lessee, to be delivered to Lessor for execution and, upon execution, to be filed for recordation with the FAA pursuant to the Act; (c) furnish Lessor and Lender with such evidence of compliance with the insurance provisions of Section 11 hereof with respect to such Replacement Engine and the payment of all premiums then due with respect to such insurance, as Lessor or Lender may reasonably request; (d) furnish Lessor and Lender with an opinion or opinions of Lessee's counsel, in form, substance and scope reasonably satisfactory to Lessor and Lender, to the effect that, upon such conveyance, Lessor will acquire good title to such Replacement Engine free and clear of all Liens other than Permitted Liens (including Lender's interests), and that such Replacement Engine will be leased hereunder and will be subject to the Lien of the Mortgage to the same extent as the Engine replaced thereby and to such further effect as Lessor or Lender may reasonably request; (e) furnish Lessor and Lender with an Officer's Certificate certifying that, upon consummation of such replacement, no Lease Event of Default or Lease Default will exist hereunder; and (f) furnish such other certificates or documents (including appropriate UCC-3 amendments to the financing statements filed on or before the Delivery Date) as Lessor or any Participant may reasonably request to effect such replacement. SALE AND LEASE AGREEMENT 27 10.2.3 Recordation and Opinions. In the case of any Replacement Engine conveyed to Lessor under this Section 10.2, promptly upon the recordation of the Lease Supplement and any supplement or amendment to the Mortgage covering such Replacement Engine pursuant to the Act, Lessee will cause to be delivered to Lessor and Lender an opinion of William C. Boston & Associates or other FAA counsel satisfactory to Lessor as to the due recordation of such Lease Supplement and any such supplement or amendment to the Mortgage. 10.2.4 Conveyance; Replacement Engine. Upon compliance by Lessee with the terms of this Section 10.2, Lessor will Transfer to Lessee the Engine with respect to which such Event of Loss occurred, and Lessee will be subrogated to all claims of Lessor, if any, against third parties for damage to or loss of such Engine to the extent of the insured value thereof. 10.2.5 No Reduction of Rent. No Event of Loss with respect to an Engine under the circumstances contemplated by the terms of this Section 10.2 shall result in any changes of Basic Rent or Renewal Rent. 10.3 Application of Certain Payments. Any payments (other than insurance proceeds, the application of which is provided for in Section 11) received at any time by Lessor, Lessee or any Permitted Sublessee from any governmental authority or other Person with respect to any Event of Loss, will be applied as follows: 10.3.1 Replacement of Engine. If such payments are received with respect to an Engine that has been or is being replaced by Lessee pursuant to Section 10.2, so much of such payments remaining after reimbursement of Lessor and Owner Participant for costs and expenses shall be paid over to, or retained by, Lessee, provided Lessee shall have fully performed or, concurrently therewith, will fully perform the terms of Section 10.2 with respect to the Event of Loss for which such payments are made. 10.3.2 Nonreplacement. If such payments are received with respect to the Airframe and/or Engines that have not been and will not be replaced pursuant to Section 10.2, so much of such payments remaining after reimbursement of Lessor and Owner Participant for costs and expenses as shall not exceed the Stipulated Loss Value and other amounts required to be paid by Lessee hereunder shall be applied in reduction of Lessee's obligation to pay such Stipulated Loss Value and other amounts if not already paid by Lessee, or, if already paid by Lessee, shall be applied to reimburse Lessee for its payment of such Stipulated Loss Value and other amounts. The balance, if any, of such payment remaining thereafter shall be divided between Lessor and Lessee in proportion to their interests in the Aircraft. SALE AND LEASE AGREEMENT 28 10.4 Requisition of Aircraft for Use by Governmental Authorities. In the event of the requisition, unless and until such requisition becomes an Event of Loss, for use of the Airframe and the Engines or engines installed on such Airframe during the Term by any governmental authority, Lessee shall notify Lessor of such requisition, and, unless and until such requisition becomes an Event of Loss, all of Lessee's obligations under this Lease with respect to the Aircraft shall continue to the same extent as if such requisition had not occurred. All payments received by Lessor or Lessee from such governmental authority for the use of such Airframe and Engines or engines prior to the time such requisition becomes an Event of Loss shall be paid over to, or retained by, Lessee (or, if directed by Lessee, any Permitted Sublessee); and all payments received by Lessor or Lessee from such governmental authority for the use of such Airframe and Engines or engines after such time shall be paid over to, or retained by, Lessor unless Lessee shall have fully performed or, concurrently therewith, will fully perform the terms of Section 10.1 with respect to such Event of Loss. 10.5 Requisition of an Engine for Use by Governmental Authorities. In the event of the requisition for use by any governmental authority (other than in circumstances contemplated by Section 10.4) of any Engine but not the Airframe, Lessee will replace such Engine hereunder by complying with the terms of Section 10.2 to the same extent as if an Event of Loss had occurred with respect to such Engine, and any payments received by Lessor or Lessee from such governmental authority with respect to such requisition shall be paid over to, or retained by, Lessee (subject to performance by Lessee of the terms of Section 10.2 to the same extent as if an Event of Loss had occurred with respect to such requisitioned Engine). 10.6 Application of Payments During Existence of Default. Any amount referred to in this Section 10 which is payable or creditable to or retainable by Lessee shall not be paid or credited to or retained by Lessee if, at the time of such payment, credit or retention, (A) a Lease Event of Default or (B) a Lease Default under Section 14.1 or 14.5 shall have occurred and be continuing hereunder, but shall be paid to and held by Lessor as security for the obligations of Lessee under this Lease and applied against Lessee's obligations hereunder as and when due; at such time as there shall not be continuing any such Lease Event of Default or Lease Default, or at such earlier time as Lessee shall have paid in full all Rent and other amounts due and payable hereunder and under the other Operative Agreements by Lessee, any remaining balance of such amount shall be paid to Lessee to the extent not previously applied in accordance with the preceding clause of this sentence. Section 11. Insurance. 11.1 Public Liability and Property Damage Insurance. Lessee shall at all times maintain, or cause to be maintained, at its or any Permitted Sublessee's expense, SALE AND LEASE AGREEMENT 29 public liability (including without limitation contractual liability, passenger legal liability and property damage but excluding manufacturer's product liability coverage) insurance which shall: 11.1.1 Type, Form and Amount. Be of a type and form carried by similarly situated United States commercial air carriers generally, and carried in amounts not less than $350,000,000 (per occurrence) combined single limit (or such greater amount as Lessee may carry from time to time on other 737-200 series aircraft in its fleet); 11.1.2 Coverage. Include, but not be limited to, public liability insurance, contractual liability insurance, passenger liability insurance and property damage liability insurance (including cargo and baggage liability insurance); and 11.1.3 Additional Insureds. Name as additional insureds Lessor (in its individual and trust capacities), Lender and Owner Participant, as their interests may appear. 11.2 Insurance Against Loss of or Damage to Aircraft and Engines. Lessee shall at all times maintain, or cause to be maintained, at its or any Permitted Sublessee's expense insurance against loss of or damage to the Aircraft, Airframe and Engines as follows: 11.2.1 Type, Form and Amount. "All-risk" insurance on the Aircraft and "all-risk" coverage on each Engine and on Parts while removed from the Aircraft or Engines, which is of the type, form and in an amount in compliance with the last sentence of this Section 11.2.1, not less than that carried by Lessee on similar equipment owned or leased by Lessee and not less than that usually carried by similarly situated United States commercial air carriers; and, to the extent so usually carried, at all times that the Aircraft or any Engine is not covered by the insurance described in Section 11.2.2, coverage against the perils of (i) strikes, riots, civil commotions or labor disturbances, (ii) any malicious act or act of sabotage and (iii) hijacking, or any unlawful seizure or wrongful exercise of control, of the Aircraft or crew in flight (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 other than hijacking committed by persons engaged in a program of irregular warfare for terrorist purposes. Such insurance shall at all times be for an amount not less than Stipulated Loss Value for the Aircraft. 11.2.2 War-Risk Insurance. If at any time (a) war-risk insurance is maintained by Lessee or any Permitted Sublessee subleasing the Aircraft or any Engine with respect to other aircraft operated by Lessee or such Permitted Sublessee on the same or similar routes, or (b) the Aircraft is operated on routes where the custom in the SALE AND LEASE AGREEMENT 30 commercial airline industry is to carry war-risk insurance, then war-risk insurance of the type carried by similarly situated United States commercial air carriers operating the same or comparable models of aircraft on the same or similar routes shall be maintained on the Aircraft in an amount not less than that specified in Section 11.2.1. 11.2.3 Certain Requirements. The insurance policies required by this Section 11.2 shall: 11.2.3.1 Additional Insureds. Be endorsed to name Lessor (in its individual and trust capacities), Lender and Owner Participant as additional insureds, as their interests may appear. 11.2.3.2 Payment of Proceeds. Provide that proceeds thereunder shall be paid directly to Lender, so long as the Aircraft is subject to the Lien of the Mortgage and thereafter to Lessor, in either case as exclusive loss payee; provided, however, that any proceeds payable as a result of any property damage to the Airframe or any Engine, which property damage does not exceed $1,500,000 and does not constitute an Event of Loss with respect to the Aircraft or such Engine, shall be paid to Lessee, unless Lessor or Lender, prior to such payment, shall have notified the insurer making such payment that a Lease Event of Default or a Lease Default specified in Section 14.1 or 14.5 has occurred and is continuing. 11.2.3.3 Waiver of Subrogation. Provide that the insurers shall waive any rights of subrogation against Lessor, Lender and Owner Participant except for claims arising out of gross negligence or willful misconduct of such Persons; provided that the exercise by insurers of rights of subrogation, if any, permitted by this Section 11.2 shall not, in any way, delay payment of any claim that would otherwise be payable by such insurers but for the existence of such rights of subrogation or entitle such insurers to exercise or to assert any setoff, recoupment, counterclaim or any other deduction in respect of any amounts payable under such policies. 11.2.4 Deductibles. The insurance required by this Section 11.2 may, subject to Section 11.8, provide for standard deductibles which are from time to time in effect in the aviation insurance industry generally and which are customarily maintained by similarly situated United States commercial air carriers; provided, however, such deductibles shall not be more than the deductibles generally maintained by Lessee (and which Lessee is under no compulsion to maintain pursuant to any mortgage, lease or other agreement) with respect to its fleet of Boeing Model 737-200 series aircraft and Pratt & Whitney JT8D-9A engines generally. SALE AND LEASE AGREEMENT 31 11.2.5 Government Indemnity. In the case of a contract with the Government in respect of the Aircraft or Engines, a valid agreement by the Government to indemnify Lessee, Lessor, Lender and Owner Participant against the same risks which are required hereunder to be insured against in amounts at least equal to the amounts required hereunder from time to time (such indemnity to be backed by the full faith and credit of the United States of America), shall be considered adequate insurance with respect to the Aircraft, Airframe and any Engine subject to such contract to the extent of the risks and in the amounts that are the subject of any such agreement to indemnify. 11.3 General Policy Provisions. Each insurance policy to be procured and maintained hereunder shall: 11.3.1 Primary Insurance. Be primary and without right of contribution from other insurance which may provide coverage to Lessor, Lender or Owner Participant with respect to its interest in the Aircraft, Airframe or any Engine or its liabilities with respect to or arising out of the transactions contemplated by the Operative Agreements; 11.3.2 Coverage for Each Insured. Expressly provide that all the provisions thereof, except the agreed values and the limits of the liability of the insurer under such policy, shall operate in the same manner as if there were a separate policy covering each insured; 11.3.3 Waiver of Certain Rights. Waive any right of the insurers to any setoff, recoupment, counterclaim or any other deduction, whether by attachment or otherwise, in respect of any liability of Lessee, Lender, Lessor or Owner Participant; 11.3.4 Breach of Warranty. Provide that, in respect of Lessor, Lender and Owner Participant, such insurance shall not be invalidated by any action or inaction by Lessee or any additional insured (other than such additional insured, as to such additional insured) and shall insure the interests of Lessor, Lender and Owner Participant regardless of any breach or violation by Lessee or any additional insured (other than such additional insured, as to such additional insured) of any representation, warranty, declaration or condition contained in such policy; 11.3.5 Notice of Termination or Changes. Provide for not less than 30 days' prior written notice to be received by Lessor, Lender and Owner Participant before any lapse, alteration, termination or cancellation of the insurance evidenced thereby shall be effective as to Lessor, Lender and Owner Participant, except that war-risk and allied perils policies may provide for not less than seven days' prior written notice or such lesser or greater notice as shall at the time be customary in the aviation insurance SALE AND LEASE AGREEMENT 32 industry generally, and which are customarily in effect with respect to major United States commercial air carriers generally from time to time; 11.3.6 Nonliability for Premiums. Provide that neither Lessor, Lender nor Owner Participant shall be liable for any insurance premium; and 11.3.7 Identity of Insurers. Be with insurance companies, underwriters or funds of recognized responsibility. 11.4 Application of Insurance Proceeds. As between Lessor and Lessee, all insurance proceeds received under policies required to be maintained (or to be caused to be maintained) by Lessee pursuant to Section 11.2 as a result of the occurrence of an Event of Loss with respect to the Aircraft, Airframe or any Engine will be applied in accordance with Section 10.3.1 or 10.3.2, as the case may be (except that the balance referred to in Section 10.3.2 shall be paid over to, or retained by, Lessee). All insurance proceeds in respect of any property damage loss not constituting an Event of Loss with respect to the Airframe or an Engine will be applied in payment for repairs or for replacement property in accordance with the terms of Section 8, if not already paid for by Lessee, and any balance remaining after compliance with such Section with respect to such loss shall be paid to Lessee. In the case of a loss with respect to an engine (other than an Engine) installed on the Airframe, Lessor shall hold any payment to it of any insurance proceeds in respect of such loss for the account of Lessee or any other third party that is entitled to receive such proceeds. The provisions of Section 10.6 shall apply to amounts referred to in this Section 11.4. 