-----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, VCyGgaDea0z6lyCO5uSFYulM3OW4+bKKEAh+RYJkl6VgiicYiqDmounJTvfTrSrs 5+ouqgSpgdZfVKe0C7feug== 0000950134-97-000228.txt : 19970115 0000950134-97-000228.hdr.sgml : 19970115 ACCESSION NUMBER: 0000950134-97-000228 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961130 FILED AS OF DATE: 19970114 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KITTY HAWK INC CENTRAL INDEX KEY: 0000932110 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, NONSCHEDULED [4522] IRS NUMBER: 752564006 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25202 FILM NUMBER: 97505773 BUSINESS ADDRESS: STREET 1: 1515 WEST 20TH ST STREET 2: SECOND FLOOR CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75240 BUSINESS PHONE: 9724562200 MAIL ADDRESS: STREET 1: P O BOX 612787 CITY: DALLAS/FORT WORTH IN STATE: TX ZIP: 75261 10-Q 1 FORM 10-Q FOR PERIOD ENDING NOVEMBER 30, 1996 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED NOVEMBER 30, 1996 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-25202 KITTY HAWK, INC. (Exact name of registrant as specified in its charter) Delaware 75-2564006 (State of Incorporation) (I.R.S. Employer Identification No.) 1515 West 20th Street P.O. Box 612787 Dallas/Fort Worth International Airport, Texas 75261 (972) 456-2200 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) 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 [ ] Number of shares outstanding of the registrant's common stock, $0.01 par value, as of January 13, 1997: 10,451,807. 2 KITTY HAWK, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets November 30, 1996 and August 31, 1996 ....................... 3 Condensed Consolidated Statements of Income Three months ended November 30, 1996 and 1995 ............... 4 Condensed Consolidated Statements of Cash Flows Three months ended November 30, 1996 and 1995 ............... 5 Condensed Consolidated Statements of Stockholders' Equity Three months ended November 30, 1996 ........................ 6 Notes to Condensed Consolidated Financial Statements ........... 7 - 8 Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations. ........................ 9 - 14 PART II. OTHER INFORMATION Item 1.Legal Proceedings ......................................... 15 Item 2.Changes in Securities. .................................... 15 Item 3.Defaults upon Senior Securities ........................... 15 Item 4.Submission of Matters to a Vote of Security Holders ....... 15 Item 5.Other Information ......................................... 15 Item 6.Reports on Form 8-K and Exhibits .......................... 15 - 16 Signatures ....................................................... 17
2 3 PART I.FINANCIAL INFORMATION KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 30, AUGUST 31, ASSETS 1996 1996 -------------- -------------- (unaudited) Current assets Cash and cash equivalents ............................. $ 27,294,783 $ 5,763,904 Trade accounts receivable ............................. 9,141,216 14,195,990 Deferred income taxes ................................. 156,562 156,562 Income tax receivable ................................. 176,015 765,395 Inventory and aircraft supplies ....................... 2,578,197 1,713,812 Prepaid expenses and other assets ..................... 2,702,441 918,929 -------------- -------------- Total current assets .............................. 42,049,214 23,514,592 -------------- -------------- Property and equipment Aircraft .............................................. 58,782,586 53,695,320 Aircraft work-in-progress ............................. 16,271,689 13,476,355 Machinery and equipment ............................... 2,493,605 1,776,319 Furniture and fixtures ................................ 246,370 241,370 Transportation equipment .............................. 289,499 236,708 -------------- -------------- 78,083,749 69,426,072 Less: accumulated depreciation and amortization ...... (15,016,667) (13,112,786) -------------- -------------- Net property and equipment ........................ 63,067,082 56,313,286 -------------- -------------- Total assets ............................................... $ 105,116,296 $ 79,827,878 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable ...................................... $ 8,069,013 $ 12,952,180 Accrued expenses ...................................... 1,840,769 1,580,465 Accrued maintenance reserves .......................... 2,105,471 2,323,466 Revolving Credit Facility for aircraft acquisitions expected to be refinanced ........................... 10,000,000 10,000,000 Current maturities of long-term debt .................. 3,658,916 3,620,240 -------------- -------------- Total current liabilities ......................... 25,674,169 30,476,351 Long-term debt ............................................. 22,344,902 23,291,302 Deferred income taxes ...................................... 2,421,480 2,421,480 Commitments and contingencies Stockholders' equity Preferred stock, $1 par value: Authorized shares --1,000,000, none issued ........................... -- -- Common stock, $.01 par value: Authorized shares --25,000,000; issued and outstanding --10,669,517 and 7,967,710, respectively ........... 106,695 79,677 Additional paid in capital ............................ 34,013,159 4,635,524 Retained earnings ..................................... 22,632,193 20,999,846 Less common stock in treasury, 217,710 shares ..................................... (2,076,302) (2,076,302) -------------- -------------- Total stockholders' equity ........................ 54,675,745 23,638,745 -------------- -------------- Total liabilities and stockholders' equity ................. $ 105,116,296 $ 79,827,878 ============== ==============
See accompanying notes. 3 4 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)
THREE MONTHS ENDED NOVEMBER 30, NOVEMBER 30, 1996 1995 ------------ ------------ Revenues: Air freight carrier ......................... $ 13,252,829 $ 12,816,182 Air logistics ............................... 12,160,877 23,229,016 ------------ ------------ Total revenues ........................... 25,413,706 36,045,198 ------------ ------------ Costs of revenues: Air freight carrier ......................... 9,081,228 8,518,032 Air logistics ............................... 11,214,356 21,590,934 ------------ ------------ Total costs of revenues .................. 20,295,584 30,108,966 ------------ ------------ Gross profit ................................... 5,118,122 5,936,232 General and administrative expenses ............ 2,031,897 2,012,230 Non-qualified employee profit sharing expense .. 235,620 359,781 ------------ ------------ Operating income ............................... 2,850,605 3,564,221 Other income (expense): Interest expense ............................ (463,304) (360,784) Other, net .................................. 333,278 29,834 ------------ ------------ Income before income taxes ..................... 2,720,579 3,233,271 Income taxes ................................... 1,088,232 1,277,142 ------------ ------------ Net income ..................................... $ 1,632,347 $ 1,956,129 ============ ============ Net income per share ........................... $ 0.18 $ 0.25 ============ ============ Weighted average common and common equivalent shares outstanding ............... 9,322,527 7,967,710 ============ ============
See accompanying notes. 4 5 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
THREE MONTHS ENDED NOVEMBER 30, NOVEMBER 30, 1996 1995 ------------ ------------ Operating activities: Net income ......................................... $ 1,632,347 $ 1,956,129 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization .................... 1,903,881 1,187,356 Stock bonus ...................................... 21,684 -- Changes in operating assets and liabilities: Trade accounts receivable ...................... 5,054,774 (3,933,225) Income taxes receivable ........................ 589,380 -- Inventory and aircraft supplies ................ (864,385) (86,824) Prepaid expenses and other ..................... (1,783,512) (2,776,366) Accounts payable and accrued expenses .......... (4,622,863) 1,396,476 Accrued maintenance reserves ................... (217,995) -- Income taxes payable ........................... -- 1,064,051 ------------ ------------ Net cash provided by (used in) operating activities ........................... 1,713,311 (1,192,403) Investing activities: Capital expenditures ............................... (8,657,677) (174,697) ------------ ------------ Financing activities: Repayments of long-term debt ....................... (907,724) (873,557) Proceeds from issuance of common stock ............. 29,382,969 -- ------------ ------------ Net cash provided by (used in) financing activities ......................................... 28,475,245 (873,557) ------------ ------------ Net increase (decrease) in cash and cash equivalents ........................................ 21,530,879 (2,240,657) Cash and cash equivalents at beginning of period ............................................. 5,763,904 3,801,378 ------------ ------------ Cash and cash equivalents at end of period ............ $ 27,294,783 $ 1,560,721 ============ ============
See accompanying notes. 5 6 KITTY HAWK, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL NUMBER OF COMMON PAID IN RETAINED TREASURY SHARES STOCK CAPITAL EARNINGS STOCK TOTAL ---------------------------------------------------------------------------------- Balance at August 31, 1996 ................ 7,967,710 $ 79,677 $ 4,635,524 $20,999,846 $(2,076,302) $23,638,745 Shares sold in initial public offering .... 2,700,000 27,000 29,355,969 -- -- 29,382,969 Shares issued to employees under the Annual Incentive Compensation Plan ..... 1,807 18 21,666 -- -- 21,684 Net income ................................ -- -- -- 1,632,347 -- 1,632,347 ---------------------------------------------------------------------------------- Balance at November 30, 1996 .............. 10,669,517 $ 106,695 $34,013,159 $22,632,193 $(2,076,302) $54,675,745 ==================================================================================
See accompanying notes. 6 7 KITTY HAWK, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying condensed consolidated financial statements, which should be read in conjunction with the consolidated financial statements and footnotes included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on November 27, 1996, are unaudited (except for the August 31, 1996 condensed consolidated balance sheet which was derived from the Company's audited consolidated balance sheet included in the aforementioned Form 10-K), but have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended November 30, 1996 are not necessarily indicative of the results that may be expected for the year ended August 31, 1996. On December 17, 1996, the Company filed a Form 8-K and elected to change its fiscal year end to December 31. Operating results for the three month period ended November 30, 1996 are not necessarily indicative of the results that may be expected for a calendar year. Net income per share is computed by dividing net income by the weighted average number of common and common equivalent shares outstanding during the period. The effect of options to purchase 390,707 and 153,567 shares of the Company's common stock at $0.01 granted to certain executives in December 1995 and June 1996, respectively, have been included in the calculation of weighted average common and common equivalent shares for the three month period ended November 30, 1996. 2. REGISTRATION OF STOCK OFFERING In October 1996, the Company sold in an initial public offering 2,700,000 shares of Common Stock. 3. LITIGATION The Company filed suit against Express One International, Inc. ("Express One") in July 1992 in Dallas County, Texas, claiming that Express One breached an aircraft charter agreement and seeking actual damages of approximately $60,000. Express One counterclaimed, asserting that the Company wrongfully repudiated the lease agreement and seeking damages of $356,718 for services performed, $1,140,000 for additional fees it would have received under the contract, punitive damages and its attorney's fees and costs. In February 1995, a jury awarded the Company $25,000 in damages plus its attorneys' fees and denied Express One's counterclaims. The court entered judgment in favor of the Company for $25,000 in damages, for $148,115 in attorneys fees through trial and for additional attorneys fees if Express One appeals. Before expiration of the time for appeal, Express One filed a petition under Chapter 11 of the U.S. Bankruptcy Code. There is a dispute about whether Express One has preserved a right to appeal and whether the judgment has become final. Therefore, the judgment awarded to the Company has not been recorded in the financial statements. The Company does not expect the outcome to have a material adverse effect upon the Company's financial condition or results of operations. 7 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The USPS selected the Company's air freight carrier in September 1992 as the successful bidder on a contract for a multi-city network of air transportation services supporting the USPS Express Mail system. Two unsuccessful bidders sued the USPS to enjoin the award. The Company intervened. This litigation (the "ANET Litigation") was settled in April 1993 by agreements under which the USPS terminated the Company's contract for convenience and awarded the contract to the incumbent contractor, Emery Worldwide Airlines, Inc. ("Emery"). In March 1995, the Company was served with a complaint in a qui tam lawsuit filed on behalf of the U.S. Government by a third-party plaintiff seeking to share a recovery under the Federal False Claims Act (the "Act"). The suit, filed in May 1994, was filed under seal in accordance with the Act, to enable the U.S. Government to review the claim before its disclosure to the defendants. The U.S. Government declined to pursue the claim, but the third-party plaintiff chose to continue. The suit claimed that the Company and another defendant fraudulently failed to disclose to the USPS, both in the Company's successful bid and in the settlement of the ANET litigation, that certain of the aircraft the Company proposed to purchase and use to perform the contract were aging aircraft with high use, and claimed that the Company and Emery similarly fraudulently conspired in connection with the settlement of the ANET litigation. The suit sought to recover treble the $10 million settlement payment made by the USPS in settling the ANET litigation, plus the third party plaintiff's costs and fees. In May 1996, the court dismissed the suit and awarded the Company its attorneys' fees and costs. The plaintiff has asked the court to reconsider its ruling. The Company does not expect the outcome of this matter to have a material adverse effect upon the Company's financial condition or results of operations. 4. SUBSEQUENT EVENTS In December 1996, the Company sold two recently acquired and modified Boeing 727-200 aircraft to an operating lessor and entered into an operating lease agreement for such aircraft commencing January 1, 1997, ending December 31, 1997, with five successive one year renewal options. The Company has an option to purchase the aircraft at the end of each year, and must guarantee to the lessor certain minimum sale values if the Company elects not to renew the lease or exercise its purchase option. The funds from the sale were partially used to pay indebtedness incurred to acquire, convert to cargo configuration, perform maintenance updates and hushkit the aircraft. In November 1996, the Company acquired a Boeing 727-200 aircraft in passenger configuration under a seven year operating lease at a monthly rate of $50,000.00. The aircraft is being modified to cargo configuration and is undergoing maintenance updates at the Company's cost. In November 1996, the Company purchased a Boeing 727-200 aircraft in passenger configuration. The aircraft was slightly damaged in the process of its original delivery to the Company and is expected to be repaired and finally delivered in January 1997. The aircraft will be modified to cargo configuration, undergo maintenance updates, and equipped with a hushkit. In December 1996, the Company entered into a revision of its agreement with the supplier of noise abatement equipment increasing the number of hushkits it has firmly committed to purchase and establishing fixed prices for those kits. See Management's Discussion and Analysis of Financial Condition and Results of Operations - "Liquidity and Capital Resources". 8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Revenues. The Company's revenues are derived from two related businesses: (i) air freight carrier and (ii) air logistics. Air freight carrier revenues are derived substantially from ACMI contract and on-demand charters flown with Company aircraft. Air logistics revenues are derived substantially from on-demand air freight charters arranged by Kitty Hawk for its customers utilizing the flight services of third-party air freight carriers. For those on-demand charters that are arranged by the Company and flown by its air freight carrier, charges to the customer for air transportation are accounted for as air freight carrier revenues and charges for ground handling and transportation are accounted for as air logistics revenues. As the Company's fleet size increases, the Company expects the percentage of its revenues derived from its air freight carrier business to materially increase. GM, the US Postal Service and Burlington Air Express, Inc. have each accounted for more than 10% of the Company's revenues for the last fiscal year. Cost of Revenues. The principal components of the costs of revenues attributable to the air freight carrier consist of the costs for the maintenance and operation of aircraft, including the salaries of pilots and maintenance personnel, charges for fuel, insurance and maintenance, and depreciation of engines and airframes. Generally, charges for fuel are only applicable for the on-demand charters flown by the air freight carrier because fuel for the ACMI contract charters is generally provided by the customer or billed to them on a direct pass-through basis. The principal components of the costs of revenues attributable to air logistics consist of sub-charter costs paid to third-party air freight carriers and costs paid for ground handling and transportation. With respect to on-demand charters that are flown by the air freight carrier, all related air transportation expenses are allocated to the air freight carrier and all related cargo ground handling and transportation expenses are allocated to air logistics. Due to recent strikes and labor disruptions at certain GM plants, there has been a decrease during the three month period ended November 30, 1996 in the number of charters flown by the Company's air logistics business. 9 10 RESULTS OF OPERATIONS The following table sets forth, on a comparative basis for the periods indicated, the components of the Company's gross profit (in thousands) and the gross profit margin by revenue type:
Three months ended November 30, 1996 1995 ----------------- ----------------- Air freight carrier: Revenues ..................... $13,253 100.0% $12,816 100.0% Costs of revenues ............ 9,081 68.5% 8,518 66.5% ------- ------- ------- ------- Gross profit ................. $ 4,172 31.5% $ 4,298 33.5% ======= ======= ======= ======= Air logistics: Revenues ..................... $12,161 100.0% $23,229 100.0% Costs of revenues ............ 11,214 92.2% 21,591 92.9% ------- ------- ------- ------- Gross profit ................. $ 947 7.8% $ 1,638 7.1% ======= ======= ======= =======
The following table presents, for the periods indicated, condensed consolidated income statement data expressed as a percentage of total revenues:
Three months ended November 30, 1996 1995 ------ ------ Revenues: Air freight carrier ................................. 52.1% 35.6% Air logistics ....................................... 47.9 64.4 ------ ------ Total revenues .................................. 100.0 100.0 Total costs of revenues .................................. 79.9 83.5 ------ ------ Gross profit ............................................. 20.1 16.5 General and administrative expenses ................. 8.0 5.6 Non-qualified employee profit sharing expense ....... 0.9 1.0 ------ ------ Operating income ......................................... 11.2 9.9 Interest expense .................................... (1.8) (1.0) Other income ........................................ 1.3 0.1 ------ ------ Income before income taxes ............................... 10.7 9.0 Income taxes ............................................. 4.3 3.5 ====== ====== Net income ............................................... 6.4% 5.5% ====== ======
10 11 QUARTER ENDED NOVEMBER 30, 1996 COMPARED TO QUARTER ENDED NOVEMBER 30, 1995 Revenues -- Air Freight Carrier. Air freight carrier on-demand and ACMI contract charter revenues were $2.4 million and $10.4 million, or 17.9% and 78.4%, respectively, of total air freight carrier revenues for the quarter ended November 30, 1996, as compared to $6.8 million and $5.3 million, or 53.0% and 41.6%, respectively, for the quarter ended November 30, 1995. ACMI contract charter revenues for the quarter ended November 30, 1996 increased 96.2% over quarter ended November 30, 1995, primarily as the result of additional Boeing 727-200 ACMI contract charters. Revenues from on-demand charters flown by Company aircraft for the quarter ended November 30, 1996 decreased 64.7% from the comparable prior year period due to aircraft being shifted from on-demand to ACMI and lower general on-demand activity during the recent strikes and labor disruptions involving GM. For the quarter ended November 30, 1996, as compared to the quarter ended November 30, 1995, prices for the Company's on-demand and ACMI contract charters remained relatively constant. Revenues -- Air Logistics. Air logistics revenues decreased $11.1 million, or 47.6%, to $12.2 million in the quarter ended November 30, 1996, from $23.2 million in the quarter ended November 30, 1995. This decrease was primarily due to decreased demand for on-demand charters from the automobile industry resulting from the recent strikes and labor disruptions involving GM in the quarter ended November 30, 1996. For the quarter ended November 30, 1996, as compared to the quarter ended November 30, 1995, prices for the Company's air logistics services remained relatively constant. Costs of Revenues -- Air Freight Carrier. Air freight carrier costs of revenues increased $563,000 or 6.6% to $9.1 million in the quarter ended November 30, 1996, from $8.5 million in the quarter ended November 30, 1995, reflecting increased pilot and maintenance personnel costs associated with increased fleet size and ACMI activities. These increases were partially offset by reduced fuel costs due to aircraft being shifted from on-demand to ACMI contract charters. As a result of these factors, gross profit margin from the air freight carrier decreased to 31.5% in the quarter ended November 30, 1996, from 33.5% in the quarter ended November 30, 1995. As reported to the FAA, overall aircraft utilization increased to 5,460 flight hours for the quarter ended November 30, 1996, from 4,617 in the quarter ended November 30, 1995, a 18.3% increase. This increase was primarily due to the increased hours flown for ACMI contract charters. Costs of Revenues -- Air Logistics. Air logistics costs of revenues decreased $10.4 million, or 48.1%, to $11.2 million in the quarter ended November 30, 1996, from $21.6 million in the quarter ended November 30, 1995, reflecting the decreased volume of business. The gross profit margin from air logistics increased to 7.8% in the quarter ended November 30, 1996, from 7.1% in the comparable prior period, a 9.9% increase. This increase was primarily due to the Company's success in reducing its costs paid to third-party air freight carriers and ground service providers. General and Administrative Expenses. General and administrative expenses increased $20,000, or 1.0%, to $2.0 million in the quarter ended November 30, 1996. This increase was primarily due to an increase in support functions and administrative costs associated with the growth in the aircraft fleet and the increased revenue volume for the air freight carrier in the quarter ended November 30, 1996. As a percentage of total revenues, general and administrative expenses increased to 8.0% in the quarter ended November 30, 1996, from 5.6% in quarter ended November 30, 1995. Non-qualified Employee Profit Sharing Expense. Employee profit sharing expense decreased $124,000, or 34.5%, to $236,000 in the quarter ended November 30, 1996, from $360,000 in the quarter ended November 30, 1995, reflecting the reduction of net income before taxes in the quarter ended November 30, 1996. Operating Income. As a result of the above operating income decreased $714,000, or 20%, to $2.9 million in the quarter ended November 30, 1996, from $3.6 million in the quarter ended November 30, 1995. Operating income margin increased to 11.2% from 9.9%, for the quarters ended November 30, 1996 and 1995, respectively. 11 12 Interest Expense. Interest expense increased to $463,000 for the quarter ended November 30, 1996 from $361,000 for the quarter ended November 30, 1995, a 28.4% increase. The increase was primarily the result of the incurrence of additional long-term debt to finance the acquisition of three Boeing 727-200 aircraft. Other Income (Expense). Other income increased to $333,000 in the quarter ended November 30, 1996, from $30,000 in the comparable prior year period. The increase was primarily due to increased interest income from the investment of IPO proceeds in the quarter ended November 30, 1996. Income Taxes. Income taxes as a percentage of income before income taxes increased to 40.0% for the quarter ended November 30, 1996, from 39.5% for the comparable prior year period. The increase was primarily due to increased state income taxes. Net Income. As a result of the above, net income decreased to $1.6 million in the quarter ended November 30, 1996, compared to $2.0 million in the quarter ended November 30, 1995. Net income as a percentage of total revenues increased to 6.4% in the quarter ended November 30, 1996, from 5.5% in the comparable prior year period. LIQUIDITY AND CAPITAL RESOURCES The Company's capital requirements are primarily for the acquisition and modification of aircraft and working capital. In addition, the Company has, and will continue to have, capital requirements for the requisite periodic and major overhaul maintenance checks for its air freight carrier fleet. The Company's funding of its capital requirements historically has been primarily from a combination of internally generated funds and bank borrowings. In addition, the Company has leased aircraft and entered into a sale leaseback for acquisition and may do so in the future. Cash provided by operating activities was $1.7 million and cash used in operating activities was $1.2 million in the quarters ended November 30, 1996 and 1995, respectively. At the end of the quarters ended November 30, 1996 and 1995, the Company had working capital of $16.4 million and $3.8 million, respectively. On August 14, 1996, Kitty Hawk entered into a Credit Agreement with Wells Fargo Bank (Texas), National Association ("WFB"), and Bank One, Texas, N.A. ("BOT") for a $15 million Revolving Credit Loans Facility (the "Revolving Credit Facility"), and a $10 million Term Loan Facility (the "Term Loan") (collectively, the "Commitments"). As of January 13, 1997 $1.5 million was outstanding under the Revolving Credit Facility, and $0 was outstanding under the Term Loan. Borrowings under these Commitments bear interest at WFB's prime rate or, at Kitty Hawk's option, a Eurodollar rate plus 1.5% to 2.0% based upon a debt-to-cash flow ratio of Kitty Hawk. Under the Credit Agreement, $10 million of proceeds of the Revolving Credit Facility are restricted to use from time to time for interim financing of up to $6.5 million per aircraft for aircraft acquisitions by the Company; the remaining $5 million of the Revolving Credit Facility may be used for general corporate purposes, including interim financing for acquired aircraft that exceeds the limits that apply to the restricted portion. Term Loans must be used to finance the purchase of one DC9-15F hushkit and up to seven major maintenance checks for jet aircraft. The Revolving Credit Facility expires on December 31, 1998. Any advance under the portion of the Revolving Credit Facility that is restricted to interim financing for aircraft acquisition must repaid in full within 150 days of first advance for the acquired aircraft. All advances under the Term Loan must be made by April 29, 1998. The Term Loan matures on March 31, 2003. The Commitments are cross-collateralized and are secured by certain aircraft owned by the Company, all aircraft acquired with advances under the restricted portion of the Revolving Credit Facility while those advances are outstanding, certain leases of aircraft and engines, accounts, chattel paper, general intangibles and other personal property. 12 13 The Credit Agreement prohibits (i) the redemption or repurchase of the Company's securities, (ii) the payment of dividends to Kitty Hawk's stockholders in an amount over 25% of the Company's net income of the immediately preceding fiscal year, (iii) certain investments, acquisitions of stock, acquisitions of assets to the extent that the business acquired is not in the present lines of business of the Company, and other business combinations, (iv) certain transactions with affiliates and (v) the Company to incur any additional indebtedness, liabilities or obligations other than debt incurred (a) with the prior written consent of WFB and BOT or (b) in the ordinary course of business not to exceed $25 million. The Credit Agreement also contains certain other covenants, including limitations on the ability of the Company to change its lines of business. If a "Change of Control" occurs, WFB and BOT may accelerate or terminate the Commitments. "Change of Control" includes (a) the failure of Kitty Hawk to own all of the outstanding stock of certain of its subsidiaries, (b) M. Tom Christopher failing to own at least 51% of the outstanding stock of Kitty Hawk, (c) M. Tom Christopher ceasing to be Chief Executive Officer of Kitty Hawk or active in the management of the Company or (d) if, after the consummation of a public offering, any person (or two or more persons acting as a group) acquiring beneficial ownership of 25% or more of the outstanding shares of Common Stock. During the quarters ended November 30, 1996 and 1995, these and similar restrictions and prohibitions under the Company's other credit facilities did not have a material impact on the Company's ability to meet its cash obligations and the Company does not believe that the restrictions under the Credit Agreement will have any such impact in the future. In addition, the Company has a loan with 1st Source Bank. As of January 13, 1997, the outstanding balance of this loan was approximately $1 million. The loan bears interest at 9.75%, is secured by a DC9-15F and matures in May 2000. The 1st Source loan contains certain aircraft maintenance covenants and provides that a change in the Company's business is an event of default upon which 1st Source may declare all or any part of the remaining unpaid principal due and payable. In November 1996, in connection with the Company's recent acquisition of a one-third undivided interest in four Falcon 20 jet aircraft, the Company and the two other co-owners of such aircraft entered into a five year, $4.3 million term loan. The loan bears interest at a floating prime rate, is secured by the four Falcon 20 jet aircraft and requires monthly payments of principal and interest. The Company's liability under such loan is limited to $2.0 million. Capital expenditures were $8.7 million and $174,697 for the quarters ended November 30, 1996 and 1995, respectively. Capital expenditures for the quarter ended November 30, 1996 were primarily for the purchase of: (i) one Boeing 727-200 aircraft and (ii) cargo and noise abatement modification of two Boeing 727-200 aircraft. Capital expenditures for the quarter ended November 30, 1995 were primarily for the purchase of one JT8D-7 engine. In October 1996, the Company sold in an initial public offering 2,700,000 shares of Common Stock, raising net proceeds of approximately $29.4 million to purchase and modify to cargo configuration five Boeing 727-200 aircraft. As of January 13, 1997, the Company has purchased one Boeing 727-200 freighter aircraft for $4.7 million and one Boeing 727-200 aircraft for $2.31 million, which will be modified to cargo configuration in early 1997 for an additional cost of approximately $3.1 million (including approximately $1.82 million for noise abatement equipment). The Company further expects to finalize the purchase of two additional Boeing 727-200s and subsequently to modify them to cargo configuration for a total expenditure of approximately $17.0 million (including noise abatement equipment for approximately $5.0 million). As of January 13, 1997, Company has used approximately $10.0 million of the net proceeds of the initial public offering to fund these expenses. In December 1996, the Company amended its agreement with the supplier of noise abatement equipment to increase the number of hushkits it has firmly committed to purchase and to establish fixed prices. In connection with this new agreement, the Company paid the vendor an additional $350,000 in deposits on seven (7) future, firm orders valued between $13 and 17.5 million, depending on type selected. The Company further believes the $6.9 million amount for noise abatement modifications proposed for fiscal year 1997 for these three aircraft together with an additional $1.5 million to modify a currently owned DC9-15Faircraft with noise abatement equipment during fiscal 1997, represents the total capital expenditures that would currently be necessary to comply with the requirements of existing applicable environmental regulations for such fiscal year. In fiscal year 1998, the Company anticipates an aggregate capital 13 14 expenditure ranging from $9.0 million to $11.0 million for noise abatement modifications to aircraft currently owned or proposed to be purchased. In the event the Company acquires more aircraft than currently proposed, the Company's anticipated aggregate capital expenditures for noise abatement modifications in fiscal year 1998 could materially increase. The Company's revenue fleet is comprised of ten Boeing 727-200 aircraft manufactured between 1969 and 1978, five Douglas DC9-15F aircraft manufactured during 1967 and 1968, and nine turbo-prop Convairs manufactured between 1948 and 1957. Manufacturers' Service Bulletins ("Service Bulletins") and FAA Airworthiness Directives ("Directives") issued under the FAA's "Aging Aircraft" program or issued on an ad hoc basis cause certain of these aircraft to be subject to extensive aircraft examinations and require certain of these aircraft to undergo structural inspections and modifications to address problems of corrosion and structural fatigue at specified times. It is possible that additional Service Bulletins or Directives applicable to the types of aircraft included in the Company's fleet could be issued in the future. The cost of compliance with such Directives and Service Bulletins cannot currently be estimated, but could be substantial. The Company understands the FAA has established an internal procedure to review approvals for new and existing transport category airplane cargo door and other modifications that could affect the Company's fleet of Boeing 727-200 aircraft. The Company believes that as a result of this FAA review, changes to existing and future cargo door and other modifications may be required in 1997 or thereafter. While it is unknown at this time the precise nature of the changes that may be required, if any, or the impact of the changes on Kitty Hawk's fleet of Boeing 727-200 aircraft, compliance with any such changes could have a material adverse impact on Kitty Hawk and its operations. The Company historically has followed, and currently intends to follow, a policy of retiring Convairs at the time of their next scheduled major overhaul maintenance checks rather than expending the amounts necessary for such checks. Kitty Hawk presently intends to purchase the facility it currently occupies at Dallas/Fort Worth International Airport on or before March 1, 1997. Based upon negotiations with the lessor of the facility, the Company expects to purchase the facility for approximately $1.75 million. The Company believes that the net proceeds from its initial public offering, together with available funds, bank borrowings, and cash flows expected to be generated by operations, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 12 months. Thereafter, if cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may sell additional equity or debt securities or obtain additional credit facilities. 14 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Information pertaining to this item is incorporated from Part I. Financial Information (Note 3 - Litigation). ITEM 2. CHANGES IN SECURITIES Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 3, 1996, the Company held its 1996 annual meeting of stockholders. The only matter voted on at this meeting was the re-election of two persons, Richard R. Wadsworth, Jr. and Lewis S. White, as Class 2 directors to serve as members of the Company's Board of Directors for terms of three years ending at the 1999 annual meeting of stockholders, or until their successors are duly elected and qualified. With respect to each nominee, 7,750,000 shares were voted for such nominee and no shares were voted against or withheld. There were no abstentions or broker non-votes. Each Class 1 and 3 director continued as a member of the Company's Board of Directors after the meeting. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. REPORTS ON FORM 8-K AND EXHIBITS (a) The Company did not file any reports on Form 8-K during the three months ended November 30, 1996. (b) Exhibits: The following exhibits are filed herewith or are incorporated by reference from previous filings with the Securities and Exchange Commission. 15 16
Exhibit No. Description - ----------- ----------- 3.1 -- Certificate of Incorporation of the Company.(2) 3.2 -- Bylaws of the Company.(2) 3.3 -- Amendment No. 1 to the Certificate of Incorporation of the Company.(2) 3.4 -- Amendment No. 1 to the Bylaws of the Company.(2) 4.1 -- Specimen Common Stock Certificate.(3) 10.1 -- Aircraft Purchase Agreement between the Company and Intrepid Aviation Partners, LLC dated as of September 24, 1996.(3) 10.2 -- Purchase Agreement between the Company and International Aero Components, Inc. dated as of November 15, 1996.(4) 10.3 -- Purchase Agreement between the Company and International Technical Consultants, Inc. dated as of November 25, 1996.(4) 10.4 -- Aircraft Lease Agreement between the Company and Pegasus Capital Corporation dated as of November 25, 1996. (1) 10.5 -- Aircraft Lease (N750US) between the Company and Fleet Capital Corporation dated December 27, 1996. (1) 10.6 -- Amendment No. 6 dated December 1996 to that certain Purchase Agreement between Federal Express Corporation and Postal Air, Inc. (predecessor to the Company) dated as of October 22, 1992 (1)(5) 10.7 -- Aircraft Lease (N751US) between the Company and Fleet Capital Corporation dated December 27, 1996.(1) 11.1 -- Statement of Computation of Net Income per Share.(1) 21.1 -- Subsidiaries of the Registrant.(3) 27.1 -- Financial Data Schedule.(1)
- ----------- (1) Filed herewith. (2) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, and incorporated herein by reference. (4) Previously filed as an exhibit to the Company's Annual Report on Form 10-K dated as of November 27, 1996, and incorporated herein by reference. (5) Confidential treatment request for certain portions thereof pursuant to Rule 24b-2 promulgated pursuant to the Securities and Exchange Act of 1934, as amended. 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 14th day of January, 1997. KITTY HAWK, INC. By: /s/ RICHARD R. WADSWORTH ----------------------------------- Richard R. Wadsworth Senior Vice President -- Finance, Chief Financial Officer, and Secretary 17 18 INDEX TO EXHIBITS
Exhibit No. Description - ----------- ----------- 3.1 -- Certificate of Incorporation of the Company.(2) 3.2 -- Bylaws of the Company.(2) 3.3 -- Amendment No. 1 to the Certificate of Incorporation of the Company.(2) 3.4 -- Amendment No. 1 to the Bylaws of the Company.(2) 4.1 -- Specimen Common Stock Certificate.(3) 10.1 -- Aircraft Purchase Agreement between the Company and Intrepid Aviation Partners, LLC dated as of September 24, 1996.(3) 10.2 -- Purchase Agreement between the Company and International Aero Components, Inc. dated as of November 15, 1996.(4) 10.3 -- Purchase Agreement between the Company and International Technical Consultants, Inc. dated as of November 25, 1996.(4) 10.4 -- Aircraft Lease Agreement between the Company and Pegasus Capital Corporation dated as of November 25, 1996. (1) 10.5 -- Aircraft Lease (N750US) between the Company and Fleet Capital Corporation dated December 27, 1996. (1) 10.6 -- Amendment No. 6 dated December 1996 to that certain Purchase Agreement between Federal Express Corporation and Postal Air, Inc. (predecessor to the Company) dated as of October 22, 1992 (1)(5) 10.7 -- Aircraft Lease (N751US) between the Company and Fleet Capital Corporation dated December 27, 1996.(1) 11.1 -- Statement of Computation of Net Income per Share.(1) 21.1 -- Subsidiaries of the Registrant.(3) 27.1 -- Financial Data Schedule.(1)
- ----------- (1) Filed herewith. (2) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (Reg. No. 33-85698) dated as of December 1994, and incorporated herein by reference. (3) Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (Reg. No. 333-8307) dated as of October 1996, and incorporated herein by reference. (4) Previously filed as an exhibit to the Company's Annual Report on Form 10-K dated as of November 27, 1996, and incorporated herein by reference. (5) Confidential treatment request for certain portions thereof pursuant to Rule 24b-2 promulgated pursuant to the Securities and Exchange Act of 1934, as amended. EX-10.4 2 AIRCRAFT LEASE AGREEMENT 1 EXHIBIT 10.4 ------------------------------ AIRCRAFT LEASE AGREEMENT DATED AS OF NOVEMBER 25, 1996 BETWEEN PEGASUS CAPITAL CORPORATION AS LESSOR AND KITTY HAWK AIRCARGO, INC. AS LESSEE ONE (1) BOEING MODEL 727-251 AIRCRAFT U.S. REGISTRATION N264US MANUFACTURER'S SERIAL NUMBER 19983 AND THREE (3) PRATT AND WHITNEY JT8D-7B ENGINES ------------------------------ COUNTERPART NO. 3 OF 6 SERIALLY NUMBERED, MANUALLY EXECUTED COUNTERPARTS. TO THE EXTENT THAT THIS AIRCRAFT LEASE AGREEMENT CONSTITUTES CHATTEL PAPER UNDER THE UNIFORM COMMERCIAL CODE IN THE U.S. OR ANY CORRESPONDING LAW IN ANY FOREIGN JURISDICTION, NO SECURITY INTEREST IN THIS AIRCRAFT LEASE AGREEMENT MAY BE CREATED THROUGH THE TRANSFER OR POSSESSION OF ANY COUNTERPART HERETO OTHER THAN COUNTERPART NO.1. 2 INDEX
SECTION HEADING PAGE - ------- ------- ---- Preamble 1 1. Definitions 1 2. Lease and Conditions 7 3. Delivery and Acceptance; Term 9 4. Rent 10 5. Representations and Warranties 12 6. Possession and Use 15 7. Information 21 8. Covenants of Lessee 22 9. Replacement of Parts; Alterations, Modifications and Additions 24 10. General Tax Indemnity 25 11. Casualty Occurrences 26 12. Insurance 29 13. Indemnification 32 14. Liens 33 15. Perfection of Title and Further Assurances 33 16. Return of Aircraft and Records 34 17. Events of Default 37 18. Remedies 39 19. Alienation 42 20. Miscellaneous 43 EXHIBITS EXHIBIT A Description of Aircraft I EXHIBIT B Aircraft Document Summary II EXHIBIT C Definitions and Values III EXHIBIT D Form of Lease Supplement VI EXHIBIT E Return Condition Requirements IX EXHIBIT F Delivery and Other Requirements XII EXHIBIT G Maintenance Recording Requirements XIV EXHIBIT H (Intentionally Omitted) XVI EXHIBIT J-l/J-2 Casualty Values XVII EXHIBIT K Hush Kits
3 AIRCRAFT LEASE AGREEMENT THIS AGREEMENT, dated as of November 25, 1996, is by and between PEGASUS CAPITAL CORPORATION a California corporation ("Lessor"), and KITTY HAWK AIRCARGO, INC., a Texas corporation ("Lessee"). WITNESSETH WHEREAS, Lessee desires to lease from Lessor, and Lessor is willing to lease to Lessee, the Aircraft described herein, upon and subject to the following terms and conditions. NOW THEREFORE, for and in consideration of the premises, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Lessor and Lessee hereby agree as follows: Section 1. Definitions. Unless the context otherwise requires, the following terms shall have the following respective meanings for all purposes of this Agreement and shall be equally applicable to both the singular and the plural forms of the terms herein defined: Aircraft shall mean the Airframe, together with: (i) the three (3) Engines, whether or not installed on the Aircraft; (ii) all Parts and all components thereof; (iii) all ancillary Aircraft or devices furnished with the Aircraft under this Lease; (iv) all Aircraft Documents, and (v) all substitutions, replacements and renewals of any and all thereof. Aircraft Documents shall mean the maintenance and inspection records and all other current and historical records and documentation pertaining to the Aircraft, including, without limitation, the items identified in Exhibit B hereto, those generated by Lessee during the Term, and all such documents and records required to be maintained under Applicable Law and in accordance with the requirements of the FAR Part 121.380, as set forth in Exhibit G hereto. Airframe shall mean: (a) the Boeing model 727-251 airframe (excluding Engines or engines from time to time installed thereon) bearing manufacturer's serial number 19983 and U.S. Registration N264US; and (b) any and all Parts which are from time to time incorporated or installed on or attached thereto or which have been removed therefrom so long as title thereto remains vested in Lessor in accordance herewith, including the terms of Section 9 hereof. Applicable Law shall mean: (i) any law, statute, decree, constitution, regulation, order, judgment, rule, license, permit, injunction 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 interpretation with binding characteristics or 1 4 application of those described in (i) or (ii) above; (iv) any administrative interpretation with binding characteristics or application of those described in (i) or (ii) above; and (v) any amendment or revision of any of those described in (i), (ii), (iii) or (iv) above, and in each case, which is applicable to the Aircraft and its use and operation, the Lessee, any Sublessee, or the transactions contemplated by this Lease and the Operative Agreements. Approved Insurance Broker shall mean that insurance broker of internationally recognized responsibility and standing specializing in Aircraft insurance as is reasonably acceptable to and approved by Lessor. Approved Insurer shall mean that insurer of internationally recognized responsibility and standing effecting Aircraft insurance as is reasonably acceptable to and approved by Lessor. Approved Maintenance Provider shall mean: (i) with respect to any scheduled maintenance or any modification or alteration to the Aircraft, Lessee, Hamilton Aviation of Tucson, Arizona or Aero Corporation of Lake City, Florida, or AAR of Oklahoma, or any other Person which is an FAA approved maintenance facility and which is approved in advance in writing by Lessor to perform maintenance on the Aircraft; and (ii) with respect to any other required maintenance hereunder, an FAA approved maintenance facility which is approved in writing, in advance, by Lessor. Basic Rent shall mean the rent for the Aircraft specified on Exhibit C and payable throughout the Term for the Aircraft pursuant to Section 4(a) hereof. Basic Rent Payment Date shall mean the day for payment of Basic Rent determined in accordance with Exhibit C. It is further understood and agreed that if a Basic Rent Payment Date shall fall on a day which is not a Business Day, any payment due on such Basic Rent Payment Date shall be made on the preceding Business Day. Business Day shall mean any day other than a Saturday, Sunday or other day on which banking institutions in Dallas, Texas, or San Francisco, California are authorized or required by law to be closed. Cargo Door shall mean the modifications made to the Airframe to convert the same from passenger to cargo configuration, including the cargo door kit manufactured by Aeronautical Engineers, Inc., STC #'s SA1797SO and SA1798SO. Casualty Occurrence shall mean any of the following events with respect to the Aircraft, Airframe or any Engine: (a) loss of such property or its use due to theft or disappearance for a period in excess of sixty (60) consecutive days, or destruction, damage beyond economic repair, or rendition of such property permanently unfit for normal use by Lessee for any reason whatsoever; (b) any damage to such property which results in an insurance settlement with respect to such property on the basis of a 2 5 total loss or on the basis of a compromised or constructive total loss; (c) the condemnation, confiscation, appropriation or seizure of, or requisition of title to, such property; or the use of such property by any Governmental Entity or purported Governmental Entity, which in any such case shall have resulted in the loss of possession thereof by Lessee for a period in excess of sixty (60) consecutive days (or for such shorter period ending on the date which is the date of receipt of an insurance settlement with respect to such property on the basis of a total loss); (d) the disposal of such property by an administrator of Lessee (including a receiver, manager, liquidator or provisional liquidator) or any official exercising similar powers pursuant to applicable bankruptcy law, or any similar statute, or any disposal of such property by an administrator of Lessee or any person exercising similar powers pursuant to any security interest over the assets of Lessee; or (e) the occurrence of any event described in Section 6(a)(iii)(4) hereof. A Casualty Occurrence with respect to the Airframe shall constitute a Casualty Occurrence with respect to the Aircraft. Casualty Value shall mean Six Million Four Hundred Thousand Dollars (US$640,000.00), or if the Lessee notifies Lessor that the Hush Kits are to be insured by Lessee under policies of insurance as provided in Exhibit K hereto, then Four Million Five Hundred Thousand Dollars (U.S.$4,500,000.00), or, in either case, such greater value as shall be agreed between Lessor and Lessee during the Term, as allocated in Exhibits J-1 and J-2 hereto. Commencement Date shall mean the date of Lease Supplement No.1. Default shall mean an event which would constitute an Event of Default but for the lapse of time or the giving of notice or both. Delivery Location shall mean the location specified in Exhibit C hereto for the delivery of the Aircraft by Lessor to Lessee. Dollars shall mean lawful currency of the United States of America. Engine shall mean any Engine installed on or furnished with the Aircraft on the Delivery Date, such Engines being identified as to manufacturer, type and manufacturer serial number in Exhibit A hereto, and any Replacement Engine which may from time to time be substituted therefor pursuant to Section 11 or 16 hereof; together in each case with any and all Parts (excluding the Hush Kits) incorporated or installed in or attached thereto and any and all Parts (excluding the Hush Kits) removed therefrom so long as title thereto remains vested in Lessor in accordance with the terms of Section 9 hereof after removal from such Engine. Except as otherwise set forth herein, at such time as a Replacement Engine shall be so substituted, 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. Estimated Delivery Date shall mean the date specified on Exhibit C hereto. 3 6 Event of Default shall mean the occurrence of any of the events specified in Section 17 hereof. Expiration Date shall mean the date which is thirty (30) days after the Last Basic Rent Payment Date, unless sooner terminated as provided herein, or extended pursuant to Section 21 hereof. FAA shall mean the Federal Aviation Administration of the United States Department of Transportation or any successor thereto. FAR shall mean the Federal Aviation Regulations promulgated under the Federal Aviation Act, as amended and supplemented from time to time. Federal Aviation Act shall mean 49 U.S.C. Section 40101 et. seq., as amended and as in effect on the date of this Lease, or any successor or substituted U.S. legislation at the time in effect and applicable. Governmental Entity shall mean and include: (i) the FAA; (ii) any national, state, or local government (whether domestic or foreign), any political subdivision thereof or local jurisdiction therein; (iii) any board, commission, department, division, organ, instrumentality, court or agency of any entity described in (ii) above, however constituted, and (iv) any association, organization or institution of which any entity described in (ii) or (iii) above is a member or to whose jurisdiction any such entity is subject or in whose activities any such entity is a participant but only (except for purposes of defining "Applicable Law" above) to the extent that any entity described in (i) through (iv) above has jurisdiction over this Lease, the Operative Agreements or the Aircraft and its operations, or any of the parties hereto. Hush Kit shall mean all noise reduction hardware as described in Exhibit K hereto, and as acquired by the Lessee from the Federal Express Corporation, as may be installed by Lessee on the Airframe and the Engines from time to time, together with relevant data, manuals, and documents. Indemnities shall mean, collectively, the Lessor, and any Lessor Lender, and their respective officers, directors, shareholders, controlling persons, agents, and employees, and their respective successors and assigns. Lease Agreement, this Lease Agreement, this Lease, this Agreement, herein, hereunder or other like words shall mean this Lease and all Exhibits, Lease Supplements, amendments or modifications hereto or thereto from time to time entered into. Lease Identification shall mean a placard in the form set forth in Exhibit C hereto. 4 7 Lease Payment shall mean the amount specified in Exhibit C hereto. Lease Supplement shall mean Lease Supplement No. 1, substantially in the form of Exhibit D hereto. Lessor Lender shall mean any Person(s) to whom Lessor grants a security interest in the Aircraft and/or this Lease and the other Operative Agreements, pursuant to Section 19 hereof, for the purpose of any financing by Lessor. Lessor's Estate shall mean all estate, right, title and interest of the Lessor in and to the Aircraft, the Lease, the Lease Supplement, any bill of sale, any warranty with respect to the Airframe or the Engines, all amounts of Basic Rent and Supplemental Rent, including, without limitation, insurance proceeds and requisition, indemnity or other payments of any kind for or with respect to the Aircraft (other than the Hush Kits). Lessor's Liens shall mean Liens on the Aircraft (other than the Hush Kits) or the Lessor's Estate arising as a result of: (i) claims against Lessor or the Lessor's Estate not related to the transactions contemplated by this Lease; or (ii) acts or omissions of Lessor, not contemplated and expressly permitted under this Lease; or (iii) Taxes imposed against Lessor, the Lessor's Estate, or the Aircraft which are not indemnified against by Lessee pursuant to Section 10 hereof; or (iv) claims against Lessor, Lessor's Estate or the Aircraft arising out of the voluntary transfer by Lessor of all or any part of its interests in the Lessor's Estate, the Aircraft or this Lease, other than a transfer pursuant to Sections 11 or 18 hereof; or (v) Liens granted by the Lessor to any Lessor Lender. Lien shall mean any mortgage, pledge, lien, charge, encumbrance, hypothecation, lease, exercise of rights, security interest or claim (including any imposed with respect to any Taxes, or any airport or landing fees or related charges). Maintenance Program shall mean the Lessee's FAA-approved maintenance program for Boeing model 727-200 Aircraft, or such other FAA-approved manufacturer's maintenance program as in effect from time to time for the Aircraft encompassing scheduled maintenance, condition-monitored maintenance and on-condition maintenance of the Airframe, Engines and components of the Aircraft as shall be approved by Lessor. Upon request by Lessor, a copy of such Maintenance Program shall be provided to Lessor by Lessee. Maintenance Reserves shall mean the Maintenance Reserve Payments for the Aircraft specified on Exhibit C payable by the Lessee throughout the Term pursuant to Section 4(a) and Section 6(g) hereof. Operative Agreements shall mean this Lease, any Lease Supplement, any Permitted Sublease, the Letter Agreement (as defined in Lease Supplement No. 1), and any other documents and agreements executed and delivered by Lessor, Lessee and any 5 8 Sublessee, or any Lessor Lender or any other Person in furtherance of the transactions contemplated hereby. Parts shall mean all appliances, components, parts, instruments, appurtenances, avionics, accessories, furnishings, Hush Kits, the Cargo Door, and all other equipment of whatever nature (other than complete Engines or engines), which may now or from time to time be incorporated or installed in or attached to the Airframe or any Engine. Except as otherwise set forth herein, only at such time as a replacement part shall be substituted for a Part in accordance with Section 9 hereof, shall the Part so replaced cease to be a Part hereunder. Permitted Lien shall mean: (i) any Lien for Taxes which are either not assessed or, if assessed, are not yet due and payable or are being contested in good faith by appropriate proceedings so long as such proceedings shall not involve any danger of the sale, forfeiture or loss of the Aircraft; or (ii) any undetermined or inchoate Lien of a repairer, carrier, hangarkeeper, material supplier or other similar Lien arising in the ordinary course of business in respect of obligations which are not overdue or which have been adequately bonded or are being contested in good faith by appropriate proceedings; provided that (in the case of both (i) and (ii)) such proceedings, or the continued existence of such Lien, do not involve any danger of the sale, forfeiture or loss of the Aircraft; or (iii) the respective rights of the parties to the Operative Agreements as set forth therein, and any Liens expressly permitted thereby including Liens granted by the Lessor to any Lessor Lender. Permitted Sublease shall mean: (i) any charter agreement, "wet lease", ACMI agreement, or other contract for the use of the Aircraft under the terms of which Lessee retains possession and operational control of the Aircraft at all times; or (ii) or any sublease or other contract between Lessee and a Sublessee whereby Lessee does not retain possession and operational control of the Aircraft, provided that Lessor has expressly accepted and approved the same in writing subject to the provisions of Section 6(a)(ii) hereof. Person shall mean and include any individual, corporation, company, limited liability company, partnership, firm, joint stock company, joint venture, trust, estate, unincorporated organization, association or Governmental Entity. Rent shall mean Basic Rent and Supplemental Rent, collectively. Replacement Engine shall mean an engine of the same manufacturer and model, and having equivalent value, utility, modification status and remaining useful life as the Engine it is intended to replace under Section 11 (b) hereof, or, at Lessee's option, an engine of the same manufacturer as such Engine but of an improved model, and otherwise of an equivalent value, utility and remaining useful life and suitable for installation and use on the Airframe without any diminution in the value, utility or remaining useful life of the Airframe. 6 9 Return Occasion shall mean the return of possession of the Aircraft from Lessee to Lessor at the end of the Term of this Lease, or upon Lessor demanding that Lessee return or Lessor taking possession of the Aircraft pursuant to Section 18 hereof. Sublessee shall mean any Person in possession of the Aircraft pursuant to a Permitted Sublease. Supplemental Rent shall mean any and all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees to pay hereunder to Lessor, or any Lessor Lender, including without limitation: (i) any payment of Casualty Value; (ii) any payment of indemnity required by Sections 10 and 13 hereof; (iii) to the extent permitted by any Applicable Law, interest at the Interest Rate (all computations of interest under this Lease to be made on the basis of a 365 day year for the actual number of days elapsed) calculated: (1) on any part of any installment of Basic Rent not paid on the due date thereof for the period the same remains unpaid, and (2) on any Supplemental Rent not paid when due hereunder until the same is paid; (iv) Maintenance Reserves; and (v) the Lease Payment. Taxes shall mean any and all sales, use, business, gross income, personal property, transfer, fuel, leasing, occupational, value added, excess profits, excise, gross receipts, franchise, stamp, ad valorem, documentation, registration, income, levies, imposts, customs, import, export, withholdings or other taxes, excises, or duties of any nature whatsoever, together with any penalties, fines, charges or interest thereon. Term shall mean the term of this Lease which shall commence on the Commencement Date and which shall end on the Expiration Date. The terms Engine Manufacturer, First Basic Rent Payment Date, Interest Rate, Last Basic Rent Payment Date, Lease Identification, Lessee's Address, Lessor's Address, Manufacturer, and Payment Location, shall have the meanings set forth in Exhibit C hereto. Section 2. Lease and Conditions. (a) Lessor hereby agrees to lease the Aircraft to Lessee, and Lessee hereby agrees to lease the Aircraft from Lessor, subject to and in accordance with the terms hereof, as supplemented by the Lease Supplement. (b) Lessor shall deliver the Aircraft hereunder to Lessee upon the receipt by Lessor of the following items on or before the Commencement Date (or such other date as may be designated by Lessor), all of which shall be reasonably satisfactory to Lessor in form and substance, and duly authorized and executed: 7 10 (1) this Lease and the Lease Supplement in the form of Exhibit D hereto, along with each of the other Operative Agreements; (2) a copy of the certificate of incorporation and by-laws of Lessee certified by the Secretary or a Director of Lessee as being correct and as containing all amendments and additions, a certificate of good standing issued by the state of Lessee's incorporation, as well as a certificate of the Secretary or a Director of Lessee certifying as to the resolutions of the board of directors of Lessee authorizing the execution, delivery and performance of this Lease, the Operative Agreements, and all other documents related thereto, together with an incumbency certificate as to the Person or Persons authorized to execute and deliver such documents on behalf of Lessee; (3) a certificate signed by a duly authorized officer of Lessee, dated the Commencement Date, stating that: (i) the representations and warranties contained in Section 5(c) hereof are true and accurate on and as of such date as though made on and as of such time; and (ii) no event has occurred and is continuing, or would result from the execution, delivery and performance by Lessee of this Lease and the Operative Agreements which constitutes a Default or an Event of Default; (4) an opinion or report, dated the Commencement Date, signed by an Approved Insurance Broker or Approved Insurer as to the due compliance with the insurance provisions of Section 12 hereof with respect to the Aircraft in form and substance reasonably satisfactory to Lessor; (5) certificates of an Approved Insurance Broker evidencing the insurance as required by Section 12 hereof in form and substance reasonably satisfactory to Lessor; (6) the first installment of Basic Rent; (7) legal opinions from Lessee's counsel, and from Crowe & Dunlevy, special FAA counsel, as to all required filings under Applicable Law with Governmental Entities, recordation and registration of the Lease, and the perfection of any Lessor Lender's security interest thereunder and therein, and as to such matters as may reasonably be requested by Lessor, in form and substance reasonably satisfactory to Lessor; (8) certified copies of all necessary governmental and corporate consents to the Lease, including but not limited to any approvals required from the FAA; (9) a copy of Lessee's Operating Certificate and Operations Specifications or any other documentation or authority pursuant to which the Aircraft will be operated by Lessee; 8 11 (10) payment of the Security Deposit; (11) six (6) original, executed counterparts of the Lease, and evidence of its filing and registration with the FAA, and the payment of all fees and Taxes in connection therewith; and (12) such other documents and matters incident to any of the foregoing as Lessor may reasonably request (including but not limited to a precautionary UCC-1 filing in Texas). (c) Lessee's obligation to lease the Aircraft hereunder from Lessor shall be conditioned upon the tender of Aircraft for delivery and the receipt by Lessee of the following documents on or before the Commencement Date for the Aircraft, all of which shall be reasonably satisfactory in form and substance to Lessee; (1) this Lease and the Lease Supplement in the form of Exhibit D hereto; (2) an officer's certificate evidencing the due authority of Lessor for the execution, delivery and performance of this Lease and all other documents related thereto, together with an incumbency certificate as to the person or persons authorized to execute and deliver such documents on behalf of Lessor; (3) (Intentionally Omitted); (4) a copy of a currently effective airworthiness certificate for the Aircraft; (5) a copy of the current registration certificate for the Aircraft; and (6) an opinion, at Lessee's expense, from Crowe & Dunlevy, special FAA counsel, to the effect that Lessor is the owner of record of the Aircraft and that the Aircraft is duly registered in the United States, that the Aircraft is unencumbered but for this Lease, and as to such other matters as may reasonably be requested by Lessee. Section 3. Delivery and Acceptance; Effective Date, Term. (a) Delivery. The Aircraft will become available for delivery on or about the Estimated Delivery Date set forth in Exhibit C. (b) Place of Delivery and Acceptance. The Aircraft shall be delivered to and accepted by Lessee at the Delivery Location set forth in Exhibit C. After acceptance by Lessee, Lessee may conduct a test flight of the Aircraft at the Delivery Location, at 9 12 Lessor's expense, such test flight not to exceed one (1) hour in duration. Lessor shall repair, at Lessor's expense, discrepancies in the condition of the Aircraft which render the Aircraft unairworthy, noted by Lessee during the test flight. Lessor and Lessee agree that the first hour of the ferry flight shall be deemed to be the test flight hereunder. (c) Casualty to the Aircraft Preceding Delivery. In the event of a Casualty Occurrence with respect to the Aircraft prior to its delivery, Lessor shall promptly notify Lessee in writing and the obligation of the Lessor to make the Aircraft available to the Lessee shall terminate. In such event, Lessor shall promptly return to Lessee any monies paid by Lessee hereunder with respect to the Lease Payment. Notwithstanding anything to the contrary contained in this Lease or any other Operative Agreement, Lessor shall not be liable for any delay in delivery of the Aircraft, or failure to deliver the Aircraft, caused by acts of God, (including but not limited to fire, floods, earthquakes or other natural disasters) or caused by acts of any Governmental Entity. (d) Acceptance of Aircraft. The Aircraft to be leased hereunder shall be delivered to Lessee in compliance with Exhibit F hereto, but otherwise in "AS IS, WHERE IS" condition and SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND REPRESENTATION AS SET FORTH IN SECTIONS 5(a) AND (b) HEREOF. Upon tender of delivery in the condition required by this Lease, Lessee shall immediately accept delivery of the Aircraft. Upon acceptance of the Aircraft, Lessee shall hereupon indicate and confirm its acceptance of the Aircraft by delivery to Lessor of a Lease Supplement, dated the Commencement Date, in the form set forth in Exhibit D hereto. (e) Effective Date and Term of Lease. The effective date of this Lease shall be the Commencement Date and the Term of this Lease shall continue until the Expiration Date; provided that this Lease may be earlier terminated by Lessor pursuant to the provisions of Sections 3(c) or 18 hereof. Section 4. Rent. (a) Rent. Lessee covenants and agrees to pay to Lessor, or its assigns (including but not limited to any Lessor Lender), the following as Rent: (i) the Basic Rent as set forth in Exhibit C hereto throughout the Term hereof, payable in consecutive monthly installments and due on each Basic Rent Payment Date; and (ii) any and all Supplemental Rent as the same becomes due, including without limitation the Maintenance Reserves, payable in accordance with Section 6(g) hereof. 