11.5 Certificates; Reports. Etc. With respect to any policy required hereunder, Lessee shall cause to be furnished to Lessor and each Participant on or prior to the Delivery Date of the Aircraft and on or prior to expiration of such policy, certificates of the insurer or insurers (or their authorized representatives) providing insurance pursuant to the requirements of this Section 11, as to hull and liability insurance. On or before the Delivery Date of the Aircraft, and annually thereafter on or before such expiration date, Lessee shall cause to be furnished to Lessor and each Participant a report signed by Frank B. Hall & Co. (or any other firm of independent aircraft insurance brokers, appointed by Lessee, reasonably satisfactory to the Participants) describing in reasonable detail the insurance then carried and maintained with respect to the Aircraft and stating the opinion of such firm that the insurance then carried and maintained on the Aircraft complies with the terms hereof as to hull and liability insurance. Lessee agrees that it will cause such firm to advise Lessor and each Participant in writing promptly of any default in the payment of any premium or any other act or omission on the part of Lessee or any Permitted Sublessee of which they have knowledge and which might invalidate or render unenforceable, in whole or in part, the insurance on the Aircraft. To the extent such agreement is reasonably obtainable, Lessee further agrees to cause such SALE AND LEASE AGREEMENT 33 firm to advise Lessor and each Participant in writing at least 30 days (seven days in the case of war-risk and allied perils coverage) prior to the expiration or termination date of any insurance carried and maintained on the Aircraft pursuant to this Section 11. 11.6. Lessor's Right to Maintain Insurance. In the event that Lessee shall fail to maintain or cause to be maintained insurance as herein provided, Lessor or any Participant may at its option (but shall not be obligated to) provide such insurance and in such event, Lessee shall, upon demand, reimburse such Person, as Supplemental Rent, for the cost thereof. No such payment, performance or compliance shall be deemed to cure any Lease Event of Default or Lease Default or otherwise relieve Lessee of its obligations with respect thereto. At Lessor's or Lender's request and expense, and subject to the permission of Lessee's insurance carriers, Lessee will increase the amount of coverage under any insurance policy that Lessee maintains pursuant to Section 11.2.1 or 11.2.2, and notwithstanding the provisions of Section 11.4, the proceeds of any such additional insurance shall be payable to Lessor or Lender, as the case may be; provided, however, that no such insurance may be obtained which would limit or otherwise adversely affect the availability or coverage or cost of any insurance required to be obtained or maintained pursuant to this Section 11. 11.7 Insurance for Own Account. Nothing in this Section 11 shall limit or prohibit Owner Participant (directly or through Lessor) from obtaining insurance for its own account, and any proceeds payable thereunder shall be payable as provided in the insurance policy relating thereto; provided, however, that no such insurance may be obtained which would limit or otherwise adversely affect the availability or coverage or cost of any insurance required to be obtained or maintained pursuant to this Section 11. Nothing in this Section 11 shall limit or prohibit Lessor or Lender from obtaining insurance for its own account, and any proceeds payable thereunder shall be payable as provided in the insurance policy relating thereto; provided, however, that no such insurance may be obtained which would limit or otherwise adversely affect the availability or coverage or cost of any insurance required to be obtained or maintained pursuant to this Section 11 or obtained by Owner Participant pursuant to the preceding sentence. 11.8 Self-Insurance. Notwithstanding the foregoing provisions of this Section 11, Lessee may, from time to time, self-insure with respect to the Aircraft to the same extent as it does with respect to, or maintain policies with deductibles or premium adjustment provisions consistent with similar provisions applicable to, other comparable aircraft operated by Lessee; provided, however, that if at any time Lessee's unsecured senior long-term debt securities are not rated "Investment Grade", in the case of hull insurance such self-insurance shall in no case be in an amount greater than 4% of Lessee's tangible net worth (as defined in accordance with accepted financial practice); and provided, further that, in the case of public liability insurance, such self-insurance shall in no event exceed $50,000,000. As used in this Section 11.8, the term "Investment Grade" SALE AND LEASE AGREEMENT 34 means a rating of "Baa3" or higher from Moody's Investors Service, Inc. or a rating from any other nationally recognized bond rating service equivalent to or better than such a rating. Section 12. Inspection. At all reasonable times, and upon reasonable notice, Lessor or any Participant or its authorized representatives or designees may inspect the Aircraft and inspect and copy (subject to any confidentiality agreements, copyright restrictions and the like) the books and records of Lessee relative thereto. Any such inspection of the Aircraft shall be without out-of-pocket expense or risk to Lessee; provided that no exercise of such inspection right shall interfere with the normal operation or maintenance of the Aircraft by, or the business of, Lessee (or any Permitted Sublessee). Subject to the proviso to the preceding sentence of this Section 12, Owner Participant may observe the "C" check (or its equivalent) referred to in clause (I) of Section 5.3.1 and any Card inspection during the Term. Neither Lessor nor any Participant shall have any duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. Section 13. Assignment. 13.1 General. Except as otherwise expressly permitted in Section 7.2 hereof or Section 12.5.1 of the Participation Agreement, or as required in the case of any requisition by the Government referred to in Section 7.1.4, Lessee will not, without the prior written consent of Lessor, assign or transfer any of its rights or obligations under this Lease. Lessor may assign or convey any of its right, title and interest in and to this Lease or the Aircraft in accordance with the Participation Agreement, the Trust Agreement or the express provisions of this Lease. The terms and provisions of the Lease shall be binding upon and inure to the benefit of Lessor and Lessee and their respective permitted successors and assigns. 13.2 Security for Lessor's Obligations. In order to secure the indebtedness evidenced by the Note, the Mortgage provides, among other things, for the assignment by Lessor to Lender of its right, title and interest in, to and under this Lease and any Permitted Sublease, to the extent set forth in the Mortgage, and for the creation of a first mortgage lien on and perfected security interest in the Aircraft in favor of Lender. Lessee hereby consents to such assignment and to the creation of such mortgage and security interest. Except as may otherwise be provided in the Mortgage, all rights of Lessor and Owner Participant with respect to the Lease, the Aircraft, the Airframe or any Engine (or any part thereof) shall be exercisable by Lender. SALE AND LEASE AGREEMENT 35 Section 14. Events of Default. The following events shall constitute Lease Events of Default (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body), and each such Lease Event of Default shall continue so long as, but only so long as, it shall not have been remedied or waived: 14.1 Failure To Pay Rent. Lessee shall fail to make any payment of Basic Rent or Renewal Rent within 5 Business Days from the due date thereof; or any other payments required under the Operative Agreements within 10 Business Days after the receipt of written notice of such default to Lessee from Lessor. 14.2 Specific Defaults. Lessee shall fail to carry and maintain (or cause to be carried and maintained) insurance on or with respect to the Aircraft in accordance with the provisions of Section 11, provided that any such failure shall not constitute a Lease Event of Default so long as such failure is for a period of not more than 30 days, Lessee shall not operate the Aircraft at a time when such insurance is not in effect and the Aircraft continues to be covered by such insurance as is required when the Aircraft is on the ground; or 14.3 General Default. Lessee shall fail to perform or observe any other material covenant, condition or agreement to be performed or observed by it hereunder or under any other Operative Agreement (except the Tax Indemnification Agreement), and such failure shall continue unremedied for a period of 30 days after Lessee's receipt of written notice thereof from Lessor or Lender, unless Lessee shall be diligently proceeding to correct such failure and such failure is cured within 180 days after receipt of such notice or the end of the Term, whichever shall first occur; or 14.4 Misrepresentation and Breach of Warranty. Any representation or warranty made by Lessee herein or in the Participation Agreement or in any other Operative Agreement (other than the Tax Indemnification Agreement) or in any document or certificate furnished by Lessee in connection with any thereof, shall prove to have been incorrect in any material respect at the time made and shall remain incorrect in any material respect 30 days after Lessee's receipt of written notice thereof from Lessor or Lender; or 14.5 Bankruptcy, Etc. Lessee shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official or agency in an involuntary case SALE AND LEASE AGREEMENT 36 or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due unless the subject of a bona fide dispute, within the meaning of Title 11 of the United States Code, or shall take any corporate action to authorize any of the foregoing; or an involuntary case or other proceeding shall be commenced against Lessee seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official or agency of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 90 days; or 14.6 Cross Default. A Lease Event of Default shall have occurred and be continuing under either of the other two Sale and Lease Agreements of even date herewith, each relating to a Boeing 737-200 series aircraft having FAA registration number N55SW or N56SW; provided, that Lender (or lender of any Successor Indebtedness) shall then be Lender (or lender of any Successor Indebtedness) (as such terms are defined therein) under such other Sale and Lease Agreement. Section 15. Remedies. 15.1 Default; Remedies. Upon the occurrence of a Lease Event of Default and at any time thereafter so long as the same shall be continuing, Lessor may, at its option, declare by written notice to Lessee this Lease to be in default (provided, however, that any Lease Event of Default specified in Section 14.5 shall be automatic and shall not require any such declaration or notice) and at any time thereafter, so long as any such Lease Event of Default shall be continuing, Lessor may exercise one or more of the following remedies as Lessor in its sole discretion shall elect, to the extent permitted by, and subject to compliance with any mandatory requirements of, applicable law then in effect which have not been effectively waived by Lessee: 15.1.1 Return; Repossession. Lessor may cause Lessee, upon written demand by Lessor and at Lessee's expense, to return promptly, and Lessee shall return promptly, all or any part of the Aircraft, Airframe or Engines as Lessor may so demand to Lessor or its order in the manner and condition required by, and otherwise in accordance with all the provisions of, Section 5 as if the Aircraft, Airframe or Engines were being returned at the end of the Term; or Lessor, at its option, may enter upon the premises where the Aircraft, Airframe or any Engine, or part thereof is located and take immediate possession of and remove the same by summary proceedings or otherwise, all without liability accruing to Lessor for or by reason of such entry or taking of possession, whether for the restoration of damage to property caused by such taking or otherwise, and Lessee expressly waives any right it may have under applicable law to a hearing prior to repossession of the Aircraft, Airframe or any Engine or part thereof; or SALE AND LEASE AGREEMENT 37 15.1.2 Sale, Use, Etc. Lessor may sell all or any part of the Aircraft, Airframe or any Engine, at public or private sale, at such times and places, to such Persons (including Lessor or any Participant) as Lessor may determine, or otherwise dispose of, hold, use, operate, lease to others or keep idle the Aircraft, Airframe or any Engine or part thereof, as Lessor, in its sole discretion, may determine, all free and clear of any rights of Lessee except as hereinafter set forth in this Section 15 and without any duty to account to Lessee with respect to such action or inaction or for any proceeds with respect thereto; or 15.1.3 Certain Liquidated Damages. 15.1.3.1 Liquidated Damages--Fair Market Rental Value. Whether or not Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under Section 15.1.1 or 15.1.2 with respect to the Aircraft, Airframe or any Engine or part thereof, Lessor, by written notice to Lessee specifying a payment date not earlier than ten days from the date of such notice, may cause Lessee to pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent or Renewal Rent, as the case may be, due on or after the date specified for payment in such notice), any unpaid Basic Rent or Renewal Rent, as the case may be, due prior to such date plus an amount equal to the excess, if any, of the Stipulated Loss Value for the Aircraft, computed as of such date over the fair market rental value (determined as hereafter provided in this Section 15) of the Aircraft for the remainder of the Term, after discounting such fair market rental value semiannually (effective on each Rent Payment Date) by a rate equal to the Overdue Rate to present worth as of the date specified for payment in such notice, together with interest, if any, on such amount and unpaid Basic Rent or Renewal Rent, as the case may be, at the Overdue Rate from the date specified for payment in such notice to the date of payment in full; or 15.1.3.2 Liquidated Damages--Fair Market Sales Value. If Lessor shall not have sold the Aircraft, Lessor, by written notice to Lessee specifying a payment date not earlier than ten days from the date of such notice, may cause Lessee to pay to Lessor, and Lessee shall pay to Lessor, on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent or Renewal Rent, as the case may be, due on or after the date specified for payment in such notice), any unpaid Basic Rent or Renewal Rent, as the case may be, due prior to such date plus an amount equal to the excess, if any, of the Stipulated Loss Value for the Aircraft, computed as of such date over the fair market sales value of the Aircraft (determined as hereafter provided in this Section 15 as of the date specified for payment in such notice), together with interest, if any, on such amount and unpaid Basic Rent or SALE AND LEASE AGREEMENT 38 Renewal Rent, as the case may be, at the Overdue Rate from the date specified for payment in such notice to the date of payment in full; or 15.1.4 Liquidated Damages upon Sale. If Lessor, pursuant to Section 15.1.2 or applicable law, shall have sold the Aircraft, Lessor, in lieu of exercising its rights under Section 15.1.3 with respect to the Aircraft, may, if Lessor shall so elect, upon giving written notice to Lessee, cause Lessee to pay Lessor, and Lessee shall pay to Lessor, on the date of such sale, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent or Renewal Rent, as the case may be, due on or after the date of such sale), any unpaid Basic Rent or Renewal Rent, as the case may be, due prior to such date of sale plus the amount of any deficiency between the net proceeds of such sale or (if such sale is a private sale and is made to Lessor, a Participant or any Affiliate thereof) between the fair market sales value of the Aircraft, determined as of the date of such sale as hereinafter provided in this Section 15, and the Stipulated Loss Value of the Aircraft, computed as of the date of such sale, together with interest, if any, on such amount and such unpaid Basic Rent or Renewal Rent at the Overdue Rate from the date of such sale to the date of payment in full; or 15.1.5 Rescission and Other Remedies. Lessor may terminate or rescind this Lease as to the Aircraft, or may exercise any other right or remedy which may be available to it under applicable law or proceed by appropriate court action to enforce the terms hereof or to recover damages for the breach hereof, including without limitation Lessee's agreement to lease the Aircraft for the Term and to pay Rent. In addition to the foregoing remedies, Lessee shall be liable (except as otherwise provided above and without duplication of amounts otherwise payable hereunder) for any and all unpaid Rent due hereunder before, during or after the exercise of any of the foregoing remedies and for all reasonable and actual legal fees and other costs and expenses (including the fees and expenses of all appraisers required by this Section 15) of Lessor and Participants, incurred by reason of the occurrence of any Lease Event of Default or the exercise of Lessor's remedies with respect thereto, including all insurance and storage costs and all costs and expenses incurred in connection with the return of the Aircraft, Airframe or any Engine or part thereof, in accordance with the terms of Section 5 or in placing the Aircraft, Airframe or any Engine or part thereof, in the condition and airworthiness required by Section 5. Lessor agrees to give Lessee at least 15 days' prior written notice of the date fixed for any public sale of the Aircraft, the Airframe or any Engine or part thereof, and of the date on or after which will occur the execution of any contract providing for any private sale, and any such public sale shall be conducted in general so as to afford Lessee a reasonable opportunity to bid. SALE AND LEASE AGREEMENT 39 15.2 Determination of Fair Market Rental Value and Fair Market Sales Value. For the purpose of this Section 15, the "fair market rental value" or the "fair market sales value" of the Aircraft shall be the rental value or sales value, as the case may be, which would be obtained in an arm's-length transaction between an informed and willing lessee or purchaser, as the case may be, under no compulsion to lease or purchase, as the case may be, and an informed and willing lessor or seller in possession, as the case may be, and in each case shall be determined on an "as is, where is" basis pursuant to an appraisal by a recognized independent aircraft appraiser chosen by Lessor and approved by Lessee, which approval shall not be unreasonably withheld or delayed and shall be deemed granted if such choice is not rejected within 10 days after Lessee's receipt of notice of Lessor's choice. 15.3 No Waiver, Etc. No remedy referred to in this Section 15 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity; and the exercise or beginning of exercise by Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Lessor of any or all of such other remedies. No express or implied waiver by Lessor of any Lease Event of Default shall in any way be, or be construed to be, a waiver of any earlier or subsequent Lease Event of Default. To the extent permitted by applicable law, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use the Aircraft, Airframe or any Engine, or part thereof, in mitigation of Lessor's damages as set forth in this Section 15 or which may otherwise limit or modify any of Lessor's rights or remedies under this Section 15. Section 16. Notices. All notices required under the terms and provisions hereof shall be in writing and shall be given by certified mail, telecopy or any other customary means of written communication, addressed: If to Lessee, at 2702 Love Field Dr., P.O. Box 36611, Dallas, Texas 75235-1611 (telecopy no. 214/904-4022), Attention: Treasurer, or at such other address as Lessee shall from time to time designate in writing; If to Lessor, at 79 Main Street, P. 0. Box 30007, Salt Lake City, Utah 84130-0007 (telecopy no. 801/350-5053), Attention: Corporate Trust Department, or at such other address as Lessor shall from time to time designate in writing; If to any Participant, at its address set forth in the signature pages of the Participation Agreement, or at such other address as such Participant shall from time to time designate in writing. SALE AND LEASE AGREEMENT 40 The effective date of any such notice shall be the date on which it is received by the addressee. Lessee shall furnish to Lessor for transmission to Owner Participant and Lender a sufficient number of copies of all reports, notices, requests, demands, certificates, financial statements and other instruments furnished hereunder, except in any case where Lessee shall have transmitted the same directly to any such person. Section 17. Net Lease; Lessee's Obligations; No Setoff, Counterclaim, Etc. This is a net lease and it is hereby recognized that Lessor is the owner of the Aircraft (except that Owner Participant will be the owner for income tax purposes) and Lessee is the lessee thereof. It is the intent of the parties hereto that this Lease be a "true lease". Lessee's obligation to pay all Rent payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including without limitation: (a) any setoff, counterclaim, recoupment, defense or other right which Lessee may have against Lessor (in its individual or trust capacity), any Participant, any Indemnified Party or any other Person for any reason whatsoever (except as expressly provided in Section 13.5.2 of the Participation Agreement or in Sections 6 and 7 of the Tax Indemnification Agreement); (b) any defect in the title, airworthiness, condition, design, operation or fitness for use of, or any damage to or loss or destruction of, the Aircraft, Airframe or any Engine, or any interruption or cessation in the use or possession thereof by Lessee for any reason whatsoever; (c) any insolvency, bankruptcy, reorganization or similar proceedings by or against Lessee; (d) any restriction, prevention or curtailment of or interference with any use of the Aircraft or part thereof; (e) any invalidity or unenforceability or disaffirmance of this Lease or any provision hereof or any of the other Operative Agreements or any provision thereof, in each case whether against or by Lessee or otherwise; or (f) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or otherwise except as specifically provided herein, Lessee nonetheless agrees to pay an amount equal to each Basic Rent, Renewal Rent and Supplemental Rent payment at the time such payment would have become due and payable in accordance with the terms hereof had this Lease not been terminated in whole or in part. All Rent payable by Lessee shall be paid without notice or demand (except as otherwise expressly provided) and without abatement, suspension, deferment, deduction, diminution or proration by reason of any circumstance or occurrence whatsoever (except as expressly provided in Section 13.5.2 of the Participation Agreement or in Sections 6 and 7 of the Tax Indemnification Agreement). Lessee hereby waives, to the extent permitted by applicable law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease or any part hereof, or to any abatement, suppression, deferment, diminution, reduction or proration of Rent except in accordance with the express terms hereof. Each SALE AND LEASE AGREEMENT 41 payment of Rent made by Lessee shall be final as to Lessor and Lessee. Lessee will not seek to recover all or any part of any such payment of Rent for any reason whatsoever. Section 18. Renewal Options; Early Termination. 18.1 Renewal Options. At the end of the Base Lease Term or any Renewal Term, so long as no Lease Event of Default or Lease Default has occurred and is continuing and the aggregate of all Renewal Terms shall not exceed six years, Lessee shall have the option to renew this Lease for a Renewal Term; provided, that if, at the time of exercise by Lessee of any of its renewal rights set forth in this Section 18.1, Owner Participant and its Affiliates shall be the owner of all of the beneficial interest in one or more other Boeing Model 737-200 series aircraft then subject to a lease under which the lessee is Lessee (all of such aircraft, together with the Aircraft, referred to as the "Owner Group Aircraft"), then Lessee shall be obligated to exercise such renewal rights (or to have exercised such renewal rights for a Renewal Term which shall be then continuing) with respect to at least three of such Owner Group Aircraft (or such lesser number of Owner Group Aircraft as shall exist at such time). In order to exercise the option to renew, except as otherwise provided in Section 13.4.1 of the Participation Agreement, Lessee shall notify Lessor thereof in writing not more than 360 days nor less than 180 days prior to the commencement of the applicable Renewal Term (which notice shall be irrevocable). The Renewal Rent payable for such Renewal Term hereunder shall be the fair market rental value of the Aircraft calculated as of the commencement of such Renewal Term; provided, that if a Stage III Upgrade shall have occurred and (i) Owner Participant shall have performed its obligations set forth in Section 13.4 of the Participation Agreement, upon proper request by Lessee, then such fair market value shall be determined taking into account the value of the hush kit installed pursuant to such upgrade, and (ii) if Owner Participant shall not have so performed or shall not have been requested to do so by Lessee, then such fair market value shall be determined without taking into account the value of the hush kit installed pursuant to such upgrade, i.e., as if no Stage III Upgrade had occurred. Such fair market rental value shall be determined not later than three months prior to the commencement of such Renewal Term by mutual consent of Owner Participant and Lessee or, if they shall be unable so to agree, by three recognized independent aircraft appraisers, one chosen and paid for by Owner Participant, one chosen and paid for by Lessee and the third appraiser chosen by the mutual consent of the first two appraisers and paid for equally by Owner Participant and Lessee, the appraisals of which three appraisers shall be averaged and such average shall be deemed to be the fair market rental value of the Aircraft for all purposes hereof; provided, however, that if the appraisal of one appraiser is more disparate from the average of all three appraisals than each of the other two appraisals, then the appraisal of such appraiser shall be excluded, the remaining appraisals shall be averaged and such average shall be deemed to be the fair market rental value of the Aircraft for all purposes hereof. If either Owner Participant or Lessee shall fail to appoint an appraiser by the date which is two months SALE AND LEASE AGREEMENT 42 prior to the commencement of such Renewal Term or if such two appraisers cannot agree on the amount of such appraisal and fail to appoint a third appraiser by the date which is one month before the commencement of such Renewal Term, then either Owner Participant or Lessee may apply to any court having jurisdiction to make such appointment. Fair market rental value shall be the cash rental obtainable in an arm's-length lease between an informed and willing lessee (under no compulsion to lease) and an informed and willing lessor (under no compulsion to lease) and shall be determined on the assumptions that the Aircraft is in the United States of America, available for use by the lessee and in the return condition required by Section 5 of this Lease and otherwise in compliance with the requirements of this Lease. Stipulated Loss Value amounts that are payable during each such Renewal Term shall be calculated as of the date of commencement of such Renewal Term and shall be determined by multiplying 1.1 times the appraised value of the Aircraft at such time; provided, however, that no such amount shall be less than the principal amount of any indebtedness then secured by a Lien on the Aircraft. 18.2 Early Termination. Provided that this Lease has not been terminated and provided that no Lease Default or Lease Event of Default shall have occurred and be continuing hereunder, Lessee shall have the option to terminate this Lease with respect to the Aircraft not more than 42 days prior to the expiration of the Base Lease Term or the applicable Renewal Term. Lessee may exercise such option of termination by delivering irrevocable written notice of such exercise to Lessor not less than six months' prior written notice of such advanced date of termination. Such notice shall provide the date elected by Lessee for such early termination and a calculation of the final payment of Rent, which shall be due on such early termination date and shall be calculated as provided in clause (ii) of Section 3.3. 18.3 Default Purchase Option. In the event of Owner Participant's failure to satisfy its obligations specified in Section 13.4 of the Participation Agreement, Lessee shall have the option to purchase the Aircraft. In order to exercise such option, Lessee shall notify Lessor (and, if the Mortgage is then in effect, Lender) thereof in writing, specifying a Rent Payment Date on which such purchase is to occur. In such case, Lessee shall purchase the Aircraft on such Rent Purchase Date at a purchase price equal to Termination Value. Upon receipt of such purchase price from Lessee and all Rent and other amounts due hereunder and under any other Operative Agreement, Lessor shall Transfer to Lessee the Aircraft. Section 19. Successor Owner Trustee. Lessee agrees that in the case of the appointment of any successor Owner Trustee pursuant to the terms of the Trust Agreement, such successor Owner Trustee shall, upon written notice by such successor Owner Trustee to Lessee, succeed to all the rights, powers and title of Lessor hereunder and shall be deemed to be Lessor and the owner of the Aircraft for all purposes hereof SALE AND LEASE AGREEMENT 43 without the necessity of any consent or approval by Lessee (but such successor Owner Trustee shall qualify under the terms of Section 10.2 of the Participation Agreement) and without in any way altering the terms of this Lease or Lessee's obligations hereunder. One such appointment and designation of a successor Owner Trustee shall not exhaust the right to appoint and designate further successor or additional Owner Trustees pursuant to the Trust Agreement, and such right may be exercised repeatedly as long as this Lease shall be in effect. Section 20. Right to Perform for Lessee. If Lessee fails to make any payment of Rent required to be made by it hereunder or fails to perform or comply with any of its agreements contained herein, Lessor may (but shall not be obligated to) make such payment or perform or comply with such agreement, and the amount of such payment and the amount of the expenses of Lessor incurred in connection with such payment or the performance of or compliance with such agreement, as the case may be, together with interest thereon at the Overdue Rate, shall be deemed Supplemental Rent, payable by Lessee upon demand. Section 21. Quiet Enjoyment. So long as this Lease shall not have been declared to be in default pursuant to Section 15, during the Term Lessor will not, through its own actions or inactions, interfere in the quiet enjoyment of the Aircraft by Lessee or any Permitted Sublessee. Section 22. Investment of Security Funds; Miscellaneous; Amendment. 