10 13 (b) Place and Method of Payment. All Basic Rent and Supplemental Rent payable under this Lease shall be paid in U.S. Dollars, by wire transfer of immediately available funds at the Payment Location specified on Exhibit C hereto, or at such other location as Lessor shall designate in writing. (c) Prohibition Against Setoff, Counterclaim, Etc. This Lease is a net lease. Lessee's obligation to pay all Rent hereunder shall be absolute and unconditional and shall not be affected or reduced by any circumstances, including, without limitation: (i) any setoff, counterclaim, recoupment, defense or other right which Lessee may have against Lessor, the Manufacturer, any seller of or Person providing services with respect to the Aircraft or any other Person, for any reason whatsoever; (ii) any defect in the title, airworthiness or eligibility for registration under Applicable Law, or any condition, design, operation, merchantability or fitness for use of, or any damage to or loss or destruction of, the Aircraft, or any interruption or cessation in the use or possession thereof by Lessee for any reason whatsoever, whether arising out of or related to an act or omission of Lessee, or any other Person; (iii) any Liens, Lessor Liens, or Permitted Liens with respect to the Aircraft; (iv) the invalidity or unenforceability or lack of due authorization or other infirmity of this Lease or any absence of right, power or authority of Lessor or Lessee to enter into this Lease; (v) any insolvency, bankruptcy, reorganization or similar proceedings by or against Lessor or Lessee or any other Person; (vi) any other circumstance or happening of any nature whatsoever, whether or not similar to any of the foregoing; or (vii) any Taxes (with respect to which Lessee's obligations shall be as set forth in Section 10 hereof); it being the express intention of Lessor and Lessee that all Rent payable hereunder shall be payable in all events, unless the obligation to pay the same shall be terminated pursuant to the express provisions of this Lease. Notwithstanding anything to the contrary contained herein, in the event that the Aircraft is lost or destroyed, in lieu of paying Rent thereafter, Lessee shall indemnify the Lessor for all losses, liabilities and damages arising out of such loss or destruction, and pay to the order of Lessor all amounts due and owing pursuant to Section 11 hereof, on demand. 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 law or otherwise, to terminate this Lease or any obligation imposed upon Lessee hereunder or in relation hereto. If for any reason whatsoever this Lease shall be terminated in whole or in part by operation of law or Applicable Law, and so long as Lessor honors its covenant of quiet enjoyment under Section 20(f) hereof, Lessee nonetheless agrees to pay to Lessor amounts equal to the Rent payments hereunder at the time such payments would have become due and payable in accordance with the terms hereof had this Lease not been so terminated. 11 14 Section 5. Representations and Warranties. (a) In reliance on Lessee's representations, warranties and covenants contained in this Agreement, LESSOR HAS NOT AND SHALL NOT BE DEEMED TO HAVE MADE (WHETHER BY VIRTUE OF HAVING LEASED THE AIRCRAFT UNDER THIS LEASE, OR HAVING ACQUIRED THE AIRCRAFT, OR HAVING DONE OR FAILED TO DO ANY ACT, OR HAVING ACQUIRED OR FAILED TO ACQUIRE ANY STATUS UNDER OR IN RELATION TO THIS LEASE OR OTHERWISE) AND LESSOR HEREBY SPECIFICALLY DISCLAIMS ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED (EXCEPT AS HEREIN BELOW PROVIDED IN THIS SECTION 5(a)), AS TO AIRWORTHINESS, CONDITION, DESIGN, OPERATION, MERCHANTABILITY, FREEDOM FROM CLAIMS OF INFRINGEMENT OR THE LIKE, OR FITNESS FOR USE FOR A PARTICULAR PURPOSE OF THE AIRCRAFT, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE AIRCRAFT, THE ABSENCE THEREFROM OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, OR AS TO ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED (INCLUDING ANY IMPLIED WARRANTY ARISING FROM A COURSE OF PERFORMANCE OR DEALING OR USAGE OF TRADE), WITH RESPECT TO THE AIRCRAFT; AND LESSEE HEREBY WAIVES, RELEASES, RENOUNCES AND DISCLAIMS EXPECTATION OF OR RELIANCE UPON ANY SUCH WARRANTY OR WARRANTIES. LESSOR SHALL HAVE NO RESPONSIBILITY OR LIABILITY WHATSOEVER TO LESSEE OR ANY OTHER PERSON, WHETHER ARISING IN CONTRACT OR TORT, OUT OF ANY NEGLIGENCE OR STRICT LIABILITY OF LESSOR OR OTHERWISE, FOR: (i) ANY LIABILITY, LOSS OR DAMAGE CAUSED OR ALLEGED TO BE CAUSED DIRECTLY OR INDIRECTLY BY THE AIRCRAFT OR ANY ENGINE OR BY ANY INADEQUACY THEREOF OR DEFICIENCY OR DEFECT THEREIN OR BY ANY OTHER CIRCUMSTANCE IN CONNECTION THEREWITH; (ii) THE USE, OPERATION OR PERFORMANCE OF THE AIRCRAFT OR ANY ENGINE OR ANY RISKS RELATING THERETO; (iii) ANY INTERRUPTION OF SERVICE, LOSS OF BUSINESS OR ANTICIPATED PROFITS OR CONSEQUENTIAL DAMAGES; OR (iv) THE DELIVERY, OPERATION, SERVICING, MAINTENANCE, REPAIR, IMPROVEMENT OR REPLACEMENT OF THE AIRCRAFT. THE WARRANTIES AND REPRESENTATIONS SET FORTH IN THIS SECTION 5(a) ARE EXCLUSIVE AND IN LIEU OF ALL OTHER REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, AND LESSOR SHALL NOT BE DEEMED TO HAVE MADE ANY OTHER WARRANTIES, EXCEPT THAT: (i) Lessor warrants that on the Commencement Date the Aircraft shall be free and clear of any and all Lessor Liens; (ii) Lessor further represents and warrants that the making and performance by Lessor of this Lease has been duly authorized by all necessary action on the part of Lessor and will not violate any provision of its articles of incorporation or by-laws; and 12 15 (iii) Lessor further represents and warrants that this Lease has been duly executed and delivered by Lessor, and that this Lease and the Lease Supplement when executed and delivered hereunder constitute legal, valid and binding obligations of Lessor, enforceable in accordance with their respective terms except as may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally, and, to the extent that certain remedies require or may require enforcement by a court of equity, by such principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) as a court having jurisdiction may impose and by laws which may affect some of such remedies; (iv) no consent, approval or authorization of, or notice to, any Governmental Entity having jurisdiction with respect to the execution, delivery or performance by Lessor of this Lease, and each of the Operative Agreements to which Lessor is a party (including all monetary and other obligations hereunder or thereunder) is required for Lessor to execute and deliver this Lease, and to perform the transactions contemplated hereby; and (v) there are no suits or proceedings pending or, to the knowledge of Lessor, threatened in any court or before any Governmental Entity against or affecting Lessor which will have a materially adverse effect on the current business or financial condition of Lessor. (b) Manufacturers' Warranties. So long as Lessee is not in Default and Lessor has not terminated this Lease, Lessor hereby assigns to Lessee such rights as Lessor may have under any warranty, express or implied, with respect to the Aircraft and the Engines made by the Manufacturer, the Engine Manufacturer, or any other Person (including any Approved Maintenance Provider), to the extent that the same exist or may be assigned or otherwise made available to Lessee; and that any monies recovered by Lessor pursuant to such warranties which are suffered by Lessee during the Term shall be paid over by Lessor to Lessee; provided, however, that upon the occurrence of an Event of Default and any termination of this Lease pursuant thereto, all such rights shall immediately revert to Lessor including all claims thereunder whether or not perfected. (c) Lessee's Representations and Warranties. Lessee hereby represents, warrants, and covenants, each of which shall survive the execution and delivery of this Lease, and the delivery by Lessor and acceptance by Lessee of the Aircraft: (i) Lessee is a corporation duly incorporated and validly existing under the laws of the State of Texas and has the full power and authority to carry on its business as presently conducted and to perform its obligations under this Lease; (ii) this Lease, and each of the Operative Agreements to which Lessee is a party, has been duly authorized by all necessary action on the part of Lessee, does 13 16 not require any approval of stockholders of Lessee, and neither the execution and delivery hereof nor the consummation of the transactions contemplated hereby nor compliance by Lessee with any of the terms and provisions hereof will, to the knowledge of Lessee after having made due inquiry, contravene any Applicable Law or result in any breach of, or constitute any default under, or result in the creation of any Lien upon any property of Lessee under Lessee's articles of incorporation or any credit agreement or instrument or other agreement or instrument to which Lessee is a party or by which Lessee or its properties or assets are bound or affected; (iii) no consent, approval or authorization of, or notice to, any Governmental Entity having jurisdiction with respect to the execution, delivery or performance by Lessee of this Lease, and each of the Operative Agreements to which Lessee is a party (including all monetary and other obligations hereunder or thereunder) is required for Lessee to execute and deliver this Lease, and to perform the transactions contemplated hereby; (iv) this Lease has been duly executed and delivered by Lessee, and the Lease, the Lease Supplement and the other Operative Agreements, when executed and delivered by Lessee, constitute legal, valid and binding obligations of Lessee, enforceable in accordance with their respective terms; (v) there are no suits or proceedings pending or, to the knowledge of Lessee, threatened in any court or before any Governmental Entity against or affecting Lessee which will have a materially adverse effect on the current business or financial condition of Lessee; (vi) except for the registration on the Aircraft registry maintained by the FAA and the placing on the Aircraft and on each Engine of the plates containing the legends referred to in Section 6(f) hereof, and the precautionary filing of a UCC-1 financing statement in Texas, no further filing or recording of this Lease or of any other document and no further action, is necessary under the Laws of any Governmental Entity in order to fully protect and establish Lessor's title to the Aircraft as against Lessee or any third party; (vii) other than with respect to the Hush Kits, Lessee will not claim to have any legal or beneficial interest in the Aircraft or make any demands with respect thereto against Lessor, other than in respect of the Lessee's interest conferred by this Lease; (viii) Lessee has not received notice of default or exercise of remedies with respect to any of its obligations: (a) for the payment of indebtedness for borrowed money, of any currency, equal to an amount in excess of the equivalent of One Hundred Thousand Dollars (US $100,000.00) or of any interest or premium thereon; or (b) for the payment of rent under any lease or agreement to lease real, personal or mixed property where the aggregate rentals over the term thereof is more than an 14 17 amount equal to or greater than the equivalent of One Hundred Thousand Dollars (US $100,000.00); (ix) the Maintenance Program will comply with all FAA requirements (including but not limited to those under Part 121 of the FAR's); (x) subject to compliance with Section 8(h) hereof, Lessee will maintain in full force and effect during the Term of this Lease, or cause any Sublessee to maintain to the satisfaction of Lessor, a current operating certificate, air transport license and a current certificate of airworthiness for the type of operations conducted by Lessee or Sublessee, as the case may be (in accordance with Applicable Law and the requirements of the FAA, the Lessee, any Sublessee, and each of the transactions contemplated hereby and by the other Operative Agreements); and (xi) Lessee is a duly authorized and certificated air carrier in good standing under Applicable Law, has satisfied all of the requirements of and is in good standing with the FAA, and has complied with and satisfied all requirements of the FAA, as applicable, so as to enable it to fulfill its obligations hereunder, and to otherwise lawfully operate, possess, use and maintain the Aircraft. Section 6. Possession and Use. (a) Possession. (i) Sublease, Assignment and Transfer. Subject only to Section 22 hereof, Lessee hereby covenants and agrees that it will not, and hereby acknowledges and confirms that it has no right to, without the prior written consent of Lessor (which consent Lessor may withhold in its reasonable sole discretion), assign this Lease or sublet or transfer possession of the Aircraft, Airframe or any Engine pursuant to a Permitted Sublease or otherwise, or install any Engine or permit any Engine to be installed on any airframe other than the Airframe, provided that so long as no Default or Event of Default shall have occurred and be continuing and as long as the action to be taken shall not affect the registration of, Lessor's title to, or the priority of any Lien of any Lessor Lender in and to, the Aircraft and so long as all necessary approvals of each Governmental Entity having jurisdiction over Lessee, and its operations, have been obtained, then Lessee may: (1) without the prior written consent of Lessor, deliver possession of the Aircraft, the Airframe or any Engine, or any Part thereof, to the manufacturer thereof for testing or other similar purposes or to any Approved Maintenance Provider for service, repair, maintenance, testing or overhaul work on the Aircraft, Airframe or Engine or any Part thereof to the extent required or permitted by the terms of Section 9 hereof; 15 18 (2) without the prior written consent of Lessor, install an Engine on an airframe (other than the Airframe) owned by Lessee free and clear of all Liens except: (A) those of the type permitted under Section 14 hereof and those which apply only to the engines (other than Engines), appliances, parts, instruments, appurtenances, accessories, furnishings and other Aircraft (other than Parts) installed on such airframe (but not to the airframe as an entirety); and (B) the rights of the participants under normal interchange or pooling agreements which are customary in the airline industry and do not contemplate, permit, result in or require the transfer of title to the airframe or engines installed thereon; (3) without the prior written consent of Lessor, install an Engine on an airframe leased to Lessee or in the possession of Lessee subject to a conditional sale agreement or owned by Lessee subject to a security agreement, provided, that: (A) such airframe is free and clear of all Liens except the rights of the parties to the lease or conditional sale or other security agreement covering such airframe and except Liens of the type permitted by clauses (A) and (B) of Section 6(a)(i)(2), and except the lien of any mortgage which either by its terms does not apply to the Engine or which effectively provides that each Engine leased to Lessee hereby shall not become subject to the lien thereof or to any rights of any party thereunder other than Lessee (with respect to Lessee' rights expressly granted hereunder), notwithstanding the installation of such Engine on any airframe subject to the lien of such mortgage; and (B) there shall be in effect a written agreement of the lessor or owner or secured party of such airframe (which may be a lease or conditional sale or other security agreement covering such airframe) substantially similar in effect to the agreement of Lessor in Section 6(b) below whereby such lessor or owner or secured party effectively and expressly agrees that neither it nor its successors or assigns will acquire or claim any right, title or interest in any Engine by reason of such Engine being installed on such airframe at any time while such Engine is subject to this Lease, and a copy of such agreement shall be provided to Lessor and any Lessor Lender upon written request, provided, however, that the restriction contained in this clause shall not apply to the installation of an Engine on an airframe leased to Lessee or in the possession of Lessee subject to a conditional sale agreement or owned by Lessee subject to a security agreement for a period not to exceed sixty (60) days so long as Lessee installs a Replacement Engine or re-installs such Engine on the Airframe at the expiration of such period free and clear of any Liens other than those of the type permitted under Section 14 hereof; (4) without the prior written consent of Lessor, install an engine (other than an Engine) on the Airframe or a part (other than a Part) on the Aircraft, provided that such installation does not create, or permit to exist, any Liens on the Aircraft except those of the type permitted under Section 14 hereof and those which apply only to such engine or part which has been installed on the Aircraft; and (5) without the prior written consent of Lessor, and provided that it is in the ordinary course of Lessee's business, enter into a Permitted Sublease as described in clause (i) of the definition of "Permitted Sublease". 16 19 (ii) Subleases. In the event that Lessee seeks to sublease the Aircraft pursuant to a Permitted Sublease whereby Lessee does not retain possession and operational control of the Aircraft at all times, in addition to securing Lessor's advance written consent to any such Permitted Sublease and the terms and conditions thereof, Lessee shall execute and deliver any and all such documents and agreements, and secure all such approvals and consents from any Person or Governmental Entity, as Lessor and any Lessor Lender shall deem reasonably necessary or desirable in order to preserve and protect its respective rights and interests hereunder and under the other Operative Agreements; and provided further that: (1) any Sublessee shall be a duly certificated air carrier holding a current and valid U.S. air operator's certificate; (2) any such Sublessee shall have duly executed and delivered a Permitted Sublease and all documents and agreements contemplated thereby, each in form and substance satisfactory to, and approved in writing by, Lessor, such approval not to be unreasonably withheld; and (3) Lessee and Sublessee shall have executed and delivered to Lessor and any Lessor Lender any and all such documents, and secured all such approvals and consents from any Person or Governmental Entity, as Lessor and any Lessor Lender shall reasonably require in order to preserve and protect their respective rights and interests hereunder, Lessor's rights as owner and lessor of the Aircraft, and Lessor's rights to the proceeds hereof, including but not limited to an opinion of legal counsel addressing the foregoing and otherwise in form and substance and from a qualified law firm of recognized standing acceptable to Lessor. Notwithstanding anything to the contrary contained in this Lease, including but not limited to Sections 6(a)(i) and 6(a)(ii), (x) any transfer of possession or control of the Aircraft by reason of any Permitted Sublease shall be, and shall expressly provide that it is, subject and subordinate to all of the terms of this Lease, including, without limitation, Lessor's right to the return and/or repossession of the Aircraft upon the occurrence of an Event of Default or otherwise pursuant hereto; (y) none of the terms and provisions of such Permitted Sublease shall be adverse or inconsistent with the terms and provisions hereof and the rights and privileges of Lessor hereunder; and (z) Lessee shall remain primarily liable hereunder for the performance of all the provisions hereof, and obligations and duties of Lessee hereunder to the same extent as if such transfer of possession of the Aircraft had not occurred and notwithstanding the terms and provisions of any Permitted Sublease. Lessee shall advise Lessor in writing of its request for consent to sublease the Aircraft at least ninety (90) days prior to the proposed commencement date, and shall provide Lessor with copies of the various documents and agreements proposed to be executed and delivered between it and any Sublessee, as soon as practicable Lessor shall review the same with 17 20 reasonable diligence and expedition, and promptly either approve or reject the same in writing to Lessee. (iii) Certain Limitations on Transfers. With respect to any transfer pursuant to Section 6(a)(i) or 6(a)(ii) hereof: (1) the rights of any transferee that received possession by reason of a transfer permitted by this Section 6(a) shall be subject and subordinate to all of the terms of this Lease; (2) Lessee shall remain primarily liable hereunder for the performance of all terms of this Lease to the same extent as if such transfer had not occurred; (3) no relinquishment of possession of the Aircraft, the Airframe or any Engine pursuant to the terms of this Section 6(a) shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder; and (4) if any of the actions permitted under Section 6(a)(i), or accomplished pursuant to Section 6(a)(ii), shall result in the divestiture of Lessor's title in and to such Aircraft, Airframe, Engine or Part, such action shall be deemed a Casualty Occurrence with respect to such Aircraft, Airframe, Engine or Part, and Lessee shall comply with Section 11 in respect thereof. (b) Reciprocal Recognition of Rights.In the event Lessee shall have received from the lessor or secured party of any airframe leased to Lessee or owned by Lessee subject to a conditional sale or other security agreement a written agreement complying with clause (B) of Section 6(a)(i)(3) hereof (which agreement may be contained in the lease, conditional sale agreement or security agreement relating to such airframe), and the lease or conditional sale or other security agreement covering such airframe also covers an engine or engines owned by the lessor under such lease or subject to a security interest in favor of the secured party under such conditional sale or other security agreement, Lessor hereby agrees for the benefit of such lessor or secured party that Lessor will not acquire or claim, as against such lessor or secured party, any right, title or interest in any such engine as the result of such engine being installed on the Airframe at any time while such engine is subject to such lease or conditional sale or other security agreement and owned by such lessor or subject to a security interest in favor of such secured party. (c) Lawful Insured Operations. Lessee will not permit the Aircraft to be maintained, used or operated in violation of any Applicable Law or law of any Governmental Entity, or in violation of any airworthiness certificate, or license or registration issued by any such authority, or contrary to the Manufacturer's operating manuals or instructions for the Aircraft. In the event that any Applicable Laws require alteration of the Aircraft (other than Stage 3 noise requirements under FAR Part 36), 18 21 Lessee shall comply therewith at its sole cost and expense and shall maintain the same in proper condition for operation under all Applicable Laws. Lessee agrees not to operate the Aircraft, or permit the Aircraft to be operated: (i) unless the Aircraft is covered by insurance as required by the provisions hereof, or (ii) contrary to the terms of such insurance. Lessee also agrees not to operate or locate the Aircraft or suffer or permit the Aircraft to be operated or located in any area excluded from coverage by any insurance policy issued pursuant to the requirements of this Lease. (d) Maintenance. Lessee, at its own cost and expense, shall: (i) perform or cause the Approved Maintenance Provider to perform all airworthiness directives, mandatory manufacturer's service bulletins, and all other mandatory service, inspections, repair, maintenance, overhaul and testing: (A) as may be required under applicable FAA rules and regulations and in compliance with the Maintenance Program, (B) in the same manner and with the same care as shall be the case with similar Aircraft and engines owned by or operated on behalf of Lessee without discrimination, and (C) so as to keep the Aircraft in as good operating condition as when delivered to the Lessee, ordinary wear and tear excepted, with all systems in good operating condition; (ii) keep the Aircraft in such condition as is necessary to enable the airworthiness certification of the Aircraft to be maintained at all times under applicable FAA regulations and any other Applicable Law, including, but not limited to any Aircraft modifications or installations required by the FAA (provided, however, that nothing contained herein shall preclude Lessee from removing the Hush Kits so long as the Airframe and Engines are restored to their respective configurations as existed prior to Hush Kit installation); (iii) maintain, in the English language, all records, logs and other materials required by, and in accordance with the requirements of Exhibit G hereto, and in a manner acceptable to the FAA and any other Governmental Entity having jurisdiction over the Aircraft and its operation; and (iv) Lessee shall furnish Lessor reports on a monthly basis, concurrent with its payment of Maintenance Reserves: (A) on the hours/cycles operated for the Airframe, APU, and Landing Gear; (B) on the hours/cycles operated for each Engine (noting its location); and (C) on an annual basis, a list of those service bulletins, airworthiness directives and engineering modifications incorporated on the Aircraft during the preceding calendar year. (e) Registration. At all times during the Term: (i), Lessor shall, at its sole cost and expense, cause the Aircraft to continue to be registered in the United States in accordance with Applicable Law in the name of Lessor as owner and lessor hereunder; (ii) Lessee shall, at its sole cost and expense, make all such other filings as are required by the FAA and Applicable Law and any other government or Governmental 19 22 Entity having jurisdiction over Lessee, the Aircraft and its operation; and (iii) each of Lessee and Lessor (provided that no Event of Default has occurred and is continuing) shall refrain from taking any action or inaction that would adversely affect the United States registration of the Aircraft and the Lease. (f) Lease Identification. Upon delivery of the Aircraft, Lessee agrees to place the Lease Identification, as delivered by Lessor, in the cockpit in a location reasonably adjacent to, and not less prominent than, the airworthiness certificate for the Aircraft and to place the Lease Identification on each Engine. Lessee agrees to make such changes to the Lease Identification as Lessor may reasonably request from time to time. (g) Maintenance Reserves. (i) Lessee shall pay in arrears, no later than the tenth (10th) calendar day following the last day of each calendar month during the Term, to Lessor, as Supplemental Rent, the Maintenance Reserves on such dates and in such amounts with respect to the Airframe and each Engine, as specified in Exhibit C hereto. Such payments are Supplemental Rent and are the exclusive property of Lessor, and Lessee shall have no rights thereto except as expressly provided herein. (ii) Use of Maintenance Reserves. Lessor shall hold the aggregate amounts of Maintenance Reserves paid by Lessee less any disbursements from Maintenance Reserves pursuant to this Section 6(g) in reserve to reimburse Lessee for the actual cost of: (A) the replacement of time expired life-limited Parts during Engine restoration visits (where such visits constitute scheduled shop visits requiring teardown and disassembly, or where Engine flanges are split and time is restored to life limited parts within the Engine) in accordance with the Maintenance Program; (B) major overhauls of the Landing Gear and APU, and (C) such other major maintenance project as Lessor shall approve in writing (any of which events contemplated by (A), (B), or (C) hereof being a "Major Maintenance Program"). If Lessee intends to undertake a Major Maintenance Program, the cost for which it will seek reimbursement from the Maintenance Reserves, Lessee shall notify Lessor at least thirty (30) days in advance and shall request Lessor's consent in writing, of the workscope Lessee desires to accomplish, the estimated cost thereof and the maintenance facility Lessee proposes to have accomplish the work. Lessor shall advise in writing of its consent or rejection within ten (10) days after receipt of Lessee's notice. (iii) Payment by Lessor. Any claims by Lessee for reimbursement from Maintenance Reserves shall be made not later than ninety (90) days after completion of the related work for which reimbursement is sought. Provided no Event of Default shall have occurred and be continuing, Lessor shall pay to Lessee, or directly to the repair facility if Lessee so directs Lessor in writing, within thirty (30) days after presentation of an invoice together with supporting evidence 20 23 reasonably acceptable to Lessor, such as third party bills and work package certified completed, such amounts as are equal to the cost incurred by Lessee, during the Term of the Lease and claimed by Lessee (together with supporting evidence of the purpose and amount of the expenditure satisfactory to Lessor), in respect of a Major Maintenance Program, including without limitation a Major Maintenance Program undertaken to comply with the requirements set forth in Section 16 and in Exhibit E hereof provided, however, that: (1) no payment shall be made in respect of replacements or repairs caused by premature failure, ingestion, faulty maintenance or installation, or covered by manufacturer's service bulletins, improper operations, misuse, neglect, accidental cause, or any cost which is reimbursable by a claim under the manufacturer's warranties or by insurance (deductibles being treated as reimbursable by insurance for this purpose) after due diligence in effecting recovery, or any other replacements or repairs paid for or reimbursable by any other Person; (2) the total amounts payable at any time by Lessor to Lessee in respect of each Engine, individually, shall not in any event exceed with respect to each Engine the balance of any funds paid by Lessee to Lessor pursuant to this Section 6(g) in respect of each such Engine respectively (after taking account of all such previous payments by Lessor hereunder), less any repair or overhaul expenditure which Lessor may incur in accordance with the terms of this Lease, and provided further that payments for overhaul of an Engine shall be reimbursed up to the amount proportionately allocated for each Engine as set forth in the description of Maintenance Reserves in Exhibit C; and (3) (Intentionally Omitted) (4) if, on any occasion during the Term, the maximum amount available to Lessee in respect of each Engine, respectively, is insufficient to meet a claim for payment, the shortfall is for the account of Lessee and may not be carried forward or made the subject of any further claim for payment. (iv) Lessee's Right to Payment. For the avoidance of doubt, Lessee has no right to the payment or return of any Maintenance Reserves except as expressly provided in this Section 6(g), and as provided in Exhibit E hereto, and without limitation no such right shall be deemed to arise on termination or expiry of this Lease for any reason. Section 7. Information and Inspection. During the Term of this Lease, Lessee agrees to furnish Lessor the following: 21 24 (a) promptly upon the same being made generally available to the shareholders of Lessee, after the end of each calendar quarter, a copy of the interim financial statements of Lessee; (b) promptly upon the same being made available to the shareholders of Lessee and any Sublessee, but in no event later than ninety (90) days after the end of each fiscal year, a copy of Lessee's annual audited consolidated profit and loss account and balance sheet; and (c) from time to time at the request for the same from Lessor, and no more frequently than quarterly (unless a Default has occurred), such information concerning the location, condition, use and operation of the Aircraft, as well as financial and system-wide operational data of Lessee, as the Lessor may reasonably request. Lessee shall permit Lessor or its designee, on three (3) days' prior written notice or at each "C" check or any portion thereof, to visit and inspect the Aircraft, its condition, use and operation, and the records maintained in connection therewith, at any reasonable time without interfering with the normal commercial operation of the Aircraft. Lessee shall provide Lessor with ten (10) Business Days' prior written notice of each "C" check or portion thereof. Lessor shall have no duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. Lessor's failure to object to any condition or procedure observed or observable in the course of an inspection hereunder shall not be deemed to waive or modify any of the terms of this Lease with respect to such condition or procedure. Section 8. Covenants of Lessee. In addition to and not in limitation of Lessee's other representations, warranties, covenants and agreements set forth elsewhere in this Lease, Lessee covenants and agrees that: (a) Maintenance of Corporate Existence. Subject only to Section 22 hereof, during the term of this Lease, Lessee will preserve and maintain its corporate existence and such of its rights, privileges, licenses and franchises in any jurisdiction where failure to obtain such licensing or qualification would have a material adverse effect upon Lessee and its business and its ability to perform hereunder. (b) Maintenance of Status. Lessee is, and shall remain so long as it shall be the Lessee under this Lease, duly qualified to operate and maintain the Aircraft under Applicable Law and in accordance with the requirements of this Agreement. (c) Payment of Taxes. Lessee will pay or cause to be paid all Taxes (including but not limited to any withholding tax imposed under Applicable Law on Rent payments made to Lessor hereunder), assessments and governmental charges or levies imposed upon it, the Lessor, any Lessor Lender and the Aircraft and its use and 22 25 operation (including all landing fees, customs duties, airport fees and the like), or upon Lessee's income or profits, or upon any property belonging to it, prior to the date on which the same, if not paid, would give rise to a Lien (other than a Lien permitted by Section 14 hereof) upon the Aircraft, including the Airframe, the Engines or any of the Parts thereof, except as may be excluded by the proviso to Section 10(a) hereof. Lessee shall promptly pay any and all such Taxes as and when the same are due, and Lessee, on reasonable demand from time to time, shall provide written evidence to Lessor that it has paid, or set aside adequate reserves to pay, any Taxes so imposed. (d) Place of Business. Lessee will not, without prior written notice to Lessor, change its principal place of business or chief executive office if there is more than one place of business. (e) Notice of Default. Immediately after Lessee or any of its corporate officers obtains knowledge of an Event of Default hereunder or under any other Operative Agreement, Lessee shall notify Lessor in writing of such Event of Default. (f) Governmental Consents. Lessee, at its sole cost and expense, shall maintain in full force and effect all governmental consents, licenses, authorizations, approvals, declarations, filings and registrations obtained or effected in connection with this Lease, each Operative Agreement, and/or required by any Applicable Law or by any other Governmental Entity, and every document or instrument contemplated hereby or thereby and to take all such additional action as may be proper in connection herewith or therewith. Lessee further undertakes, at its sole cost and expense, to obtain or effect any new or additional governmental consents, licenses, authorizations, approvals, declarations, filings or registrations of any Governmental Entity as may become necessary for the performance of any of the terms and conditions of this Lease, each Operative Agreement, or any other document or instrument contemplated hereby or thereby or as is otherwise required by Applicable Law. (g) No Liens. Lessee, at its sole cost and expense, shall at all times keep the Aircraft free and clear of Liens (excluding, however, any Permitted Liens). (h) Licenses. Subsequent to the execution and delivery of this Lease, Lessee will diligently pursue and acquire, and thereafter maintain in full force and effect during the Term of this Lease, or cause any Sublessee to maintain to the satisfaction of Lessor, a current operating certificate, air transport license and a current certificate of airworthiness for the type of operations conducted by Lessee or Sublessee, as the case may be, in accordance with Applicable Law and each other Governmental Entity having jurisdiction over the Aircraft, the Lessee, any Sublessee and each of the transactions contemplated hereby and by the other Operative Agreements. (i) No Discrimination. Lessee shall not discriminate in its maintenance and care of the Aircraft as between it and the other Boeing model 727-200 Aircraft operated by Lessee. 23 26 Section 9. Replacement of Parts; Alterations, Modifications and Additions. (a) Replacement of Parts. Other than Parts which constitute the Hush Kits, Lessee, at its own cost and expense, will promptly replace or cause to be replaced by the Approved Maintenance Provider, or applicable vendor of the same, all Parts which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever. In addition, in the ordinary course of maintenance, service, repair, overhaul or testing, Lessee may, at its own cost and expense, cause to be removed any Parts, whether or not worn out, destroyed, damaged beyond repair or permanently rendered unfit for use, provided that Lessee shall immediately replace such Parts (other than Parts constituting the Hush Kits, which may be removed or replaced at Lessee's option), at its own cost and expense. All replacement Parts (other than the Hush Kits) shall be free and clear of all Liens, other than Liens permitted by Section 14 hereof, shall be in at least the same modification status and service bulletin accomplishment status, shall be interchangeable as to form, fit and function, shall have been overhauled, repaired and inspected by an FAA-approved agency and shall bear FAA acceptable tags, and shall be in as good an operating condition as, and have a value, utility and remaining useful life at least equal to, the Parts replaced (assuming such replaced Parts were in the condition and repair in which they were required to be maintained by the terms hereof) and all historical records relating to such replacement Parts shall be maintained by Lessee in English, and in compliance with the requirements of the FAA. All Parts (other than the Hush Kits) which are at any time removed from the Aircraft shall remain the property of Lessor and subject to this Lease, no matter where located, until such time as such Parts shall be replaced by Parts which have been incorporated or installed in or attached to the Aircraft and which meet the requirements for replacemeent Parts specified above. Immediately upon any replacement Part becoming incorporated or installed in or attached to the Aircraft as above provided, (i) title to the removed Part shall thereupon vest in Lessee, free and clear of all rights of Lessor, (ii) title to such replacement Part shall thereupon vest solely in Lessor, and (iii) such replacement Part shall become subject to this Lease and be deemed a Part for all purposes hereof to the same extent as the Part which it has replaced. (b) 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 as may be required from time to time to meet the applicable standards of the FAA, or to comply with any Applicable Law, rule, directive, bulletin, regulation or order of any Governmental Entity or of the manufacturer of the Aircraft, Engines or Parts (provided, however, that neither Lessee or Lessor shall have any obligation to equip the Aircraft with Hush Kits so as to comply with Stage 3 noise requirements of FAR Part 36). In addition, Lessee, at its own cost and expense, and with the advance written consent of Lessor, may from time to time make alterations and 24 27 modifications in and additions to the Aircraft (including the installation of the Cargo Door, and installation and removal of the Hush Kits for which no additional consent of Lessor is required), provided no such alteration, modification or addition diminishes the remaining warranty, value or utility, or impairs the condition or airworthiness of the Aircraft. Title to all Parts (excluding, however, the Hush Kits) incorporated or installed in or attached or added to the Aircraft as the result of such alteration, modification or addition shall vest immediately in Lessor and shall become subject to this Lease, without the necessity for any further act or transfer, document or notice, provided, however, that Lessee may remove such Parts (including the Hush Kits, so long as the Airframe and Engines are restored to their respective configurations as existed prior to Hush Kit installation) prior to return of the Aircraft to Lessor on the Expiration Date if such removal does not damage or otherwise result in any diminution in value of the Aircraft. (The removal of the Hush Kits, in accordance herewith, will not constitute an impairment or diminution in value of the Aircraft.) In no event shall Lessor bear any liability or cost for any alteration, modification or addition to, or for any grounding or suspension of certification of the Aircraft, or for any loss of revenue arising therefrom. (c) Airworthiness Directives. The costs of complying with and otherwise accomplishing any airworthiness directive shall be paid by, and such compliance shall be the sole responsibility of, Lessee. Section 10. General Tax Indemnity. (a) Indemnity. Lessee shall pay when due and indemnify and hold each Indemnitee harmless from and against any and from all Taxes imposed against any such Indemnitee, Lessee, the Aircraft or any interest therein or use thereof, and any and all license, registration and recording fees and assessments, as well as Taxes arising directly or indirectly out of this Lease, and each other Operative Agreement, or based on or measured by, the payments of Rent and other amounts due hereunder or thereunder, the terms, covenants and conditions hereof and thereof, or the use, operation, maintenance, possession, condition, control, occupancy, servicing, installation, transportation, storage, substitution, recording, documentation, import, export, hypothecation, rental, lease, pledge, modification, location, repair, abandonment, replacement, delivery, registration, repossession, improvement, subleasing, manufacture, rental, settlement of any insurance claim, return or other disposition of the Aircraft or any Part thereof or interest therein regardless of the method of calculation; provided, however, that Lessee shall have no obligation to pay any Taxes assessed by the federal government of the United States, or any state thereof, against the Lessor or any Lessor Lender which are based upon or measured by their respective gross annual incomes or profits, capital gains, personal holding company Taxes or Taxes incurred under Internal Revenue Code Section 341, or any sales or use taxes in the event that Lessor, or any Indemnitee sells the Aircraft (other than pursuant to the exercise of remedies under Section 18 hereof). 25 28 (b) Miscellaneous. In case any report or return is required to be made with respect to any Taxes which are an obligation of Lessee under this Section 10, Lessee will either make such report or return in such manner as will show the ownership of the Aircraft in Lessor and send a copy of such report or return to Lessor or will notify Lessor of such requirement and make such report or return in such manner as shall be reasonably satisfactory to Lessor. If actual notice is given by any taxing authority to Lessor that a report or return is required to be filed with respect to any such Taxes referred to in this Section 10, Lessor shall promptly notify Lessee of such required report or return. Lessor agrees to respond to any reasonable request of Lessee for information within the control of Lessor with respect to the filing of any report or return, but Lessee agrees to pay any reasonable costs, fees or other charges of independent counsel or independent accountants incurred in connection with such request. Lessee's obligations under this Section 10 shall not be affected by any circumstances, including, without limitation, any set-off, counterclaim, recoupment, defense or other right which Lessee may have against Lessor or any other Person for any reason whatsoever. Lessee will pay to an Indemnitee, on demand, to the extent permitted by Applicable Law, interest at the Interest Rate on any amount not paid when due pursuant to this Section 10 until the same shall be paid in full. All indemnities, obligations, adjustments and payments provided for in this Section 10 shall survive, and remain in full force and effect, notwithstanding the expiration or other termination of this Lease. The obligations of Lessee in respect of all such indemnities, obligations, adjustments and payments are expressly made for the benefit of, and shall be enforceable by, an Indemnitee, without declaring this Lease to be in default or taking other action thereunder, and notwithstanding any provision to the contrary contained herein. (c) Gross-Up. The Lessee further agrees that if at any time any Applicable Law or any Governmental Entity requires any deduction or withholding in respect of Taxes from any payment of Rent or other amounts due under this Lease or under any other Operative Agreement, the sum due from the Lessee in respect of such payment shall be increased to the extent necessary to ensure that, after paying such Taxes or making such deductions or withholding, the Lessor or other Person entitled to the same, receives on the due date for such payment a net sum equal to the sum which it would have received had no such deduction or withholding been required to be made. Section 11. Casualty Occurrences. (a) Casualty Occurrence with respect to the Airframe. Upon a Casualty Occurrence with respect to the Airframe, Lessee shall give Lessor written notice of such occurrence. On or before ninety (90) days after the date of the Casualty Occurrence, or upon receipt of insurance proceeds in an amount equal to the Casualty Value, whichever is sooner, Lessee shall pay to Lessor in immediately available funds the Casualty Value to which it is entitled (as set forth in Exhibit J hereto). Upon such 26 29 payment, and the payment of all other amounts then due and payable under this Lease: (i) the obligation of Lessee to make further payments of Basic Rent hereunder shall terminate, (ii) this Lease shall terminate with respect to the Aircraft, and (iii) Lessor will transfer to Lessee, without recourse or warranty, all of Lessor's right, title and interest, in and to the Airframe and Engines (if any) suffering the Casualty Occurrence, free and clear of Lessor's Liens, as well as all of Lessor's right, title and interest in and to any Engine constituting part of the Aircraft but not installed thereon at the time of the Casualty Occurrence. No Casualty Occurrence shall result in any abatement of Rent until receipt by Lessor of the Casualty Value. (b) Casualty Occurrence with respect to an Engine. Upon a Casualty Occurrence with respect to an Engine only, Lessee shall give Lessor prompt written notice thereof and shall, within thirty (30) days after the date of such Casualty Occurrence, convey to Lessor, as replacement for the Engine suffering a Casualty Occurrence, title to a Replacement Engine. Each Replacement Engine shall be free of all Liens (except those Liens which are permitted by Section 14 hereof), shall be the same or better make and model, and shall be in as good an operating condition as the Engine being replaced, assuming the Engine being replaced was in the condition and repair required by the terms hereof immediately prior to the Casualty Occurrence, it being understood that Lessee shall have no obligation to provide a Hush Kit for any such Replacement Engine whether or not a Hush Kit had been provided with respect to the Engine being replaced. Upon full compliance by Lessee with the terms of this paragraph, Lessor will transfer to Lessee title to the Engine which suffered the Casualty Occurrence. Prior to or at the time of any such conveyance, Lessee, at its own expense, will promptly: (i) furnish Lessor with a full warranty bill of sale, in form and substance reasonably satisfactory to Lessor, with respect to such Replacement Engine; (ii) cause a further Lease Supplement hereto, in form and substance reasonably' satisfactory to Lessor, subjecting such Replacement Engine to this Lease, to be duly executed by Lessee, and recorded pursuant to Applicable Law; (iii) furnish Lessor with such evidence of title to such Replacement Engine and of compliance with the insurance provisions of Section 12 hereof with respect to such Replacement Engine as Lessor may reasonably request; (iv) furnish Lessor with an opinion of Lessee's counsel acceptable to Lessor and any Lessor Lender to the effect that title to such Replacement Engine has been duly conveyed to Lessor, free and clear of all Liens, that such Replacement Engine is duly leased hereunder and that such Replacement Engine is duly subjected to the Operative Agreements and the Lien of the Lessor Lender's mortgage or security agreement; (v) furnish a certificate signed by a duly authorized financial officer or executive of Lessee certifying that, upon consummation of such replacement, no Default or Event of Default will exist hereunder; (vi) furnish Lessor with such documents as Lessor may reasonably request in connection with the consummation of the transactions contemplated by this Section 11(b), in each case in form and substance satisfactory to Lessor; (vii) furnish such financing statement covering the Replacement Engine as may be reasonably requested by Lessor; and (viii) furnish Lessor with a report by an independent power plant engineer, acceptable to Lessor, that the Replacement Engine meets the requirements of this Lease. Upon full 27 30 compliance by Lessee with the terms of this Section 11(b), Lessor will transfer to Lessee all of the right, title and interest in the Engine, free and clear of Lessor's Liens, which suffered the Casualty Occurrence and which was originally leased to Lessee. For all purposes hereof, each such Replacement Engine shall be deemed part of the property leased hereunder, shall be deemed an "Engine" as defined herein and shall be deemed part of the Aircraft. No Casualty Occurrence covered by this Section 11(b) shall result in any reduction in Rent. (c) Application of Proceeds and Payments. Any payments received at any time by Lessor or by Lessee from any insurer under insurance (other than liability insurance), or from any Governmental Entity or other Person with respect to a Casualty Occurrence will be applied as follows: (i) unless clause 11(c)(ii) below is applicable, so much of such payments as shall not exceed the Casualty Value required to be paid by Lessee pursuant to Section 11(a) of this Lease shall be paid to or as directed by Lessor in reduction of Lessee's obligation to pay such Casualty Value if not already paid by Lessee, or, if already paid by Lessee (unless a Default or an Event of Default shall have occurred and be continuing) shall be applied by Lessor to reimburse Lessee for its payment of such Casualty Value and the balance of such payment, if any, remaining thereafter, if such payment is received with respect to insurance other than liability insurance (unless a Default or an Event of Default shall have occurred and be continuing) shall be paid over to, or retained by Lessee; or (ii) if such payments are received as a result of a Casualty Occurrence with respect to an Engine which is being replaced by Lessee with a Replacement Engine pursuant to Section 11(b) hereof, unless a Default or Event of Default shall have occurred and be continuing, all such payments shall be paid over to, or retained by, Lessee if Lessee shall have satisfied Lessor, in its sole discretion, that Lessee has fully performed or, concurrently therewith will fully perform, the terms of Section 11(b) and of Section 15 hereof with respect to the Casualty Occurrence for which such payments are made. (d) Requisition for Use by Government with Respect to the Aircraft. In the event of the requisition for use by a Governmental Entity of the Airframe or any Engine (other than a requisition constituting a Casualty Occurrence), all of Lessee's obligations under this Lease, including without limitation those 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 it is impossible for Lessee to perform its maintenance obligations with respect to the Airframe or such Engine because of the possession of the Airframe or such Engine by such Governmental Entity, promptly upon the return of the Airframe or such Engine to Lessee, Lessee shall undertake all actions necessary to restore the Aircraft or such Engine to the condition it would have been in had Lessee fully performed such obligations throughout the period of time the Aircraft or such Engine was in the possession of such Governmental Entity. All payments received by 28 31 Lessor or Lessee from the Governmental Entity for the use of the Airframe or such Engine during the Term therefor shall be paid over to, or retained by, Lessee if no Default or Event of Default shall have occurred and be continuing; and all payments received by Lessor or Lessee from the Governmental Entity for the use of such item after the Term therefor shall be paid over to, or retained by, Lessor. (e) Other Applications. Any amounts not payable to or retained by Lessee pursuant to this Section 11 or Section 12 hereof because a Default or an Event of Default shall have occurred and be continuing shall be paid to Lessor until such Default or Event of Default shall cease to be continuing, except that if Lessor shall have theretofore declared this Lease to be in default pursuant to Section 18 hereof, such amounts shall be retained by Lessor and disposed of in accordance with the provisions thereof. Section 12. Insurance. (a) Public Liability and Property Damage Insurance. Lessee will carry and maintain in effect, at its own cost and expense, with Approved Insurers, comprehensive public liability insurance (including, without limitation, contractual liability to cover Lessee's obligations under Section 13 of this Lease, and passenger legal liability), and property damage insurance with respect to the Aircraft. Such insurance shall be in an amount not less than the amount applicable to similar aircraft and engines which comprise Lessee's fleet, shall be of the type usual and customary by international airline standards for airline carriers operating other similar Aircraft in international operations and carried by Lessee on the other Aircraft in Lessee's fleet and shall at all times be in amounts not less than Two Hundred Fifty Million Dollars (US$250,000,000.00), per occurrence, with zero deductible. Lessee shall not discriminate against the Aircraft in providing such insurance. (b) Insurance Against Loss or Damage. Lessee, at its own cost and expense, will maintain in effect with Approved Insurers "all-risk" ground and flight Aircraft hull insurance (which shall include, but not be limited to, full war risk and allied perils, hijacking, a disappearance clause and coverage against 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, and foreign object damage to Engines) covering such Aircraft, and fire, transit and extended and "all-risk" coverage insurance with respect to Engines and Parts while not installed on such Aircraft or an Aircraft, which in each case is at least as broad as coverage of the type usual and customary by international airline standards for airline carriers operating other similar Aircraft in international operations and carried by Lessee on the other Aircraft in Lessee's fleet. Such insurance shall be for an amount not less than the Casualty Value. Such insurance shall include provisions for deductibles in an amount of not more than Two Hundred Fifty Thousand Dollars (US$250,000.00). No deductible shall apply in the event of a Casualty occurrence with repect to the Airframe. 29 32 (c) Required Policy Designations and Provisions. Each policy of insurance obtained and maintained pursuant to this Section, and each policy obtained in substitution or replacement for any such policies, shall: (i) designate Lessor as owner of the Aircraft (excluding the Hush Kits) covered thereby, and shall designate the Indemnities as additional named insureds, and the Lessor and/or the Lessor Lender as sole loss payee, as their interests may appear (but without imposing upon the Indemnities any obligation imposed upon the insured, including, without limitation, the liability to pay any premiums for any such policies); provided, however, that Lessee shall be sole loss payee with respect to insurance relating to the Hush Kits; (ii) expressly provide that, in respect of the interests of the Indemnities in such policies, the insurance shall not be invalidated by any action or inaction of Lessee, and shall insure the Indemnities regardless of any breach or violation of any warranty, declaration or condition contained in such policies by Lessee; (iii) provide that if such insurance is canceled by the Approved Insurers for any reason whatsoever, or is adversely changed in any way with respect to the interests of the Indemnities or if such insurance is allowed to lapse for nonpayment of premium, such cancellation, adverse change or lapse shall not be effective as to the Indemnities for thirty (30) days (seven (7) days in the case of any war risks or allied perils coverage or such lesser period of time as may be customarily applicable) after issuance to the Indemnities of written or telex notice by such insurer or insurers to Lessor and Lessor's Lender of such prospective cancellation, change or lapse; (iv) include coverage for the territorial limits of any country in which the Aircraft may at any time be located; (v) provide that, as against the Indemnities, the insurer waives any rights of set-off, counterclaim or any other deduction, whether by attachment or otherwise, and waives the rights it may have to be subrogated to any right of any insured against the Indemnities with respect to the Aircraft; and (vi) provide that in the event of any damage or loss, other than damage or loss to a Hush Kit, whether or not a Casualty Occurrence hereunder, and which results in a payment, such payment shall be payable directly to Lessor as the sole loss payee, for the account of all interests. Any payment with respect to loss or damage to a Hush Kit shall be payable to Lessee directly. Each such policy shall be primary without right of contribution from any other insurance which may be carried by the Indemnities. 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, the Indemnities shall have the right to carry additional and separate insurance for their own benefit at their own expense, without, however, thereby limiting Lessee's obligations under this Section 12. (d) Application of Insurance Proceeds for a Casualty Occurrence. It is agreed that insurance payments which arise from insurance obtained hereunder and received as the result of the occurrence of a Casualty Occurrence shall be applied in accordance with Section 11(c) hereof. 30 33 (e) Application of Insurance Proceeds for Other than a Casualty Occurrence. The insurance payments for any property damage loss to the Airframe or any Engine (but excluding payments with respect to the Hush Kits) not constituting a Casualty Occurrence, or to any Part, shall be paid to Lessor, and thereafter be applied by Lessor in payment for the repairs or for replacement property Lessee is required to perform or that Lessee must obtain in accordance with the terms of Sections 9 or 11 of this Lease, or, if such repair or replacement has already been paid for by the Lessee, to reimburse Lessee for such repairs or replacements, and any balance remaining after compliance with such sections with respect to such loss shall be applied, in the sole discretion of Lessor, towards any amounts due and owing to Lessor hereunder by Lessee. (f) Application in Default. Any amount (other than amounts relating to the Hush Kits) referred to in Section 11(c) or Section 12(e) hereof which is otherwise payable to Lessee shall not be paid to Lessee, or, if it has been previously paid to Lessee, and not yet applied by Lessee as permitted or required hereunder, shall be immediately delivered by Lessee to Lessor, if at the time of such payment, a Default or an Event of Default shall have occurred and be continuing. In either case, all such amounts shall be held by Lessor as security for the obligations of Lessee, or, at the option of Lessor, applied by Lessor toward payment of any of Lessee's obligations at the time due hereunder. At such time as there shall not be continuing any such Default or Event of Default, all such amounts at the time held by Lessor in excess of the amount, if any, which Lessor has elected for application as provided above, shall be paid to Lessee. (g) Certificates of Insurance. On or before the Delivery Date, and thereafter on each renewal by the Lessee of the insurance required hereby, Lessee will furnish to Lessor a certificate and a letter of undertaking executed and delivered by an Approved Insurance Broker who is authorized by an Approved Insurer, appointed by Lessee, describing in reasonable detail insurance carried on the Aircraft and certifying that the insurance then maintained on the Aircraft complies with the terms of this Lease. Lessee will cause such Approved Insurance Broker who is authorized by an Approved Insurer to agree to advise Lessor in writing or by telex: (i) at least thirty (30) days (seven (7) days in the case of any war risk and allied perils coverage or such lesser period of time as may be customarily applicable) prior to the termination or cancellation by the underwriters for any reason (including, without limitation, failure to pay the premium therefor) of any such insurance; and (ii) at least three (3) Business Days or, in the case of any war risk and allied perils coverage, such lesser period of time as may be customarily applicable, prior to any non-renewal by the underwriters for any reason (including, without limitation, failure to pay the premium therefor) of any such insurance. (h) Reinsurance. In the event that the insurances required hereunder are reinsured, such reinsurance shall contain a "cut-through" clause reasonably satisfactory to Lessor, and Lessee will furnish to Lessor a certificate and a letter of undertaking executed and delivered by an Approved Insurance Broker who is authorized by an Approved Insurer appointed by Lessee, describing in reasonable detail the reinsurance 31 34 carried on the Aircraft and certifying that the reinsurance then maintained on the Aircraft complies with the terms of this Lease. Section 13. Indemnification, Lessee hereby agrees and undertakes, from and after the delivery of the Aircraft on the Commencement Date (or such earlier time as Lessee takes possession of the Aircraft), to indemnify, reimburse and hold harmless each Indemnitee from and against any and all claims, damages, losses, liabilities, demands, suits, judgments, settlements, causes of action, legal proceedings (whether civil or criminal), penalties, fines, Taxes, other actions, and any attorneys' fees and all other costs and expenses in connection therewith, including any of the foregoing arising or imposed with or without any such Indemnitee's fault or negligence or under the doctrine of strict liability or any other theory of liability (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: (i) the Aircraft or this Lease or the enforcement of any of the terms hereof and thereof, including but not limited to the breach of any representation, warranty, covenant, obligation or duty of Lessee hereunder or under any Operative Agreement or any other document of agreement executed and delivered in connection herewith or with respect to any Indemnitee; or (ii) the condition, ownership, manufacture, purchase, delivery, lease, acceptance, possession, repossession, return, disposition, use, registration, import, export, maintenance, storage or operation of the Aircraft either in the air or on the ground; or (iii) any defect in the Aircraft (whether or not discovered or discoverable by Lessee or Lessor) arising from any material or articles or Parts used therein or from the design, testing, or use thereof or from any maintenance, service, repair, overhaul, or testing of the Aircraft, whether or not the Aircraft is in the possession of Lessee, and regardless of where the Aircraft may then be located; or (iv) any transaction, approval, or document contemplated by this Lease or any Operative Agreement, or given or entered into in connection herewith or therewith; provided, however, that Lessee shall be subrogated to all rights and remedies of Lessor against any Person pursuant to which Lessee has paid a Claim hereunder, including but not limited to any rights or remedies that Lessor may have against the Manufacturer, the Engine Manufacturer, the Approved Maintenance Provider, or the manufacturer of any Part, or any of their subcontractors. In the event Lessee is required to indemnify any Indemnitee hereunder, Lessee shall pay to such Indemnitee an amount which, after deduction of all Taxes and like charges required to be paid by such Indemnitee in respect of such payment, is equal to the amount of the indemnification required, provided, however, that all of the provisions of Section 10 hereof shall apply to such payment; and provided further, however, that Lessee shall not be required to indemnify any Indemnitee against Claims arising out of such Indemnitee's gross negligence or willful misconduct. Lessee hereby waives, and releases each Indemnitee from any Claims (whether now existing or hereafter arising) for or on account of or arising or in any way connected with injury to or death of personnel or any agent of Lessee or loss or damage to 32 35 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 ownership, manufacture, purchase, delivery, leasing, condition, use, maintenance, storage, repossession or operation of the Aircraft, either in the air or on the ground, or which may be caused by any defect in the Aircraft from the material or any article or Part used therein or from the design or testing thereof, or use thereof or from any maintenance, service, repair, overhaul, or testing of the Aircraft regardless of when such defect may be discovered, whether or not the Aircraft is at the time in the possession of Lessee, and regardless of the location of the Aircraft at any such time. The indemnities contained in this Section 13 shall survive the execution and delivery of this Lease and the other Operative Agreements, and shall continue in full force and effect notwithstanding the expiration or other termination of this Lease or other Operative Agreement and are expressly made for the benefit of and shall be enforceable by each Indemnitee. Section 14. 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: (i) the respective rights of Lessor and Lessee as herein provided; (ii) Lessor's Liens with respect to the Aircraft; (iii) Permitted Liens; and (iv) Liens in favor of any Lessor Lender; provided, however, that Lessee may create a Lien on the Hush Kits, provided that any such lienholder expressly acknowledges and agrees with Lessor or any Lessor Lender that it shall have no Lien on the Aircraft or any other Part thereof Section 15. Perfection of Title and Further Assurances. (a) Recordation of Lease. Lessee shall, at its sole cost and expense, and as may otherwise be directed by Lessor from time to time, cause this Lease, all exhibits hereto, any amendments or supplements hereto, and any and all additional instruments which shall be executed pursuant to the terms hereof to be kept, filed and recorded, and to be re-executed, re-filed and re-recorded at all times during the Term with the FAA and each other Governmental Entity having jurisdiction over the Aircraft, this Lease, the Operative Agreements and the transactions contemplated hereby and thereby to the extent required to perfect and preserve Lessor's and Lessor Lender's interest and title in and to the Aircraft, this Lease and each Operative Agreement to the maximum extent possible under Applicable Law. (b) Other Filings. (i) If at any time any filing or recording is reasonably necessary to protect the interest of Lessor or any Lessor Lender, Lessee, at Lessor's cost and expense (unless an Event of Default shall have occurred and be continuing or unless in the event of a Permitted Sublease, then, at Lessee's cost and expense) and upon 33 36 request by Lessor or any Lessor Lender, shall cause this Lease and any Lessor Lender's security agreement and any and all additional instruments which shall be executed pursuant to the terms hereof or thereof, to be kept, filed and recorded and to be re-executed, refiled and re-recorded in the appropriate office pursuant to Applicable Law to perfect, protect and preserve the rights and interests of Lessor and any Lessor Lender hereunder and in the Aircraft. At the reasonable request of Lessor or any Lessor Lender, Lessee shall furnish to Lessor and any Lessor Lender opinions of counsel or other evidence satisfactory to Lessor and any Lessor Lender of each such filing or refiling and recordation or re-recordation. (ii) Without limiting the foregoing, Lessee shall do or cause to be done, and pay all Taxes in connection with (pursuant to Section 10 hereof), at Lessee's sole cost and expense, any and all acts and things which may be required to perfect and preserve the title and interest of Lessor and the Lien of any Lessor Lender in the Aircraft and this Lease, as Lessor and any Lessor Lender may reasonably request, arising out of or in any way related to Lessee's or Sublessee's use or operation of the Aircraft. Lessee shall also do or cause to be done, at its sole cost and expense, any and all acts and things which may be required under the terms of any other Applicable Law involving any jurisdiction in which Lessee may operate, or any and all acts and things which the Lessor or any Lessor Lender may reasonably request, to perfect and preserve Lessor's ownership rights regarding and any Lessor Lender's Lien in and to the Aircraft within any such jurisdiction. (iii) In addition, Lessee will promptly and duly execute and deliver to Lessor such further documents and assurances and take such further actions as Lessor may from time to time reasonably request in order to more effectively carry out the intent and purpose of this Lease and to establish, protect and perfect the rights and remedies created or intended to be created in favor of Lessor and any Lessor Lender hereunder, including, without limitation, if reasonably requested by Lessor at the expense of Lessee, the execution and delivery of supplements or amendments hereto or to any Lessor Lender's security agreement in recordable form, subjecting to this Lease and to the Lien of any Lessor Lender's security agreement, any Replacement Engine and the recording or filing of counterparts thereof, in accordance with the laws of any appropriate jurisdiction. Lessee shall not consolidate with or merge into any other corporation unless Lessee has notified Lessor and any Lessor Lender in writing prior to the consummation of such transaction and Lessee shall have taken all such actions requested by Lessor or Lender pursuant to this Section 15. Section 16. Return of Aircraft and Records. (a) Return. On the Expiration Date or such other Return Occasion, Lessee, at its own expense, shall return the Aircraft to Lessor in the condition specified in Exhibit E hereto (it being agreed, however, that Lessee need not comply with Stage 3 noise requirements of FAR Part 36 for the Aircraft) at a location designated by Lessor in the United States (the "Return Location"), fully equipped, with all required Parts 34 37 (excluding, however, the Hush Kits) and Engines, duly installed thereon, by delivering the same to Lessor at such location. At such time as the Aircraft has been inspected by Lessor and found to be in the condition required hereunder, Lessor shall issue a redelivery receipt to Lessee confirming the same. Any engines installed on the Aircraft returned to Lessor hereunder which had not originally been installed on the Aircraft will be deemed to be part of the Aircraft and owned by Lessor, and Lessor shall, subject to such engines fulfilling all requirements of a Replacement Engine under Section 11(b) hereof, and otherwise complying with all requirements of Exhibit E hereto, relinquish title to any Engines previously removed and replaced by such last-installed engines. (b) Engines. Lessee may return the Aircraft on the Return Occasion with an engine not owned by Lessor, so long as (i) such engine conforms in all respects to the requirements set forth in Section 11(b) hereof with respect to a Replacement Engine; (ii) such engine conforms to the return condition requirements set forth in Subsections 16(d) and 16(f) hereof; and (iii) Lessee, at its own expense and concurrently with such delivery, furnishes Lessor with a warranty bill of sale, in form and substance reasonably satisfactory to Lessor, with respect to such engine and with evidence of Lessee's full and unencumbered title to such engine (including, if requested, an opinion of Lessee's counsel to the effect of the opinion required by Section 11(b)(iv) hereof) and Lessee takes such other action as Lessor may reasonably request in order that full legal and beneficial ownership and title to such engine shall be duly and fully vested in Lessor. Lessee's obligation to comply with the terms of this Subsection 16(c) shall be conditioned on the Lessor's transferring to Lessee full legal and beneficial ownership and title to any Engine not installed on the Aircraft at the Return Occasion, without any representation, warranty or recourse of any kind whatsoever, express or implied, except a warranty that such Engine is free and clear of Liens, other than Liens which Lessee is required to discharge hereunder. (c) Records. Upon the Return Occasion, Lessee shall deliver to Lessor all logs, manuals, data and inspection, modification, and overhaul records which are required to be maintained with respect to the Aircraft under applicable rules and regulations of the FAA, and otherwise in accordance with the terms of this Lease and Exhibit G hereto. Lessee shall deliver to Lessor all such Maintenance Program data and task cards as required to transition the Aircraft to another operator's maintenance program. (d) Service Bulletin and Modification Kits. At or upon the return of the Aircraft pursuant to this Section 16, Lessee shall deliver to Lessor, at no cost to Lessor, all service bulletin kits furnished without charge by a manufacturer for installation on the Aircraft which have not been so installed, together with appropriate instructions for installation. In the event such uninstalled kits were purchased or manufactured by Lessee, then Lessor shall have a right to purchase such kits at Lessee's acquisition price for a period of ninety (90) days after return of the Aircraft. 35 38 (e) Condition of Aircraft. Upon the Return Occasion, Lessee shall return the Aircraft (other than the Hush Kits) to Lessor in such condition that the Aircraft (other than the Hush Kits) shall comply with all of the conditions set forth in Exhibit E hereto, with all Aircraft systems fully functional and in good working order. (f) Final Inspection. Upon the Return Occasion, Lessee shall make the Aircraft available, at Lessee's expense, to Lessor at Lessee's principal maintenance base or such other location mutually agreed to by Lessor and Lessee for detailed inspection in order to verify that the condition of the Aircraft (other than the Hush Kits) complies with the requirements set forth above, and Lessee shall thereafter make the Aircraft available at the Return Location for a further and final Engine inspection, including borescope and power assurance runs (such inspection being hereinafter collectively referred to as the "Final Inspection"). Lessor shall cause the Final Inspection to be conducted only during those times when the Aircraft is not engaged in operation. Lessee shall give Lessor not less than ten (10) days prior written notice of the commencement date of such Final Inspection. The period allowed for the Final Inspection shall have such duration as to permit the opening of any areas of the Aircraft which would be opened by Lessee to satisfy the requirements of Exhibit E. The Final Inspection shall commence on or before the Expiration Date with respect to the Aircraft and shall continue on consecutive days until all activity required above to be conducted during the Final Inspection has been concluded. To the extent that any portion of the Final Inspection extends beyond the Expiration Date, the Term shall be deemed to have been automatically extended, and the obligation to pay Rent hereunder shall continue on a daily basis at the rate of 125% of the Basic Rent 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, and Lessee shall continue to insure the Aircraft in accordance with Section 12 during any such extension period. Lessor shall work diligently in its inspection of the Aircraft, such that any delay in completion of the Final Inspection is not caused solely by any act or omission by or on behalf of Lessor. (g) Aircraft Documentation. In order to enable Lessor to prepare for the Final Inspection of the Aircraft pursuant to Subsection 16(g) above, Lessee agrees to make available to Lessor at Lessee's principal maintenance base not later than ten (10) days prior to the commencement of such Final Inspection, the Aircraft Documents, together with such other documentation regarding the condition, use, maintenance, operation and history of the Aircraft generated during Lessee's possession of the Aircraft, and as Lessor may otherwise reasonably request. (h) Corrections and Subsequent Corrections. To the extent that the Aircraft or any Engine fails upon the Return Occasion to conform to any requirement imposed by this Lease and particularly Section 16(f), Lessor, at its sole option, may continue the Lease in effect in the manner provided for in Section 16(f) above with regard to automatic extension until such time as the Aircraft (other than the Hush Kits) is brought up to the condition required by Section 16(f) above; or Lessor may accept the return of 36 39 the Aircraft and thereafter have any such nonconformance corrected at such time as Lessor may deem appropriate but not to occur later than ninety (90) days following the return of the Aircraft, at commercial rates then charged by the Person selected by Lessor to perform such correction and Rent shall continue as set forth in Section 16(f) above for the number of days required to perform such correction. Any direct expense incurred by Lessor for such correction shall become Supplemental Rent payable by Lessee within thirty (30) days following the submission of a written statement by Lessor to Lessee, identifying the items corrected and setting forth the expense of such correction. Lessee's obligation to pay such Supplemental Rent shall survive the passage of the Expiration Date or other termination of this Lease. (i) Functional Check Flight. Immediately prior to the expiration of the Term, observers (not to exceed three (3) in number) selected by and at the expense of Lessor, will accompany Lessee's flight crew on a functional check flight (not to exceed two (2) hours in duration) to be accomplished in accordance with Manufacturer's procedures and at Lessee's expense to demonstrate the airworthiness of the Aircraft being returned and proper functioning of all systems and components. At all times during such functional check flight Lessee's flight crew shall be in command of the Aircraft; provided, however, that Lessor's qualified pilots may operate the controls. Any discrepancy or malfunction detected shall be corrected at Lessee's expense and subject to the requirements of this Section 16. Section 17. Events of Default. Any one or more of the following occurrences or events shall constitute an Event of Default: (a) Lessee shall fail to make any payment of Rent to Lessor when due under this Lease and such payment shall be overdue for a period of five (5) Business Days; (b) Lessee shall fail to obtain and maintain any insurance required under the provisions of Section 12 hereof, or shall let any such insurance coverage lapse, or shall operate the Aircraft outside of the scope of the insurance coverage maintained with respect to the Aircraft; (c) any representation or warranty made by Lessee in Sections 5(c)(i) through 5(c)(vi) hereof inclusive is incorrect at the time given in any material respect; any other representation or warranty made by Lessee herein or in any document or certificate furnished to Lessor in connection herewith or therewith or pursuant hereto is incorrect in any material respect at any time during the Term and the Lessee fails to cure the same so as to make the representation or warranty correct within fifteen (15) days after Lessee has actual notice thereof (or such longer period as Lessor may agree, in its sole discretion, provided that Lessee is diligently pursuing efforts to cure the same and the defect is capable of correction); 37 40 (d) Lessee shall fail to perform or observe any other covenant, condition or agreement to be performed or observed by it pursuant to this Lease and such failure shall continue for a period of fifteen (15) days after notice thereof is given by Lessor to Lessee, or if Lessee shall fail to observe its covenant to keep the Aircraft free and clear of Liens, seven (7) days after the date of imposition of any such Lien (or such longer period as Lessor may agree, in its sole discretion, provided that Lessee is diligently pursuing efforts to cure the same and the defect is capable of correction); (e) Lessee consents to the appointment of a receiver, trustee or liquidator of itself or of a substantial part of its property, or Lessee admits in writing its inability to pay its debts generally as they come due, or makes a general assignment for the benefit of creditors, or Lessee files a voluntary petition in bankruptcy or a voluntary petition seeking reorganization in a proceeding under any bankruptcy laws, as now or hereafter in effect (other than for purposes of a solvent reorganization on terms previously approved by Lessor), or an answer admitting the material allegations of a petition filed against Lessee in any such proceeding, or Lessee by voluntary petition, answer or consent seeks relief under the provisions of any bankruptcy, insolvency or other similar law providing for the reorganization or winding-up of corporations, or provides for an agreement, composition, extension or adjustment with its creditors; (f) an order, judgment or decree is entered by any court, with or without the consent of Lessee, appointing a receiver, trustee or liquidator for Lessee or of all or any substantial part of its property, or all or any substantial part of the property of Lessee is sequestered, and any such order, judgment or decree of appointment or sequestration remains in effect, 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 bankruptcy, insolvency or other similar laws of any Governmental Entity (as now or hereafter in effect) is filed and is not withdrawn or dismissed within sixty (60) days thereafter, or if, under the provisions of any Applicable Law providing for reorganization or winding-up of corporations which may apply to Lessee, any court of competent jurisdiction assumes jurisdiction over, or custody or control of, Lessee or of all or any substantial part of its property and such jurisdiction, custody or control remains in effect, unrelinquished, unstayed or unterminated for a period of sixty (60) days; (h) a final judgment for the payment of money not covered by insurance in excess of One Hundred Thousand Dollars (US $100,000.00), or final judgments for the payment of money not covered by insurance in excess of One Hundred Fifty Thousand Dollars (US $150,000.00) in the aggregate, shall be rendered against Lessee and the same shall remain undischarged for a period of thirty (30) days during which execution thereof shall not be effectively stayed by agreement of the parties involved, stayed by court order or adequately bonded or attachments or other Liens, except for security interests; 38 41 (i) Lessee shall receive notice of default or exercise of remedies with respect to the payment of any obligation for the payment of borrowed money, for the deferred purchase price of property or for the payment of rent or hire under any lease of Aircraft which has a principal amount of One Hundred Thousand Dollars (US $100,000.00) or more (determined in the case of borrowed money by the amount outstanding under the agreement pursuant to which such borrowed money was borrowed, in the case of a deferred purchase price by the remaining balance and in the case of a lease by the present discounted value of the remaining rent or hire payable thereunder (ignoring any fair market renewal)) when the same becomes due; or Lessee shall receive notice of default or exercise of remedies with respect to the performance of any other term, agreement or condition contained in any material agreement or instrument under or by which any such obligation is created, evidenced or secured, and Lessee fails to cure the same; (j) except as permitted under Section 22 hereof, Lessee shall either temporarily or permanently discontinue its business or sell or otherwise dispose of all or substantially all of its assets or Lessee shall voluntarily suspend all or substantially all of its commercial airline operations or the franchises, concessions, permits, rights or privileges required for the conduct of the business and operations of Lessee shall be revoked, canceled or otherwise terminated or the free and continued use and exercise thereof curtailed or prevented, and as a result thereof the preponderant business activity of Lessee ceases to be that of a commercial airline, or Lessee shall cease to be an "air carrier operating under a certificate of convenience and necessity" within the meaning of 11 U.S. C. Section 11 10; (k) a default or an event of default by Lessee shall occur under any other Operative Agreement, or other agreement between Lessor and Lessee; or (l) any of the foregoing occurrences or events shall have occurred or be continuing with respect to any Sublessee, if any, or under any Permitted Sublease, mutatis mutandis, as if Sublessee were substituted in the place of Lessee hereunder. Section 18. Remedies. (a) Upon the occurrence of any Event of Default and at any time thereafter, Lessor may, at its option and without notice to Lessee, declare this Lease to be in default and Lessor may exercise one or more of the following remedies as Lessor in its sole discretion shall elect, to the extent available and permitted by, and subject to compliance with any mandatory requirements of any applicable Law then in effect: (i) demand that Lessee, and Lessee shall upon such demand of Lessor and at Lessee's expense, immediately return the Aircraft to Lessor at such location as may be directed by Lessor, in the manner specified in such notice, and such return shall not be delayed for purposes of complying with the return conditions specified in Section 16 hereof (none of which conditions shall be deemed to affect 39 42 Lessor's possession of the Aircraft) or delayed for any other reason. Notwithstanding the foregoing, at Lessor's option, Lessee shall be required thereafter to take such actions, at Lessee's expense, as would be required by the provisions of this Lease if the Aircraft were being returned at the end of the Term hereof. In addition, 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 is located and take immediate possession of and, at Lessor's sole option, remove the same (and/or any engine which is not an Engine but which is installed on the Airframe, subject to the rights of the owner, lessor or secured party thereof) 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, or otherwise, caused by such entry or taking, except damage caused by gross negligence or willful misconduct of Lessor; (ii) sell at private or public sale, as Lessor may determine, or hold, use, operate or lease to others the Aircraft as Lessor in its sole discretion may determine, all free and clear of any rights of Lessee; (iii) proceed by appropriate court action or actions, either at law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease and to recover damages for the breach thereof and to rescind this Lease; (iv) retain and/or liquidate the Security Deposit; (v) terminate this Lease by written notice to Lessee and/or repossess the Aircraft; and (vi) exercise any other remedy available under Applicable Law. In addition to the foregoing, Lessee shall be liable for any and all unpaid Rent during or after the exercise of any of the aforementioned remedies, together with interest on such unpaid amounts at the Interest Rate, and until satisfaction of all of Lessee's obligations to Lessor hereunder and for all reasonable legal fees and other costs and out-of-pocket expenses actually incurred by Lessor 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 16 hereof or in placing the Aircraft in the condition and with airworthiness certification as required by such Section. Further, upon the occurrence of any of the events specified in Sections 17(e), 17(f), and/or 17(g), this Lease shall immediately terminate and Lessee shall forthwith, or shall require and instruct any such receiver or trustee to return the Aircraft to Lessor in the condition required by and otherwise in accordance with Section 16 hereof. (b) In effecting any repossession, Lessor, its representatives and agents, to the extent permitted by Applicable Law shall: (i) have the right to enter upon any premises where it reasonably believes the Aircraft, the Airframe, an Engine or Part to 40 43 be located; (ii) not be liable, in conversion or otherwise, for the taking of any personal property of Lessee which is in or attached to the Aircraft, the Airframe, an Engine or Part which is repossessed; provided, however, that Lessor shall return to Lessee all personal property of Lessee which was on the Aircraft at the time Lessor re-takes possession of the Aircraft; (iii) not be liable or responsible, in any manner, for any inadvertent damage or injury to any of Lessee's property in repossessing and holding the Aircraft, the Airframe, an Engine or Part, except for that caused by or in connection with Lessor's gross negligence or willful misconduct; (iv) have the right to maintain possession of and dispose of the Aircraft, the Airframe, an Engine or Part on any premises owned by Lessee or under Lessee's control; and (v) have the right to obtain a key to any premises at which the Aircraft, the Airframe, an Engine or Part may be located from the landlord or owner thereof. (c) If demanded by Lessor, Lessee, at its sole expense, shall assemble and make the Aircraft, the Airframe, any Engines or Parts available at such location as may be directed by Lessor. Lessee hereby agrees that, in the event of the return to or repossession by Lessor of the Aircraft, the Airframe, any Engines or Parts, any rights in any warranty (express or implied) heretofore assigned to Lessee or otherwise held by Lessee shall without further act, notice or writing be assigned or reassigned to Lessor, if assignable. Lessee shall be liable to Lessor for all out-of-pocket expenses, disbursements, costs and fees incurred in: (i) repossessing, storing, preserving, shipping, maintaining, repairing and refurbishing the Aircraft, the Airframe, an Engine or Part to the condition required by Section 16 hereof; and (ii) preparing the Aircraft, the Airframe, an Engine or Part for sale or lease, advertising the sale or lease of the Aircraft, the Airframe, an Engine or Part and selling or releasing the Aircraft, the Airframe, an Engine or Part. Lessor is hereby authorized and instructed, at its option, to make reasonable expenditures which Lessor, in its sole discretion, considers advisable to repair and restore the Aircraft, the Airframe, an Engine or Part to the condition required by Section 16 hereof, all at Lessee's sole expense. (d) Whether or not Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights hereunder with respect to the Aircraft, Lessor, by written notice to Lessee specifying a payment date not earlier than ten (10) days from the date of such notice, may demand, and Lessee hereby agrees to pay to Lessor on demand on the payment date specified in such notice, as liquidated damages for loss of a bargain and not as a penalty, any Rent due on or before such payment date plus an amount equal to the excess, if any, of (A) the Casualty Value over (B) the fair market value of the Aircraft, computed as of the payment date specified pursuant to this Section 18(d), except that Lessee shall be required to pay the Casualty Value without credit for fair market value if Lessee does not voluntarily return the Aircraft to Lessor within such ten (10) day notice period at the location designated by Lessor or other location mutually agreed to between Lessor and Lessee, together with interest, to the extent permitted by Applicable Law, at the Interest Rate on the amount of such excess, if any, from such payment date specified pursuant to this Section 18(d) to the date of actual payment of such amount. 41 44 (e) Whether or not Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights hereunder with respect to the Aircraft or Lessee upon the occurrence of an Event of Default, Lessee and Lessor hereby stipulate that Lessor shall be entitled to sequester the Aircraft and Lessee hereby agrees to deliver the Aircraft into the custody of Lessor or its designated agents for such purpose, at Lessee's expense, upon receipt of a written demand from Lessor with respect thereto. (f) No remedy referred to in this Section 18 is intended to be exclusive, but, to the extent permissible hereunder or under Applicable Law, 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 Default or Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Default or Event of Default. Section 19. Alienation. Lessor shall have the right, at its sole cost and expense, to assign, sell or encumber any interest of Lessor in the Aircraft (other than the Hush Kits) or this Lease and/or the proceeds hereof subject to the rights of Lessee under the provisions of this Lease, and in accordance with Applicable Law; and provided that the Aircraft shall remain registered in the United States, and provided further that in the event of a sale of the Aircraft, any such purchaser shall be a Person of recognized standing and ability in the aviation industry so as to be able to fulfill its obligations as lessor hereunder to the reasonable satisfaction of Lessee. To effect or facilitate any such assignment, sale or encumbrance, Lessee agrees to provide, at Lessor's sole cost and expense, such agreements, consents, conveyances or documents as may be reasonably requested by Lessor, which shall include, without limitation, in the event of a sale complying herewith, an unrestricted release of Lessor from its obligations under this Lease. The agreements, covenants, obligations and liabilities contained herein including, but not limited to, all obligations to pay Rent and indemnify each Indemnitee are made for the benefit of each Indemnitee and their respective successors and permitted assigns; provided, however, that no assignment, sale or encumbrance shall increase the aggregate financial exposure or Rent obligations of Lessee under this Lease as compared to what such obligations would have been had such assignment, sale or encumbrance not occurred. In the event this Lease is assigned, sold or encumbered by Lessor, any assignee, transferee or Lessor Lender shall agree in writing delivered to Lessee as a condition precedent thereto not to disturb or otherwise interfere with the quiet enjoyment by Lessee of the Aircraft so long as no Default or Event of Default shall have occurred and be continuing, and that such assignee, transferee or Lessor Lender shall have no interest whatsoever in the Hush Kits absent Lessee's express transfer or conveyance thereof in a written bill of sale. Any purchaser of the Aircraft subject to the Lease shall assume the obligations of Lessor, specifically including Lessor's obligations 42 45 under Exhibit E hereto, under the Lease and shall acknowledge in writing to Lessee, receipt of the Security Deposit and Maintenance Reserves remaining at the time of any such purchase, and that it shall receive, hold and distribute such funds only in accordance with and subject to the terms and conditions of this Lease. Any subsequent sale, assignment or encumbrance made by any transferee, assignee, or mortgagee shall be subject to the terms of this Section 19. Section 20. 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. To the extent permitted by Applicable Law, Lessee hereby waives any provisions of Applicable Law which renders any provisions hereof prohibited or unenforceable in any respect. This Lease supersedes any prior or contemporaneous agreements, whether oral or in writing, of the parties hereto and shall constitute the entire agreement of the parties hereto. 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 under hand 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, and nothing herein shall be construed as conveying to Lessee any right, title or interest in the Aircraft or any Engine or Part except as a lessee only, and subject in all events to the terms and conditions hereof. The headings in this Lease are for convenience of reference only and shall not define or limit any terms of the provisions hereof. Whenever required by the context hereof, the singular shall include the plural and vice versa. All Exhibits and Schedules attached hereto are incorporated herein by reference and are deemed to be a part hereof. (b) Governing Law; Jurisdiction. (i) This Lease shall in all respects be governed by, and construed in accordance with, the laws of the State of California, including all matters of construction, validity and performance. Lessor and Lessee hereby expressly submit to the non-exclusive jurisdiction of California. Lessee further agrees that any legal action or proceeding against it or any of its assets may be brought in California or in any jurisdiction where Lessee or any of its assets may be found. (ii) Lessee further irrevocably consents to the service of process in any such action or proceeding by the mailing of copies thereof by certified mail, postage prepaid, to Lessee and to Lessee's counsel at their respective addresses set forth in Exhibit C hereto. The foregoing, however, shall not limit the rights of the Lessor to serve process in any other manner permitted by Applicable Law or to bring any legal action or proceeding or to obtain execution of judgment or to recover the Aircraft in any jurisdiction. Lessee further agrees that final judgment against Lessee in any action or 43 46 proceeding or arbitration in connection with this Lease or any of the other Operative Agreements shall be conclusive and may be enforced in any other jurisdiction within or outside of California by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and the amount of Lessee's indebtedness. Lessee hereby irrevocably waives, to the fullest extent permitted by Applicable Law, any objection which Lessee may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Lease or any of the other Operative Agreements brought in California or the courts of any country or place where Lessee or any of its assets may be found, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in California has been brought in an inconvenient forum. (iii) The foregoing submission to jurisdiction shall not be construed so as to limit the right of either party to take proceedings to enforce any judgment awarded against the other in whatsoever jurisdictions shall to it seem fit nor shall the taking of proceedings in any one or more jurisdiction, preclude the taking of proceedings in any other jurisdiction, whether concurrently or not. To the extent that each of Lessor and Lessee may be entitled, in any jurisdiction on which judicial proceedings may at any time be commenced with respect to this Lease or any instrument, agreement or documents contemplated hereby or referred to herein, to claim for itself or its revenues or assets immunity (whether by reason of sovereignty or otherwise) from suit, from the in rem or in personam jurisdiction of any court, from attachment prior to judgment, from attachment in aid of execution of judgment or from any other legal process, and to the extent that in any such jurisdiction there may be attributed such an immunity (whether or not claimed), each of Lessor and Lessee hereby irrevocable waives such immunity in respect of suit, jurisdiction of any court attachment prior to judgment, attachment in aid of execution of judgment, set-off, execution of judgment and other legal process and consents generally in respect of any such legal action or proceedings to the giving of any relief or the issue of any process in connection with such action or proceedings including, without limitation, the making, enforcement or execution against any property whatsoever (irrespective of its use or intended use) or any order or judgment which may be made or given in such action or proceedings. Lessee hereby expressly and irrevocably waives any rights it may have to a trial by jury in any action or proceeding brought to enforce any provision of this Lease or any of the other Operative Agreements. (c) Notices. All notices required under the terms and provisions hereof shall be in writing, shall be sent to Lessor or Lessee at their respective addresses or facsimile numbers set forth in Exhibit C hereto (or such other addresses or facsimile numbers as the parties may designate from time to time by notice pursuant to this Section 20(c)) by telefax and by air courier. Any such notice shall become effective upon the earlier of actual receipt or the fifth (5th) day following the date such notice is sent by air courier. 44 47 (d) Lessor's to Perform for Lessee. If Lessee fails to make any payment of Supplemental Rent required to be made by it hereunder 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 conform 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 Interest Rate, shall be payable by Lessee to Lessor (as Supplemental Rent) upon demand. Lessor agrees to notify Lessee in writing prior to making any payment under this Section 20(d), unless the Aircraft will be in danger of loss, sale, confiscation, forfeiture or seizure should such payment not be made. The taking of any such action by Lessor pursuant to this Subsection 20(d) shall not constitute a waiver or release of any 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. (e) Counterparts. To the extent, if any, 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 in this Lease or in any Lease Supplement may be created through the transfer or possession of any counterpart other than the original counterpart, which shall be so identified. Subject to the preceding sentence, this Lease and each Lease Supplement may be executed simultaneously 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. (f) Quiet Enjoyment. Lessor covenants that, so long as no Event of Default has occurred and is continuing, Lessee shall quietly enjoy the use and possession of the Aircraft without interference by Lessor, or by any Person lawfully claiming by or through Lessor. (g) Brokers. Each party agrees to indemnify and hold the other harmless from and against any and all claims, suits, damages, costs and expenses (including, but not limited to reasonable attorneys' fees) asserted by any agent, broker or other third party for any commission or compensation of any nature whatsoever based upon the lease of the Aircraft, if such claim, damage, cost or expense arises out of any action or alleged action by the indemnifying party, its employees or agents. (h) Confidential Treatment. Each of the parties agrees not to disclose to any third party (other than their auditors and respective professional advisors, lenders or potential lenders, and except as otherwise required by Applicable Law) any non-public, proprietary information provided by and concerning the other party which the other party specifies as being of a sensitive and confidential nature, including but not limited to the amount of Basic Rent due and owing hereunder. 45 48 (i) Section 1110. To the extent provided thereby (or to the fullest extent it may lawfully so agree, whether or not provided thereby), Lessee hereby agrees that any right of Lessor to take possession of such Aircraft or Engines in compliance with the provisions of this Lease and in accordance with Section 1110 of Title 11 of the United States Code or any similar provision of any superseding statute, as amended from time to time, shall not be affected by the provisions of Sections 362 or 363 of said Title, or other analogous part of any superseding statute, as amended from time to time, and accordingly, it is the intention of the parties hereto that this Lease be afforded the benefits of said Section 1110. (j) Expenses. Each party will pay all expenses (including legal, professional and out-of-pocket expenses) incurred or payable by it in connection with the negotiation, preparation, and execution of this Lease and the other Operative Agreements and all such expenses related to any amendment to or extension of or other documentation in connection with, or the granting of any waiver or consent under this Lease and the other Operative Agreements. Notwithstanding the foregoing, Lessee will pay to Lessor and Lessor Lender or its order on demand all reasonable expenses (including reasonable legal and other costs) payable or incurred by Lessor and Lessor Lender for FAA counsel and in connection with the enforcement of, registration of or preservation of any of Lessor's and Lessor Lender rights under this Lease and the other Operative Agreements associated with or arising, directly or indirectly, from the occurrence of an Event of Default or from a Permitted Sublease hereunder. Section 21. Renewal. Provided that no Default or Event of Default has occurred and is continuing, then Lessee may, upon ninety (90) days advance written notice to Lessor, elect to extend the Term of this Lease, for an additional twenty four (24) months, from eighty four (84) months to one hundred and eight (108) months. All other terms and conditions of this Lease, and the respective parties obligations hereunder, including but not limited to the payment of Rent, shall continue in full force and effect. 46 49 Section 22. Merger. Provided that no Default or Event of Default shall have occurred and be continuing, in the event that Lessee consolidates with or merges into any other corporation or conveys, transfers or leases in one or more transactions substantially all of its assets to any Person (a "Merger Transaction"), prior thereto the Lessee shall cause the successor entity (the "Successor") to execute and deliver to Lessor a duly authorized, valid, binding and enforceable agreement in form and substance reasonably satisfactory to Lessor containing an assumption by the Successor of the due and punctual performance and observance of all terms, covenants, agreements and conditions of this Agreement to be performed or observed by Lessee, and such other matters as Lessor may reasonably request; and provided further that the Successor shall be solvent and shall be able to fulfill all of the obligations of Lessee hereunder. [Remainder of Page Intentionally Left Blank.] 47 50 IN WITNESS WHEREOF, Lessor and Lessee, each pursuant to due authority, have each caused this Lease to be executed by their duly authorized officers as of the day and year first above written. LESSOR: PEGASUS CAPITAL CORPORATION By: /s/ GREGORY HARDING BROWN ---------------------------------------------- Name: GREGORY HARDING BROWN -------------------------------------------- Title: EXECUTIVE VICE PRESIDENT ------------------------------------------- LESSEE: KITTY HAWK AIRCARGO, INC. BY: /s/ RICHARD R. WADSWORTH, JR. ---------------------------------------------- Name: RICHARD R. WADSWORTH, JR. -------------------------------------------- Title: VICE PRESIDENT AND CHIEF FINANCIAL OFFICER ------------------------------------------- 48 EX-10.5 3 AIRCRAFT LEASE BETWEEN FLEET CAPITAL CORP. 1 EXHIBIT 10.5 AIRCRAFT LEASE (N750US) DATED AS OF DECEMBER 30, 1996 between FLEET CAPITAL CORPORATION as Lessor and KITTY HAWK AIRCARGO, INC. as Lessee This is Counterpart No. 1 of a total of 3 counterparts. Only Counterpart No. 1 shall be considered chattel paper for purposes of the Uniform Commercial Code and a security interest may be perfected only by possession of Counterpart No. 1. TABLE OF CONTENTS SECTION 1 Acceptance and Lease of Aircraft SECTION 2 Conditions to Closing; Closing Covenants SECTION 3 Term and Rent SECTION 4 Acceptance SECTION 5 Covenants and Warranties SECTION 6 Representations, Warranties and Agreements of Lessee SECTION 7 Net Lease SECTION 8 Return of Aircraft SECTION 9 Liens SECTION 10 Taxes SECTION 11 Registration, Maintenance and Operation; Compliance and Use; Replacement Parts; Additions; Aircraft Marking SECTION 12 Inspection SECTION 13 Loss or Destruction SECTION 14 Insurance SECTION 15 Indemnification SECTION 16 Assignment and Sublease SECTION 17 [Intentionally Left Blank] SECTION 18 Events of Default SECTION 19 Remedies SECTION 20 Performance of Obligations of Lessee by Lessor SECTION 21 Intent SECTION 22 Notices SECTION 23 End of Term Options SECTION 24 [Intentionally Left Blank] SECTION 25 Transaction Expenses SECTION 26 Miscellaneous SECTION 27 Amendments SECTION 28 Truth in Leasing EXHIBIT A - Definitions Lease Supplement No. 1 Schedule No. 1 to Lease Supplement No. 1 Schedule No. 2 to Lease Supplement No. 1 Schedule No. 2-A to Lease Supplement No. 1 Schedule No. 2-B to Lease Supplement No. 1 Schedule No. 3 to Lease Supplement No. 1 Lease Supplement No. 2 EXHIBIT B - Aircraft Bill of Sale EXHIBIT C-1 - Opinion of Counsel - Lessee (with Section 1110 provisions) EXHIBIT C-2 - Opinion of Counsel - Guarantor EXHIBIT D - Financial Covenants Rider
2 AIRCRAFT LEASE This AIRCRAFT LEASE (together with all Supplements, Exhibits and Certificates hereto, the "Lease") is made and entered into as of the 30th day of December, 1996 by and between Fleet Capital Corporation, a Rhode Island corporation ("Lessor"), with a place of business at 50 Kennedy Plaza, Fifth Floor, Providence, RI 02903-2305, and Kitty Hawk Aircargo, Inc., a Texas corporation ("Lessee"), having its principal place of business and chief executive office at P.O. Box 612787, 1515 W. 20th Street, DFW International Airport, Texas 75261. Certain capitalized terms as used in this Lease are defined in Exhibit A hereto, and such definitions are hereby incorporated herein and made a part hereof as though set forth herein in full. SECTION 1. Acceptance and Lease of Aircraft Subject to the satisfaction of each condition set forth in Section 2 (I) and (II), Lessor hereby agrees to purchase the Aircraft from the Lessee and to lease the same to Lessee and Lessee hereby agrees to lease the same from Lessor for the Basic Term hereof pursuant to the terms and conditions of this Lease. The sale of the Aircraft to Lessor shall include all of Lessee's right, title and interest in and to the Aircraft. SECTION 2. Conditions to Closing; Closing Covenants. (I) Conditions Precedent. Lessor's obligations to purchase the Aircraft from the Lessee and to lease said Aircraft to Lessee, shall each be both subject to and conditioned upon all of the following conditions being satisfied: (a) Lessor receiving on or prior to the Acceptance Date, all of the following in form and substance satisfactory to it: (i) the Purchase Documents duly executed and accompanied by evidence of authenticity and authority; (ii) evidence of reservation of an "N" number for the Aircraft, together with an assignment of Lessee's rights in such "N" number to Lessor; (iii) evidence that the Aircraft has been duly certified as to type and airworthiness by the FAA in the form of a Standard Airworthiness Certificate (FAA Form 8100-2) issued by the FAA; (iv) three (3) duly executed originals of the Lease, including, Lease Supplement No. 1, Lease Supplement No. 2 and all Schedules and Exhibits thereto; (v) a certificate or certificates, executed by the Lessee's secretary or other authorized officer certifying: (A) resolutions of Lessee's Board of Directors authorizing the execution, delivery and performance of this Lease, the Purchase Documents, the applicable FAA documents and the transactions contemplated hereby and thereby and (B) the name(s) of the person(s) authorized to execute and deliver such documents on behalf of Lessee together with specimen signature(s) of such person; (vi) certificate(s) of insurance as to the coverage required under Section 14 hereof, accompanied, if requested by Lessor, by the applicable policies and report(s) of insurance broker(s) or underwriter(s) pursuant thereto as to the conformity of such coverage with such requirements; (vii) evidence that FAA Counsel has received in escrow the executed FAA AC Form 8050-2 Aircraft Bill of Sale (the "Bill of Sale" in the name of Lessor and AC Form 8050-1 Aircraft Registration Application in the name of Lessor (the "Registration Application") (except for the pink copy which shall be available to be placed on the Aircraft upon acceptance thereof), releases in form and substance satisfactory to FAA Counsel, Lessor's counsel and/or Lessor of any Liens, such other bills of sale, in the form of FAA AC Form 8050-2 or otherwise, as are necessary, in the opinion of Lessor's counsel and/or FAA Counsel to vest good and marketable title to the Aircraft in the name of Lessor and executed duplicates of the Lease and Lease Supplements No. 1 and 2, all the foregoing (except for such Warranty Bill of Sale) being in proper form for filing with the FAA; (viii) opinions of counsel for Lessee and the Guarantors satisfactory to Lessor and substantially in the forms of Exhibits C-1 and C-2, respectively, hereto; 3 (ix) certificate(s) of good standing for Lessee from the state of its incorporation and the state(s) where the Primary Hangar Location and Lessee's chief executive offices and principal place of business are located; (x) UCC financing statements executed by Lessee (and, where needed, assignment, release and/or termination statements) with respect to the Aircraft in all places which are, in Lessor's opinion, necessary or appropriate to protect Lessor's interest therein have been delivered to Lessor; (xi) an opinion of FAA Counsel satisfactory to Lessor that title to the Airframe is vested in Lessor and that the Aircraft (including, without limitation the Airframe and Engines) is free and clear of all liens and encumbrances of record; (xii) a Guaranty in favor of Lessor, duly executed by each Guarantor, in form and substance satisfactory to Lessor and Lessor's counsel, unconditionally guaranteeing, among other things, the payment and performance by Lessee of all its obligations under the Lease; (xiii) resolutions of each Guarantor's Board of Directors, certified by such Guarantor's Secretary, authorizing the execution, delivery and performance of the Guaranty by such Guarantor, and an incumbency certificate of each Guarantor, containing the names of the person(s) authorized to execute and deliver such Guaranty on behalf of such Guarantor and, if requested, certified copies of the organizational documents of each Guarantor; (xiv) a Security Deposit Agreement, in form and substance satisfactory to Lessor, executed by Lessee and providing for a security deposit securing payment and performance of the obligations of Lessee hereunder ; (xv) an escrow agreement, in form and substance satisfactory to Lessor, executed by Lessee and Fleet National Bank providing for the deposit and possession and investment of the security deposit referred to in the preceding paragraph; and (xvi) such other documents, certificates and opinions, and evidence of such other matters, as Lessor, Lessor's counsel or FAA Counsel may reasonably request. (b) No material adverse change in the financial condition of Lessee has occurred since the date of the last financial statements furnished to Lessor as set forth on Schedule No. 2 to Lease Supplement No. 1. (c) Receipt by Lessor of a satisfactory inspection report with respect to the Aircraft prepared by inspector(s) acceptable to Lessor. (d) Lessee's acceptance of the Aircraft on or before the Acceptance Date. (e) In addition to the above listed conditions precedent, Lessee covenants and agrees that upon Lessor's acknowledgment that all the conditions to the sale and lease as aforestated have been satisfied, Lessee shall release from escrow to Lessor the documents held by FAA Counsel on behalf of Lessee and shall authorize FAA Counsel to file and record all appropriate documentation, including, without limitation, the Lease and Lease Supplements No. 1 and No. 2, with the FAA on the Acceptance Date. Upon satisfaction of the foregoing conditions precedent Lessor shall fund the amount of the Lessor's Cost as instructed by Lessee. (II) Conditions Subsequent. On or subsequent to the Acceptance Date, but not later than the date of the Aircraft's first flight under the leasehold conveyed herein, Lessee shall provide written confirmation to Lessor that a copy of the Registration Application has been properly placed within the Aircraft. In addition, prior to the date of the Aircraft's first flight hereunder Lessee shall provide Lessor with written confirmation that: (a) a copy of this Lease, including Lease Supplements No. 1 and No. 2, has been properly placed within the Aircraft; (b) a copy of this Lease, including Lease Supplements No. 1 and No. 2, was mailed, within 24 hours following execution thereof, to the Flight Standards Technical Division of the FAA; and 3 4 (c) Lessee has notified the FAA (such notification to have been given by telephone or in person to the FAA Flight Standards District Office, General Aviation District Office, Air Carrier District Office or International Field Office nearest the airport where such flight will originate) concerning the first flight of the Aircraft under this Lease. SECTION 3. Term and Rent. (a) The leasing of the Aircraft by Lessor to Lessee shall commence on the Acceptance Date and end on the Expiration Date each as set forth on Schedule No. 2 to Lease Supplement No. 1, unless this Lease shall have been terminated or extended in accordance with the terms hereof. (b) Lessee shall pay to Lessor as basic rent (herein referred to as "Basic Rent") the following: (i) on the Acceptance Date, an amount equal to the Daily Lease Rate, multiplied by the number of days elapsed from and including the Acceptance Date with respect to the Aircraft to but excluding the Rent Commencement Date; (ii) on the First Basic Rent Date and on each Basic Rent Date thereafter, to and including the Last Basic Rent Date, an amount equal to the Basic Rent set forth on Schedule 2-A to Lease Supplement No. 1; and (iii) after the Expiration Date until the Aircraft is returned to the Lessor in accordance with Section 8 hereof, an amount equal to the Basic Rent which amount shall be payable each and every calendar month immediately after the Expiration Date until the return of the Aircraft to the Lessor as provided under this Lease on the day of the month on which Basic Rent was payable during the Term. (c) In addition, Lessee shall pay to Lessor the following amounts (herein referred to as "Supplemental Rent" and, together with all Basic Rent, collectively as "Rent"): (i) any other amount payable hereunder which Lessee assumes the obligation to pay, or agrees to pay, under this Lease to Lessor or others; (ii) on the date provided herein, any amount payable hereunder as Casualty Value and/or any amounts due pursuant to Section 23 hereof plus any and all amounts regarding the same and (iii) to the extent permitted by applicable law, interest at the Late Payment Rate for the number of days actually elapsed on any amount payable hereunder not paid when due, plus, as an administrative and late charge, an amount equal to five percent (5%) of the amount payable if not paid when due. The expiration or other termination of Lessee's obligation to pay Basic Rent hereunder shall not terminate, limit or modify the obligations of Lessee with respect to Supplemental Rent, which shall survive such expiration or other termination. (d) All payments of Rent or other amounts required hereunder shall be made to Lessor in immediately available United States funds on the date payable hereunder at its address set forth herein or at such other address or to such other Person as Lessor may direct by notice in writing to Lessee. SECTION 4. Acceptance. The execution by Lessee of Lease Supplement No. 1 shall evidence that the Aircraft is leased under, and is subject to all of the terms, provisions and conditions of, this Lease and constitute Lessee's unconditional and irrevocable acceptance of the Aircraft for all purposes of this Lease. SECTION 5. Covenants and Warranties. Lessor warrants that during the term of this Lease, so long as no Event of Default or Default has occurred and is continuing hereunder, Lessee's possession and quiet enjoyment of the Aircraft shall not be divested or interfered with by Lessor or anyone claiming through or under Lessor. This provision shall be binding upon any assignee of Lessor pursuant to the penultimate paragraph of Section 16 hereof. The warranty set forth hereinabove is in lieu of all other warranties of Lessor, whether written, oral or implied, with respect to this Lease or the Aircraft, and Lessor shall not be deemed to have modified in any respect the obligations of Lessee pursuant to Section 7 hereof, which obligations are and shall remain absolute, irrevocable and unconditional under all events and circumstances whatsoever. LESSEE EXPRESSLY ACKNOWLEDGES THAT IT HAS SELECTED THE AIRCRAFT WITHOUT ANY ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES AND LESSEE EXPRESSLY AGREES THAT IT IS LEASING THE AIRCRAFT FROM LESSOR IN AN "AS IS" CONDITION. LESSOR SHALL NOT BE DEEMED TO HAVE MADE, AND LESSOR HEREBY EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY (EXCEPT FOR THE WARRANTY CONTAINED IN THIS SECTION 5), EITHER EXPRESS OR IMPLIED, AS TO THE AIRCRAFT, ANY PART THEREOF, ANY RECORDS, OR ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN, CONDITION, 4 5 CAPACITY OR DURABILITY OF THE AIRCRAFT, ITS MERCHANTABILITY OR ITS FITNESS FOR ANY PARTICULAR PURPOSE, USE OR OPERATION, THE QUALITY OF THE MATERIALS OR WORKMANSHIP OF THE AIRCRAFT, ITS VALUE OR AIRWORTHINESS, TITLE, SAFETY, THE ABSENCE OF ANY PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT OR LATENT DEFECT (WHETHER OR NOT DISCOVERABLE BY LESSEE), COMPLIANCE OF THE AIRCRAFT WITH THE REQUIREMENTS OF ANY LAW, RULE, REGULATION OR STANDARD PERTAINING THERETO, OR THE CONFORMITY OF THE AIRCRAFT TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE DOCUMENT RELATING THERETO OR ANY INTERFERENCE OR ANY COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, NOR SHALL LESSOR BE LIABLE, REGARDLESS OF ANY ACTUAL OR ALLEGED NEGLIGENCE OF LESSOR, FOR ANY DEFECTS, EITHER PATENT OR LATENT (WHETHER OR NOT DISCOVERABLE BY LESSEE), IN THE AIRCRAFT OR ANY PART THEREOF OR ANY DIRECT OR INDIRECT DAMAGE TO PERSONS OR PROPERTY RESULTING THEREFROM OR FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES OR FOR STRICT OR ABSOLUTE LIABILITY IN TORT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, LESSEE HEREBY WAIVES ANY CLAIM (INCLUDING ANY CLAIM BASED ON STRICT OR ABSOLUTE LIABILITY IN TORT OR INFRINGEMENT) IT MIGHT HAVE AGAINST LESSOR FOR ANY LOSS, DAMAGE (INCLUDING, WITHOUT LIMITATION, DIRECT, INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGE) OR EXPENSE CAUSED BY THE AIRCRAFT OR BY LESSEE'S LOSS OF USE THEREOF FOR ANY REASON WHATSOEVER. Lessee acknowledges that Lessee, and not Lessor, has selected the Aircraft, the Airframe and the Engines. Lessee further acknowledges that the Lessor has not manufactured or supplied the Aircraft, the Airframe, or the Engines and that the Lessor acquired or will acquire the Aircraft and/or the right to possession thereto in connection with this Lease. So long and only so long as an Event of Default or Default hereunder shall not have occurred and be continuing, and so long and only so long as the Aircraft shall be subject to this Lease and Lessee shall be entitled to possession of the Aircraft hereunder, Lessor assigns to Lessee and authorizes Lessee, at Lessee's expense, to assert for Lessor's account, all rights and powers of Lessor under any manufacturer's, vendor's or dealer's warranty on the Aircraft or any part thereof, (including, without limitation, any warranty of Manufacturer). Notwithstanding the foregoing, Lessee shall not attempt to enforce any such performance by legal proceeding without Lessor's prior written approval. SECTION 6. Representations, Warranties and Agreements of Lessee. Lessee represents, warrants and agrees as follows: (a) Due Organization. Lessee has the form of business organization indicated in the caption of this Lease and is duly organized and existing in good standing under the laws of the state listed in the caption of this Lease and is duly qualified to do business wherever necessary to carry on its present business and operations and to own its property including, without limitation, the Primary Hangar Location. (b) Due Authorization; No Violation. This Lease has been duly authorized by all necessary action on the part of Lessee consistent with its form of organization, does not require any further shareholder, member or partner approval, does not require the approval of, or the giving notice to, any Federal, state, local or foreign governmental authority (including, without limitation, the Department of Transportation and/or the FAA) and does not contravene any law binding on Lessee or contravene any provision of, or constitute a default or result in the creation of any Lien other than a Permitted Lien under any certificate or articles of incorporation or organization or by-laws or partnership certificate or agreement, or any agreement, indenture, or other instrument to which Lessee is a party or by which it may be bound. (c) Enforceability. This Lease has been duly executed and delivered by authorized officers or partners of Lessee and constitutes a legal, valid and binding obligation of Lessee enforceable in accordance with its terms. (d) Financial Statements. To the extent that separately audited financial statements are prepared by the Lessee or separately prepared financial statements are filed with the Securities and Exchange Commission ("SEC"), Lessee agrees to furnish Lessor (i) as soon as available, and in any event within one hundred twenty (120) days after the last day of each fiscal year of Lessee, a copy of the balance sheet of Lessee as of the end of such fiscal year, and related statements of income and retained earnings of Lessee for such fiscal year, all in reasonable detail prepared in accordance with generally accepted accounting principles consistently applied each on a comparative basis with corresponding statements for the prior fiscal year; (ii) within sixty (60) days after the last day of each fiscal quarter of Lessee (except the last fiscal quarter of any fiscal year), a copy of the balance sheet of Lessee as of the end of each such quarter, and statement of income and retained earnings covering the fiscal year to date of Lessee, each on a comparative basis with the corresponding period of the prior year, all in reasonable detail and certified by the treasurer or principal financial officer of Lessee and (iii) within thirty (30) days after the date on which they are filed, all reports, forms and other filings, if any, required to be made by Lessee to the SEC or (in 5 6 respect of the Aircraft or the Lease) the FAA, including, without limitation, any SEC Form 10-Q and related reports or documents. All credit, financial and other information provided by Lessee or at Lessee's direction is, and all such information hereafter furnished will be, true, correct and complete in all material respects. (e) Furnishing of Information. Lessee agrees that it shall furnish from time to time to Lessor such information relating to Lessee, each Guarantor their subsidiaries and/or affiliates, financial or otherwise, as Lessor shall reasonably request. Lessor agrees that any such information furnished to it by Lessee shall be held pursuant to the terms and conditions of a confidentiality agreement executed by Lessor in connection with this Lease. (f) Location of Chief Executive Offices; Lessee Name. The chief executive offices and principal place of business of Lessee is located at the address set forth in Schedule No. 2 to Lease Supplement No. 1, and Lessee agrees to give Lessor thirty (30) days' prior written notice of any relocation of said chief executive offices or principal place of business from its present location, or of any change in its name or identity. Within the previous six (6) years Lessee has not changed its name, done business under any other names, changed its chief place of business from its present location or merged or been the surviving entity of any merger. (g) Documents on Board. A current and valid Registration Application or Certificate of Aircraft Registration, and a copy of this Lease and the Lease Supplements, will be kept on board the Aircraft at all times during the term of this Lease. (h) Selection of Aircraft. Lessor has not selected, manufactured or supplied the Aircraft to Lessee and has acquired the Aircraft subject hereto solely in connection with this Lease and Lessee has received and approved the terms of any purchase order or agreement with respect to the Aircraft. (i) Litigation. There are no proceedings pending or, so far as the officers of Lessee know, threatened against or affecting Lessee or any of its property before any court, administrative officer or administrative agency which would, directly or indirectly, adversely affect or impair the title of Lessor to the Aircraft, or which, if decided adversely affect the financial condition or operations of Lessee or the ability of Lessee to perform its obligations under this Lease. (j) No Adverse Mortgages. The right, title and interest of Lessor in and to the Aircraft and the Rent will not be adversely affected or impaired by the terms of any mortgage, loan agreement or indenture or any other contract, agreement or instrument to which Lessee is a party, or under which it or any of its property is or may become bound. In addition, no mortgage, deed of trust, or other Lien which now covers or affects, or which may hereafter cover or affect, any property or interest therein of Lessee, now attaches or hereafter will attach to the Aircraft, the Airframe or any Engine, or in any manner affects or will affect adversely Lessor's right, title and interest therein. (k) Taxes. Lessee has filed or caused to be filed and will continue to file all Federal, state and local tax returns which are required to be filed, and has paid or caused to be paid and will continue to pay all taxes shown to be due and payable on such returns or (except to the extent being contested in good faith and for the payment of which adequate reserves have been provided) on any assessment received by Lessee, to the extent that such taxes have heretofore or in the future become due and payable. (l) Filing. Except for the registration of the Aircraft with the FAA and except for filing and recording of the applicable documents pursuant to the Federal Aviation Act no further action, including any filing or recording of any document (except for any financing statement under Article 9 of the UCC of any applicable jurisdiction to be filed pursuant hereto) is necessary or advisable in order to establish and perfect Lessor's title to and interest in, the Aircraft, as against Lessee and/or any Person in any applicable jurisdiction. (m) Good Title. Lessor will be the owner of the Aircraft as of the Acceptance Date and will have good and marketable title to the Aircraft, free and clear of all Liens other than any Liens created in favor of Lessor under this Lease. (n) Records. Lessee has reviewed all Records with respect to the operation and maintenance of the Aircraft prior to the Acceptance Date and such Records have been kept in accordance with the requirements of the FAA rules and regulations and industry standards. Lessee shall maintain all such Records during the Term in accordance with the requirements of the FAA, and any manufacturer's maintenance programs or requirements as well as Sections 8 and 11 of this Lease. 