22.1 Investment of Security Funds. Any moneys required to be paid to or retained by Lessor which are not required to be paid to Lessee pursuant to Section 10.6 or 11.4 solely because a Lease Event of Default or Lease Default under Section 14.1 or 14.5 shall have occurred and be continuing, or which are held by Lessor pending payment to Lessee pursuant to Section 11.4 or which are required to be paid to Lessee pursuant to Section 10.3 or 11.4 after completion of a replacement to be made pursuant to Section 10.2, shall, until paid to Lessee as provided in Section 10 or 11 or applied as provided herein or in the Trust Agreement, be invested by Lessor from time to time as directed in writing by Lessee and at the expense and risk of Lessee in the following securities (which, except in the case of the shares described in clause (e) below, shall mature within 91 days of the date of purchase thereof): (a) direct obligations of the Government; (b) obligations fully guaranteed by the Government; (c) open market commercial paper of any corporation incorporated under the laws of the United States of America or any State thereof rated P-1 or its equivalent by Moody's Investors Service, Inc. and A-1 or its equivalent by Standard & Poor's Corporation; or (d) certificates of deposit issued by, or bankers' acceptances of, or time deposits or a deposit account with any bank, trust company or national banking association incorporated or doing business under the laws of the United States of America or any state thereof having a combined capital and SALE AND LEASE AGREEMENT 44 surplus of at least $50,000,000; or (e) shares of a money market fund registered under the Investment Company Act of 1940, as amended, the sole assets of which are direct obligations of the Government. There shall be promptly remitted to Lessee or its order any gain (including interest received) realized as the result of any such investment (net of any fees, commissions and other expenses, if any, incurred in connection with such investment) unless a Lease Event of Default of a Lease Default under Section 14.1 or 14.5 shall have occurred and be continuing. Lessee will promptly pay to Lessor, on demand, the amount of any loss realized as the result of any such investment (together with any fees, commissions and other expenses, if any, incurred in connection with such investment), such amount to be disposed of in accordance with the terms of the Trust Agreement. 22.2 Miscellaneous; Amendment. Lessee shall do, execute, acknowledge and deliver, or shall cause to be done, executed, acknowledged and delivered, all such further acts, conveyances and assurances as Lessor or any Participant shall reasonably require for accomplishing the purposes of this Agreement and the other Operative Agreements. Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. To the extent permitted by applicable law, Lessee hereby waives any provision of law which renders any provision hereof prohibited or unenforceable in any respect. No term or provision of this Lease may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. This Lease shall constitute an agreement of lease, and nothing herein shall be construed as conveying to Lessee any right, title or interest in or to the Aircraft, Airframe or Engines except as a lessee only. The section and paragraph headings in this Lease and the table of contents are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof and all references herein to numbered sections, unless otherwise indicated, are to sections of this Lease. THIS LEASE HAS BEEN, AND EACH LEASE SUPPLEMENT AND AMENDMENT HERETO IS INTENDED TO BE, DELIVERED IN THE STATE OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE IN SUCH STATE BY RESIDENTS THEREOF AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. This Lease and each Lease Supplement and amendment hereto may be executed in several counterparts, each of which shall be deemed an original, and all such counterparts shall constitute one and the same instrument. SALE AND LEASE AGREEMENT 45 Section 23. Permitted Foreign Air Carriers. Lessor may, in the exercise of its reasonable business judgment, by written notice to Lessee, remove any foreign air carrier from Exhibit B and Lessee may, by written notice to Lessor, request that any foreign air carrier be added to Exhibit B, subject to Lessor's prior written consent, which consent shall not be unreasonably withheld. Notwithstanding the foregoing, no deletion of an airline from the list of Permitted Foreign Air Carriers pursuant hereto shall (i) reduce the number of Permitted Foreign Air Carriers below 35, (ii) affect any existing sublease or other agreement providing for transfer of possession of the Aircraft, Airframe, any Engine or Part which was permitted hereunder at the time entered into, or (iii) preclude any subsequent renewal or extension of such sublease or other agreement to which the Permitted Foreign Air Carrier under a sublease is entitled by the terms thereof as originally in effect. SALE AND LEASE AGREEMENT 46 IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be duly executed and delivered as of the day and year first above written. Lessor: FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity except as expressly stated herein, but solely as Owner Trustee under the Trust Agreement By: /s/ Dorian Light Shaw --------------------------- Title: ASSISTANT VICE PRESIDENT Lessee: SOUTHWEST AIRLINES CO. By: /s/ John D. Owen --------------------------- John D. Owen Treasurer SALE AND LEASE AGREEMENT EXHIBIT A TO LEASE AGREEMENT SALE AND LEASE AGREEMENT SUPPLEMENT NO. ______ THIS SALE AND LEASE AGREEMENT SUPPLEMENT NO._________, dated __________, ____ is between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under that certain Trust Agreement, dated as of September 1, 1990 (the "Trust Agreement"), between the Owner Participant named therein and such Bank ("Lessor"), and SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee"). RECITALS. A. Lessor and Lessee have heretofore entered into that certain Sale and Lease Agreement dated as of September 1, 1990, as supplemented and amended from time to time (herein called the "Lease Agreement" and the defined terms therein being herein used with the same meaning), which Lease Agreement provides in Section 2 for the execution of a Lease Supplement substantially in the form hereof for the purpose of Lessee's selling to Lessor, and Lessor's leasing back to Lessee, the Aircraft under the Lease Agreement as and when delivered by Lessor to Lessee in accordance with the terms thereof; and B. The Lease Agreement relates to the airframe and engines described below, and a counterpart of the Lease Agreement is attached hereto and made a part hereof and this Lease Supplement, together with such attachment, is being filed for recordation with the FAA on the date hereof as one document. In consideration of the premises and other good and sufficient consideration, and pursuant to Section 2 of the Lease Agreement, Lessor and Lessee hereby agree as follows: 1. Lessee hereby delivers and sells to Lessor and Lessor hereby accepts and purchases from Lessee and in turn delivers and leases back to Lessee, and Lessee hereby accepts and leases back from Lessor, under the Lease Agreement, as herein supplemented, the following-described Boeing Model 737-2H4 Aircraft (the "Delivered Aircraft"), which Delivered Aircraft as of the date hereof consists of the following: SALE AND LEASE AGREEMENT A-1 Airframe: U.S. Registration Number N ________SW; Manufacturer's Serial No. ___; and Engines: Two Pratt & Whitney JT8D-9A Engines bearing Engine Manufacturer's Serial Numbers as follows: __________ and ________________. Each of the Engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 2. The Delivery Date of the Delivered Aircraft is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. Lessee hereby confirms to Lessor that the Delivered Aircraft has been or will be duly marked in accordance with the terms of Section 7.1.2 of the Lease and that Lessee has accepted the Delivered Aircraft for all purposes hereof and of the Lease Agreement, including its being airworthy, in accordance with specifications, in good working order and repair and without defect or inherent vice in title, condition, design, operation or fitness for use, whether or not discoverable by Lessee as of the date hereof, and free and clear of all Liens except Permitted Liens. 4. All the provisions of the Lease Agreement are hereby incorporated by reference in this Lease Supplement, on and as of the date of this Lease Supplement, to the same extent as if fully set forth herein. 5. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. SALE AND LEASE AGREEMENT A-2 IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed and delivered as of the date and year first above written. Lessor: FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By: --------------------------- Title: Lessee: SOUTHWEST AIRLINES CO. By: --------------------------- John D. Owen Treasurer SALE AND LEASE AGREEMENT A-3 EXHIBIT B TO LEASE AGREEMENT PERMITTED FOREIGN AIR CARRIERS Aer Lingus Interflug Aerolineas Argentinas Japan Air Lines Aeromexico Japan Air System Air Canada KLM Air Europa Korean Air Air Europe Lan Chile Air France Lauda Air Air Inter Linjeflyg Air Jamaica Lufthansa Air New Zealand Luxair Alitalia Maersk All Nippon Airways Malaysian Airline System ALM Martinair Ansett Airlines of Australia Mexicana Asiana Airlines Monarch Airlines Australian Airlines Olympic Airlines Austrian Airlines Qantas Airways AVENSA Ryanair Bahamasair Sabena Bavaria SAS Braathens S.A.F.E. Saudi Arabia Airlines Britannia Singapore Airlines British Airways SouthWest Airlines British Midland Swissair CAAC TAP Canadian Airlines International Thai Airways Cathay Pacific Airways Transavia Holland Cayman Airways Transbrasil China Airlines TransEuropean Condor Flugdienst UTA Dan-Air Varig Finnair Viasa Garuda Viva Air Hapag Lloyd Iberia Icelandair SALE AND LEASE AGREEMENT B-1 EXHIBIT C TO LEASE AGREEMENT OTHER RETURN CONDITIONS At the time of the return of the Aircraft upon the expiration or earlier termination of the Term, the Aircraft shall be in the following condition: 1. General Condition (a) The Aircraft shall be clean and free of leaks, in each case in accordance with United States commercial airline operating standards. (b) All decals shall be clean, secure and legible. 2. Fuselage, Windows and Doors (a) The fuselage shall be free of loose or pulled or missing rivets. (b) The doors shall be free moving, correctly rigged and be fitted with serviceable seals. 3. Wings and Empennage (a) The wings shall be free of fuel leaks. 4. Interior (a) The ceilings, sidewalls and bulkhead panels shall be clean and free of cracks and stains. (b) All carpet and seat covers shall be in good condition, clean and stain free and meet FAR fire resistance regulations. (c) All seats shall meet FAA fire retardant regulations and be serviceable, in good condition and repainted as necessary. (d) All signs and decals shall be in English and be clean and legible. SALE AND LEASE AGREEMENT C-1 (e) All emergency equipment having a calendar life shall have a minimum of one year or one hundred per cent of its total approved life, whichever is less, remaining. 5. Cockpit (a) All decals shall be in English and be clean, secure and legible. (b) All seat covers shall be in good condition, clean and shall conform to FAR fire resistance regulation. (c) All seats shall be fully serviceable and shall be repainted as necessary. 6. Cargo Compartment (a) All panels shall be in good condition. (b) All nets shall be in good condition. 7. Fuel Tanks (a) The fuel tanks shall be substantially free of bacteria growth and water. SALE AND LEASE AGREEMENT C-2 SCHEDULE I TO LEASE AGREEMENT The Lessor's Cost for the Aircraft is $11,000,000. SALE AND LEASE AGREEMENT SALE AND LEASE AGREEMENT SUPPLEMENT NO. 1 THIS SALE AND LEASE AGREEMENT SUPPLEMENT NO. 1 dated September 27, 1990 is between FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under that certain Trust Agreement, dated as of September 1, 1990 (the "Trust Agreement"), between the Owner Participant named therein and such Bank ("Lessor"), and SOUTHWEST AIRLINES CO., a Texas corporation ("Lessee"). RECITALS. A. Lessor and Lessee have heretofore entered into that certain Sale and Lease Agreement dated as of September 1, 1990, as supplemented and amended from time to time (herein called the "Lease Agreement" and the defined terms therein being herein used with the same meaning), which Lease Agreement provides in Section 2 for the execution of a Lease Supplement substantially in the form hereof for the purpose of Lessee's selling to Lessor, and Lessor's leasing back to Lessee, the Aircraft under the Lease Agreement as and when delivered by Lessor to Lessee in accordance with the terms thereof; and B. The Lease Agreement relates to the airframe and engines described below, and a counterpart of the Lease Agreement is attached hereto and made a part hereof and this Lease Supplement, together with such attachment, is being filed for recordation with the FAA on the date hereof as one document. In consideration of the premises and other good and sufficient consideration, and pursuant to Section 2 of the Lease Agreement, Lessor and Lessee hereby agree as follows: 1. Lessee hereby delivers and sells to Lessor and Lessor hereby accepts and purchases from Lessee and in turn delivers and leases back to Lessee, and Lessee hereby accepts and leases back from Lessor, under the Lease Agreement, as herein supplemented, the following-described Boeing Model 737-2H4 Aircraft (the "Delivered Aircraft"), which Delivered Aircraft as of the date hereof consists of the following: Airframe: U.S Registration Number N57SW; Manufacturer's Serial No. 21722; and Engines: Two Pratt & Whitney JT8D-9A Engines bearing Engine Manufacturer's Serial Numbers as follows: P707364B and P687758B. Each of the Engines described above has 750 or more rated takeoff horsepower or the equivalent of such horsepower. 2. The Delivery Date of the Delivered Aircraft is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. Lessee hereby confirms to Lessor that the Delivered Aircraft has been or will be duly marked in accordance with the terms of Section 7.1.2 of the Lease and that Lessee has accepted the Delivered Aircraft for all purposes hereof and of the Lease Agreement, including its being airworthy, in accordance with specifications, in good working order and repair and without defect or inherent vice in title, condition, design, operation or fitness for use, whether or not discoverable by Lessee as of the date hereof, and free and clear of all Liens except Permitted Liens. 4. All the provisions of the Lease Agreement are hereby incorporated by reference in this Lease Supplement, on and as of the date of this Lease Supplement, to the same extent as if fully set forth herein. 5. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF TEXAS AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE. -2- IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to be duly executed and delivered as of the date and year first above written. Lessor: FIRST SECURITY BANK OF UTAH, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee under the Trust Agreement By: /s/ Dorian Light Shaw --------------------------- Title: ASSISTANT VICE PRESIDENT Lessee: SOUTHWEST AIRLINES CO. By: /s/ John D. Owen --------------------------- John D. Owen Treasurer SALE AND LEASE AGREEMENT 3 EX-99.J 10 EX-99.J EXHIBIT 99.J THIS IS COUNTERPART NO. TWO (DUPLICATE) OF TWO COUNTERPARTS. TO THE EXTENT THIS AGREEMENT CONSTITUTES CHATTEL PAPER (AS SUCH TERM IS DEFINED IN THE UNIFORM COMMERCIAL CODE IN EFFECT IN ANY APPLICABLE JURISDICTION), NO SECURITY INTEREST HEREIN MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART OTHER THAN COUNTERPART NO. ONE. MARINE SHIPPING CONTAINER VARIABLE LEASE (COMBINED CONTAINER SET IV) THIS MARINE SHIPPING CONTAINER VARIABLE LEASE (the "AGREEMENT") made as of the 17th day of April, 1995 by and between TRANS OCEAN CONTAINER CORPORATION, a Delaware corporation, whose head office is located at 851 Traeger Avenue, San Bruno, CA 94066 (hereinafter called the "Lessee") and Investors Asset Holding Corp., a Massachusetts corporation, not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust," having a principal place of business c/o American Finance Group, Exchange Place, Boston, MA 02109 (hereinafter called the "Lessor"). W I T N E S S E T H: WHEREAS, the Lessor has agreed to purchase from the Lessee approximately 2500 TEU's (as defined below) of maritime shipping containers, including dry cargo, open top, and collapsible flat rack containers, which containers shall be more fully described in Bills of Sale issued pursuant to that certain Purchase and Sale Agreement of even date herewith (the "Purchase and Sale Agreement") between the parties (said containers are hereafter called the "Containers"); WHEREAS, the Lessee is engaged in the business of leasing and operating containers; and WHEREAS, the Lessor desires to lease the Containers to the Lessee and the Lessee is willing to lease the Containers from the Lessor, all on the terms and conditions set forth herein. NOW, THEREFORE, the parties hereby agree as follows: 1. Lessor-Lessee Relationship (a) The Lessor hereby leases the Containers to the Lessee, and the Lessee hereby leases the Containers from the Lessor, in accordance with the terms and conditions set forth below. (b) In order to further evidence the relationship of lessor 1 (1) the Lessor has and shall retain exclusive legal and beneficial ownership of the