6 7 (o) Claims. Except as set forth in a letter from Lessee to Lessor delivered contemporaneously herewith, Lessee has no pending claims, and does not have knowledge of any facts upon which a future claim may be based, against any prior owner, the Manufacturer of the Aircraft or of any Engine or part thereof for breach of warranty or otherwise. (p) U.S. Citizen. The Lessee is, and for the remainder of the Term will continue to be, a "citizen of the United States" within the meaning of the Federal Aviation Act. (q) Engines. Each of the Engines has 750 or greater rated takeoff horsepower or the equivalent of such horsepower. (r) Due Authorization of Guarantors, No Violation. The execution, delivery and performance of the Guarantees have been duly authorized by all necessary action on the part of each Guarantor consistent with its form of organization; does not require any further shareholder, member or partner approval or the approval of any trustee or holders of any indebtedness or obligations of any Guarantor except such as have been duly obtained; does not require the approval of, or the giving notice to, any Federal, state, local or foreign governmental authority (including, without limitation, the Department of Transportation and/or the FAA) and does not contravene any law binding on any Guarantor or contravene any provision of, or constitute a default or result in the creation of any Lien other than a Permitted Lien under any certificate or articles of incorporation or organization or by-laws or partnership certificate or agreement, or any agreement, indenture, or other instrument to which Lessee is a party or by which it may be bound. (s) Binding Obligations of Guarantors. Each Guaranty constitutes the legal, valid and binding obligation of the signatory Guarantor enforceable against such Guarantor in accordance its terms. (t) Litigation Regarding Guarantors. There are no pending legal actions or proceedings to which any Guarantor is a party, and there are no other pending or threatened legal actions or proceedings affecting any Guarantor of which Lessee has knowledge, before any court, arbitrator or administrative agency, and there are no final judgments of record against any Guarantor of which Lessee has knowledge, which, whether individually or in the aggregate would materially and/or adversely affect the financial condition of any Guarantor, or the ability of any Guarantor to perform its obligations under its Guaranty. Further, no Guarantor is in default under any material obligation for the payment of borrowed money, for the deferred purchase price of property, or for the payment of any rent which, either individually or in the aggregate, would have the same such effect. (u) Delivery of Further Financial Statements. Lessee agrees to cause Parent to furnish Lessor (i) as soon as available, and in any event within one hundred twenty (120) days after the last day of each fiscal year of Parent, a copy of the balance sheets of Parent as of the end of such fiscal year, and related statements of income and retained earnings of Parent for such fiscal year, all in reasonable detail prepared in accordance with generally accepted accounting principles consistently applied and certified by an independent certified public accounting firm of recognized standing and which is reasonably acceptable to Lessor, each on a comparative basis with corresponding statements for the prior fiscal year; (ii) within sixty (60) days after the last day of each fiscal quarter of Parent (except the last fiscal quarter of any fiscal year), a copy of the balance sheet as of the end of each such quarter, and statement of income and retained earnings covering the fiscal year to date of Parent, each on a comparative basis with the corresponding period of the prior year, all in reasonable detail and certified by the treasurer or principal financial officer of Parent; and (iii) within thirty (30) days after the date on which they are filed, all reports, forms and other filings, if any, required to be made by Parent to the SEC or (in respect of the Aircraft or the Lease) the FAA, including, without limitation, any SEC Forms 10-K, 10-Q and related reports or documents. All credit, financial and other information provided by Parent or at Parent's or Lessee's direction is, and all such information hereafter furnished will be, true, correct and complete in all material respects. Notwithstanding anything to the contrary, Lessor agrees that the independent certified public accounting firm currently preparing financial statements for Parent, Ernst & Young, shall be deemed to be acceptable to Lessor for the Term of this Lease unless and until Lessor provides notice to Lessee that such independent certified public accounting firm is no longer reasonably acceptable. (v) Insolvency, Fair Consideration. Lessee is not insolvent within the meaning of any applicable state or Federal laws. The sale of the Aircraft by Lessee to Lessor and Lessee's undertaking of the obligations contained herein shall not cause Lessee to be insolvent within the meaning of applicable state and/or Federal laws. The payment by Lessor to Lessee of the Lessor's Cost of the Aircraft is fair consideration for the Aircraft within the meaning of applicable state and Federal laws. 7 8 (w) Approvals, Consents and No Contravention. Without limiting the generality of any of the foregoing representations and warranties, the sale by Lessee to Lessor of the Aircraft does not require any stockholder approval or consent of any trustee or holders of any indebtedness or obligations of Lessee and will not contravene any laws, statutes, regulations, judgments or decrees applicable to Lessee, including, but not limited to, laws or statutes regarding fraudulent conveyances, bankruptcy, creditors' rights or bulk transfers, or the certificate of incorporation or by-laws of Lessee, or contravene the provisions of, or constitute a default under, or violate any restrictive covenants or other agreement to which Lessee is a party or by which Lessee or its assets may be bound or affected, and any authorization, approval, license, filing or registration with any court or governmental agency or instrumentality which is necessary in connection with such sale has been effected and a written copy thereof has been delivered to Lessor. Lessee has full power, authority and legal right to sell the Aircraft to Lessor. The sale of the Aircraft to Lessor has been duly authorized by all necessary corporate action and constitutes a legal, valid and binding obligation of Lessee. (x) Section 1110. Lessee holds, and for the remainder of the Term will continue to hold, an air carrier operating certificate issued by the FAA and/or the Secretary of Transportation pursuant to Chapter 447 of the Federal Aviation Act for aircraft capable of carrying ten (10) or more individuals or 6,000 pounds or more of cargo within the meaning of 11 U.S.C. Section 1110 ("Section 1110"). To the best of Lessee's knowledge, Lessor and any assignee, mortgagee or lender of the Lessor is entitled to the benefits of Section 1110 (or any comparable or successor provision affecting protection to Lessors, mortgagees or lenders of aircraft) with respect to the Aircraft and this Lease. Lessee further agrees not to take any position in connection with any bankruptcy proceedings involving it that is inconsistent with a Lessor's (and any assignee, mortgagee or lender of the Lessor's) rights under Section 1110 or any comparable or successor provision affecting protection to lessors, mortgagees or lenders of aircraft. Lessee further agrees to take reasonable steps as requested consistent with the terms of this Lease to permit Lessor and any assignee, mortgagee or lender of the Lessor to maintain such rights. SECTION 7. Net Lease. This Lease is a net lease, and Lessee acknowledges and agrees that Lessee's obligation to pay all Rent hereunder and the rights of Lessor in and to such Rent, shall be absolute, irrevocable and unconditional and shall not be subject to cancellation, termination, modification or repudiation by Lessee or any abatement, reduction, setoff, defense, counterclaim or recoupment (collectively, "Abatements") for any reason or under any circumstance whatsoever, including, without limitation, Abatements due to any present or future claims of Lessee against Lessor, its successors and assigns whether under this Lease or otherwise, the Manufacturer or any other Person for whatever reason. Lessee hereby waives any and all existing and future claims to any Abatement against such Rent, and agrees to pay all such Rent regardless of any Abatement which may be asserted in connection with this Lease, the Aircraft or otherwise. Except as otherwise expressly provided herein, this Lease shall not terminate, nor shall the obligations of Lessee be affected, by reason of any defect in or damage to, or any loss or destruction of, the Aircraft or any part thereof from whatsoever cause, or the invalidity or unenforceability or lack of due authorization of this Lease or lack of right, power or authority of Lessor to enter into this Lease, or for any other cause, whether similar or dissimilar to the foregoing, any present or future law or regulation to the contrary notwithstanding, it being the express intention of Lessor and Lessee that all Rent payable to Lessor hereunder shall be, and continue to be, payable in all events unless and until the obligation to pay the same shall be terminated pursuant to the express provisions of this Lease. Notwithstanding the foregoing, the payment of Rent by Lessee hereunder shall not constitute a waiver of any defense, offset or counterclaim hereunder. SECTION 8. Return of Aircraft. (a) Condition Upon Return. Unless purchased by Lessee, upon the expiration or other termination of this Lease (whether following an Event of Default, at the end of the Basic Term or any Renewal Term or otherwise), Lessee, at its own expense, will return the Aircraft to Lessor at a location specified by the Lessor within the continental United States or to such other location as Lessor may reasonably request and in the condition in which the Aircraft is required to be maintained pursuant to Section 11 hereof and any other applicable provisions of the Lease, fully equipped with the same number, make and model number of Engines as are set forth on Schedule No. 1 to Lease Supplement No. 1, which shall fully comply with Section 8(g) hereof, and which, in the opinion of Lessor, have the same or improved utility, value, useful life, performance, and efficiency as such Engines had on the Acceptance Date and are suitable for use on the Airframe and owned by Lessor and properly installed thereon. Lessee shall not be relieved of any of its duties, obligations, covenants, or agreements under this Lease (including, without limitation, its obligation to pay Basic Rent) prior to the return of the Aircraft in the manner and condition required with 8 9 respect to such return. The Aircraft, at Lessee's expense, upon redelivery pursuant hereto, (i) shall be duly certified by the FAA as an airworthy aircraft, (ii) shall be free and clear of all Liens (other than this Lease and any Lessor's Liens), and rights of third parties under pooling, interchange, overhaul, repair or other or similar arrangements, (iii) shall be in the same configuration and in the same operating condition, ordinary wear and tear excepted, as when delivered to Lessee hereunder, (iv) shall be in good operating condition, in good physical condition and good appearance (ordinary wear and tear excepted) with all systems operating, shall be in compliance with Lessee's written FAA-approved maintenance program for Boeing B727-214 Advanced Freighter series aircraft and in compliance with all applicable airworthiness directives and shall have been maintained in a nondiscriminatory manner with all Boeing B727-214 Advanced Freighter series aircraft in Lessee's fleet, (v) shall be in compliance with all so-called "mandatory", "alert" and (to the extent applicable to Lessee, or its operations and to the extent such service bulletins relate to the safety and/or airworthiness of the Aircraft) "highly recommended" service bulletins, Service Letters, modification kits, and similar notices and components issued, supplied, or available by or through the Manufacturer and/or the Manufacturer(s) of any Engine or Part with respect to the Aircraft and all "airworthiness alerts" and Airworthiness or other Directives, Circulars, Operator Bulletins and Instructions and all other applicable service, maintenance, repair and overhaul regulations issued by the FAA or similar regulatory agency having jurisdictional authority which require compliance or termination within six (6) months after the redelivery date of the Aircraft, (vi) shall have all logos and other identifying marks of Lessee or others removed and the exterior of the Aircraft shall have a good overall appearance with no material damage and (vii) shall be otherwise in the condition and repair required under this Lease. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, the Aircraft shall be in the following condition: I. General Condition of Aircraft. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, the Aircraft shall: (i) be clean by commercial airline standards; (ii) have installed the full complement of Engines and Parts and accessories and loose equipment as would remain installed in such Aircraft, and shall be in a condition suitable for operation in commercial service, all installed systems to be fully operational; (iii) have in existence a valid and existing airworthiness certificate with respect to the Aircraft issued by the FAA; (iv) [Intentionally Left Blank]; (v) all then current outstanding airworthiness directives affecting such model of Aircraft issued by the FAA which require compliance or termination within six (6) months after the redelivery date of the Aircraft shall have been accomplished, and all pilot discrepancies cleared from the logbook; (vi) have installed all applicable vendors' and Manufacturers' service bulletin kits theretofore received by Lessee that are appropriate for the Aircraft and to the extent not installed, such kits shall be furnished free of charge to Lessor; and (vii) have all of the operator's markings removed in a workmanlike manner and to the approval of the Lessor. II. General Condition of Fuselage, Windows and Doors. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all dents, abrasions or external doublers on the fuselage shall meet the requirements of the Manufacturer approved "Structural Repair Manual"; 9 10 (ii) all windows shall be free of delamination, blemishes, crazing and shall be properly sealed; and (iii) all doors shall be free moving, correctly rigged and be fitted with serviceable seals. III. General Condition of Wings and Empennage. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all leading edge shall be repaired in accordance with Manufacturer approved "Structural Repair Manual"; (ii) all control surfaces shall be painted or waxed and polished, to industry standard; (iii) all unpainted cowlings and fairings shall be polished to industry standard; and (iv) all wings shall be free of fuel leaks, and no previous fuel leaks shall have temporary repairs. IV. General Condition of Interior. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all ceilings, sidewalls and bulkhead panels shall be clean and free of cracks and stains; (ii) all signs and decals shall be clean, legible, and in English; and (iii) all required calendar life limited emergency equipment shall have a minimum of one year life remaining. V. General Condition of Cockpit. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all decals in the cockpit shall be clean, secure, legible, and in English; (ii) all fairing and instrument panels shall be free of stains and cracks, shall be clean, secure and repainted as necessary; (iii) all floor coverings shall be clean; (iv) all seat covers shall be in good condition, clean and shall conform to applicable FAA fire resistance regulations or requirements; and (v) all seats shall be fully serviceable and frames shall be repainted as necessary. VI. General Condition of Cargo Compartments. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all panels shall be in as good condition as on delivery; and (ii) all rollers and cargo moving mechanisms shall be serviceable. 10 11 VII. General Condition of Landing Gear and Wheel Wells. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all the landing gear and wheel wells shall be clean, free of leaks and repaired as necessary, and coated with corrosion inhibitor; and (ii) all landing gear and wheel wells decals shall be clean, secure and legible. VIII. Further Condition of Aircraft regarding Corrosion. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) the Aircraft shall meet the requirements of any then existing FAA-approved corrosion control program and aging aircraft corrosion control program on the date of return; and (ii) the fuel tanks of the Aircraft shall be free from contamination and corrosion, and a tank treatment program shall be in operation. IX. Documentation. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, Lessee shall, upon the return of the Aircraft to the Lessor, deliver to the Lessor all of the currently revised: (i) current Illustrated Parts Catalogue, including Airframe and Engines on microfilm or hard copy; (ii) current Maintenance Manual on microfilm or hard copy; (iii) current Structural Repair Manual on microfilm or hard copy; (iv) Wiring Diagram Manual on microfilm or hard copy; (v) FAA-approved Flight Manual in hard copy; (vi) Weight and Balance Manual in hard copy; (vii) Airworthiness Directives and Modifications status in hard copy; (viii) Operational Specifications in hard copy; (ix) current status of all time controlled, on condition and condition monitored units which are on the Aircraft and Engines in hard copy; (x) cross reference list of operator's part number to Manufacturer's part number microfilm (if applicable); (xi) one copy of all FAA Forms 337 required; (xii) Aircraft and Engine Time Status report; and (xiii) all existing Aircraft and Engine historical records in hard copy or microfilm. (b) Overhaul-General. At the time of such return, (i) the Airframe (including, without limitation, the landing gear on the Aircraft) shall not have been operated more than one-half of the allowable time between major airframe overhauls or major block maintenance before the next major airframe overhaul or major block maintenance, whichever shall then apply, in accordance with Lessee's then approved overhaul and/or maintenance program authorized by and performed to FAA requirements applicable to Lessee, and shall have no less than half life (as measured by reference to calendar, phase and/or periodic maintenance and/or inspection standards) remaining on any life limited Airframe part or component (including, without 11 12 limitation, the landing gear on the Aircraft) before overhaul or replacement and (ii) each Engine shall not have been operated more than one-half of the allowable time remaining before overhaul (both hot and cold sections as measured by reference to calendar, phase and/or periodic maintenance and/or inspection standards) and all cycle limited parts or time controlled components of each Engine shall not have been operated more than one-half of the allowable cycles or time remaining before replacement; said Engine overhaul and Engine parts and components replacement to be performed in accordance with Lessee's then approved engine overhaul and parts and components replacement program authorized by and performed to FAA requirements applicable to Lessee. In addition to the requirements set forth in clauses (i) and (ii) above, all inspections and scheduled maintenance required to be performed on the Airframe, Engines and all life limited parts and components within one hundred twenty (120) days and/or one hundred hours (100) shall have been performed by Lessee. (c) Overhaul-Airframe. In the event that Lessee does not meet the conditions in clause (i) and/or the final sentence of Section 8(b) hereof with respect to the Airframe, Lessee shall pay Lessor a dollar amount computed by multiplying (i) Lessor's then current cost for such major overhaul or major block maintenance as the case may be (such cost being the then current rates charged by an airframe overhaul facility approved by the Manufacturer of the Airframe and acceptable to Lessor, together with all costs associated with such overhaul), by (ii) a fraction of which (x) the numerator shall be the excess of the number of hours since the last such major overhaul or major block maintenance, as the case may be, over fifty percent (50%) of the number of hours of allowable time between major overhauls or major block maintenance and (y) the denominator shall be the total number of hours of such allowable time. In the event the life limited parts or components requirement contained in clauses (i) or (ii) and/or the final sentence of Section 8(b) hereof are not met, Lessee shall pay to Lessor with respect to each part or component for which said requirement is not met the dollar amount obtained by multiplying (i) the ratio that the life expended in excess of half-life bears to the total allowable life for such part or component by (ii) Lessor's cost of replacement of such part or component. Lessor's cost of replacement of a part or component shall include Lessor's then current cost of purchasing the part or component itself and all of Lessor's then current costs associated with the replacement. (d) Overhaul-Engine. In the event that Lessee does not meet the conditions in clause (ii) and/or the final sentence of Section 8(b) hereof with respect to the Engines, Lessee shall pay to the Lessor with respect to each Engine for which said conditions are not met the dollar amount per Engine obtained by multiplying (i) the ratio that the time accumulated since half time bears to the time allowable between overhaul by (ii) Lessor's cost for such overhaul of such Engine; Lessor's cost referred to in this clause (ii) being the then current rates charged by an engine overhaul facility approved by the Manufacturer of the Engines and acceptable to Lessor, together with all costs associated with such overhaul. In the event the foregoing Engine cycle limited part and time controlled component requirement set forth in clause (ii) and/or the final sentence of Section 8(b) hereof are not met, Lessee shall pay to Lessor with respect to each Engine for which said requirement is not met the dollar amount per part (or per component) obtained by multiplying (i) the ratio that the time (or cycles) accumulated since half time (or one-half of the allowable cycles) bears to the time (or cycles) accumulated since half time (or one-half of the allowable cycles) bears to the time (or cycles) allowable between replacements by (ii) Lessor's cost of replacement of the part (or component). Lessor's cost of replacement of a part or component shall include Lessor's then current cost of purchasing the part or component itself and all of Lessor's then current costs associated with the replacement. (e) Fuel; Records. Upon the return of the Aircraft in accordance with this Section; (i) each fuel tank shall contain the same quantity of fuel as was contained in such tank when the Aircraft was delivered to Lessee on the Acceptance Date (which shall be presumed to be fifty percent (50%) of full capacity, unless otherwise specified in the Purchase Documents) or, in the case of differences in such quantity, an appropriate adjustment will be made at the then current market price of fuel, and (ii) Lessee shall deliver 12 13 all Records to Lessor. In the event any Records are missing or incomplete, Lessor shall have the right to cause any such Records to be reconstructed at the expense of Lessee. (f) Storage. Upon the expiration or other termination of the Lease, Lessee will, if requested by Lessor, permit Lessor to store the Aircraft at the Primary Hangar Location as described in Schedule No. 2 to Lease Supplement No. 1, at Evergreen Air Center, Inc., Pinal Air Park, Marana, AZ 85653 or at some other location mutually acceptable to the Lessor and Lessee. During such storage period Lessee will, at its own cost and expense, keep the Aircraft properly hangared or tied down, and will permit Lessor or any person designated by Lessor, including the authorized representative or representatives of any prospective purchaser, lessee or user of the Aircraft to inspect the same. Lessee shall not be liable, except in the case of negligence or intentional misconduct of Lessee or of its employees or agents, for injury to, or the death of, any person exercising, either on behalf of Lessor or any prospective purchaser, Lessee or user, the rights of inspection granted hereunder. Lessee shall bear the risk of loss and shall pay any and all expenses connected with insuring and maintaining the Aircraft during such storage period. (g) Return of Engines. In the event that any engine not owned by Lessor shall be installed on the returned Airframe as set forth in paragraph (a) of this Section, then Lessee will, concurrently with such delivery, at its own expense and not at any cost to Lessor, furnish Lessor with a full warranty bill of sale, in form and substance satisfactory to Lessor, with respect to each such engine and with a written opinion of FAA Counsel to the effect that, upon such return, Lessor will acquire good and marketable title to such engine, free and clear of all Liens (except Lessor's Liens). Thereupon, unless a Default or Event of Default shall have occurred and be continuing, Lessor will transfer to Lessee, without recourse or warranty of any kind whatsoever (except as to Lessor's Liens) on an "AS-IS, WHERE-IS" BASIS WITHOUT ANY REPRESENTATION BY, OR RECOURSE OR WARRANTY TO, LESSOR, all of Lessor's right, title and interest in and to any Engine not installed on the Airframe at the time of the return of such Airframe. (h) Inspection Prior to Return. Not more than ninety (90) days prior to the expiration of the Lease, upon the written request of Lessor, Lessee shall, at its expense, review the maintenance records of the Aircraft to determine if the Aircraft is in the condition required by Section 8(a). Following such review, Lessee shall certify to Lessor that such Aircraft is in the condition required by Section 8(a) according to the maintenance records for such Aircraft, or, if the maintenance records so indicate, indicate what maintenance or repair is needed to bring the Aircraft to the specified condition. (i) Survival. The provisions of this Section 8 shall survive the expiration or other termination of this Lease and the return of the Aircraft for any reason whatsoever. (j) Injunctive Relief. Without limiting any other terms or conditions of this Lease, the provisions of this Section 8 are of the essence of this Lease, and upon application to any court of equity having jurisdiction, Lessor shall be entitled to a decree against Lessee requiring specific performance of the covenants of Lessee set forth in this Section 8. SECTION 9. Liens. Lessee will not directly or indirectly, voluntarily or involuntarily, create, incur, assume or suffer to exist any Liens on or with respect to the Aircraft or any part thereof, Lessor's title thereto or any interest of Lessor therein (and Lessee will promptly, at its own expense, take such action as Lessor deems necessary or advisable to duly discharge any such Lien), except Permitted Liens. In the event that Lessee fails to take action to discharge or remove any such Lien, Lessor may take such action as it deems necessary or appropriate to discharge or remove such Lien. Lessee shall reimburse Lessor on demand for any costs incurred by Lessor in connection with such action together with interest at the Late Payment Rate. Lessor's rights hereunder are in addition to, and not in derogation of, any other rights which Lessor may have hereunder, at law or in equity. SECTION 10. Taxes. Lessee agrees to (i) report, to the extent legally permissible (or if such reporting by Lessee is not legally permissible, then to prepare reports for filing by Lessor), (ii) pay when due and (iii) to defend and indemnify Lessor against liability for all license and registration fees, assessments, and sales, use, property, excise, privilege and other taxes (including any related interest or penalties) or other charges or fees now or hereafter imposed by any governmental body or agency upon the Aircraft, or with respect to landing, airport use, manufacturing, ordering, shipment, purchase, ownership, delivery, installation, leasing, operation, possession, use, return, or other disposition thereof or the rentals hereunder (other than taxes on or measured solely by the net income of Lessor)("Impositions"). Any fees, taxes or other 13 14 lawful charges paid by Lessor upon failure of Lessee to make such payments shall at Lessor's option become immediately due from Lessee to Lessor. Notwithstanding the foregoing, Lessee shall pay, indemnify Lessor for, and hold Lessor harmless on a net after-tax basis from and against, all Impositions on or measured by the net income of Lessor imposed against Lessor by any local or foreign government or other taxing authority if and to the extent that Lessor would not have incurred such Impositions but for the operation or presence of the Aircraft within the jurisdiction asserting an Imposition. SECTION 11. Registration, Maintenance and Operation; Compliance and Use; Replacement Parts; Additions; Aircraft Marking. (a) Registration, Maintenance and Operation. During the Term, Lessee, at its own cost and expense, shall (i) cause the Aircraft to be duly registered in the name of the Lessor under the Federal Aviation Act at all times; (ii) maintain, inspect, service, repair, overhaul and test the Airframe and each Engine in accordance with Lessee's FAA approved and Manufacturer's recommended maintenance programs; (iii) maintain (in the English language) all Records and (iv) promptly furnish to Lessor such information as may be required to enable Lessor to file any reports required by any governmental authority as a result of Lessor's ownership of the Aircraft. All maintenance procedures required by Section 11, subparagraph (a)(ii) or any other provision of this Lease shall be performed in accordance with all FAA and Manufacturer's standards and procedures by properly trained, licensed, and certified maintenance sources and maintenance personnel utilizing replacement parts approved by the FAA and the Manufacturer, so as to keep the Airframe and each Engine in good operating condition, ordinary wear and tear alone excepted, and to enable the airworthiness certificate of the Aircraft to be continually maintained. (b) Compliance and Use. Lessee shall operate the Aircraft solely in the conduct of its business and/or for commercial purposes (and not for consumer, personal, home or family purposes) and in a cargo configuration for which Lessee is duly authorized by the FAA and it will not operate or permit the Aircraft to be operated at any time or in any geographic area when or where insurance required by the provisions of Section 14 hereof shall not be in effect, or in a manner, for any time period, such that Lessor or a third party shall be deemed to have "operational control" of the Aircraft. At all times the Aircraft will be operated only by duly qualified, currently certificated pilots as required by the insurance policies required under this Lease. IN ADDITION, EXCEPT AS EXPRESSLY PERMITTED BY THE FOLLOWING PARAGRAPH OR AS SPECIFICALLY CONSENTED TO IN WRITING BY LESSOR, THE AIRCRAFT SHALL NOT BE OPERATED, USED OR LOCATED OUTSIDE THE CONTINENTAL UNITED STATES. Notwithstanding the foregoing, Lessor agrees that the Aircraft may be flown temporarily to any country in the world in connection with the conduct of Lessee's business; provided, however, that in no event may the Aircraft temporarily fly, be operated, used or located in, or to any such country or area (1) which is excluded from coverage by any insurance policy in effect with respect to such Aircraft or by any insurance policy required by the terms of Section 14 hereof or any country or area not specifically and fully covered by such insurance; (2) in a recognized or threatened area of hostility unless fully covered to Lessor's satisfaction by hull, political, expropriation, hijacking and war risk insurance or (3) to Libya, Iraq, Cuba (other than the United States government facility at Guantanamo Bay), North Korea, or such other country or countries as Lessor shall set forth pursuant to written notice to Lessee from time to time. Lessee further agrees that it shall not operate the Aircraft, or permit the Aircraft to be operated in any manner unless the insurance coverages set forth in Section 14 hereof are in full force and effect. (c) Replacement Parts. Except as otherwise provided in the succeeding paragraph (d) of this Section, Lessee, at its own cost and expense, will promptly replace all Parts which may from time to time become worn out, lost, stolen, taken, destroyed, seized, confiscated, requisitioned, damaged beyond repair or permanently rendered or declared unfit for use for any reason whatsoever. (such substituted Parts hereinafter called "Replacement Parts"). In addition, in the ordinary course of maintenance, service, repair, overhaul or testing, Lessee may, at its own cost and expense, remove serviceable Parts, provided that Lessee shall, at its own cost and expense, replace such serviceable Parts as promptly as practicable. All Replacement Parts (i) shall be free and clear of all Liens, (ii) be in an airworthy condition and of at least equivalent model and modification status and service bulletin accomplishment status, be fully interchangeable as to form, fit and function and shall be in a good operating condition as, and shall have a value, useful life 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, (iii) have a current "serviceable tag" of the Manufacturer or maintenance facility providing such items to Lessee, indicating that such Parts are new, serviceable or overhauled, (iv) if overhauled, have all overhaul records, (v) if a life limited Part, have continuous records since the date of manufacture or the date of the last overhaul, and (vi) shall not in any manner alter or adversely affect the Aircraft's airworthiness certificate. All Parts at any time removed from the Airframe or any Engine shall remain the property of Lessor, no matter where located, until such time as such 14 15 Parts shall be replaced by Parts which have been incorporated or installed in or attached to the Airframe or such Engine and which meet the requirements for Replacement Parts specified above. Immediately upon any Replacement Part becoming incorporated or installed in or attached to the Airframe or such Engine as above provided, without further act, (i) title to the removed Part shall thereupon vest in Lessee, on an AS IS, WHERE IS BASIS WITHOUT ANY REPRESENTATION BY, OR RECOURSE OR WARRANTY TO, LESSOR, free and clear of all rights of Lessor and Lessor's Liens and shall no longer be deemed a Part hereunder, (ii) title to such Replacement Part shall thereupon vest in the Lessor, and (iii) such Replacement Part shall become subject to this Lease and be deemed part of the Airframe or Engine, as the case may be, for all purposes hereof to the same extent as the Parts originally incorporated or installed in or attached to the Airframe or such Engine. (d) Additions. Lessee shall be entitled from time to time during the Term to acquire and install on the Aircraft at Lessee's own cost and expense (and Lessor hereby appoints Lessee to be Lessor's agent for such purpose, so long as no Event of Default has occurred and is continuing), any additional accessory, device or equipment as may be available at such time ("Additions") but only so long as such Additions (i) are ancillary to the Aircraft, (ii) are not required to render the Aircraft complete for its intended use by Lessee, (iii) will not impair the originally intended function or use of the Aircraft or diminish the value of the same and (iv) can be readily removed without causing material damage to the Aircraft. Title to Additions which are not removed by Lessee prior to the return of the Aircraft to Lessor shall vest in Lessor upon such return. Lessee shall repair all damage to the Aircraft resulting from such installation and removal of Additions so as to restore the Aircraft to its condition prior to installation, ordinary wear and tear excepted. (e) Aircraft Marking. Lessee agrees, at its own cost and expense, to (i) cause the Airframe and the Engines to be kept numbered with the identification or serial number therefor as specified in Schedule No. 1 to Lease Supplement No. 1 hereof; (ii) prominently display on the Aircraft that "N" number, and only that "N" number, specified in Schedule No. 1 to Lease Supplement No. 1 or such other "N" number as has been approved in writing by the Lessor and duly recorded with the FAA; (iii) notify Lessor in writing thirty (30) days prior to making any change in the configuration (other than changes in configuration mandated by the FAA), appearance or coloring of the Aircraft from that in effect at the time the Aircraft is accepted by Lessee hereunder, and in the event of such change or modification of configuration, coloring or appearance, at the request of Lessor to restore the Aircraft to the configuration, coloring and/or appearance in effect on the Acceptance Date or, at Lessor's option to pay to Lessor an amount equal to the reasonable cost of such restoration and (iv) affix and maintain in the Airframe adjacent to the airworthiness certificate and on each Engine a metal nameplate bearing the Aircraft Marking specified in Lease Supplement No. 2 and such other markings as from time to time may be required by law or otherwise deemed necessary or advisable by Lessor in order to protect the title of Lessor to the Aircraft and the rights of Lessor under this Lease. Lessee will not place the Aircraft in operation or exercise any control or dominion over the same until such Aircraft Markings have been placed thereon. Lessee will replace promptly any such Aircraft Marking which may be removed, defaced or destroyed. (f) Pooling of Parts. Any Part removed from the Airframe or any Engine as provided in Section 11(c) hereof may be subjected by Lessee (or any Permitted Sublessee) to normal pooling arrangements customary in the airline industry entered into in the ordinary course of Lessee's (or any Permitted Sublessee's) business with a U.S. Air Carrier; provided that the Part replacing such removed Part shall be incorporated or installed in or attached to the Aircraft in accordance with Section 11(c) hereof immediately upon the removal of such removed Part. In addition, any Replacement Part when incorporated or installed in or attached to the Aircraft in accordance with Section 11(c) hereof may be owned by another U.S. Air Carrier subject to such a normal pooling arrangement; provided that Lessee (or any Permitted Sublessee) ensures that the Part so removed remains the property of Lessor, and that Lessee (or any Permitted Sublessee), at its expense, immediately thereafter either (x) causes title to such Replacement Part to vest in Lessor free and clear of all Liens and rights of others in accordance with Section 11(c) hereof, or (y) replaces such Replacement Part by incorporating or installing in or attaching to the Aircraft a further Replacement Part owned by Lessee (or any Permitted Sublessee) free and clear of all Liens and rights of others (except for any Lessor Liens) by causing title to such further Replacement Part to vest in Lessor in accordance with Section 11(c) hereof. SECTION 12. Inspection. (a) During the Term of this Lease, Lessee shall furnish to Lessor such information concerning the location, condition, use and operation of the Aircraft (or any component thereof including, the Airframe and any Engine or Part), as Lessor may reasonably request. Lessor or its authorized representatives or agents shall have the right, at any reasonable time and from time to time and wherever located, to inspect the Aircraft and its condition, use, and operation, and the Records, and to travel on the flight deck as 15 16 observers at any such inspection. Lessor shall not have any duty to make any such inspection nor shall Lessor incur any liability or obligation of any kind whatsoever by reason of not making any such inspection. Without limiting the generality of the foregoing or any other term of this Lease, Lessor or its authorized representatives or agents shall have the right to inspect the Aircraft during any "C" and/or "D" checks (as such checks are determined and/or defined by the Manufacturer or the Lessee's FAA-approved maintenance program) or their respective equivalent (such checks collectively the "Major Checks"), performed by or on behalf of Lessee during the Term of this Lease, and Lessee shall inform Lessor of any such Major Check schedule by providing written notice as to time and location of all said Major Checks. During any Major Checks, Lessee agrees to provide sufficient manpower to allow Lessor or its authorized representatives or agents to inspect, during the course of any Major Check, any area of the Aircraft which Lessor requests to inspect and which would normally be required during any such Major Check. (b) No later than five (5) days prior to the date the Aircraft is to be returned, Lessee shall make the Aircraft available to Lessor for a detailed inspection by a qualified FAA designated airworthiness representative or any other authorized representative or agent of the Lessor in order to verify that the condition of the Aircraft complies with all of the requirements of this Lease, including, without limitation, Section 8 hereof, (any such inspection the "Final Inspection"). Such Final Inspection may be scheduled at an appropriate maintenance facility of the Lessee or a FAA authorized maintenance performer then performing maintenance on such Aircraft. Lessor shall use its best efforts to conduct such Final Inspection during operational downtime of the Aircraft. The Lessee shall provide the Lessor not less than sixty (60) days prior written notice of the location and commencement date of the Final Inspection. The Final Inspection, at Lessor's sole option, shall also include a two hour operational test flight of the Aircraft ("Test Flight"). Any such Test Flight shall be conducted by Lessee at its sole cost and expense using the Lessee's approved test flight procedures. Lessor shall be permitted to have a minimum of two (2) authorized representatives attend the Final Inspection. In the event that the Lessee has exercised its Sale Option pursuant to Section 23 (c) and the Aircraft has either not been sold within ninety (90) days of the then current Expiration Date or the proposed sale price is less than the then current Maximum Lessor Risk, the Lessee shall be required to open any areas of the Aircraft reasonably requested to be opened by the Lessor or its authorized representatives or agents in order to verify any aspect of the Aircraft's condition or any item or component thereof, including, without limitation, the lower cargo compartment bilges, and borescoping of the Engines. Without limiting the generality of the foregoing or any other term of this Agreement, all Engines shall, upon the request of Lessor, have had within the thirty (30) day period immediately preceding the Final Inspection an "engine trim run" and a "combustion chamber" inspection performed in conformance with the Manufacturer's recommended procedures. All Records shall be provided to the Lessor or its authorized representatives or agents at the Final Inspection. (c) The cost and expense of the Test Flight and Final Inspection shall be paid by the Lessee. SECTION 13. Loss or Destruction. (a) Event of Loss with Respect to the Aircraft. Upon the occurrence of any Event of Loss with respect to the Aircraft, Lessee shall notify Lessor of any such Event of Loss within five (5) days of the date thereof. On the next Basic Rent Date following the date of such notice (or, if such Event of Loss occurs after the Last Basic Rent Date, within thirty (30) days after such notice), Lessee shall pay to Lessor any Rent then due, plus the Casualty Value of the Aircraft determined as of the Basic Rent Date immediately following the date of such Event of Loss, together with interest at the Late Payment Rate for the period (if any) from the Basic Rent Date following the date of such notice through the date of payment. Upon making such payment and all Rent due and owing, Lessee's obligation to pay further Basic Rent for the Aircraft subsequent to such payment shall cease, but Lessee's obligation to pay Supplemental Rent as well as any other amounts due under this Lease, if any, for the Aircraft shall remain unchanged. Except in the case of loss, permanent disappearance, destruction or Return to Manufacturer, Lessor shall be entitled to recover possession of the Aircraft, unless possession thereof is required to be delivered to a third party insurance carrier in order to settle an insurance claim. Lessor shall be entitled to any salvage value in excess of the Casualty Value paid to Lessor. Lessor shall be under no duty to Lessee to pursue any claim against any Person in connection with an Event of Loss, but Lessee may at its own cost and expense and with Lessor's prior written consent pursue the same on behalf of Lessor in such manner as may be acceptable to Lessor. Following the payment of the Casualty Value of the Aircraft in accordance with the provisions of this subsection, Lessee, if possible, shall, as agent for Lessor, dispose of the Aircraft as soon as it is able to do so for the best price obtainable. Any such disposition shall be on an AS-IS, WHERE-IS BASIS WITHOUT ANY REPRESENTATION BY, OR RECOURSE OR WARRANTY TO, LESSOR, of any kind whatsoever. Lessee may, after paying Lessor the amounts specified in this subsection, retain all amounts of such price up to the Casualty Value of the Aircraft actually paid by Lessee, together with Lessee's reasonable costs and expenses of disposition attributable thereto and any excess shall be paid over to, and retained by, Lessor. In the event of a Return to Manufacturer, Lessor agrees that Lessee shall receive and retain all amounts payable to Lessor by the Manufacturer up to the amount, if any, of the Casualty Value actually paid by Lessee hereunder, but any 16 17 excess shall be retained by Lessor. With respect to a Requisition of Use, Lessor agrees that Lessee shall receive and retain all amounts paid by any governmental authority up to the Casualty Value actually paid by Lessee hereunder, and any excess shall be paid over to, and retained by, Lessor. (b) Event of Loss with Respect to an Engine. Upon an Event of Loss with respect to any Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe upon which such Engine was installed or upon the occurrence of an Event of Loss of an Engine not then installed on the Airframe, Lessee shall give Lessor prompt written notice thereof and shall within thirty (30) days after the occurrence of such Event of Loss, duly convey to Lessor title to a similar engine of the name, make and model number as that suffering the Event of Loss. Such engine shall be free and clear of all Liens, have a value, utility, and useful life at least equal to, and (ii) be in as good an operating condition as, the Engine with respect to which such Event of Loss has 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. Lessee, at its own cost and expense, shall furnish Lessor with such documents to evidence such conveyance as Lessor shall request. Upon full compliance by Lessee with the terms of this paragraph, Lessor will transfer to Lessee, without recourse, representation or warranty of any kind whatsoever, all of Lessor's right, title and interest, if any, in and to the Engine with respect to which such Event of Loss has occurred. SUCH TRANSFER SHALL BE "AS-IS, WHERE-IS" AND LESSOR SHALL NOT BE DEEMED TO HAVE MADE, AND LESSOR HEREBY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE ENGINE SO TRANSFERRED TO LESSEE other than that the Engine is free and clear of Lessor's Liens. Each such replacement engine shall, after such conveyance shall be deemed an "Engine" as defined herein and shall be deemed part of the same Aircraft as was the Engine replaced thereby. No Event of Loss with respect to an Engine shall result in any reduction or delay in the payment of Basic Rent or relieve Lessee of any obligation under this Lease. (c) Risk of Loss; no Release of Obligations. Except as provided in this Section 13, Lessee shall bear the risk of loss and shall not be released from its obligations hereunder in the event of any damage to the Aircraft or any part thereof or any Event of Loss relating thereto. SECTION 14. Insurance. (a) Aircraft Liability and Property Damage Insurance. Lessee shall maintain at its own cost and expense for the entire Term with insurers satisfactory to Lessor, (i) comprehensive aircraft and general public liability insurance against bodily injury and property damage claims including, without limitation, contractual liability, premises damage, public liability, personal property liability, personal injury liability, death and property damage liability, public and passenger legal liability coverage in an amount not less than $200,000,000.00 for each single occurrence and (ii) such other property damage insurance with respect to the Aircraft as is of the type and in the amounts usually carried by companies engaged in the same or a similar business as Lessee and which covers risks of the kind customarily insured against by such companies. Lessee shall also provide worker's compensation insurance with all-states coverage for the Aircraft's crew and maintenance personnel. (b) Insurance Against Loss or Damage to the Aircraft. Lessee shall maintain at its own cost and expense for the entire Term with insurers satisfactory to Lessor, all-risk ground and flight aircraft hull insurance covering the Aircraft, including foreign object damage, fire and explosion coverage, cargo, environmental, ingestion and lightning and electrical damage and comparable insurance with respect to any Engines or Parts while removed from the Aircraft, and with respect to any engines or parts while temporarily installed on the Aircraft, provided that such insurance shall at all times be in an amount not less than the Casualty Value of the Aircraft (such amount determined at the Rent Commencement Date and at each annual renewal date of the insurance policies provided hereunder for the next succeeding year throughout the Term). Lessee shall maintain in effect hijacking (air piracy) insurance with respect to the Aircraft in a face amount of not less than the Casualty Value of the Aircraft (determined as described herein), which shall be in full force and effect worldwide throughout any geographical areas at any time traversed by the Aircraft. Such insurance shall also include war risk, governmental confiscation and expropriation and related insurance. (c) Lessor as Additional Insured; Notice. Any policies of insurance carried in accordance with this Section and any policies taken out in substitution or replacement or any such policies (i) shall be amended to name Lessor as the owner of the Aircraft and as additional insured as its interests may appear, (ii) with respect to insurance carried in accordance with paragraph (b) of this Section 14 covering the Aircraft, shall provide that any amount payable thereunder which exceeds $100,000.00 in the aggregate shall be paid directly to Lessor as sole loss payee and not to Lessor and Lessee jointly (and, so long as no Event of Default has occurred, such amounts shall be disbursed by Lessor to Lessee or other appropriate Persons in payment of the costs actually incurred with respect to repairs made to the Aircraft so as to restore it to the operating condition required by Section 11 hereof, or shall be disbursed by Lessor as otherwise required by the Lease), and that, provided no Default or Event of Default has occurred and is continuing, any amount(s) of less than $100,000.00 in the aggregate shall be paid to Lessee (and such amounts shall be applied by Lessee to pay the costs of such repairs), (iii) shall provide for thirty (30) days, or in the case of war risk insurance, seven 17 18 (7) days, written notice by such insurer of cancellation, change, non-renewal or reduction and (iv) shall provide that in respect of the interests of Lessor in such policies, the insurance shall not be invalidated by any action or inaction of Lessee regardless of any breach or violation of any warranties, declarations or conditions contained in such policies by or binding upon Lessee. Each shall be primary insurance, not subject to any co-insurance clause and shall be without right of contribution from any other insurance. Lessee shall arrange for appropriate certification as to the satisfaction of the requirements set forth above in this Section 14 to be delivered to Lessor not later than the Acceptance Date by each such insurer or underwriter therefor, which certification shall specifically acknowledge that the insurance is in conformity with this Section 14. Notwithstanding the foregoing, Lessee shall promptly provide Lessor with a copy of each policy of insurance required hereunder if it so requests. (d) Reports, etc. Annually on the anniversary of the Acceptance Date, Lessee shall furnish to Lessor a report describing in reasonable detail the insurance then carried and maintained on the Aircraft and certifying that such insurance complies with the terms hereof and, if Lessor shall so request, a copy of each applicable policy. In the event Lessee shall fail to maintain insurance as herein provided, Lessor may, at its option, provide such insurance, and Lessee shall, upon demand, reimburse Lessor for the cost thereof, together with interest at the Late Payment Rate from the date of payment through the date of reimbursement. (e) Agreed Value. Anything herein to the contrary notwithstanding, at all times while the Aircraft is subject to this Lease, the insurance required hereunder shall be for an amount on an "agreed value" basis not less than the lower of the Casualty Value or the Lessor's Cost. (f) No Right To Self-Insure. Lessee shall not self-insure (by deductible, premium adjustment, or risk retention arrangement of any kind) the insurance required to be maintained hereunder, except to the extent of deductibles usually and customarily maintained by companies engaged in the same or similar business as Lessee and operating the same or similar aircraft, but in no event shall any deductible exceed the Permitted Deductible amount on Schedule No. 2-A to Lease Supplement No. 1. Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-fact to file, settle or adjust, and receive payment of claims under any such insurance policy and to endorse Lessee's name on any checks, drafts or other instruments on payment of such claims. Lessee further agrees to give Lessor prompt notice of any damage to or loss of, the Aircraft, or any part thereof. (g) Attorney-in Fact. Lessee irrevocably appoints Lessor (and any assignee, mortgagee and/or lender of the Lessor) its attorney-in-fact to act in Lessee's name and on its behalf to make, execute, deliver and file any instruments or documents, settle, receive payment, make claim or proof of loss and to take any action as Lessor (and any such assignee, mortgagee and/or lender) deems necessary or appropriate to carry out the intent of this Section 14 or any agreements, documents or instruments related thereto. To the extent appropriate or permissible under applicable law, such appointment is coupled with an interest, shall be irrevocable and shall terminate only upon payment in full of the obligations set forth in this Lease and/or any agreements, documents or instruments related thereto. Notwithstanding the foregoing, to the extent that no Default or Event of Default has occurred and is continuing, Lessor agrees that it shall not exercise its powers as attorney in fact with respect to amounts of less than $100,000.00 payable under such policies of insurance as are provided for hereunder. SECTION 15. Indemnification. Lessee assumes liability for, and hereby agrees to indemnify, protect, save, defend and keep harmless Lessor, its agents, employees, officers, directors, shareholders, subsidiaries, affiliates, successors and assigns (collectively "Lessor"), on a net after-tax basis, from and against any and all liabilities, obligations, losses, damages, penalties, claims (including, without limitation, claims involving or alleging product liability or strict or absolute liability in tort), actions, suits, demands, costs, expenses and disbursements (including, without limitation, legal fees and expenses) of any kind and nature whatsoever (other than Impositions, the indemnification against which is set forth in Section 10 hereof) ("Claims") which may be imposed on, incurred by or asserted against Lessor, whether or not Lessor shall also be indemnified as to any such Claim by any other Person, in any way relating to or arising out of this Lease or any documents contemplated hereby, or the performance or enforcement of any of the terms hereof or thereof, or in any way relating to or arising out of the assertion or enforcement of any manufacturer's, vendor's or dealer's warranties on the Aircraft or any part thereof, (including, without limitation, any warranty of any Manufacturer), the manufacture, inspection, construction, purchase, pooling, interchange, acceptance, rejection, ownership, titling or re-titling, delivery, lease, sublease, possession, use, operation, maintenance, condition, registration or re-registration, sale, return, removal, repossession, storage or other disposition of the Aircraft or any part thereof or any accident in connection therewith (including, without limitation, latent and other defects, whether or not discoverable, and any Claim for patent, trademark or copyright infringement). Notwithstanding the foregoing, Lessee shall not be required to indemnify Lessor for (a) any Claim caused by the gross negligence or willful misconduct of the Lessor, (b) any Claim caused by the failure of 18 19 Lessor to comply with any regulatory requirements which non-compliance is caused solely and directly by Lessor, negligence or willful misconduct or (c) any Claim in respect of the Aircraft arising from acts or events which occur after (x) possession of the Aircraft has been redelivered to Lessor (which return and delivery shall be in full and complete compliance with the terms of this Lease, including, without limitation, Section 8) and (y) any and all other obligations of any kind whatsoever of the Lessee under this Lease which have been fully paid and/or performed, including, without limitation pursuant to Section 10 hereof, as the case may be, unless any such Claims were caused by Lessee (or any stockholder, director, officer, employee, successor, assignee, agent or servant of the Lessee) or resulted or arose, directly or indirectly, from any acts, events or omissions of any kind whatsoever during the Term of this Lease. WITHOUT LIMITING THE GENERALITY OF THE TERMS OF THIS LEASE, LESSEE AGREES THAT LESSOR SHALL NOT BE LIABLE TO LESSEE FOR ANY CLAIM CAUSED DIRECTLY OR INDIRECTLY BY THE INADEQUACY OF THE AIRCRAFT OR ANY PART THEREOF FOR ANY PURPOSE OR ANY DEFICIENCY OR DEFECT THEREIN OR THE USE OF MAINTENANCE THEREOF OR ANY REPAIRS, SERVICING OR ADJUSTMENTS THERETO OR ANY DELAY IN PROVIDING OR FAILURE TO PROVIDE ANY OF THE SAME OR ANY INTERRUPTION OR LOSS OF SERVICE OR USE THEREOF OR ANY LOSS OF BUSINESS, OR PROFITS ALL OF WHICH SHALL BE THE SOLE RISK AND RESPONSIBILITY OF LESSEE. The liability of Lessee to make indemnification payments pursuant to this Section 15 shall, notwithstanding any expiration or other termination (whether voluntary, as the result of Default or Event of Default, or otherwise) of this Lease, continue to exist until such indemnity payments are irrevocably made by Lessee in full and received by Lessor. If any Claim is made against Lessee or Lessor, the party receiving notice of such Claim shall promptly notify the other, but the failure of the party receiving notice to so notify the other shall not relieve Lessee of any obligation hereunder. SECTION 16. Assignment and Sublease. EXCEPT AS EXPRESSLY SET FORTH HEREIN OR AS MAY BE OTHERWISE CONSENTED TO IN WRITING BY LESSOR, LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, SUBLEASE, CONVEY, PLEDGE, MORTGAGE OR OTHERWISE ENCUMBER ITS OR LESSOR'S INTEREST IN AND TO THE LEASE OR THE AIRCRAFT, AND ANY SUCH SALE, TRANSFER, ASSIGNMENT, SUBLEASE, CONVEYANCE, PLEDGE, MORTGAGE, OR ENCUMBRANCE, WHETHER BY OPERATION OF LAW OR OTHERWISE, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR SHALL BE NULL AND VOID. IN ADDITION, LESSEE SHALL NOT RELINQUISH POSSESSION OF THE AIRFRAME OR ANY ENGINE OR INSTALL ANY ENGINE OR PART, OR PERMIT ANY ENGINE OR PART TO BE INSTALLED, ON ANY AIRFRAME OTHER THAN THE AIRFRAME LEASED HEREUNDER EXCEPT AS EXPRESSLY SET FORTH HEREIN. No acceptance, assignment, subletting, relinquishment or installation shall in any event relieve Lessee of primary, absolute and unconditional liability for its duties and obligations under this Lease. In no event may the Aircraft be subleased to a Person who is not a "citizen of the United States" within the meaning of the Federal Aviation Act. Notwithstanding anything to the contrary set forth herein, nothing herein shall prohibit Lessee from entering into any contract or arrangement with any third party so long as Lessee maintains operational control of the Aircraft and the rights, title and interests of such third party are subject and subordinate to the rights, title and interests of Lessor hereunder. (a) Notwithstanding the foregoing, provided that, so long as no Default or Event of Default shall have occurred hereunder and be continuing, and Lessee shall continue to comply with the provisions of Sections 11 and 14, Lessee (and any Permitted Sublessee except that any Permitted Sublessee shall not have the right to sublease or lease the Aircraft to any other Person) may, without the prior written consent of Lessor: (i) subject the Airframe, the Engines or engines then installed thereon to normal interchange agreements or any Engine to normal pooling or similar arrangements, in each case customary in the airline industry and entered into by Lessee (or any Permitted Sublessee) in the ordinary course of its business with a U.S. Air Carrier or any other air carrier approved by Lessor; provided that (A) no transfer of registration of the Airframe or any Engine shall be effected in connection therewith and the terms of this Lease shall be observed; (B) no such agreement or arrangement contemplates or requires the transfer of title to the Airframe or any Engine and (C) 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 to such Engine and Lessee shall comply with Section 13(b) hereof in respect thereof; (ii) deliver possession of the Airframe or any Engine to the manufacturer thereof or to any organization for testing, service, repair, maintenance or overhaul work on the Airframe, Engine or any part thereof or for alterations or modifications in or additions to such Airframe or Engine to the extent required or permitted by the terms of Section 11 hereof; (iii) install an Engine on an airframe owned by Lessee (or any Permitted Sublessee) which airframe is 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 third parties under interchange agreements which would be permitted under clause (i) 19 20 above, provided that Lessor's title to such Engine shall not be divested as a result thereof and (C) mortgage Liens or other security interests, provided, that (as regards this clause (C)), such mortgage Liens or other security interests provide that such Engine shall not become subject to the lien of such mortgage or security interest, notwithstanding the installation thereof on such airframe; (iv) install an Engine on an airframe leased to Lessee (or any Permitted Sublessee) or purchased by Lessee subject to a conditional sale or other security agreement, provided that (x) such airframe is free and clear of all Liens, except: (A) the rights of the parties to the lease or conditional sale or other security agreement covering such airframe, or their assignees, and (B) Liens of the type permitted by subparagraph (iii) of this paragraph (b) and (y) such lease, conditional sale or other security agreement provides that such Engine shall not become subject to the lien or security interest of such lease, conditional sale or other security agreement, notwithstanding the installation thereof on such airframe; (v) transfer possession of the Airframe or any Engine to the United States of America or any instrumentality or agency thereof pursuant to the Civil Reserve Air Fleet Program for a period that does not extend beyond the end of the Term so long as Lessee (or any Permitted Sublessee) shall (A) promptly notify Lessor upon subjecting the Airframe or any Engine to the Civil Reserve Air Fleet Program and provide Lessor with the name and address of the Contracting Office Representative for the Military Aircraft Command of the United States Air Force, and (B) promptly notify Lessor upon transferring possession of the Airframe or any Engine to the United States of America or any agency or instrumentality thereof pursuant to such program; or (vi) transfer possession of the Airframe or any Engine to the United States of America or any agency or instrumentality thereof pursuant to a contract, a copy of which shall be provided to Lessor, provided that the terms of such contract shall not be inconsistent with the terms hereof (including, without limitation, that no such contract shall extend beyond the end of the Term). (vii) sublease the Aircraft to any Permitted Sublessee, provided, however, that A. Lessee shall provide to the Lessor prior written notice of any proposed sublease and a copy of such sublease prior to entering into said sublease. B. Any sublease shall provide that it shall terminate at the option of Lessor, upon the expiration or earlier termination of this Lease and the term of such sublease shall not exceed the then remaining Term of this Lease (including, any Renewal Term as to which the option to renew has been irrevocably exercised). C. Any sublease shall be a true lease and not a lease intended as "security" as such term is used in Section 1-201 (37) of the UCC. D. With respect to any sublease, to the extent that it has not already done so, Lessee agrees to assign, and does hereby assign, as collateral security, and grant, and does hereby grant, to Lessor a security interest in (i) the sublease, (ii) all amounts payable thereunder, (iii) all proceeds of insurance payable to Lessee pursuant to the sublease, and (iv) all rights and remedies of Lessee under the sublease and proceeds from the exercise thereof all to secure payment and performance of all of Lessee's liabilities, obligations and indebtedness under this Lease. Lessor's security interest which is created hereby, if Lessor so elects, may be perfected by possession of the sublease rather than filing, as provided in the UCC. Until the occurrence of a Default or an Event of Default hereunder, Lessee shall have the right to collect and receive, in accordance with the terms hereof, rent and other sums payable under such sublease and to retain, use and enjoy the same. The filing of this Lease with the FAA shall constitute notice to all third parties of the security interest of Lessor in any such subleases without the need for the filing of a specific assignment thereof. E. Lessee shall deliver to the Lessor a fully executed copy of each and every sublease, which are, and will be, the only copies of such sublease marked "Secured Party's Original." All copies of the sublease shall bear the following legend: "To the extent, if any, this instrument constitutes chattel paper under the UCC, no security interest herein may be created through the transfer and/or possession of any counterpart other than the counterpart marked 'Secured Party's Original.'" All copies of each sublease, other than the "Secured Party's Original" shall bear the following legend: "'Copy.' No interest herein may be 20 21 created or the aircraft subject hereto through the transfer and/or possession hereof." F. Any sublease shall be expressly subject and subordinate to this Lease and the rights of Lessor hereunder and in and to the Aircraft. No amendment, termination, waiver or modification of any of the terms and/or conditions of such sublease shall be effective unless consented to in writing in advance by Lessor, provided, however, that Lessor's consent shall not be necessary with respect to any amendment or modification of such sublease which increases the amount of the monthly rentals under such sublease or with respect to any renewal of such sublease provided that the term of such sublease, upon effecting such renewal ends on or before the then current Term of this Lease. G. Lessee shall deliver to Lessor a consent and acknowledgment executed by Lessee and Permitted Sublessee in the form and substance satisfactory to Lessor along with such other instruments (including, without limitation, FAA recording documents and UCC financing statements) as Lessor may reasonably require. Lessee shall agree to take such other actions as are deemed necessary by Lessor to effect the terms and conditions of this Section. H. Lessee shall provide evidence, satisfactory to Lessor, that Lessor shall have the benefits of Section 1110 (as set forth in Section 6 (x) of this Lease) after giving effect to such sublease. I. Such other terms and conditions as Lessor deems necessary and appropriate. Notwithstanding anything to the contrary set forth herein, nothing in this subparagraph (vii) shall prohibit Lessee from entering into any contract or arrangement with any third party so long as Lessee maintains operational control of the Aircraft and the rights, title and interests of such third party are subject and subordinate to the rights, title and interests of Lessor hereunder. Without limiting the generality of the foregoing, the rights of any Permitted Sublessee or other transferee who receives possession by reason of a transfer permitted by this Section 16 (other than the transfer of an Engine which is deemed an Event of Loss) shall be subject and subordinate to, and any sublease permitted by this Section 16, shall expressly provide that it is subject and subordinate to, all the terms of this Lease, including, without limitation, the covenants contained in Section 8 hereof and Lessor's rights, powers and remedies hereunder, including the right to repossession pursuant to Section 19 hereof and to avoid such sublease upon such repossession and each sublease shall expressly require any Permitted Sublessee to forthwith deliver the Aircraft to Lessor upon any rightful demand therefor pursuant to Section 19 hereof, and the terms of any such sublease shall (A) not permit any Permitted Sublessee to take any action not permitted to be taken by Lessee in this Lease with respect to the Aircraft, (B) be consistent with the requirements of this Lease, (C) not permit any further subleasing or leasing of the Aircraft by the Permitted Sublessee or otherwise, (D) include appropriate provisions for the continued registration and maintenance of the Aircraft in accordance with FAA standards, and compliance with the terms and conditions hereof, including, without limitation, use and operation, insurance with an appropriate insurance certificate to be furnished to Lessor prior to Lessee's entry into any such sublease, (E) provide that the Lessor may, at its option, void or terminate such sublease following an Event of Default or Default hereunder, (F) provide that in the event that Lessor declares the Lease to be in default pursuant to Section 18 hereof, any Permitted Sublessee's rights under such sublease shall, at the option of Lessor, automatically be deemed to be assigned to Lessor (to the extent not already assigned to the Lessor), and (G) that the Permitted Sublessee shall not transfer possession of or any other rights to the Airframe or any Engine to any Person, except as expressly permitted herein. No pooling agreement, sublease or other relinquishment of possession of the Airframe or any Engine shall in any way whatsoever discharge or diminish any of Lessee's obligations to Lessor (and any assignee, mortgagee and lender of the Lessor) hereunder, discharge or diminish the obligations of the Guarantor under the Guaranty or constitute a waiver of Lessor's (or any such assignee, mortgagee or lender of the Lessor's) rights or remedies hereunder and all of the obligations of Lessee hereunder shall be and remain primary and shall continue in full force and effect as the obligations of a principal and not of a guarantor or surety. Lessor, may at any time, with or without notice to Lessee, mortgage, grant a security interest in or otherwise transfer, sell or assign all or any part of its interest in this Lease or the Aircraft or any Rent or other sums due or to become due hereunder and Lessee shall perform all of its obligations under this Lease for the benefit of such assignee, lender, creditor, mortgagee, transferee or Person except that the interest of any such assignee, lender, creditor, mortgagee, transferee or Person shall be subject to Lessee's rights 21 22 of use and possession, renewal rights, and purchase options, if any, hereunder, so long as no Default or Event of Default has occurred and is continuing hereunder. Lessee agrees that the rights hereunder of any such assignee, lender, creditor, mortgagee, transferee or Person shall not be subject to any defense, setoff, recoupment, abatement, reduction, claim or counterclaim (collectively the "Defenses") that Lessee has or may at any time have against Lessor for any reason whatsoever and Lessee hereby waives any right to assert at any time any of the foregoing Defenses against any such assignee, lender, creditor, mortgagee, transferee or Person. Lessee further agrees that any such assignee, lender, creditor, mortgagee, transferee or Person shall have all of Lessor's rights hereunder, but none of the Lessor's obligations or duties. Lessee acknowledges that any such assignment, transfer or sale will not materially change its duties or materially increase its burdens or risks hereunder and that any such assignment, transfer or sale shall be permitted even if the assignment, transfer or sale would be deemed to materially affect the Lessee's interests hereunder. Lessee further agrees, if so directed in writing, to, among other things, pay all sums due or to become due hereunder directly to the assignee, lender, creditor, mortgagee, transferee or Person or any other party designated in writing by Lessor or any such assignee, lender, creditor, mortgagee, transferee or Person. Upon the request of Lessor or any assignee, lender, creditor, mortgagee, transferee or Person, Lessee also agrees (i) to promptly execute and deliver to Lessor or to such assignee, lender, creditor, mortgagee, transferee or Person an acknowledgment of assignment in form and substance satisfactory to the requesting party which, among other things, reaffirms the basic terms and conditions of this Lease and (ii) to comply with the reasonable demands of any such assignee, lender, creditor, mortgagee, transferee or Person in order to perfect any such assignment or transfer. This Lease, including all agreements, covenants, representations and warranties, shall be binding upon and inure to the benefit of, and may be enforced by (a) Lessor and its successors, assigns (including, without limitation, all parties referred to in Section 16), agents and servants and (b) Lessee and its successors and, to the extent expressly permitted by Lessor, assigns. SECTION 17. [Intentionally Left Blank] SECTION 18. Events of Default. The term "Event of Default", wherever used herein, shall mean any of the following events or circumstances (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary, or come about or be effected by operation of law, or be pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation or any administrative or governmental body): (a) Lessee shall fail to make any payment of Rent, Casualty Value and/or any amount due pursuant to Section 23 hereof within ten (10) days after any or all of the same shall become due and payable, or, upon demand, any other amount required to be paid herein or under any other agreement with Lessor; or (b) Lessee shall fail to keep in full force and effect any of the insurance required under this Lease, or shall operate the Aircraft at a time when, or at a place in which, such insurance shall not be in effect; or (c) Lessee shall fail to perform or observe any covenant, condition or agreement, (other than those specifically referred to in this Section 18) required to be performed or observed by it under this Lease or any agreement, document or certificate delivered by or on behalf of Lessee in connection herewith, and such failure shall continue for (I) ten (10) days after written notice thereof from Lessor to Lessee and (II) provided that Lessee is diligently pursuing a cure of such default to the satisfaction of Lessor, for forty-five (45) days thereafter; or (d) Lessee shall default in the payment or performance of any indebtedness or obligation to Lessor or any affiliated person, firm or entity controlling, controlled by or under common control with Lessor, under any loan, note, security agreement, lease, guaranty, title retention or conditional sales agreement or any other instrument or agreement evidencing such indebtedness with Lessor or such other affiliated person, firm or entity affiliated with Lessor; or (e) any representation or warranty made by Lessee herein or in any certificate, agreement, statement or document hereto or hereafter furnished to Lessor in connection herewith, including without limitation, any financial information disclosed to Lessor, shall prove to be or to have been false or incorrect in any material respect; or (f) the commencement of any bankruptcy, insolvency, arrangement, reorganization, receivership, liquidation or other similar proceeding by or against Lessee or any of its properties or businesses, the appointment of a trustee, receiver, liquidator or custodian for Lessee or any of its properties of business, if Lessee suffers the entry of an order for relief under Title 11 of the United States Code or the making by Lessee of a general assignment or deed of trust for the benefit of creditors; or 22 23 (g) Lessee defaults in any payment or other obligation to any third party which default gives rise to a right on behalf of such third party to accelerate such obligation and such obligation is either accelerated by the third party or paid in full by the Lessee during the continuance of such default; or (h) Lessee (I) sells, transfers or disposes of all or substantially all of its respective stock, assets or property and after giving effect to such sale, transfer or disposition the Lessee's tangible net worth does not equal or exceed its tangible net worth immediately preceding such occurrence, or (II) merges with or into any other entity and the surviving entity after giving effect to such merger does not comply with all of the terms and conditions of this lease, including, without limitation, the terms and conditions of the Financial Covenants Rider hereto; or (i) if M. Tom Christopher shall cease to own a minimum of 25% of Parent's voting capital stock issued and outstanding from time to time; or if Parent shall cease to own 100% of Lessee's or any Guarantor's (other than Parent's) voting capital stock issued and outstanding from time to time; or if M. Tom Christopher shall no longer serve as chairman of the board or chief executive officer of Parent; or any major automobile manufacturer; or (j) there shall be a change in the ownership of Parent's stock such that Parent is no longer subject to the reporting requirements of the Securities Exchange Act of 1934 or no longer has a class of equity securities registered under Section 12 of the Securities Act of 1933; or (k) Lessee shall fail to return the Aircraft to Lessor at the end of the Term in accordance and in compliance with Section 8 hereof unless Lessee is diligently pursuing compliance with such Section to the satisfaction of Lessor; or (l) Lessee shall or shall attempt to remove, sell, transfer, convey, pledge, mortgage, encumber, part with possession of, assign or sublet the Aircraft or any part thereof (except as expressly permitted by the provisions of this Lease or such use by the United States Government pursuant to the Civil Reserve Air Fleet Program), use the Aircraft for an illegal purpose or permit the same to occur or Lessee shall create, incur, assume or suffer to exist any Lien (other than Permitted Liens) with respect to the Aircraft, this Lease or Lessor's interests thereunder; or (m) any event or condition set forth in subsections (b) through (j) of this Section 18 shall occur with respect to any guarantor or other person responsible, in whole or in part, for payment or performance of this Lease; or (n) any event or condition set forth in subsections (d) through (j) of this Section 18 shall occur with respect to any affiliated person, firm or entity controlling, controlled by or under common control with Lessee. Lessee shall promptly notify Lessor of the occurrence of any Default or Event of Default. SECTION 19. Remedies. (a) Upon the occurrence of any Event of Default and so long as the same shall be continuing, Lessor may, at its option, declare this Lease to be in default (provided that no such declaration shall be a condition to any suit against Lessee for specific performance of a defaulted covenant or for damages in respect of such default upon such occurrence or at any time thereafter), and at any time thereafter, whether or not such Event of Default shall be continuing, Lessor may exercise any one or more of the following remedies, as Lessor in its sole discretion shall lawfully elect: (i) Proceed by appropriate court action, either at law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease or to recover damages for breach thereof. (ii) By notice terminate this Lease, whereupon all rights of Lessee to the use of the Aircraft or any part thereof shall absolutely cease and terminate but Lessee shall remain liable as hereinafter provided and thereupon Lessee, if so requested by Lessor, shall (a) at its expense promptly return the Aircraft to the possession of Lessor at such place as Lessor shall designate and in the condition required upon the return thereof pursuant to and in accordance with the terms of this Lease, (b) Lessor, at its option, may enter upon the premises where the Aircraft is located and take immediate possession of and remove the same, together with any Engines and Parts by self-help, summary proceedings or otherwise without any liability of any kind whatsoever on the part of Lessor for or by reason of such entry or taking of possession and Lessee hereby waives any cause of action it may have arising from, or in connection with, the foregoing or (c) Lessee will provide storage as set forth in this Lease. In addition, upon the written request of Lessor, Lessee, at its expense, will replace any engine installed on the Airframe with an Engine. Lessee shall, without further demand, forthwith pay to Lessor an amount equal to any unpaid Rent due and payable for all periods up to and including the Basic Rent Date following the date on which Lessor has 23 24 declared this Lease to be in default, plus, as liquidated damages for loss of a bargain and not as a penalty, an amount equal to the Casualty Value of the Aircraft, computed as of the Basic Rent Date immediately following the date on which Lessor has declared this Lease to be in default (plus all costs, charges and expenses including, legal fees and disbursements incurred by Lessor by reason of the occurrence of any Event of Default or the exercise of any of Lessor's remedies with respect thereto or otherwise). Following the return of the Aircraft to Lessor pursuant to this subparagraph (ii), Lessor shall proceed at its option to sell or otherwise dispose of the Aircraft by public or private sale, with or without notice, and without having the Aircraft present at the place of sale and in such manner as it shall deem appropriate, provided that Lessor, if it so elects, may purchase the Aircraft at such sale for a price not less than the highest bona fide bid given by a Person unrelated to Lessee. Lessee waives all its rights under laws governing such sale to the extent permitted by law. Lessor may apply any deposit or other cash collateral or sale or remarketing proceeds of the Aircraft at any time to reduce any amounts due to Lessor. Notwithstanding the foregoing, Lessor may at its option and in its sole discretion keep idle, lease, or use or operate all or part of the Aircraft without any liability whatsoever and may use Lessee's premises for storage pending lease or sale or for holding a sale without liability for rent or costs or any other matter whatsoever. The net proceeds of such sale or lease as provided above shall be applied by Lessor (x) first, to pay all costs, charges and expenses, including the cost of discharging all Liens, on the Aircraft and all legal fees and disbursements incurred by Lessor as a result of the Event of Default and/or the exercise of its remedies with respect thereto, (y) second, to pay to Lessor an amount equal to any unpaid Rent due and payable and the Casualty Value, to the extent not previously paid and (z) third, to reimburse Lessee for the Casualty Value to the extent paid by Lessee as liquidated damages. Any surplus remaining thereafter shall be retained by Lessor. To the extent that all Rent then due and payable with respect to the Aircraft and the Casualty Value have not been previously paid, Lessee shall forthwith pay upon demand to Lessor the sum of (A) the amount by which (1) the sum of (aa) all Rent then due and payable with respect to the Aircraft, (bb) the Casualty Value or portion thereof not theretofore paid and (cc) the amount payable under clause (x) of the preceding sentence exceeds (2) the net proceeds of the sale or lease of the Aircraft actually received by the Lessor and (B) interest at the Late Payment Rate on the full amount of said Casualty Value and Rent then due and unpaid, computed from the date such sums are due until the same are paid by Lessee. For purposes of computing liquidated damages under this subparagraph (ii) only, the proceeds of any releasing of the Aircraft shall be determined by discounting to present value, at the rate of twelve and one-half percent (12.5%) per annum, the periodic rentals which are payable to Lessor pursuant to such re-lease, up to and including the Expiration Date. (b) Lessee shall be liable for all costs, charges and expenses, including legal fees and disbursements, incurred by Lessor by reason of the occurrence of any Event of Default, the exercise of any of Lessor's rights or remedies with respect thereto or otherwise. (c) Lessee hereby waives, to the maximum extent now or hereafter permitted by applicable law, for itself and for its successors or assigns any and all rights Lessee or Lessee's successors or assigns may have following an Event of Default under any bankruptcy, insolvency or similar laws, rules or regulations with respect to the continued possession or use of the Aircraft or relief from the payment of Rent therefor or otherwise with respect to this Lease. Rejection of this Lease by any bankruptcy trustee or debtor-in-possession shall entitle Lessor to the immediate return of the Aircraft and to liquidated damages calculated in the manner provided for in Section 19(a)(ii) above with respect to an Event of Default. (d) No right or remedy referred to herein is intended to be exclusive, but each shall be cumulative and in addition to any other right or remedy referred to above or otherwise available to Lessor at law or in equity, including, without limitation, such rights and/or remedies as are provided for in the UCC. No express or implied waiver by Lessor of any Default or Event of Default hereunder shall in any way be, or be construed to be, a waiver of any future or subsequent Default or Event of Default. The failure or delay of Lessor in exercising any rights granted it hereunder upon the occurrence of any of the contingencies set forth herein shall not constitute a waiver of any such right upon the continuation or reoccurrence of any such contingencies or similar contingencies, and any single or partial exercise of any particular right by Lessor shall not exhaust the same or constitute a waiver of any other right provided for or otherwise referred to herein. (e) 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 in mitigation of Lessor's damages as set forth in this Section 19 or which may otherwise limit or modify any of Lessor's rights or remedies under this Section 19. To the extent permitted by applicable law, Lessee waives any and all rights and remedies conferred upon a lessee by Section 2A-508 to 2A-522 (inclusive) of the UCC, including, without limitation, any rights of Lessee (a) to cancel or repudiate this Lease or any supplement or any document relating thereto, (b) to reject or evoke acceptance of the Aircraft or any component thereof and (c) to recover from Lessor any general or consequential damages, for any reason whatsoever. 24 25 SECTION 20. Performance of Obligations of Lessee by Lessor. If any Default or Event of Default occurs or if Lessee fails to perform or comply with any of its agreements contained herein, Lessor shall have the right, but shall not be obligated, to effect such performance or compliance and the amount of any out-of-pocket expenses and other reasonable expenses of Lessor incurred in connection with the performance of or compliance with such agreements, as the case may be, together with interest thereon at the Late Payment Rate, shall be payable by Lessee promptly upon demand and any such action by Lessor shall not be deemed a cure or waiver of any Default or Event of Default hereunder. SECTION 21. Intent Title to the Aircraft shall at all times remain in Lessor and at no time during the Term shall title become vested in Lessee. Lessee shall acquire no right, title or interest in or to the Aircraft except the right to use the same pursuant to the terms of this Lease. Notwithstanding anything to contrary contained herein or otherwise, (i) should a court of competent jurisdiction determine that this agreement is one intended as security, and (ii) to secure the prompt and full payment and performance as and when due of any and all obligations and indebtedness of Lessee to Lessor, now existing or hereafter created of any kind whatsoever, including, without limitation any other aircraft lease executed contemporaneously with this Lease, Lessee hereby grants and conveys to, Lessor a security interest and lien in this Lease, the Aircraft, any subleases relating to the Aircraft or any part thereof and any and all proceeds (including insurance proceeds) of any or all of the foregoing. The security interest granted herein shall survive the termination or expiration of this Lease by any Event of Default or Default or otherwise and shall remain in full force and effect until such time as Lessee has no further obligations of any kind whatsoever under this Lease. SECTION 22. Notices. All communications and notices provided for herein shall be in writing and shall become effective upon hand delivery or upon delivery to an overnight delivery service or two (2) Business Days after being deposited in the United States mail with proper postage for first-class mail prepaid, sent by registered or certified mail, return receipt requested, and addressed to Lessor or Lessee at their respective addresses set forth under the signatures hereto or such other address as either party may hereafter designate by written notice to the other. SECTION 23. End of Term Options. (a) If no Event of Default (or event or condition which, with the passage of time or giving of notice, or both, would become such an Event of Default) has occurred and is continuing, on each Expiration Date, Lessee shall have the option to: (i) purchase the Aircraft pursuant to paragraph (b) below (the "Purchase Option"), (ii) sell the Aircraft pursuant to paragraph (c) below (the "Sale Option") or (iii) on any Expiration other than the Final Expiration Date, to renew the Term of the Lease for an additional one year period on the same terms and conditions as are set forth herein except that the amount of Basic Rent payable during such Renewal Term shall be as set forth for such Renewal Term on Schedule 2-A to Lease Supplement No. 1 (the "Renewal Option"). Subject to the foregoing limitations on exercise of the Renewal Option, Lessee shall give Lessor 180 days irrevocable written notice (the "Option Notice") prior to each Expiration Date if Lessee intends to exercise the Purchase Option, the Sale Option or the Renewal Option. If Lessee does not provide a timely Option Notice, then the Lessee shall be irrevocably deemed to have exercised (x) the Renewal Option as of the then current Expiration Date provided that the then current Expiration Date is not the Final Expiration Date, or (y) the Purchase Option as of the then current Expiration Date if the then current Expiration Date is Final Expiration Date. (b) Upon exercise of the Purchase Option, Lessee shall pay to Lessor on the applicable Expiration Date an amount equal to: (i) all Rent then due and owing under the Lease; plus (ii) all taxes, assessments and other charges due or payable in connection with the sale of the Aircraft to Lessee; plus (iii) the Purchase Option Price as of such Expiration Date. Upon receipt of the amounts set forth in the preceding sentence, Lessor shall convey all of Lessor's right, title and interest in and to the Aircraft to Lessee on an "AS-IS," "WHERE-IS" BASIS WITHOUT REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, and without recourse to Lessor, except that the Aircraft shall be free and clear of all liens created by Lessor. (c) Upon exercise of the Sale Option, Lessee shall place the Aircraft in the condition required by Section 8 of the Lease and shall obtain bids for the Aircraft and market such Aircraft in a commercially reasonable manner to the highest qualified bidder on or before the Expiration Date, at Lessee's sole cost and expense; provided, however, that no sale shall occur without Lessor's prior written consent. Lessor agrees that, if so requested by Lessee and upon performance of and compliance with the other terms and conditions of this Section 23 by Lessee, it shall consent to any bona fide offer to purchase the Aircraft, including, any offer to purchase the Aircraft made by Lessee, which equals or exceeds the Maximum Lessor Risk. Lessor may also offer to purchase the Aircraft pursuant to this Section 23 and/or solicit and/or obtain bids for the Aircraft, provided, however, that Lessor shall be under no duty to so act. 25 26 If the Aircraft is sold pursuant to the exercise of a Sale Option on or before the applicable Expiration Date, then, on the earlier of such Expiration Date or the date on which the proceeds from such sale are paid by the purchaser of the Aircraft (the "Termination Date"), Lessor shall receive all proceeds of such sale and Lessee shall pay to Lessor: (i) all Rent due and owing under the Lease through and including the Expiration Date; plus (ii) all taxes, assessments and other charges due or payable in connection with the sale of the Aircraft; plus (iii) the amount by which the net proceeds of such sale are less than the Purchase Option Price as of the Expiration Date, if any, but in no event more than the Maximum Lessee Risk, as of the Expiration Date. In the event that the sale price is greater than the Purchase Option Price, together with the amounts set forth in (i) and (ii) above to the extent that such amounts have not already been paid by Lessee, any excess of such sales price shall be remitted to Lessee. Upon receipt of the amounts set forth in the preceding sentence, Lessor shall convey all of Lessor's right, title and interest in and to the Aircraft to the purchaser thereof on an "AS-IS," "WHERE-IS" BASIS WITHOUT REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, and without recourse to Lessor, except that the Aircraft shall be free and clear of all liens created by Lessor. If the Aircraft is not sold pursuant to the exercise of a Sale Option on or before such Expiration Date, then, on such Expiration Date, Lessee shall return the Aircraft to Lessor under the terms and in the condition required by Section 8 of the Lease, and shall pay to Lessor an amount equal to: (i) all Rent then due and owing under the Lease through and including such Expiration Date; plus (ii) the applicable Purchase Option Price. Lessor's actual out-of- pocket costs and expenses incurred in removing, storing, repairing and selling the Aircraft during the period between the date the Aircraft is returned and the actual sale thereof shall be payable to Lessor by Lessee upon presentation of Lessor's invoice therefor. Upon sale of the Aircraft, the net proceeds thereof shall be allocated: FIRST, to Lessor in an amount equal to: (i) to the extent that such amounts have not already been paid by Lessee, all Rent then due and owing under the Lease through and including such Expiration Date, plus (ii) to the extent that such amounts have not already been paid by Lessee, Lessor's actual out-of-pocket costs and expenses incurred in removing, storing, repairing and selling the Aircraft, plus (iii) all taxes, assessments and other charges due or payable in connection with the sale of the Aircraft, plus (iv) to the extent that such amount has not already been paid by Lessee the Purchase Option Price and SECOND, the excess, if any, to Lessee. SECTION 24. Intentionally Left Blank. SECTION 25. Transaction Expenses. Lessee shall pay all actual and reasonable fees, costs and expenses incurred by Lessor in connection with this Lease, whether or not the transactions contemplated hereby are consummated, including, without limitation, appraisal fees, Lessor's in-house counsel expenses and fee of $15,000.00, FAA Counsel fees and expenses, and FAA and UCC title and lien searches, reports, filing and recording fees, charges and taxes. Lessee also agrees to pay all fees and expenses of Lessor's counsel, FAA Counsel and all other third parties who are engaged by Lessor to enforce Lessor's rights and/or remedies hereunder, to update any FAA or UCC title and/or lien reports and/or to review, file and record any and all documents and instruments as required by Lessor or the FAA during and after the Term of this Lease. SECTION 26. Miscellaneous. (a) All agreements, indemnities, representations, covenants and warranties contained in this Lease or any agreement, document or certificate delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery of this Lease and the expiration or other termination of this Lease for any reason whatsoever. (b) Any provision of this Lease which may be determined to be 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 hereof prohibited or unenforceable in any respect. (c) This Lease, and each related instrument, document, agreement and certificate, collectively constitute, and are intended to collectively constitute, the complete and exclusive statement of the terms of the agreement between Lessor and Lessee with respect to the purchase and leasing of the Aircraft and cancel and supersede any and all prior or contemporaneous oral or written understandings, memoranda, negotiations, communications and agreements with respect thereto including, without limitation, any proposal letter, commitment letter and/or term sheet delivered to the Lessee by Lessor. (d) This Lease may be executed in any number of counterparts and by the different parties hereto on separate counterparts. Each counterpart of the Lease bears the following legend on the face and execution pages thereof: "This is Counterpart No. 1 of a total of 3 counterparts. Only Counterpart No. 1 shall be 26 27 considered chattel paper for purposes of the Uniform Commercial Code and a security interest may be perfected only by possession of Counterpart No. 1." To the extent, if any, that this Lease constitutes chattel paper (as such term is defined in the UCC as in effect in any applicable jurisdiction) no security interest in this Lease may be created through the transfer or possession of any counterpart other than the counterpart marked "Counterpart No. 1". (e) The division of this Lease into sections, the provision of a table of contents and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Lease. (f) The actual dates of execution hereof by the parties hereto are respectively the dates set forth under the signatures hereto, however this Lease shall be effective as of the date first above written. (g) Lessee will promptly and duly execute and deliver to Lessor and any assignee, mortgagee and/or lender of the Lessor, such other documents and assurances, including, without limitation, such amendments to this Lease as may be required by Lessor (and by any assignee, mortgagee and/or lender of the Lessor), and UCC financing statements and continuation statements, and will take such further action as Lessor or any such assignee, mortgagee and/or lender may from time to time request in order to carry out more effectively the intent and purposes of this Lease and to establish and protect the rights and remedies created or intended to be created in favor of Lessor and of any such assignee, mortgagee and/or lender. Lessee irrevocably appoints Lessor (and any assignee, mortgagee and/or lender of the Lessor) its attorney-in-fact to act in Lessee's name and on its behalf to make, execute, deliver and file any instruments or documents and to take any action as Lessor (and any such assignee, mortgagee and/or lender) deems necessary or appropriate to carry out the intent of this Lease or any agreements, documents or instruments related thereto. To the extent appropriate or permissible under applicable law, such appointment is coupled with an interest, shall be irrevocable and shall terminate only upon payment in full of the obligations set forth in this Lease and/or any agreements, documents or instruments related thereto. (h) Time is of the essence in the payment and performance of all of Lessee's obligations under the Lease. This Lease shall be deemed to have been executed in Rhode Island by virtue of the Lessor having countersigned and accepted the Lease in Rhode Island and shall be deemed to be performed in Rhode Island by virtue of the payment of Rent to be made to Lessor in Rhode Island, and this Lease shall be delivered for closing purposes in Lessor's office at 50 Kennedy Plaza, Providence, Rhode Island. This Lease shall in all respects be governed by, and construed in accordance with, the laws of the State of Rhode Island, without giving effect to principles of conflicts of law or choice of law, including all matters of construction, validity and performance. Lessee hereby irrevocably consents and agrees that any legal action, suit or proceeding arising out of or in any way in connection with this Agreement may be instituted or brought in the courts of the State of Rhode Island or the United States District Court for the District of Rhode Island, as Lessor may elect, and by execution and delivery of this Lease, Lessee hereby irrevocably accepts and submits to, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of any such court, and to all proceedings in such courts. To the extent permitted by applicable law, this Lease shall be deemed a "finance lease" under Section 2A-103(g) of the UCC. LESSEE ACKNOWLEDGES AND AGREES THAT THIS LEASE IS A COMMERCIAL TRANSACTION. LESSEE ALSO HEREBY KNOWINGLY AND FREELY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING HEREFROM OR IN RELATION HERETO. Any action by Lessee against Lessor for any cause of action relating to this Lease shall be brought within one year after any such cause of action first arises. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] 27 28 SECTION 27. AMENDMENTS. NO TERM OR PROVISION OF THIS LEASE MAY BE AMENDED, ALTERED, WAIVED, DISCHARGED OR TERMINATED ORALLY, EXCEPT IN A WRITING SIGNED BY A DULY AUTHORIZED OFFICER OF THE PARTY AGAINST WHOM THE ENFORCEMENT OF THE AMENDMENT, ALTERATION, WAIVER, DISCHARGE OR TERMINATION IS SOUGHT. RRW ----------------- LESSEE'S INITIALS SECTION 28. Truth in Leasing. THE AIRCRAFT, AS EQUIPMENT, BECAME SUBJECT TO THE MAINTENANCE REQUIREMENTS OF PART 121 OF THE FEDERAL AVIATION REGULATIONS ("FARS") UPON THE REGISTRATION OF THE AIRCRAFT WITH THE FAA. LESSOR CERTIFIES THAT DURING THE 12 MONTHS (OR PORTION THEREOF DURING WHICH THE AIRCRAFT HAS BEEN SUBJECT TO U.S. REGISTRATION) PRECEDING THE EXECUTION OF THIS LEASE, THE AIRCRAFT HAS BEEN MAINTAINED AND INSPECTED UNDER PART 121 OF THE FARS. LESSEE CERTIFIES THAT THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER PART 121 OF THE FARS FOR OPERATIONS TO BE CONDUCTED UNDER THE LEASE. UPON EXECUTION OF THIS LEASE, AND DURING THE TERM HEREOF, THE LESSEE, WHOSE NAME AND ADDRESS ARE SET FORTH IMMEDIATELY BELOW, ACTING BY AND THROUGH THE SIGNATORY HERETO, WHO EXECUTES THIS SECTION SOLELY IN HIS CAPACITY OF THE LESSEE SET FORTH BELOW HIS SIGNATURE, CERTIFIES THAT THE LESSEE SHALL BE RESPONSIBLE FOR THE OPERATIONAL CONTROL OF THE AIRCRAFT UNDER THE LEASE, UNLESS, THE AIRCRAFT IS SUBLEASED TO AN AIR CARRIER OR AIR TAXI OPERATOR CERTIFICATED UNDER PART 121 OR PART 135, RESPECTIVELY, OF THE FARS. THE LESSEE FURTHER CERTIFIES THAT IT UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FARS, PROVIDED HOWEVER, THAT THE LESSEE SHALL NOT BE DEEMED TO BE RESPONSIBLE FOR THE OPERATIONAL CONTROL OF THE AIRCRAFT FOR SO LONG AS THE AIRCRAFT IS IN POSSESSION OF ANY SUBLESSEE THAT IS CERTIFICATED UNDER PART 121 OR PART 135 OF THE FARS. AN EXPLANATION OF FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FARS CAN BE OBTAINED FROM THE NEAREST FEDERAL AVIATION FLIGHT STANDARD DISTRICT OFFICE, GENERAL AVIATION DISTRICT OFFICE OR AIR CARRIER DISTRICT OFFICE. IN WITNESS WHEREOF, the parties hereto have caused the Lease to be duly executed by the respective officers thereunto duly authorized. Lessor: Lessee: Fleet Capital Corporation Kitty Hawk Aircargo, Inc. By: /s/ PATRICE S. KANE By: /s/ RICHARD R. WADSWORTH ------------------------- ---------------------------- Print Name: Patrice S. Kane Print Name: Richard R. Wadsworth Title: Vice President Title: Vice President and CFO Date: December 26, 1996 Date: December 27, 1996 Address: 50 Kennedy Plaza, 5th Fl. Address: P.O. Box 612787 Providence, RI 02903 1515 W. 20th Street DFW International Airport, Texas 75261 This is Counterpart No. 1 of a total of 3 counterparts. Only Counterpart No. 1 shall be considered chattel paper for purposes of the Uniform Commercial Code and a security interest may be perfected only by possession of Counterpart No. 1. 28 29 EXHIBIT A Definitions (a) All References in the Lease to designated Sections and other subdivisions are to such designated Sections and other subdivisions only, and the words "herein," "hereof" and "hereunder" and other words of similar import refer to the Lease as whole and not to any particular Section or other subdivision. (b) Except as otherwise indicated, all the agreements and instruments defined herein or in the Lease shall mean such agreements and instruments as the same may from time to time be supplemented or amended, or as the terms thereof may be waived or modified to the extent permitted by, and in accordance with, the terms thereof. (c) The terms defined herein and in the Lease shall, for purposes of the Lease and all Lease Supplements, Schedules and Exhibits thereto, have the meanings assigned to them and shall include the plural as well as the singular as the context requires. (d) Unless otherwise specified, all financial terms used in this Lease shall be defined in accordance with GAAP and shall be determined on a consolidated basis for Parent. (e) The following terms shall have the following meanings for all purposes of the Lease: Basic Rent Date, Daily Lease Rate, Expiration Date, First Basic Rent Date, Last Basic Rent Date, Maximum Lessee Risk, Maximum Lessor Risk, Permitted Deductible, Primary Hangar Location, Purchase Option Price and Rent Commencement Date shall have the meanings set forth in Schedules 2, 2-A and 2-B to Lease Supplement No. 1 to the Lease. Abatements shall have the meaning set forth therefor in Section 7 of the Lease. Acceptance Date shall mean the date (which date shall be no later than the date designated as the "Last Acceptance Date" on Schedule No. 2 to Lease Supplement No. 1) on which Lessee has irrevocably and unconditionally accepted the Aircraft for lease under the Lease as evidenced by the execution and delivery of Lease Supplement No. 1 relating thereto dated such date. Additions shall have the meaning set forth in Section 11 of the Lease. Aircraft shall mean (i) the Airframe, (ii) the Engines, and (iii) to the extent applicable, the Records. Aircraft Marking shall mean the marking described on Lease Supplement No. 2. Airframe shall mean (i) the Aircraft described in Schedule No. 1 to Lease Supplement No. 1, and, unless the context requires otherwise, shall not include the Engines and (ii) any and all Parts from time to time incorporated in, installed on or attached to such Aircraft and any and all Parts removed therefrom so long as title thereto shall remain vested in Lessor in accordance with the applicable terms of this Lease after removal from the Aircraft. Basic Rent shall have the meaning set forth in Section 3 of the Lease. Basic Term shall mean the number of months set forth in Schedule No. 2 to Lease Supplement No. 1. Bill of Sale shall have the meaning set forth in Section 2 of the Lease. Business Day shall mean any day other than a Saturday, Sunday or other day on which banks located in Providence, Rhode Island are closed or are authorized to close. Casualty Value shall have the meaning set forth in Schedule No. 3 to Lease Supplement No. 1 to the Lease except that, in the case of an Event of Loss covered by the insurance required to be maintained by Lessee pursuant to Section 14(b) of the Lease (or which would have been covered by such insurance, had such insurance been maintained as required), Casualty Value shall mean the higher of fair market sales value (as determined by the Lessor in its sole discretion) or the value determined in accordance with Schedule No. 3 to Lease Supplement No. 1. 29 30 Civil Reserve Air Fleet Program shall mean the Civil Reserve Fleet Program administered by the United States Government pursuant to Executive Order No. 11490, as amended, or any substantially similar program. Claims shall have the meaning set forth in Section 15 of the Lease. Default shall mean an event or circumstance which, after the giving of notice or lapse of time, or both, would become an Event of Default. Defenses shall have the meaning set forth in Section 16 of the Lease. Engine shall mean (i) each of the engines described and listed by manufacturer's serial numbers in Schedule No. 1 to Lease Supplement No. 1 and originally installed on the Airframe covered by such Lease Supplement whether or not thereafter installed on such Airframe or any other airframe from time to time; (ii) any engine which may from time to time be substituted, pursuant to the applicable terms of this Lease, for an Engine leased hereunder and (iii) in each case set forth in clauses (i) and (ii) hereof, with any and all Parts incorporated in or installed on or attached to such Engine or engine or any and all Parts removed therefrom so long as title thereto shall remain vested in Lessor in accordance with the applicable terms of this Lease after removal from such Engine. The term "Engines" means, as of any date of determination, all Engines leased hereunder. Event of Default shall have the meaning set forth in Section 18 of the Lease. Event of Loss with respect to the Aircraft, the Airframe or any Engine shall mean any of the following events with respect to such property (i) loss of such property or the use thereof due to theft, disappearance, destruction, damage beyond 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 constructive total loss; (iii) the condemnation, confiscation or seizure of, or requisition of title to or use of, such property by the act of any government (foreign or domestic) or of any state or local authority or any instrumentality or agency of the foregoing other than use by the United States Government pursuant to the Civil Reserve Air Fleet Program where such use is in express compliance with the terms and conditions of this Lease ("Requisition of Use"); (iv) as a result of any rule, regulation, order or other action by any government (foreign or domestic) or governmental body (including, without limitation, the FAA or any similar foreign governmental body) having jurisdiction, the use of such property shall have been prohibited, or such property shall have been declared unfit for use, for a period of six (6) consecutive months, unless Lessee, prior to the expiration of six-month period, shall have undertaken and, in the opinion of the Lessor, shall be diligently carrying forward all steps which are necessary or desirable to permit the normal use of such property by Lessee or, in any event, if use shall have been prohibited, or such property shall have been declared unfit for use, for a period of twelve (12) consecutive months; (v) with respect to an Engine, the removal thereof from the Airframe for a period of six (6) months or longer, whether or not such Engine is operational other than as expressly permitted by Sections 11 (f) or 13(b) hereof, or (vi) such property shall be returned to the Manufacturer, other than for modification in the event of patent infringement or for repair or replacement (any such return being herein referred to as a "Return to Manufacturer"). The date of such Event of Loss shall be the date of such theft, disappearance, destruction, damage, Requisition of Use, prohibition, unfitness for use for the stated period, removal for the stated period or Return to Manufacturer. An Event of Loss with respect to the Aircraft shall be deemed to have occurred if an Event of Loss occurs with respect to the Airframe. An Event of Loss with respect to any Engine shall not, without loss of the Airframe, be deemed an Event of Loss with respect to the Aircraft. FAA shall mean the United States Federal Aviation Administration and/or the Administrator of the Federal Aviation Administration and the Department of Transportation, or any person, governmental department, bureau, authority, commission or agency succeeding the functions of any of the foregoing. FAA Counsel shall mean Messrs. Daugherty, Fowler & Peregrin, 204 North Robinson, 900 City Place, Oklahoma City, Oklahoma 73102, or such other counsel as Lessor may designate. Federal Aviation Act shall Subtitle VII of Title 49 of the United States Code, as amended and recodified. Final Inspection shall have the meaning set forth therefor in Section 12 of the Lease. 30 31 Financial Covenants Rider shall mean the Financial Covenants Rider set forth as Exhibit D hereto. GAAP shall mean generally accepted accounting principles, applied on a consistent basis, as set froth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are to be applied on a "consistent basis" when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period. Guarantor shall mean each of Kitty Hawk, Inc., a Delaware corporation, Aircraft Leasing, Inc., a Texas corporation and Kitty Hawk Charters, Inc. a Texas corporation. Guaranty shall mean the Guaranty described in Section 2 (I)(a)(xii) of the Lease. Impositions shall have the meaning set forth in Section 10 of the Lease. Late Payment Rate shall mean the lesser of a rate equal to 1.5% per month or the highest rate permitted by applicable law. The Late Payment Rate shall be computed on the basis of a 360 day year and a 30 day month. Lease Supplement shall mean a supplement to the Lease to be entered into on the Acceptance Date by Lessor and Lessee, which supplement shall be substantially in the form as attached to the Lease and identified as either Lease Supplement No. 1 or Lease Supplement No. 2 both of which are attached to the Lease and made a part thereof. Lessor's Cost shall have meaning set forth in Schedule No. 2 to Lease Supplement No. 1 to the Lease. Lessor's Liens shall mean any Liens created or granted by Lessor with respect to Lessor's purchase or financing of the Aircraft or resulting from claims against Lessor not related to Lessor's ownership of the Aircraft. Liens shall mean all liens, charges, security interests, and encumbrances of every nature and description whatever, including, without limitation, liens, charges, security interests and encumbrances with respect to Impositions, (other than Lessor's Liens) and rights of third parties under management, pooling, interchange, overhaul, repair or other similar agreements or arrangements. Major Checks shall have the meaning set forth therefor in Section 12 of the Lease. Manufacturer shall mean the manufacturers identified on Lease Supplement No. 2 and their respective successors and assigns. Option Notice shall have the meaning set forth therefor in Section 23 of the Lease. Parent shall mean Kitty Hawk, Inc., a Delaware corporation. Parts shall mean all appliances, avionics, parts, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature (other than Additions or complete Engines), which may from time to time be incorporated or installed in or attached to the Airframe or any Engine or so long as title thereto shall be vested in Lessor in accordance with the applicable terms of this Lease. Permitted Liens shall mean (a) the respective rights of others under agreements or arrangements to the extent expressly provided by the terms of Section 16 of the Lease, (b) Lessor's Liens and (c) Liens for taxes either not yet due or being contested by Lessee in good faith and inchoate materialmen's, mechanic's, workmen's, repairmen's, employee's or other like Liens arising in the ordinary course of business of Lessee for sums not yet delinquent or being contested in good faith (and for the payment of which adequate assurances and/or security have, in Lessor's sole judgment, been provided to Lessor) with due diligence and by appropriate proceedings, if counsel for Lessor shall have determined in his sole opinion that the nonpayment of any such tax or Lien or the contest of any such payment in such proceedings does not and will not adversely affect the title, property or rights of Lessor. 31 32 Permitted Sublessee shall mean any person, firm or entity controlling, controlled by or under common control with Lessee (or such other Person consented to in writing by Lessor, which consent shall be given, if at all, in the sole discretion of Lessor) which is (i) a U.S. Air Carrier, (ii) is not the subject of a petition, proceeding or final order under any bankruptcy, insolvency, liquidation or reorganization laws, or subject to any receivership or custodian proceedings or appointments under laws, or any other similar laws, in effect on the date any permitted sublease is entered into pursuant to this Lease, and (iii) which enters into a sublease in accordance with, and contains all the terms and conditions of, Section 16 hereof. Person shall mean any individual, partnership, corporation, trust, association, joint venture, joint stock company, limited liability company, limited liability partnership or non-incorporated organization or government or any department or agency thereof, or any other entity of any kind whatsoever. Purchase Documents shall mean the documents identified on Lease Supplement No. 2 and such other documents as Lessor shall consider necessary or advisable in order to convey to Lessor title to the Aircraft as contemplated under the Lease, which documents shall be in form and substance satisfactory to Lessor. Purchase Option shall have the meaning set forth therefor in Section 23 of the Lease. Records means any and all logs, manuals, certificates, date and inspection, modification, maintenance, engineering, technical and overhaul records (including all computerized data, records and materials of any kind whatsoever) with respect to the Aircraft, including, without limitation, all records required to be maintained by the FAA or any other governmental agency or authority having jurisdiction with respect to the Aircraft or any Manufacturer of the Aircraft (or any part thereof) with respect to the enforcement of warranties or otherwise, which Records shall be at all times the property of the Lessor after the Acceptance Date. Renewal Term shall have the meaning set forth in Section 23 of the Lease. Rent shall have the meaning set forth in Section 3 of the Lease. Replacement Parts shall have the meaning set forth in Section 11 of the Lease. Requisition of Use shall have the meaning set forth in the Event of Loss definition contained herein. Renewal Option shall have the meaning set forth therefor in Section 23 of the Lease. Return to Manufacturer shall have the meaning set forth in the Event of Loss definition contained herein. Sale Option shall have the meaning set forth therefor in Section 23 of the Lease. Section 1110 shall have the meaning set forth in Section 6 of the Lease. Supplemental Rent shall have the meaning set forth in Section 3 of the Lease. Termshall mean the Basic Term together with any Renewal Term entered into pursuant to Section 23 of the Lease. Termination Date shall have the meaning set forth therefor in Section 23 of the Lease. Test Flight shall have the meaning set forth therefor in Section 12 of the Lease. UCC shall mean the Uniform Commercial Code as in effect in the applicable jurisdiction. 32 33 U.S. Air Carrier means any United States air carrier as to which there is in force exemption authority under Part 298 issued by the U.S. Department of Transportation or a certificate issued pursuant to Section 401 of the Federal Aviation Act, and as to which there is in force an air carrier operating certificate issued pursuant to Part 121 of the regulations under such Federal Aviation Act, or which may operate as an air carrier by certification or otherwise under any successor or substitute provisions therefor or in the absence thereof. Warranty Bill of Sale shall mean a warranty bill of sale in the form of Exhibit B hereto. Initials: Lessee: RRW ------------------ Lessor: PSK ------------------ 33 34 LEASE SUPPLEMENT NO. 1 under AIRCRAFT LEASE dated as of December 30, 1996, by and between Fleet Capital Corporation, as lessor ("Lessor"), and Kitty Hawk Aircargo, Inc., as lessee ("Lessee"). (a) The Aircraft. Lessee hereby acknowledges, agrees and certifies that the Aircraft as set forth and described in Schedule No. 1 hereto is in Lessee's possession, has been inspected by Lessee to its complete satisfaction, has been found to be in good working order, repair and condition and fully equipped to operate as required under applicable law for its purpose, is of a size, design, capacity and manufacture selected by Lessee and suitable for Lessee's purposes, and is, as of the date set forth below, unconditionally, irrevocably and fully accepted by Lessee for lease under the Lease. Lessee hereby further unconditionally and irrevocably reaffirms its acknowledgments and agreements in the Lease. All capitalized terms used herein which are not otherwise defined herein shall have the meanings given to such terms in the Lease. (b) Representations by Lessee. Lessee hereby represents and warrants to Lessor that on the date hereof: (1) The representations and warranties of Lessee set forth in the Lease and all certificates and opinions delivered in connection therewith were true and correct in all respects when made and are true and correct as of the date hereof, with the same force and effect as if the same had been made on this date. (2) Lessee has satisfied or complied with all conditions precedent and requirements as set forth in the Lease and Lease Supplements which are required to be or to have been satisfied or complied with on or prior to the date thereof. (3) No Default or Event of Default under the Lease has occurred and is continuing on the date hereof. (4) Lessee has obtained, and there are in full force and effect, such insurance policies with respect to the Aircraft, as such term is defined in the Lease, as are required to be obtained under the terms of the Lease. (5) Lessee has furnished no equipment for the Aircraft other than as stated on Schedule No. 1 hereto or permitted as an Addition thereto pursuant to the Lease. (6) The facts, terms, information, description and costs set forth in the attached schedules hereto are true, complete, accurate and correct. (7) The Lease shall be deemed a "finance lease" under Section 2A-103 (g) of the UCC. Date of unconditional, irrevocable and final acceptance by Lessee: December __, 1996. IN WITNESS WHEREOF, Lessee has caused this Lease Supplement No. 1 to be duly executed by its officer thereunto duly authorized. Kitty Hawk Aircargo, Inc. By: /s/ RICHARD R. WADSWORTH ------------------------- Title: Vice President and CFO ---------------------- Date: December 27, 1996 34 35 SCHEDULE NO. 1 TO LEASE SUPPLEMENT NO. 1 Description of Aircraft 1978 Boeing B727-214 Advanced Freighter aircraft which consists of the following components: (a) Airframe bearing FAA Registration Mark 750US and manufacturer's serial number 21512. (b) three (3) Pratt & Whitney JT8D-15A engine(s) bearing manufacturer's serial numbers 708904, 708342 and 708909, (each of which has 750 or more rated takeoff horsepower or the equivalent of such horsepower). (c) Standard accessories and optional equipment and such other items fitted or installed on the Aircraft and as may be more particularly described hereinafter: See Schedule A which is attached hereto and made a part hereof. (d) Those items of Lessee furnished equipment described in a bill of sale or bills of sale therefor (copies of which may be appended hereto), delivered by Lessee to Lessor which constitute appliances and equipment which will be installed on the Aircraft. Initials: Lessee: RRW --------- Lessor: PSK --------- 35 36 SCHEDULE NO. 2 TO LEASE SUPPLEMENT NO. 1 Financial Terms Rent Commencement Date: February 1, 1997 Basic Term: twelve months commencing January 1, 1997 and through and including December 31, 1997 Basic Rent Dates: The first day of each and every calendar month from and including February 1, 1997 through January 1, 1998. (Upon each exercise by Lessee of its Renewal Option pursuant to Section 23 of the Lease, the Basic Rent Dates shall include the first day of each of the twelve calendar months commencing with the first day of February after the then current Expiration Date through the next January 1) First Basic Rent Date: February 1, 1997 Last Basic Rent Date: January 1, 1998 (upon each exercise by Lessee of its Renewal Option pursuant to Section 23 of the Lease, the definition of Last Basic Rent Date shall be amended by adding one calendar year to the Last Basic Rent Date then in effect.) Expiration Date: December 31, 1997 (upon each exercise by Lessee of its Renewal Option pursuant to Section 23 of the Lease, the definition of Expiration Date shall be amended by adding one calendar year to the then current Expiration Date.) Final Expiration Date: December 31, 2002 Renewal Terms: a series of five additional and consecutive twelve month terms commencing on the 12th, 24th, 36th, Basic Rent Dates Primary Hangar Location: DFW International Airport, Texas Lessee's Chief Executive Offices P.O. Box 612787 and Principal Place of Business: 1515 W. 20th Street DFW International Airport, Texas 75261 Acceptance Date: December __, 1996 Last Acceptance Date: December 31, 1996 Date of Last Financial Statements: August 31, 1996 Lessor's Cost: $9,391,188.00 Initials: Lessee: RRW _________ Lessor: PSK _________ 36 37 SCHEDULE NO. 2-A TO LEASE SUPPLEMENT NO. 1 Financial Terms (continued) Basic Rent: Basic Rent Dates 1 to 12 $128,444.80 Basic Rent Dates 13 to 36 $128,444.80 (during any applicable Renewal Term) Basic Rent Dates 37 to 72 $105,091.20 (during any applicable Renewal Term) Permitted Deductible: $500,000.00 per occurrence Initials: Lessee: RRW _________ Lessor: PSK _________ 37 38 SCHEDULE NO. 2-B TO LEASE SUPPLEMENT NO. 1 "Maximum Lessee Risk" shall mean an amount equal to the percentage of the Lessor's Cost of the Aircraft set forth below for each of the following Expiration Dates: Expiration Date: Amount: (expressed as a percentage of Lessor's Cost) ---------------- ------- December 31, 1997 79.52% December 31, 1998 71.28% December 31, 1999 62.33% December 31, 2000 55.72% December 31, 2001 48.18% December 31, 2002 40.00% "Maximum Lessor Risk" shall mean an amount equal to the percentage of the Lessor's Cost of the Aircraft set forth below for each of the following Expiration Dates: Expiration Date: Amount: (expressed as a percentage of Lessor's Cost) ---------------- ------- December 31, 1997 14.20% December 31, 1998 13.17% December 31, 1999 12.07% December 31, 2000 10.87% December 31, 2001 9.94% December 31, 2002 6.67% "Purchase Option Price" shall mean an amount equal to the percentage of the Lessor's Cost of the Aircraft set forth below for each of the following Expiration Dates: Expiration Date: Amount: (expressed as a percentage of Lessor's Cost) ---------------- ------- December 31, 1997 93.72% December 31, 1998 84.45% December 31, 1999 74.40% December 31, 2000 66.59% December 31, 2001 58.12% December 31, 2002 46.67% 38 39 SCHEDULE NO. 3 TO LEASE SUPPLEMENT NO. 1 CASUALTY VALUES The Casualty Value of the Aircraft for any Basic Rent Date shall be the amount set forth opposite such Basic Rent Date. BASIC RENT CASUALTY DATE VALUE ------ ------------- 1-12 $9,602,489.93 13-24 $8,801,421.39 25-36 $7,930,858.27 37-48 $6,987,043.87 49-60 $6,253,592.09 61-72 $5,458,158.47 Initials: Lessee: _________ Lessor: PSK --------- 39 40 LEASE SUPPLEMENT NO. 2 under AIRCRAFT LEASE dated as of December 30, 1996, by and between Fleet Capital Corporation, as lessor ("Lessor"), and Kitty Hawk Aircargo, Inc., as lessee ("Lessee"). Manufacturer of Airframe: Boeing Manufacturer of Engines: Pratt & Whitney Purchase Documents: 1. Aircraft Purchase Agreement between Aircraft Leasing, Inc. ("ALI") and First Security Bank National Association ("First Security"). 2. First Security's Warranty Bill of Sale to ALI. 3. First Security's FAA Bill of Sale to ALI. 4. ALI's Warranty Bill of Sale to Lessee dated December __, 1996. 5. ALI's FAA Bill of Sale to Lessee dated December __, 1996. 6. Lessee's Warranty Bill of Sale to Lessor dated December __, 1996 in the form of Exhibit B hereto. 7. FAA Bill of Sale transferring title to the Aircraft from Lessee to Lessor. 8. Invoices for the Aircraft, including the Engines, showing ALI and/or Lessee as the purchasers thereof, all other above referenced contracts and evidence that such invoices have been are paid in full. Aircraft Marking (Referenced in Section 11 of the Lease): Two-inch by four-inch plaque to be maintained in cockpit and affixed in conspicuous position stating: "This property is Owned by and Leased from Fleet Capital Corporation, 50 Kennedy Plaza, Fifth Floor, Providence, Rhode Island 02903. Any removal, alteration, disposal or other change in the condition or location of this property must be approved by the Owner-Lessor." Similar markings to be permanently affixed to each Engine. IN WITNESS WHEREOF, the parties hereto have each caused this Lease Supplement No. 2 to be duly executed by their respective officers, thereunto duly authorized. FLEET CAPITAL CORPORATION, AS LESSOR By: /s/ PATRICE S. KANE --------------------------------- Name: Patrice S. Kane Title: Vice President Date: December __, 1996 KITTY HAWK AIRCARGO, INC., AS LESSEE By: /s/ RICHARD R. WADSWORTH --------------------------------- Name: Richard R. Wadsworth Title: Vice President and CFO Date: December 27, 1996 40 41 EXHIBIT B TO AIRCRAFT LEASE AGREEMENT WARRANTY BILL OF SALE Kitty Hawk Aircargo, Inc. (the "Seller"), in consideration of the sum of __________________________________ and __/100 Dollars ($____________) paid by Fleet Capital Corporation (the "Buyer"), receipt of which is acknowledged, hereby grants, sells, assigns, transfers and delivers to Buyer the aircraft described below together with the engines installed thereon and all appliances, parts, instruments, appurtenances, accessories, furnishings, avionics, components and other equipment of whatever nature installed on said aircraft and all logbooks, manuals, certificates, data and inspection, modification, maintenance, engineering, technical, overhaul and all other books and records (including all computerized data, records and materials) as pertain to the operation and maintenance of such aircraft (all of the foregoing hereinafter collectively referred to as the "Aircraft"), along with whatever claims and rights Seller may have against the manufacturer and/or vendor of the Aircraft (collectively, the "Vendor"), including, but not limited to, all warranties and representations. At Buyer's request, Seller will cause the Vendor to execute an Acknowledgment in form and substance satisfactory to Buyer in its sole discretion. DESCRIPTION OF AIRCRAFT Boeing B727-214 Advanced Freighter aircraft bearing FAA Registration Mark N_____ and manufacturer's serial number _____ and three (3) Pratt & Whitney JT8D-____ engines, respectively, bearing manufacturer's serial numbers. ____, ______ and (See also Schedule A attached hereto and made a part hereof for further description of the Aircraft.) Seller represents, warrants and agrees to Buyer that (1) Seller is the lawful owner of the full title to the Aircraft and that Buyer will acquire by the terms of this Bill of Sale good and full title to the Aircraft free and clear of all mortgages, leases, security interests, claims, charges, liens and encumbrances of any kind whatsoever; (2) Seller has the right to sell the Aircraft as aforesaid; (3) Seller shall warrant and defend title to the Aircraft and indemnify Buyer against the claims of any person, party, firm, corporation or entity of any kind whatsoever and (4) the Aircraft had been delivered to Seller, and has been delivered to Buyer, in good order and condition and conforms to the specifications and the requirements and standards applicable thereto. Seller agrees to save and hold harmless Buyer from and against any and all foreign, Federal, state, municipal and local license fees and taxes of any kind or nature, including, without limiting the generality of the foregoing, any and all excise, personal property, privilege, use and sales taxes, and from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions and suits, including, without limitation, attorney's fees, resulting therefrom and imposed upon, incurred by or asserted against Buyer as a consequence of the sale of the Aircraft to the Buyer. Seller agrees and acknowledges that the terms and conditions of this Bill of Sale, including, without limitation, all representations, warranties and agreements for the benefit of Buyer, shall survive the delivery of the Aircraft and the delivery, execution and recording of this or any Federal Aviation Administration Bill of Sale. IN WITNESS WHEREOF, Seller has executed this Bill of Sale this _______day of December, 1996 SELLER: Kitty Hawk Aircargo, Inc. By: ------------------------- Title: ---------------------- 41 42 EXHIBIT C-1 TO AIRCRAFT LEASE OPINION LETTER (Lessee) December __, 1996 Fleet Capital Corporation 50 Kennedy Plaza Providence, Rhode Island 02903 Re: Aircraft Lease Gentlemen: We have acted as counsel for ____________________ (hereinafter called the "Lessee"), a ____________________ corporation, in connection with the transaction between the Lessee and Fleet Capital Corporation, a Rhode Island corporation (hereinafter called "Lessor"), whereby the Lessee will lease from the Lessor, a _______________ aircraft, Model No. ______________, Serial No. _______________, FAA Registration No. N _______, equipped with ______________ (_) __________ engines, Model No. __________, manufacturer's serial numbers __________ and __________, (hereinafter collectively called the "Aircraft") under an Aircraft Lease between the Lessee and the Lessor dated as of _______________, 19 ___, (said Aircraft Lease together with all Lease Supplements and Exhibits thereto from time to time collectively referred to as the "Lease"), upon and subject to the terms and conditions of the Lease. All capitalized terms used herein which are not otherwise defined herein shall have the meanings assigned to such terms in the Lease. (Please insert a paragraph setting forth in detail the relationship and length of association of Counsel with the Lessee and a description of the review conducted by Counsel which shall, list among other things, the items reviewed and the inquiries and investigations involved in making the representations listed below.) It is our opinion that: 1. Lessee is a corporation duly organized, validly existing and in good standing under the laws of the State of ____________, and is qualified to do business in each jurisdiction in which such qualification is necessary in order for Lessee to carry on its business and to perform its obligations under the Lease, and is in good standing under the laws of each jurisdiction in which it is so qualified. 