Containers, and the Lessee shall not have any right, title or interest in the Containers, except as provided in this Agreement; (2) in the conduct of its business, the Lessee will not hold itself out as an owner of the Containers or take any action that would be inconsistent with the ownership of the Containers by the Lessor or that would otherwise be inconsistent with, or outside the scope of, the lease created under this Agreement; and (3) Lessor and Lessee agree to treat the transactions provided for in this Agreement as a lease of the Containers by the Lessor to the Lessee for United States federal income tax purposes and to take positions consistent with such treatment in filing the respective United States federal income tax returns, if any, required to be filed thereby. (c) The Lessee and the Lessor expressly recognize and acknowledge that this Agreement does not create a partnership, joint venture or other entity among or between the Lessor, the Lessee, and/or any other person, and is intended only to set forth the terms and conditions of the lessor/lessee relationship between the Lessor and the Lessee with respect to the matters specifically contained herein. (d) The Lessee acknowledges and agrees that: (i) LESSOR IS NOT A MANUFACTURER OF THE CONTAINERS OR A MERCHANT OR DEALER IN PROPERTY OF SUCH KIND; (ii) ON OR BEFORE THE PURCHASE DATE OF EACH CONTAINER, THE LESSEE WILL HAVE ACCEPTED THE CONTAINER INTO ITS FLEET OF MANAGED, OWNED AND LEASED INTERMODAL MARINE CONTAINERS; AND (iii) LESSOR HAS NOT MADE, AND DOES NOT HEREBY MAKE, ANY REPRESENTATION, WARRANTY, OR COVENANT, EXPRESS OR IMPLIED, WITH RESPECT TO THE MERCHANTABILITY, CONDITION, QUALITY, DURABILITY, DESIGN, OPERATION, FITNESS FOR USE, OR SUITABILITY OF THE CONTAINERS OR ANY COMPONENT THEREOF IN ANY RESPECT WHATSOEVER OR IN CONNECTION WITH OR FOR THE PURPOSES AND USES OF THE LESSEE, AND THE LESSOR HAS NOT MADE AND DOES NOT HEREBY MAKE ANY OTHER REPRESENTATIONS, WARRANTIES, OR COVENANTS OF ANY KIND AND CHARACTER, EXPRESS OR IMPLIED WITH RESPECT THERETO, AND SHALL NOT BE LIABLE FOR ANY ACTUAL, INCIDENTAL, CONSEQUENTIAL, OR OTHER DAMAGES OF OR TO ANY PERSON WHATSOEVER, WITH RESPECT THERETO, AND THE LESSEE IS LEASING THE CONTAINERS "AS IS AND WITH ALL FAULTS." (e) Lessee represents, warrants and certifies to the Lessor as of the date of execution and delivery of this Agreement: (i) Lessee is duly organized, validly existing and in 2 good standing under the laws of the state of its incorporation, with full power to enter into and to pay and perform its obligations under this Agreement, and is duly qualified and in good standing in all other jurisdictions in the United States in which the nature of its business or the ownership of its properties, or both, make such qualification necessary and where failure to so qualify would materially adversely affect its financial condition or the conduct of its business or the performance of its obligations under or the enforceability of this Agreement. (ii) This Agreement and all related documents have been duly authorized, executed and delivered by Lessee, are valid, legal and binding obligations of Lessee, are enforceable against Lessee in accordance with their terms and do not and will not contravene any provisions of or constitute a default under Lessee's organizational documents or its by-laws, any agreement to which it is a party or by which it or its property is bound, or any law, regulation or order of any governmental authority; (iii) Lessor's right, title and interest in and to this Agreement and the Containers and the rentals therefrom will vest in Lessor on the Purchase Date for such Containers and will not be affected or impaired by the terms of any agreement or instrument by which Lessee or its property is bound except for Lessee's rights under this Agreement and the rights of the sublessees under the applicable subleases of such Containers; (iv) no approval of, or filing with, any governmental authority or other person is required in connection with Lessee's entering into, or the payment or performance of its obligations under, this Agreement except for the filing of UCC-l financing statements as contemplated by Section 4 of the Purchase and Sale Agreement; (v) there are no suits or proceedings pending or, to the knowledge of Lessee, threatened, before any court or governmental agency against Lessee which, if decided adversely to Lessee, would materially adversely affect Lessee's business or financial condition or its ability to perform any of its obligations under this Agreement; (vi) there has been no material adverse change to the Lessee's financial condition or results from its operations since the date of its most recent audited financial statements delivered to Lessor; and (vii) the address stated in the preamble to this Agreement as Lessee's head office is the principal place of business and chief executive office of Lessee; and Lessee does not conduct business under a trade, assumed or fictitious name except as follows: Trans Ocean, Trans Ocean Leasing, and TOL. 3 2. The Lessee's Duties In consideration of the right to use and operate the Containers as lessee pursuant to this Agreement, the Lessee agrees that it will, during the term hereof, perform the following duties, using a level or standard of care no less than the Lessee would use with respect to containers it owns, leases or operates for others: (a) accept delivery of the Containers; (b) place such marks upon the Containers, register the Containers in accordance with such tariffs as required for their operation in marine shipping service, paint the Containers any appropriate color, and place on the Containers such markings or legends as the Lessee deems required or appropriate; (c) take all reasonable and customary steps as may be required to provide for the sublease of the Containers under short, medium and long term leases on such terms and conditions as it may deem satisfactory, in its sole discretion (except as otherwise specifically provided for in this Agreement); (d) pay to the Lessor the Fixed Rent or the Variable Rent (as defined in Section 6(c)(6)), as the case may be, on the last day of each calendar quarter immediately following the calendar quarter for which such Fixed Rent or Variable Rent is payable; (e) pay all Operating Expenses (as defined below) and file all applicable tax returns and other reports with respect to ad valorem, gross receipts and property taxes attributable to the Set Containers (as defined below); (f) on behalf of Lessor, sell or otherwise dispose of Containers that become subject to Casualty Occurrences or Ordinary Disposal Occurrences, as described in Section 4(b) below (for this purpose, a Casualty Occurrence shall include a "Casualty Occurrence" (as defined below) that occurs prior to the Purchase Date but that becomes known to Lessee after the Purchase Date); (g) perform all administrative and related functions necessary for the operation and subleasing of the Containers, including but not limited to: (i) maintaining and servicing (or causing the sublessees to maintain and service) the Containers in a condition that meets the then current general interchange standards of the International Institute of Container Lessors, Guide for Container Equipment Inspection, and in such condition as may be required by any applicable law or the rules or regulations of any governmental body having jurisdiction over the Containers and as maybe necessary or appropriate to make the Containers suitable for rental in international commerce; 4 (ii) supervising all maintenance and repair of each Container, whether performed by the Lessee, an employee of a depot operator, or other third party, to ensure such maintenance satisfies the highest of the following standards: (A) any standard required or set forth for the Containers or equipment of a similar class under any applicable industry convention or governmental law or regulation; (B) any standard set by any insurance policy under which the Containers shall from time to time be insured; and (C) good commercial practice; (iii) performing periodic inspections and surveys of the Containers in the possession of depot operators to ensure maintenance of the Containers in a seaworthy and safe operating condition; (iv) maintaining records with respect to the rental of the Containers, locations of the Containers when off-hire, repair and maintenance history and repair and maintenance activity; and (v) monitoring the location of the Containers while off-lease. In performing such administrative and related functions hereunder, the Lessee shall not knowingly discriminate against or in favor of the Containers in seeking subleases; and (h) defend, indemnify and hold the Lessor and any party or parties from whom Lessor obtained financing for the Containers (the "Lenders") harmless from and against any claims asserted against them arising out of the possession or operation of the Containers (including, but not limited to, injury to persons or loss of or damage to lading or other property), provided that the costs of such defense, indemnification and holding harmless shall be an Operating Expense for purposes of Section 6 (excluding, however, those costs or expenses that result from the gross negligence or willful misconduct of the Lessee). 3. Covenant of Quiet Enjoyment The Lessor shall not disturb the Lessee's quiet enjoyment of the Containers provided Lessor is not entitled to terminate this Agreement pursuant to Section 4(c). 4. Duration (a) Initial Term; Extension Options. Except as provided below, the term of this Agreement as to each of the Containers shall 5 commence on the date such Container is included in the Container Set (as defined below) as determined under Section 6(b)(4), and shall remain in full force and effect until June 30, 2003 (the "Stated Term"), provided that the Lessor is hereby granted an option to extend the Stated Term of this Agreement on the same terms and conditions for up to four one-year renewal periods. The Lessor must provide written notice to Lessee of its election to exercise this renewal option not less than ninety (90) days prior to the expiration of the Stated Term of this Agreement or each subsequent renewal period. (b) Termination due to a Casualty Occurrence or an Ordinary Disposal Occurrence. Notwithstanding Section 4(a), this Agreement shall terminate as to any Container upon the total loss or destruction of that Container (a "Casualty Occurrence") or upon an Ordinary Disposal Occurrence (as defined below) (an "Ordinary Disposal Occurrence"), unless within ninety (90) days after the Lessee receives notice of the Casualty Occurrence or within ninety (90) days after the Ordinary Disposal Occurrence, the Lessee shall, in accordance with Section 9(b) below, replace that Container with one of like size, type, age, and condition and shall notify the Lessor of the replacement. The replacement container shall be deemed to be a "Container" for all purposes of this Agreement from and after the date of the Casualty Occurrence or the Ordinary Disposal Occurrence, as applicable. Unless Lessee replaces a Container subject to a Casualty Occurrence or an Ordinary Disposal Occurrence in accordance with Section 9(b) below, Lessee will sell, lease or otherwise dispose of such Container, and will distribute the net proceeds from such sale, lease or other disposition, in accordance with said section. For purposes hereof, an "Ordinary Disposal Occurrence" means the determination by Lessee to dispose of a Container in the ordinary course of business for one or both of the following reasons: (i) the Container is no longer marketable, for example, due to technological obsolescence; or (ii) the Container has suffered such damage that it is not economic to repair and re-lease the Container as described in the remainder of this section. When a Container is returned to the Lessee in damaged condition, the Lessee compares the net cash value of repairing that Container to the net proceeds that would be received if that Container were instead sold. If the net cash value is less than the net proceeds, the Lessee will dispose of the Container as an Ordinary Disposal Occurrence. The net cash value is obtained by subtracting the cost of restoring that Container to a leasable condition from the estimated present value of the future cash streams from leasing that Container over its remaining useful life. (c) Termination by the Lessor. Notwithstanding Section 4(a), but subject to Section 4(d), the Lessor may terminate this Agreement as to any Container by written notice effective upon delivery of the notice to Lessee (except that this Agreement shall 6 automatically terminate without notice in the event of the occurrence under Section 4(c)(5) below), which notice may be given only in the event that: (1) the Lessee shall fail to pay to the Lessor the Fixed Rent or the Variable Rent required by Section 2(d) and such failure shall continue for a period of ten (10) days after notice thereof by the Lessor to the Lessee; (2) the Lessee shall assign or transfer any of its rights hereunder without the prior written consent of the Lessor; (3) the Lessee shall default in the performance or observance of any other covenant, condition, agreement, or duty to be performed or observed by the Lessee under this Agreement and such default shall continue unremedied for a period of thirty (30) days after notice thereof by the Lessor to the Lessee; (4) any representation or warranty made by the Lessee in Section 1(e) hereof, Section 5 of the Purchase and Sale Agreement, or in any Bill of Sale (as defined in the Purchase and Sale Agreement) shall prove to have been false in any material respect at the time made; (5) the Lessee shall have (i) ceased doing business as a going concern, (ii) made an assignment for the benefit of creditors, admitted in writing its inability to pay its debts as they mature or generally failed to pay its debts as they become due, (iii) initiated any voluntary bankruptcy or insolvency proceeding, (iv) failed to obtain the discharge of any bankruptcy or insolvency proceeding initiated against it by others within 60 days of the date such proceedings were initiated, or (v) requested or consented to the appointment of a trustee or receiver with respect to itself or for a substantial part of its property; or (6) the Lessee shall make two (2) or more Variable Rent payments in amounts that, together with all other Variable Rent payments theretofore made, fail to aggregate a cumulative annual return to the Lessor of fourteen percent (14%) or more of the aggregate Container Cost of the Containers then under lease hereunder. The events described in Sections 4(c)(l), (2), (3), (4) and (5) above are hereinafter collectively referred to as "Events of Default." (d) Containers Subject to Sublease. Notwithstanding Sections 4(a) or 4(c), if a Container is subject to sublease at a time when this Agreement would otherwise terminate as to the Container, this Agreement shall remain in full force and effect as to the Container until the last day of the calendar quarter in which the Container comes off the sublease unless (x) such termination was as a 7 consequence of the Event of Default specified in Section 4(c) (5), or (y) such termination was as a consequence of any other Event of Default and Lessor gives the notice described in Section 5(c)(A); provided that, unless termination as to the Container was pursuant to Section 4(c), the Lessee shall be entitled to continue this Agreement as to a Container after the last day of the calendar quarter in which the Container comes off the sublease if in its reasonable judgment it is economically feasible to restore the Container to a leasable condition and to re-lease the Container to an end-user, in which case this Agreement shall continue as to that Container until the last day of the calendar quarter in which the Container comes off a sublease or the last day of the calendar quarter in which the Lessee determines that it is not economically feasible to restore the Container to a leasable condition and to re-lease the Container to an end-user. Notwithstanding the foregoing, unless Lessor exercises its renewal option pursuant to Section 4(a), the Lessee shall not be entitled pursuant to the foregoing proviso to continue this Agreement as to any Container after the last day of the calendar quarter in which the Container comes off the sublease without the prior written consent of the Lessor. (e) Termination by the Lessee. Notwithstanding Section 4(d), the Lessee may terminate this Agreement as to any Container of a particular size and type at the end of the Stated Term thereof and at any time thereafter, upon the election of the Lessee, at the Lessee's sole and absolute discretion, if Variable Rent specifically allocable to the Set Containers of that size and type, calculated in a manner analogous to Section 6(c), for the most recent calendar quarter that can be reasonably calculated by the Lessee, is less than fourteen percent (14%) of the aggregate Container Cost of Containers of that size and type then under lease hereunder multiplied by a fraction the numerator of which is the number of days in that quarter and the denominator of which is 365. (f) Treatment of Non-Terminated Containers. Notwithstanding the foregoing, the termination of this Agreement with respect to any individual Container shall not relieve the Lessee from performing its obligations hereunder as to any Containers not subject to such termination. 