2. Lessee has the corporate power and authority to execute, deliver and perform the Lease and to lease the Aircraft from Lessor thereunder. 3. The leasing of the Aircraft from Lessor by Lessee, the execution and delivery of the Lease, the applicable FAA documents, Purchase Documents and other related instruments, documents and agreements, and the compliance by the Lessee with the terms thereof, and the payment and performance by Lessee of all of its obligations thereunder (a) have been duly and legally authorized by appropriate corporate action taken by Lessee (b) are not in contravention of, and will not result in a violation or breach of, any of the terms of Lessee's certificate of incorporation (or equivalent document) its by-laws, or of any provisions relating to shares of the capital stock of Lessee, and (c) will not violate or constitute a breach of any provision of law, any order of any court other governmental body, agency, authority or instrumentality or any indenture, agreement or other instrument to which Lessee is a party, or by or under which Lessee or any of Lessee's property is bound, or be in conflict with, result in a breach of, or constitute (with due notice and/or lapse of time) a default under any such indenture, agreement or any instrument, or result in the creation or imposition of any Lien upon any of Lessee's property or assets. 4. The Lease, the Purchase Documents, the applicable FAA documents and related instruments, documents and agreements with respect thereto and the Aircraft have been executed by the duly authorized officer or officers of Lessee and delivered to Lessor, and constitute the 42 43 legal, valid and binding obligations of Lessee enforceable in accordance with the respective terms thereof. 5. Neither the execution and delivery of the Lease, the Purchase Documents, the applicable FAA documents and related instruments, documents and agreements with respect thereto and the Aircraft, nor the payment and performance by Lessee of all of its obligations under the foregoing documents, require the consent or approval of, the giving of notice to, or the registration, filing or recording with, or the taking of any other action in respect of, the Federal Aviation Administration, the Department of Transportation or any other federal, state, local or foreign government or governmental authority or agency, except for the registration, recording and filing referred to herein. 6. No mortgage, deed of trust, or other Lien which now covers or affects, or which may hereafter cover or affect, any property or interest therein of Lessee, now attaches or hereafter will attach to the Aircraft, the Airframe or any Engine, or in any manner affects or will affect adversely Lessor's right, title and interest therein. 7. There is no litigation or other proceedings now pending, or to the best of our knowledge, threatened, against the Lessee, in any court or before any regulatory commission, board or other administrative governmental agency, authority, body or instrumentality which would directly or indirectly adversely affect or impair the title of Lessor to the Aircraft, or which, if decided adversely to Lessee, would materially adversely affect the business operations or financial condition of Lessee. 8. Except for the (I) registration of the Aircraft pursuant to the Federal Aviation Act, (II) the filing and recording of (a) the Lease and (b) the Bill of Sale for the Aircraft from the Lessee, as seller of the Aircraft to Lessor pursuant to the Federal Aviation Act and (III) the filing of the Uniform Commercial Code Financing Statements executed by Lessee in connection with the execution of the Lease, no further action, including any filing or recording of any other documents, is necessary or advisable in order to establish and perfect Lessor's title to and interest in, the Aircraft as against Lessee and/or third parties in any applicable jurisdiction. 9. Lessee is a "citizen of the United States" within the meaning of the Federal Aviation Act. 10. Lessor will acquire title to the Aircraft to be sold and leased back free and clear of all liens and encumbrances and claims of any present or future creditors of the Lessee. The Bills of Sale covering the Aircraft will grant and convey to Lessor full legal title and ownership in and to the Aircraft. Without limiting the generality of the foregoing, the retention of possession by the Lessee of the Aircraft following the sale of the Aircraft to, and the lease back of the Aircraft from, Lessor, shall not be deemed fraudulent or void as against any present or future creditor of the Lessee under the laws of the jurisdiction in which the Aircraft is now, or will at the time of such sale and leaseback be, located, nor would any subsequent bona fide purchaser from the Lessee of the Aircraft, in the event of any attempted subsequent sale thereof by the Lessee, acquire any title to or rights in the Aircraft superior to Lessor's title to and rights in the Aircraft. Very truly yours, 43 44 EXHIBIT C-2 TO AIRCRAFT LEASE OPINION LETTER (Guarantor) December __, 1996 Fleet Capital Corporation 50 Kennedy Plaza Providence, Rhode Island 02903 RE: ___________________ Gentlemen: We have acted as general counsel for ________, a ________ corporation, ("Guarantor"), an affiliate of Kitty Hawk Aircargo, Inc. ("Obligor"), in connection with the preparation, execution, and delivery of the Guaranty Agreement ("Guaranty"), by Guarantor and which Guaranty will be delivered in connection with the Aircraft Lease dated December __, 1996 between Fleet Capital Corporation ("Fleet"), as lessor, and Obligor, as lessee, (the "Agreement") and the related transactions contemplated thereby. Terms not otherwise defined herein shall have the defined meanings set forth in the Agreement. We are familiar with the Guarantor, its affairs, and its charters, by-laws, and corporate records. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such records, instruments, decisions, certificates, and documents, have made such inquiries as to questions of fact of officers and representatives of and Guarantor and have made such examinations of laws, rules, regulations, orders, decrees, writs, judgments, awards, injunctions, and the like, as are necessary and appropriate for purposes of giving the opinions hereinafter expressed. Based upon the foregoing, it is our opinion: 1. That Guarantor is duly organized, validly existing and in good standing under the laws of _________. Guarantor has the necessary authority and power to own its assets and to transact the business in which it is engaged. Guarantor is fully licensed and duly qualified to do business in each jurisdiction in which the conduct of its business and the ownership of its assets requires such qualification, including every jurisdiction where such licensing or qualification is or will be required for the purpose of enforcing Fleet's rights under the Guaranty. 2. That Guarantor has full power, authority, and legal right to execute and deliver the Guaranty and to perform its obligations thereunder. 3. That no consent of any other party (including any stockholders, trustees or holders of indebtedness), and no consent, license, approval or authorization of, exemption by, or registration or declaration with, any governmental body, authority, bureau or agency is required in connection with the execution, delivery or performance by Guarantor of the Guaranty or the validity or enforceability of the Guaranty. 4. That (A) the execution, delivery and performance by Guarantor of the Guaranty do not and will not violate any provision of any applicable law or regulation or of any judgment, award, order, writ or decree of any court or governmental instrumentality, will not violate any provision of its charter or by-laws and will not violate any provision of, or cause a default under, any mortgage, indenture, contract, agreement or other undertaking to which Guarantor is a party, or which purports to be binding upon Guarantor or upon any of its assets; and (B) the execution, delivery, and performance by Guarantor of the Guaranty will not result in the creation or imposition of any lien or other encumbrance on any of the assets of Guarantor. 5. That the Guaranty has been duly authorized, executed, and delivered by Guarantor and constitutes a legal, valid, and binding obligation of Guarantor enforceable in accordance with its terms. 44 45 6. That there is no action, suit, investigation or proceeding (whether or not purportedly on behalf of Guarantor) pending or threatened against or effecting Guarantor or any of its assets (A) which involves the Guaranty or any of the Engines or any of the transactions contemplated by the Agreement or (B) if which adversely determined could have an adverse effect upon the Guaranty or any of the Engines or any of the transactions contemplated by the Agreement or a material adverse effect on the business, operations, or financial condition of Guarantor. 7. That (A) the Guarantor has received reasonably equivalent value and adequate and sufficient consideration in exchange for the giving of the Guaranty (B) the Guarantor was not insolvent on the date of the execution by Guarantor of the Guaranty and did not become insolvent as a result of the execution by Guarantor of the Guaranty, (C) the Guarantor has sufficient capital to perform its obligations under the Guaranty and (D) the performance of the obligations by Guarantor under the Guaranty will not cause the Guarantor to exceed its ability to pay its debts as they mature. Very truly yours, 45 46 EXHIBIT D TO AIRCRAFT LEASE (To be omitted from FAA filing copy) FINANCIAL COVENANTS RIDER Throughout the Term, the following minimum financial ratios shall be met by the Parent on a consolidated basis. Each of the following ratios shall be calculated at the end of each fiscal quarter of the Parent for the then previous four fiscal quarters of Parent. A. Debt Service Coverage Ratio shall be equal to or greater than 1.25 to 1.00. B. Leverage Ratio shall be less than or equal to 3.25 to 1.00. C. Senior Debt to Cash Flow Ratio shall be less than or equal to 5.00 to 1.00. Lessee shall provide Lessor with written notice of any change, modification, amendment, extension, renewal, transfer, compromise or discharge to the "Senior Debt to Cash Flow Ratio," "Debt Service Coverage Ratio" or "Leverage Ratio" set forth in the Credit Agreement ("Credit Modification"). Any such Credit Modification which raises any or all of the above referenced ratios in the Credit Agreement shall, for purposes of this Lease, automatically raise the corresponding Debt Service Coverage Ratio, Leverage Ratio and/or Senior Debt to Cash Flow Ratio set forth above to the levels then set forth in the Credit Agreement. Lessee hereby authorizes Lessor to take such actions as are necessary to document the foregoing amendments to the above referenced ratios without the need for Lessee's signature or consent thereto. ADDITIONAL DEFINITIONS: Credit Agreement shall mean that certain Amended and Restated Credit Agreement dated as of August 14, 1996 among Lessee and Guarantors, as borrowers and guarantors, as the case may be, Skyfreighters, Inc. , as a party, and Wells Fargo Bank (Texas), National Association and certain other lenders named therein. Currently Maturing Long Term Debt shall mean that portion of Debt which is payable within twelve (12) months of Parent's last fiscal quarterly or annual financial statement, as the case may be. Debt shall mean Parent's (a) indebtedness, liabilities and obligations for borrowed money and/or capitalized leases, (b) indebtedness, liabilities and obligations evidenced by bonds, notes, debentures or other similar instruments and (c) indebtedness, liabilities and obligations to pay the deferred purchase price of goods or services, except trade accounts payable arising in the ordinary course of business that are note past due by more than ninety (90) days. Debt Service Coverage Ratio shall mean Parent's net income plus depreciation plus amortization plus the taxable equivalent of non-recurring items divided by Currently Maturing Long Term Debt. For purposes of this definition, the term "taxable equivalent of non-recurring items" shall mean the pre-tax expenses of non-recurring accounting changes and restructuring charges multiplied by Parent's then current combined effective tax rate. Debt to Cash Flow Ratio shall mean Parent's Senior Debt divided by EBITDA. EBITDA shall mean Parent's earnings before interest, taxes, depreciation and amortization. Leverage Ratio shall mean the ratio of Parent's total liabilities divided by Parent's tangible net worth , which calculation shall be made in accordance wit GAAP. Senior Debt shall mean that portion of Parent's (a) indebtedness, liabilities and obligations for borrowed money and/or capitalized leases and (b) indebtedness, liabilities and obligations evidenced by bonds, notes, debentures or other similar instruments which mature by their terms on a date more than one year after the original creation thereof, including, without limitation, any debt evidenced by the Credit Agreement or which would be classified as "long-term indebtedness" on the balance sheet of Parent in accordance with GAAP. 46 EX-10.6 4 AMENDMENT NO.6 DATED 12/96-THE PURCHASE AGREEMENT 1 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION EXHIBIT 10.6 AMENDMENT SIX TO THAT CERTAIN PURCHASE AGREEMENT DATED OCTOBER 22, 1992 BETWEEN FEDERAL EXPRESS CORPORATION AND POSTAL AIR, INC. THIS AMENDMENT TO THE PURCHASE AGREEMENT ("Amendment #6") is entered into by and between Federal Express Corporation ("FedEx") and Kitty Hawk Air Cargo, Inc., as successor-in-interest to Postal Air, Inc., and Aircraft Leasing, Inc., an affiliate of Kitty Hawk Air Cargo, Inc. ("Buyer"), and amends the Purchase Agreement dated October 22, 1992 (and as amended by Amendments One, Two, Three, Four and Five dated November 17, 1992, February, 1993, June 11, 1993, May 10, 1994, and September 29, 1995, respectively, the "Purchase Agreement"), by and between FedEx and Buyer. Terms capitalized herein which are not otherwise defined in this Amendment shall have the meanings set forth for such terms as provided in the Purchase Agreement unless the context clearly requires otherwise. RECITALS 1. Buyer has purchased and taken Delivery of Five Aircraft Kits pursuant to the Agreement; 2. Buyer holds open firm orders for two (2) Aircraft Kits and options for six (6) Aircraft Kits under the Agreement; 3. Buyer and FedEx wish to amend the Agreement to provide for additional Firm Order Aircraft Kits and options for additional Aircraft Kits for Delivery to Buyer between January 7, 1997 and May 31, 1999 in accordance with the terms and conditions of the Agreement; NOW, THEREFORE, in consideration of the foregoing, and subject to the terms and conditions set forth herein, the parties hereto agree as follows: 1. Articles 4 and 6 of the Agreement shall be replaced in their entirety with the revised terms attached hereto as Attachment I to this Amendment #6. 2. With respect to Firm Order Kits #6 through #15, Exhibit C of the Purchase Agreement shall be replaced in its entirety with the new Delivery Schedule in Attachment II to this Amendment #6. 3. With respect to Firm Order Kits #6 through #15, Exhibit D shall be replaced in its entirety with Attachment III to this Amendment #6. 4. All Option Kits provided under Amendment #5, Exhibit D shall be canceled and replaced with the option grant provided in Attachment II to this Amendment #6. 5. Exhibit F (Escalation Formula) shall be modified as follows: A. The formula term for Pbase shall be defined as follows: Page 1 of 2 2 Pbase = Base Kit Price (December 1996 dollars). B. The formula term for Ppw1 shall be defined as follows: Ppw1 = Pratt & Whitney (PW) Commercial Parts Support Price List prices as of December 1, 1996. C. The formula for CPIbase shall be modified as follows: CPIbase = U.S. Government Consumer Price Index for all urban areas as of December 1996. 6. Except as otherwise specified in this Amendment, all terms and conditions of the Purchase Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have signed this Amendment on this 6th day of December, 1996. FEDERAL EXPRESS CORPORATION ("FedEx") By: /s/ JAMES R. PARKER Name: James R. Parker Title: Vice President KITTY HAWK AIR CARGO, INC. ("Buyer") By: /s/ TILMON J. REEVES Name: Tilmon J. Reeves Title: President AIRCRAFT LEASING, INC. ("Buyer") By: /s/ RICHARD R. WADSWORTH, JR. Name: Richard R. Wadsworth, Jr. Title: President Page 2 of 2 3 ATTACHMENT #1 TO AMENDMENT #6 ARTICLE 4 INDEMNIFICATION SECTION 4.1 - BUYER'S INDEMNIFICATION. (a) EXCEPT FOR THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OR MALICIOUS ACTS OF THE PARTIES INDEMNIFIED IN THIS SECTION, BUYER SHALL BE SOLELY LIABLE FOR, AND SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS, FEDEX, ITS OFFICIALS, DIRECTORS, AGENTS AND EMPLOYEES FROM AND AGAINST ALL LIABILITIES, DAMAGES, LOSSES, COSTS AND EXPENSES OF ANY KIND WHATSOEVER FOR (1) BODILY INJURIES TO OR DEATHS OF PERSONS, AND (2) LOSS OR DAMAGE TO, OR LOSS OF USE OF PROPERTY, INCLUDING THE AIRCRAFT, WHETHER OR NOT CAUSED BY OR ARISING IN TORT OR OCCASIONED IN WHOLE OR IN PART BY THE FAULT OR NEGLIGENCE OF FEDEX, ITS OFFICERS, DIRECTORS, AGENTS, AND EMPLOYEES OR OF ITS VENDORS, CONTRACTORS, SUBCONTRACTORS OR CONSULTANTS. BUYER SPECIFICALLY AGREES TO INDEMNIFY, DEFEND AND HOLD HARMLESS FEDEX, ITS OFFICERS, DIRECTORS, EMPLOYEES AND AGENTS FROM AND AGAINST ANY CLAIM ARISING FROM OR RELATED TO THE NOISE CREATED BY THE OPERATION OF AIRCRAFT UPON WHICH THE KIT IS INSTALLED. (b) If any claim for damages, losses, costs and expenses is made or suit is brought against any indemnified party, the liability for which has been expressly assumed by Buyer, the party against whom such claim is so made or suit is so brought shall promptly notify Buyer, and Buyer shall have the right to assume and conduct the defense thereof or to effect any settlement which it, in its opinion, deems proper. Page 1 of 2 4 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ARTICLE 6 INSURANCE SECTION 6.1 - BUYER'S INSURANCE. Buyer shall, at all times from the date of Delivery of the first Kit hereunder, at Buyer's own expense, carry and maintain in effect with respect to the Aircraft upon which a Kit is installed, all-risk aircraft hull, third-party public liability and property damage insurance covering the liability assumed by Buyer under this Agreement. Such coverage shall be in an amount (i) as to aircraft hull insurance, at the values set by Buyer under its insurance policy, and (ii) as to third-party public liability and property damage insurance, $[BLACKED-OUT] combined single limit. Additionally, such hull insurance shall contain a waiver of subrogation provision in favor of FedEx, its officers, directors, agents and employees, and FedEx vendors, subcontractors and consultants, and such public liability and property damage insurance shall name FedEx, its officers, directors, agents and employees and FedEx's vendors, subcontractors and consultants as additional insureds. Page 2 of 2 5 AMENDMENT #6, ATTACHMENT II EXHIBIT C TO THAT CERTAIN PURCHASE AGREEMENT BETWEEN FEDERAL EXPRESS CORPORATION ("FEDEX") AND KITTY HAWK AIR CARGO, INC. AND AIRCRAFT LEASING, INC., AS SUCCESSORS IN INTEREST TO POSTAL AIR, INC. ("BUYER") DATED OCTOBER 22, 1992 AIRCRAFT KIT DELIVERY SCHEDULE _
AIRCRAFT MODEL/ SCHEDULED KIT NO. TYPE OF KIT DELIVERY DATE ------- ----------- ------------- 6* 727-200 / Lightweight On or about 3-Jan-97 7* 727-200 / Heavyweight On or about 6-Feb-97 8 727-200 / Heavyweight On or about 6-Feb-97 9 TBD/TBD Between 4-Feb-97 & 31-May-99 10 TBD/TBD Between 4-Feb-97 & 31-May-99 11 TBD/TBD Between 4-Mar-97 & 31-May-99 12 TBD/TBD Between 4-Apr-97 & 31-May-99 13 TBD/TBD Between 4-Apr-97 & 31-May-99 14 TBD/TBD Between 4-Apr-97 & 31-May-99 15 TBD/TBD Between 4-Apr-97 & 31-May-99
* Note: Firm Order Kits #6 & #7 are carried over from Amendment #5. Buyer shall provide FedEx with the FAA-approved flight manual pages referencing the Aircraft serial number, engine power rating, the maximum takeoff and landing weights for the Aircraft on which each Kit shall be installed, and copies of Airframe major repairs and installed supplemental type certificates, not later than sixty (60) days prior to the delivery date established above. Buyer acknowledges its understanding that the normal FAA processing time for the Stage 3 aircraft flight manual supplement is 30-60 days and that FedEx shall not be liable for delays resulting from not receiving the above referenced information at least (60) days prior to each scheduled Kit Delivery Date. Unless otherwise specified, Buyer shall also provide FedEx with at least (60) days notice of whether the double chamfer-cut C-1 fan blades should be delivered concurrent with Delivery of each Kit or Page 1 of 2 6 at a later date upon (30) days notice from Buyer (i.e., to facilitate the 5- day return requirement on the removed C-1 fan blades). Unless otherwise specified, Heavyweight Kit Buyers shall also provide FedEx with at least 180 days notice of whether -15, -15A, -17 or -17A engines will be installed. Page 2 of 2 7 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AMENDMENT #6, ATTACHMENT III EXHIBIT D TO THAT CERTAIN PURCHASE AGREEMENT BETWEEN FEDERAL EXPRESS CORPORATION ("FEDEX") AND KITTY HAWK AIR CARGO, INC. AND AIRCRAFT LEASING, INC. AS SUCCESSORS IN INTEREST TO POSTAL AIR, INC. ("BUYER") DATED OCTOBER 22, 1992 _ PURCHASE PRICE AND PAYMENT SCHEDULE Notwithstanding anything in this Agreement to the contrary, the entire Purchase Price for any Kit must be paid not later than the Delivery Date of such Kit. I. PURCHASE PRICE AND DELIVERY OF KITS A. FIRM ORDER KIT. The 1997 Base Purchase Price for the ten (10) Firm Order Aircraft Kits described in Exhibit C shall be [BLACKED-OUT] Dollars ($[BLACKED-OUT]) per 727-200 Lightweight Kit and [BLACKED- OUT] Dollars ($[BLACKED-OUT]) per 727-200 Heavyweight Kit. For any deliveries after December 31, 1997, the above 1997 Base Kit Price shall be adjusted according to the formula outlined in Exhibit F. B. OPTION KITS. In addition to the Kits described in paragraph I.A above, Buyer shall be granted five (5) options exercisable upon at least 180 days written notice for delivery on dates to be mutually agreed upon between March 1, 1997 and May 31, 1999, subject to availability. Option Kits shall be available only following delivery of all Firm Order Kits under the Agreement. The 1997 Base Purchase Price for Option Kits shall be as follows: 727-200 727-200 Lightweight Heavyweight Kit Kit ----------------- ------------------ Option Kit #1-#5 $[BLACKED-OUT] $[BLACKED-OUT] Page 1 of 3 8 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION For deliveries after December 31, 1997, the above Base Purchase Price shall be adjusted according to the formula outlined in Exhibit F. All costs of meeting the Configuration Specification in Exhibit A shall be for Buyer's account. C. CREDITS. FedEx shall extend to Buyer a credit of $[BLACKED-OUT] per engine if such Engine is already installed with Pratt & Whitney double chamfer cut C-1 fan blades or is in compliance with Pratt & Whitney service bulletin 6072 (as appropriate). These credits shall only be available if specifically requested by Buyer prior to Kit Delivery. D. DELIVERY OF KITS. All Kits shall be delivered F.O.B. Memphis, Tennessee. With respect to Option Kits, and Firm Order Kits which do not have a specific Delivery Date, Buyer shall provide FedEx with at least 180 days written notice of the date delivery of each Kit is requested and the type of Kit being ordered. Subject to delivery position availability, FedEx shall confirm delivery position availability to Buyer in writing within five (5) Business Days of Buyer's request. E. TRANSFER OF KITS BETWEEN BUYER'S AIRCRAFT. Following Aircraft Kit Installation on an Aircraft, Buyer shall be permitted, upon 210 days written notice to FedEx, to purchase Transfer Kits, as available from FedEx, to allow the transfer of the Stage 3 Kit engines from such Aircraft to another Buyer-owned or operated Aircraft, subject to the payment of the following transfer fees: i. The 1997 Base Purchase Price of each Transfer Kit to allow transfer of a Lightweight Kit shall be [BLACKED-OUT] Dollars ($[BLACKED-OUT]). ii. The 1997 Base Purchase Price of each Transfer Kit to allow the transfer of a Heavyweight Kit shall be [BLACKED-OUT] Dollars ($[BLACKED-OUT]). The Transfer Kit Prices in this paragraph shall be escalated, as appropriate, in accordance with the formula in Exhibit F. All costs of meeting the Configuration Specification in Exhibit A shall be at Buyer's expense. II. PAYMENT AND DEPOSIT SCHEDULE A. DEPOSITS i. INITIAL DEPOSITS: FedEx acknowledges its previous receipt of Buyer's initial $[BLACKED-OUT] per Kit deposits for Firm Order Kits #6 and #7. Upon contract execution, Buyer shall pay to FedEx a non-refundable deposit of [BLACKED-OUT] Dollars ($[BLACKED-OUT]) per Kit for Firm Order Kits #6 and #7, [BLACKED-OUT] Dollars ($[BLACKED-OUT]) per Kit for Firm Order Kit #8, and [BLACKED-OUT] Dollars ($[BLACKED-OUT]) per Kit for Firm Order Kits #9 through #15 as an advance payment applicable to the Purchase Price. ii. PROGRESS PAYMENTS FOR FIRM ORDER KITS #9 THROUGH #15 ONLY: At least 180 days prior to the scheduled Delivery Date of each Firm Order Kit, Buyer shall pay to FedEx a non- refundable deposit of [BLACKED-OUT] Dollars ($[BLACKED-OUT]) as an advance payment applicable to the Purchase Price at Delivery. Page 2 of 3 9 BLACKED-OUT TEXT OMITTED AND SEPARATELY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION iii. OPTION KITS: Upon exercising each option pursuant to paragraph I.B above, Buyer shall pay to FedEx a non- refundable deposit of [BLACKED-OUT] Dollars ($[BLACKED-OUT]) as an advance payment applicable to the Purchase Price at Delivery. iv. TRANSFER KITS: Upon ordering Transfer Kits, Buyer shall pay to FedEx a non-refundable deposit of [BLACKED-OUT] Dollars ($[BLACKED-OUT]) for each Lightweight Transfer Kit and [BLACKED-OUT] Dollars ($[BLACKED-OUT] ) for each Heavyweight Transfer Kit. B. PAYMENT OF BALANCE OF PURCHASE PRICE Upon delivery of each Kit or Transfer Kit to Buyer, Buyer shall pay FedEx the balance of the Kit price. All payments shall be made by wire transfer in immediately available U.S. funds to the account of Federal Express Corporation, account number 07701985, at Citibank N.A., New York, NY (ABA number 021000089). Page 3 of 3 EX-10.7 5 AIRCRAFT LEASE 1 EXHIBIT 10.7 AIRCRAFT LEASE (N751US) DATED AS OF DECEMBER 30, 1996 between FLEET CAPITAL CORPORATION as Lessor and KITTY HAWK AIRCARGO, INC. as Lessee This is Counterpart No. 1 of a total of 3 counterparts. Only Counterpart No. 1 shall be considered chattel paper for purposes of the Uniform Commercial Code and a security interest may be perfected only by possession of Counterpart No. 1. TABLE OF CONTENTS SECTION 1 Acceptance and Lease of Aircraft SECTION 2 Conditions to Closing; Closing Covenants SECTION 3 Term and Rent SECTION 4 Acceptance SECTION 5 Covenants and Warranties SECTION 6 Representations, Warranties and Agreements of Lessee SECTION 7 Net Lease SECTION 8 Return of Aircraft SECTION 9 Liens SECTION 10 Taxes SECTION 11 Registration, Maintenance and Operation; Compliance and Use; Replacement Parts; Additions; Aircraft Marking SECTION 12 Inspection SECTION 13 Loss or Destruction SECTION 14 Insurance SECTION 15 Indemnification SECTION 16 Assignment and Sublease SECTION 17 [Intentionally Left Blank] SECTION 18 Events of Default SECTION 19 Remedies SECTION 20 Performance of Obligations of Lessee by Lessor SECTION 21 Intent SECTION 22 Notices SECTION 23 End of Term Options SECTION 24 [Intentionally Left Blank] SECTION 25 Transaction Expenses SECTION 26 Miscellaneous SECTION 27 Amendments SECTION 28 Truth in Leasing EXHIBIT A - Definitions Lease Supplement No. 1 Schedule No. 1 to Lease Supplement No. 1 Schedule No. 2 to Lease Supplement No. 1 Schedule No. 2-A to Lease Supplement No. 1 Schedule No. 2-B to Lease Supplement No. 1 Schedule No. 3 to Lease Supplement No. 1 Lease Supplement No. 2 EXHIBIT B - Aircraft Bill of Sale EXHIBIT C-1 - Opinion of Counsel - Lessee (with Section 1110 provisions) EXHIBIT C-2 - Opinion of Counsel - Guarantor EXHIBIT D - Financial Covenants Rider
2 AIRCRAFT LEASE This AIRCRAFT LEASE (together with all Supplements, Exhibits and Certificates hereto, the "Lease") is made and entered into as of the 30th day of December, 1996 by and between Fleet Capital Corporation, a Rhode Island corporation ("Lessor"), with a place of business at 50 Kennedy Plaza, Fifth Floor, Providence, RI 02903-2305, and Kitty Hawk Aircargo, Inc., a Texas corporation ("Lessee"), having its principal place of business and chief executive office at P.O. Box 612787, 1515 W. 20th Street, DFW International Airport, Texas 75261. Certain capitalized terms as used in this Lease are defined in Exhibit A hereto, and such definitions are hereby incorporated herein and made a part hereof as though set forth herein in full. SECTION 1. Acceptance and Lease of Aircraft Subject to the satisfaction of each condition set forth in Section 2 (I) and (II), Lessor hereby agrees to purchase the Aircraft from the Lessee and to lease the same to Lessee and Lessee hereby agrees to lease the same from Lessor for the Basic Term hereof pursuant to the terms and conditions of this Lease. The sale of the Aircraft to Lessor shall include all of Lessee's right, title and interest in and to the Aircraft. SECTION 2. Conditions to Closing; Closing Covenants. (I) Conditions Precedent. Lessor's obligations to purchase the Aircraft from the Lessee and to lease said Aircraft to Lessee, shall each be both subject to and conditioned upon all of the following conditions being satisfied: (a) Lessor receiving on or prior to the Acceptance Date, all of the following in form and substance satisfactory to it: (i) the Purchase Documents duly executed and accompanied by evidence of authenticity and authority; (ii) evidence of reservation of an "N" number for the Aircraft, together with an assignment of Lessee's rights in such "N" number to Lessor; (iii) evidence that the Aircraft has been duly certified as to type and airworthiness by the FAA in the form of a Standard Airworthiness Certificate (FAA Form 8100-2) issued by the FAA; (iv) three (3) duly executed originals of the Lease, including, Lease Supplement No. 1, Lease Supplement No. 2 and all Schedules and Exhibits thereto; (v) a certificate or certificates, executed by the Lessee's secretary or other authorized officer certifying: (A) resolutions of Lessee's Board of Directors authorizing the execution, delivery and performance of this Lease, the Purchase Documents, the applicable FAA documents and the transactions contemplated hereby and thereby and (B) the name(s) of the person(s) authorized to execute and deliver such documents on behalf of Lessee together with specimen signature(s) of such person; (vi) certificate(s) of insurance as to the coverage required under Section 14 hereof, accompanied, if requested by Lessor, by the applicable policies and report(s) of insurance broker(s) or underwriter(s) pursuant thereto as to the conformity of such coverage with such requirements; (vii) evidence that FAA Counsel has received in escrow the executed FAA AC Form 8050-2 Aircraft Bill of Sale (the "Bill of Sale" in the name of Lessor and AC Form 8050-1 Aircraft Registration Application in the name of Lessor (the "Registration Application") (except for the pink copy which shall be available to be placed on the Aircraft upon acceptance thereof), releases in form and substance satisfactory to FAA Counsel, Lessor's counsel and/or Lessor of any Liens, such other bills of sale, in the form of FAA AC Form 8050-2 or otherwise, as are necessary, in the opinion of Lessor's counsel and/or FAA Counsel to vest good and marketable title to the Aircraft in the name of Lessor and executed duplicates of the Lease and Lease Supplements No. 1 and 2, all the foregoing (except for such Warranty Bill of Sale) being in proper form for filing with the FAA; (viii) opinions of counsel for Lessee and the Guarantors satisfactory to Lessor and substantially in the forms of Exhibits C-1 and C-2, respectively, hereto; 3 (ix) certificate(s) of good standing for Lessee from the state of its incorporation and the state(s) where the Primary Hangar Location and Lessee's chief executive offices and principal place of business are located; (x) UCC financing statements executed by Lessee (and, where needed, assignment, release and/or termination statements) with respect to the Aircraft in all places which are, in Lessor's opinion, necessary or appropriate to protect Lessor's interest therein have been delivered to Lessor; (xi) an opinion of FAA Counsel satisfactory to Lessor that title to the Airframe is vested in Lessor and that the Aircraft (including, without limitation the Airframe and Engines) is free and clear of all liens and encumbrances of record; (xii) a Guaranty in favor of Lessor, duly executed by each Guarantor, in form and substance satisfactory to Lessor and Lessor's counsel, unconditionally guaranteeing, among other things, the payment and performance by Lessee of all its obligations under the Lease; (xiii) resolutions of each Guarantor's Board of Directors, certified by such Guarantor's Secretary, authorizing the execution, delivery and performance of the Guaranty by such Guarantor, and an incumbency certificate of each Guarantor, containing the names of the person(s) authorized to execute and deliver such Guaranty on behalf of such Guarantor and, if requested, certified copies of the organizational documents of each Guarantor; (xiv) a Security Deposit Agreement, in form and substance satisfactory to Lessor, executed by Lessee and providing for a security deposit securing payment and performance of the obligations of Lessee hereunder ; (xv) an escrow agreement, in form and substance satisfactory to Lessor, executed by Lessee and Fleet National Bank providing for the deposit and possession and investment of the security deposit referred to in the preceding paragraph; and (xvi) such other documents, certificates and opinions, and evidence of such other matters, as Lessor, Lessor's counsel or FAA Counsel may reasonably request. (b) No material adverse change in the financial condition of Lessee has occurred since the date of the last financial statements furnished to Lessor as set forth on Schedule No. 2 to Lease Supplement No. 1. (c) Receipt by Lessor of a satisfactory inspection report with respect to the Aircraft prepared by inspector(s) acceptable to Lessor. (d) Lessee's acceptance of the Aircraft on or before the Acceptance Date. (e) In addition to the above listed conditions precedent, Lessee covenants and agrees that upon Lessor's acknowledgment that all the conditions to the sale and lease as aforestated have been satisfied, Lessee shall release from escrow to Lessor the documents held by FAA Counsel on behalf of Lessee and shall authorize FAA Counsel to file and record all appropriate documentation, including, without limitation, the Lease and Lease Supplements No. 1 and No. 2, with the FAA on the Acceptance Date. Upon satisfaction of the foregoing conditions precedent Lessor shall fund the amount of the Lessor's Cost as instructed by Lessee. (II) Conditions Subsequent. On or subsequent to the Acceptance Date, but not later than the date of the Aircraft's first flight under the leasehold conveyed herein, Lessee shall provide written confirmation to Lessor that a copy of the Registration Application has been properly placed within the Aircraft. In addition, prior to the date of the Aircraft's first flight hereunder Lessee shall provide Lessor with written confirmation that: (a) a copy of this Lease, including Lease Supplements No. 1 and No. 2, has been properly placed within the Aircraft; (b) a copy of this Lease, including Lease Supplements No. 1 and No. 2, was mailed, within 24 hours following execution thereof, to the Flight Standards Technical Division of the FAA; and 3 4 (c) Lessee has notified the FAA (such notification to have been given by telephone or in person to the FAA Flight Standards District Office, General Aviation District Office, Air Carrier District Office or International Field Office nearest the airport where such flight will originate) concerning the first flight of the Aircraft under this Lease. SECTION 3. Term and Rent. (a) The leasing of the Aircraft by Lessor to Lessee shall commence on the Acceptance Date and end on the Expiration Date each as set forth on Schedule No. 2 to Lease Supplement No. 1, unless this Lease shall have been terminated or extended in accordance with the terms hereof. (b) Lessee shall pay to Lessor as basic rent (herein referred to as "Basic Rent") the following: (i) on the Acceptance Date, an amount equal to the Daily Lease Rate, multiplied by the number of days elapsed from and including the Acceptance Date with respect to the Aircraft to but excluding the Rent Commencement Date; (ii) on the First Basic Rent Date and on each Basic Rent Date thereafter, to and including the Last Basic Rent Date, an amount equal to the Basic Rent set forth on Schedule 2-A to Lease Supplement No. 1; and (iii) after the Expiration Date until the Aircraft is returned to the Lessor in accordance with Section 8 hereof, an amount equal to the Basic Rent which amount shall be payable each and every calendar month immediately after the Expiration Date until the return of the Aircraft to the Lessor as provided under this Lease on the day of the month on which Basic Rent was payable during the Term. (c) In addition, Lessee shall pay to Lessor the following amounts (herein referred to as "Supplemental Rent" and, together with all Basic Rent, collectively as "Rent"): (i) any other amount payable hereunder which Lessee assumes the obligation to pay, or agrees to pay, under this Lease to Lessor or others; (ii) on the date provided herein, any amount payable hereunder as Casualty Value and/or any amounts due pursuant to Section 23 hereof plus any and all amounts regarding the same and (iii) to the extent permitted by applicable law, interest at the Late Payment Rate for the number of days actually elapsed on any amount payable hereunder not paid when due, plus, as an administrative and late charge, an amount equal to five percent (5%) of the amount payable if not paid when due. The expiration or other termination of Lessee's obligation to pay Basic Rent hereunder shall not terminate, limit or modify the obligations of Lessee with respect to Supplemental Rent, which shall survive such expiration or other termination. (d) All payments of Rent or other amounts required hereunder shall be made to Lessor in immediately available United States funds on the date payable hereunder at its address set forth herein or at such other address or to such other Person as Lessor may direct by notice in writing to Lessee. SECTION 4. Acceptance. The execution by Lessee of Lease Supplement No. 1 shall evidence that the Aircraft is leased under, and is subject to all of the terms, provisions and conditions of, this Lease and constitute Lessee's unconditional and irrevocable acceptance of the Aircraft for all purposes of this Lease. SECTION 5. Covenants and Warranties. Lessor warrants that during the term of this Lease, so long as no Event of Default or Default has occurred and is continuing hereunder, Lessee's possession and quiet enjoyment of the Aircraft shall not be divested or interfered with by Lessor or anyone claiming through or under Lessor. This provision shall be binding upon any assignee of Lessor pursuant to the penultimate paragraph of Section 16 hereof. The warranty set forth hereinabove is in lieu of all other warranties of Lessor, whether written, oral or implied, with respect to this Lease or the Aircraft, and Lessor shall not be deemed to have modified in any respect the obligations of Lessee pursuant to Section 7 hereof, which obligations are and shall remain absolute, irrevocable and unconditional under all events and circumstances whatsoever. LESSEE EXPRESSLY ACKNOWLEDGES THAT IT HAS SELECTED THE AIRCRAFT WITHOUT ANY ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES AND LESSEE EXPRESSLY AGREES THAT IT IS LEASING THE AIRCRAFT FROM LESSOR IN AN "AS IS" CONDITION. LESSOR SHALL NOT BE DEEMED TO HAVE MADE, AND LESSOR HEREBY EXPRESSLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY (EXCEPT FOR THE WARRANTY CONTAINED IN THIS SECTION 5), EITHER EXPRESS OR IMPLIED, AS TO THE AIRCRAFT, ANY PART THEREOF, ANY RECORDS, OR ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN, CONDITION, 4 5 CAPACITY OR DURABILITY OF THE AIRCRAFT, ITS MERCHANTABILITY OR ITS FITNESS FOR ANY PARTICULAR PURPOSE, USE OR OPERATION, THE QUALITY OF THE MATERIALS OR WORKMANSHIP OF THE AIRCRAFT, ITS VALUE OR AIRWORTHINESS, TITLE, SAFETY, THE ABSENCE OF ANY PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT OR LATENT DEFECT (WHETHER OR NOT DISCOVERABLE BY LESSEE), COMPLIANCE OF THE AIRCRAFT WITH THE REQUIREMENTS OF ANY LAW, RULE, REGULATION OR STANDARD PERTAINING THERETO, OR THE CONFORMITY OF THE AIRCRAFT TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE DOCUMENT RELATING THERETO OR ANY INTERFERENCE OR ANY COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, NOR SHALL LESSOR BE LIABLE, REGARDLESS OF ANY ACTUAL OR ALLEGED NEGLIGENCE OF LESSOR, FOR ANY DEFECTS, EITHER PATENT OR LATENT (WHETHER OR NOT DISCOVERABLE BY LESSEE), IN THE AIRCRAFT OR ANY PART THEREOF OR ANY DIRECT OR INDIRECT DAMAGE TO PERSONS OR PROPERTY RESULTING THEREFROM OR FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES OR FOR STRICT OR ABSOLUTE LIABILITY IN TORT. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, LESSEE HEREBY WAIVES ANY CLAIM (INCLUDING ANY CLAIM BASED ON STRICT OR ABSOLUTE LIABILITY IN TORT OR INFRINGEMENT) IT MIGHT HAVE AGAINST LESSOR FOR ANY LOSS, DAMAGE (INCLUDING, WITHOUT LIMITATION, DIRECT, INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGE) OR EXPENSE CAUSED BY THE AIRCRAFT OR BY LESSEE'S LOSS OF USE THEREOF FOR ANY REASON WHATSOEVER. Lessee acknowledges that Lessee, and not Lessor, has selected the Aircraft, the Airframe and the Engines. Lessee further acknowledges that the Lessor has not manufactured or supplied the Aircraft, the Airframe, or the Engines and that the Lessor acquired or will acquire the Aircraft and/or the right to possession thereto in connection with this Lease. So long and only so long as an Event of Default or Default hereunder shall not have occurred and be continuing, and so long and only so long as the Aircraft shall be subject to this Lease and Lessee shall be entitled to possession of the Aircraft hereunder, Lessor assigns to Lessee and authorizes Lessee, at Lessee's expense, to assert for Lessor's account, all rights and powers of Lessor under any manufacturer's, vendor's or dealer's warranty on the Aircraft or any part thereof, (including, without limitation, any warranty of Manufacturer). Notwithstanding the foregoing, Lessee shall not attempt to enforce any such performance by legal proceeding without Lessor's prior written approval. SECTION 6. Representations, Warranties and Agreements of Lessee. Lessee represents, warrants and agrees as follows: (a) Due Organization. Lessee has the form of business organization indicated in the caption of this Lease and is duly organized and existing in good standing under the laws of the state listed in the caption of this Lease and is duly qualified to do business wherever necessary to carry on its present business and operations and to own its property including, without limitation, the Primary Hangar Location. (b) Due Authorization; No Violation. This Lease has been duly authorized by all necessary action on the part of Lessee consistent with its form of organization, does not require any further shareholder, member or partner approval, does not require the approval of, or the giving notice to, any Federal, state, local or foreign governmental authority (including, without limitation, the Department of Transportation and/or the FAA) and does not contravene any law binding on Lessee or contravene any provision of, or constitute a default or result in the creation of any Lien other than a Permitted Lien under any certificate or articles of incorporation or organization or by-laws or partnership certificate or agreement, or any agreement, indenture, or other instrument to which Lessee is a party or by which it may be bound. (c) Enforceability. This Lease has been duly executed and delivered by authorized officers or partners of Lessee and constitutes a legal, valid and binding obligation of Lessee enforceable in accordance with its terms. (d) Financial Statements. To the extent that separately audited financial statements are prepared by the Lessee or separately prepared financial statements are filed with the Securities and Exchange Commission ("SEC"), Lessee agrees to furnish Lessor (i) as soon as available, and in any event within one hundred twenty (120) days after the last day of each fiscal year of Lessee, a copy of the balance sheet of Lessee as of the end of such fiscal year, and related statements of income and retained earnings of Lessee for such fiscal year, all in reasonable detail prepared in accordance with generally accepted accounting principles consistently applied each on a comparative basis with corresponding statements for the prior fiscal year; (ii) within sixty (60) days after the last day of each fiscal quarter of Lessee (except the last fiscal quarter of any fiscal year), a copy of the balance sheet of Lessee as of the end of each such quarter, and statement of income and retained earnings covering the fiscal year to date of Lessee, each on a comparative basis with the corresponding period of the prior year, all in reasonable detail and certified by the treasurer or principal financial officer of Lessee and (iii) within thirty (30) days after the date on which they are filed, all reports, forms and other filings, if any, required to be made by Lessee to the SEC or (in 5 6 respect of the Aircraft or the Lease) the FAA, including, without limitation, any SEC Form 10-Q and related reports or documents. All credit, financial and other information provided by Lessee or at Lessee's direction is, and all such information hereafter furnished will be, true, correct and complete in all material respects. (e) Furnishing of Information. Lessee agrees that it shall furnish from time to time to Lessor such information relating to Lessee, each Guarantor their subsidiaries and/or affiliates, financial or otherwise, as Lessor shall reasonably request. Lessor agrees that any such information furnished to it by Lessee shall be held pursuant to the terms and conditions of a confidentiality agreement executed by Lessor in connection with this Lease. (f) Location of Chief Executive Offices; Lessee Name. The chief executive offices and principal place of business of Lessee is located at the address set forth in Schedule No. 2 to Lease Supplement No. 1, and Lessee agrees to give Lessor thirty (30) days' prior written notice of any relocation of said chief executive offices or principal place of business from its present location, or of any change in its name or identity. Within the previous six (6) years Lessee has not changed its name, done business under any other names, changed its chief place of business from its present location or merged or been the surviving entity of any merger. (g) Documents on Board. A current and valid Registration Application or Certificate of Aircraft Registration, and a copy of this Lease and the Lease Supplements, will be kept on board the Aircraft at all times during the term of this Lease. (h) Selection of Aircraft. Lessor has not selected, manufactured or supplied the Aircraft to Lessee and has acquired the Aircraft subject hereto solely in connection with this Lease and Lessee has received and approved the terms of any purchase order or agreement with respect to the Aircraft. (i) Litigation. There are no proceedings pending or, so far as the officers of Lessee know, threatened against or affecting Lessee or any of its property before any court, administrative officer or administrative agency which would, directly or indirectly, adversely affect or impair the title of Lessor to the Aircraft, or which, if decided adversely affect the financial condition or operations of Lessee or the ability of Lessee to perform its obligations under this Lease. (j) No Adverse Mortgages. The right, title and interest of Lessor in and to the Aircraft and the Rent will not be adversely affected or impaired by the terms of any mortgage, loan agreement or indenture or any other contract, agreement or instrument to which Lessee is a party, or under which it or any of its property is or may become bound. In addition, no mortgage, deed of trust, or other Lien which now covers or affects, or which may hereafter cover or affect, any property or interest therein of Lessee, now attaches or hereafter will attach to the Aircraft, the Airframe or any Engine, or in any manner affects or will affect adversely Lessor's right, title and interest therein. (k) Taxes. Lessee has filed or caused to be filed and will continue to file all Federal, state and local tax returns which are required to be filed, and has paid or caused to be paid and will continue to pay all taxes shown to be due and payable on such returns or (except to the extent being contested in good faith and for the payment of which adequate reserves have been provided) on any assessment received by Lessee, to the extent that such taxes have heretofore or in the future become due and payable. (l) Filing. Except for the registration of the Aircraft with the FAA and except for filing and recording of the applicable documents pursuant to the Federal Aviation Act no further action, including any filing or recording of any document (except for any financing statement under Article 9 of the UCC of any applicable jurisdiction to be filed pursuant hereto) is necessary or advisable in order to establish and perfect Lessor's title to and interest in, the Aircraft, as against Lessee and/or any Person in any applicable jurisdiction. (m) Good Title. Lessor will be the owner of the Aircraft as of the Acceptance Date and will have good and marketable title to the Aircraft, free and clear of all Liens other than any Liens created in favor of Lessor under this Lease. (n) Records. Lessee has reviewed all Records with respect to the operation and maintenance of the Aircraft prior to the Acceptance Date and such Records have been kept in accordance with the requirements of the FAA rules and regulations and industry standards. Lessee shall maintain all such Records during the Term in accordance with the requirements of the FAA, and any manufacturer's maintenance programs or requirements as well as Sections 8 and 11 of this Lease. 6 7 (o) Claims. Except as set forth in a letter from Lessee to Lessor delivered contemporaneously herewith, Lessee has no pending claims, and does not have knowledge of any facts upon which a future claim may be based, against any prior owner, the Manufacturer of the Aircraft or of any Engine or part thereof for breach of warranty or otherwise. (p) U.S. Citizen. The Lessee is, and for the remainder of the Term will continue to be, a "citizen of the United States" within the meaning of the Federal Aviation Act. (q) Engines. Each of the Engines has 750 or greater rated takeoff horsepower or the equivalent of such horsepower. (r) Due Authorization of Guarantors, No Violation. The execution, delivery and performance of the Guarantees have been duly authorized by all necessary action on the part of each Guarantor consistent with its form of organization; does not require any further shareholder, member or partner approval or the approval of any trustee or holders of any indebtedness or obligations of any Guarantor except such as have been duly obtained; does not require the approval of, or the giving notice to, any Federal, state, local or foreign governmental authority (including, without limitation, the Department of Transportation and/or the FAA) and does not contravene any law binding on any Guarantor or contravene any provision of, or constitute a default or result in the creation of any Lien other than a Permitted Lien under any certificate or articles of incorporation or organization or by-laws or partnership certificate or agreement, or any agreement, indenture, or other instrument to which Lessee is a party or by which it may be bound. (s) Binding Obligations of Guarantors. Each Guaranty constitutes the legal, valid and binding obligation of the signatory Guarantor enforceable against such Guarantor in accordance its terms. (t) Litigation Regarding Guarantors. There are no pending legal actions or proceedings to which any Guarantor is a party, and there are no other pending or threatened legal actions or proceedings affecting any Guarantor of which Lessee has knowledge, before any court, arbitrator or administrative agency, and there are no final judgments of record against any Guarantor of which Lessee has knowledge, which, whether individually or in the aggregate would materially and/or adversely affect the financial condition of any Guarantor, or the ability of any Guarantor to perform its obligations under its Guaranty. Further, no Guarantor is in default under any material obligation for the payment of borrowed money, for the deferred purchase price of property, or for the payment of any rent which, either individually or in the aggregate, would have the same such effect. (u) Delivery of Further Financial Statements. Lessee agrees to cause Parent to furnish Lessor (i) as soon as available, and in any event within one hundred twenty (120) days after the last day of each fiscal year of Parent, a copy of the balance sheets of Parent as of the end of such fiscal year, and related statements of income and retained earnings of Parent for such fiscal year, all in reasonable detail prepared in accordance with generally accepted accounting principles consistently applied and certified by an independent certified public accounting firm of recognized standing and which is reasonably acceptable to Lessor, each on a comparative basis with corresponding statements for the prior fiscal year; (ii) within sixty (60) days after the last day of each fiscal quarter of Parent (except the last fiscal quarter of any fiscal year), a copy of the balance sheet as of the end of each such quarter, and statement of income and retained earnings covering the fiscal year to date of Parent, each on a comparative basis with the corresponding period of the prior year, all in reasonable detail and certified by the treasurer or principal financial officer of Parent; and (iii) within thirty (30) days after the date on which they are filed, all reports, forms and other filings, if any, required to be made by Parent to the SEC or (in respect of the Aircraft or the Lease) the FAA, including, without limitation, any SEC Forms 10-K, 10-Q and related reports or documents. All credit, financial and other information provided by Parent or at Parent's or Lessee's direction is, and all such information hereafter furnished will be, true, correct and complete in all material respects. Notwithstanding anything to the contrary, Lessor agrees that the independent certified public accounting firm currently preparing financial statements for Parent, Ernst & Young, shall be deemed to be acceptable to Lessor for the Term of this Lease unless and until Lessor provides notice to Lessee that such independent certified public accounting firm is no longer reasonably acceptable. (v) Insolvency, Fair Consideration. Lessee is not insolvent within the meaning of any applicable state or Federal laws. The sale of the Aircraft by Lessee to Lessor and Lessee's undertaking of the obligations contained herein shall not cause Lessee to be insolvent within the meaning of applicable state and/or Federal laws. The payment by Lessor to Lessee of the Lessor's Cost of the Aircraft is fair consideration for the Aircraft within the meaning of applicable state and Federal laws. 7 8 (w) Approvals, Consents and No Contravention. Without limiting the generality of any of the foregoing representations and warranties, the sale by Lessee to Lessor of the Aircraft does not require any stockholder approval or consent of any trustee or holders of any indebtedness or obligations of Lessee and will not contravene any laws, statutes, regulations, judgments or decrees applicable to Lessee, including, but not limited to, laws or statutes regarding fraudulent conveyances, bankruptcy, creditors' rights or bulk transfers, or the certificate of incorporation or by-laws of Lessee, or contravene the provisions of, or constitute a default under, or violate any restrictive covenants or other agreement to which Lessee is a party or by which Lessee or its assets may be bound or affected, and any authorization, approval, license, filing or registration with any court or governmental agency or instrumentality which is necessary in connection with such sale has been effected and a written copy thereof has been delivered to Lessor. Lessee has full power, authority and legal right to sell the Aircraft to Lessor. The sale of the Aircraft to Lessor has been duly authorized by all necessary corporate action and constitutes a legal, valid and binding obligation of Lessee. (x) Section 1110. Lessee holds, and for the remainder of the Term will continue to hold, an air carrier operating certificate issued by the FAA and/or the Secretary of Transportation pursuant to Chapter 447 of the Federal Aviation Act for aircraft capable of carrying ten (10) or more individuals or 6,000 pounds or more of cargo within the meaning of 11 U.S.C. Section 1110 ("Section 1110"). To the best of Lessee's knowledge, Lessor and any assignee, mortgagee or lender of the Lessor is entitled to the benefits of Section 1110 (or any comparable or successor provision affecting protection to Lessors, mortgagees or lenders of aircraft) with respect to the Aircraft and this Lease. Lessee further agrees not to take any position in connection with any bankruptcy proceedings involving it that is inconsistent with a Lessor's (and any assignee, mortgagee or lender of the Lessor's) rights under Section 1110 or any comparable or successor provision affecting protection to lessors, mortgagees or lenders of aircraft. Lessee further agrees to take reasonable steps as requested consistent with the terms of this Lease to permit Lessor and any assignee, mortgagee or lender of the Lessor to maintain such rights. SECTION 7. Net Lease. This Lease is a net lease, and Lessee acknowledges and agrees that Lessee's obligation to pay all Rent hereunder and the rights of Lessor in and to such Rent, shall be absolute, irrevocable and unconditional and shall not be subject to cancellation, termination, modification or repudiation by Lessee or any abatement, reduction, setoff, defense, counterclaim or recoupment (collectively, "Abatements") for any reason or under any circumstance whatsoever, including, without limitation, Abatements due to any present or future claims of Lessee against Lessor, its successors and assigns whether under this Lease or otherwise, the Manufacturer or any other Person for whatever reason. Lessee hereby waives any and all existing and future claims to any Abatement against such Rent, and agrees to pay all such Rent regardless of any Abatement which may be asserted in connection with this Lease, the Aircraft or otherwise. Except as otherwise expressly provided herein, this Lease shall not terminate, nor shall the obligations of Lessee be affected, by reason of any defect in or damage to, or any loss or destruction of, the Aircraft or any part thereof from whatsoever cause, or the invalidity or unenforceability or lack of due authorization of this Lease or lack of right, power or authority of Lessor to enter into this Lease, or for any other cause, whether similar or dissimilar to the foregoing, any present or future law or regulation to the contrary notwithstanding, it being the express intention of Lessor and Lessee that all Rent payable to Lessor hereunder shall be, and continue to be, payable in all events unless and until the obligation to pay the same shall be terminated pursuant to the express provisions of this Lease. Notwithstanding the foregoing, the payment of Rent by Lessee hereunder shall not constitute a waiver of any defense, offset or counterclaim hereunder. SECTION 8. Return of Aircraft. (a) Condition Upon Return. Unless purchased by Lessee, upon the expiration or other termination of this Lease (whether following an Event of Default, at the end of the Basic Term or any Renewal Term or otherwise), Lessee, at its own expense, will return the Aircraft to Lessor at a location specified by the Lessor within the continental United States or to such other location as Lessor may reasonably request and in the condition in which the Aircraft is required to be maintained pursuant to Section 11 hereof and any other applicable provisions of the Lease, fully equipped with the same number, make and model number of Engines as are set forth on Schedule No. 1 to Lease Supplement No. 1, which shall fully comply with Section 8(g) hereof, and which, in the opinion of Lessor, have the same or improved utility, value, useful life, performance, and efficiency as such Engines had on the Acceptance Date and are suitable for use on the Airframe and owned by Lessor and properly installed thereon. Lessee shall not be relieved of any of its duties, obligations, covenants, or agreements under this Lease (including, without limitation, its obligation to pay Basic Rent) prior to the return of the Aircraft in the manner and condition required with 8 9 respect to such return. The Aircraft, at Lessee's expense, upon redelivery pursuant hereto, (i) shall be duly certified by the FAA as an airworthy aircraft, (ii) shall be free and clear of all Liens (other than this Lease and any Lessor's Liens), and rights of third parties under pooling, interchange, overhaul, repair or other or similar arrangements, (iii) shall be in the same configuration and in the same operating condition, ordinary wear and tear excepted, as when delivered to Lessee hereunder, (iv) shall be in good operating condition, in good physical condition and good appearance (ordinary wear and tear excepted) with all systems operating, shall be in compliance with Lessee's written FAA-approved maintenance program for Boeing B727-214 Advanced Freighter series aircraft and in compliance with all applicable airworthiness directives and shall have been maintained in a nondiscriminatory manner with all Boeing B727-214 Advanced Freighter series aircraft in Lessee's fleet, (v) shall be in compliance with all so-called "mandatory", "alert" and (to the extent applicable to Lessee, or its operations and to the extent such service bulletins relate to the safety and/or airworthiness of the Aircraft) "highly recommended" service bulletins, Service Letters, modification kits, and similar notices and components issued, supplied, or available by or through the Manufacturer and/or the Manufacturer(s) of any Engine or Part with respect to the Aircraft and all "airworthiness alerts" and Airworthiness or other Directives, Circulars, Operator Bulletins and Instructions and all other applicable service, maintenance, repair and overhaul regulations issued by the FAA or similar regulatory agency having jurisdictional authority which require compliance or termination within six (6) months after the redelivery date of the Aircraft, (vi) shall have all logos and other identifying marks of Lessee or others removed and the exterior of the Aircraft shall have a good overall appearance with no material damage and (vii) shall be otherwise in the condition and repair required under this Lease. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, the Aircraft shall be in the following condition: I. General Condition of Aircraft. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, the Aircraft shall: (i) be clean by commercial airline standards; (ii) have installed the full complement of Engines and Parts and accessories and loose equipment as would remain installed in such Aircraft, and shall be in a condition suitable for operation in commercial service, all installed systems to be fully operational; (iii) have in existence a valid and existing airworthiness certificate with respect to the Aircraft issued by the FAA; (iv) [Intentionally Left Blank]; (v) all then current outstanding airworthiness directives affecting such model of Aircraft issued by the FAA which require compliance or termination within six (6) months after the redelivery date of the Aircraft shall have been accomplished, and all pilot discrepancies cleared from the logbook; (vi) have installed all applicable vendors' and Manufacturers' service bulletin kits theretofore received by Lessee that are appropriate for the Aircraft and to the extent not installed, such kits shall be furnished free of charge to Lessor; and (vii) have all of the operator's markings removed in a workmanlike manner and to the approval of the Lessor. II. General Condition of Fuselage, Windows and Doors. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all dents, abrasions or external doublers on the fuselage shall meet the requirements of the Manufacturer approved "Structural Repair Manual"; 9 10 (ii) all windows shall be free of delamination, blemishes, crazing and shall be properly sealed; and (iii) all doors shall be free moving, correctly rigged and be fitted with serviceable seals. III. General Condition of Wings and Empennage. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all leading edge shall be repaired in accordance with Manufacturer approved "Structural Repair Manual"; (ii) all control surfaces shall be painted or waxed and polished, to industry standard; (iii) all unpainted cowlings and fairings shall be polished to industry standard; and (iv) all wings shall be free of fuel leaks, and no previous fuel leaks shall have temporary repairs. IV. General Condition of Interior. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all ceilings, sidewalls and bulkhead panels shall be clean and free of cracks and stains; (ii) all signs and decals shall be clean, legible, and in English; and (iii) all required calendar life limited emergency equipment shall have a minimum of one year life remaining. V. General Condition of Cockpit. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all decals in the cockpit shall be clean, secure, legible, and in English; (ii) all fairing and instrument panels shall be free of stains and cracks, shall be clean, secure and repainted as necessary; (iii) all floor coverings shall be clean; (iv) all seat covers shall be in good condition, clean and shall conform to applicable FAA fire resistance regulations or requirements; and (v) all seats shall be fully serviceable and frames shall be repainted as necessary. VI. General Condition of Cargo Compartments. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all panels shall be in as good condition as on delivery; and (ii) all rollers and cargo moving mechanisms shall be serviceable. 10 11 VII. General Condition of Landing Gear and Wheel Wells. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) all the landing gear and wheel wells shall be clean, free of leaks and repaired as necessary, and coated with corrosion inhibitor; and (ii) all landing gear and wheel wells decals shall be clean, secure and legible. VIII. Further Condition of Aircraft regarding Corrosion. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, (i) the Aircraft shall meet the requirements of any then existing FAA-approved corrosion control program and aging aircraft corrosion control program on the date of return; and (ii) the fuel tanks of the Aircraft shall be free from contamination and corrosion, and a tank treatment program shall be in operation. IX. Documentation. In addition to any other requirements of this Section 8 or any other applicable provisions of this Lease, Lessee shall, upon the return of the Aircraft to the Lessor, deliver to the Lessor all of the currently revised: (i) current Illustrated Parts Catalogue, including Airframe and Engines on microfilm or hard copy; (ii) current Maintenance Manual on microfilm or hard copy; (iii) current Structural Repair Manual on microfilm or hard copy; (iv) Wiring Diagram Manual on microfilm or hard copy; (v) FAA-approved Flight Manual in hard copy; (vi) Weight and Balance Manual in hard copy; (vii) Airworthiness Directives and Modifications status in hard copy; (viii) Operational Specifications in hard copy; (ix) current status of all time controlled, on condition and condition monitored units which are on the Aircraft and Engines in hard copy; (x) cross reference list of operator's part number to Manufacturer's part number microfilm (if applicable); (xi) one copy of all FAA Forms 337 required; (xii) Aircraft and Engine Time Status report; and (xiii) all existing Aircraft and Engine historical records in hard copy or microfilm. (b) Overhaul-General. At the time of such return, (i) the Airframe (including, without limitation, the landing gear on the Aircraft) shall not have been operated more than one-half of the allowable time between major airframe overhauls or major block maintenance before the next major airframe overhaul or major block maintenance, whichever shall then apply, in accordance with Lessee's then approved overhaul and/or maintenance program authorized by and performed to FAA requirements applicable to Lessee, and shall have no less than half life (as measured by reference to calendar, phase and/or periodic maintenance and/or inspection standards) remaining on any life limited Airframe part or component (including, without 11 12 limitation, the landing gear on the Aircraft) before overhaul or replacement and (ii) each Engine shall not have been operated more than one-half of the allowable time remaining before overhaul (both hot and cold sections as measured by reference to calendar, phase and/or periodic maintenance and/or inspection standards) and all cycle limited parts or time controlled components of each Engine shall not have been operated more than one-half of the allowable cycles or time remaining before replacement; said Engine overhaul and Engine parts and components replacement to be performed in accordance with Lessee's then approved engine overhaul and parts and components replacement program authorized by and performed to FAA requirements applicable to Lessee. In addition to the requirements set forth in clauses (i) and (ii) above, all inspections and scheduled maintenance required to be performed on the Airframe, Engines and all life limited parts and components within one hundred twenty (120) days and/or one hundred hours (100) shall have been performed by Lessee. (c) Overhaul-Airframe. In the event that Lessee does not meet the conditions in clause (i) and/or the final sentence of Section 8(b) hereof with respect to the Airframe, Lessee shall pay Lessor a dollar amount computed by multiplying (i) Lessor's then current cost for such major overhaul or major block maintenance as the case may be (such cost being the then current rates charged by an airframe overhaul facility approved by the Manufacturer of the Airframe and acceptable to Lessor, together with all costs associated with such overhaul), by (ii) a fraction of which (x) the numerator shall be the excess of the number of hours since the last such major overhaul or major block maintenance, as the case may be, over fifty percent (50%) of the number of hours of allowable time between major overhauls or major block maintenance and (y) the denominator shall be the total number of hours of such allowable time. In the event the life limited parts or components requirement contained in clauses (i) or (ii) and/or the final sentence of Section 8(b) hereof are not met, Lessee shall pay to Lessor with respect to each part or component for which said requirement is not met the dollar amount obtained by multiplying (i) the ratio that the life expended in excess of half-life bears to the total allowable life for such part or component by (ii) Lessor's cost of replacement of such part or component. Lessor's cost of replacement of a part or component shall include Lessor's then current cost of purchasing the part or component itself and all of Lessor's then current costs associated with the replacement. (d) Overhaul-Engine. In the event that Lessee does not meet the conditions in clause (ii) and/or the final sentence of Section 8(b) hereof with respect to the Engines, Lessee shall pay to the Lessor with respect to each Engine for which said conditions are not met the dollar amount per Engine obtained by multiplying (i) the ratio that the time accumulated since half time bears to the time allowable between overhaul by (ii) Lessor's cost for such overhaul of such Engine; Lessor's cost referred to in this clause (ii) being the then current rates charged by an engine overhaul facility approved by the Manufacturer of the Engines and acceptable to Lessor, together with all costs associated with such overhaul. In the event the foregoing Engine cycle limited part and time controlled component requirement set forth in clause (ii) and/or the final sentence of Section 8(b) hereof are not met, Lessee shall pay to Lessor with respect to each Engine for which said requirement is not met the dollar amount per part (or per component) obtained by multiplying (i) the ratio that the time (or cycles) accumulated since half time (or one-half of the allowable cycles) bears to the time (or cycles) accumulated since half time (or one-half of the allowable cycles) bears to the time (or cycles) allowable between replacements by (ii) Lessor's cost of replacement of the part (or component). Lessor's cost of replacement of a part or component shall include Lessor's then current cost of purchasing the part or component itself and all of Lessor's then current costs associated with the replacement. (e) Fuel; Records. Upon the return of the Aircraft in accordance with this Section; (i) each fuel tank shall contain the same quantity of fuel as was contained in such tank when the Aircraft was delivered to Lessee on the Acceptance Date (which shall be presumed to be fifty percent (50%) of full capacity, unless otherwise specified in the Purchase Documents) or, in the case of differences in such quantity, an appropriate adjustment will be made at the then current market price of fuel, and (ii) Lessee shall deliver 12 13 all Records to Lessor. In the event any Records are missing or incomplete, Lessor shall have the right to cause any such Records to be reconstructed at the expense of Lessee. (f) Storage. Upon the expiration or other termination of the Lease, Lessee will, if requested by Lessor, permit Lessor to store the Aircraft at the Primary Hangar Location as described in Schedule No. 2 to Lease Supplement No. 1, at Evergreen Air Center, Inc., Pinal Air Park, Marana, AZ 85653 or at some other location mutually acceptable to the Lessor and Lessee. During such storage period Lessee will, at its own cost and expense, keep the Aircraft properly hangared or tied down, and will permit Lessor or any person designated by Lessor, including the authorized representative or representatives of any prospective purchaser, lessee or user of the Aircraft to inspect the same. Lessee shall not be liable, except in the case of negligence or intentional misconduct of Lessee or of its employees or agents, for injury to, or the death of, any person exercising, either on behalf of Lessor or any prospective purchaser, Lessee or user, the rights of inspection granted hereunder. Lessee shall bear the risk of loss and shall pay any and all expenses connected with insuring and maintaining the Aircraft during such storage period. (g) Return of Engines. In the event that any engine not owned by Lessor shall be installed on the returned Airframe as set forth in paragraph (a) of this Section, then Lessee will, concurrently with such delivery, at its own expense and not at any cost to Lessor, furnish Lessor with a full warranty bill of sale, in form and substance satisfactory to Lessor, with respect to each such engine and with a written opinion of FAA Counsel to the effect that, upon such return, Lessor will acquire good and marketable title to such engine, free and clear of all Liens (except Lessor's Liens). Thereupon, unless a Default or Event of Default shall have occurred and be continuing, Lessor will transfer to Lessee, without recourse or warranty of any kind whatsoever (except as to Lessor's Liens) on an "AS-IS, WHERE-IS" BASIS WITHOUT ANY REPRESENTATION BY, OR RECOURSE OR WARRANTY TO, LESSOR, all of Lessor's right, title and interest in and to any Engine not installed on the Airframe at the time of the return of such Airframe. (h) Inspection Prior to Return. Not more than ninety (90) days prior to the expiration of the Lease, upon the written request of Lessor, Lessee shall, at its expense, review the maintenance records of the Aircraft to determine if the Aircraft is in the condition required by Section 8(a). Following such review, Lessee shall certify to Lessor that such Aircraft is in the condition required by Section 8(a) according to the maintenance records for such Aircraft, or, if the maintenance records so indicate, indicate what maintenance or repair is needed to bring the Aircraft to the specified condition. (i) Survival. The provisions of this Section 8 shall survive the expiration or other termination of this Lease and the return of the Aircraft for any reason whatsoever. (j) Injunctive Relief. Without limiting any other terms or conditions of this Lease, the provisions of this Section 8 are of the essence of this Lease, and upon application to any court of equity having jurisdiction, Lessor shall be entitled to a decree against Lessee requiring specific performance of the covenants of Lessee set forth in this Section 8. SECTION 9. Liens. Lessee will not directly or indirectly, voluntarily or involuntarily, create, incur, assume or suffer to exist any Liens on or with respect to the Aircraft or any part thereof, Lessor's title thereto or any interest of Lessor therein (and Lessee will promptly, at its own expense, take such action as Lessor deems necessary or advisable to duly discharge any such Lien), except Permitted Liens. In the event that Lessee fails to take action to discharge or remove any such Lien, Lessor may take such action as it deems necessary or appropriate to discharge or remove such Lien. Lessee shall reimburse Lessor on demand for any costs incurred by Lessor in connection with such action together with interest at the Late Payment Rate. Lessor's rights hereunder are in addition to, and not in derogation of, any other rights which Lessor may have hereunder, at law or in equity. SECTION 10. Taxes. Lessee agrees to (i) report, to the extent legally permissible (or if such reporting by Lessee is not legally permissible, then to prepare reports for filing by Lessor), (ii) pay when due and (iii) to defend and indemnify Lessor against liability for all license and registration fees, assessments, and sales, use, property, excise, privilege and other taxes (including any related interest or penalties) or other charges or fees now or hereafter imposed by any governmental body or agency upon the Aircraft, or with respect to landing, airport use, manufacturing, ordering, shipment, purchase, ownership, delivery, installation, leasing, operation, possession, use, return, or other disposition thereof or the rentals hereunder (other than taxes on or measured solely by the net income of Lessor)("Impositions"). Any fees, taxes or other 13 14 lawful charges paid by Lessor upon failure of Lessee to make such payments shall at Lessor's option become immediately due from Lessee to Lessor. Notwithstanding the foregoing, Lessee shall pay, indemnify Lessor for, and hold Lessor harmless on a net after-tax basis from and against, all Impositions on or measured by the net income of Lessor imposed against Lessor by any local or foreign government or other taxing authority if and to the extent that Lessor would not have incurred such Impositions but for the operation or presence of the Aircraft within the jurisdiction asserting an Imposition. SECTION 11. Registration, Maintenance and Operation; Compliance and Use; Replacement Parts; Additions; Aircraft Marking. (a) Registration, Maintenance and Operation. During the Term, Lessee, at its own cost and expense, shall (i) cause the Aircraft to be duly registered in the name of the Lessor under the Federal Aviation Act at all times; (ii) maintain, inspect, service, repair, overhaul and test the Airframe and each Engine in accordance with Lessee's FAA approved and Manufacturer's recommended maintenance programs; (iii) maintain (in the English language) all Records and (iv) promptly furnish to Lessor such information as may be required to enable Lessor to file any reports required by any governmental authority as a result of Lessor's ownership of the Aircraft. All maintenance procedures required by Section 11, subparagraph (a)(ii) or any other provision of this Lease shall be performed in accordance with all FAA and Manufacturer's standards and procedures by properly trained, licensed, and certified maintenance sources and maintenance personnel utilizing replacement parts approved by the FAA and the Manufacturer, so as to keep the Airframe and each Engine in good operating condition, ordinary wear and tear alone excepted, and to enable the airworthiness certificate of the Aircraft to be continually maintained. (b) Compliance and Use. Lessee shall operate the Aircraft solely in the conduct of its business and/or for commercial purposes (and not for consumer, personal, home or family purposes) and in a cargo configuration for which Lessee is duly authorized by the FAA and it will not operate or permit the Aircraft to be operated at any time or in any geographic area when or where insurance required by the provisions of Section 14 hereof shall not be in effect, or in a manner, for any time period, such that Lessor or a third party shall be deemed to have "operational control" of the Aircraft. At all times the Aircraft will be operated only by duly qualified, currently certificated pilots as required by the insurance policies required under this Lease. IN ADDITION, EXCEPT AS EXPRESSLY PERMITTED BY THE FOLLOWING PARAGRAPH OR AS SPECIFICALLY CONSENTED TO IN WRITING BY LESSOR, THE AIRCRAFT SHALL NOT BE OPERATED, USED OR LOCATED OUTSIDE THE CONTINENTAL UNITED STATES. Notwithstanding the foregoing, Lessor agrees that the Aircraft may be flown temporarily to any country in the world in connection with the conduct of Lessee's business; provided, however, that in no event may the Aircraft temporarily fly, be operated, used or located in, or to any such country or area (1) which is excluded from coverage by any insurance policy in effect with respect to such Aircraft or by any insurance policy required by the terms of Section 14 hereof or any country or area not specifically and fully covered by such insurance; (2) in a recognized or threatened area of hostility unless fully covered to Lessor's satisfaction by hull, political, expropriation, hijacking and war risk insurance or (3) to Libya, Iraq, Cuba (other than the United States government facility at Guantanamo Bay), North Korea, or such other country or countries as Lessor shall set forth pursuant to written notice to Lessee from time to time. Lessee further agrees that it shall not operate the Aircraft, or permit the Aircraft to be operated in any manner unless the insurance coverages set forth in Section 14 hereof are in full force and effect. (c) Replacement Parts. Except as otherwise provided in the succeeding paragraph (d) of this Section, Lessee, at its own cost and expense, will promptly replace all Parts which may from time to time become worn out, lost, stolen, taken, destroyed, seized, confiscated, requisitioned, damaged beyond repair or permanently rendered or declared unfit for use for any reason whatsoever. (such substituted Parts hereinafter called "Replacement Parts"). In addition, in the ordinary course of maintenance, service, repair, overhaul or testing, Lessee may, at its own cost and expense, remove serviceable Parts, provided that Lessee shall, at its own cost and expense, replace such serviceable Parts as promptly as practicable. All Replacement Parts (i) shall be free and clear of all Liens, (ii) be in an airworthy condition and of at least equivalent model and modification status and service bulletin accomplishment status, be fully interchangeable as to form, fit and function and shall be in a good operating condition as, and shall have a value, useful life 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, (iii) have a current "serviceable tag" of the Manufacturer or maintenance facility providing such items to Lessee, indicating that such Parts are new, serviceable or overhauled, (iv) if overhauled, have all overhaul records, (v) if a life limited Part, have continuous records since the date of manufacture or the date of the last overhaul, and (vi) shall not in any manner alter or adversely affect the Aircraft's airworthiness certificate. All Parts at any time removed from the Airframe or any Engine shall remain the property of Lessor, no matter where located, until such time as such 14 15 Parts shall be replaced by Parts which have been incorporated or installed in or attached to the Airframe or such Engine and which meet the requirements for Replacement Parts specified above. Immediately upon any Replacement Part becoming incorporated or installed in or attached to the Airframe or such Engine as above provided, without further act, (i) title to the removed Part shall thereupon vest in Lessee, on an AS IS, WHERE IS BASIS WITHOUT ANY REPRESENTATION BY, OR RECOURSE OR WARRANTY TO, LESSOR, free and clear of all rights of Lessor and Lessor's Liens and shall no longer be deemed a Part hereunder, (ii) title to such Replacement Part shall thereupon vest in the Lessor, and (iii) such Replacement Part shall become subject to this Lease and be deemed part of the Airframe or Engine, as the case may be, for all purposes hereof to the same extent as the Parts originally incorporated or installed in or attached to the Airframe or such Engine. (d) Additions. Lessee shall be entitled from time to time during the Term to acquire and install on the Aircraft at Lessee's own cost and expense (and Lessor hereby appoints Lessee to be Lessor's agent for such purpose, so long as no Event of Default has occurred and is continuing), any additional accessory, device or equipment as may be available at such time ("Additions") but only so long as such Additions (i) are ancillary to the Aircraft, (ii) are not required to render the Aircraft complete for its intended use by Lessee, (iii) will not impair the originally intended function or use of the Aircraft or diminish the value of the same and (iv) can be readily removed without causing material damage to the Aircraft. Title to Additions which are not removed by Lessee prior to the return of the Aircraft to Lessor shall vest in Lessor upon such return. Lessee shall repair all damage to the Aircraft resulting from such installation and removal of Additions so as to restore the Aircraft to its condition prior to installation, ordinary wear and tear excepted. (e) Aircraft Marking. Lessee agrees, at its own cost and expense, to (i) cause the Airframe and the Engines to be kept numbered with the identification or serial number therefor as specified in Schedule No. 1 to Lease Supplement No. 1 hereof; (ii) prominently display on the Aircraft that "N" number, and only that "N" number, specified in Schedule No. 1 to Lease Supplement No. 1 or such other "N" number as has been approved in writing by the Lessor and duly recorded with the FAA; (iii) notify Lessor in writing thirty (30) days prior to making any change in the configuration (other than changes in configuration mandated by the FAA), appearance or coloring of the Aircraft from that in effect at the time the Aircraft is accepted by Lessee hereunder, and in the event of such change or modification of configuration, coloring or appearance, at the request of Lessor to restore the Aircraft to the configuration, coloring and/or appearance in effect on the Acceptance Date or, at Lessor's option to pay to Lessor an amount equal to the reasonable cost of such restoration and (iv) affix and maintain in the Airframe adjacent to the airworthiness certificate and on each Engine a metal nameplate bearing the Aircraft Marking specified in Lease Supplement No. 2 and such other markings as from time to time may be required by law or otherwise deemed necessary or advisable by Lessor in order to protect the title of Lessor to the Aircraft and the rights of Lessor under this Lease. Lessee will not place the Aircraft in operation or exercise any control or dominion over the same until such Aircraft Markings have been placed thereon. Lessee will replace promptly any such Aircraft Marking which may be removed, defaced or destroyed. (f) Pooling of Parts. Any Part removed from the Airframe or any Engine as provided in Section 11(c) hereof may be subjected by Lessee (or any Permitted Sublessee) to normal pooling arrangements customary in the airline industry entered into in the ordinary course of Lessee's (or any Permitted Sublessee's) business with a U.S. Air Carrier; provided that the Part replacing such removed Part shall be incorporated or installed in or attached to the Aircraft in accordance with Section 11(c) hereof immediately upon the removal of such removed Part. In addition, any Replacement Part when incorporated or installed in or attached to the Aircraft in accordance with Section 11(c) hereof may be owned by another U.S. Air Carrier subject to such a normal pooling arrangement; provided that Lessee (or any Permitted Sublessee) ensures that the Part so removed remains the property of Lessor, and that Lessee (or any Permitted Sublessee), at its expense, immediately thereafter either (x) causes title to such Replacement Part to vest in Lessor free and clear of all Liens and rights of others in accordance with Section 11(c) hereof, or (y) replaces such Replacement Part by incorporating or installing in or attaching to the Aircraft a further Replacement Part owned by Lessee (or any Permitted Sublessee) free and clear of all Liens and rights of others (except for any Lessor Liens) by causing title to such further Replacement Part to vest in Lessor in accordance with Section 11(c) hereof. SECTION 12. Inspection. (a) During the Term of this Lease, Lessee shall furnish to Lessor such information concerning the location, condition, use and operation of the Aircraft (or any component thereof including, the Airframe and any Engine or Part), as Lessor may reasonably request. Lessor or its authorized representatives or agents shall have the right, at any reasonable time and from time to time and wherever located, to inspect the Aircraft and its condition, use, and operation, and the Records, and to travel on the flight deck as 15 16 observers at any such inspection. Lessor shall not have any duty to make any such inspection nor shall Lessor incur any liability or obligation of any kind whatsoever by reason of not making any such inspection. Without limiting the generality of the foregoing or any other term of this Lease, Lessor or its authorized representatives or agents shall have the right to inspect the Aircraft during any "C" and/or "D" checks (as such checks are determined and/or defined by the Manufacturer or the Lessee's FAA-approved maintenance program) or their respective equivalent (such checks collectively the "Major Checks"), performed by or on behalf of Lessee during the Term of this Lease, and Lessee shall inform Lessor of any such Major Check schedule by providing written notice as to time and location of all said Major Checks. During any Major Checks, Lessee agrees to provide sufficient manpower to allow Lessor or its authorized representatives or agents to inspect, during the course of any Major Check, any area of the Aircraft which Lessor requests to inspect and which would normally be required during any such Major Check. (b) No later than five (5) days prior to the date the Aircraft is to be returned, Lessee shall make the Aircraft available to Lessor for a detailed inspection by a qualified FAA designated airworthiness representative or any other authorized representative or agent of the Lessor in order to verify that the condition of the Aircraft complies with all of the requirements of this Lease, including, without limitation, Section 8 hereof, (any such inspection the "Final Inspection"). Such Final Inspection may be scheduled at an appropriate maintenance facility of the Lessee or a FAA authorized maintenance performer then performing maintenance on such Aircraft. Lessor shall use its best efforts to conduct such Final Inspection during operational downtime of the Aircraft. The Lessee shall provide the Lessor not less than sixty (60) days prior written notice of the location and commencement date of the Final Inspection. The Final Inspection, at Lessor's sole option, shall also include a two hour operational test flight of the Aircraft ("Test Flight"). Any such Test Flight shall be conducted by Lessee at its sole cost and expense using the Lessee's approved test flight procedures. Lessor shall be permitted to have a minimum of two (2) authorized representatives attend the Final Inspection. In the event that the Lessee has exercised its Sale Option pursuant to Section 23 (c) and the Aircraft has either not been sold within ninety (90) days of the then current Expiration Date or the proposed sale price is less than the then current Maximum Lessor Risk, the Lessee shall be required to open any areas of the Aircraft reasonably requested to be opened by the Lessor or its authorized representatives or agents in order to verify any aspect of the Aircraft's condition or any item or component thereof, including, without limitation, the lower cargo compartment bilges, and borescoping of the Engines. Without limiting the generality of the foregoing or any other term of this Agreement, all Engines shall, upon the request of Lessor, have had within the thirty (30) day period immediately preceding the Final Inspection an "engine trim run" and a "combustion chamber" inspection performed in conformance with the Manufacturer's recommended procedures. All Records shall be provided to the Lessor or its authorized representatives or agents at the Final Inspection. (c) The cost and expense of the Test Flight and Final Inspection shall be paid by the Lessee. SECTION 13. Loss or Destruction. (a) Event of Loss with Respect to the Aircraft. Upon the occurrence of any Event of Loss with respect to the Aircraft, Lessee shall notify Lessor of any such Event of Loss within five (5) days of the date thereof. On the next Basic Rent Date following the date of such notice (or, if such Event of Loss occurs after the Last Basic Rent Date, within thirty (30) days after such notice), Lessee shall pay to Lessor any Rent then due, plus the Casualty Value of the Aircraft determined as of the Basic Rent Date immediately following the date of such Event of Loss, together with interest at the Late Payment Rate for the period (if any) from the Basic Rent Date following the date of such notice through the date of payment. Upon making such payment and all Rent due and owing, Lessee's obligation to pay further Basic Rent for the Aircraft subsequent to such payment shall cease, but Lessee's obligation to pay Supplemental Rent as well as any other amounts due under this Lease, if any, for the Aircraft shall remain unchanged. Except in the case of loss, permanent disappearance, destruction or Return to Manufacturer, Lessor shall be entitled to recover possession of the Aircraft, unless possession thereof is required to be delivered to a third party insurance carrier in order to settle an insurance claim. Lessor shall be entitled to any salvage value in excess of the Casualty Value paid to Lessor. Lessor shall be under no duty to Lessee to pursue any claim against any Person in connection with an Event of Loss, but Lessee may at its own cost and expense and with Lessor's prior written consent pursue the same on behalf of Lessor in such manner as may be acceptable to Lessor. Following the payment of the Casualty Value of the Aircraft in accordance with the provisions of this subsection, Lessee, if possible, shall, as agent for Lessor, dispose of the Aircraft as soon as it is able to do so for the best price obtainable. Any such disposition shall be on an AS-IS, WHERE-IS BASIS WITHOUT ANY REPRESENTATION BY, OR RECOURSE OR WARRANTY TO, LESSOR, of any kind whatsoever. Lessee may, after paying Lessor the amounts specified in this subsection, retain all amounts of such price up to the Casualty Value of the Aircraft actually paid by Lessee, together with Lessee's reasonable costs and expenses of disposition attributable thereto and any excess shall be paid over to, and retained by, Lessor. In the event of a Return to Manufacturer, Lessor agrees that Lessee shall receive and retain all amounts payable to Lessor by the Manufacturer up to the amount, if any, of the Casualty Value actually paid by Lessee hereunder, but any 16 17 excess shall be retained by Lessor. With respect to a Requisition of Use, Lessor agrees that Lessee shall receive and retain all amounts paid by any governmental authority up to the Casualty Value actually paid by Lessee hereunder, and any excess shall be paid over to, and retained by, Lessor. (b) Event of Loss with Respect to an Engine. Upon an Event of Loss with respect to any Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe upon which such Engine was installed or upon the occurrence of an Event of Loss of an Engine not then installed on the Airframe, Lessee shall give Lessor prompt written notice thereof and shall within thirty (30) days after the occurrence of such Event of Loss, duly convey to Lessor title to a similar engine of the name, make and model number as that suffering the Event of Loss. Such engine shall be free and clear of all Liens, have a value, utility, and useful life at least equal to, and (ii) be in as good an operating condition as, the Engine with respect to which such Event of Loss has 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. Lessee, at its own cost and expense, shall furnish Lessor with such documents to evidence such conveyance as Lessor shall request. Upon full compliance by Lessee with the terms of this paragraph, Lessor will transfer to Lessee, without recourse, representation or warranty of any kind whatsoever, all of Lessor's right, title and interest, if any, in and to the Engine with respect to which such Event of Loss has occurred. SUCH TRANSFER SHALL BE "AS-IS, WHERE-IS" AND LESSOR SHALL NOT BE DEEMED TO HAVE MADE, AND LESSOR HEREBY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EITHER EXPRESS OR IMPLIED, AS TO THE ENGINE SO TRANSFERRED TO LESSEE other than that the Engine is free and clear of Lessor's Liens. Each such replacement engine shall, after such conveyance shall be deemed an "Engine" as defined herein and shall be deemed part of the same Aircraft as was the Engine replaced thereby. No Event of Loss with respect to an Engine shall result in any reduction or delay in the payment of Basic Rent or relieve Lessee of any obligation under this Lease. (c) Risk of Loss; no Release of Obligations. Except as provided in this Section 13, Lessee shall bear the risk of loss and shall not be released from its obligations hereunder in the event of any damage to the Aircraft or any part thereof or any Event of Loss relating thereto. SECTION 14. Insurance. (a) Aircraft Liability and Property Damage Insurance. Lessee shall maintain at its own cost and expense for the entire Term with insurers satisfactory to Lessor, (i) comprehensive aircraft and general public liability insurance against bodily injury and property damage claims including, without limitation, contractual liability, premises damage, public liability, personal property liability, personal injury liability, death and property damage liability, public and passenger legal liability coverage in an amount not less than $200,000,000.00 for each single occurrence and (ii) such other property damage insurance with respect to the Aircraft as is of the type and in the amounts usually carried by companies engaged in the same or a similar business as Lessee and which covers risks of the kind customarily insured against by such companies. Lessee shall also provide worker's compensation insurance with all-states coverage for the Aircraft's crew and maintenance personnel. (b) Insurance Against Loss or Damage to the Aircraft. Lessee shall maintain at its own cost and expense for the entire Term with insurers satisfactory to Lessor, all-risk ground and flight aircraft hull insurance covering the Aircraft, including foreign object damage, fire and explosion coverage, cargo, environmental, ingestion and lightning and electrical damage and comparable insurance with respect to any Engines or Parts while removed from the Aircraft, and with respect to any engines or parts while temporarily installed on the Aircraft, provided that such insurance shall at all times be in an amount not less than the Casualty Value of the Aircraft (such amount determined at the Rent Commencement Date and at each annual renewal date of the insurance policies provided hereunder for the next succeeding year throughout the Term). Lessee shall maintain in effect hijacking (air piracy) insurance with respect to the Aircraft in a face amount of not less than the Casualty Value of the Aircraft (determined as described herein), which shall be in full force and effect worldwide throughout any geographical areas at any time traversed by the Aircraft. Such insurance shall also include war risk, governmental confiscation and expropriation and related insurance. (c) Lessor as Additional Insured; Notice. Any policies of insurance carried in accordance with this Section and any policies taken out in substitution or replacement or any such policies (i) shall be amended to name Lessor as the owner of the Aircraft and as additional insured as its interests may appear, (ii) with respect to insurance carried in accordance with paragraph (b) of this Section 14 covering the Aircraft, shall provide that any amount payable thereunder which exceeds $100,000.00 in the aggregate shall be paid directly to Lessor as sole loss payee and not to Lessor and Lessee jointly (and, so long as no Event of Default has occurred, such amounts shall be disbursed by Lessor to Lessee or other appropriate Persons in payment of the costs actually incurred with respect to repairs made to the Aircraft so as to restore it to the operating condition required by Section 11 hereof, or shall be disbursed by Lessor as otherwise required by the Lease), and that, provided no Default or Event of Default has occurred and is continuing, any amount(s) of less than $100,000.00 in the aggregate shall be paid to Lessee (and such amounts shall be applied by Lessee to pay the costs of such repairs), (iii) shall provide for thirty (30) days, or in the case of war risk insurance, seven 17 18 (7) days, written notice by such insurer of cancellation, change, non-renewal or reduction and (iv) shall provide that in respect of the interests of Lessor in such policies, the insurance shall not be invalidated by any action or inaction of Lessee regardless of any breach or violation of any warranties, declarations or conditions contained in such policies by or binding upon Lessee. Each shall be primary insurance, not subject to any co-insurance clause and shall be without right of contribution from any other insurance. Lessee shall arrange for appropriate certification as to the satisfaction of the requirements set forth above in this Section 14 to be delivered to Lessor not later than the Acceptance Date by each such insurer or underwriter therefor, which certification shall specifically acknowledge that the insurance is in conformity with this Section 14. Notwithstanding the foregoing, Lessee shall promptly provide Lessor with a copy of each policy of insurance required hereunder if it so requests. (d) Reports, etc. Annually on the anniversary of the Acceptance Date, Lessee shall furnish to Lessor a report describing in reasonable detail the insurance then carried and maintained on the Aircraft and certifying that such insurance complies with the terms hereof and, if Lessor shall so request, a copy of each applicable policy. In the event Lessee shall fail to maintain insurance as herein provided, Lessor may, at its option, provide such insurance, and Lessee shall, upon demand, reimburse Lessor for the cost thereof, together with interest at the Late Payment Rate from the date of payment through the date of reimbursement. (e) Agreed Value. Anything herein to the contrary notwithstanding, at all times while the Aircraft is subject to this Lease, the insurance required hereunder shall be for an amount on an "agreed value" basis not less than the lower of the Casualty Value or the Lessor's Cost. (f) No Right To Self-Insure. Lessee shall not self-insure (by deductible, premium adjustment, or risk retention arrangement of any kind) the insurance required to be maintained hereunder, except to the extent of deductibles usually and customarily maintained by companies engaged in the same or similar business as Lessee and operating the same or similar aircraft, but in no event shall any deductible exceed the Permitted Deductible amount on Schedule No. 2-A to Lease Supplement No. 1. Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-fact to file, settle or adjust, and receive payment of claims under any such insurance policy and to endorse Lessee's name on any checks, drafts or other instruments on payment of such claims. Lessee further agrees to give Lessor prompt notice of any damage to or loss of, the Aircraft, or any part thereof. (g) Attorney-in Fact. Lessee irrevocably appoints Lessor (and any assignee, mortgagee and/or lender of the Lessor) its attorney-in-fact to act in Lessee's name and on its behalf to make, execute, deliver and file any instruments or documents, settle, receive payment, make claim or proof of loss and to take any action as Lessor (and any such assignee, mortgagee and/or lender) deems necessary or appropriate to carry out the intent of this Section 14 or any agreements, documents or instruments related thereto. To the extent appropriate or permissible under applicable law, such appointment is coupled with an interest, shall be irrevocable and shall terminate only upon payment in full of the obligations set forth in this Lease and/or any agreements, documents or instruments related thereto. Notwithstanding the foregoing, to the extent that no Default or Event of Default has occurred and is continuing, Lessor agrees that it shall not exercise its powers as attorney in fact with respect to amounts of less than $100,000.00 payable under such policies of insurance as are provided for hereunder. SECTION 15. Indemnification. Lessee assumes liability for, and hereby agrees to indemnify, protect, save, defend and keep harmless Lessor, its agents, employees, officers, directors, shareholders, subsidiaries, affiliates, successors and assigns (collectively "Lessor"), on a net after-tax basis, from and against any and all liabilities, obligations, losses, damages, penalties, claims (including, without limitation, claims involving or alleging product liability or strict or absolute liability in tort), actions, suits, demands, costs, expenses and disbursements (including, without limitation, legal fees and expenses) of any kind and nature whatsoever (other than Impositions, the indemnification against which is set forth in Section 10 hereof) ("Claims") which may be imposed on, incurred by or asserted against Lessor, whether or not Lessor shall also be indemnified as to any such Claim by any other Person, in any way relating to or arising out of this Lease or any documents contemplated hereby, or the performance or enforcement of any of the terms hereof or thereof, or in any way relating to or arising out of the assertion or enforcement of any manufacturer's, vendor's or dealer's warranties on the Aircraft or any part thereof, (including, without limitation, any warranty of any Manufacturer), the manufacture, inspection, construction, purchase, pooling, interchange, acceptance, rejection, ownership, titling or re-titling, delivery, lease, sublease, possession, use, operation, maintenance, condition, registration or re-registration, sale, return, removal, repossession, storage or other disposition of the Aircraft or any part thereof or any accident in connection therewith (including, without limitation, latent and other defects, whether or not discoverable, and any Claim for patent, trademark or copyright infringement). Notwithstanding the foregoing, Lessee shall not be required to indemnify Lessor for (a) any Claim caused by the gross negligence or willful misconduct of the Lessor, (b) any Claim caused by the failure of 18 19 Lessor to comply with any regulatory requirements which non-compliance is caused solely and directly by Lessor, negligence or willful misconduct or (c) any Claim in respect of the Aircraft arising from acts or events which occur after (x) possession of the Aircraft has been redelivered to Lessor (which return and delivery shall be in full and complete compliance with the terms of this Lease, including, without limitation, Section 8) and (y) any and all other obligations of any kind whatsoever of the Lessee under this Lease which have been fully paid and/or performed, including, without limitation pursuant to Section 10 hereof, as the case may be, unless any such Claims were caused by Lessee (or any stockholder, director, officer, employee, successor, assignee, agent or servant of the Lessee) or resulted or arose, directly or indirectly, from any acts, events or omissions of any kind whatsoever during the Term of this Lease. WITHOUT LIMITING THE GENERALITY OF THE TERMS OF THIS LEASE, LESSEE AGREES THAT LESSOR SHALL NOT BE LIABLE TO LESSEE FOR ANY CLAIM CAUSED DIRECTLY OR INDIRECTLY BY THE INADEQUACY OF THE AIRCRAFT OR ANY PART THEREOF FOR ANY PURPOSE OR ANY DEFICIENCY OR DEFECT THEREIN OR THE USE OF MAINTENANCE THEREOF OR ANY REPAIRS, SERVICING OR ADJUSTMENTS THERETO OR ANY DELAY IN PROVIDING OR FAILURE TO PROVIDE ANY OF THE SAME OR ANY INTERRUPTION OR LOSS OF SERVICE OR USE THEREOF OR ANY LOSS OF BUSINESS, OR PROFITS ALL OF WHICH SHALL BE THE SOLE RISK AND RESPONSIBILITY OF LESSEE. The liability of Lessee to make indemnification payments pursuant to this Section 15 shall, notwithstanding any expiration or other termination (whether voluntary, as the result of Default or Event of Default, or otherwise) of this Lease, continue to exist until such indemnity payments are irrevocably made by Lessee in full and received by Lessor. If any Claim is made against Lessee or Lessor, the party receiving notice of such Claim shall promptly notify the other, but the failure of the party receiving notice to so notify the other shall not relieve Lessee of any obligation hereunder. SECTION 16. Assignment and Sublease. EXCEPT AS EXPRESSLY SET FORTH HEREIN OR AS MAY BE OTHERWISE CONSENTED TO IN WRITING BY LESSOR, LESSEE SHALL NOT SELL, TRANSFER, ASSIGN, SUBLEASE, CONVEY, PLEDGE, MORTGAGE OR OTHERWISE ENCUMBER ITS OR LESSOR'S INTEREST IN AND TO THE LEASE OR THE AIRCRAFT, AND ANY SUCH SALE, TRANSFER, ASSIGNMENT, SUBLEASE, CONVEYANCE, PLEDGE, MORTGAGE, OR ENCUMBRANCE, WHETHER BY OPERATION OF LAW OR OTHERWISE, WITHOUT THE PRIOR WRITTEN CONSENT OF LESSOR SHALL BE NULL AND VOID. IN ADDITION, LESSEE SHALL NOT RELINQUISH POSSESSION OF THE AIRFRAME OR ANY ENGINE OR INSTALL ANY ENGINE OR PART, OR PERMIT ANY ENGINE OR PART TO BE INSTALLED, ON ANY AIRFRAME OTHER THAN THE AIRFRAME LEASED HEREUNDER EXCEPT AS EXPRESSLY SET FORTH HEREIN. No acceptance, assignment, subletting, relinquishment or installation shall in any event relieve Lessee of primary, absolute and unconditional liability for its duties and obligations under this Lease. In no event may the Aircraft be subleased to a Person who is not a "citizen of the United States" within the meaning of the Federal Aviation Act. Notwithstanding anything to the contrary set forth herein, nothing herein shall prohibit Lessee from entering into any contract or arrangement with any third party so long as Lessee maintains operational control of the Aircraft and the rights, title and interests of such third party are subject and subordinate to the rights, title and interests of Lessor hereunder. (a) Notwithstanding the foregoing, provided that, so long as no Default or Event of Default shall have occurred hereunder and be continuing, and Lessee shall continue to comply with the provisions of Sections 11 and 14, Lessee (and any Permitted Sublessee except that any Permitted Sublessee shall not have the right to sublease or lease the Aircraft to any other Person) may, without the prior written consent of Lessor: (i) subject the Airframe, the Engines or engines then installed thereon to normal interchange agreements or any Engine to normal pooling or similar arrangements, in each case customary in the airline industry and entered into by Lessee (or any Permitted Sublessee) in the ordinary course of its business with a U.S. Air Carrier or any other air carrier approved by Lessor; provided that (A) no transfer of registration of the Airframe or any Engine shall be effected in connection therewith and the terms of this Lease shall be observed; (B) no such agreement or arrangement contemplates or requires the transfer of title to the Airframe or any Engine and (C) 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 to such Engine and Lessee shall comply with Section 13(b) hereof in respect thereof; (ii) deliver possession of the Airframe or any Engine to the manufacturer thereof or to any organization for testing, service, repair, maintenance or overhaul work on the Airframe, Engine or any part thereof or for alterations or modifications in or additions to such Airframe or Engine to the extent required or permitted by the terms of Section 11 hereof; (iii) install an Engine on an airframe owned by Lessee (or any Permitted Sublessee) which airframe is 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 third parties under interchange agreements which would be permitted under clause (i) 19 20 above, provided that Lessor's title to such Engine shall not be divested as a result thereof and (C) mortgage Liens or other security interests, provided, that (as regards this clause (C)), such mortgage Liens or other security interests provide that such Engine shall not become subject to the lien of such mortgage or security interest, notwithstanding the installation thereof on such airframe; (iv) install an Engine on an airframe leased to Lessee (or any Permitted Sublessee) or purchased by Lessee subject to a conditional sale or other security agreement, provided that (x) such airframe is free and clear of all Liens, except: (A) the rights of the parties to the lease or conditional sale or other security agreement covering such airframe, or their assignees, and (B) Liens of the type permitted by subparagraph (iii) of this paragraph (b) and (y) such lease, conditional sale or other security agreement provides that such Engine shall not become subject to the lien or security interest of such lease, conditional sale or other security agreement, notwithstanding the installation thereof on such airframe; (v) transfer possession of the Airframe or any Engine to the United States of America or any instrumentality or agency thereof pursuant to the Civil Reserve Air Fleet Program for a period that does not extend beyond the end of the Term so long as Lessee (or any Permitted Sublessee) shall (A) promptly notify Lessor upon subjecting the Airframe or any Engine to the Civil Reserve Air Fleet Program and provide Lessor with the name and address of the Contracting Office Representative for the Military Aircraft Command of the United States Air Force, and (B) promptly notify Lessor upon transferring possession of the Airframe or any Engine to the United States of America or any agency or instrumentality thereof pursuant to such program; or (vi) transfer possession of the Airframe or any Engine to the United States of America or any agency or instrumentality thereof pursuant to a contract, a copy of which shall be provided to Lessor, provided that the terms of such contract shall not be inconsistent with the terms hereof (including, without limitation, that no such contract shall extend beyond the end of the Term). (vii) sublease the Aircraft to any Permitted Sublessee, provided, however, that A. Lessee shall provide to the Lessor prior written notice of any proposed sublease and a copy of such sublease prior to entering into said sublease. B. Any sublease shall provide that it shall terminate at the option of Lessor, upon the expiration or earlier termination of this Lease and the term of such sublease shall not exceed the then remaining Term of this Lease (including, any Renewal Term as to which the option to renew has been irrevocably exercised). C. Any sublease shall be a true lease and not a lease intended as "security" as such term is used in Section 1-201 (37) of the UCC. D. With respect to any sublease, to the extent that it has not already done so, Lessee agrees to assign, and does hereby assign, as collateral security, and grant, and does hereby grant, to Lessor a security interest in (i) the sublease, (ii) all amounts payable thereunder, (iii) all proceeds of insurance payable to Lessee pursuant to the sublease, and (iv) all rights and remedies of Lessee under the sublease and proceeds from the exercise thereof all to secure payment and performance of all of Lessee's liabilities, obligations and indebtedness under this Lease. Lessor's security interest which is created hereby, if Lessor so elects, may be perfected by possession of the sublease rather than filing, as provided in the UCC. Until the occurrence of a Default or an Event of Default hereunder, Lessee shall have the right to collect and receive, in accordance with the terms hereof, rent and other sums payable under such sublease and to retain, use and enjoy the same. The filing of this Lease with the FAA shall constitute notice to all third parties of the security interest of Lessor in any such subleases without the need for the filing of a specific assignment thereof. E. Lessee shall deliver to the Lessor a fully executed copy of each and every sublease, which are, and will be, the only copies of such sublease marked "Secured Party's Original." All copies of the sublease shall bear the following legend: "To the extent, if any, this instrument constitutes chattel paper under the UCC, no security interest herein may be created through the transfer and/or possession of any counterpart other than the counterpart marked 'Secured Party's Original.'" All copies of each sublease, other than the "Secured Party's Original" shall bear the following legend: "'Copy.' No interest herein may be 20 21 created or the aircraft subject hereto through the transfer and/or possession hereof." F. Any sublease shall be expressly subject and subordinate to this Lease and the rights of Lessor hereunder and in and to the Aircraft. No amendment, termination, waiver or modification of any of the terms and/or conditions of such sublease shall be effective unless consented to in writing in advance by Lessor, provided, however, that Lessor's consent shall not be necessary with respect to any amendment or modification of such sublease which increases the amount of the monthly rentals under such sublease or with respect to any renewal of such sublease provided that the term of such sublease, upon effecting such renewal ends on or before the then current Term of this Lease. G. Lessee shall deliver to Lessor a consent and acknowledgment executed by Lessee and Permitted Sublessee in the form and substance satisfactory to Lessor along with such other instruments (including, without limitation, FAA recording documents and UCC financing statements) as Lessor may reasonably require. Lessee shall agree to take such other actions as are deemed necessary by Lessor to effect the terms and conditions of this Section. H. Lessee shall provide evidence, satisfactory to Lessor, that Lessor shall have the benefits of Section 1110 (as set forth in Section 6 (x) of this Lease) after giving effect to such sublease. I. Such other terms and conditions as Lessor deems necessary and appropriate. Notwithstanding anything to the contrary set forth herein, nothing in this subparagraph (vii) shall prohibit Lessee from entering into any contract or arrangement with any third party so long as Lessee maintains operational control of the Aircraft and the rights, title and interests of such third party are subject and subordinate to the rights, title and interests of Lessor hereunder. Without limiting the generality of the foregoing, the rights of any Permitted Sublessee or other transferee who receives possession by reason of a transfer permitted by this Section 16 (other than the transfer of an Engine which is deemed an Event of Loss) shall be subject and subordinate to, and any sublease permitted by this Section 16, shall expressly provide that it is subject and subordinate to, all the terms of this Lease, including, without limitation, the covenants contained in Section 8 hereof and Lessor's rights, powers and remedies hereunder, including the right to repossession pursuant to Section 19 hereof and to avoid such sublease upon such repossession and each sublease shall expressly require any Permitted Sublessee to forthwith deliver the Aircraft to Lessor upon any rightful demand therefor pursuant to Section 19 hereof, and the terms of any such sublease shall (A) not permit any Permitted Sublessee to take any action not permitted to be taken by Lessee in this Lease with respect to the Aircraft, (B) be consistent with the requirements of this Lease, (C) not permit any further subleasing or leasing of the Aircraft by the Permitted Sublessee or otherwise, (D) include appropriate provisions for the continued registration and maintenance of the Aircraft in accordance with FAA standards, and compliance with the terms and conditions hereof, including, without limitation, use and operation, insurance with an appropriate insurance certificate to be furnished to Lessor prior to Lessee's entry into any such sublease, (E) provide that the Lessor may, at its option, void or terminate such sublease following an Event of Default or Default hereunder, (F) provide that in the event that Lessor declares the Lease to be in default pursuant to Section 18 hereof, any Permitted Sublessee's rights under such sublease shall, at the option of Lessor, automatically be deemed to be assigned to Lessor (to the extent not already assigned to the Lessor), and (G) that the Permitted Sublessee shall not transfer possession of or any other rights to the Airframe or any Engine to any Person, except as expressly permitted herein. No pooling agreement, sublease or other relinquishment of possession of the Airframe or any Engine shall in any way whatsoever discharge or diminish any of Lessee's obligations to Lessor (and any assignee, mortgagee and lender of the Lessor) hereunder, discharge or diminish the obligations of the Guarantor under the Guaranty or constitute a waiver of Lessor's (or any such assignee, mortgagee or lender of the Lessor's) rights or remedies hereunder and all of the obligations of Lessee hereunder shall be and remain primary and shall continue in full force and effect as the obligations of a principal and not of a guarantor or surety. Lessor, may at any time, with or without notice to Lessee, mortgage, grant a security interest in or otherwise transfer, sell or assign all or any part of its interest in this Lease or the Aircraft or any Rent or other sums due or to become due hereunder and Lessee shall perform all of its obligations under this Lease for the benefit of such assignee, lender, creditor, mortgagee, transferee or Person except that the interest of any such assignee, lender, creditor, mortgagee, transferee or Person shall be subject to Lessee's rights 21 22 of use and possession, renewal rights, and purchase options, if any, hereunder, so long as no Default or Event of Default has occurred and is continuing hereunder. Lessee agrees that the rights hereunder of any such assignee, lender, creditor, mortgagee, transferee or Person shall not be subject to any defense, setoff, recoupment, abatement, reduction, claim or counterclaim (collectively the "Defenses") that Lessee has or may at any time have against Lessor for any reason whatsoever and Lessee hereby waives any right to assert at any time any of the foregoing Defenses against any such assignee, lender, creditor, mortgagee, transferee or Person. Lessee further agrees that any such assignee, lender, creditor, mortgagee, transferee or Person shall have all of Lessor's rights hereunder, but none of the Lessor's obligations or duties. Lessee acknowledges that any such assignment, transfer or sale will not materially change its duties or materially increase its burdens or risks hereunder and that any such assignment, transfer or sale shall be permitted even if the assignment, transfer or sale would be deemed to materially affect the Lessee's interests hereunder. Lessee further agrees, if so directed in writing, to, among other things, pay all sums due or to become due hereunder directly to the assignee, lender, creditor, mortgagee, transferee or Person or any other party designated in writing by Lessor or any such assignee, lender, creditor, mortgagee, transferee or Person. Upon the request of Lessor or any assignee, lender, creditor, mortgagee, transferee or Person, Lessee also agrees (i) to promptly execute and deliver to Lessor or to such assignee, lender, creditor, mortgagee, transferee or Person an acknowledgment of assignment in form and substance satisfactory to the requesting party which, among other things, reaffirms the basic terms and conditions of this Lease and (ii) to comply with the reasonable demands of any such assignee, lender, creditor, mortgagee, transferee or Person in order to perfect any such assignment or transfer. This Lease, including all agreements, covenants, representations and warranties, shall be binding upon and inure to the benefit of, and may be enforced by (a) Lessor and its successors, assigns (including, without limitation, all parties referred to in Section 16), agents and servants and (b) Lessee and its successors and, to the extent expressly permitted by Lessor, assigns. SECTION 17. [Intentionally Left Blank] SECTION 18. Events of Default. The term "Event of Default", wherever used herein, shall mean any of the following events or circumstances (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary, or come about or be effected by operation of law, or be pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation or any administrative or governmental body): (a) Lessee shall fail to make any payment of Rent, Casualty Value and/or any amount due pursuant to Section 23 hereof within ten (10) days after any or all of the same shall become due and payable, or, upon demand, any other amount required to be paid herein or under any other agreement with Lessor; or (b) Lessee shall fail to keep in full force and effect any of the insurance required under this Lease, or shall operate the Aircraft at a time when, or at a place in which, such insurance shall not be in effect; or (c) Lessee shall fail to perform or observe any covenant, condition or agreement, (other than those specifically referred to in this Section 18) required to be performed or observed by it under this Lease or any agreement, document or certificate delivered by or on behalf of Lessee in connection herewith, and such failure shall continue for (I) ten (10) days after written notice thereof from Lessor to Lessee and (II) provided that Lessee is diligently pursuing a cure of such default to the satisfaction of Lessor, for forty-five (45) days thereafter; or (d) Lessee shall default in the payment or performance of any indebtedness or obligation to Lessor or any affiliated person, firm or entity controlling, controlled by or under common control with Lessor, under any loan, note, security agreement, lease, guaranty, title retention or conditional sales agreement or any other instrument or agreement evidencing such indebtedness with Lessor or such other affiliated person, firm or entity affiliated with Lessor; or (e) any representation or warranty made by Lessee herein or in any certificate, agreement, statement or document hereto or hereafter furnished to Lessor in connection herewith, including without limitation, any financial information disclosed to Lessor, shall prove to be or to have been false or incorrect in any material respect; or (f) the commencement of any bankruptcy, insolvency, arrangement, reorganization, receivership, liquidation or other similar proceeding by or against Lessee or any of its properties or businesses, the appointment of a trustee, receiver, liquidator or custodian for Lessee or any of its properties of business, if Lessee suffers the entry of an order for relief under Title 11 of the United States Code or the making by Lessee of a general assignment or deed of trust for the benefit of creditors; or 22 23 (g) Lessee defaults in any payment or other obligation to any third party which default gives rise to a right on behalf of such third party to accelerate such obligation and such obligation is either accelerated by the third party or paid in full by the Lessee during the continuance of such default; or (h) Lessee (I) sells, transfers or disposes of all or substantially all of its respective stock, assets or property and after giving effect to such sale, transfer or disposition the Lessee's tangible net worth does not equal or exceed its tangible net worth immediately preceding such occurrence, or (II) merges with or into any other entity and the surviving entity after giving effect to such merger does not comply with all of the terms and conditions of this lease, including, without limitation, the terms and conditions of the Financial Covenants Rider hereto; or (i) if M. Tom Christopher shall cease to own a minimum of 25% of Parent's voting capital stock issued and outstanding from time to time; or if Parent shall cease to own 100% of Lessee's or any Guarantor's (other than Parent's) voting capital stock issued and outstanding from time to time; or if M. Tom Christopher shall no longer serve as chairman of the board or chief executive officer of Parent; or any major automobile manufacturer; or (j) there shall be a change in the ownership of Parent's stock such that Parent is no longer subject to the reporting requirements of the Securities Exchange Act of 1934 or no longer has a class of equity securities registered under Section 12 of the Securities Act of 1933; or (k) Lessee shall fail to return the Aircraft to Lessor at the end of the Term in accordance and in compliance with Section 8 hereof unless Lessee is diligently pursuing compliance with such Section to the satisfaction of Lessor; or (l) Lessee shall or shall attempt to remove, sell, transfer, convey, pledge, mortgage, encumber, part with possession of, assign or sublet the Aircraft or any part thereof (except as expressly permitted by the provisions of this Lease or such use by the United States Government pursuant to the Civil Reserve Air Fleet Program), use the Aircraft for an illegal purpose or permit the same to occur or Lessee shall create, incur, assume or suffer to exist any Lien (other than Permitted Liens) with respect to the Aircraft, this Lease or Lessor's interests thereunder; or (m) any event or condition set forth in subsections (b) through (j) of this Section 18 shall occur with respect to any guarantor or other person responsible, in whole or in part, for payment or performance of this Lease; or (n) any event or condition set forth in subsections (d) through (j) of this Section 18 shall occur with respect to any affiliated person, firm or entity controlling, controlled by or under common control with Lessee. Lessee shall promptly notify Lessor of the occurrence of any Default or Event of Default. SECTION 19. Remedies. (a) Upon the occurrence of any Event of Default and so long as the same shall be continuing, Lessor may, at its option, declare this Lease to be in default (provided that no such declaration shall be a condition to any suit against Lessee for specific performance of a defaulted covenant or for damages in respect of such default upon such occurrence or at any time thereafter), and at any time thereafter, whether or not such Event of Default shall be continuing, Lessor may exercise any one or more of the following remedies, as Lessor in its sole discretion shall lawfully elect: (i) Proceed by appropriate court action, either at law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease or to recover damages for breach thereof. (ii) By notice terminate this Lease, whereupon all rights of Lessee to the use of the Aircraft or any part thereof shall absolutely cease and terminate but Lessee shall remain liable as hereinafter provided and thereupon Lessee, if so requested by Lessor, shall (a) at its expense promptly return the Aircraft to the possession of Lessor at such place as Lessor shall designate and in the condition required upon the return thereof pursuant to and in accordance with the terms of this Lease, (b) Lessor, at its option, may enter upon the premises where the Aircraft is located and take immediate possession of and remove the same, together with any Engines and Parts by self-help, summary proceedings or otherwise without any liability of any kind whatsoever on the part of Lessor for or by reason of such entry or taking of possession and Lessee hereby waives any cause of action it may have arising from, or in connection with, the foregoing or (c) Lessee will provide storage as set forth in this Lease. In addition, upon the written request of Lessor, Lessee, at its expense, will replace any engine installed on the Airframe with an Engine. Lessee shall, without further demand, forthwith pay to Lessor an amount equal to any unpaid Rent due and payable for all periods up to and including the Basic Rent Date following the date on which Lessor has 23 24 declared this Lease to be in default, plus, as liquidated damages for loss of a bargain and not as a penalty, an amount equal to the Casualty Value of the Aircraft, computed as of the Basic Rent Date immediately following the date on which Lessor has declared this Lease to be in default (plus all costs, charges and expenses including, legal fees and disbursements incurred by Lessor by reason of the occurrence of any Event of Default or the exercise of any of Lessor's remedies with respect thereto or otherwise). Following the return of the Aircraft to Lessor pursuant to this subparagraph (ii), Lessor shall proceed at its option to sell or otherwise dispose of the Aircraft by public or private sale, with or without notice, and without having the Aircraft present at the place of sale and in such manner as it shall deem appropriate, provided that Lessor, if it so elects, may purchase the Aircraft at such sale for a price not less than the highest bona fide bid given by a Person unrelated to Lessee. Lessee waives all its rights under laws governing such sale to the extent permitted by law. Lessor may apply any deposit or other cash collateral or sale or remarketing proceeds of the Aircraft at any time to reduce any amounts due to Lessor. Notwithstanding the foregoing, Lessor may at its option and in its sole discretion keep idle, lease, or use or operate all or part of the Aircraft without any liability whatsoever and may use Lessee's premises for storage pending lease or sale or for holding a sale without liability for rent or costs or any other matter whatsoever. The net proceeds of such sale or lease as provided above shall be applied by Lessor (x) first, to pay all costs, charges and expenses, including the cost of discharging all Liens, on the Aircraft and all legal fees and disbursements incurred by Lessor as a result of the Event of Default and/or the exercise of its remedies with respect thereto, (y) second, to pay to Lessor an amount equal to any unpaid Rent due and payable and the Casualty Value, to the extent not previously paid and (z) third, to reimburse Lessee for the Casualty Value to the extent paid by Lessee as liquidated damages. Any surplus remaining thereafter shall be retained by Lessor. To the extent that all Rent then due and payable with respect to the Aircraft and the Casualty Value have not been previously paid, Lessee shall forthwith pay upon demand to Lessor the sum of (A) the amount by which (1) the sum of (aa) all Rent then due and payable with respect to the Aircraft, (bb) the Casualty Value or portion thereof not theretofore paid and (cc) the amount payable under clause (x) of the preceding sentence exceeds (2) the net proceeds of the sale or lease of the Aircraft actually received by the Lessor and (B) interest at the Late Payment Rate on the full amount of said Casualty Value and Rent then due and unpaid, computed from the date such sums are due until the same are paid by Lessee. For purposes of computing liquidated damages under this subparagraph (ii) only, the proceeds of any releasing of the Aircraft shall be determined by discounting to present value, at the rate of twelve and one-half percent (12.5%) per annum, the periodic rentals which are payable to Lessor pursuant to such re-lease, up to and including the Expiration Date. (b) Lessee shall be liable for all costs, charges and expenses, including legal fees and disbursements, incurred by Lessor by reason of the occurrence of any Event of Default, the exercise of any of Lessor's rights or remedies with respect thereto or otherwise. (c) Lessee hereby waives, to the maximum extent now or hereafter permitted by applicable law, for itself and for its successors or assigns any and all rights Lessee or Lessee's successors or assigns may have following an Event of Default under any bankruptcy, insolvency or similar laws, rules or regulations with respect to the continued possession or use of the Aircraft or relief from the payment of Rent therefor or otherwise with respect to this Lease. Rejection of this Lease by any bankruptcy trustee or debtor-in-possession shall entitle Lessor to the immediate return of the Aircraft and to liquidated damages calculated in the manner provided for in Section 19(a)(ii) above with respect to an Event of Default. (d) No right or remedy referred to herein is intended to be exclusive, but each shall be cumulative and in addition to any other right or remedy referred to above or otherwise available to Lessor at law or in equity, including, without limitation, such rights and/or remedies as are provided for in the UCC. No express or implied waiver by Lessor of any Default or Event of Default hereunder shall in any way be, or be construed to be, a waiver of any future or subsequent Default or Event of Default. The failure or delay of Lessor in exercising any rights granted it hereunder upon the occurrence of any of the contingencies set forth herein shall not constitute a waiver of any such right upon the continuation or reoccurrence of any such contingencies or similar contingencies, and any single or partial exercise of any particular right by Lessor shall not exhaust the same or constitute a waiver of any other right provided for or otherwise referred to herein. (e) 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 in mitigation of Lessor's damages as set forth in this Section 19 or which may otherwise limit or modify any of Lessor's rights or remedies under this Section 19. To the extent permitted by applicable law, Lessee waives any and all rights and remedies conferred upon a lessee by Section 2A-508 to 2A-522 (inclusive) of the UCC, including, without limitation, any rights of Lessee (a) to cancel or repudiate this Lease or any supplement or any document relating thereto, (b) to reject or evoke acceptance of the Aircraft or any component thereof and (c) to recover from Lessor any general or consequential damages, for any reason whatsoever. 