5. Termination. (a) Settlement of the Variable Rent. Upon any termination of this Agreement as to any Container, the Lessee shall make a complete and final settlement of the Fixed Rent and the Variable Rent for the Container as determined in Section 6 no later than the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to the Container. (b) Remarketing of the Containers. Upon termination of this Agreement as to any Container, other than as a consequence of one 8 of the events specified in Section 4(b) or 4(c), the Lessor hereby authorizes the Lessee to remarket the Containers on behalf of the Lessor, and the Lessee shall, pursuant to such authorization: (1) sell, lease or otherwise dispose of the Container, at the sole and absolute discretion of the Lessee; provided that if the Lessee elects to acquire the Container from the Lessor, the price to be paid for the Container will be negotiated in an arm's length transaction and if the parties are unable to agree on a price, Lessee will not be entitled to acquire the Container from the Lessor. Lessee shall use its best efforts to maximize the net proceeds received on account of any sale, lease or other disposition of a Container pursuant to this Section 5(b) using a level or standard of care no less than the Lessee would use with respect to containers it owns, leases or operates for others. The net proceeds of the sale, lease or other disposition shall be allocated between the Lessee and the Lessor as follows: (A) the Lessor shall first receive an amount equal to the lesser of (i) the amount of the net proceeds, or (ii) the value of the Container pursuant to Exhibit A hereto; and (B) any net proceeds remaining after the allocation to the Lessor in subpart (A) shall be paid 50% to the Lessor and 5O% to the Lessee as incentive compensation for handling the sale, lease or other disposition; and (2) make payment of any share of the net proceeds to be paid the Lessor pursuant to Section 5(b)(1) coincident with the final Variable Rent payment for the Container, but in any event, not later than the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to the Container. For purposes of this Agreement, "net proceeds" means all proceeds received by the Lessee as a result of the sale, lease or other disposition of a Container (including without limitation damage recoveries and insurance proceeds), less all costs of the sale, lease or other disposition (including without limitation the cost of repairing and/or rehabilitating the Container to prepare it for sale, sales commissions paid to vendors, and repositioning costs). If pursuant to this Section 5(b) the Lessee fails to sell, lease or otherwise dispose of a Container on or prior to the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to that Container, the Lessee shall, from and after such day, no longer be entitled to sell, lease or otherwise dispose of that Container pursuant to this Section 5(b) and the Lessee shall thereupon return that Container to the Lessor's possession and control "AS IS, WHERE IS." The Lessor shall thereupon retake possession and control of that 9 Container and shall thereafter sell, lease or otherwise dispose of that Container free from any right or interest of the Lessee but subject to the matters set forth in the next succeeding paragraph. On or before the last day of each calendar quarter, commencing with the calendar quarter in which Lessee returns a Container to the Lessor's possession and control pursuant to the preceding paragraph, provided no Event of Default has occurred and is continuing since the commencement of the remarketing period contained in this Section 5(b), the Lessor and the Lessee shall make a complete and final settlement of the net proceeds received with respect to any Container during such quarter. The net proceeds of the sale, lease or other disposition shall be allocated between the Lessee and the Lessor as follows: (A) the Lessor shall first receive an amount equal to the lesser of (i) the amount of the net proceeds, or (ii) the value of the Container pursuant to Exhibit A hereto; and (B) any net proceeds remaining after the allocation to the Lessor in subpart (A) shall be paid 50% to the Lessor and 50% to the Lessee. (c) Return of the Containers (Event of Default). (A) Upon termination of this Agreement as a consequence of an Event of Default, the Lessor may, upon written notice to Lessee (except that no notice is required with respect to the Event of Default specified in Section 4(c)(5)), pursuant to the security interest granted under Section 10 below, direct any or all sublessees of on-lease Containers to make payment directly to the Lessor and to return the Containers to Lessor at the termination of the subleases and otherwise exercise all rights and remedies of a secured creditor under the Uniform Commercial Code in effect in the applicable jurisdiction. (B) In the alternative, upon termination of this Agreement as a consequence of an Event of Default (other than the Event of Default specified in Section 4(c)(5)), if Lessor does not give the notice described in Section 5(c)(A), this Agreement will continue as to any Container subject to sublease at the time when this Agreement would otherwise terminate as to that Container until the last day of the calendar quarter in which the Container comes off the sublease. (C) In addition, upon termination of this Agreement as a consequence of an Event of Default, the Lessee shall effect an orderly transition of any Container that is off-lease at the time of termination, and of any Container that is redelivered to Lessee by a sublessee (if this Agreement continues pursuant to Section 5(c)(B)) to the Lessor for its own use or as lessor to a container operator, all in accordance with the Lessor's directions. In the 10 event that the Lessor chooses to continue operation of any such Container for its own use or as lessor to a container operator, the Lessee shall redeliver possession of such Container to the Lessor in sound operating condition, normal wear and tear excepted, and arrange for the transport of such Container to any of the depot location(s) described on Schedule I attached hereto (or such other depot locations as may be mutually acceptable to Lessor and Lessee) (any location described on said Schedule I or as so agreed by Lessor and Lessee being hereinafter referred to as a "Schedule I Location"), it being understood that the costs, if any, of transport of such Container to a Schedule I Location shall be at the expense of the Lessee. Notwithstanding the foregoing, Lessee may redeliver replacement containers of like size, type, age and condition if the original Containers were re-delivered by Lessee's sublessees to non-Schedule I Locations. The Lessee shall not arrange for the transport of more than 400 TEU's of Containers (or replacement containers) to any of the following Schedule I Locations: Bremen, Milan, Leghorn, Genoa, Marseille, Chicago or New Orleans, except as agreed by the Lessor. (d) Return of the Containers (Performance). Upon termination of this Agreement as a consequence of the event specified in Section 4(c)(6), this Agreement will continue as to any Container subject to sublease at the time when this Agreement would otherwise terminate as to that Container until the last day of the calendar quarter in which the Container comes off the sublease. The Lessee shall thereupon effect an orderly transition of such Container, and of any Container that is off-lease at the time of termination of this Agreement, to the Lessor for its own use or as lessor to a container operator, all in accordance with the Lessor's directions. In the event that the Lessor chooses to continue operation of any such Container for its own use or as lessor to a container operator, the Lessee shall redeliver possession of such Container to the Lessor "AS IS, WHERE IS." 6. Fixed Rent; Variable Rent (a) Payment. During the term of this Agreement, the Lessee shall pay to the Lessor at a place designated by the Lessor in United States Dollars (1) the Fixed Rent; and (2) the Variable Rent payment based on the Lessee's use of the Containers. Because of the difficulty and complexity for the Lessee to account for the use of each Container separately, the Lessor agrees that the Variable Rent shall be based on the average use of a set of similar containers (the "Container Set") and shall be calculated in accordance with the provisions of this Section. All rentals and any other amounts to be remitted to the Lessor under this Agreement shall be paid by wire transfer of funds in accordance with payment instructions confirmed by the Lessor. All remittances due the Lessor under this Agreement shall be paid without notice or demand, and without abatement, set-off or deduction of any amounts whatsoever except as specifically set forth in this Agreement. All 11 remittances that become past due will bear interest at a floating rate per annum equal to the lesser of (i) the "prime" rate of NatWest Bank N.A. as announced from time to time at its head office in New York, New York, plus two percent (2%) per annum (with each change in such prime rate to cause an equal and corresponding change in the rate of interest payable hereunder) or (ii) the highest rate allowed by California law, from the due date until paid. (b) General. (1) Container Set. The Container Set shall be denominated "Combined Container Set IV" and shall consist of the Containers and such other containers as are designated by the Lessee as included in the Container Set. The containers in the Container Set (including the Containers) shall be referred to as "Set Containers." (2) Set Container Requirements. Each Set Container must satisfy the following criteria: (A) each Set Container must be a standard dry cargo or special container (other than a refrigerated or tank container) or other container-related equipment of similar classification and type; (B) each Set Container must either be (i) owned by the Lessee or an affiliate of the Lessee or a partnership of which the Lessee is a general partner; (ii) leased by the Lessee from third parties, such as the Lessor; or (iii) managed by the Lessee for the account of third parties; and (C) each Set Container must either be acquired by the Lessee or an affiliate of the Lessee or a partnership of which the Lessee is a general partner or committed to the Container Set between January 1, 1992 and December 31, 1994. (3) Notification to Lessor. The Lessee shall, after all the Set Containers to be included in the Container Set have been identified, provide the Lessor with a summary description, in writing, of the Set Containers included in the Container Set. (4) Inclusion in the Container Set. A Container shall be considered to be included in the Container Set on the date that payment for such Container is received in accordance with the Purchase and Sale Agreement (the "Purchase Date"). (5) Container Cost. The Container Cost of each Container shall equal US $2,350 per TEU or as otherwise mutually agreed to by the parties. (6) Exchange Rate. If the Container Cost is not paid in 12 United States dollars, the amount in such dollars shall be calculated based on the exchange rate prevailing on the date of payment. (7) TEUs. Each Set Container shall equal the following number of twenty (20) foot equivalent units ("TEUs"): (i) Each twenty (20)-foot dry cargo container shall equal one (l) TEU; (ii) Each forty (40)-foot dry cargo container shall equal one and one-half (1.50) TEUs; (iii) Each twenty (20)-foot open top container shall equal one and fifty-four hundredths (1.54) TEUs; (iv) Each forty (40)-foot open top container shall equal two and forty-eight hundredths (2.48) TEUs; (v) Each forty (40)-foot collapsible end flat rack container shall equal two and seventy-six hundredths (2.76) TEUs; and (vi) Each forty (40)-foot jumbo high cube container shall equal one and sixty-eight hundredths (l.68) TEUs. (c) Fixed Rent; Determination of Variable Rent. (1) Adjusted Gross Revenues of the Container Set. Adjusted gross revenues of the Container Set ("Adjusted Gross Revenues of the Container Set") for any particular calendar quarter shall equal (x) the Gross Revenues of the Container Set for that quarter less (y) the Operating Expenses of the Container Set for that quarter. (i) Gross revenues of the Container Set ("Gross Revenues") for any particular quarter shall equal all revenues of the Lessee relating to the Container Set accrued during that quarter from leasing or subleasing all Set Containers, including but not limited to ancillary and all other related charges, such as pickup and drop off charges, special handling fees, and late payment fees, less uncollectible accounts receivable with respect to the Set Containers for the same quarter, as recorded on the books of account of the Lessee in accordance with generally accepted accounting principles. (ii) Operating expenses of the Container Set ("Operating Expenses") for any particular quarter shall equal all operating costs and expenses incurred in connection with the operation and leasing of the Set Containers during that quarter, including but not limited to, costs and expenses related to the following: maintaining, repairing, or refurbishing the Set 13 Containers; inspection, handling and storage; transporting the Set Containers other than to the point of origin of the initial leases or subleases; legal fees incurred in enforcing lease obligations; insurance; third-party claims arising out of the possession or operation of the Set Containers (including, but not limited to, injury to persons and loss of or damage to lading or other property), including legal fees incurred in defending against such third-party claims; charges, assessments or levies of any kind against the Set Containers; and ad valorem, gross receipts and property taxes attributable to the Set Containers. Notwithstanding the foregoing, the Operating Expenses shall not include: (w) those costs and expenses that would be considered costs or expenses associated with ownership of containers (as opposed to those associated with operation and maintenance of containers), such as costs and expenses incurred by the Lessee or Lessor in connection with the purchase and sale of the Set Containers; (x) any taxes incurred by the Lessor in respect of the Lessor's acquisition of the Containers or any income, capital or franchise taxes imposed on the Lessor which are based on or measured by its net income, gross receipts (other than gross receipts attributable to the Set Containers), or net worth (all of which taxes shall be paid by the Lessor individually); (y) any income, capital or franchise taxes imposed on the Lessee which are based on or measured by its net income, gross receipts (other than gross receipts attributable to the Set Containers), or net worth (all of which taxes shall be paid by the Lessee individually); or (z) costs and expenses incurred by the Lessee in connection with the leasing, management, and administration of the Set Containers as would generally be considered to be a part of the Lessee's own marketing, general and administrative expenses, including but not limited to, salaries, travel and entertainment expenses of the Lessee's personnel; rent; and bookkeeping and accounting charges. (2) Container Set TEU-Days. For all Set Containers in the Container Set for any particular calendar quarter, the number of Container Set TEU-days ("Container Set TEU-Days") shall equal the sum of the Monthly Container Set TEU-Days for each of the months of that quarter. The Monthly Container Set TEU-Days for any particular month shall equal (x) the number of TEU's of Set Containers on the first day of the month and the number