24 25 SECTION 20. Performance of Obligations of Lessee by Lessor. If any Default or Event of Default occurs or if Lessee fails to perform or comply with any of its agreements contained herein, Lessor shall have the right, but shall not be obligated, to effect such performance or compliance and the amount of any out-of-pocket expenses and other reasonable expenses of Lessor incurred in connection with the performance of or compliance with such agreements, as the case may be, together with interest thereon at the Late Payment Rate, shall be payable by Lessee promptly upon demand and any such action by Lessor shall not be deemed a cure or waiver of any Default or Event of Default hereunder. SECTION 21. Intent Title to the Aircraft shall at all times remain in Lessor and at no time during the Term shall title become vested in Lessee. Lessee shall acquire no right, title or interest in or to the Aircraft except the right to use the same pursuant to the terms of this Lease. Notwithstanding anything to contrary contained herein or otherwise, (i) should a court of competent jurisdiction determine that this agreement is one intended as security, and (ii) to secure the prompt and full payment and performance as and when due of any and all obligations and indebtedness of Lessee to Lessor, now existing or hereafter created of any kind whatsoever, including, without limitation any other aircraft lease executed contemporaneously with this Lease, Lessee hereby grants and conveys to, Lessor a security interest and lien in this Lease, the Aircraft, any subleases relating to the Aircraft or any part thereof and any and all proceeds (including insurance proceeds) of any or all of the foregoing. The security interest granted herein shall survive the termination or expiration of this Lease by any Event of Default or Default or otherwise and shall remain in full force and effect until such time as Lessee has no further obligations of any kind whatsoever under this Lease. SECTION 22. Notices. All communications and notices provided for herein shall be in writing and shall become effective upon hand delivery or upon delivery to an overnight delivery service or two (2) Business Days after being deposited in the United States mail with proper postage for first-class mail prepaid, sent by registered or certified mail, return receipt requested, and addressed to Lessor or Lessee at their respective addresses set forth under the signatures hereto or such other address as either party may hereafter designate by written notice to the other. SECTION 23. End of Term Options. (a) If no Event of Default (or event or condition which, with the passage of time or giving of notice, or both, would become such an Event of Default) has occurred and is continuing, on each Expiration Date, Lessee shall have the option to: (i) purchase the Aircraft pursuant to paragraph (b) below (the "Purchase Option"), (ii) sell the Aircraft pursuant to paragraph (c) below (the "Sale Option") or (iii) on any Expiration other than the Final Expiration Date, to renew the Term of the Lease for an additional one year period on the same terms and conditions as are set forth herein except that the amount of Basic Rent payable during such Renewal Term shall be as set forth for such Renewal Term on Schedule 2-A to Lease Supplement No. 1 (the "Renewal Option"). Subject to the foregoing limitations on exercise of the Renewal Option, Lessee shall give Lessor 180 days irrevocable written notice (the "Option Notice") prior to each Expiration Date if Lessee intends to exercise the Purchase Option, the Sale Option or the Renewal Option. If Lessee does not provide a timely Option Notice, then the Lessee shall be irrevocably deemed to have exercised (x) the Renewal Option as of the then current Expiration Date provided that the then current Expiration Date is not the Final Expiration Date, or (y) the Purchase Option as of the then current Expiration Date if the then current Expiration Date is Final Expiration Date. (b) Upon exercise of the Purchase Option, Lessee shall pay to Lessor on the applicable Expiration Date an amount equal to: (i) all Rent then due and owing under the Lease; plus (ii) all taxes, assessments and other charges due or payable in connection with the sale of the Aircraft to Lessee; plus (iii) the Purchase Option Price as of such Expiration Date. Upon receipt of the amounts set forth in the preceding sentence, Lessor shall convey all of Lessor's right, title and interest in and to the Aircraft to Lessee on an "AS-IS," "WHERE-IS" BASIS WITHOUT REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, and without recourse to Lessor, except that the Aircraft shall be free and clear of all liens created by Lessor. (c) Upon exercise of the Sale Option, Lessee shall place the Aircraft in the condition required by Section 8 of the Lease and shall obtain bids for the Aircraft and market such Aircraft in a commercially reasonable manner to the highest qualified bidder on or before the Expiration Date, at Lessee's sole cost and expense; provided, however, that no sale shall occur without Lessor's prior written consent. Lessor agrees that, if so requested by Lessee and upon performance of and compliance with the other terms and conditions of this Section 23 by Lessee, it shall consent to any bona fide offer to purchase the Aircraft, including, any offer to purchase the Aircraft made by Lessee, which equals or exceeds the Maximum Lessor Risk. Lessor may also offer to purchase the Aircraft pursuant to this Section 23 and/or solicit and/or obtain bids for the Aircraft, provided, however, that Lessor shall be under no duty to so act. 25 26 If the Aircraft is sold pursuant to the exercise of a Sale Option on or before the applicable Expiration Date, then, on the earlier of such Expiration Date or the date on which the proceeds from such sale are paid by the purchaser of the Aircraft (the "Termination Date"), Lessor shall receive all proceeds of such sale and Lessee shall pay to Lessor: (i) all Rent due and owing under the Lease through and including the Expiration Date; plus (ii) all taxes, assessments and other charges due or payable in connection with the sale of the Aircraft; plus (iii) the amount by which the net proceeds of such sale are less than the Purchase Option Price as of the Expiration Date, if any, but in no event more than the Maximum Lessee Risk, as of the Expiration Date. In the event that the sale price is greater than the Purchase Option Price, together with the amounts set forth in (i) and (ii) above to the extent that such amounts have not already been paid by Lessee, any excess of such sales price shall be remitted to Lessee. Upon receipt of the amounts set forth in the preceding sentence, Lessor shall convey all of Lessor's right, title and interest in and to the Aircraft to the purchaser thereof on an "AS-IS," "WHERE-IS" BASIS WITHOUT REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, and without recourse to Lessor, except that the Aircraft shall be free and clear of all liens created by Lessor. If the Aircraft is not sold pursuant to the exercise of a Sale Option on or before such Expiration Date, then, on such Expiration Date, Lessee shall return the Aircraft to Lessor under the terms and in the condition required by Section 8 of the Lease, and shall pay to Lessor an amount equal to: (i) all Rent then due and owing under the Lease through and including such Expiration Date; plus (ii) the applicable Purchase Option Price. Lessor's actual out-of- pocket costs and expenses incurred in removing, storing, repairing and selling the Aircraft during the period between the date the Aircraft is returned and the actual sale thereof shall be payable to Lessor by Lessee upon presentation of Lessor's invoice therefor. Upon sale of the Aircraft, the net proceeds thereof shall be allocated: FIRST, to Lessor in an amount equal to: (i) to the extent that such amounts have not already been paid by Lessee, all Rent then due and owing under the Lease through and including such Expiration Date, plus (ii) to the extent that such amounts have not already been paid by Lessee, Lessor's actual out-of-pocket costs and expenses incurred in removing, storing, repairing and selling the Aircraft, plus (iii) all taxes, assessments and other charges due or payable in connection with the sale of the Aircraft, plus (iv) to the extent that such amount has not already been paid by Lessee the Purchase Option Price and SECOND, the excess, if any, to Lessee. SECTION 24. Intentionally Left Blank. SECTION 25. Transaction Expenses. Lessee shall pay all actual and reasonable fees, costs and expenses incurred by Lessor in connection with this Lease, whether or not the transactions contemplated hereby are consummated, including, without limitation, appraisal fees, Lessor's in-house counsel expenses and fee of $15,000.00, FAA Counsel fees and expenses, and FAA and UCC title and lien searches, reports, filing and recording fees, charges and taxes. Lessee also agrees to pay all fees and expenses of Lessor's counsel, FAA Counsel and all other third parties who are engaged by Lessor to enforce Lessor's rights and/or remedies hereunder, to update any FAA or UCC title and/or lien reports and/or to review, file and record any and all documents and instruments as required by Lessor or the FAA during and after the Term of this Lease. SECTION 26. Miscellaneous. (a) All agreements, indemnities, representations, covenants and warranties contained in this Lease or any agreement, document or certificate delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery of this Lease and the expiration or other termination of this Lease for any reason whatsoever. (b) Any provision of this Lease which may be determined to be 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 hereof prohibited or unenforceable in any respect. (c) This Lease, and each related instrument, document, agreement and certificate, collectively constitute, and are intended to collectively constitute, the complete and exclusive statement of the terms of the agreement between Lessor and Lessee with respect to the purchase and leasing of the Aircraft and cancel and supersede any and all prior or contemporaneous oral or written understandings, memoranda, negotiations, communications and agreements with respect thereto including, without limitation, any proposal letter, commitment letter and/or term sheet delivered to the Lessee by Lessor. (d) This Lease may be executed in any number of counterparts and by the different parties hereto on separate counterparts. Each counterpart of the Lease bears the following legend on the face and execution pages thereof: "This is Counterpart No. 1 of a total of 3 counterparts. Only Counterpart No. 1 shall be 26 27 considered chattel paper for purposes of the Uniform Commercial Code and a security interest may be perfected only by possession of Counterpart No. 1." To the extent, if any, that this Lease constitutes chattel paper (as such term is defined in the UCC as in effect in any applicable jurisdiction) no security interest in this Lease may be created through the transfer or possession of any counterpart other than the counterpart marked "Counterpart No. 1". (e) The division of this Lease into sections, the provision of a table of contents and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Lease. (f) The actual dates of execution hereof by the parties hereto are respectively the dates set forth under the signatures hereto, however this Lease shall be effective as of the date first above written. (g) Lessee will promptly and duly execute and deliver to Lessor and any assignee, mortgagee and/or lender of the Lessor, such other documents and assurances, including, without limitation, such amendments to this Lease as may be required by Lessor (and by any assignee, mortgagee and/or lender of the Lessor), and UCC financing statements and continuation statements, and will take such further action as Lessor or any such assignee, mortgagee and/or lender may from time to time request in order to carry out more effectively the intent and purposes of this Lease and to establish and protect the rights and remedies created or intended to be created in favor of Lessor and of any such assignee, mortgagee and/or lender. Lessee irrevocably appoints Lessor (and any assignee, mortgagee and/or lender of the Lessor) its attorney-in-fact to act in Lessee's name and on its behalf to make, execute, deliver and file any instruments or documents and to take any action as Lessor (and any such assignee, mortgagee and/or lender) deems necessary or appropriate to carry out the intent of this Lease or any agreements, documents or instruments related thereto. To the extent appropriate or permissible under applicable law, such appointment is coupled with an interest, shall be irrevocable and shall terminate only upon payment in full of the obligations set forth in this Lease and/or any agreements, documents or instruments related thereto. (h) Time is of the essence in the payment and performance of all of Lessee's obligations under the Lease. This Lease shall be deemed to have been executed in Rhode Island by virtue of the Lessor having countersigned and accepted the Lease in Rhode Island and shall be deemed to be performed in Rhode Island by virtue of the payment of Rent to be made to Lessor in Rhode Island, and this Lease shall be delivered for closing purposes in Lessor's office at 50 Kennedy Plaza, Providence, Rhode Island. This Lease shall in all respects be governed by, and construed in accordance with, the laws of the State of Rhode Island, without giving effect to principles of conflicts of law or choice of law, including all matters of construction, validity and performance. Lessee hereby irrevocably consents and agrees that any legal action, suit or proceeding arising out of or in any way in connection with this Agreement may be instituted or brought in the courts of the State of Rhode Island or the United States District Court for the District of Rhode Island, as Lessor may elect, and by execution and delivery of this Lease, Lessee hereby irrevocably accepts and submits to, for itself and in respect of its property, generally and unconditionally, the non-exclusive jurisdiction of any such court, and to all proceedings in such courts. To the extent permitted by applicable law, this Lease shall be deemed a "finance lease" under Section 2A-103(g) of the UCC. LESSEE ACKNOWLEDGES AND AGREES THAT THIS LEASE IS A COMMERCIAL TRANSACTION. LESSEE ALSO HEREBY KNOWINGLY AND FREELY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY LITIGATION ARISING HEREFROM OR IN RELATION HERETO. Any action by Lessee against Lessor for any cause of action relating to this Lease shall be brought within one year after any such cause of action first arises. [THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK] 27 28 SECTION 27. AMENDMENTS. NO TERM OR PROVISION OF THIS LEASE MAY BE AMENDED, ALTERED, WAIVED, DISCHARGED OR TERMINATED ORALLY, EXCEPT IN A WRITING SIGNED BY A DULY AUTHORIZED OFFICER OF THE PARTY AGAINST WHOM THE ENFORCEMENT OF THE AMENDMENT, ALTERATION, WAIVER, DISCHARGE OR TERMINATION IS SOUGHT. RRW _________________ LESSEE'S INITIALS SECTION 28. Truth in Leasing. THE AIRCRAFT, AS EQUIPMENT, BECAME SUBJECT TO THE MAINTENANCE REQUIREMENTS OF PART 121 OF THE FEDERAL AVIATION REGULATIONS ("FARS") UPON THE REGISTRATION OF THE AIRCRAFT WITH THE FAA. LESSOR CERTIFIES THAT DURING THE 12 MONTHS (OR PORTION THEREOF DURING WHICH THE AIRCRAFT HAS BEEN SUBJECT TO U.S. REGISTRATION) PRECEDING THE EXECUTION OF THIS LEASE, THE AIRCRAFT HAS BEEN MAINTAINED AND INSPECTED UNDER PART 121 OF THE FARS. LESSEE CERTIFIES THAT THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER PART 121 OF THE FARS FOR OPERATIONS TO BE CONDUCTED UNDER THE LEASE. UPON EXECUTION OF THIS LEASE, AND DURING THE TERM HEREOF, THE LESSEE, WHOSE NAME AND ADDRESS ARE SET FORTH IMMEDIATELY BELOW, ACTING BY AND THROUGH THE SIGNATORY HERETO, WHO EXECUTES THIS SECTION SOLELY IN HIS CAPACITY OF THE LESSEE SET FORTH BELOW HIS SIGNATURE, CERTIFIES THAT THE LESSEE SHALL BE RESPONSIBLE FOR THE OPERATIONAL CONTROL OF THE AIRCRAFT UNDER THE LEASE, UNLESS, THE AIRCRAFT IS SUBLEASED TO AN AIR CARRIER OR AIR TAXI OPERATOR CERTIFICATED UNDER PART 121 OR PART 135, RESPECTIVELY, OF THE FARS. THE LESSEE FURTHER CERTIFIES THAT IT UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FARS, PROVIDED HOWEVER, THAT THE LESSEE SHALL NOT BE DEEMED TO BE RESPONSIBLE FOR THE OPERATIONAL CONTROL OF THE AIRCRAFT FOR SO LONG AS THE AIRCRAFT IS IN POSSESSION OF ANY SUBLESSEE THAT IS CERTIFICATED UNDER PART 121 OR PART 135 OF THE FARS. AN EXPLANATION OF FACTORS BEARING ON OPERATIONAL CONTROL AND PERTINENT FARS CAN BE OBTAINED FROM THE NEAREST FEDERAL AVIATION FLIGHT STANDARD DISTRICT OFFICE, GENERAL AVIATION DISTRICT OFFICE OR AIR CARRIER DISTRICT OFFICE. IN WITNESS WHEREOF, the parties hereto have caused the Lease to be duly executed by the respective officers thereunto duly authorized. Lessor: Lessee: Fleet Capital Corporation Kitty Hawk Aircargo, Inc. By: /s/ PATRICE S. KANE By: /s/ RICHARD R. WADSWORTH ------------------------- ---------------------------- Print Name: Patrice S. Kane Print Name: Richard R. Wadsworth Title: Vice President Title: Vice President and CFO Date: December 26, 1996 Date: December 27, 1996 Address: 50 Kennedy Plaza, 5th Fl. Address: P.O. Box 612787 Providence, RI 02903 1515 W. 20th Street DFW International Airport, Texas 75261 This is Counterpart No. 1 of a total of 3 counterparts. Only Counterpart No. 1 shall be considered chattel paper for purposes of the Uniform Commercial Code and a security interest may be perfected only by possession of Counterpart No. 1. 28 29 EXHIBIT A Definitions (a) All References in the Lease to designated Sections and other subdivisions are to such designated Sections and other subdivisions only, and the words "herein," "hereof" and "hereunder" and other words of similar import refer to the Lease as whole and not to any particular Section or other subdivision. (b) Except as otherwise indicated, all the agreements and instruments defined herein or in the Lease shall mean such agreements and instruments as the same may from time to time be supplemented or amended, or as the terms thereof may be waived or modified to the extent permitted by, and in accordance with, the terms thereof. (c) The terms defined herein and in the Lease shall, for purposes of the Lease and all Lease Supplements, Schedules and Exhibits thereto, have the meanings assigned to them and shall include the plural as well as the singular as the context requires. (d) Unless otherwise specified, all financial terms used in this Lease shall be defined in accordance with GAAP and shall be determined on a consolidated basis for Parent. (e) The following terms shall have the following meanings for all purposes of the Lease: Basic Rent Date, Daily Lease Rate, Expiration Date, First Basic Rent Date, Last Basic Rent Date, Maximum Lessee Risk, Maximum Lessor Risk, Permitted Deductible, Primary Hangar Location, Purchase Option Price and Rent Commencement Date shall have the meanings set forth in Schedules 2, 2-A and 2-B to Lease Supplement No. 1 to the Lease. Abatements shall have the meaning set forth therefor in Section 7 of the Lease. Acceptance Date shall mean the date (which date shall be no later than the date designated as the "Last Acceptance Date" on Schedule No. 2 to Lease Supplement No. 1) on which Lessee has irrevocably and unconditionally accepted the Aircraft for lease under the Lease as evidenced by the execution and delivery of Lease Supplement No. 1 relating thereto dated such date. Additions shall have the meaning set forth in Section 11 of the Lease. Aircraft shall mean (i) the Airframe, (ii) the Engines, and (iii) to the extent applicable, the Records. Aircraft Marking shall mean the marking described on Lease Supplement No. 2. Airframe shall mean (i) the Aircraft described in Schedule No. 1 to Lease Supplement No. 1, and, unless the context requires otherwise, shall not include the Engines and (ii) any and all Parts from time to time incorporated in, installed on or attached to such Aircraft and any and all Parts removed therefrom so long as title thereto shall remain vested in Lessor in accordance with the applicable terms of this Lease after removal from the Aircraft. Basic Rent shall have the meaning set forth in Section 3 of the Lease. Basic Term shall mean the number of months set forth in Schedule No. 2 to Lease Supplement No. 1. Bill of Sale shall have the meaning set forth in Section 2 of the Lease. Business Day shall mean any day other than a Saturday, Sunday or other day on which banks located in Providence, Rhode Island are closed or are authorized to close. Casualty Value shall have the meaning set forth in Schedule No. 3 to Lease Supplement No. 1 to the Lease except that, in the case of an Event of Loss covered by the insurance required to be maintained by Lessee pursuant to Section 14(b) of the Lease (or which would have been covered by such insurance, had such insurance been maintained as required), Casualty Value shall mean the higher of fair market sales value (as determined by the Lessor in its sole discretion) or the value determined in accordance with Schedule No. 3 to Lease Supplement No. 1. 29 30 Civil Reserve Air Fleet Program shall mean the Civil Reserve Fleet Program administered by the United States Government pursuant to Executive Order No. 11490, as amended, or any substantially similar program. Claims shall have the meaning set forth in Section 15 of the Lease. Default shall mean an event or circumstance which, after the giving of notice or lapse of time, or both, would become an Event of Default. Defenses shall have the meaning set forth in Section 16 of the Lease. Engine shall mean (i) each of the engines described and listed by manufacturer's serial numbers in Schedule No. 1 to Lease Supplement No. 1 and originally installed on the Airframe covered by such Lease Supplement whether or not thereafter installed on such Airframe or any other airframe from time to time; (ii) any engine which may from time to time be substituted, pursuant to the applicable terms of this Lease, for an Engine leased hereunder and (iii) in each case set forth in clauses (i) and (ii) hereof, with any and all Parts incorporated in or installed on or attached to such Engine or engine or any and all Parts removed therefrom so long as title thereto shall remain vested in Lessor in accordance with the applicable terms of this Lease after removal from such Engine. The term "Engines" means, as of any date of determination, all Engines leased hereunder. Event of Default shall have the meaning set forth in Section 18 of the Lease. Event of Loss with respect to the Aircraft, the Airframe or any Engine shall mean any of the following events with respect to such property (i) loss of such property or the use thereof due to theft, disappearance, destruction, damage beyond 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 constructive total loss; (iii) the condemnation, confiscation or seizure of, or requisition of title to or use of, such property by the act of any government (foreign or domestic) or of any state or local authority or any instrumentality or agency of the foregoing other than use by the United States Government pursuant to the Civil Reserve Air Fleet Program where such use is in express compliance with the terms and conditions of this Lease ("Requisition of Use"); (iv) as a result of any rule, regulation, order or other action by any government (foreign or domestic) or governmental body (including, without limitation, the FAA or any similar foreign governmental body) having jurisdiction, the use of such property shall have been prohibited, or such property shall have been declared unfit for use, for a period of six (6) consecutive months, unless Lessee, prior to the expiration of six-month period, shall have undertaken and, in the opinion of the Lessor, shall be diligently carrying forward all steps which are necessary or desirable to permit the normal use of such property by Lessee or, in any event, if use shall have been prohibited, or such property shall have been declared unfit for use, for a period of twelve (12) consecutive months; (v) with respect to an Engine, the removal thereof from the Airframe for a period of six (6) months or longer, whether or not such Engine is operational other than as expressly permitted by Sections 11 (f) or 13(b) hereof, or (vi) such property shall be returned to the Manufacturer, other than for modification in the event of patent infringement or for repair or replacement (any such return being herein referred to as a "Return to Manufacturer"). The date of such Event of Loss shall be the date of such theft, disappearance, destruction, damage, Requisition of Use, prohibition, unfitness for use for the stated period, removal for the stated period or Return to Manufacturer. An Event of Loss with respect to the Aircraft shall be deemed to have occurred if an Event of Loss occurs with respect to the Airframe. An Event of Loss with respect to any Engine shall not, without loss of the Airframe, be deemed an Event of Loss with respect to the Aircraft. FAA shall mean the United States Federal Aviation Administration and/or the Administrator of the Federal Aviation Administration and the Department of Transportation, or any person, governmental department, bureau, authority, commission or agency succeeding the functions of any of the foregoing. FAA Counsel shall mean Messrs. Daugherty, Fowler & Peregrin, 204 North Robinson, 900 City Place, Oklahoma City, Oklahoma 73102, or such other counsel as Lessor may designate. Federal Aviation Act shall Subtitle VII of Title 49 of the United States Code, as amended and recodified. Final Inspection shall have the meaning set forth therefor in Section 12 of the Lease. 30 31 Financial Covenants Rider shall mean the Financial Covenants Rider set forth as Exhibit D hereto. GAAP shall mean generally accepted accounting principles, applied on a consistent basis, as set froth in Opinions of the Accounting Principles Board of the American Institute of Certified Public Accountants and/or in statements of the Financial Accounting Standards Board and/or their respective successors and which are applicable in the circumstances as of the date in question. Accounting principles are to be applied on a "consistent basis" when the accounting principles applied in a current period are comparable in all material respects to those accounting principles applied in a preceding period. Guarantor shall mean each of Kitty Hawk, Inc., a Delaware corporation, Aircraft Leasing, Inc., a Texas corporation and Kitty Hawk Charters, Inc. a Texas corporation. Guaranty shall mean the Guaranty described in Section 2 (I)(a)(xii) of the Lease. Impositions shall have the meaning set forth in Section 10 of the Lease. Late Payment Rate shall mean the lesser of a rate equal to 1.5% per month or the highest rate permitted by applicable law. The Late Payment Rate shall be computed on the basis of a 360 day year and a 30 day month. Lease Supplement shall mean a supplement to the Lease to be entered into on the Acceptance Date by Lessor and Lessee, which supplement shall be substantially in the form as attached to the Lease and identified as either Lease Supplement No. 1 or Lease Supplement No. 2 both of which are attached to the Lease and made a part thereof. Lessor's Cost shall have meaning set forth in Schedule No. 2 to Lease Supplement No. 1 to the Lease. Lessor's Liens shall mean any Liens created or granted by Lessor with respect to Lessor's purchase or financing of the Aircraft or resulting from claims against Lessor not related to Lessor's ownership of the Aircraft. Liens shall mean all liens, charges, security interests, and encumbrances of every nature and description whatever, including, without limitation, liens, charges, security interests and encumbrances with respect to Impositions, (other than Lessor's Liens) and rights of third parties under management, pooling, interchange, overhaul, repair or other similar agreements or arrangements. Major Checks shall have the meaning set forth therefor in Section 12 of the Lease. Manufacturer shall mean the manufacturers identified on Lease Supplement No. 2 and their respective successors and assigns. Option Notice shall have the meaning set forth therefor in Section 23 of the Lease. Parent shall mean Kitty Hawk, Inc., a Delaware corporation. Parts shall mean all appliances, avionics, parts, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature (other than Additions or complete Engines), which may from time to time be incorporated or installed in or attached to the Airframe or any Engine or so long as title thereto shall be vested in Lessor in accordance with the applicable terms of this Lease. Permitted Liens shall mean (a) the respective rights of others under agreements or arrangements to the extent expressly provided by the terms of Section 16 of the Lease, (b) Lessor's Liens and (c) Liens for taxes either not yet due or being contested by Lessee in good faith and inchoate materialmen's, mechanic's, workmen's, repairmen's, employee's or other like Liens arising in the ordinary course of business of Lessee for sums not yet delinquent or being contested in good faith (and for the payment of which adequate assurances and/or security have, in Lessor's sole judgment, been provided to Lessor) with due diligence and by appropriate proceedings, if counsel for Lessor shall have determined in his sole opinion that the nonpayment of any such tax or Lien or the contest of any such payment in such proceedings does not and will not adversely affect the title, property or rights of Lessor. 31 32 Permitted Sublessee shall mean any person, firm or entity controlling, controlled by or under common control with Lessee (or such other Person consented to in writing by Lessor, which consent shall be given, if at all, in the sole discretion of Lessor) which is (i) a U.S. Air Carrier, (ii) is not the subject of a petition, proceeding or final order under any bankruptcy, insolvency, liquidation or reorganization laws, or subject to any receivership or custodian proceedings or appointments under laws, or any other similar laws, in effect on the date any permitted sublease is entered into pursuant to this Lease, and (iii) which enters into a sublease in accordance with, and contains all the terms and conditions of, Section 16 hereof. Person shall mean any individual, partnership, corporation, trust, association, joint venture, joint stock company, limited liability company, limited liability partnership or non-incorporated organization or government or any department or agency thereof, or any other entity of any kind whatsoever. Purchase Documents shall mean the documents identified on Lease Supplement No. 2 and such other documents as Lessor shall consider necessary or advisable in order to convey to Lessor title to the Aircraft as contemplated under the Lease, which documents shall be in form and substance satisfactory to Lessor. Purchase Option shall have the meaning set forth therefor in Section 23 of the Lease. Records means any and all logs, manuals, certificates, date and inspection, modification, maintenance, engineering, technical and overhaul records (including all computerized data, records and materials of any kind whatsoever) with respect to the Aircraft, including, without limitation, all records required to be maintained by the FAA or any other governmental agency or authority having jurisdiction with respect to the Aircraft or any Manufacturer of the Aircraft (or any part thereof) with respect to the enforcement of warranties or otherwise, which Records shall be at all times the property of the Lessor after the Acceptance Date. Renewal Term shall have the meaning set forth in Section 23 of the Lease. Rent shall have the meaning set forth in Section 3 of the Lease. Replacement Parts shall have the meaning set forth in Section 11 of the Lease. Requisition of Use shall have the meaning set forth in the Event of Loss definition contained herein. Renewal Option shall have the meaning set forth therefor in Section 23 of the Lease. Return to Manufacturer shall have the meaning set forth in the Event of Loss definition contained herein. Sale Option shall have the meaning set forth therefor in Section 23 of the Lease. Section 1110 shall have the meaning set forth in Section 6 of the Lease. Supplemental Rent shall have the meaning set forth in Section 3 of the Lease. Termshall mean the Basic Term together with any Renewal Term entered into pursuant to Section 23 of the Lease. Termination Date shall have the meaning set forth therefor in Section 23 of the Lease. Test Flight shall have the meaning set forth therefor in Section 12 of the Lease. UCC shall mean the Uniform Commercial Code as in effect in the applicable jurisdiction. 32 33 U.S. Air Carrier means any United States air carrier as to which there is in force exemption authority under Part 298 issued by the U.S. Department of Transportation or a certificate issued pursuant to Section 401 of the Federal Aviation Act, and as to which there is in force an air carrier operating certificate issued pursuant to Part 121 of the regulations under such Federal Aviation Act, or which may operate as an air carrier by certification or otherwise under any successor or substitute provisions therefor or in the absence thereof. Warranty Bill of Sale shall mean a warranty bill of sale in the form of Exhibit B hereto. Initials: Lessee: RRW __________________ Lessor: PSK __________________ 33 34 LEASE SUPPLEMENT NO. 1 under AIRCRAFT LEASE dated as of December 30, 1996, by and between Fleet Capital Corporation, as lessor ("Lessor"), and Kitty Hawk Aircargo, Inc., as lessee ("Lessee"). (a) The Aircraft. Lessee hereby acknowledges, agrees and certifies that the Aircraft as set forth and described in Schedule No. 1 hereto is in Lessee's possession, has been inspected by Lessee to its complete satisfaction, has been found to be in good working order, repair and condition and fully equipped to operate as required under applicable law for its purpose, is of a size, design, capacity and manufacture selected by Lessee and suitable for Lessee's purposes, and is, as of the date set forth below, unconditionally, irrevocably and fully accepted by Lessee for lease under the Lease. Lessee hereby further unconditionally and irrevocably reaffirms its acknowledgments and agreements in the Lease. All capitalized terms used herein which are not otherwise defined herein shall have the meanings given to such terms in the Lease. (b) Representations by Lessee. Lessee hereby represents and warrants to Lessor that on the date hereof: (1) The representations and warranties of Lessee set forth in the Lease and all certificates and opinions delivered in connection therewith were true and correct in all respects when made and are true and correct as of the date hereof, with the same force and effect as if the same had been made on this date. (2) Lessee has satisfied or complied with all conditions precedent and requirements as set forth in the Lease and Lease Supplements which are required to be or to have been satisfied or complied with on or prior to the date thereof. (3) No Default or Event of Default under the Lease has occurred and is continuing on the date hereof. (4) Lessee has obtained, and there are in full force and effect, such insurance policies with respect to the Aircraft, as such term is defined in the Lease, as are required to be obtained under the terms of the Lease. (5) Lessee has furnished no equipment for the Aircraft other than as stated on Schedule No. 1 hereto or permitted as an Addition thereto pursuant to the Lease. (6) The facts, terms, information, description and costs set forth in the attached schedules hereto are true, complete, accurate and correct. (7) The Lease shall be deemed a "finance lease" under Section 2A-103 (g) of the UCC. Date of unconditional, irrevocable and final acceptance by Lessee: December __, 1996. IN WITNESS WHEREOF, Lessee has caused this Lease Supplement No. 1 to be duly executed by its officer thereunto duly authorized. Kitty Hawk Aircargo, Inc. By: /s/ RICHARD R. WADSWORTH -------------------------------- Title: Vice President and CFO ----------------------------- Date: December 27, 1996 34 35 SCHEDULE NO. 1 TO LEASE SUPPLEMENT NO. 1 Description of Aircraft 1978 Boeing B727-214 Advanced Freighter aircraft which consists of the following components: (a) Airframe bearing FAA Registration Mark 751US and manufacturer's serial number 21513. (b) three (3) Pratt & Whitney JT8D-15A engine(s) bearing manufacturer's serial numbers 708336, 708393 and 657572, (each of which has 750 or more rated takeoff horsepower or the equivalent of such horsepower). (c) Standard accessories and optional equipment and such other items fitted or installed on the Aircraft and as may be more particularly described hereinafter: See Schedule A which is attached hereto and made a part hereof. (d) Those items of Lessee furnished equipment described in a bill of sale or bills of sale therefor (copies of which may be appended hereto), delivered by Lessee to Lessor which constitute appliances and equipment which will be installed on the Aircraft. Initials: Lessee: RRW --------- Lessor: PSK --------- 35 36 SCHEDULE NO. 2 TO LEASE SUPPLEMENT NO. 1 Financial Terms Rent Commencement Date: February 1, 1997 Basic Term: twelve months commencing January 1, 1997 and through and including December 31, 1997 Basic Rent Dates: The first day of each and every calendar month from and including February 1, 1997 through January 1, 1998. (Upon each exercise by Lessee of its Renewal Option pursuant to Section 23 of the Lease, the Basic Rent Dates shall include the first day of each of the twelve calendar months commencing with the first day of February after the then current Expiration Date through the next January 1) First Basic Rent Date: February 1, 1997 Last Basic Rent Date: January 1, 1998 (upon each exercise by Lessee of its Renewal Option pursuant to Section 23 of the Lease, the definition of Last Basic Rent Date shall be amended by adding one calendar year to the Last Basic Rent Date then in effect.) Expiration Date: December 31, 1997 (upon each exercise by Lessee of its Renewal Option pursuant to Section 23 of the Lease, the definition of Expiration Date shall be amended by adding one calendar year to the then current Expiration Date.) Final Expiration Date: December 31, 2002 Renewal Terms: a series of five additional and consecutive twelve month terms commencing on the 12th, 24th, 36th, Basic Rent Dates Primary Hangar Location: DFW International Airport, Texas Lessee's Chief Executive Offices P.O. Box 612787 and Principal Place of Business: 1515 W. 20th Street DFW International Airport, Texas 75261 Acceptance Date: December __, 1996 Last Acceptance Date: December 31, 1996 Date of Last Financial Statements: August 31, 1996 Lessor's Cost: $9,070,191.00 Initials: Lessee: RRW _________ Lessor: PSK _________ 36 37 SCHEDULE NO. 2-A TO LEASE SUPPLEMENT NO. 1 Financial Terms (continued) Basic Rent: Basic Rent Dates 1 to 12 $124,054.47 Basic Rent Dates 13 to 36 $124,054.47 (during any applicable Renewal Term) Basic Rent Dates 37 to 72 $101,494.11 (during any applicable Renewal Term) Permitted Deductible: $500,000.00 per occurrence Initials: Lessee: RRW -------------------- Lessor: PSK -------------------- 37 38 SCHEDULE NO. 2-B TO LEASE SUPPLEMENT NO. 1 "Maximum Lessee Risk" shall mean an amount equal to the percentage of the Lessor's Cost of the Aircraft set forth below for each of the following Expiration Dates: Expiration Date: Amount: (expressed as a percentage of Lessor's Cost) ---------------- ------- December 31, 1997 79.52% December 31, 1998 71.28% December 31, 1999 62.33% December 31, 2000 55.72% December 31, 2001 48.18% December 31, 2002 40.00% "Maximum Lessor Risk" shall mean an amount equal to the percentage of the Lessor's Cost of the Aircraft set forth below for each of the following Expiration Dates: Expiration Date: Amount: (expressed as a percentage of Lessor's Cost) ---------------- ------- December 31, 1997 14.20% December 31, 1998 13.17% December 31, 1999 12.07% December 31, 2000 10.87% December 31, 2001 9.94% December 31, 2002 6.67% "Purchase Option Price" shall mean an amount equal to the percentage of the Lessor's Cost of the Aircraft set forth below for each of the following Expiration Dates: Expiration Date: Amount: (expressed as a percentage of Lessor's Cost) ---------------- ------- December 31, 1997 93.72% December 31, 1998 84.45% December 31, 1999 74.40% December 31, 2000 66.59% December 31, 2001 58.12% December 31, 2002 46.67% 38 39 SCHEDULE NO. 3 TO LEASE SUPPLEMENT NO. 1 CASUALTY VALUES The Casualty Value of the Aircraft for any Basic Rent Date shall be the amount set forth opposite such Basic Rent Date.
BASIC BASIC RENT CASUALTY RENT CASUALTY DATE VALUE DATE VALUE ---- ----- ---- -----
Initials: Lessee: _________ Lessor: _________ 39 40 LEASE SUPPLEMENT NO. 2 under AIRCRAFT LEASE dated as of December 30, 1996, by and between Fleet Capital Corporation, as lessor ("Lessor"), and Kitty Hawk Aircargo, Inc., as lessee ("Lessee"). Manufacturer of Airframe: Boeing Manufacturer of Engines: Pratt & Whitney Purchase Documents: 1. Aircraft Purchase Agreement between Aircraft Leasing, Inc. ("ALI") and First Security Bank National Association ("First Security"). 2. First Security's Warranty Bill of Sale to ALI. 3. First Security's FAA Bill of Sale to ALI. 4. ALI's Warranty Bill of Sale to Lessee dated December __, 1996. 5. ALI's FAA Bill of Sale to Lessee dated December __, 1996. 6. Lessee's Warranty Bill of Sale to Lessor dated December __, 1996 in the form of Exhibit B hereto. 7. FAA Bill of Sale transferring title to the Aircraft from Lessee to Lessor. 8. Invoices for the Aircraft, including the Engines, showing ALI and/or Lessee as the purchasers thereof, all other above referenced contracts and evidence that such invoices have been are paid in full. Aircraft Marking (Referenced in Section 11 of the Lease): Two-inch by four-inch plaque to be maintained in cockpit and affixed in conspicuous position stating: "This property is Owned by and Leased from Fleet Capital Corporation, 50 Kennedy Plaza, Fifth Floor, Providence, Rhode Island 02903. Any removal, alteration, disposal or other change in the condition or location of this property must be approved by the Owner-Lessor." Similar markings to be permanently affixed to each Engine. IN WITNESS WHEREOF, the parties hereto have each caused this Lease Supplement No. 2 to be duly executed by their respective officers, thereunto duly authorized. FLEET CAPITAL CORPORATION, AS LESSOR By: /s/ PATRICE S. KANE ---------------------------------- Name: Patrice S. Kane Title: Vice President Date: December 26, 1996 KITTY HAWK AIRCARGO, INC., AS LESSEE By: /s/ RICHARD R. WADSWORTH --------------------------------- Name: Richard R. Wadsworth ------------------------------- Title: Vice President and CFO ------------------------------ Date: December 27, 1996 40 41 EXHIBIT B TO AIRCRAFT LEASE AGREEMENT WARRANTY BILL OF SALE Kitty Hawk Aircargo, Inc. (the "Seller"), in consideration of the sum of __________________________________ and __/100 Dollars ($____________) paid by Fleet Capital Corporation (the "Buyer"), receipt of which is acknowledged, hereby grants, sells, assigns, transfers and delivers to Buyer the aircraft described below together with the engines installed thereon and all appliances, parts, instruments, appurtenances, accessories, furnishings, avionics, components and other equipment of whatever nature installed on said aircraft and all logbooks, manuals, certificates, data and inspection, modification, maintenance, engineering, technical, overhaul and all other books and records (including all computerized data, records and materials) as pertain to the operation and maintenance of such aircraft (all of the foregoing hereinafter collectively referred to as the "Aircraft"), along with whatever claims and rights Seller may have against the manufacturer and/or vendor of the Aircraft (collectively, the "Vendor"), including, but not limited to, all warranties and representations. At Buyer's request, Seller will cause the Vendor to execute an Acknowledgment in form and substance satisfactory to Buyer in its sole discretion. DESCRIPTION OF AIRCRAFT Boeing B727-214 Advanced Freighter aircraft bearing FAA Registration Mark N_____ and manufacturer's serial number _____ and three (3) Pratt & Whitney JT8D-____ engines, respectively, bearing manufacturer's serial numbers. ____, ______ and (See also Schedule A attached hereto and made a part hereof for further description of the Aircraft.) Seller represents, warrants and agrees to Buyer that (1) Seller is the lawful owner of the full title to the Aircraft and that Buyer will acquire by the terms of this Bill of Sale good and full title to the Aircraft free and clear of all mortgages, leases, security interests, claims, charges, liens and encumbrances of any kind whatsoever; (2) Seller has the right to sell the Aircraft as aforesaid; (3) Seller shall warrant and defend title to the Aircraft and indemnify Buyer against the claims of any person, party, firm, corporation or entity of any kind whatsoever and (4) the Aircraft had been delivered to Seller, and has been delivered to Buyer, in good order and condition and conforms to the specifications and the requirements and standards applicable thereto. Seller agrees to save and hold harmless Buyer from and against any and all foreign, Federal, state, municipal and local license fees and taxes of any kind or nature, including, without limiting the generality of the foregoing, any and all excise, personal property, privilege, use and sales taxes, and from and against any and all liabilities, obligations, losses, damages, penalties, claims, actions and suits, including, without limitation, attorney's fees, resulting therefrom and imposed upon, incurred by or asserted against Buyer as a consequence of the sale of the Aircraft to the Buyer. Seller agrees and acknowledges that the terms and conditions of this Bill of Sale, including, without limitation, all representations, warranties and agreements for the benefit of Buyer, shall survive the delivery of the Aircraft and the delivery, execution and recording of this or any Federal Aviation Administration Bill of Sale. IN WITNESS WHEREOF, Seller has executed this Bill of Sale this _______day of December, 1996 SELLER: Kitty Hawk Aircargo, Inc. By: ------------------------- Title: ---------------------- 41 42 EXHIBIT C-1 TO AIRCRAFT LEASE OPINION LETTER (Lessee) December __, 1996 Fleet Capital Corporation 50 Kennedy Plaza Providence, Rhode Island 02903 Re: Aircraft Lease Gentlemen: We have acted as counsel for ____________________ (hereinafter called the "Lessee"), a ____________________ corporation, in connection with the transaction between the Lessee and Fleet Capital Corporation, a Rhode Island corporation (hereinafter called "Lessor"), whereby the Lessee will lease from the Lessor, a _______________ aircraft, Model No. ______________, Serial No. _______________, FAA Registration No. N _______, equipped with ______________ (_) __________ engines, Model No. __________, manufacturer's serial numbers __________ and __________, (hereinafter collectively called the "Aircraft") under an Aircraft Lease between the Lessee and the Lessor dated as of _______________, 19 ___, (said Aircraft Lease together with all Lease Supplements and Exhibits thereto from time to time collectively referred to as the "Lease"), upon and subject to the terms and conditions of the Lease. All capitalized terms used herein which are not otherwise defined herein shall have the meanings assigned to such terms in the Lease. (Please insert a paragraph setting forth in detail the relationship and length of association of Counsel with the Lessee and a description of the review conducted by Counsel which shall, list among other things, the items reviewed and the inquiries and investigations involved in making the representations listed below.) It is our opinion that: 1. Lessee is a corporation duly organized, validly existing and in good standing under the laws of the State of ____________, and is qualified to do business in each jurisdiction in which such qualification is necessary in order for Lessee to carry on its business and to perform its obligations under the Lease, and is in good standing under the laws of each jurisdiction in which it is so qualified. 2. Lessee has the corporate power and authority to execute, deliver and perform the Lease and to lease the Aircraft from Lessor thereunder. 3. The leasing of the Aircraft from Lessor by Lessee, the execution and delivery of the Lease, the applicable FAA documents, Purchase Documents and other related instruments, documents and agreements, and the compliance by the Lessee with the terms thereof, and the payment and performance by Lessee of all of its obligations thereunder (a) have been duly and legally authorized by appropriate corporate action taken by Lessee (b) are not in contravention of, and will not result in a violation or breach of, any of the terms of Lessee's certificate of incorporation (or equivalent document) its by-laws, or of any provisions relating to shares of the capital stock of Lessee, and (c) will not violate or constitute a breach of any provision of law, any order of any court other governmental body, agency, authority or instrumentality or any indenture, agreement or other instrument to which Lessee is a party, or by or under which Lessee or any of Lessee's property is bound, or be in conflict with, result in a breach of, or constitute (with due notice and/or lapse of time) a default under any such indenture, agreement or any instrument, or result in the creation or imposition of any Lien upon any of Lessee's property or assets. 4. The Lease, the Purchase Documents, the applicable FAA documents and related instruments, documents and agreements with respect thereto and the Aircraft have been executed by the duly authorized officer or officers of Lessee and delivered to Lessor, and constitute the 42 43 legal, valid and binding obligations of Lessee enforceable in accordance with the respective terms thereof. 5. Neither the execution and delivery of the Lease, the Purchase Documents, the applicable FAA documents and related instruments, documents and agreements with respect thereto and the Aircraft, nor the payment and performance by Lessee of all of its obligations under the foregoing documents, require the consent or approval of, the giving of notice to, or the registration, filing or recording with, or the taking of any other action in respect of, the Federal Aviation Administration, the Department of Transportation or any other federal, state, local or foreign government or governmental authority or agency, except for the registration, recording and filing referred to herein. 6. No mortgage, deed of trust, or other Lien which now covers or affects, or which may hereafter cover or affect, any property or interest therein of Lessee, now attaches or hereafter will attach to the Aircraft, the Airframe or any Engine, or in any manner affects or will affect adversely Lessor's right, title and interest therein. 7. There is no litigation or other proceedings now pending, or to the best of our knowledge, threatened, against the Lessee, in any court or before any regulatory commission, board or other administrative governmental agency, authority, body or instrumentality which would directly or indirectly adversely affect or impair the title of Lessor to the Aircraft, or which, if decided adversely to Lessee, would materially adversely affect the business operations or financial condition of Lessee. 8. Except for the (I) registration of the Aircraft pursuant to the Federal Aviation Act, (II) the filing and recording of (a) the Lease and (b) the Bill of Sale for the Aircraft from the Lessee, as seller of the Aircraft to Lessor pursuant to the Federal Aviation Act and (III) the filing of the Uniform Commercial Code Financing Statements executed by Lessee in connection with the execution of the Lease, no further action, including any filing or recording of any other documents, is necessary or advisable in order to establish and perfect Lessor's title to and interest in, the Aircraft as against Lessee and/or third parties in any applicable jurisdiction. 9. Lessee is a "citizen of the United States" within the meaning of the Federal Aviation Act. 10. Lessor will acquire title to the Aircraft to be sold and leased back free and clear of all liens and encumbrances and claims of any present or future creditors of the Lessee. The Bills of Sale covering the Aircraft will grant and convey to Lessor full legal title and ownership in and to the Aircraft. Without limiting the generality of the foregoing, the retention of possession by the Lessee of the Aircraft following the sale of the Aircraft to, and the lease back of the Aircraft from, Lessor, shall not be deemed fraudulent or void as against any present or future creditor of the Lessee under the laws of the jurisdiction in which the Aircraft is now, or will at the time of such sale and leaseback be, located, nor would any subsequent bona fide purchaser from the Lessee of the Aircraft, in the event of any attempted subsequent sale thereof by the Lessee, acquire any title to or rights in the Aircraft superior to Lessor's title to and rights in the Aircraft. Very truly yours, 43 44 EXHIBIT C-2 TO AIRCRAFT LEASE OPINION LETTER (Guarantor) December __, 1996 Fleet Capital Corporation 50 Kennedy Plaza Providence, Rhode Island 02903 RE: ___________________ Gentlemen: We have acted as general counsel for ________, a ________ corporation, ("Guarantor"), an affiliate of Kitty Hawk Aircargo, Inc. ("Obligor"), in connection with the preparation, execution, and delivery of the Guaranty Agreement ("Guaranty"), by Guarantor and which Guaranty will be delivered in connection with the Aircraft Lease dated December __, 1996 between Fleet Capital Corporation ("Fleet"), as lessor, and Obligor, as lessee, (the "Agreement") and the related transactions contemplated thereby. Terms not otherwise defined herein shall have the defined meanings set forth in the Agreement. We are familiar with the Guarantor, its affairs, and its charters, by-laws, and corporate records. We have examined originals or copies, certified or otherwise identified to our satisfaction, of such records, instruments, decisions, certificates, and documents, have made such inquiries as to questions of fact of officers and representatives of and Guarantor and have made such examinations of laws, rules, regulations, orders, decrees, writs, judgments, awards, injunctions, and the like, as are necessary and appropriate for purposes of giving the opinions hereinafter expressed. Based upon the foregoing, it is our opinion: 1. That Guarantor is duly organized, validly existing and in good standing under the laws of _________. Guarantor has the necessary authority and power to own its assets and to transact the business in which it is engaged. Guarantor is fully licensed and duly qualified to do business in each jurisdiction in which the conduct of its business and the ownership of its assets requires such qualification, including every jurisdiction where such licensing or qualification is or will be required for the purpose of enforcing Fleet's rights under the Guaranty. 2. That Guarantor has full power, authority, and legal right to execute and deliver the Guaranty and to perform its obligations thereunder. 3. That no consent of any other party (including any stockholders, trustees or holders of indebtedness), and no consent, license, approval or authorization of, exemption by, or registration or declaration with, any governmental body, authority, bureau or agency is required in connection with the execution, delivery or performance by Guarantor of the Guaranty or the validity or enforceability of the Guaranty. 4. That (A) the execution, delivery and performance by Guarantor of the Guaranty do not and will not violate any provision of any applicable law or regulation or of any judgment, award, order, writ or decree of any court or governmental instrumentality, will not violate any provision of its charter or by-laws and will not violate any provision of, or cause a default under, any mortgage, indenture, contract, agreement or other undertaking to which Guarantor is a party, or which purports to be binding upon Guarantor or upon any of its assets; and (B) the execution, delivery, and performance by Guarantor of the Guaranty will not result in the creation or imposition of any lien or other encumbrance on any of the assets of Guarantor. 5. That the Guaranty has been duly authorized, executed, and delivered by Guarantor and constitutes a legal, valid, and binding obligation of Guarantor enforceable in accordance with its terms. 44 45 6. That there is no action, suit, investigation or proceeding (whether or not purportedly on behalf of Guarantor) pending or threatened against or effecting Guarantor or any of its assets (A) which involves the Guaranty or any of the Engines or any of the transactions contemplated by the Agreement or (B) if which adversely determined could have an adverse effect upon the Guaranty or any of the Engines or any of the transactions contemplated by the Agreement or a material adverse effect on the business, operations, or financial condition of Guarantor. 7. That (A) the Guarantor has received reasonably equivalent value and adequate and sufficient consideration in exchange for the giving of the Guaranty (B) the Guarantor was not insolvent on the date of the execution by Guarantor of the Guaranty and did not become insolvent as a result of the execution by Guarantor of the Guaranty, (C) the Guarantor has sufficient capital to perform its obligations under the Guaranty and (D) the performance of the obligations by Guarantor under the Guaranty will not cause the Guarantor to exceed its ability to pay its debts as they mature. Very truly yours, 45 46 EXHIBIT D TO AIRCRAFT LEASE (To be omitted from FAA filing copy) FINANCIAL COVENANTS RIDER Throughout the Term, the following minimum financial ratios shall be met by the Parent on a consolidated basis. Each of the following ratios shall be calculated at the end of each fiscal quarter of the Parent for the then previous four fiscal quarters of Parent. A. Debt Service Coverage Ratio shall be equal to or greater than 1.25 to 1.00. B. Leverage Ratio shall be less than or equal to 3.25 to 1.00. C. Senior Debt to Cash Flow Ratio shall be less than or equal to 5.00 to 1.00. Lessee shall provide Lessor with written notice of any change, modification, amendment, extension, renewal, transfer, compromise or discharge to the "Senior Debt to Cash Flow Ratio," "Debt Service Coverage Ratio" or "Leverage Ratio" set forth in the Credit Agreement ("Credit Modification"). Any such Credit Modification which raises any or all of the above referenced ratios in the Credit Agreement shall, for purposes of this Lease, automatically raise the corresponding Debt Service Coverage Ratio, Leverage Ratio and/or Senior Debt to Cash Flow Ratio set forth above to the levels then set forth in the Credit Agreement. Lessee hereby authorizes Lessor to take such actions as are necessary to document the foregoing amendments to the above referenced ratios without the need for Lessee's signature or consent thereto. ADDITIONAL DEFINITIONS: Credit Agreement shall mean that certain Amended and Restated Credit Agreement dated as of August 14, 1996 among Lessee and Guarantors, as borrowers and guarantors, as the case may be, Skyfreighters, Inc. , as a party, and Wells Fargo Bank (Texas), National Association and certain other lenders named therein. Currently Maturing Long Term Debt shall mean that portion of Debt which is payable within twelve (12) months of Parent's last fiscal quarterly or annual financial statement, as the case may be. Debt shall mean Parent's (a) indebtedness, liabilities and obligations for borrowed money and/or capitalized leases, (b) indebtedness, liabilities and obligations evidenced by bonds, notes, debentures or other similar instruments and (c) indebtedness, liabilities and obligations to pay the deferred purchase price of goods or services, except trade accounts payable arising in the ordinary course of business that are note past due by more than ninety (90) days. Debt Service Coverage Ratio shall mean Parent's net income plus depreciation plus amortization plus the taxable equivalent of non-recurring items divided by Currently Maturing Long Term Debt. For purposes of this definition, the term "taxable equivalent of non-recurring items" shall mean the pre-tax expenses of non-recurring accounting changes and restructuring charges multiplied by Parent's then current combined effective tax rate. Debt to Cash Flow Ratio shall mean Parent's Senior Debt divided by EBITDA. EBITDA shall mean Parent's earnings before interest, taxes, depreciation and amortization. Leverage Ratio shall mean the ratio of Parent's total liabilities divided by Parent's tangible net worth , which calculation shall be made in accordance wit GAAP. Senior Debt shall mean that portion of Parent's (a) indebtedness, liabilities and obligations for borrowed money and/or capitalized leases and (b) indebtedness, liabilities and obligations evidenced by bonds, notes, debentures or other similar instruments which mature by their terms on a date more than one year after the original creation thereof, including, without limitation, any debt evidenced by the Credit Agreement or which would be classified as "long-term indebtedness" on the balance sheet of Parent in accordance with GAAP. 46 EX-11.1 6 STATEMENT OF COMPUTATION OF NET INCOME PER SHARE 1 EXHIBIT 11.1 KITTY HAWK, INC. AND SUBSIDIARIES STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
QUARTER ENDED NOVEMBER 30 1996 1995 ---------- ---------- Primary net income per share (1): Weighted average number of common shares outstanding .................................. 9,322,527 7,423,436 Common shares related to SAB No. 83 (2) ........... -- 544,274 ---------- ---------- Weighted average common and common equivalent shares outstanding ........................... 9,322,527 7,967,710 ========== ========== Net income ........................................ $1,632,347 $1,956,129 ========== ========== Net income per share .............................. $ 0.18 $ 0.25 ========== ========== Fully diluted net income per share: Weighted average number of common shares outstanding ................................... 9,322,527 7,423,436 Common shares related to SAB No. 83 (2) ........... -- 544,274 ---------- ---------- Weighted average common and common equivalent shares outstanding ............................ 9,322,527 7,967,710 ========== ========== Net income ........................................ $1,632,347 $1,956,129 ========== ========== Net income per share .............................. $ 0.18 $ 0.25 ========== ==========
(1) The Company reports primary net income per share as the effect of dilutive securities is less than 3%. (2) Stock options granted to executives within 12 months of the filing date have been included in this line item through the date of exercise. See Note 1 of Notes to Consolidated Financial Statements. EX-27.1 7 FINANCIAL DATA SCHEDULE
5 3-MOS AUG-31-1997 NOV-30-1996 27,294,783 0 9,141,216 0 2,578,197 42,049,214 78,083,749 (15,016,667) 105,116,296 25,674,169 0 0 0 106,695 54,569,050 105,116,296 0 25,413,706 0 20,295,584 2,397,543 0 0 2,720,579 1,088,232 1,632,347 0 0 0 1,632,347 .18 .18
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