of TEU's of Set Containers on the last day of the month, divided by two; multiplied by (y) the number of days in that month. (3) Container Set Daily Adjusted Gross Revenues. The "Container Set Daily Adjusted Gross Revenues" for any particular calendar quarter shall equal the Adjusted Gross Revenues of the Container Set for that quarter divided by the number of Container Set TEU-Days for the same quarter. (4) Lessor Container TEU-Days. For all Containers in the Container Set for any particular calendar quarter, the number of Lessor Container TEU-days ("Lessor Container TEU-Days") shall equal 14 the sum of the Individual Container TEU-Days for each Container for that quarter. The Individual Container TEU-Days for any particular Container, for any particular quarter shall equal (x) the applicable TEU factor for a Container of that size and type (as set forth in Section 6(b)(7) above) multiplied by (y) the actual number of days during the quarter that the Container was included in the Container Set; provided that, if in any quarter a Container is subject to a Casualty Occurrence or an Ordinary Disposal Occurrence (and the Lessee does not replace that Container pursuant to Section 9(b)), that Container shall be deemed to be removed from the Container Set at the midpoint of that quarter. (5) Lessor Adjusted Gross Revenues. The "Lessor Adjusted Gross Revenues" for any particular calendar quarter shall equal the Container Set Daily Adjusted Gross Revenues for that quarter multiplied by the number of Lessor Container TEU-Days for the same quarter. (6) Fixed Rent and Variable Rent. (i) Lessee shall pay Lessor "Fixed Rent" with respect to the Containers included in the Container Set for the period commencing on the Purchase Date therefor and ending on March 31, 1996 (the "Fixed Rent Period"). Fixed Rent for any particular calendar quarter shall equal the product obtained by multiplying (x) the number of Lessor Container TEU-Days for that quarter, divided by the number of days in that quarter, by (y) $98.81. (ii) Lessee shall pay Lessor "Variable Rent" with respect to the Containers included in the Container Set for the period commencing on April 1, 1996 and ending on the day this Agreement terminates in accordance with Section 4 above (the "Variable Rent Period"). Subject to subparts (iii) and (iv) below, the Variable Rent for any particular calendar quarter shall equal seventy-five percent (75.0%) of the Lessor Adjusted Gross Revenues for that quarter. (iii) If the Variable Rent otherwise payable pursuant to subpart (ii) for any calendar quarter during the first year of the Variable Rent Period is less than the product obtained by multiplying (x) the number of Lessor Container TEU-Days for that quarter, divided by the number of days in that quarter, by (y) $98.81 (the "first Year Threshold Amount"), the Variable Rent for that quarter shall be increased by an amount equal to the lesser of: (x) fifteen percent (15%) times the Lessor Adjusted Gross Revenues for that quarter; or (y) the amount by which the First Year Threshold Amount exceeds the Variable Rent otherwise payable pursuant to subpart (ii) for that quarter without the adjustment provided by this subpart (iii). If the Variable Rent otherwise payable pursuant to subpart (ii) for any calendar quarter during the second year of the Variable Rent Period is less than the product obtained by multiplying (x) the number of Lessor Container 15 TEU-Days for that, quarter, divided by the number of days in that quarter, by (y) $91.69 (the "Second Year Threshold Amount"), the Variable Rent payable with respect to such Container shall be increased by an amount equal to the lesser of: (x) fifteen percent (15%) times the Lessor Adjusted Gross Revenues for that quarter; or (y) the amount by which the Second Year Threshold Amount exceeds the Variable Rent otherwise payable pursuant to subpart (ii) for that quarter without the adjustment provided by this subpart (iii). The amount by which Variable Rent is increased pursuant to this subpart (iii) shall hereinafter be referred to as "Additional Variable Rent." (iv) Commencing with the third year of the Variable Rent Period, the Variable Rent otherwise payable pursuant to subpart (ii) for any calendar quarter shall be decreased by an amount equal to the lesser of: (x) one-twelfth of the aggregate Additional Variable Rent; or (y) the amount by which the Variable Rent otherwise payable pursuant to subpart (ii) for that quarter without the adjustment provided by this subpart (iv) exceeds the product obtained by multiplying (A) the number of Lessor Container TEU-Days for that quarter, divided by the number of days in that quarter, by (B) $80. Notwithstanding the foregoing, the aggregate deductions from Variable Rent made pursuant to this subpart (iv) shall in no event exceed the aggregate Additional Variable Rent. (7) Carry-Forward of Operating Deficit. If Variable Rent for any particular calendar quarter is less than zero, the amount by which Variable Rent is less than zero (the "Operating Deficit") shall be carried forward and offset against and to the extent of Lessor's positive Variable Rent in subsequent calendar quarters, without interest, until the Operating Deficit is fully offset; provided that, no offset pursuant to this Section shall be made for any quarter for which Additional Variable Rent is payable. In no event shall the Lessor be obligated to make any direct payment to the Lessee to reimburse the Lessee for any Operating Deficit. 7. Withholding Taxes; Arthur Andersen Review; Reports. (a) Withholding Taxes. (i) If at any time during the term of this Agreement, the Lessee is required by law to make any deduction or withholding on account of any tax, assessment or other governmental charge, which is currently in force or may in the future come into force as a result of the action of any tax authority, with respect to the Containers, the Fixed Rent, the Variable Rent, or any other amount payable by the Lessee to the Lessor hereunder, other than any taxes imposed on the Lessee which are based on or measured by its net income, gross receipts (other than gross receipts attributable to the Set Containers), or net worth, the Lessee shall, thereupon be 16 entitled to deduct or withhold, or to offset against the Fixed Rent, the Variable Rent, or any other amount otherwise payable by the Lessee to the Lessor hereunder, the amount of such tax, assessment or other governmental charge (together with interest, additions to tax, penalties or other liabilities related thereto), irrespective of whether such tax, assessment or other governmental charge is imposed with respect to the then current or a previous taxable period, and any amount so deducted, withheld, or offset by the Lessee and paid by the Lessee to the applicable taxing authority pursuant to and in accordance with the deduction or withholding requirement shall be deemed to have been paid by the Lessee to Lessor in satisfaction of the requirements of this Agreement (ii) The Lessee agrees to execute and deliver all such documents and instruments, and to take all such action, as the Lessor shall reasonably request to minimize amounts to be deducted or withheld pursuant to the tax deduction or withholding requirement or to obtain an exemption from the deduction or withholding requirement and to effect any necessary compliance therewith. (iii) If the Lessor is organized under the laws of a jurisdiction outside the United States, then, on or prior to the date it becomes entitled to the receipt of any payment hereunder and from time to time thereafter if requested in writing by the Lessee, the Lessor shall, if and for so long as the Lessor is lawfully able to do so, provide the Lessee with (i) an accurate, complete and duly executed Internal Revenue Service Form 1001 or 4224, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that the Lessor is entitled to benefits under an income tax treaty to which the United States is a party that reduces the rate of withholding tax on payments under this Agreement or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States; or (ii) in the event that, by virtue of a change in law or regulations, such forms are no longer valid, such other evidence of the Lessor's exemption from withholding (if and for so long as the Lessor is legally able to provide such evidence) as is reasonably requested by the Lessee. (iv) If the Lessee makes any deduction or pays any withholding tax pursuant to this Section, the Lessee shall promptly give the Lessor written evidence of payment of such tax. (b) Arthur Andersen Review. Arthur Andersen & Company or such other independent public accounting firm as may be satisfactory to the Lessor will review the calculations of the Adjusted Gross Revenues of the Container Set for each calendar quarter during the Variable Rent Period in the course of performing the annual audit of the Lessee's financial statements and will confirm by a written report to the Lessor to accompany the Variable Rent payment to be paid on or about June 30th of each year during the Variable Rent 17 Period that the calculations made by the Lessee during the preceding year were made in accordance with this Agreement. The Lessee will bear the cost of the review. Any adjustments in the Variable Rent resulting from the review shall be reflected in the payment that accompanies the written report. (c) Reports, Inspection. (i) Concurrently with payment of the Variable Rent for each calendar quarter, Lessee shall provide to Lessor a report substantially in the form of Schedule II hereto showing the calculation of the Lessor Adjusted Gross Revenues for that quarter. (ii) During the term of this Agreement and for a period of one year following termination of this Agreement for any reason whatsoever, for the purpose of verifying the amount of Variable Rent due under this Agreement for any one or more calendar quarters, Lessor shall have the right on five business days notice, at Lessor's expense, to examine during the Lessee's. normal business hours the business records relating to the Containers. 8. Utilization and Other Matters. (a) The Lessee agrees to use the Containers in accordance with the standards accepted in the container leasing industry. The Lessor retains the right to have the Containers inspected at any time, so long as any inspection does not interfere with normal utilization of the Containers. (b) The Lessee agrees not to grant or suffer to exist a lien of any kind on the Containers, or to permit any sublessee to grant or suffer to exist a lien of any kind on the Containers, except for the following liens or encumbrances ("Permitted Liens"): (i) liens or encumbrances that result from acts or omissions of the Lessor; (ii) liens or charges for current taxes, assessments or other governmental charges which are either not yet due or are being contested in good faith and by appropriate proceedings so long, as such proceedings do not involve any danger of the sale, forfeiture or loss of any Container or any interest therein; (iii) materialmen's, mechanics', workmen's, repairmen's, employees' and other like liens arising in the ordinary course of business which are either inchoate and relate to an obligation which is not yet due or which are being contested in good faith and by appropriate proceedings so long as such proceedings do not involve any danger of the sale, forfeiture or loss of any Container or any interest therein; and (iv) the rights of the sublessees of the Containers under 18 their respective subleases with the Lessee. Lessor may enter into a financing arrangement with one or more Lenders; provided that such Lenders acknowledge in writing that they take subject to this Agreement. (c) The Lessee will not permit any sublessee to sell or otherwise transfer title to any Container to any third party. (d) The Lessee agrees to give the Lessor, within one hundred and eighty (180) days of the end of each calendar year, an inventory of the Containers as of year end. This inventory will specify the name of the lessee of each Container then on lease. 9. Insurance; Total Loss or Destruction. (a) The Lessee agrees during the term of this Agreement to insure the Containers against all risks of physical loss and to maintain comprehensive general liability insurance covering the Containers against bodily injury or property damage, in each case subject to normal terms and conditions of a comprehensive insurance policy, the cost of which insurance shall be an Operating Expense of the Container Set for purposes of Section 6. The Lessee will provide the Lessor with a Certificate of Insurance evidencing the insurance for all Containers covered by this Agreement and naming Lessor and Lenders as an additional insured and loss payee as their interests may appear. If the Lessee, through its own negligence, does not maintain the insurance in effect, any loss or expense due to the failure to maintain the insurance in effect shall be the responsibility of the Lessee and, notwithstanding the provisions of Section 6, shall not be an Operating Expense of the Container Set for purposes of Section 6. (b) (i) In the case of a Casualty Occurrence or an Ordinary Disposal Occurrence as to a Container, the Lessee agrees to replace the Container within ninety (90) days after Lessee receives notice of the Casualty Occurrence or within ninety (90) days after the Ordinary Disposal Occurrence with one of like size, type, age, and condition and to deliver to the Lessor with respect thereto concurrently with the replacement of such Container a Certificate of Replacement in the form of Exhibit B attached hereto, a Bill of Sale in substantially the form attached to the Purchase and Sale Agreement, and an amendment to the Uniform Commercial Code financing statements originally filed with respect to this transaction. (ii) In the alternative, until the last day of the calendar quarter following the calendar quarter in which there occurs a Casualty Occurrence or an Ordinary Disposal Occurrence, Lessee may, on behalf of the Lessor, and Lessor hereby authorizes Lessee to, sell, lease or otherwise dispose of a Container subject to a Casualty Occurrence or an Ordinary Disposal Occurrence, at the 19 sole and absolute discretion of the Lessee; provided that, if (x) a Container is subject to a Casualty Occurrence or an Ordinary Disposal Occurrence during the period commencing on the Purchase Date and ending on June 30, 1999; and (y) the total number of Containers included in the Container Set on the Purchase Date and theretofore sold, leased or otherwise disposed of pursuant to this Section (calculated on a TEU basis as of the last day of the most recent calendar quarter during such period) exceeds five percent (5%) of the total number of Containers (calculated on a TEU basis as of the Purchase Date), Lessee shall replace such Container in accordance. with the preceding Section and shall not be entitled to sell, lease or otherwise dispose of such Container pursuant to this Section. The net proceeds of the sale, lease or other disposition shall be allocated between the Lessor and the Lessee as follows: (1) the Lessor shall first receive an amount equal to the lesser of: (A) the amount of the net proceeds; or (B) the value of the Container according to Exhibit A attached hereto; and (2) any net proceeds remaining after the allocation to the Lessor in subpart (1) shall be paid 50% to the Lessor and 50% to the Lessee as incentive compensation for handling the sale, lease or other disposition. (iii) The cost of the replacement or the payment shall not be an Operating Expense of the Container Set for purposes of Section 6. (iv) If the Lessee elects to replace the Container, it shall be entitled to retain the net proceeds of the Casualty Occurrence or Ordinary Disposal Occurrence for its own account, and the Lessor shall transfer all of its right, title and interest in and to the original Container to the Lessee. Lessor agrees to execute or to cause to be executed all necessary documents, including a bill of sale and a Uniform Commercial Code release, to evidence such transfer to Lessee. (v) If the Lessee elects to pay the Lessor the amount described in Section 9(b) (ii) above, the Lessor shall be entitled to Fixed Rent or Variable Rent on account of the Container subject to the Casualty Occurrence or Ordinary Disposal Occurrence in accordance with Section 6 and shall be entitled to receive such amount on or prior to the last day of the calendar quarter following the calendar quarter in which termination of this Agreement occurs as to such Container. 10. Security Interest. To secure the prompt and full payment and performance of any and all of Lessee's obligations hereunder, 20 Lessee hereby assigns, transfers, sets over, and grants to Lessor a security interest in all of Lessee's right, title and interest in and to any and all present or future subleases, leases, chattel paper, agreements for use, or other similar agreements relating to the Containers, all accounts, rents, payments and other rights to receive moneys relating thereto, all other general intangibles thereunder, all books and records and other documents relating thereto, and all proceeds of the foregoing (in each case to the extent the same relates to the Containers) (collectively, the "Collateral"). Upon the occurrence and during the continuance of an Event of Default (provided that the Lessor shall have delivered to the Lessee written notice of termination of this Agreement pursuant to Section 4(c) and the written notice described in Section 5 (c) (A), except that no notices are required with respect to the Event of Default specified in Section 4(c) (5)), Lessee agrees that Lessor shall have the right from and after the effective date of termination to receive and collect all rent and other sums payable to or receivable by Lessee under any such subleases, and the right to make all waivers and agreements, to give all notices, consents and releases and to do any and all other things whatsoever which the Lessee is or may become entitled to do under any sublease (in each case to the extent such sublease relates to the Containers). Anything herein to the contrary notwithstanding, nothing contained in this Section 10 may be interpreted as permitting the Lessor or any Lender, and no right or remedy may be exercised by the Lessor or any Lender, which would result in the derogation of any covenant of quiet enjoyment made to any sublessee under any sublease of a Container. 11. Sale or Transfer by Lessor. The Lessor may at any time sell or transfer any Container or any interest therein subject to this Agreement, provided that: (a) the party to whom the Container is sold or transferred acknowledges in writing that the sale or transfer is subject to this Agreement; (b) the Lessor shall not be entitled to offer or sell any Container or any interest therein or assign or transfer this Agreement or any interest therein to any resident, domiciliary or citizen of the United States unless the offer, sale, assignment or transfer is made in compliance with all applicable United States and state securities laws; and (c) the Lessor shall not be entitled to sell or transfer any Container or any interest therein during the term of this Agreement to any person engaged in the business of operating and leasing ocean-going marine shipping containers to end-users, or any affiliates thereof (other than PLM International, Inc. and its affiliates). 21 With respect to paragraph (b) above, the Lessor agrees that it will not authorize discussions concerning the sale or transfer of any Container or any interest therein, or the assignment or transfer of this Agreement or any interest therein, within the United States. If an agency or court of the United States or any State thereof makes a legitimate request for information to evidence compliance with the matters stated in this Section 11, the Lessor shall, upon notice from the Lessee that such request has been made, disclose such information or the evidence verifying such information so as to comply with such request. 12. Assignment or Transfer by Lessee. No assignment hereof by Lessee or transfer of any of the rights of Lessee hereunder shall be valid or effective as against the Lessor unless in conformity with the prior written consent of the Lessor (which consent shall not be unreasonably withheld). 13. Governing Law. This Agreement is to be interpreted and enforced in accordance with the laws of the State of California. 14. Securities Laws Representation. For the purpose of the United States and state securities laws, Lessor represents and warrants to the Lessee that the following are true and correct on the date the Lessor executes this Agreement: (a) The Lessor has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of an investment in containers and of protecting its own interests in connection with such investment. (b) The Lessor is entering into this Agreement and acquiring the Containers or an interest therein for its own account and not with a view to or for sale in connection with any distribution of a security. Lessor acknowledges that this transaction has not been registered under the Securities Act of 1933, as amended (the "Act"), or any state securities law. Therefore, if this transaction is deemed a security under federal or state securities laws, an interest in this Agreement or in the Containers may not be resold unless it is registered under the Act and all applicable state securities laws or an exemption from such registration is available. 15. Amendment. No modification or amendment of this Agreement shall be valid unless in writing and executed by the parties hereto. 16. Integration. This Agreement represents the entire agreement and understand- 22 ing between the parties hereto and supersedes all prior or contemporaneous agreements, whether written or oral, with respect to the subject matter hereof. 17. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 18. Title and Headings; Sections. Title and headings of the sections and subsections of this Agreement are for convenience of reference only and do not form a part of this Agreement and shall not in any way affect the interpretation thereof. References to sections and subsections without further attribution mean sections and subsections of this Agreement. 19. Successors and Assigns. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of each party hereto. 20. Further Assurances. The parties hereto agree to execute and deliver, or cause to be executed and delivered, such further instruments or documents and take such further action as may be reasonably required effectively to carry out the transactions contemplated herein. 21. Waiver of Jury Trial. LESSEE AND LESSOR EACH IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM, OR ANY OTHER LITIGATION OR PROCEEDING UPON, ARISING OUT OF, OR RELATED TO THIS AGREEMENT. 22. Chattel Paper. Only one counterpart of this Agreement shall be marked "Counterpart No. One" ("Counterpart No. One"), and all other counterparts hereof shall be marked as, and shall be duplicates. To the extent this Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code in effect in any applicable jurisdiction), no security interest herein may be created through the transfer or possession of any counterpart other than Counterpart No. One. 23 23. Effectiveness. This Agreement shall be effective, only when it has been executed and delivered by each of the parties hereto. EXECUTED as of the 17th day of April, 1995. TRANS OCEAN CONTAINER CORPORATION, the Lessee 851 Traeger Avenue San Bruno, CA. 94066 Telecopy No. (415) 873-6764 By: /s/ [ILLEGIBLE] ------------------------------------ Its: TREASURER ----------------------------------- INVESTORS ASSET HOLDING CORP., not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust," the Lessor Exchange Place Boston, MA 02109 Telecopy No. (617) 523-1410 By: ------------------------------------ Its: ----------------------------------- 24 23. Effectiveness. This Agreement shall be effective, only when it has been executed and delivered by each of the parties hereto. EXECUTED as of the 17th day of April, 1995. TRANS OCEAN CONTAINER CORPORATION, the Lessee 851 Traeger Avenue San Bruno, CA. 94066 Telecopy No. (415) 873-6764 By: ------------------------------------ Its: ----------------------------------- INVESTORS ASSET HOLDING CORP., not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust," the Lessor Exchange Place Boston, MA 02109 Telecopy No. (617) 523-1410 By: /s/ [ILLEGIBLE] ------------------------------------ Its: Vice-President ----------------------------------- 24 EXHIBIT A VALUE IN THE EVENT OF A CASUALTY OCCURRENCE OR AN ORDINARY DISPOSAL OCCURRENCE (As % of Container Cost) After After Quarter* Value Quarter* Value -------- ----- -------- ----- 0 103.75% 31 64.77% 1 103.00% 32 62.76% 2 102.23% 33 60.68% 3 101.43% 34 58.53% 4 100.61% 35 56.31% 5 99.76% 36 54.02% 6 98.89% 37 51.66% 7 97.98% 38 49.22% 8 97.05% 39 46.70% 9 96.08% 40 44.10% 10 95.08% 41 41.41% 11 94.05% 42 38.64% 12 92.99% 43 35.77% 13 91.90% 44 32.82% 14 90.76% 45 29.77% 15 89.59% 46 26.61% 16 88.39% 47 23.36% 17 87.14% 48 20.00% 18 85.85% 49 18.61% 19 84.52% 50 17.18% 20 83.15% 51 15.70% 21 81.73% 52 14.17% 22 80.27% 53 12.59% 23 78.76% 54 10.96% 24 77.20% 55 9.28% 25 75.59% 56 7.54% 26 73.93% 57 5.74% 27 72.21% 58 3.89% 28 70.44% 59 1.98% 29 68.61% 60 0.00% 30 66.72% - ---------- * Quarters begin to be counted as of the beginning of the first calendar quarter after the calendar quarter in which the Container is included in the Container Set. 26 EXHIBIT B SAMPLE Certificate of Replacement Number ______ A. Description of the Container(s) Trans Ocean Container Corporation (the "Lessee") certifies that the Container(s) listed below in Column 1 (the "Affected Container(s)") that heretofore were subject to the Marine Shipping Container Variable Lease dated as of April _____, 1995 (the "Agreement") with Investors Asset Holding Corp., a Massachusetts corporation, not in its individual capacity but solely as Trustee of the "AFG/ICCU Trust" (the "Lessor") have been subject to a Casualty Occurrence or an Ordinary Disposal Occurrence (as such terms are defined in the Agreement). Therefore, in accordance with Section 9(b) of the Agreement, the Lessee elects to provide replacement container(s) therefor and certifies that: (i) the container(s) listed below in Column 2 (the "Replacement Container (s)") are of like size, type, age and condition as the Affected Container(s), and (ii) effective on the date indicated below, the Replacement Container(s) shall, for purposes of the Agreement, replace the Affected Container(s), and (iii) the Replacement Container(s) are, as of such date, "Containers" for purposes of the Agreement. COLUMN 1 COLUMN 2 -------- -------- 1. Designation of Containers 1. Designation of Containers 2. Type: 2. Type: 3. Quantity: 3. Quantity: 4. Container 4. Container Numbers: Numbers: B. Date Replacement Container(s) Are Effective Under The Agreement: C. Lease of the Replacement Containers(s) The Lessee shall lease the above-designated Replacement Container(s) in accordance with the terms and conditions of the Agreement. D. Restriction on Transfer of the Replacement Container(s) The Lessor may not sell or transfer the above designated Replacement Container(s) or any interest therein except in accordance with the Agreement. TRANS OCEAN CONTAINER CORPORATION By: ------------------------------- Title: ---------------------------- 27 SCHEDULE I Specified Depot Locations for Redelivery of the Containers Pusan New York Hong Kong London Kaohsiung Le Havre Kobe Antwerp Nagoya Rotterdam Yokohama Bremen Seattle Hamburg San Francisco/Oakland Marseille Los Angeles/Long Beach Genoa Houston Leghorn New Orleans Milan Chicago 28 SCHEDULE II TRANS OCEAN LTD CALCULATION OF DAILY ADJUSTED GROSS REVENUE COMBINED CONTAINER SET IV ? QUARTER 199? I. CONTAINER SET RESULTS
DRY CARGO DRY CARGO HIGH CUBE OPEN TOP OPEN TOP COLLAPSIBLE 20' 40' DRY 40' 20' 40' FLAT 40' TOTAL --------- --------- --------- -------- -------- ----------- ----- GROSS REVENUE $5 $5 $5 $5 $5 $5 $30 BAD DEBT WRITE-OFFS ($1) ($1) ($1) ($1) ($1) ($1) ($6) --------- --------- --------- -------- -------- ----------- ----- TOTAL GROSS REVENUE $4 $4 $4 $4 $4 $4 $24 REPAIR AND MAINTENANCE EXPENSE $1 $1 $1 $1 $1 $1 $6 OTHER OPERATING EXPENSES $1 $1 $1 $1 $1 $1 $6 --------- --------- --------- -------- -------- ----------- ----- TOTAL EXPENSES $2 $2 $2 $2 $2 $2 $12 --------- --------- --------- -------- -------- ----------- ----- ADJUSTED GROSS REVENUE $2 $2 $2 $2 $2 $2 $12 ========= ========= ========= ======== ======== =========== =====
II. CONTAINER SET TEU DAYS BEGINNING ENDING AVERAGE DAYS IN CONTAINER SET MONTH TEUS TEUS TEUS MONTH TEU DAYS - ---------- --------- ------ ------- ------- ------------- Month 1 6.00 6.00 6.00 31 186.00 Month 2 6.00 6.00 6.00 30 180.00 Month 3 6.00 6.00 6.00 31 186.00 ------------- TOTAL CONTAINER SET TEU DAYS 552.00 ============= III. DAILY ADJUSTED GROSS REVENUE PER TEU
DRY CARGO DRY CARGO HIGH CUBE OPEN TOP OPEN TOP COLLAPSIBLE 20' 40' DRY 40' 20' 40' FLAT 40' TOTAL --------- --------- --------- -------- -------- ----------- ------ AVERAGE # OF CONTAINER TEU DAYS 92.00 138.00 154.56 92.00 33.44 42.00 552.00 GROSS REVENUE $0.05 $0.04 $0.03 $0.05 $0.15 $0.12 $0.05 BAD DEBT WRITE-OFFS ($0.01) ($0.01) ($0.01) ($0.01) ($0.03) ($0.02) ($0.01) --------- --------- --------- -------- -------- ----------- ------ TOTAL GROSS REVENUE $0.04 $0.03 $0.03 $0.04 $0.12 $0.10 $0.04 REPAIR AND MAINTENANCE EXPENSE $0.01 $0.01 $0.01 $0.01 $0.03 $0.02 $0.01 OTHER OPERATING EXPENSES $0.01 $0.01 $0.01 $0.01 $0.03 $0.02 $0.01 --------- --------- --------- -------- -------- ----------- ------ TOTAL EXPENSES $0.02 $0.01 $0.01 $0.02 $0.06 $0.05 $0.02 --------- --------- --------- -------- -------- ----------- ------ ADJUSTED GROSS REVENUE $0.02 $0.01 $0.01 $0.02 $0.06 $0.05 $0.02 ========= ========= ========= ======== ======== =========== ======
TRANS OCEAN LTD CALCULATION OF LESSOR'S VARIABLE RENT COMBINED CONTAINER SET IV ? QUARTER 199? LESSOR: ? I. LESSOR'S CONTAINER TEU DAYS 40' HIGH 40' DRY CUBE CARGO DRY CARGO TOTAL ------- --------- ------ NUMBER OF CONTAINER DAYS IN THE CONTAINER SET: 92 92 TEU FACTOR: 1.50 1.68 ------- --------- LESSOR'S CONTAINER TEU DAYS: 138.00 154.56 292.56 ------- --------- ====== II LESSOR'S ADJUSTED GROSS REVENUE DAILY ADJUSTED GROSS REVENUE PER TEU: $0.02 LESSOR'S CONTAINER TEU DAYS: 292.56 -------- LESSOR'S ADJUSTED GROSS REVENUE $5.85 -------- VARIABLE RENT PERCENTAGE: 75.00% -------- VARIABLE RENT DUE TO LESSOR: $4.39 ======== CONTAINER TEU DAYS CALCULATION ? QUARTER 199? LESSOR TOTAL UNIT TOTAL CONTAINER ACTIVITY NUMBER DAYS IN TEU TEU TYPE DATE OF UNITS QUARTER FACTOR DAYS - ------------ -------- -------- ------- ------ ------- C40 Month 1 1 92 1.50 138.00 -------- ------- ------- 1 92 138.00 J40 Month 1 1 92 1.68 154.56 -------- ------- ------- 1 92 154.56 LLR00D LOAN AMORTIZATION SCHEDULE 9/29/97 10:34:50 PAGE 1 EQUITY OWNER: 8801 AFG TRUST 88-1 PERCENT OWNED: 100.000000% LESSEE: AMOCO RENTAL SCHEDULE: B-O-9 LENDER NAME: KANSALLIS FINANCE LTD LOAN CODE: KFNL052
PRINCIPAL PRINCIPAL PAYMENT PMT BALANCE TOTAL INTEREST PRINCIPAL BALANCE DATE # BEFORE PMT PAYMENT PAYMENT PAYMENT AFTER PMT - ------------------------------------------------------------------------------------------------- 2/01/1989 1 119,033.61 9,808.71 3,228.79 6,579.92 112,453.69 8/01/1989 2 112,453.69 9,808.71 5,903.82 3,904.89 108,548.80 2/01/1990 3 108,548.80 9,808.71 5,698.81 4,109.90 104,438.90 8/01/1990 4 104,438.90 9,808.71 5,483.04 4,325.67 100,113.23 2/01/1991 5 100,113.23 9,808.71 5,255.94 4,552.77 95,560.46 8/01/1991 6 95,560.46 9,808.71 5,016.92 4,791.79 90,768.67 2/01/1992 7 90,768.67 9,808.71 4,765.36 5,043.35 85,725.32 8/01/1992 8 85,725.32 9,808.71 4,500.58 5,308.13 80,417.19 2/01/1993 9 80,417.19 9,808.71 4,221.90 5,586.81 74,830.38 8/01/1993 10 74,830.38 9,808.71 3,928.60 5,880.11 68,950.27 2/01/1994 11 68,950.27 9,808.71 3,619.89 6,188.82 62,761.45 8/01/1994 12 62,761.45 9,808.71 3,294.98 6,513.73 56,247.72 8/01/1994 56,247.72 17,975.55 .00 17,975.55 38,272.17 2/01/1995 13 38,272.17 6,674.24 2,009.29 4,664.95 33,607.22 8/01/1995 14 33,607.22 6,674.24 1,764.38 4,909.86 28,697.36 2/01/1996 15 28,697.36 6,674.24 1,506.61 5,167.63 23,529.73 8/01/1996 16 23,529.73 6,674.24 1,235.31 5,438.93 18,090.80 2/01/1997 17 18,090.80 6,674.24 949.77 5,724.47 12,366.33 8/01/1997 18 12,366.33 6,674.24 649.23 6,025.01 6,341.32 8/02/1997 6,341.32 6,341.32 .00 6,341.32 .00 2/01/1998 19 .00 .00 .00 .00 .00 182,066.83 63,033.22 119,033.61
YEARLY RATE OF RETURN: 10.50000% ** END OF REPORT ** Exhibit A - Value in the Event of a Casualty Occurrence or an Ordinary Disposal Occurrence Exhibit B - Certificate of Replacement Schedule I - Specified Depot Locations Schedule II - Form of Report re: Lessor Adjusted Gross Revenues EX-27 11 EX-27
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 4,468,062 175,617 1,767,212 0 0 5,996,644 18,578,185 8,461,236 14,457,880 632,892 3,688,947 0 0 0 10,136,041 14,457,880 0 2,945,128 0 0 2,468,673 0 338,932 137,523 0 137,523 0 0 0 137,523 0 0
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